Mitchell Services Limited (MSV) Earnings Call Transcript & Summary

Okay. Good morning, everyone. My name is Allen Chan from Bridge Street Capital, and I'm pleased to have with us Mitchell Services to deliver their first quarter for FY '26. Today, we have Andrew Elf, CEO; and Greg Switala, CFO, to discuss the recent quarterly. As always, we'll have a Q&A at the end post their presentation. See if you can put any questions in the Q&A, and I'll address them at the end. Andrew and Greg, over to you. Thank you.

Thanks very much, Allen, and good morning or good afternoon, everyone, wherever you are, and thanks very much for your interest. Look, we generally keep the presentation part of this very short and then open it up to questions that people may be interested in asking. So look, just touching on the quarter. Pleasingly, a nice clean quarter without any negative impacts sort of outside the company's control, such as weather or issues with client sites, things like that. So we've got a good clean run to deliver some good numbers, which we did, which is a good solid start to the year. As we've said to people, you can't just take that first quarter and times it by 4. You do have some seasonality impacts over sort of Christmas, New Year with rig stopping for Christmas, New Year and a bit of wet season, too. So traditionally, quarter 1, quarter 4 are the best quarters for the company. But it's a good solid start nonetheless and certainly much improved on the same quarter in the previous year. What we do talk about in the quarterly, just the exposure to commodities by revenue basis for the company. Obviously, we do have an exposure to coal and fair to say that we've never seen less rigs running in coal ever, to be honest. And again, Queensland royalty regime certainly does not help that. But on the flip side, half the company's revenue does come from gold, and I really don't need to say too much about that. It is firing on all cylinders, and it's starting to get busy in our neck of the woods, too. So obviously, we do have a presence all over Australia but more limited in the West. We're probably more Eastern states centric. Western Australia is probably further ahead of Queensland in regards to gold and demand for rigs, but as we mentioned, we're just starting to see that demand increase here in the East as well, which is quite good for us. So all in all, a solid start and some positive tailwinds with gold, and then hopefully, coal at some stage can start improving. Importantly, we make the point, too, that we only had sort of 60-something rigs out of 90 running, utilization rate of around about 70%, which means that there is still plenty of leverage in the business to put more rigs out, generate more earnings. And given the nature of the business and the high level of fixed costs we do have, a lot of those additional earnings will drop down to the profit before tax line. So importantly, a solid profit before tax number for us in the first quarter and a good return on capital in that quarter as well. Obviously, from a cash sort of balance sheet perspective, I think the balance sheet is in the best shape it's been in. There is absolutely a pathway to net cash in this business. There's franking credits in hand again now as a result of that tax payment and really some good cash flow generation from here, really gives the company some options to assess moving forward in regards to either capital management or other growth opportunities. From a Loop decarbonization perspective, just to sort of round it out before I go out to questions, we closed the transaction with Sumitomo and fantastic to see them invest into the business, a global Fortune 500 company effectively investing into a startup at a val of circa $24 million, amazing and certainly already their relationships and things like that obviously validate what we're doing but also are going to help us grow that business. So the momentum is continuing to build in that business, but as we've said to people, look, it is early days. It is choppy. It will take time. We can't sit here yet and go it's going to do this many rigs at this profit or anything like that. It's early days, but the signs are certainly very positive for the business. So that's just a bit of a summary of the quarter and a few other things. So Al, I'll hand back to you, and we'll open up for some questions.

Fantastic. Thanks, Andrew. First question. Over the balance of the year, do you expect any material investment required in working capital?

Look, you just -- the answer is you just don't know. It probably depends on wins to be honest. So I certainly think the working capital is being managed well and will improve through the last quarter into the half year. Correct me if I'm wrong, Greg. But again, there is a pipeline of opportunities. We tender for those. If we win, there could be a material investment into working capital. And an example of that could be, let's say, a 5- or 6-rig underground job. You might spend a few hundred thousand per rig to get them up and out the door. You need $100,000 for a vehicle. So there's a whole lot of sort of maintenance-style CapEx and a bit of things there, rods, hire the people. Then you've got the debtor that comes onboard. That then takes sort of 60 days to wash through. So something like that could be multiple millions of dollars in maintenance CapEx and then again in working capital. So it will depend on wins. But otherwise, no, we should be -- should be managed quite well. Greg, I don't know if you have anything else to add to that.

No, I think that's fair to say. And sort of new wins aside, FY '25 was really the year where you saw that increase in working capital just given those new wins and the location of the sites of those new contracts. And you can sort of see in this quarter the absence of that mobilization activity and new contract wins, the cash flow really normalizing on the basis of no increase in working capital. And again, to the extent that there isn't a big new win coming out of [ left field ]. Those cash flows should remain strong and without any significant working capital investment required.

Got it. Thank you. I guess just to add to that, can you remind me of what your expectations are for CapEx in FY '26?

I think -- so for the quarter, it was about $3.5 million. Again, noting all those things that Andrew mentioned earlier around what new wins come about and what don't, all things being equal, probably in the order of $15 million or there, thereabouts is probably a good sustaining business-as-usual CapEx number based on current utilization levels and current contracts in hand.

Thanks, Greg. Another question here from [ Daniel ]. EBITDA margins were very strong in Q1 at circa 20%. With the strategy to focus on high-margin specialist work streams, is the old 15% to 20% EBITDA margin range still the right way to think about the business in all operating conditions?

Yes. I wouldn't change the thought process. I think a good, clean quarter absent of major [ mobs and demobs ] sheet and no issues on client sites or rain. But you always know there's going to be things starting, stopping, things being won, clients changing volumes. It will rain someday. So I think, again, that's probably a good assumption to make. And if we can get a good run or some specialist work or we do a little bit better, then fantastic. But I wouldn't be too bullish. Again, as the cycle changes, if utilization rates increase, demand increases, potentially that leverage in the negotiating relationship moves towards the service providers a little bit. That may help as well. But for the time being, I think best just to focus on that.

Got it. Can you provide some more color on Sumitomo's involvement in Loop and their thinking about the growth strategy of the JV? Do they have a more aggressive growth plan versus current JV partners?

No, I don't think so. I think they're a fantastic business partner. Obviously, a significant amount of due diligence in advance of their investment, hence validating what we're trying to do. And I think they share the vision and strategy for the business to move forward together and grow the business the best we can. If you said to me, is that Loop business where I thought it would be, ahead or behind, I think it's definitely ahead. I think the fact that you've had a Fortune 500 company validate that, invest in it. We've completed the first project successfully and then it's more in the pipeline. Again, it's going to take time, as I've said, and we just got to be patient. But we're doing everything right. It's going well. And I think to Sumitomo's credit, they're patient. They're a long-term investor. They're a business partner, and they understand that things will take time. So we're all running as fast as we can but making sure we do everything the right way to make that business a success.

Thanks, Andrew. A question from [ Glenn ]. How is the work going in PNG? There's been a lot of set-up costs over time. Some of the cash flows and profits, I guess, are still strong.

Look, I certainly think that the team over there is doing a wonderful job and the client's happy. And that's the main thing, number one. Number two, it is meeting our expectations in regards to returns, obviously confidential in nature. But it is specialist work in a remote location, and it's going well. So we just got to keep focus there and keep doing a good job. So we're happy with how it's going and so is the client.

Excellent. Next question. How are the conditions in the employment market for skilled drillers given the boom in gold and signs of increasing capital flow in the drilling space, especially in WA?

Look, I think at the moment, it's okay. But again, that can change. So I don't see anything changing between sort of now and the early part of next year potentially. But I think once you come out of sort of the wet season, maybe sort of March, April, May, it might start changing. We'll wait and see. Obviously, from the time that money is raised to the time it gets into the ground takes some time and there's a bit of a gap. But I think we're starting to see some of that money now go into drilling tenders and drilling programs. Obviously, WA is a little bit ahead of the East. But certainly being honest with everybody on the call, what's your major challenge going to be if it really gets going? It's people. It's a people business. It's a service business. There's no access to overseas skilled drillers under the current schemes that the government has in place. So you've got to train your own and make your own. Obviously, we've got a fantastic brand that's been around a long time, and we look after our people and do the right thing. It's a larger drilling company. We've got good clients, good gear. We look after the people with a good culture. So people are certainly willing to come and work for us, and we've got good training and things like that. So we're as good as positioned as we can be to work through any challenges that may come from the people side of things.

Thanks, Andrew. And maybe just add on some earlier commentary on utilization rates, but a question from [ Peter ]. Are you able to comment on how you see utilization rates for the remainder of FY '26? Is the gold price likely to flow through to increase utilization this year? Or is there more of a delayed effect?

Look, there are certainly some good opportunities coming in the pipeline in the gold space. And obviously, I won't sit here and say who they are or where they are just for confidentiality of those clients. But you'd like to hope that if we're sitting here, if the gold price is still where it is now, at this time next year, you'd like to have more rigs running in gold. So I think you've got tailwinds behind you in regards to utilization in gold. And then coal, I think, is going to be flat. But potentially, any normalization in that market, particularly in Queensland, there's obviously an upside on rig count in the coalfields, too. So we'll wait and see how coal plays out, but certainly gold, I think -- hopefully, we've got more rigs running as you move forward.

Thank you. Another question from [ Glenn ]. We obviously talked about Tier 1 miners in the percentage of sales. However, with the large number of rigs available, is it time to chase more juniors on the base of prepaid set-up costs?

Yes. Good question. And absolutely, I mean, we do service the whole market, the whole sector, but the Tier 1s are the foundation of the business through the cycle and is what makes us a sustainable long-term company. They do represent circa 80% of our revenue. But there's a whole lot of other people that we do work for out there. We're working with Southern Cross in Victoria. We're working with Falcon in Victoria. We're just about to start working with Waratah in New South Wales. So certainly, we will, where we can, try and put the rigs into juniors where we think they're very well funded or they got a larger program coming up or the project is looking really good, so somewhere where there's a chance of a sort of a multiyear, multi-rig opportunity emerging rather than sort of one rig for a couple of holes or something like that. But absolutely, as -- we'll always try and give preference to our larger long-term customers with rig allocations when the market is busy. They look after us when things aren't so good. Look after them when things are better, but absolutely take advantage of that other space and the work that's around when you can. So we will best we can.

Got it. Our next question, might just rephrase. But will rigs be higher than end of the quarter into Q2? I guess any movement from period end and maybe details on pipeline? So what's the current number out? And how many tenders are currently out there? Does that make sense?

Yes. I can't see a material movement in operating rig count in Q2. I think it's going to be there or thereabouts. So certainly, not racing. I haven't got a whole lot of rigs racing out the door or anything like that. With the current number out, we're sort of in that low 60s out of 90, so 70% utilization or a tick under. And again, we sort of said to people traditionally, you're never going to have 100% of your rigs out. If you do, it will be for a short time. There's always rigs stopping, starting, moving, things like that. So the best way to think of it would sort of go, well, what sort of 90% of 90, and that's a good number to try and aspire to and get a few more rigs out. As far as pipeline goes, there's more coming. There are some larger ones coming for underground gold, underground copper, underground minerals, again, out of respect to the clients, won't say who they are, but it's well in excess of 20, 30 rigs. They're obviously competitive and hard to win. But we'll put our best foot forward and see what we can do. And obviously, we've got a number of rigs in hand. They're good rigs. There's no intention to go out and spend growth capital on new rigs if we don't need to. We will if the opportunity arises, if it is required. But obviously, the focus is to try and use what we've got in hand.

Thank you, Andrew. Next question, with the business in a very strong strategic position, how are you thinking about the medium- to long-term targets for the business? Where do you see the business in 5 years' time in terms of rig count, commodity exposure, et cetera?

We've got a Board strategy session in November with the Board, and we'll be talking about some of those sort of medium-, longer-term targets in more detail. I think obviously, just looking at where we have come from, I certainly think the company has done well with strategic acquisitions over the last sort of 10 years, either at assets at the bottom of the cycle or earnings accretive, material organic investments and then the subsequent paydown of debt and the subsequent material returns to shareholders and that strengthens the balance sheet. So really, now is the time to sit down with the Board again in November and go, okay, what is our plan for the next 5 years and how do we see things and where do we want to go and those sort of things and then again, coming back to our shareholders and communicating that in the right way.

Great. This next. second question extends from that. But can you comment on capital management next year if all goes well and delivers?

Yes. I think, clearly, where the debt is at the moment, debt repayment is not on the agenda there. So in terms of plans, it will be shareholder returns. We've called out publicly that, that sort of targeted ratio is 75% of NPAT or there, thereabouts in the form of shareholder returns. And then it's really going to just be a question of whether that comes in the form of a buyback and a dividend, and I can't necessarily answer that on behalf of the Board in this call. Fair to say it will be subject to factors such as the share price but -- in terms of that mix, but absolutely shareholder returns to the extent that these sort of NPAT numbers play out and with the balance sheet where it is today.

Thanks, Greg. Last question now from [ Glenn ]. You mentioned mainly East Coast business for Mitchell and a bit about coal drilling -- with the coal drilling dropping off. I guess, in general, how are drilling activity in Victoria, which has been basically a gold hotspot in the past? Maybe just some comments there.

Look, I think it's -- Victoria is certainly improving again. And there's some good support down there from the government who certainly could do with more royalties from gold. So that's a positive thing as well. I think Southern Cross is an amazing success story, market cap over $1 billion now. Falcon down there as well, some fantastic results. Catalyst is another client. So we're working with Catalyst, Falcon and Southern Cross as well as Agnico Eagle down there. We've got a very strong presence and profile in that Golden Triangle in the East, getting busy, absolutely. Certainly, New South Wales as well and -- but Queensland, again, a little bit harder. Obviously, some of those rigs that are in the coal can transition across into the metals, And so any additional volume in the metals is sort of getting soaked up with rigs coming back out of the coal. So it might take a little bit longer for things to get busy before you really start getting a bit more active in Queensland. But all in all, it's heading in the right direction, which is great.

Thank you. Question from [ Mark ]. Given the inevitable cyclicality of drilling, would you consider diversifying into a horizontal or vertical business? And if so, what does that look like, I guess?

Yes, absolutely, [ Mark ]. I think, again, we've got plenty of rigs, and we know the earnings profile of a drilling business can be choppy and can be cyclical. There is a strong balance sheet. Is there an argument to potentially look at something with a higher quality earnings profile funded out of debt whilst being still conservative on the balance sheet that takes out some of those lumps and bumps but still provides a good cash return and good return on capital? So again, that's a discussion item with the Board in November.

Thanks, Andrew. Probably it's the last question from [ Lee ]. Okay. So I'll give it a shot here, guys. Despite all the operational and financial progress of the business over recent years, the market has been unwilling to rerate the valuation of the company. Do you believe the public markets remain the most appropriate environment for the business? And if so, what feedback have you had from investors regarding the valuation and what needs to be demonstrated to see the business trading along with yours peers? Maybe from Bridge Street's perspective, probably take that one offline, [ Lee ]. I can probably talk to you outside the call and maybe arrange a call with management to give you a better insight. But Andrew or Greg, did you have any comments or is it best we...

I think just alluding to [ Mark's ] previous question, I think investors want to see earnings. Investors want to see real net profit after-tax earnings, and it has been choppy for us for various reasons, some in our control and some out of our control. But again, I think what we have achieved as a team and teams in the field, the clients, the Board is amazing. And I think the business really is in a fantastic position now. The market's the market. We've just got to control what we can control and keep delivering, keep trying to deliver and grow the net profit after tax. And if we can deliver that on a more consistent basis and grow it, I'm sure that the market would recognize that. Market's pretty intelligent, I think.

And maybe just to add to that, Andrew, Greg, I think FY '23, '24, you guys had 2 good years of $40 million EBITDA. And obviously, recent events, again, are probably out of your control, so there's no reason why you guys can't get back to that level, is probably Bridge Street's view from the research perspective.

Yes, that's right, Allen. It's a good team. It's a fantastic people, some excellent equipment. Money is being spent. Hard work has been done. Balance sheet is strong. Market is starting some tailwinds in the market. Pathway to net cash provides strategic options. Greg spoke about capital management. So it's an exciting time.

Perfect. That was the last question, Andrew, Greg. If anyone else has a question, if you don't mind, just, yes, get the fingers typing, otherwise, I thank Andrew and Greg today. And yes, well done, guys.

All right. Thanks, everyone, for attending and your questions. And thanks for hosting, Allen. Appreciate it.

Thank you.