Mitchell Services Limited (MSV) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining us today. My name is Allen Chan for Bridge Street Capital and we are hosting Mitchell Services. They are here to present their full year results. We have Executive Chair, Nathan Mitchell; CEO, Andrew Elf; and CFO, Greg Switala, to talk us through the presentation. We will have a Q&A at the end. So if you could put all your questions into the chat and I will address them after the presentation. Andrew, over to you. Thank you.

Thanks very much, Allen and hello, everybody. Good morning and thanks very much for joining the Mitchell Services full year results call. Obviously, I'll go through some slides. Nathan will certainly add his comments along the way and Greg as well. And as Allen said, we'll open up for some questions at the end. We'll take the disclaimer on Page 2 as being read as the agenda, 3 -- Page 3 as well and just move straight to the market profile. So we can see there, obviously, the number of shares slightly down year-on-year with the buyback that's been in place. Share price obviously has traded in a fairly wide range throughout the year and just off a little bit in the last little bit. The holdings there, obviously, Mitchell Group, Nathan Mitchell, Executive Chairman; and Dream Challenge, Scott Tumbridge, one of our other directors and the founder of Deepcore that we acquired back in 2019, a pretty good register of institutional investors for a company of our size. And then obviously the retail investors there as well. Just moving on to Slide 5, a summary of the business. I'm not going to go through every single metric there, other than to say there's a couple of key ones heading in the right direction. Operating cash flow, a fantastic result and up year-on-year. And return on capital, again, another good result, profit after tax over $9 million and importantly, a national safety award against all the companies of different sizes and different industries. And certainly, our safety performance and our culture within the business is something that we're very proud of. So a good year for the company in summary there from a numbers perspective. From an overview perspective, you can see some of the clients there on the right. Obviously, we make the point towards the bottom of the slide that over 90% of our revenue is from the global major miners and the relevant splits of revenue, surface, underground, gold, et cetera. But demand for drilling services, there is a continued demand and we re-won all of our key expiring contracts in '24. So that's certainly a credit to the team and the quality of the service that we're providing. Inflationary pressures have eased. I think that's pretty well publicized across the industry. The drilling services market, certainly for majors and producers, is stronger than exploration. Exploration remains soft. The business has no exposure to lithium or nickel. And obviously, we've got those high-quality revenue streams from those high-quality clients that helps us generate that strong cash flow. So importantly, when you look at where commodities are at the moment, gold represents about 40% of our book and gold is, from a price perspective, very high. Operationally, on Page 7, the customer base remains strong. As I said, we've rewon the major contracts that we need to rewin, obviously, albeit with fewer operating rigs, and that's come through in recent quarterlies. We have been awarded some new contracts in recent times, which is fantastic. Good wins with some new clients as well, including Whitehaven, Daunia and Blackwater. We won the old BMA assets out there. But the market is expected to soften due to a couple of factors outside of our control, namely the underground fire event at Grosvenor. Again, that's been well publicized. It's the site that we are operating at. And we've got a couple of surface rigs going out to do some investigatory/remediation work at the current time. It is the client's intention to conduct some investigation works and hopefully get back out there again like they did after the last incident. But obviously, those assets are for sale as well. So we say here that second point, mining industry corporate activity, obviously rig counts are affected by transaction [Audio Gap] as well. And then, as mentioned previously, that general market for junior explorers is a little bit softer and you certainly see that in the equity markets. And then again, once the equity side of things improves, it takes the lag time, sort of 6 to 9 months or so for that money to then go into the ground. But importantly, the EBITDA for the year, $40.4 million, slightly lower than the previous corresponding period based on that decrease in utilization. But again, some very strong numbers overall coming through. And again, importantly, a very strong material growth opportunity for the business does exist and certainly pleasing to put these next few slides into the pack for the first time and to tell people a little bit more about this opportunity that we've got in front of us. So again, we've called it Loop. And again, it's a partnership between ourselves, Mitchell Services and Talisman. It's a 50-50 joint venture. You've obviously got over 50 years of brand and drilling experience on the Mitchell side. And then obviously, you've got the expertise and technical focus that Talisman brings on the other side and certainly, that operational experience in coal mining, both surface and underground. So really, the aim of this business is to reduce emissions from fugitive gases and then to recycle that waste by using the gas where possible. So we purchased a rig. It's currently clearing customs. We've hired a CEO for that business called Vikesh Magan. He was previously working for Thiess, running over $1 billion business operations in Queensland. And obviously, a key part of this business is linking in the drilling and the gas management and drainage with operational activities. So hopefully we get some good traction. And the aim is to try and get that rig running with a client early next year, once it's cleared customs and been set up. So importantly, on the next slide, with Loop, it is a full service offering from start to finish with Talisman and with Mitchell together from a decarbonization strategy perspective and modeling and gas reservoirs, gas content through to operational readiness and then actually conducting the work on the ground and draining the gas and in field management. And again, there's potential downstream opportunities longer term as well. So it's quite an exciting opportunity for the company, but it will take time to develop and it will come. And then again, there's a couple of slides in here, probably more for those that aren't attending today that can sort of read through these at their leisure and get a bit more of an understanding of it. But it really is that government legislation that has driven the change, the safeguard mechanism legislation. And that basically the long and short of it is, you're either going to pay a tax if you don't reduce your emissions or you can do the drilling and reduce your emissions. And at this stage, our modeling certainly shows that in a majority of cases, it's a case by case, mine-by-mine basis, but it's certainly going to be cheaper to drain and manage the gas than it is to pay the tax and certainly more socially acceptable as well. So Nathan, I'm not sure if you've got any comments on this opportunity and what you've seen previously in your career with things like this.

Yes. Thanks, Andrew. I think, look, it's an exciting opportunity for Mitchell Services and Talisman. I think this is something that's been in the wind for a number of years, even decades. The opportunity around waste gas previously just hasn't been there in the market. And it's something that we've been looking at for a long, long time. And this safeguard mechanism opens that door for us. I think for us, it's around what we saw back in the early 2000s in the start of the CSG industry. Obviously we'll start small and grow. We'll obviously be first mover in this industry. And so we're looking to really grab hold of this and drive it forward over the next 12 months and ongoing. So hopefully, we see a number of rigs post the first one. That's the plan. But again, I think it will be driven by our customers and how we can offer them a full turnkey solution. So, yes, that's an exciting time for the business.

Look, we're certainly not going to sit here today and answer questions on what's the total available market, how many rigs and all this sort of thing. We're not -- it's not there yet. It's early days. It's going to take time. It's going to be choppy. But it is a material opportunity. We can certainly say that. We're talking 10s of rigs, at least at a minimum if this thing gets going.

So just running through the FY '24 financial results. Despite EBITDA remaining relatively flat, the company has produced a strong post-tax earnings with profit increasing by 21% to $9.2 million for the year. This improvement essentially was driven by the reduced D&A as well as lower finance costs, given both the normalization of CapEx and the significant reduction in net debt. And I'll touch on both of these points as I move through the pack. Looking at Slide 9, increased pre-interest and tax earnings, together with the reducing PP&E base represent favorable conditions for strong ROIC numbers, and we've certainly seen that again in FY '24 with return on invested capital over 16%, up from 12% in FY '23. Slide 10, looking at the balance sheet. The strong profit performance has meant that the overall balance sheet has continued to remain strong. And from a working capital perspective, the solid EBITDA performance and a reduction in operating rigs has driven a $7 million improvement from $27 million last year to $20 million currently. This improvement has driven material increases to cash flows and significant reductions to net debt. And I'll also highlight those points as we move on. From a cash flow perspective, on Slide 11, the company generated record operating cash flows of over $43 million at an EBITDA to cash conversion ratio of well over 100%. This exceptional performance was driven largely from 3 factors, namely the strong EBITDA performance, the significant working capital improvement, as highlighted on the previous slide, as well as a 40% reduction in interest costs given the rapid debt reductions over the same period. Worth highlighting too, that the business doesn't expect to pay income tax until at least the end of FY '25, having benefited from the ATOs instant asset write-off program in relation to CapEx in FY '21 and '22. Looking at Slide 12, I touched earlier on the significant debt reduction and that's certainly highlighted on this slide. Net debt has essentially reduced by 90% to $1.9 million at June. And with the Deepcore acquisition facility now fully paid, gross debt comprises entirely of equipment finance facilities with pricing that was fixed mostly prior to the rate increases that we've seen in recent years. And that's highlighted in the blended average cost of gross debt figure being about 5.7% as you see there. On a net debt to trailing EBITDA basis, operating leverage is now practically 0. And probably just worth noting there, just given the upcoming dividend in September of about $4.3 million. Net debt at the end of FY '25 Q1 will likely represent an increase versus the $1.9 million figure at June and we'll report on that as per normal in the quarterly that comes out in October. Finally, from a financial perspective, just looking at CapEx on 13. The total CapEx in FY '24 was $17 million and largely in line with expectations. Andrew and Nathan will talk to capital management later in the presentation with the company continuing to apply sensible limits to growth CapEx under a balanced framework. Growth CapEx in FY '24 was limited to that decarbonization rig that Andrew spoke about earlier, as well as 1 new LF160.

Thanks, Greg. And just following on from Greg's comments there, I think the allocation to these 4 pillars has been excellent. I think the company in the last few years has done what it said it's going to do and I think this slide really does highlight the delivery of that. And in particular, the last point down the bottom, the significant reduction in net debt from $40 million to just under $2 million and $17.7 million to dividends and buybacks to shareholders. So I think that's been a fantastic effort by the company, by the team, good strategy and good timing, Nathan.

Yes.

And I think just on to the strategy for '25, I might hand over to Nathan and let him talk a little bit about this line and capital management and things like that.

Yes. Thanks, Andrew. I think and key again, and we say this every year and every quarterly, everything is about timing. And I think yet again, we are seeing -- when we said in there, some softening in the exploration market. And again, I think the decision 12 months ago or longer to reduce debt write-down, again, was excellent timing by the Board and the team. And whilst we're still busy and we're still winning a lot of work, we're seeing definitely a softening in the Western Australian market. So strategy for this year is to continue what we're doing. We're going to focus on the capital allocation, the buyback, still looking at dividends, obviously, winning contracts that are profitable and looking after the clients that make us the money. So they're the key structures for the business. The decarbonization, we're excited. But obviously, that won't really kick in until sometime next year and then probably post that in the years to come, where we see some real change. But suffice to say this, next 12 months, I think we're in a very good position. Whether things continue to remain the same or soften or grow, we've got a position of a debt position where we can accelerate into it or take advantage of potential company mergers or changes or buys or purchases that we see potentially coming in the future or not coming in the future. So as we said before, I think the inflationary pressures have eased a bit. I think not to say that the costs are coming down, but they're not going up, which is great. I think the dividends that we did last year, I think were excellent and also the buybacks. Again, those 4 pillars that we talked about last year, we will continue to look at those 4 pillars and really just allocate start of the year is already just starting this year. And I think we'll look at that as we go through the year, how we allocate those buybacks and how we allocate those dividends going forward. So yes, we see some choppy wins ahead, but I think we're in an excellent position, depending on what happens in the market. So unfortunately, we've had the issue with our client at Anglo. That's never great for us and never great for our customers. So that's something we're dealing with at the moment. But as Andrew said before, we've got a couple of rigs going back out there now. So that should kick back in again. So all in all, I think 2025 is going to be still good for us.

No, that's great. Thanks, Nathan. And look, just to wrap up, in summary, and Nathan has probably covered most of it there obviously. Year-on-year NPAT, return on capital, materially greater, debt down, returns to shareholders and significant reductions in debt. The demand is there for drilling, but again, a little bit choppy. FY '24, we've re-won major contracts account, and we're doing a good job, good safety, good culture. Clients are generally pretty happy. Inflationary pressures have eased and things, of course, as Nathan said, it's a fantastic brand. It's been around a long time. It's very well respected and we're going to be here for many more years to come. Again, we've spoken about the contractual side of things and utilization. But again, most importantly, and just to reiterate what Nathan said, we've got options available to us. We've done the hard work the last few years, and we're in a good position whichever way things go. And certainly, if opportunities come, we'll jump in whatever they may be. Allen, I'll hand back to yourself for the questions.

Thanks, Andrew. Thanks, Nathan. Thanks, Greg. Okay. So I guess the first question that has been voiced is around the buyback. I guess there is questions around shareholders suggesting that at these levels, you should be a little bit more aggressive. You've mentioned that you guys have [ 20,000-odd ] shares per day. Is there a thought process that you possibly uptick in daily volume or what's the methodology? Just kind of share with us overview.

I think it's -- at this stage, we're continuing to do buybacks. Again, it's really around trying to be a measured approach to buybacks versus dividends, not going too hard into one, not going too hard into another. So I think -- and I know people have said that are we putting a ceiling at our price? I don't think so. I think at the moment we're -- we're not focusing on the buybacks per se. We're focusing on the business. The buybacks, I think, are something that's to the benefit for the shareholders. But fundamentally, we need to run the business and generate profits. And so that's the key at the moment. I suppose it's early for us in the year. And so we've only just finished budgets going forward for 2025. And we'll see what -- I think we'll see what happens. But as I said, we like buybacks. Generally it's good for the shareholders that are hanging around and staying in the business. Yes, I think it will continue at this stage.

Thank you. A question from Daniel Seeney. What are your expectations for CapEx and depreciation in FY '25?

Thanks, Allen. Certainly from a depreciation perspective, I think reasonable to sort of assume a number that's in line with FY '24, which was $25.7 million or there thereabouts. CapEx is, to be honest, slightly harder one to answer, just given some of what Andrew was speaking about earlier in terms of fluctuating rig numbers and opportunity pipeline et cetera. So -- but based on where we are now, I'd sort of say again a number that's broadly in line with the $17 million in FY '24, but that's going to be a little bit more fluid and it will play out depending on how operating rigs plays out and tender pipeline et cetera.

Thanks, Greg. Another one from Daniel. The dividend payout ratio was 94% FY '24, which is above the policy of up to 75%. How should we think about the dividend policy in FY '25?

I might start with just commenting on the first point. So, yes, the broader policy is 75%. Just given everything we've talked -- we've sort of spoken about now in terms of that rapid debt reduction, the very favorable cash flows, et cetera, there was clearly an argument to push that to 94%. So I would certainly sort of see that as a once-off. Subject to any further comments from Nathan, I think that 75% of NPAT number is probably reasonable going forward. Obviously, yes, there is the concept of the buyback there and pending what the share price does. So the quantum of the dividend, therefore, at 75% will be very dependent on what the NPAT number is. And similar to my comments earlier around CapEx, probably fair to say a level of uncertainty around exactly what that will be. So impossible for us to call out an anticipated dividend number on this call.

Yes, I think you're right, Greg. I think 75% is -- we put that there for a reason. I think that's where we'd be. I think last year was obviously good cash flow numbers, so we pushed it up. But I think for the future going forward, I would budget on 75%.

Thank you. Just one for me, Andrew. You mentioned new contracts, Whitehaven. Can you provide some more color on those contracts? Are there any other new contracts that you could talk about?

There's a couple of others that are good as well. They're still going through the process. So I probably can't say too much about who they are or where they are. But certainly, I think, again, rigs increase and rigs decrease through the life of long-term contracts with large miners at different sites for various operational or strategic corporate reasons. And that's what we're sort of seeing. Commodity prices in copper, gold and other commodities we work in are still very strong. So some of these things we've seen are out of our control and just the natural part of things. But the team has won some good contracts on the flip side, which is a good thing. But you're always going to see costs as rigs come off and cost to get rigs out and that sort of thing. So that's going to -- those things do impact the profitability of the business in the short term, but certainly set you up for the longer term. So again, I think that that low debt position we've got really gives us the optionality as Nathan said, to take advantage of things as they come up and then to manage the business come what may in the future.

Thank you. Another one from Daniel. Employee costs have been steady at $62 million to $63 million over the last 3 halves. Should this continue in FY '25, excluding any new contract wins?

Yes, I certainly think so. We've spoken about inflationary pressures. We've spoken previously about where we think things are from a wages perspective. And again, to summarize that, with the exception of some lower level roles within the business, wages are essentially flat. So on a per employee basis, a flat wage number is a good number to work on in terms of what FY '25 will bring. At a gross number, though, it is going to be dependent, obviously, on what that rig count looks like. So at a lower rig count, potentially, that number actually reduces. Conversely, if we do pick up some of those wins, then it will increase. But on a like-for-like per employee basis, based on the sort of wages inflation flat is -- that's good.

Yes. And important on the top line side of things all of our contracts have been reset now. There's no -- no legacy contracts left out there free the sort of inflation increase that we saw come through. Contracts have been reset, rates have been reset. They're certainly not going up anymore, but they have been reset to manage that increase in labor costs that we have seen. But as Greg said, they're now flat.

I think also importantly, the 4.75% increase in wages really doesn't affect us going forward.

No, that's right. And just to add flavor to that. So, yes, fair work came out and mandated a circa 4% increase. But just given the fact that the vast majority of employees are well above award levels in this organization doesn't apply.

Thank you. Another question, Daniel. With cash tax payments potentially coming back online in FY '26, what sort of cash tax payment should we assume relative to P&L tax expenditure?

Look, without giving guidance in terms of what that profit number is, it's going to be very difficult to answer, to be honest, because it's going to largely be a function of profit. And as we sort of said, that's, at this stage, probably a little bit difficult to do. The best way I can explain that timing difference, though, is to -- there's about $12 million in ongoing depreciation that will not -- that will not be allowed a tax deduction, sort of the flip side of the benefit that we've received previously. So for purposes of anyone's modeling, $12 million of that $25 million, there won't be a tax deduction on. But the rest, as I sort of said, is going to be a function of profitability and very hard to call at this early stage in FY '25.

Thanks, Greg. Just back on rig count with Grosvenor. Do we know the outcome of those rigs there they sort of still, I guess, not being utilized? And I guess the next question on that would be, are there any rigs for sale in your fleet?

Look, certainly, the first point I'll answer is just the rigs for sale. There's always rigs coming and going in the business. We're always recycling assets buying some, selling some. It might be rigs, might be cars, pumps, compressors, trucks, whatever. So there's always going to be assets coming and going. And again, timing with those is important to get the best dollar you can. Where you send them is also important, whether they go overseas or to Western Australia more so than flooding in your own backyard, so to speak. So that's the first thing. On Grosvenor, again there's the surface rigs are sort of going back to do a little bit of work. The underground rigs obviously are stuck down underground. And again, until we know more information, it's really difficult to say where to from here with that. I mean, last time it took the client 18 months to get open up and running again. How long this time, we don't know. So we've obviously got some commercial discussions ongoing with the client regarding those rigs, but certainly can't disclose any of that here at this current time.

Thanks, Andrew. Another question from Daniel. Do you have any comments on the recent takeover bid from Dynamic Group?

Yes. I was surprised the cattle industry is getting into the drilling industry. [Audio Gap] actually were surprised by it, to be honest.

Thank you. If there's any further questions, please address them in the chat. Otherwise, I will give it back to Andrew and Nathan for final remarks.

Thanks. Thanks very much, Allen. Thanks, everyone, for being on the call. Thanks for the questions. Obviously, we've got an upcoming roadshow. So please contact Allen, if you're interested in some one-on-one meetings. We're obviously covered by Morgans, covered by QValue. So if interested in reading that research, please do. But importantly, just to sum it up, a really good few years for us to get into this position. Couldn't be prouder or happier of what the team has achieved and where the balance sheet now sits. And I really think that the company with the team, it has got, the assets it has got and the decarbonization opportunity ahead of us for Talisman, I think the future is really bright. So certainly looking forward to just some good times ahead. We'll work through some of the challenges we face with the market and some of those headwinds, Nathan.

Yes. I couldn't agree more with what Andrew has just said. I think 2024 was an excellent year for us. Again, year-on-year, it's been great. And again, I thank the team and the whole Board for what has been a great year, great strategy. As I said before, there's -- 2025 should still be a good year. As I said, we are seeing some choppy weather across the whole industry in Western Australia and across here. But hopefully, so far, we've been fairly secure from it. Obviously, the Anglo one hurts us, but overall, I think [indiscernible] upward for 2025 and 2026.

Fantastic. Well, again, thank you, Nathan, Andrew and Greg, well done.

Thanks, Allen. Appreciate it.

Thanks, Allen.

Thank you.