Mitchell Services Limited (MSV) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Annual General Meeting of Mitchell Services Limited. I would now like to hand the conference over to Mitchell Services Limited Executive Chairman, Nathan Mitchell. Thank you, and please go ahead.

Good morning, ladies and gentlemen. I am Nathan Mitchell, Executive Chairman of Mitchell Services Limited. On behalf of the Board and staff, I'd like to welcome shareholders and guests to the company's 2021 Annual General Meeting. Whilst our preference would certainly have been to hold a physical meeting and to engage with shareholders on a face-to-face basis, the current COVID-19 restrictions would have likely resulted in a low attendant numbers, with attendants effectively limited to Queensland shareholders only. To allow for greater shareholder participation, we have decided to hold the meeting virtually once again. Thank you to all those who've taken time to participate via the online platform. If at any stage during today's online meeting, we experience any technical issues, a short recess may be required. If this occurs, I'll advise you accordingly. I'm joined this morning by my fellow directors, Scott Tumbridge, Peter Miller, Robert Douglas, Neal O'Connor and Peter Hudson. I'd also like to acknowledge the attendance of my Alternate Director, Grant Moyle; as well as our Chief Executive Officer, Andrew Elf; and Chief Financial Officer and Company Secretary, Greg Switala. As required under the provisions of the Corporations Act, also joining us this morning is Paul Sepalli -- Sapelli, sorry, from Jessups, our auditor; and Chelsey Drake from Allens. I note there is a quorum present online, and I've declared the meeting open at 10:00 a.m. At today's meeting, I will deliver my annual address, which will be followed by Andrew's CEO presentation. We will then move on to formal businesses, whereby the resolutions of the meeting will be put to a vote. Shareholders will have the opportunity to ask questions on each of the business through the virtual platform. [Operator Instructions] Please note that if you ask a question today, your name will be announced at the beginning of the question. If multiple shareholders raise the same question, we will announce the name of the shareholder who raised the question first. Voting on the resolutions will be conducted in the form of a virtual poll. Each security holder eligible to vote today will have the opportunity to cast their vote using electronic voting card during online -- received during online registration. If you experience any issue voting today, please refer to the online portal guide or use the help line specified on the screen. To date, proxies have been received from 72 shareholders, representing 115,045,087 ordinary shares, being 51.14% of the company's issued share capital. All valid undirected proxies or open votes that have nominated the Chairman of the meeting as their proxy will be cast in favor of each resolution. I'll now give my annual address. Firstly, can I take this opportunity to, once again, thank every employee for the truly remarkable level of commitment, dedication and teamwork that they have displayed during these challenging times. A special thank you must go out to all those staff members who have been affected by interstate border and travel restrictions and those who have had to spend extended periods away from their families. The health and well-being of Mitchell Services employees, their families, our clients and the broader community remains our highest priority, and we are committed to doing all we can to assist in reducing the spread of COVID-19. We are working closely with government, various specialist organizations, clients and all other stakeholders to ensure that we can continue to offer a high-quality service to our clients with as little disruption as possible. And I also take this opportunity to thank all shareholders for their ongoing support. While the past 12 months have certainly had its fair share of challenges, it's important to reflect on the significant level of growth that the business has delivered since our reentry into the Australian market in late 2013. I'm extremely encouraged by the longer-term outlook as the business embarks on a significant organic growth strategy. The group generated revenue in FY '21 of $191.4 million. This represents a 9% increase when compared to FY '20 revenue of $175.6 million. It also represents a compounding annual growth rate of 44% when compared to FY '14 revenue of circa $15 million. At an underlying level, the group generated in FY '21 an EBITDA of $35.7 million and an underlying profit after tax of $7.1 million. In arriving at these underlying figures, we have not made any adjustment in relation to COVID-19, but we estimate that the financial impact of COVID-19 at an EBITDA level was approximately $1 million to $2 million. As we look past FY '21 and towards FY '22, the business is extremely well placed to take advantage of buoyant market conditions and execute on its material organic growth strategy. On the demand side, the outlook for drilling services is the strongest we have seen since 2008. Global government stimulus and subsequent investment into infrastructure projects is expected to continue to drive demand for resources. And in a world where resources and grades of certain commodities are decreasing, Australia is seen as a high-quality, low-risk jurisdiction in which to operate. We're also seeing increased business of new projects and exploration projects off the back of increased levels of activity within the capital markets. On the supply side, the barriers to entry remain high. There's been a significant level of industry consolidation, and access to funding for new mining service providers is challenging given the limited lender appetite within our sector. The tightening labor market and increased lead times in relation to the supply [Audio Gap] and related equipment means that access to key drilling services resources is limited. Recognizing these supply-side limitations, the business placed a significant forward order for up to 12 latest-generation drill rigs towards the end of 2020. And I strongly believe that, that decision will yield dividends in the longer term. It was previously our intention to sell these nominated rigs to partially fund this capital investment program. But given the strength of the current market, we have opted to retain these rigs as their value to the business through continued use will far outweigh the potential sale proceeds. Proposed timing also allows the business to take advantage of the cash flow benefit associated with the ATO's instant asset write-off program. The revenue opportunity pipeline remains at [ record ] levels, and the number of rigs required to service the total revenue opportunity pipeline far exceeds the available rigs in our fleet, even after the acquisition of 12 new rigs. As a result of the organic growth strategy and associated capital investment program, the group expects to generate in FY '22 revenue of $200 million to $220 million and an EBITDA of $40 million to $44 million. Based on anticipated size of the fleet post implementation of the growth strategy, the business would have the capacity to potentially generate up to $50 million to $60 million of EBITDA and to deliver material EPS growth. In closing, I would, once again, like to thank all staff, customers, suppliers and shareholders for their continued support. Thank you, in particular, to all shareholders who have recently participated in the capital raise. The fact that the capital raising could be constructed on the basis of an offer to existing shareholders only talks to the strength of the shareholder support, and I thank you for that support. On behalf of the Board, thank you. I'll now pass over to Andrew, the CEO, to deliver his presentation of the meeting. Thanks, Andrew.

Thanks, Nathan, and welcome, ladies and gentlemen. We'll take the disclaimers on Page 4 as being read and just ask the moderator to go straight to Slide 5, please. As people can see the Mitchell Services market profile there, obviously, a strong founder connection with the business. Nathan Mitchell, our Chairman, name on the door and just under a 20% holding; and Scott Tumbridge, who is a Director with the business and founder of Deepcore speaks for the [Audio Gap] shareholding of 7.2%; Soul Pattinson, also a major shareholder; and there's also numerous other institutional investors sitting under 5%. It's a pretty high-quality register for a small-cap company. Just on to Slide 6, please. So in regards to our safety, our critical risk control program has absolutely improved our safety performance as a business. And I can't thank our teams enough for the hard work that they put into that initiative, where we are hurting people less, and people are going home to their families in better condition than they ever have. And all the while, as Nathan alluded to, with the challenges of COVID-19, and I'll just echo what Nathan said, I think our teams have certainly gone above and beyond to continue to deliver a safe and efficient service to our clients, and many of them with extended times away from home, and we can't thank them enough. And hopefully, as we're starting to see [ now ] improve as we move forward. Just on to Slide 7, please. This slide here, Nathan touched on a few of these points, but top middle, the cornerstone of a quality drilling company is its safety. And again, we're certainly industry-leading in regards to our safety statistics. Revenue up; shifts up; underlying EBITDA, $35.7 million; 650 employees as at the end of the year, [ June ]. That's now sitting around 730 employees as at the end of September. So that gives you an idea of the growth that we're starting to plan and are going to deliver on as we move forward through the rest of this year. And importantly, there down at the bottom, you can see the bank debt decreasing as well. Just on to Slide 8, please. Nathan spoke to this compound annual growth rate over time since we reentered the market. We've repositioned the business and the fleet from 2014 to 2019. We've absolutely taken our opportunities through the cycle as we've done that. We as a team have been very disciplined with our tendering. We've grown EBITDA. We've grown our Tier 1 client book. Our surface rigs are booked out. Right now, we've committed to 9 out of those 12 rigs. We retain options on 3, and 9 out of those 12 additional rigs that Nathan spoke about are booked. We've had a solid start in FY '22. We released our quarterly yesterday. We're in a very strong position moving forward, and we'll absolutely take advantage of further leverage that exists in the business as we keep moving forward. And I'll certainly talk to that a little bit more as I go through my presentation. Just on to Slide 9, please. So I think what makes Mitchell stand out is its revenue quality and its diversity. You can see there, top left, FY '21 is sort of just under 50% Queensland, and the balance across different parts of Australia with a strong presence in Victoria, the Deepcore business. And then on a commodity perspective, roughly 1/2 gold, 1/3 in the coking or met coal space, and the balance other base metals, copper, lead, zinc, other. On the top right-hand side there, you can see the mix between surface and underground. And that's really what I talked to when I say that we've positioned the business over time. You've got a very good split there of sort of 50-50, and a great transition over the years to get to that point. And similarly, down the bottom right-hand corner, the mix of Tier 1 versus other clients. And you can see there the FY '22 forecast number with the Tier 1 clients forecast to get back above that 90% mark. So there's a very high-quality contract book for the company. Just on to Slide 10, please. So the organic growth strategy, as Nathan touched on in his presentation, we've seen the market improving for some time. Obviously, there's a lot of experience around the table, especially, we have Nathan, Scott and [ Peter ], they've seen it all before. We know you need to get in early with rigs and book manufacturing slots, and that's exactly what we did. We bought the rigs, and they're booked, and they're going to be starting to get delivered from now. So as we put our existing service fleet out to work, we made the decision not to sell those rigs, it would get a very good return for us. And the rigs that we've committed to order to deploy this organic growth strategy are booked. We knew that the longer the market stayed down for, the more -- the harder and faster it would come back. And that's exactly what it's done. It's starting to play out. And really, to be honest, it's actually surprised us a little bit at how hard and fast it's come back. So I certainly agree with Nathan that we've really got a very good time ahead of us, for sure. And just on that slide there to touch on a couple of those points, that last one in particular and following on from our quarterly. The EBITDA is forecast to increase quarter-on-quarter as we progress throughout the year. And importantly, when you look at what that run rate EBITDA is going to be in Q4, you can certainly see a genuine pathway to a potential $50 million to $60 million EBITDA in the future. Just on to Slide 11, please. The competitive profile of the market has continued to improve. There's been more industry consolidation in recent times. As Nathan said, and I agree, it's the strongest we've seen things since 2008. We've got those new rigs being delivered at the perfect time. And certainly, we're very well positioned as a business to leverage off gold and copper, in particular, moving forward. But certainly, from our perspective, the demand side is well and truly in our favor and the strongest we've seen in quite some time. Just on to Slide 12, please. As well as demand, we've got the supply side in our favor, and this significant barriers to entry slide talks to that. It's tough to get funding for mining services companies. There's a little bit of a limited appetite. It's a complex and highly regulated industry. There's more green tape and red tape than there ever has been, and more coming. The supply side of things from an equipment perspective, the secondhand market is gone, lead times are blowing out on new equipment and supply chains are getting stretched. So it's tough. The industry is consolidated. Certainly, over our time since 2013, there's a number of companies that we've consolidated and others as well outside of ourselves. The labor market is tight. It's tough to attract and retain a highly skilled workforce. But importantly, we've put many things in place at our business here to mitigate those risks, Tier 1 clients, top-of-the-range equipment, new technologies. All those sort of things certainly help us to attract and retain good people. And there's just a good anecdote down the bottom there to give people a little bit of a feel for what we're experiencing. And that just talks to drill rods, which we use to drill obviously. And that we've taken about 1/3 of a major supply total allocation to the Asia Pacific region sort of over the next 6 months. Gives you an idea of how busy it is and how tight it is. And I certainly know there's some suppliers out there not even taking orders for new clients as well. So our position and our relationship with suppliers really does hold us in good stead as we move forward. Just on to 13, please. So obviously, where to from here? This is an important one. We had a solid first quarter. I won't read those numbers verbatim, but it was a solid start. And again, as I mentioned, we expect our EBITDA to increase quarter-on-quarter as we progress through this financial year. We're recruiting more people, as I said. We've got rigs booked, we're putting them out. It's going to take a little bit of a cost to get them out, of course. And then after that, we'll move forward and onwards and upwards. We maintain our guidance. $200 million to $220 million revenue, $40 million to $44 million EBITDA, respectively. And again, that run rate heading into FY '23 is something I'd sort of just get people to just think about. It's quite exciting when you think that this business can do $50 million-plus EBITDA heading into FY '23 potentially, with the fleet that we will have on hand once these additional rigs get delivered. Just on to Slide 14, please. So in summary, we've got the supply and demand side well and truly in our favor. We're very well positioned to take advantage of leverage within the existing business. These new rigs are being delivered. We get our -- our first one is actually getting picked up tomorrow and sent out to an existing client. We've got a great team that can deliver. We've certainly proven that over time, and I think we're in great shape to move forward with that team. Very exciting times ahead for the business, I think. I'm very excited. I'm really looking forward to seeing how we go. And again, that concludes my presentation. And I'll hand back over to our Chairman, Nathan Mitchell.

Yes. Thanks, Andrew. That's a great summary of where we are, where we're going. I'll now move on to the formal business of the meeting, and that is to consider matters requiring resolution. The notice of the meeting sets out the resolutions proposed for the meeting. As the notice of meeting and an exploratory memorandum have been circulated, I propose to take them as read. There are 4 resolutions on the agenda. Resolution 1 relating to the remuneration report is advisory only. Resolutions 2 and 3 are ordinary resolutions, which means that in order for each of these resolutions to be passed, more than 50% of the cast votes on a resolution must be in favor of it. Resolution 4 is a special resolution, which means that in order for this resolution to be passed, more than 75% of votes cast on the resolution must be in favor of it. Resolutions 1 and 4 are subject to voting exclusions. The notice of meeting sets out the voting restrictions for each of these resolutions. Our first item of business is the consideration of the financial statements of the company. This does not require a vote. The Corporations Act requires that the annual report of the directors, the auditors' report and the financial report be laid before the AGM. Those reports are hereby tabled. I now invite shareholders to comment or ask any questions on those reports or the business of the company. Questions may be asked of the auditors about the conduct of the audit and the audit report. Company Secretary, has the company received any questions via the online platform on the financial statements?

No questions, Chairman.

Thank you. Moderator, are there any questions from the shareholders on the telephone line?

We have no questions, Chairman.

Thank you. Neither the Corporations Act nor the company's constitution requires a vote of shareholders at the AGM on the financial statements and reports. We therefore move to consider the resolutions of the meeting. Resolution 1 is a nonbinding resolution seeking shareholder approval to adopt the remuneration report for the financial year ended 30 June 2021. Shareholders are asked to consider and, if in favor, pass the following resolution under Sections 250R(2) of the Corporations Act. Let the remuneration report for the financial year ended 30 June 2021 be adopted. Presentation of the remuneration report is a requirement for all listed companies. The company's remuneration report is included in the company's 2021 annual report. The vote on this resolution is advisory only and does not bind the directors or the company. The proxy votes that are eligible to be voted on this resolution are displayed on your screen. The proxy votes received to date are as follows: 23.11% of the votes able to be cast. Of that, 91.49% for, 2.01% against, and 6.5% open. Company secretary, are there any online questions on Resolution 1?

We have no questions, Chairman.

Thank you. Moderator, are there any telephone questions on Resolution 1?

We have no questions, Chairman.

Thank you. Please now select either for, against or abstain for the Resolution 1 on electronic voting card. We now move to consider resolution 2, which is the reelection of Robert Douglas as a Non-Executive Director of the company. Shareholders are asked to consider and, if in favor, to pass the following resolution. Let Robert Douglas, who retires in accordance with Rule 5.1 of the company's constitution and the listing rules be eligible, offers himself for reelection, be reelected as Director of the company. Douglas was appointed as Director on the 29th of November 2013, and most recently reelected on 30 October 2018. Mr. Douglas has had over 20 years of experience in finance and investment banking and is currently an Executive Director of Morgans Financial. He has experience in all aspects of corporate advisory and equity capital raising for listed public companies and companies seeking to list including structure, prospectus preparation, due diligence, accounts and forecast, risk management, sales and marketing, logistics and legal requirements. During his career, Mr. Douglas has worked extensively with energy and resource companies. Proxy votes that are eligible to be voted on this resolution are displayed on your screen. The proxy votes received to date are as follows: 51.03% of votes able to be cast; for, 97.06%; against 0%; open, 2.9%. Company Secretary, are there any online questions on Resolution 2?

We have no questions, Chairman.

Thank you. Moderator, are there any questions on the telephone for Resolution 2?

We have no questions, Chairman.

Thank you. Please now select either for, against or abstain for Resolution 2 on your electronic voting card. We now move to consider Resolution 3, which is the reelection of Peter Miller as Non-Executive Director of the company. Shareholders are asked to consider and, if in favor, pass the following resolution. Let Peter Miller, who retires in accordance with Rule 5.1 of the company's constitution and the listing rules being eligible, offers himself for reelection, be reelected as a Director of the company. Mr. Miller was most recently reelected as Director on the 27th of November 2019. Mr. Miller has been involved in all aspects of the drilling industry for the past 30 years and founded Drill Torque in 1992. His experience encompasses working with all types of drilling rigs, building rigs and managing drilling companies. Having worked in most exploration areas in Australia, he is intimately familiar with drilling conditions, equipment requirements and pricing structures to maximize fleet productivity. Mr. Miller is widely known and well regarded within the industry. Proxy votes that are eligible to be voted on this resolution are displayed on your screen. Proxy votes received to date are as follows: 51.14% of the votes able to be cast. For, 97.06%; against, 0%; open 2.94%. Company Secretary, are there any online questions for Resolution 3?

We have no questions, Chairman.

Thank you. Moderator, are there any telephone questions for Resolution 3?

We have no questions, Chairman.

Thank you. Please now select either for, against or abstain for Resolution 3 on your electronic voting card. We now move to Resolution 4, which is the approval of additional 10% placement capacity for the company under Listing Rule 7.1A. Shareholders are asked and, if in favor, to pass the following resolution, that for the purpose of listing Rule 7.1A and for all other purposes, shareholders approve the company having the additional capacity to issue equity securities up to 10% of the issued capital of the company at the time of issue, calculated in accordance with the formula prescribed in Listing Rule 7.1A.2 until the earlier of: one, the date that is 12 months from the date of this meeting; two, the time and date of the company's next Annual General Meeting; and three, the time and date of shareholder approval of the transaction under listing rules 11.1.2 or 11.2. If this Resolution 4 is passed, the company will be able to issue equity securities up to the combined 25% limit in Listing Rules 7.1 and 7.1A, without any further shareholder approval. Proxies -- the proxy votes that are eligible to be voted on this resolution are displayed on your screen. Proxy votes received to date are as follows: 51.14% of votes able to be cast. For, 96.15%; against, 0.92%; open, 2.94%. Company Secretary, are there any online questions for Resolution 4?

We have no questions, Chairman.

Thank you. Moderator, are there any telephone questions for Resolution 4?

We have no questions, Chairman.

Thank you. Please now select either for, against or abstain for Resolution 4 on your electronic voting card. That concludes the formal part of the meeting. Shareholders are reminded that they can still submit their votes online for a further 5 minutes after the close of the meeting. The results of the poll will be announced to the ASX later today.

Greg, are there any online questions relating to the general business?

We've got one question, Chairman. Question comes from Mr. [ Christopher Lam ]. Mr. [ Lam ] would like to know, can you please update on longer-term capital management intentions, please? At what point would the Board consider returning funds to shareholders in the form of a dividend or a buyback?

Thank you. I think we are constantly looking at ways in this business, how to grow the business, how to return dividends to shareholders, and they are all [indiscernible] at the moment. At the moment, we've spoken to our shareholders today and told you how much growth there is. And I think we've made the right decision to essentially suspend dividends and buybacks for this year on the basis that the growth has been growing exponentially. I think in the future, they are always on the cards. I think that's certainly something that's in our position is dividends and buybacks, and it's something we will always consider in the future. We're not a business that's continually spending our hard-earned money on CapEx and business. But right now, while the business is -- industry is booming, I think we've made the right decision. We made the right decision, as Andrew said, back in 2021, nearly 12 months ago now, to buy those rigs. And I think -- but next year, obviously, we're hoping to make good margins, and we'll have a decision next year on what we'll do with dividends, but it's certainly part of our matrix.

I can confirm there's no further questions via the online platform, Chairman.

Great. Okay. Moderator, any other telephone questions relating to general business?

We have no questions, Chairman.

Okay. Thank you, everyone. There being no further business, I now declare the Annual General Meeting closed. Thank you all for the attendance and participation in today's virtual meeting, and we look forward to continued support next year. Thanks.