Mitchell Services Limited (MSV) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us today. My name is Allen Chan from Bridge Street Capital. And today, we are hosting Mitchell Services for the FY '26 Q2 update. Today, we have with us Andrew Elf, CEO; and Greg Switala, CFO, to talk about the quarterly. Over to you. Andrew. Thank you.

Thanks very much, Allen, and thanks, everyone, for joining us today. I'll just touch on a few key points in the quarterly and then open it up to questions as we usually do. But first off, obviously, some good results in the quarter and a solid first half. And really, that's the title on the sheet here, the strong profit in H1 has certainly driven the business to a net cash position, which is fantastic to see. So obviously, looking back, last year was a harder year with certain factors outside of our control. The couple of years before that, over $40 million EBITDA, some good returns to shareholders. So again, this is a good start for us. And hopefully, we can bring home a solid second half and have a good year for the business and our shareholders. So again, without reading it verbatim, a number of factors that hit us in the same half last year just didn't happen this year. It was a good clean operation for the 6 months, contracts that we won and spent the money on were out up and running and operating in the ordinary course of business, lack of bad weather and other things like that. Client scopes steady, where things did end, there was enough work around to be able to redeploy rig and keep the continuity going. So all in all, a very good half for the business and good execution from the team, which is just fantastic. So there is a paragraph in there about the impairment of the assets for the fire in Western Australia, obviously, an accounting nuance as we say, and that obviously reverse itself in the second half just on timing as we work through that plan process. With the insurer, which is progressing well. I won't talk too much about the market, needless to say commodity prices are certainly strong across multiple commodities and there's some tailwinds there. Pleasingly, coal has sort of bounced back a bit as well, which is good to see, too. And certainly, the demand for the rigs that we can see is certainly starting to increase further. It always takes time from capital getting raised to the capital getting into the ground, but we're certainly starting to see more demand for rigs as that money that's been raised flows through the system. So obviously, with the operating rig count, it's sort of there or thereabouts is where it's been. And there's some good tenders in the pipeline. But obviously, we're patient, we're disciplined, we're bidding things at the right prices to get those returns that we're demonstrating in this quarter. The half year result table on Page 2, a very solid start to the year. And again, the return on capital and good profitability, which is fantastic to see, obviously, pretty disciplined with our capital spending. We do expect that to be a little bit higher in the second half, but certainly, again, being disciplined and things like that. The cash flow, again, very strong and certainly some big tax bills that we've had to pay as well. So it's good to see that we've been able to manage that and still achieve what we have achieved from a net cash perspective. But again, when this business gets going and with more rigs in the share, the ability to really generate strong cash is starting to be seen. From a capital management perspective, I know people may have some questions on that and really what the quarterly here is playing with pretty straight back. Everyone is going to have to wait until the 9th of February when we come out with the half year, the board's got some decisions to make between now and that release and we'll decide what's going to happen at that point in time. But needless to say, we've spent a lot of money on bids in recent times, notwithstanding last year and buybacks. We certainly rewarded our shareholders as that debt has been reduced. So with the balance sheet where it is and the market and cash and everything else. And the board will obviously discuss and make a decision on that. And then lastly, the Loop Decarbonization business, we've released previous announcements about Sumitomo making the investment into that business, which is fantastic. But the team has just won a contract with someone only yesterday, which is going to have a couple of rigs out there for quite a long time. And there's another rig starting with a client in the not-too-distant future. So that business is gaining momentum all the time. I think certainly, the clients that are exposed to that safeguard mechanism expense are getting their head around it, understanding it and certainly, I think that Loop business is starting to get more momentum, which is upside growth opportunity for the business in the medium to longer term as well. So all in all, a good start and hopefully, we have another good half in the second half, and that's a good year for everyone. So Allen, that's just a bit of a summary of some of the key points. I might hand back to you if there's any questions from anyone.

Thanks, Andrew. First question, can you provide some comment around the rig count. So you've got 90 fleets, 62 operating, obviously, 30 rigs are still parked. Can you give me some color on where that balance sits? Are we losing tenants to competitors? I figured with the current environment, there will be plenty of work. And I guess when you go and put these things to work, how you would staff, would that be easier to sort of get people around these rigs?

Look, I think the challenge for us here in the East versus the west is the coal sector. There's obviously been pretty subdued as we say in the quarterly from a demand perspective in the coal given Queensland, and that's obviously coal price/royalties. So what's happened is a lot of those rigs that have been in Queensland coal and not just our rigs have been redeployed across the minerals, which means that hard rock minerals has had to soak up, rigs coming across from the coal. So is Western Australia, sort of your iron ore and then your had rock minerals, iron ore is steady, hard rock minerals picks up, utilization goes up. What you've seen over here, coal down, minerals up, rigs across from coal, utilization stays the same. You haven't seen that uptick as much. Having said that, there are tailwinds in minerals. Demand is increasing further. Coals had a bit of a bounce back on prices. So again, you would like to think that we can get more rigs out, but we will remain disciplined in our pricing, happy to lose if we bid fair, reasonable prices and get beaten. Happy to lose -- happy to leave the rigs in the shed and keep delivering 20-plus percent return on capital, with good profitability and cash flow with great team, safely, happy clients. But where we put the prices in and we get a win, we'll take advantage of it, we'll do it properly and make a dollar. So again, I think the chance of the rig count going up is greater than it going down, you would think at this point in time, and we'll keep taking advantage of that. Obviously, we do have the rigs available to us. It does give us leverage, but we'll remain discipline with the bidding.

That's great. Thank you. Question from Daniel. EBITDA margins in the quarter of 19.7% are very strong. How much of this is driven by steady operating conditions versus new high-margin contracts? And how sustainable is this over the rest of FY '26?

If we don't get smacked with things that we can't control, it's absolutely sustainable as ordinary course of business earnings. We've always said to people that we target 30% gross margin, 10% overhead per 20% EBITDA number, and then everything else and then generally takes care of itself, if you're managing CapEx after that from a return on capital and profit perspective. So certainly, I think that's what it really looks like in that first half is sort of bang on those sort of numbers roughly, just with the lack of things impacting earnings outside of our control and good execution from our teams and some good continuity with operations. So certainly, I think, again, if we have similar conditions in the second half, we'll see how it goes. But obviously, you're generally stronger in H1 than H2, and that's on the basis of the wet season really impacting things sort of January, February, March, usually, and it has been a bit of wet weather around, particularly in Queensland in January.

Great. Thanks. Just back on the impairment charge. Just confirming the impairment in Q2 is reflected at both EBITDA and EBIT line?

Yes, that's correct, Allen. So you can effectively add the $1.4 million back to the quoted EBITDA and EBIT numbers here to arrive at a normalized number. And I think just importantly and to clarify, it's purely timing with the insurance plan expected to sort of finalize them very shortly, and that will then reverse in Q3.

Understand. Thanks, Greg. Maybe some comments around your order book?

Yes, it's not something that we've traditionally put into presentations or spoken about a great deal. We really sort of just talk about how many rigs are running, how many rigs are in the fleet, what does the pipeline look like. what does it look like with commodities and those sort of things, so it's not something we've traditionally gone into a lot of detail with. But really, the best way to think about it is about 1/3 of our contract book rolls per year on average. So it typically got 2-year, 3-year contracts, mostly. There's obviously shorter ones in there for smaller clients. But ordinarily, you have about 1/3 of the book rolling. And some years, it's more, some years, it's less. This particular financial year, '26, it's a little bit less than that, given that we had a few good wins and have spent the money and get those jobs up and running last year. We had a higher proportion of locked-in work. But yes, certainly, the order book that you might see in some of the other NIWs and others or Mona's, we don't put together.

Question on CapEx. With CapEx of $7.8 million yet to date, can you remind us what your expectations are for the full year?

I think the $7.8 million is probably not reflective of a normalized number. In other words, I don't believe you can simply take that number and multiply it by 2 to get to the full year number, and that's largely timing related. So it will be certainly north of the $15.5 million but at the same time, FY '25 had a really high level of CapEx just given those new jobs that were won, as Andrew mentioned earlier. And I think from memory, CapEx in the last year was a tick under $20 million. So I think certainly north of $15 million but lower than $20 million, probably $17.5 million, $18 million based on what we know now is probably a reasonable number. That can obviously change, of course, depending the success of some of those tenders that Andrew mentioned earlier.

Thanks, Greg. Question from Nick here, in regards to Loop. If there's an increasing requirements, will that require additional investment in capital.

So it will require an additional investment in capital. Obviously, Loops currently owns 1 drill rig. So an increase in requirements will require capital. But just reminding everyone of the Sumitomo investment that happened in late August, whereby Sumitomo have effectively based on certain hurdles committed to 2 additional tranches of approximately $1.5 million each. So an increase in rig requirements would see the drawdown of those 2 tranches effectively. And the use of those funds would certainly be to fund the additional rigs. And I did say once it's reached that point or if it reaches that point, Loop would certainly be able to sort of stand on its own 2 feet in terms of acquiring debt facilities to fund rig 4, 5 and 6 going forward. So we don't see any direct finance requirements from Mitchell Services or Talisman, the other partner, certainly in the short term at least.

Andrew, I know we've touched on capital management, but this question relates to that. Capital management policy was to pay 75% of net profit. Are you saying this could change?

Look, I think that's been communicated as paid up to 75%. And the Board had spoken to people previously that their decision will be to allocate based on growth opportunities or buybacks or divvies, but up to 75%. So again, I can't say anything other than that until they meet, talk, decide and we put it out on the -- I think, the 18th of February, we'll release the half year or intending to release the half year. So that will be the time to keep an eye out after that.

With regards to Loop getting more momentum, when do you think you'll need to start to think about growing new decarbon rigs to support potentially new clients?

Yes. The good thing with that business is there's a lot of pre-work that we do in advance of the drilling in regards to engineering, modeling, planning, operational readiness, et cetera. So it's not like you've got to commit by rig, get it on spec and then hope to win and get the work. If you've almost got a nice scenario there where you can get a win with a client, you know that you've got a fair runway of sort of desktop-type consulting work in advance of starting operations on their site in the field and sort of tie it to, okay, you win and start that work, then you might go, okay, let's get a rig for this client because they're going to want one. So ultimately, the answer is more work, more rigs, of course, but not right now. Certainly, I think maybe if we were going to buy rigs for Loop, potentially after 30 June, unless something else changes.

A question from Chris, has debt being paid on to achieve the current net cash position or have you accumulated that cash pile? Should we make any changes to previous forecast debt reduction?

No. So I don't believe any change to the forecast debt reduction is required. And to answer the first part of the question, the $7 million worth of net cash is effectively $15 million in cash. So yes, there is a cash pile that's been accumulated coupled with $8 million worth of gross debt. Now that gross debt is just traditional equipment finance facilities that generally get paid over a 3-year period. There would certainly be no intention to try and target repaying debt off earlier. So in terms of how the debt comes off, that's just in line with what's previously been disclosed in our financials. In terms of the $15 million worth of cash, that then becomes an important aspect to the meeting, as Andrew mentioned, it's going to take place later this month in terms of best use of that from a capital management perspective.

Thank you. A question in regards to work. The inquiries you are seeing, are they from new or existing clients. And do you expect these inquiries to convert in second half or in FY '27?

Yes, Sorry if there's any noise in the background that as luck would have it, the gardener just rolled up. But yes, we're seeing inquiries to new and existing clients, particularly in the metallic versus mineral space, certainly not coal. As we say, it's pretty flat. There are a number of tenders submitted with decisions due in the next month or 2, where the work would start this site of 30 June or a touch after. So yes, there is a couple of those in the pipeline.

The next question in regards to rigs. Does it make sense to dry lease, spare rigs to operators in the Western states?

Yes, absolutely. We've done, that's something that we have done before, and we will do it again if the opportunity arose. I did have a conversation with someone late last year in Western Australia about 1 particular rig getting rented, didn't go anywhere. But yes, if it gets absolutely red hot and need more rigs there, and we -- it's not an opportunity that we would go to Western Australia for because we do operate in Western Australia. It's something to consider, absolutely.