Mitchell Services Limited (MSV) Earnings Call Transcript & Summary

We are pleased today to host Mitchell to talk about their quarterly update. Just on casking minutes, if we could sort of [indiscernible] towards I'll address and have the team answer questions for you. And also note, this session is being recorded. Just an FYI. And just to sort of start up just for the new investment on the call, maybe worthwhile giving an overview of the Mitchell, a bit of background we and obviously, the best of the Board of Management give you a bit of flavor. So Andrew, over to you. Thank you.

All right. Thanks very much, Alan, and welcome. Thanks for joining the investor briefing, and you certainly, as Alan said encourage you to get your questions in and so. For those that aren't familiar with the background of Mitchell or Mitchell the brand or Mitchell services, I'll give a bit of a brief intro and then touch on broadly before I hand over to Nathan. So just the Mitchell Services brand into [indiscernible] those that are has got over 50 years in experience sold that in 2008 for a large amount of money. It was the largest privately owned drilling company in Australia which was up for sale and was sold to ASX-listed AJ Lucas Limited. After a 5-year noncompete, we reverse merged back into the Australian market, a company called Drill Torque that was listed, changed the management team. In come 10 years, well, Novatel be 10 years of Mitchell Services post that reverse merge. But after reverse merge a couple of asset acquisitions at the bottom of the market, a couple of earnings and free of acquisitions. And in more recent times, a material organic growth strategy that's now complete. Sort of all those things aside, you look at the business today, where is it, what do we look like. The client book is 90% working on mine sites and then that sort of thing or even we've only got about 1% or 2% of our revenue comes to marine and exploration. 80% of our revenues from global major Tier 1 miners and probably 10%, 15% for Tier 2s and 3s. So it's a high-quality contract book working on the basement sites around the country that are low in the cost curve and operate through the [indiscernible]. We work in the hard rock sector. So we sort of got probably some of our revenue come from copper, gold, lensing other and 40% of coming from metallurgical coal, and we work on the surface and we work in the under as about 750 people. And it's a bit of a brief intro to the company. Obviously, Nathan Mitchell is with us today on the door found a connection and just under 20% holder. We'll talk after. So obviously, from a company perspective, 10 years in November and really company is in the best shape it's ever been. I think we're very well positioned, and I'll touch on that as I go through some updates on the lease. So I'm not going to read the quarterly such on a few key points that I'll go through. I get to say that it's been a strong start to the financial year, our financial and operating cash perspective. Even cash outflow that we have for shareholder returns in the first quarter, we remain in a very favorable net debt position and certainly on track to achieve our target $15 million in net debt by the 30th of June 2024, bearing in mind there won't be any cash tax in the short term, given we took advantage of that constant asset write-off scheme with our organic growth strategy. When people read the quarterly, we had the little chart on the recent operating shifts. Those 2 charts that you see in the recent quarterly is the corresponding quarter versus quarter year-on-year, which does show a reduction. But if you actually look at the operating rig count over sort of the last 6 months or so, it is really flat. We've got about 98 rigs in the fleet. We've got 5 that are old underground rigs that we used within an inch of their life and had a very good time with them. They're old and not going to get rebuilt. So I would work on the assumption of 93 rigs in the fleet. And from a utilization perspective, what we've told people, as we've seen previously, 90% utilization number to work on as a full utilization for doing business. So 90% of 93 rigs is approximately 83 rigs. So in that quarterly, we did state that demand remains strong and Nathan have talked to his views on the market when I finish. And we expect operating rig count to increase as we move into the second quarter. Obviously, inflation is easing, majority of contract pricing is being reset. We're certainly in good shape moving forward. The heavy lifting and hard work has been done. And obviously, you can see that the numbers are starting to come and as are the shareholder returns. Towards the end of the quarterly, we talk about the prestigious safety award that the team won in recent times. Very proud of the team for that. And that was work -- that was against all industries and also as organizations. So certainly very company of our size, I think, a very, very proud moment for us and certainly talks to the quality of our safety culture and our performance as well in regards to safety. So based on the results in the first quarter and the fleet and all of those things, I certainly think we've got a world-class fleet available to us. We've got fantastic people. The strategic outlook for the business is extremely positive. The balance sheet is getting stronger over the time. We're on track hit our net debt target was put out there of $15 million by 30 June next year. And that balance sheet strength, it's going to give us optionality in the future, whatever that may be. So from a strategic perspective, we have a couple of board strategy sessions every year. Our next one is in November. And that's probably the first time that the Board start turning their mind to where to here for us as a company given the strong and positive position that's going in the near future. From a coverage perspective, for those that aren't aware, we do have coverage from Q value and from Morgans. So if you're interested in looking further at MSP, I'd encourage you to have a read of those notes. So I'll hand over to Nathan, our Chairman, and he can just talk a little bit about his views on the market and some of the capital management of the business.

Yes. Thanks, Andrew. Look, first and foremost, I couldn't be happy or proud of the guys and what they've done. It's been another record for us on this last year and this last quarter. I think we've just gone from strengthening. We're now at 90-odd rigs in the fleet age. And I think 10 years later, that's an amazing opportunity when I sold back in 2008. We had 30 rigs. We're now 3x the size of that in only 10 years. So again, I agree with Andrew, the company hasn't been in its best position it's ever been in. So and the numbers speak for themselves. I think from a Board's point of view, I think fundamentally, we're always looking at what is the right capital management for the shareholders going forward. And for us, I think as I've said, in previous presentations and years gone by, there's really sort of four prongs to what we can do at a Board level, and that is, one, to reinvest our profits or returns into the business for growth. And we did that -- 2 years ago with that investing into the new smarter rigs, and that has really made a huge difference to our business and a 3% or 4% interest rates at instant asset write-off with the government. I think that was spot on. And you're seeing that now in the results that we're seeing today. The second prong is obviously debt reduction. And again, we're on track for debt reduction, as Andrew has said, that's another prong that we're looking at. We don't want to be holding lots of debt. We took on a lot of debt 2 years ago to make that decision on those rigs. We've now paid that debt off very quickly. And then long lead us with the other 2 prongs of what we can do as a Board. One is to either return cash to shareholders via dividends and also do share buybacks. We're doing both. I think we're trying to get a blend of all 4 of those. I think we've certainly done well in the first 2. I think we've done well in the dividends. Obviously, we paid a dividend. Overall, great which sort of paid $8.7 million in shares and buybacks for the last 12 months. So that's a fairly hefty return to shareholders, and we'll continue to try and to do that going forward. I think right now, our view is we can continue to grow, but we're now at 8% interest rates where we don't have the instant asset write-off. Not to say that we won't continue to buy rigs, which we will. We'll continue to grow the fleet as we buy and trade out of old rigs into new rigs. But what we're looking at now is the return of dividends to shareholders. So it's been a long 10 years and -- but also at the same time, we're looking at the share buybacks, as I say, that's an avenue that we feel that there is an opportunity at the current share price. The ability to be able to turn that on and turn that off subject to where the market goes, the market turns, we can turn it off. We can turn it on. We don't have franking credits. Obviously, the benefit of buying those assets and instantly writing those off gave us the depreciation benefit, which means we don't have the franking credits at the moment. So in our view, there's obviously benefits in them doing the buyback. So again, it's really a balance. We've really tried to balance, a, first and foremost, let's get the business really going well. Let's get ourselves market share. Let's get us to #1 position in the industry and look at what we do, from there with regards to returns to shareholders. And I think we've got a good blend at the moment. We've nailed the timing where the market is. And now we're seeing now those fruit to come to players. So again, I couldn't be happier with what the team has done. On a go-forward position, as Andrew said, we're obviously looking at -- we'll have the strategy meeting next month, again, which we have every year or every twice a year, of where we're going to go. The market still looks strong for us. Coking coal is up again, USD 318 at USD 0.62, USD 0.63 to Aussie dollar. Those guys are still making a lot of money, and that represents a large part of our business, 40%, as Andrew said. So that will continue. Thermals at USD 1.2, I think. We don't do very much in thermal at all. Most of our business is all coking coal. But you've got gold now at USD 19.75, I think, again, AUD 63. So I think that will go to AUD 2,000. So what's happening in overseas in the U.S. and the Middle East. So we're in a pretty strong position, I think, going forward. We spent our money the gear. And I think the market looks reasonably good for our business going forward from a drilling point of view. The majors are still drilling a lot of holes. They want safety as #1 parameter, and they're getting that from us. So that's really us and the snapshot. We'll have our AGM tomorrow on the business, and we'll run through a whole bunch of notes on the company. And -- but overall, I think we couldn't be happier. I think there's a whole bunch of questions, Andrew?

Hand back to Alan.

[indiscernible] I think we've touched on the rig so I'll read a question. So what is the plan with the current mix?

Look, I think this is all vital roots. And people ask that question to say, well, why would you sell the not a reason return that in the form of dividends or share buy backs. The issue is we are a very diverse drilling business. As I say, we're underground, we're on the surface, both in minerals and coal. So we've got live diameter. We've got directional drilling. So we've got a diverse fleet and the fleet changes. So we don't have -- we're not a hire company that has all totalis. We have a whole different set of rigs. And so this next 6 months, gold is up, there might be a lot more exploration and maybe there's not as much work for the large diameter rigs and vice versa. Coal mine slowdown is an issue. They turn us off and so we slow down. So we've always tried to keep a mix of rigs that we're ready to go to a client when they need us. And it's always an issue. You've got have these sitting on the sideline. It's a 12-month lead time for drilling rigs. And if so a client, a good client comes to us and says, look, we need you to ramp up. We can't just turn around and say, look, we'll get back to you in 12 months' time. So yes, we have got idle rigs. But the only -- if they're idle rigs that we don't think they're necessary, then we'll sell it, which is what we've done over the last 12 months, and we've returned that capital in the form of dividends -- sorry, in the form of share buybacks. So yes, we're actively looking at rigs that we think are idle and no good versus idle and are useful to us going forward.

Yes. And I'll just add to that, that as I said this 93 rigs in the fleet at 90% utilization is about 83. We got 75 running. That gives us about 8 in hand. Those older rigs that we've really run down will be scrapped or sold to a limited value. So really, there's a handful of rigs left, and the demand for the surface rigs as Nathan touched on is very strong and those rigs that we've got available to us are predominantly underground rigs. So, I certainly think 75 running heading into the second quarter. Demand is strong, and we've said in the quarterly that the account is expected to increase. It's in good shape.

Second question from Jason wouldn't even be more beneficial to utilize the buyback decide to maximize the amount of shares purchased instead of purchasing high volumes initially and heavily slowly the buyback has occurred. I guess he's referring to the speed of the buyback.

Yes, I suppose, Greg. There is limitation as to what we can do.

Yes. Look, happy to touch on that. I think the first 1 in terms of the broader capital management policy is the thought process is that profits will be returned to shareholders in the form of dividends, sort of up to 75% of profit. And then to the extent that there are any asset sales of idle rigs the thought process being, I suppose, as you reduce in theory, your earnings capacity, the appropriate form of capital return there would be would be through the buyback. So just touching on a couple of those issues around the timing. Yes, it was heavier in the early days. That was largely a function of the asset sales that did occur that circa $4 million in buybacks came at an average price of $0.37. Our view, and I do say the Board's view as well is $0.37 represents outstanding value. And so happy on the basis that it was asset sales on the basis of the $0.37. Happy to purchase to the extent that we did. Now it's probably a case of a little bit slower on the basis of needing to get to 31 December, finalizing what the extent of funds available for further distribution and obviously, the fact that the asset sales are on pause. So I hope that talks to the sort of split. The other aspect worth noting is a standard on-market share buyback where they are under the rules limitations in terms of how many shares and at what price. And so it's also a function of the volumes that are out there at the time. And that has, in more recent times reduced from where it was. But I hope that answers the question.

Thank you. Great. If you can share, what indications are you getting for clients on how they will be operating over the high period in December, January?

Yes. So obviously, people would be aware, we've gone from El Nina to El Nino, which is supposedly meant to be dryer. So that can only be a benefit for us, hopefully, given what's happened in previous years with weather, but you can never control the weather. But yes, certainly, our clients are busy. There will be a very short break at a majority of sites and set most of their intention to keep going. So as I mentioned earlier, well in excess of 90% of our revenue is from operating mine sites. And again, it's not greenfield exploration. So those mine sites, as Nathan said, are making good cash with commodity prices where they are. Their budgets are strong. The demand for drilling services is strong. They've got work to do. It's a short break, and they're going to get on with it. So should -- there is always traditional seasonality around that time. We do stock for Christmas, New Year in many instances, but it's looking good.

Thanks, Andrew. A few questions from Jason, with a target of net debt of $15 million by June 24 and current debt of roughly $18 million. Is the intention to make acquisitions, shareholder returns or CapEx on rigs?

Well, I think I want to -- it's really just going to be a blend of all 3. There's always opportunities. People are approaching us all the time for -- to look at investing or buying their companies. And we'll always look not to say that we'll do anything, I think we've been quite prudent on the companies that we bought and the investments we've made. So we certainly have a look, but at this stage, nothing on the horizon that would warrant if we do anything. And I say the rest we would just blend what we think is the right decisions for the shareholders. I think whether it's share buybacks, dividends or net debt. And I think it's -- again, it's just a blend of all 3, not to focus on one or the other.

Make sense. Thanks, Nathan. Jason, I'll recap to you firstly on broker research and then we go from there. Question from Daniel Seeney. Perhaps a question for Nathan on capital returns. The company has had a good start to FY '24 and Board has decisions to make it at the half year results. How are you thinking about weighing up dividends versus buyback in FY '24? And is it FY '23 dividend a reasonable reference point for what we should be thinking about some interim and final FY '24?

Good question. I think that -- look, we're always hoping to do better next year. It's always not sure where the world is going to go. But I think ideally, we'll do better next year. But again, weather all the other things that we -- that are outside our control, where we're on target to hopefully replicate what we've done and better it again next year. So -- and that's just been the same year in, year out every year. And so I think we'll look at -- we obviously have paid the dividend now, and there's potential for further in the future, whether it's another interim dividend or a special dividend or just share buybacks. Let's see where it goes. We're not -- we haven't made any decisions on that, and we'll take that to the meeting and the Board next week, next month.

And is there a franking level?

No. We used the balance of our franking credits in the previous full year dividend or final dividend as sort of touched on previously that we've obviously got those tax losses now as a result of the government incentive program given our material organic growth program which means we're at tax loss position. So no franking credits in the short term.

So thank you. A question from Alex. What's the biggest of challenge for the business in 2024?

Look, I always say it's a people business. It's a service business, and it's all about our teams and the people that do the hard work in the field for our clients. And the biggest challenge is just people and as i just said safety and it's managing a team of over 750 people working 24 hours a day, 7 days a week around Australia, surface and underground drilling business never stops. So certainly, I think that's our biggest challenge this year. Commodity prices are good. Demand is strong. We've got a great fleet. They're all the things that we can control and have done a good job on, but just day to day to people for sure.

Next question. Pricing and terms clearly improving, but shifts down from the last 6 months, can we expect shifts to get back to the first quarter currency levels?

Look, I probably won't comment on where the actual shift count is going to get to other than to say we've said in the quarterly that the rig count is going to increase moving into Q2. So I think you can certainly do your own maths on average operating rig out a number of shifts and make some assumptions on how many you think may be operating in Q2 and onwards. So yes, we expect it to increase, but I won't say here and actually give the number to shifts.