Mitchell Services Limited (MSV) Earnings Call Transcript & Summary

Good day, and welcome to the Mitchell Services conference call. [Operator Instructions] And finally, I would like to advise all participants this call is being recorded. Thank you. I would now like to welcome Nathan Mitchell, Executive Chairman, Andrew Elf, Chief Executive Officer; and Greg Switala, Chief Financial Officer and Company Secretary. I will now hand over to Andrew, our first speaker to start off the presentation. Andrew, over to you.

Thanks very much, and good morning, everybody. Thank you for joining us, and thanks for the interest in Mitchell Services. I'll just move through the first few slides and take the disclaimer as being read and move straight to Page 4, market profile. So obviously, the 2 points here, Nathan Mitchell our Executive Chairman and major holder with us here today, and we'll certainly open up for questions at the end of the presentation and feel free just to address your questions to Nathan. And then obviously, Scott Tumbridge, 7.3% holder Dream Challenge, and that was the business we acquired back in 2019 date 12 on the Board there as well. So just moving to the business summary on Page 5. I'll just run through these boxes at a high level and we'll talk to it more as we move through the presentation. So this is obviously the half year summary revenue up and heading in the right direction and CapEx down as we finished our major capital investment program now. All 12 of those rigs have been delivered, ramped up, transported to site and are now working and generating a return with global major miners. The average operating rig count was it did tail off towards the end of the calendar year was strong in that first half and certainly is improving again at the current point in time. Debt has peaked and reduced materially in the first half, and we'll continue to do so towards our target at the end of calendar year 2024. And obviously, the share buyback has been on foot and was $1.5 million in buyback payments as at the end of December, and that number is around about $1.8 million as at today, and it's still on foot. So just on to Page 6, this is a slide that we've put out there previously, and we expect a material increase in revenue and EBITDA in FY '23. And even though we had a couple of challenges in the first half, we stand by this at the current time. Notwithstanding factors that could impact us that may be out of our control, such as weather or other things. But certainly on the revenue side, we're looking good and then an EBITDA is certainly coming as we move forward. But I certainly think the business is in a wonderful position is continuing to grow and use the high-quality assets that we do have. Just on Page 7. Again, I won't run through that list of customers, but worth noting a majority of our revenue is from those global mining majors, approximately 90%. The commodity prices are still high. There is a strong demand for drilling, particularly in the steelmaking coal sector. And certainly, we have had some minerals contracts slow down or reduce and coal contracts start up and increase. So a little bit of a pivot within the business that impact the EBITDA would ramp up, ramp down to move rigs across into coal and where that stronger demand was. Obviously, people would be aware that the utilization is pretty good at 81%. Obviously, there's opportunity to further improve that as we move forward. There's obviously been inflationary factors within the business as well. But those 2 factors combined are providing us with an opportunity to retender and reset our prices when we have negotiations coming back and probably talk a little bit about that as we move through the preso. The capital investment program is complete. The rigs are out and generating returns. I mean that's been a very successful project for us, and we can talk more to that as we go through the presentation. But those rigs already are around about $200,000 more each to buy now than what we paid for them. So 2002, interest rates are a lot higher than what we locked our fixed interest equipment finance payments at all those rigs when we bought them. So I think the Board and the team made a very good decision in that investment. And then the last point there, obviously, the high 4 revenue streams, 90% from the majors. We split 50-50 surface underground. Gold around about 50% and obviously, 80% of the revenues from mine sites and things like that. And just along this page, Nathan I don't know if you've got any views or comments on the market or other things.

Yes, I think certainly, I think timing is everything. Looking back now the decision that we made to buy those -- that new fleet at the low interest rates before the inflation really grand old has been excellent. I think again, timing is so important to everything we do in this industry, the ups and downs. Obviously, we've seen coal really accelerate over the last couple of years, and we're still seeing that growth in the energy sector. And I think with what's happening in Ukraine and the war that's probably going to stay reasonably high for the foreseeable future and certainly a lot of interest coming back in that sector. Again, thankfully, we run across the board between minerals and energy. We're not focused on one or the other. We probably don't see the high of the highs in the mineral sector as some other contractors do, and we don't see the lows in the low. So the ability to be able to switch from one or the other. Obviously, inflation, you're probably hearing a lot of that, and we're all seeing it in our day-to-day lives. Inflation does bite. It does bite. It has bitten a lot of us in wages and in supply chain and fuel. Luckily, we don't pay for a lot of fuel. Clients pay for fuel. But still, those costs have increased significantly. Flights, as we all know, probably around Australia have certainly increased significantly, exclusively with Qantas. And those costs have gone up. But luckily for us, those costs obviously increased probably 12 months ago or 6 months ago, but we are seeing rollover, and Andrew will speak to that more. We're seeing rollover of contracts, and we're getting those price increases to offset those inflationary costs. But like everything, it's about timing and your input costs don't always equal your increasing invoices. So there is a lag period. And I think some of that's -- you'll see in these figures today, plus Andrew and Greg will talk of the one-offs that we've had issues with. But overall, I think December is always a tough month with wet weather always has been. And I think we're going back to traditional. So wet weather that we've seen over the years. And -- but I think it's looking fairly good going forward from now on. We're pretty happy with the rest of the year at this stage with the fleet count. But overall, I think the mining industry as a whole looks pretty good.

No, thanks, Nathan, and I agree. I think there's a very positive outlook. And again, we just got to have a couple of things go our way and some really good results coming through. And so just moving on to some of those operational updates that Nathan spoke about on Page 8. Obviously, the main thing with those LF 160 is to notice that they are with global mining majors. Those companies want the best tech, the new gear, et cetera. And we've certainly given it to them, and they're well and truly booked up for the long term. Those rigs are going to be a really good thing for us moving forward. multiple new and expanding contracts expected to be EBITDA accretive for the balance of the financial year. The heavy lifting has been done with contracted ended contracts have started, rigs ready, rigs are out, including the 12 LFs and they're out there making some money. And the last point on this part is a pretty important one, too, that we've now got 3 large diamond rigs out. And they're expected to remain fully utilized until at least midyear, hopefully longer. And that's highly specialist work, large rigs, specialist crews, and they do generate a good return to the company. So that's certainly going to give us a kick as we move forward as well. The rain in the first half of the year, unprecedented rainfall and multiple severe events, obviously, we do the best we can. But even places where clients made rainproof drilling pads for us got washed away. So it was tough from a rain perspective. And -- and obviously, it was sort of the best we can during that time. Disappointingly, we did have one safety incident. The client had to do with investigation there before we get going again, and that sort of impacted us there. But again, our safety performance in this business far exceeds industry cures. We're very proud of our safety record. We wouldn't be working for those global mining majors and generate 9% of our revenue from them unless our safety record was exemplary. So the thing that we're very happy about is that, that employee will make a full recovery. And just looking forward to getting back out into the field with his mates and getting back on the rigs. COVID a lot less than previous years positively as well. So all in all, a couple of things that got us, but generally, we're in very good shape. Strong bookings looking forward, strong demand should be a good time ahead of us.

Looking at the profit and loss on Slide 9. As Andrew mentioned earlier, in his operational update increased operating rigs and number of shifts led to an increase in revenue of approximately 20%. The business generated an EBITDA for the period of $16.6 million. And whilst that represents a solid performance, the EBITDA did not increase in line with the increase in revenue. As Nathan mentioned earlier, due to overall inflation pressures and key temporary factors, including severe wet weather events, contract variations and an unfortunate but isolated safety incident. Importantly, with an average operating rig count of 81 and with the recent awards of new or expanded contracts, the business is well positioned heading into the second half of FY '23. At an NPAT level, it should be noted that the acquisition-related amortization of customer contracts ceases from February. Also given that the capital investment program is now complete and ongoing CapEx is expected to decrease. The depreciation charge is expected to reduce accordingly heading into FY '24. Slide 10, looking at the balance sheet. The business is well funded to capitalize on its recent organic growth strategy and has no intention to raise equity for any reason. From a working capital perspective, the temporary increase in net working capital of approximately $3 million was largely due to increased inventory levels associated with the new LF 160 fleets. December's trade and other receivables were higher than traditional December levels, largely due to a delay in payments from a major mining client as part of an upgrade to its global accounts payable processes, which has been rectified post period end. From a cash flow perspective, on Slide 11, again generated solid 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. Cash flows from financing activities includes payments of approximately $1.5 million in the form of the on-market share buyback that, as Andrew mentioned earlier, is still currently on foot. Andrew and Nathan mentioned earlier, the benefits around the timing of the LF 160 purchases, obviously, from a cost of asset perspective and also from a financing cost perspective. But importantly, the business doesn't expect to pay any income tax now until at least the end of FY '24, and that's as a result of being able to benefit from the ATO's instant asset write-off program for which those 12 rigs qualify for. Gross debt per Slide 12, as previously picked $43 million in June following the completion of the investment program with first half '23 performance delivering a gross debt reduction of approximately 15%. The blended cost of debt of 5.2% remains in line with previous reporting periods due to the majority of debt being fixed prior to the recent interest rate rises that we've all seen. We expect the current trend of debt reduction to continue toward the end of FY '22, with the company remaining on track to reach its longer-term net debt target by the end of FY '24 being $15 million.

And just on to Slide 13 with the capital expenditure there. Obviously, the team has done a wonderful job getting those rigs delivered and out into the field and working. As Greg said, we get the benefit of the instant asset write-off and you can see the material reduction in CapEx year-on-year. Obviously, it's important to note that we always spend what we have to spend on CapEx to ensure our fleet is and remains world-class for those major clients we work for. But again, as I said, the heavy lifting and the spending is predominantly done. And really, it's a case now, we've got a fantastic fleet available to us. It's up to us now to go out and use it and generate some cash for shareholders. The capital management update on Page 14. Again, this is what we've put up previously, but the company is obviously committed to prioritizing a portion of that free cash flow to reduce leverage, as Greg said, by the end of that financial year, the target of $15 million and obviously, maintenance CapEx as required and then growth CapEx limited, but where it makes sense to do so. And then surplus cash, obviously, pending performance is where we really want to try and give something back to the shareholders and the dividend policy there, up to 75 reported post tax and profits in dividends. And so just on 15, how are we going against that capital management plan? What is our performance to date? Well, the debt is down, it's peaked, it's down materially down. And as Greg says, we'll continue to do so and on track to that $15 million within the next year or 2. Sensible CapEx limitation, obviously, well down and then payments to shareholders, obviously. We've got that share buyback on foot, and we've touched on that throughout the presentation already. So we're on our way. We just got to keep generating some good results, and we can only see that improve as we continue to move forward. And lastly, why invest in mutual services, I think we spent a lot of money on the fleet. It is a world-class fleet. The client base similarly is very strong. The revenue and earnings growth will increase from here, as Greg said, with the depreciation, reducing the amortization of customer tax dropping off, that will fall straight through to net profit before tax. And again, we've got some of those one-offs behind us will also lead to a better EBITDA performance. We're focused on that capital management strategy. I think it's an excellent strategy. And again, from a price perspective, I think it's the cheapest chips. I think where we're trading at the moment versus net tangible assets and traditional multiples, I think [indiscernible] represents very good value. So really, that's the presentation. We'll open it up for questions any questions, please?

[Operator Instructions] Your first question comes from the line of Tom Sartor from Morgans.

A few quick ones from me. Just on the fourth quarter, you -- it looks like you've sort of missed out on $2 million to $3 million of EBITDA there. Can you just quantify how much of that may have been linked to the unplanned demobilizations? And perhaps if you can give us some color on number of rigs, why that occurred? And should we expect these unplanned events here and there as a nature of the game type event in contracting?

Thanks, Tom. I think, yes, you're right. I mean $10 million in the first half and sort of 60% in a second, and the balancing item really is weather contracts and the safety incident to get us back to that sort of level, no doubt. I mean one of them was a contract with Newcrest in Western Australia at Havieron. We recently got a 2-year contract extension with that client going really well, doing a good job, and there was a new lens of that Havieron deposit we were going to drill out from the service for them. They made a corporate strategic decision to drill that from underground at a future point in time, month of portals in. So again, change in corporate strategy. And again, there's 3 rigs there that we had to take from Western Australia. Back to our spring a couple of heading somewhere else and couple back over this way. So similarly, other clients look at [indiscernible] Glencore, we're expecting a rig to run through to mid this year. I sort of said I know we're just going to wind it up at sort of Christmas. So a few little things like that and then you got to grab that rig, grab the people to crew and send them back out to another job. That's always happening in our business. It's always so. We've always got things stopping starting moving. What actually happened in that first 6 months was -- that was happening at the same time and we're getting those last gears ready to go out those mine services rigs that we spoke about. So you sort of had a combined effect of rigs getting ready to ramp up and go out. We're sort of coming off and moving combined with the wet weather and the safety. And so a few things that sort of all came together at once. But certainly, when you look as of today and looking forward, the accounts back half rigs are going out, everything is running well. No safety issues and we've got a good pathway ahead of us to 30 June.

Tom, Nathan here. Also just Christmas time is never a great time, December period. January, it's sort of a double whammy in that case where you've already got a pretty poor month as it is going in and coming out, going into December, coming out of January, like all businesses, really, and then you have those sort of things plus the weather. Yes, there is there's always going to be the sort of issues in the business. I suppose this time in the year is always probably the worst and just having those is a double head at the same time. And then you've got inflationary issues of significant costs now and transportation to go from one side of Australia to the other when you're demobilizing a lot that. And it's much easier to demobilize when you're in the Bond Basin or you're in [indiscernible] to Rama that versus from one side of Australia or the other with 20 pieces of trucks.

All right. That's good color. It looks like your average revenue per operating shift is sort of at a 3-year high. I'm curious about the amount of runway you think there's still to the upside in terms of rates? Just noting that the competitive environment, you might be seeing more rigs that were with some junior companies start to come back into the market given the fundraising in that segment seemed to be tapering off a bit and curious about whether the competitive environment is still really tight? Or do you think there's a good run rate in rates?

Yes. I think the always the important thing to consider when looking at our revenue per shift is the mix of the work. I think what you're seeing with the introduction of the 12 LF drill rigs, Tom, is 12 surface rigs. And as we move into the second half with those mines service ring on their surface rigs as well. So probably in that first half, a little bit of a change in the mix of the work as those LFs went out in a higher proportion of surface work where the capital costs are higher and the revenue per shift is higher, driving that number a little bit as well. So I think, as Nathan said, with inflation, we are getting rate increases and resetting the book. And a lot of good work has been done there by the team. As Nathan said as well, is still work to be done, and we're focused on that. So I think certainly, revenue per shift, I think, in H2 will continue to go up again as that higher proportion of service were combined with some rate increases flows through. But on the market itself, Nathan, maybe you want to comment on your views on the competitive landscape.

Yes. I think the -- it was a bit of a softening at the end of the last year in the gold market. Certainly, I think also I think a lot of the large guys, Tier 1 guys locked in last year. When this year, we're obviously seeing more of the smaller guys, they tapered off last year, I think, and -- but they seem to be coming back again strong. So there was this period, I think, between sort of November and now where the juniors were sort of have gone quiet, not that they're very much of our business, and this is what I'm hearing in the sector. But that seems to be accelerating again, which is good to see. I think gold is sort of going. Obviously, what's happening with again in Europe. People have got their eyes on gold if things happen for the worst, and I think the gold price will continue to climb. So I think the June is a standard to get a bit of wind in the sales. But for us, I think as Andrew said, we've sort of probably rerated 30% of the book. There's still more to go. Clients are open to accepting higher rates, which you can see in costs, I think, have started to peak. We saw serious headwinds in pipe and consumables last year. I think that started to come off now, prices the excess capacity starting to show and pricing is starting to show become more stable, which is good on a go forward. So overall, I think we're reasonably where the market is.

Your next question comes from the line of [ Alex Anderson from A&J Anderson Management ].

Yes. I am a shareholder with 900,000 shares. Looking at the increase in number of rigs that you have working, it would appear that you're buying market share, you've got a gross margin of 15%, and that is not really adequately giving you a return to shareholders. Please comment on that comment?

Alex, I think we never buy market. There's no benefit in us to keep spending for the sake of them spending. My father always said to me, if you're not making new money mill park them on the side, and that stands true today. I think you try and get the rig working on good margins, otherwise don't get it working. And so I mean, this rig sitting on the sideline is because we don't want them to work or the contracts that we -- that are there aren't good enough or we didn't win because our products were too high. I think more of the focus for us is trying to put them into the best possible place, the longest-term contract. And you can see what's happened in December with a turnover of contracts, it does hurt short-term contracts either way erode EBITDA compare very quickly, especially when it's unexpected. So longer-term contracts, multiyear contracts, especially for a listed company when we have to answer to our shareholders are far better for us as a company than short-term contracts like Tier 2, Tier 3 clients. Otherwise, we're always asking the question of why does it profit margins go up and down like a yoyo. So certainly, we don't buy a contract that's for sure. We're not in the business just to then.

I think also just to touch on what Nathan said, I think the capital management plan demonstrates that we're focused on returns to shareholders, and we're heading in the right direction with our returns and the performance of the business. I think the business is generating cash, debt is coming down. The buyback is on foot. And with the amortization dropping off depreciation, some of those weather and other things behind us. It is definitely the Board's intention to it some difference. So really, I think the business is in the best shape it's ever been. I really do believe that. And I think the next couple of years are going to be very good for us.

Okay. But my second comment is I look on myself as a long time shareholder, and the share buyback for them shows really nothing for me. You spend over $1 million. I would have preferred due to have kept the cash and standout of the dividend. A share buyback, I'm not a temporary shareholder. So how the percentage profit on the share buyback for me is down low.

I understand, Alex, I'm a longtime shareholder as well. So I'm not going anywhere in the future. So we're both in the same boat there. But at the share price of $0.35 to $0.40, it's pretty cheap. And I -- my belief is that at some point in the future, we will be paying good dividends. And at that point, you and I should be getting more dividends and better dividends. So that's my plan. I'm hoping it's the rest of the shareholders' plans. But at the moment, to me, it seems a better option to buy those shares back at $0.35 than to give it out. And that's because I'm a long term -- I'm not looking at it from a short-term position.

[Operator Instructions] There are no further questions at this time. I turn the call back over to our presenters.

Thanks, everyone, for joining. Appreciate the interest, and thanks for those that ask questions, appreciate it.

This concludes today's conference call. You may now disconnect.