Mitchell Services Limited (MSV) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for joining the Mitchell Services fourth quarter quarterly update. My name is Allen Chan from Bridge Street Capital. And today, we have Nathan Mitchell, Executive Chair; Andrew Elf, CEO; and CFO, Greg, to talk about the update. This is being recorded. I think let Andrew go through the update, and then we'll have Q&A at the end. Over to you, Andrew. Thank you.

Thanks very much, Allen, and thanks, everybody, for jumping onto the call. We appreciate the interest. So I will just run through a few key points. I won't take more than a minute or so, and then we'll open it up to questions as we usually do. And certainly, Nathan, Greg and myself are welcome to take any questions you may have. So just on the quarter, look, a solid quarter, but really, the theme was the shine was taken off the numbers by the client incidents that occurred in that quarter. But importantly, both of those projects are both now up and running again, which is good. The previous jobs that we've spoken about or projects we've spoken about that ramped up throughout the year did start delivering strong results for us in the fourth quarter, which will then flow on into this financial year, which is positive. The team did a good job managing the working capital in the last quarter. Obviously, that cash conversion rate, well over 100% and associated net debt level down quarter-on-quarter materially. The Loop business update, at the top on the last page there, a significant growth opportunity for the business, and pleasing to say that the first program completed went really well and we've now got a second contract that we're working through the relevant engineering with the client, with a view to drill later this calendar year. So it's always going to take time for that business to come on and develop. And we do make a point there, it's in its early stages. But again, nonetheless, it is an exciting opportunity for us. At the end of the quarterly there, we talk about the outlook. It's pretty straightforward. Gold prices are strong, quite high. The outlook is positive in that perspective. But from a coal perspective, probably fair to say it is a challenging market and certainly happy to take people's questions on that regard. So there's also a table there of the yearly results and how it sort of wound up for the year a little bit. But Allen, we'll probably hand back over to yourself and open up for any questions people may have.

Perfect. Thanks, Andrew. First question from Daniel, can you provide an indication of what June quarter EBITDA would have been without the impact of events at Oakey Creek and Moranbah North during the quarter?

I might take that one. Look, I don't think we want to pitch and pull individual contracts apart and sort of disclose individual gross margins and EBITDA margins by job. I think the best way possibly to look at it is Moranbah North was the 2-rig operation, down for about 2 months; and Oakey Creek, down for a full month. That, by definition, is sort of 60 shifts and 120 shifts. And you could possibly make your own assumptions around previously disclosed revenue per shift and normalized sort of EBITDA margins. But from my perspective, I don't think we'll pull the individual contracts apart and disclose that. I don't know if anyone's got any different views.

No. None.

Thanks, Greg. Looking ahead to FY '26, do you anticipate any further material investment in working capital over the year? Is the level of inventory on hand at 30 June, $13.6 million, reflective of ongoing requirements for the current book of contracts?

Yes. Look, I think, Greg, you might want to say a few words, too, but I think the inventory should be equal to or less than in the year ahead. We've ramped up new contracts. Some of them are remote. We've made that point in previous communications. As those jobs sort of get going and we understand how it's going and some of the supply chain aspects, we hope that we can manage that inventory level and at a minimum, keep it where it is, but hopefully reduced if we can.

Thanks, Andrew. So just to the Loop business, do you think Loop will have earnings higher in FY '26 versus FY '25?

Yes, only on the basis that the initial trial that we completed was a fairly small one and the trial that we're currently working on is a little bit larger. And therefore, if you go that contract stand-alone last year, this contract stand-alone this year, the results should be better just on the basis that it's a larger trial project, notwithstanding the fact that there's other opportunities that exist as well.

Thanks, Andrew. I guess the next question relates to sort of capital management, maybe high level, on dividend buyback, what your thoughts are.

Look, I think you can see the numbers there, the 2025, 2024 difference. Well, it's hard to say, but I think dividends is probably going to be off the table until we can -- while we'd like to be able to say that the dividend is coming, I think we'll look at it. But based on the current numbers, I think you could say that there's significant cash flow to be able to pay high dividends.

Yes, that's right. And look, on the last page of that quarterly again, we make the point that we have renewed the share buyback. And we also make the point that if the share price stays down at current levels, which is very low in our opinion, it may represent better value for shareholders to buy back stock rather than pay dividends and also on the basis of the current time where we've used our franking credits, too. So again, as Nathan says, it's a Board decision, but we just got to make some good numbers and some good cash to give the Board the opportunity to make those decisions.

I think it's too early in the year right now to be saying we're paying dividends. At the end of this year, in 2025, not a lot left in that to do it this year. But it's early in this year. I think this year has got a long way to go. So I think let's see how it pans out over the next couple of quarters.

Thanks, Nathan. A question from Nick, obviously, back on the Loop business. Everybody, explain again, more detail about the Loop business. Are you a new entrant, I guess, to the existing segment? Or has the segment not been operated in a way before? I guess what's the main features and attractiveness, margins, et cetera, that you can achieve?

Yes. So it is a new segment. It is a new market and therein lies the opportunity. Obviously, Nathan was at the forefront of the emerging coal seam gas industry back in the day, and there's some similarities with that here. It takes time for a new market to be developed. It will be choppy. It will be stop-start. There will be trials before there's longer-term contracts, and that's the stage that we're currently at. But what this business does is provide, as I said in the call, an end-to-end decarbonization solution to clients to reduce their fugitive emissions under that Safeguard Mechanism legislation in Australia. So the long and short of it is we do a lot of work in underground coal mines. We drain the gas, so those mines can be operated safely. The gas that exists within a coal seam still exists in the coal seam for surface operations. And the aim here is to drill that coal in advance of mining to drain the gas, so that it doesn't emit up into the atmosphere when the mining is undertaken. The fugitive emissions is the output of gas from that coal into the atmosphere. And there's a requirement under that legislation for coal mines to reduce their emissions year-on-year. And if they don't, they pay a tax. So the whole premise of this business is there's an opportunity to reduce your emissions and hopefully pay less than the tax. And for others, there's an imperative from a social perspective to reduce your emissions and it's also feeding into potentially government approvals for pit extensions, environmental approvals, things like that. Rather than just buying carbon credits, you actually seem to be managing your gas in a more active manner. And there's obviously potential to use that gas downstream for benefits for the economy, the power trucks, the list goes on. So effectively, that is a new market. It hasn't been around before. It's come about -- the opportunity has come about because of that government legislation. Certainly, with the federal government labor winning in a pretty strong manner and looking like they're going to be around for a while, I don't think that legislation is going to change in any way. So I think the opportunity is there, but it will just take time for it to come on. Obviously, we're working with Talisman, who are a 50-50 owner in that business. And really what it does is, from the very start of engaging with the client, understanding what is your gas content, how much gas have you got, what does your coal look like, what does the drilling plan look like, how do we engage with people to work in a pit through to the drilling, through to managing the drainage of the gas, gathering gas, and then potentially partnering with downstream providers, it is a full solution from start to finish. Some of these surface coal miners have never had to manage or deal with gas before. It's a very limited niche skill set. It's highly technical work. And it's a great opportunity for us, but it takes time. Nathan, I don't know if you got...

Yes. No, I totally agree. I think it's a really good opportunity for us. I think it's -- as Andrew just said, I don't think the government is going to change their requirements anytime soon. And I think there is a very big opportunity downstream to do something with the gas. I think it's early days at this stage, definitely. Obviously, we're the only player in the market. And I think it's going to be interesting to see what happens with this first project and the second project. And I think that will also dictate to other mines how they go about it. And we'll learn along the way as well. It's not just the drilling, it's also all of the other infrastructure that goes with it, the management of the gas and whatnot. So yes, so I think it's a really good opportunity for us.

Thanks, guys. Just more on Loop again. Obviously, you mentioned there's a second client coming onboard. When do you think you'll need or begin kind of adding client in your rigs for this segment?

I think the plan at this stage is to use the rig we've got for the second client toward the end of the year and then to reassess any future rig purchases in the second half.

I think we just want to use what we have rather than spending more CapEx. And the equipment we've got is very good. So at this stage, I think we'll try and squeeze as much out of the equipment we have at the moment.

Yes. People are just in that trial phase where they're going to be drilling for a number of months, you sort of try and stack them up together. So if Greg wants to do a trial for a few months and then Nathan for a few months, you're not going to go and buy a rig for each, you'll try and line them up so you can keep that 1 rig busy. And then when it gets a bit more momentum or if someone commits to a longer-term project, you then consider additional assets but certainly try and, as Nathan says, get the most out of the rig we've got.

Thank you. A bit on PNG, give an update on the current status of PNG from a drilling perspective and operations? Is there an update there how you're going?

Yes, it's been a slow start, as you would expect in PNG, but I couldn't be happier with where it's at. Both of those rigs started double-shifting in mid-, late June, hitting the new financial year, double-shifting. Production is very good, safety is very good, clients happy, and it is making a return.

Thanks, Andrew. I guess with the balance sheet in a very strong position and your capital management focus, how are you thinking about potential M&A for FY '26?

I think we're always on the lookout and people are always approaching us. And so that hasn't changed. So we're actively always looking. And as I say actively, people are coming to us. We're just prudent about which ones we look at. And we do the right amount of DD. So I think that's just -- fair to conclude, we always are looking at opportunities outside that aligns with the skill set that we have.

Thank you. Just on the gold sector, obviously, the size of the gold sector is strengthening, converting to new customer inquiries. How is labor supply for skilled drillers at present? Are you expecting another year of modest wage, price inflation for FY '26?

Yes. I think probably fair to say the worst of the inflationary pressure that we've seen is behind us. But certainly, the gold sector is busy. I think modest increases is probably a good word, Greg. I think we will see increases, but I think that will be modest. And we're certainly not forecasting anything to run away or any critical shortages or anything like that.

Yes. I think in the immediate short term, Fair Work had come out recently with a wage increase of 3.5%. So that 3.5% will apply to a portion of the workforce, sort of at the lower end or at award rates. And to Andrew's point, the section of the workforce that then is above that rate, probably less than the 3.5%, so a blended rate of sort of sub-3%, thereabouts, based on what we're seeing so far.

Thanks, guys. I guess on the topic of gold and obviously where the price is, can you comment on new client in the gold sector? Or are any coming from existing gold clients?

Sorry, Allen, I was reading the screen. Yes, so look, obviously, the pipeline is stronger in gold than it is in coal. Needless to say, that just hangs together with the commentary in the quarterly. We've obviously got a very good presence in that Victorian gold market through New South Wales and sort of a couple of rigs in WA and NT as well. So again, there's existing clients that have opportunities where they increase their budgets and their spending and want to increase rig count. And then similarly, there's new clients that are either smaller exploration-style clients that get funding and then of new mines, people drilling out of deposit and things like that. So there's a bit of a mix of everything in that gold space, but certainly positive outlook versus the coal at this current point in time.

Got it. So I guess that probably was into the part 2 of that same question. Obviously, with the commodity mix being gold and coal, do rig opportunities in gold offset any rig reductions in coal? Certainly, group rig utilization will stay largely flat.

Yes, it's the million-dollar question. I mean it's never that linear. It's not like sort of something stops here and it starts here straight away. It's always a bit of a mix, but that's the challenge we face is the rig utilization. We've said in previous meetings, we were hoping that it was heading up in the right direction. I think the coal side of things has made that a little bit more difficult in more recent times. But certainly, the opportunity remains within the gold space. Certainly, we've got rigs that can move between both sectors, which is important. So we can service both sectors with the equipment we've got, and that's exactly what we'll do. So will it offset exactly? You don't know. You hope so. And we're certainly going to be disciplined with our bidding, disciplined with our pricing, and put rigs out where it makes sense to do so to get a good return.

Thanks, Andrew. So the next question is from Jason. Bear with me here while I read this a bit longer. As of the end of the quarter, the number of active drill rigs appears to be around 67, 68 compared to an average of 72 active rigs throughout FY '24. This is despite the company having a fleet of approximately 90 rigs. It is evident that the company's profitability is closely tied to sustaining a utilization rate of 65 to 68 rigs. Such sort of fluctuations of drill rig impacts bottom line financially. Beyond the potential recovery in the coal market, what strategies does the company have in place to increase the number of drill rigs under contract?

Thanks, Allen. I might deal with the first part of the question. And then in terms of strategic direction, the last part, I hand back to Andrew. But I think whilst I can acknowledge why that would seem to be the case at face value, there's a little bit more to it than that. It wasn't simply a case of going from 72 and dropping 4 rigs to 68. In reality, as we've outlined in previous quarters, there's been a decent reduction in certain areas and then the company has pivoted pretty significantly to win a number of new contracts. So although on face value, it looks like it's just a simple 4-rig decrease, there's been a lot of moving parts with a lot of ramp-up mobilization in new service offering areas as well as new jurisdictions. So don't think it's -- can the business be profitable at that sort of 65 to 68 rigs? Absolutely. It just needs a little bit of stability and absence of that mobilization, demobilization. The flip side to that and the positive with all that is you can see that the leverage that is in the business as well when it does get back to sort of early 70s and a big portion of that revenue dropping back down to profit. So I think, in simple terms, the company can absolutely be profitable at those lower levels, and there's more to what's happened in the last 12 months than a simple 4-rig drop, if that makes sense.

Yes. From a BD perspective, it's really a case of we've got some fantastic business development people in the business, and we're well aware of what's coming up, where, with who, in our respective markets. And certainly, we've done a great job rewinning existing contracts and winning new ones. As Greg said, we certainly enter this year with a very high percentage of work contracted, I think higher than we ever have, to be honest, which is a real positive. So I think there's some great work that's been done. I think our business development is strong. But again, to a degree, the market is the market. And it's not always easy. But please rest assured, we are absolutely hungry and do everything we can in the BD space, that's for sure.

Great. Thanks, guys. Okay. Next question, basically, every indicator over the last year has trended down. Appreciate there are things beyond management's control, but what are your expectations for the year or this year going forward?

Yes. Well, I mean, if we don't have 3 or 4 underground coal mines have incidents and there's less rain, we're better straight off the bat. The rigs that we have won, have put out to work, have had the money spent, to Greg's point, they're up, they're running, they're profitable. We're better straight off the bat. So again, what do I expect? Better than this year. We really want to do better than the year we just had. And certainly, there are things out of our control, which is always disappointing, but that's business. But again, I think we've got a good team. We do a great job. We control what we can control really well. And if we do that, keep doing that and focus on the right things, I think we can do better and we should do better.

Last question for now is from Glenn, guys. From a margin perspective, are the competition drillers cutting prices to win work, for example, coal area and hence, forcing you guys to trim margins? Any pressures, I guess, is the question.

I think that's just course of this business. When market goes up, market goes down, obviously, the coal industry is flattening. The coal guys, obviously, the royalties haven't helped them. We all know that. I think as investors, we look at the coal industry and see that they are doing a bit tough with regards to prices and royalties. So certainly, that is a softer market. Obviously, we've moved out of that market considerably. The guys have done an excellent job to move sideways into the gold market, into the minerals market. Obviously, it cost time and money. We said that sort of in the last quarter. But yes, certainly, prices are not going to be at the high. But luckily, we are not dropping our prices. We're just not that sort of business. We don't need to drop our prices. And it hasn't really moved that much in essence. The gold guys in Western Australia are keeping the prices up. And so there's still a demand in Western Australia. So yes, they're moving, but not to the point where we see real risk for the business.

Yes. And if you're dropping your rates, you're not making enough money or margin to then have a sustainable CapEx program to rebuild and keep your rigs in good shape, you're effectively going cheap and eating yourself. So that's not something that we're prepared to do. We did things right, being disciplined, and then rightsized the back office and support functions accordingly. It's worth noting over 80% of our revenue was from global mining majors across coal and minerals. We're operating on very good mine sites, lowest on the cost curve. Drilling is required ongoing through the cycle. So there's some excellent clients we've got. We certainly do a lot of specialist drilling, and that is very technical, less competition, good margins. And that includes some of the geotech work we've done where we've worked on Melbourne Metro, Sydney Metro, Snowy Hydro, and the list goes on. So certainly, there's all sorts of things we're trying to do to improve our margins all the time: Loop technical drilling, geotech technical drilling, some of the mine services work. So again, it's a good brand. It's been around a long time, works for the right clients, does a very good job. So just be disciplined and take the right opportunities when they present themselves.

Fantastic, Andrew. Thank you. That was the last question. So Andrew, thank you. Thank you, Nathan, Greg, guys. I appreciate it. I'd just note that all calls is recorded, and I will reach out to you guys individually for any further questions. As Andrew noted, obviously, QValue covers the stock as well as Morgans. So if you have any questions, we're happy to answer them. Guys, thank you.

Thank you, everyone.

Thanks, Allen, for having us. Thanks for your interest, everyone. And Nathan and I will be up at the Noosa Mining Conference in a couple of hours for the next couple of days. So if you're at that Noosa Mining Conference, come and say hello.

Thanks, guys.

All right. Thank you.

Thank you.