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 Partners. And today we are hosting Mitchell Services for their half year results. Today we have with us Andrew Elf, CEO; Greg Switala, CFO; and Nathan Mitchell as Executive Chair. We will go through the presentation. And at the end, we'll go through Q&A. You can post questions at the bottom, I'll address them at the end. Over to you, Andrew. Thank you.

Thanks very much for the introduction, Allen, and thanks, everyone, for your time. I know it's a busy day with a lot of people releasing results today. So we appreciate the interest. We'll take the disclaimer on Page 2 as being read and just move straight to Page 4, market profile. So again, there you can see the market cap. Obviously, that's up a little bit this morning. Nathan obviously holding 19-plus percent. Dream Challenge, Scott Tumbridge, the founder of the Deepcore business we acquired some time ago now. Obviously, a good instore register for a company of our size and then other obviously. Just on Page 5, the business summary. Everything heading in the right direction there. But I think the big thing to note is the bottom middle box in regards to capital management. And we have got Nathan, the Chairman with us today, and I'm sure he'd be happy to take some questions at the end of the presentation regarding capital management and the dividend. So that's a really good thing to see there in the fully franked dividend for the half. Page 6, the capital management performance. I think this is a new slide we put in this time around. I think it paints a wonderful picture of what the business has achieved in recent times. In that sort of 2022 time, the company said it was going to put a strategy in place to reduce leverage and maximize cash return to shareholders. And that's exactly what we've done. Yes, we had a tough year in '25 and a lot of those things due to factors outside of our control, but it's a fantastic business with a good team, and it's well and truly bounced back in this half. But when you look at what it's achieved over that last handful of years, I think that's quite impressive too, that net debt has gone from $40-something million to negative or 0. And again, a lot of returns to shareholders, $21 million in div, $6 million in buybacks for $27 million. So a lot of cash coming out of this business. And $73 million in capital redeployed over the last 4 years. And worth bearing in mind that return to shareholders in cash is really only over the last 2.5 years. So I think we're in a very good position as far as the business goes, and that's some impressive numbers. From an overview of the half perspective, again, net cash position for the first time, high-quality revenue streams, 80% of our revenues from the global major miners and their respective mine sites. Half our work is on the surface, half underground. Gold obviously represents 60% of revenue. And again, that's a good exposure to have given where the market is at, at the moment. And again, as I said, improvement in all financial metrics across the board. Certainly, the level of inquiries is growing and the demand for rigs is increasing, particularly in regards to gold and copper, and that's fantastic to see. Obviously, coal remains subdued in the first half, but I think in a positive light, there has been some price increases in that market, green shoots. We're just starting to get some more inquiries. So there's certainly a catalyst, I think, in the future for coal to bounce back as well. So I think all in all, we're looking pretty good from that perspective. Operationally, on Page 8, we've said this numerous times and in our quarterly that came out a couple of weeks ago too. Last year, we had some good wins. We had to invest in those wins or projects to get the rigs out the door. They're out, they're running. We had a good first half. It was business as usual. Improved weather conditions versus the previous year. Anyone that follows NRW would see similar commentary. And again, we just had a material increase in financial performance with a good clean run in that first half that was really good. And I think the important point on this slide is that we delivered these results using only 62 rigs out of the 88 rigs that exist in the fleet. And those rigs are available for us to deploy into an improving market with increasing demand, where we can improve our financials even more. And then lastly, there, obviously, we're very proud of our industry-leading safety culture and performance. We have got a handful of slides in here on the Loop business. This is our decarbonization business. As a result of the safeguard mechanism legislation we partnered with Talisman, and Sumitomo, the Japanese majors made an investment as well. And Sumitomo's investment valued Loop at $24 million. So for those following Mitchell, with that cash that's putting out, the dividend that it's paying, the rigs that's got on the sideline, the market capitalization where it's currently sitting, it's a bit of a free kick on the decarbonization business option. We've completed a pilot project successfully last year, and the rig is due to go out again and complete another project in the next couple of months. But importantly, that contract, as I say, they're under customer 2, executed for full infield management of the decarbonization project. So if you turn to the next page about the full service offering, that's what we're providing this project that's upcoming. We're working from the modeling, gas content, drill planning right through to the drilling in the field, the draining and the gas gathering and then obviously updating models and other things like that for the clients. So it's an exciting business that really does offer a turnkey solution for clients to manage their greenhouse gas emissions. And importantly, there's various partners that we can partner with to potentially look at beneficial use and offtake agreements as well. So really, the last slide there on Loop is really just talking about what's driving that change, which is the safeguard mechanism legislation. I won't go all through it in a great deal of detail here. But if anyone is interested in learning more, certainly reach out to Allen for a one-on-one meeting with management, and we can certainly give you more information on that business. But nonetheless, it's a really big growth opportunity for the business. And I think the fact that you've got a Japanese major invested really shows that they believe that it's got some good opportunity.

Good morning, everybody. Turning first to the profit and loss on Slide 12. The improvement in earnings in the first half reflects a combination of improved operating conditions and disciplined cost control. EBITDA increased to $21.4 million, up from $12.7 million in the prior, with that flow-through evident at every level of the income statement. Net profit after tax was $8.1 million compared to a small loss in 1H '25. Importantly, too, this outcome was achieved despite a noncash impairment of approximately $1.4 million relating to equipment that was destroyed by a bushfire in WA in December. Those assets are fully insured. However, the accounting standards require us to defer the recognition of that insurance recovery until the claim becomes unconditional, which we expect to occur in early second half. Beyond the year-on-year comparison, it's also worth noting the structural improvement relative to earlier periods. Depreciation and interest continued to trend lower, reflecting disciplined capital allocation and balance sheet repair over recent years. Moving to return on invested capital on Slide 13. The uplift in earnings has translated directly to a return on invested capital of 27% for the half compared to a negative return in 1H '25. This is a meaningful outcome and one we focus on closely internally. When viewed over a longer-term horizon, ROIC has steadily improved from low single digits only a few years ago to a level that's now well above our cost of capital. This demonstrates that the business is not just more profitable, but structurally more efficient. On the balance sheet, net assets increased by 13.6% over the half, driven essentially by the strong profit outcome. Net working capital reduced by almost 20%, reflecting strong collections and a managed reduction in inventories following the elevated investment in FY '27 -- in FY '25, I beg your pardon. We remain clear on capital discipline. There's no intention to raise equity, and the balance sheet provides flexibility to support both capital management and value-accretive growth opportunities. Cash flow performance was certainly a highlight. Operating cash flow was $20.8 million, almost double that of the prior period, delivering a 97% cash conversion ratio even after allowing for tax payments. Excluding those tax payments, operating cash generated exceeded EBITDA, reflecting both improved earnings and tighter working capital management. Financing cash outflows remained low, obviously consistent with the reduced debt. Turning to debt. The company closed December in a net cash position of $7.2 million. Gross debt also reduced further during the half and all interest rates remain fixed at an average or blended cost of capital of about 6.8%. We retain access to a $15 million undrawn working capital facility as well as significant headroom under existing finance facilities, which provide flexibility to fund working capital, support growth and continue to prioritize shareholder returns without necessarily increasing the balance sheet risk along the way. Finally, on capital expenditure. CapEx for the half was largely limited to essential maintenance CapEx spend. The higher investment in prior period was obviously reflective of the transition into those new contracts in FY '25 that Andrew mentioned earlier. And we remain committed to disciplined capital allocation with CapEx decisions clearly linked to returns, cash generation and continued balance sheet strength.

So just looking at the strategy for F '26. Obviously, it's our intention to grow the business and the returns to shareholders, and that's certainly been demonstrated with the dividend announced today. We're going to continue to improve the profitability of the business, capitalizing on the opportunity that exists within the pipeline and some of those tailwinds that exist in the sector at the moment. We've got a strong balance sheet. We've got rigs available to us. And the leverage that does exist in this business is substantial. There is no doubt about that whatsoever. Obviously the capital management will remain a priority, and I'll let Nathan talk about that in questions. I'm sure we'll get some questions on that, but we'll certainly allocate as it's best for the business to do so. So look, in summary, you've got a fantastic brand that's been around for 55 years, high-quality revenue streams, a strong balance sheet, financials improving, tailwinds in the market, strong cash generation, operational leverage, the Loop growth opportunity and a demonstrated history of performance, generating cash and reducing debt and rewarding shareholders. So I think the company is in a wonderful position, and I really appreciate all the hard work of our team that are out in the field to generate what's been a good first half. I'll hand back to you for questions.

Excellent. Thank you, Andrew and Greg. Okay, the first question, "Can you please discuss your broader portfolio of rigs, including the condition, useful life and type of rigs currently not being utilized and what the pipeline or visibility is like on the increase in utilization levels? 62 out of the field of 90 suggest large potential operating leverage. When and to what extent can we expect the number to increased?"

Yes. I think again, it's a bit like trying to be like Nostradamus. It's a tough one to always talk about. There's always rigs stopping, starting, moving around. But as I say, things are looking good with the pipeline. The pipeline is strong. We'd like to think that the number of rigs operating at 30 June this year or shortly thereafter is higher than the amount running now. That's probably the best thing that we can say. We are covered by Morgans and they've certainly got some thoughts on what they're saying in that regard too. As far as what the rigs are, look, we've sold a lot of rigs that were sort of old or that sort of thing. And the rigs we got left are good rigs. They can be used. They will need some maintenance CapEx to get them up ready and out the door. And it's a mixture of surface rigs and underground rigs. I think the rig count is fairly evenly split between surface and underground rigs, and that's probably reflected in the rigs that are idle. We'll take advantage of any surface or underground opportunities as they come with those rigs and we're in a great spot to do so.

Thank, Andrew. Just to add to that, Anglo and Grosvenor, all the issues we had last year, any visibility when they may be sort of back in action, I guess?

Look, the client keeps their cards pretty close to their chest, and it's always tough for us to sit here and commentate on clients' operations. But what I can say is that they're actively working towards normalizing operations at both of those sites and slowly, slowly, they're moving forward and heading in the right direction, and we remain hopeful that we can partner with a good client on those sites again as operations normalize. So that combined with some green shoots in the coal and a bit of an increase in coal price. Again, it just adds to the story that, okay, gold is looking good, copper is looking good. Coal could bounce back. Anglo could bounce back at a couple of sites. All those things bode well for us. So we're certainly doing everything we can to support Anglo along the way and hope that goes well for them.

Thank you. The next question. "Just trying to put a narrative on FY '26 versus [ PCP ], I don't know, revenue slightly up across almost all OpEx lines cost all -- against all OpEx line, costs are down. [indiscernible] not charging more. Is this result largely reflecting the ramp-up costs in the prior period?"

Thanks, Allen, and thanks, [ Nick ]. Essentially, yes, it's a huge part of explaining that variance. Just casting our minds back to FY '25. That was a softer result for various reasons. Number one, certain contracts reducing in scope for factors outside of the business' control. And that certainly came with a ramp down cost and included underground coal mines like Grosvenor and Moranbah North that you referred to earlier. In addition to the significant ramp down with those decreases, as we said in FY '25, we won a number of significant new contracts often in new jurisdictions, including Northern Territory and PNG, and that came with a significant level of ramp-up. But we said back in '25 that we were confident that once those contracts were out sort of running on a business as usual basis, that the costs would decrease and the margins would increase. And it's pleasing to sit here in sort of mid-'26 with that being validated, I suppose. So yes, in summary, that's really the answer there.

Great. Next question from [ Daniel ]. "Margins were very strong in the half at 20%. How sustainable is this looking into the second half?"

20% is always our goal. We've always said to people a rough guide and rule of thumb, 30% gross margin, 10% overhead, 20% EBITDA is a good drilling business. It's obviously difficult to achieve. And we'd like to think we can be there or thereabouts moving forward. Again, I'd point people to the Morgans commentary and in their paper and have look at their assumptions. But again, we're in a good spot. What can change it? A whole lot of wet weather. We don't make any margin when we're on standby for wet weather. So that's going to dilute the percentages. A big contract win that would potentially require some spending at the start could potentially impact that number, but you would get the benefits down the road. So at this stage, with the projects that we've got in hand, up, running, operating, there or thereabouts is a reasonable assumption. But again, there's things that could happen that move that.

Part 2, "Can you provide some color on [indiscernible] conditions thus so far January and February of 2026."

Better than usual, better than last year. Certainly, less wet weather. And to Greg's point earlier on that insurance claim will come back the other way as well. So I think it's been a good solid start through January and February so far. But again, let's wait and see. We still got a little while to go. There's also the summer down in Victoria where they have standby for fire days or extreme fire days. So we've got to get through that fire season in Victoria and the wet season up north and then we can sort of get better visibility moving forward. But importantly, again, we're disciplined with our pricing and we're happy to lose and that's demonstrated by the rig count. There's people out there that do have more rigs running, but they're more aggressive on pricing. So again, that less is more and be patient and then you've got the rigs up the sleeve to deploy at the right prices at the right margins for your good clients if they want more too as well, so.

[indiscernible] Question, [ Thomas ], about the dividend and why it's to be a special and not an ongoing regular dividend. Should we expect another similar dividend second half '26?

Look, I think that's the position for the company and the Board at the moment, has always been the 4 different pillars that we run in the company. One is dividends, the second is buybacks. The third is growth. And the fourth is debt reduction. And we're essentially just pulling on each one of those depending on how we see the business at the time. And right now, the business is going exceptionally well. I think Andrew and Greg and the executive team and the whole team have done an excellent job. And Greg has explained that from the growth from last year going into this year. The second half is looking good, as Andrew just said, I think it's a great start with regards to the wet weather and clients. And look, there's more rigs coming on, which is good, which means more deployment. So look, I think we see what happens at the end of the 6 months. As always, if the share price is low, we may consider a buyback. If the margins are great and we deploy the cash, then we look at a dividend. Again, if the market is continuing to grow into a super cycle, then we would deploy capital where best suited, and that is in the growth. So we're really playing with all 4 of those. And I think so far, the numbers and the results show that we're doing the right decisions with the capital.

Thanks, Nathan. Next question. "Can you give any color on the Loop business? Maybe talk about the pipeline, gross margins, time line to scale?"

Look, it's a startup. That legislation is relatively new and the coal mines are only on the [indiscernible] in more recent times. So we're not going around in presentations yet going it's this many rigs at this much CapEx and this much revenue and this much EBITDA or this much return. We're not in that position yet. It's early days. It will take time, but it is very technical. It is very specialized. It is difficult to replicate. I'm not saying it can't be replicated, but it's difficult to replicate. It does have downstream opportunities. So the margin represents that specialty. So it is a higher margin type business. Certainly not going to sit here and say what it is. But the best way to think about drilling is the harder it is, the more complex it is, the more difficult it is, the more technically advanced it is, the better the margin. And obviously, the more simpler, easier, shallower, more commoditized, the lower. And I'd say that the Loop business, all the modeling and managing gas, et cetera, is right at the other end. So it is a material number. It really does have the opportunity to turn the dial even only getting a handful of rigs out. And we certainly think the market is larger than that. But it's too early to sit here and give definitive numbers.

[indiscernible] getting access to those rigs is always quite easy?

Yes, there's no -- we don't see any issues with getting the rigs if we need them for that particular type of work.

Okay. Question, [ Daniel ]. "To what extent are decent quality acquisitions available at the right price? And if these are limited, how much net cash will the company be comfortable holding on the balance sheet at a maximum?"

[Indiscernible] We're always looking for acquisitions, and we always let them go or we buy the right ones that we think. At the moment, I think the position for the company really is looking at internal growth, but we're always considering external acquisitions. So right now, it's -- the last couple of years, it probably hasn't been the right thing for acquisitions. It really depends on where the market is going. So at the moment, we're building into the market. If those acquisitions look right and the price is right, we'll consider them. But at the moment, there's no acquisitions on the table at the moment, so.

Thanks, Nathan. [Indiscernible], "In terms of dividend payout ratio going forward, what's the Board thinking?"

Thinks that's largely been answered to a certain extent, Allen, in the earlier question. It will be a mix. It will be across those 4 pillars depending what those needs are in a period like this where there's been a significant level of excess capital. The ratio has been extremely positive, and that may change as those things change down the line.

Thanks, Greg. Question from [ Mark ]. This one is for you, Nathan. "I'd like you to speak to your thoughts on the shape and strength of the outlook for the positive mining cycle and which commodities Mitchell should be targeting. Gold has been extremely buoyant. Mitchell has more or less exposure to copper."

Yes, true. And I think the acquisition of Deepcore has been excellent for us in Victoria. I think the -- obviously, that gold has really taken off, as we all know, it's $5,000 an ounce, and that's really paid dividends right across the board. Look, I think coal is going to come back at some point. We're already seeing the coal price starting to grow on -- certainly on the met coal price, maybe not so much on the thermal, but we did very little thermal and we do very little thermal. So most of our customers are met coal. So I think that -- you remember that took a huge chunk of revenue out of our business 2 years ago, 3 years ago, something like $70 million. So that was a massive reduction in our revenue, and we've had to pivot the business. And we haven't seen that curve in my career, that sort of massive pivot due to those royalties. Normally coal has been very stable over 50 years. And so it was a big elephant to swallow for the company and pivoted to gold and other metals. And I think we've done an excellent job with that and then to rewrite the business and go again. But I don't think coal is over. I think there's still life in the pet coal business. And so we still have those rigs and that equipment and that expertise for that business. Commodity-wise, I think gold will continue. Copper, unfortunately, Australia doesn't have a lot of copper, but I still believe there's good copper in Mount Isa and up around that way. So whether it gets another life is yet to be seen and whether the Queensland government really gets behind it. So I think copper is on a massive trajectory. I think everyone would have -- in this meeting would have read the stories around how much copper is needed in the next sort of 18 years. It's more than every bit of gram of copper we've mined in the last 10,000 years. So I think overall, we're in a pretty good spot with regards to commodities. It's just making sure that hopefully, government gives us some fresh runway. That's probably the biggest issue that's facing all of us is the issues around red tape, green tape and all of that. But in spite of that, with commodity prices where they are, businesses continue to find a way through that. And we're seeing that in new mines starting up in Victoria, a lot of new mines starting up in New South Wales and also obviously Western Australia. So we're not in West Australia in a big way, but Western Australia is booming as well. So whether it continues, let's wait and see. I think that's why we're being quite prudent about what we're deploying in the rig count.

Thanks, Nathan. [Indiscernible], Andrew. "But any update on current tenders in terms of decisions?"

Look, probably can't really sit here and talk to individual contracts like that. But certainly it's looking positive. I can certainly say that I think there's some good proposals we put out there that have been well received. I think that's looking positive on the tender front, that's for sure.

Okay. Follow-up question here from Nick. Back on the Loop services. "Is there much difference in demand for Loop in regards to coal versus thermal coal? Do they both attract gas deposits equally?"

Look, I think different coal deposits have got different levels of gas in them. Obviously it's organic matter that's broken down over time. It all contains gas. It's just how much depending on where it is and who it is. The main thing with Loop is it's talking to all major coal producers across New South Wales and Queensland, met and thermal. If people want us to help them reduce their greenhouse emissions, which is a good thing for the world, we'll help them do it. But certainly, the opportunity exists across the entire market. Some sites are more gassy than others, but the opportunity is just all over.

[indiscernible] Greg from [ Ben ]. "What split of your revenue is split between the various cycles of the mining. Is exploration drilling the lion's share of revenue generation or are your rigs the [indiscernible] throughout the mine life?

No, through the mine life, I think we put in presentations previously what the sort of mining -- steps of the mining cycle are and spoken that our revenue comes from a broad range of steps across. So certainly your true middle of the bush greenfield drilling, trying to find a new deposit is a very small part of our business, probably less than 5%. We certainly do have a number of rigs operating with some wonderful explorers that are a little bit more advanced. Southern Cross is on to a fantastic deposit in Victoria, Catalyst in Victoria, Waratah in New South Wales, not mining yet, but fantastic deposits with multiple rigs operating on those sites to learn more about the deposits. And then you're obviously from there, you're on to your mine site and you've got obviously rigs a little bit away from the mine, near-mine exploration and then rigs coming closer in for more of your sort of grade control or ore body delineation. Obviously, we do a lot of -- we do some geotech work as well. We've worked on sort of Sydney Metro, Melbourne Metro, the Snowy Hydro scheme, we've worked on some specialist drilling in the geotech space from time to time. We do a lot of mine services work where we've got large diameter holes for power, air, water or to drain gas out of mines. So there's a lot of different types of drilling that we do that are related to the ongoing operations of those mines, including underground gas drainage in the coal fields too. So it's a very diversified company by the commodities we work in, the geographies we work in, surface, underground, but then also the actual tasks and drilling that we're undertaking on different mines day to day.

Thanks, Andrew. That was the last question so far. If anyone else has another question, I'll give you a minute to type it in, otherwise we'll close off. Okay. Thank you, everyone, again. Andrew, any final remarks before we close off?

Thanks for hosting, Allen. Thanks, everyone, for your interest on a busy day. Again, please contact Allen if you're interested in one-on-ones with management, and we appreciate the interest. Thank you.

Thank you.

Thanks, guys. Thank you, Nathan, Greg.