Mitchell Services Limited (MSV) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Mitchell Services Limited Full Year Results Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Andrew Elf, Chief Executive Officer; and Greg Switala, Chief Financial Officer. Please go ahead.

Thanks very much for the introduction, and good morning, and welcome, everybody, and thanks for attending the Mitchell Services full year results call. We'll take the disclaimer on Page 2 of the presentation as being read, and we'll move straight to Page 4 and just touch on the market profile of the business. So again, you can see there, Nathan Mitchell, Executive Chairman, and name on the door; Scott Tumbridge, Executive Director and founder of Deepcore, both major holders; and then Soul Pattinson, again, another major holder, a good name to have on the register. So not too many major changes there in the profile of the business. Just moving on to Slide 5, the summary for the year. So operating rig count up, shifts up. Safety performance outstanding. I couldn't be proud of the team in that regard. I think, industry-leading culture that we have within the business and certainly driven by the critical risk control verification program that we've had in place for some time now. Head count is continuing to increase, as does the rig count and shifts, and that's certainly continuing into the current financial year as well. There's 100 rigs in the fleet. And certainly there, you can see that the revenue up and then the percentage is coming from those global mining majors. And EBITDA, again, up year-on-year. Looking at revenue and earnings growth into '23, we're saying there that we're expecting a material increase in revenue and a material increase in earnings. The operating rig count as at the end of June was 84. The average operating rig count was 74.8 through the course of the whole year in '22. So people can start doing their own maths in regards to what that can potentially mean. But certainly, from our perspective, I think we're in for a very, very positive year as a business. On Slide 7, you can see there, commodity prices have moved around a little bit but still remain very strong. We're certainly seeing budgets increase, the majority of our clients. There's supply constraints with new rigs. And again, that's supporting an increased level of utilization and contract terms and conditions. Certainly, clients are doing it tough as well with inflation and people. And we're certainly getting better pricing contracts and supported by the demand for services across the industry. Our preordering and delivery of the LF160 drill rigs has really positioned us very strongly. Those rigs are all in hand. They're all booked. And I'd say probably by the end of September, every single one of them will be out in the field drilling and delivering for us. So that's very exciting. Importantly, when you look at our revenue, we've got some logos there on the right that are very high-quality revenue streams in the business, and I made the point at the start there in the presentation that around about 90% of our revenue does come from global mining majors. The revenue is split 50% surface and 50% underground. Gold is around about 60% of the revenue, and 80% of our revenue is sort of derived from on or very close to operating mine sites. And again, those mine sites are low on the cost curve and operate through the cycle given that they're high-quality assets of global mining major clients. Operationally, again, I think the team, with the things that we can control, have done a wonderful job throughout the year. It's certainly been a tough operating environment given rain, given COVID and those sort of things. But controlling what we can control, I think the team has done a wonderful job and really set the business up strongly to move forward into FY '23. Our capital investment program is now complete. I've mentioned that those 12 rigs will all be operating by the end of September. We've won multiple new contracts. We've expanded contracts. And certainly, I think they will be material to the earnings of the business. They haven't been announced as individual contracts in their own right given the size but, certainly, cumulatively, I think heading into this year, that 84 rig run rate in June were very, very well positioned. Client survey results outstanding. The Mitchell brand is a high-quality brand. We're seen as a tier 1 drilling services provider working for those major clients. World-class clients want world-class service providers. And I certainly think that, that's what we're giving our clients what they want. And you combine the client results with the safety, the culture and those things and the assets we've got, I think we're in a wonderful position, as I said, to have a very good year ahead.

Looking at the profit and loss on Slide 9. The business generated full year EBITDA of $32 million, representing a 24% increase versus the previous period despite various factors, including multiple rain events, COVID-19 and mobilization costs associated with an expanding contract book. These factors temporarily impacted operating margins with the reported margin of 15% being lower than our longer-term targeted benchmark. This is best illustrated in the utilization graphs per the earlier operational update slide, where you can see the steep increase in rig count towards the final quarter with the corresponding shift levels remaining relatively flat. The EBITDA improvement in FY '22 translated into an improvement at the NPAT level, with the business effectively breakeven in FY '22 compared to a $6 million loss in FY '21. Included within the FY '22 numbers is $3 million amortization of customer contracts recognized as part of the Deepcore acquisition accounting. These will be fully amortized in February next year or by February next year, following which there will be no subsequent amortization expense. Importantly, the business exited FY '22 with an operating rig count of 84 in June, significantly greater than the FY '22 average of 74. And as such, we expect revenue and earnings to be materially greater heading into FY '23. Slide 10, looking at the balance sheet. The strengthened balance sheet post last year's equity raising has ensured that the business was able to complete its capital investment program as part of the organic growth strategy. From a working capital perspective, the temporary increase in net working capital of approximately $9 million was largely due to increased inventory and trade receivables off the back of the steep increase in operating rigs and revenue in the fourth quarter of FY '22. Andrew will outline our capital management strategy later in his presentation and his update will include the fact that business currently has no intention to raise equity for any reason. From a cash flow perspective, on Slide 11, the business has again generated strong operating cash flows, noting that the increased working capital requirements, as outlined on the previous slide, have resulted in a cash conversion percentage that is lower than previous trends and longer-term expectations. Looking forward and given the recent operation -- the operational ramp-up is behind us, we expect FY '23 cash conversion to normalize, noting also that the 3-year Deepcore earn-out arrangement ends in December this year, and that MSV will not be required to pay income tax until at least FY '24, given the buildup of tax losses associated with the ATO's instant asset write-off program that is currently in place. Gross debt per Slide 12 has peaked at $43 million at the end of the financial year following the completion of a capital investment program. Given the relatively short amortization profiles of this debt, the company expects debt levels to significantly reduce over the next 2 years and now has a formal longer-term net debt target of $15 million that is expected to achieve by the end of FY '24. Importantly, all of the equipment finance facilities were structured on a fixed interest basis with the majority of contracts finalized prior to the recent rate rises. The company's current blended average cost of debt is approximately 4.8%, or 3.4% post tax, which is unlikely to move materially given that over 80% of the book is equipment finance. Looking at CapEx on Slide 13. The operational teams have done a fantastic job in commissioning all 12 rigs on time and with budget with these new LF160 rigs comprising the majority of the $27 million growth CapEx reported in FY '22. Per the recently outlined capital management policy, the business will look to limit future investment to maintenance CapEx only and noting that the average annual maintenance CapEx over the past 2 years was approximately $16 million, expect CapEx in FY '23 to be significantly lower than the FY '22 levels.

So just on Slide 14, taking those factors into account, it's going to be a strong year in regards to cash generation. We're going to use those cash flows to reduce the leverage, as Greg said, and there is 0 intention to raise equity or increased leverage for any other reason. And just looking at where the business is today, post 30 June, that debt is already coming down. So in those boxes there, it's pretty simple. Revenue and EBITDA are up. CapEx and debt down. Returns to shareholders up. And I think that communication that we've put out there in relatively recent times has certainly been very well received by shareholders. So just to go into that a little bit more detail on Page 15. We have released the capital management policy, as Greg said, that's a primary focus over the next 2 years, and it's been very well received. So 2 aspects to it: Number one, a buyback and where appropriate. If we do sell any rigs and we have sold a couple in recent times, we'll use those funds to buy back shares. So obviously, we're reducing the earning capacity of the business if we are selling any rigs and, therefore, buy back the stock, and that buyback is underway and ongoing. And again, well received. And secondly, dividends from earnings. As we said, cash flow is going to be strong. Earnings and revenue are going to increase. That formal dividend policy is now in place. Up to 75% of post-tax profits can be paid to shareholders in the form of a dividend, and it's intended to be declared at the half year results around about February, and intended to be declared at the full year results in August again. So on 16, why invest in Mitchell? We've got a world-class fleet. Absolutely, no doubt about that. If you have a look at the money we've spent in recent times, the fleet is in fantastic shape and have a very high quality, and we're putting that to work. With a very strong client base, 90% of which global Tier 1 miners, revenue earnings are going to grow materially year-on-year into '23. We're focused on that capital management strategies over the next 2 years. And again, debt down, cash strong, returns to shareholders. I think our equity price is very low versus our net tangible assets. And certainly, I think the equity price is low versus traditional multiples. And certainly, it is a target of ours, as a team business Board to return quite a lot of funds to shareholders via dividends and buybacks over the next 2 years. I'd certainly say to people that if you do your analysis and research and have a look at what the business can do and that target debt level, you can see that -- I think it's a pretty exciting couple of years ahead for us. So in '22, EBITDA and revenue, $213.4 million revenue, $32.2 million EBITDA, up year-on-year. It's a quality brand. It's got a long history. The brand itself is over 50 years of history. Very well regarded. The feedback from clients is good. The safety performance is good. The cash flow is going to be strong in the year ahead. We're focused on our shareholders over the next 2 years. They've been very supportive in working with us to grow the business from a handful of people and rigs back in 2013 to where it is now and it's time to give something back. The buybacks in place and happening. The interim and full year dividends are moving forward. And again, as I said on the last slide, a very, very compelling, I think, investment opportunity. Thanks very much. That's the end of the formal presentation. We'll hand back to the moderator to see if there's any questions.

[Operator Instructions] Our first question will come from Tom Sartor from Morgans.

Three or 4 questions for me, if that's okay. Just curious about any potential lingering effects from those forces that knocked you around second half of last year, so around wet weather and maybe labor availability, working our way through COVID and the flu season. Are those effects abating? Or can you talk to how much of those you expect in the coming period?

We did get hit with a little bit of weather in the start of July, that last lot of rain that came through. Obviously, the weather since then has been good. Who knows what's going to happen with the weather moving forward, but I'm certainly praying for less rain. COVID, again, a little bit in July, but certainly a lot better than June. And I think you can see in the media now, reported cases on the decrease. So we're certainly seeing the improvement in that regard. But again, where does COVID go from here? Difficult to say. So I think, Tom, if we can just get a good clean run without some of those things that we can't control happening, it's -- we're very well set.

And on Slide 6, it's pretty easy to kind of pull out some kind of hard numbers on where those bars sit in terms of higher '23 guidance. Is that the wrong thing to do in terms of maybe setting a midpoint for where your thinking sits with higher earnings into '23? Or might those bars reflect a lower end of a range? They look a little light, but maybe you've built in some conservatism around those forces.

Look, I wouldn't -- we're certainly not giving guidance with specific numbers like we had previously. I think there's a few uncertainties out there with COVID, et cetera. I wouldn't be potentially looking at the bars as a guide. [ I sort of just being on look ] there is going to be a material increase in the earnings and in the revenue. It's just people could make their own decision on what they think that is. But at this stage, it's really looking good. But it's -- yes, it's tough to give an exact number.

No, fair enough. A few moving parts in there as well. Similar related, I guess, your margins were squeezed this year for reasons that are well explained. The old sort of 20% EBITDA margin target per contract, in this environment with higher costs and a bit of disruption, are those 20% targets still valid?