Mitchell Services Limited (MSV) Earnings Call Transcript & Summary

Good afternoon, everyone. Thank you for joining us today My name is Allen Chan from Bridge Street Capital Partners. Today, we have Mitchell Services, ASX Code MSV, and they're here to talk about their first quarter FY '27 quarterly update. We have with today, Nat Mitchell, Executive Chair; Andrew Elf, and Taleo. This year being recorded, and we have to take questions after the presentation. Andrew, over to you. Thank you.Andrew

Thanks very much, Alan, and thanks, everyone, for joining us and for the interest. As Al said, we'll follow the usual format. We don't wrap it on too long at the start. Just touch on a few key points and then open it up for some questions. And obviously, we're happy to answer those as Alan puts some to us. So look, a very pleasing quarter. Obviously, a lot of hard work over many years leads to a quarter like this, a creditor all of our teams that have done the hard work and delivered those results. But a very strong quarter, a record quarter in many respects. -- and very proud of those numbers. I think important to note that it does look like it's going to get better. We make the point about the rigs that are going to go out and where we think the operating rig count can potentially go. And certainly, there's a lot of leverage left in the business if that rig count increases throughout the course of this year and then going into '28 with a higher rig count again at the start of the year. So it's looking pretty good. We obviously talk about the market. I know Index released an announcement late last week where they spoke about the market as well. So it's all sort of hangs together with that. But certainly very strong in gold and copper, which is fantastic to see, particularly in the underground space. And in more recent times, even though that coal price has increased, we haven't yet seen an increase in demand for coal rigs, but that certainly is an upside opportunity for the business if that coal market does improve. I won't go through the financials, please feel free to ask any questions to Greg in that regard but there's some movements in cash and things there that he can talk about in more detail. At the end of the announcement there, very pleasing that BHP did give us approval to talk about the project that we're completing with them at the moment and the world first that we completed in regards to decarbonization drilling. So -- and then referencing the BHP presentation. So -- to date, as we've said previously, to people, we think this business is going to take some time to get traction. But I think this proves again that the concept and what we're doing works. We just need that market to come to us in a little bit of time as it develops. So all in all, great work from the team with the world first. You certainly don't see many world firsts in drilling company presentation. So that's absolutely fantastic, and certainly builds on a lot of the experience that this business has in that gas space over many years. So all in all, a great start to the year. We're well set and hopefully looking forward to a very good year ahead for the business. I'll let you open it up for some questions.

Thanks, Andrew. Okay. The first one, for the additional 10 rigs you signed contracts for the pricing and expected margins the same as the rest of the contract book.

Yes. Yes.

Asides from rig wins, do you see any rigs coming off contract for the balance of FY '27 and '28

No, but I'll give more than one-word answer to this one. I think look, you've always got an element of your book that needs to be rewon. And we do have a couple of contracts that we need to rewin in the second half, nothing in the first half but we do hope to win those contracts. There's no reason that we shouldn't. We're performing well. We're being reasonable with our price expectations. So unless someone logs in a stupid price, which you wouldn't think would happen in this market. we'd be confident of retaining those. So I don't see a great number of rigs coming off at all, maybe with clients that have got 1 rig that are sort of smaller jobs stop and start, but there's enough demand to the on that rig somewhere else. So I think no, I don't see rigs coming off.

Would it be fair to annualize Q1 underlying results and add the incremental revenue and gross margin to arrive at a run rate and FY '27 earnings number.

I think certainly sad to include the incremental revenue and gross margin in your assumptions going forward around the extra 10 rigs. Off the back of that, can you also simply annualize Q1 results for the rest of the business, probably not. And the reason for that really twofold. One, -- it is -- the business is seasonal, particularly when you get to the back end of Q2, beginning of Q3, just with that sort of Christmas shutdown, et cetera, perhaps allowing for a bit of a a wet season in sort of early January as well. I would just probably point shareholders to previous reports to sort of fall their own views around what that seasonality can look like. And then with any new job, not that these 10 rigs, the ramp-up is going to be particularly significant, but there always will be. There will be an element of time before those 10 rigs are up and running and delivering the full margin that Andrew referred to earlier.

Yes. I think what's good with those 10 rigs that are going out as they're going to existing sites. So decide to set up the workshops are set up the supervisions in place. A lot of the bigger money that you would spend to go to a new project that's remote has been spent you're literally sending rigs out there, crews out there and that sort of thing. And obviously, with the business having more rigs running and a higher top line, the impact of that mobilization is reduced. So I think to Greg's point, that can be -- that can absolutely be managed. From a rig count perspective, look, the best way to think of it is just pick an average operating rig count that you feel comfortable with and pick an average revenue per rig and an EBITDA percentage and sort of let the rest flow out from there. Obviously, we sort of finished the year at a rig count. You can see what it was for the first quarter, to make some assumptions on an average operating rig count for this year. And then sort of as I touched on earlier, the exit run rate from this year, '27 to '28 is much higher, and you can make some assumptions on how good '28 could potentially look as well.

Thanks Andrew. Question on Royce. Can you explain the CapEx increase, please? And what full year CapEx FY '27 and '28 might be?

So I think we've said previously that the CapEx looking at FY '27 CapEx is certainly going to be front half loaded, and this quarter certainly demonstrates that what that is, it's really in response to the increased demand. So there's an element of rigs that are parked up that sort of need to get ready, a bit of a capital overhaul to be ready for those jobs, and that's in line with expectations that sort of what's unfolded. I think in addition to that, just what we're also seeing the strength of that demand has meant in some instances that rigs that were otherwise scheduled for a rebuild that had to stay at client sites to service that demand. And you may have noticed just in the commentary in the quarter as well. Rig count is now 93. And I think from memory, that was 90 at 30 June. So given that increased demand and the fact that we haven't been able to bring those rigs out for that rebuild we've had to sort of pivot and purchased 3 new underground drill rigs there, which is also part of the reason and why the account has gone from 90 to 93.

Yes. I think what that means in dollars, Greg, is roughly maybe a 10% increase on last year. We've said to people CapEx is probably going to be flat year-on-year. And with that increase in demand underground, it's probably 10% to set up now.

Yes. FY '26 levels of about $22 million or there thereabouts. So yes, I agree that maybe increase by about 10%.

Thank you on from a -- the timing of the new rig deployment through the rest of the year, second 2 in additional in Q1, also which not impacted EBITDA margins is the expected rate deployment through the rest of the year, expect to impact EBITDA margins?

No. I mean, we're hoping that we can achieve a 20% EBITDA number for this year. I mean we've said to people literally our goal is sort of 30% gross margin, 10% overhead and 20% [ EBITDA. ] And if we can achieve that with wet seasons and Christmas shutdowns and getting some rigs out, that's a great result. We'd like to think that we can achieve that. . As far as the rig count goes, we're hoping to get a majority of those rigs out before Christmas. It's just going to depend on the clients and whether that can happen. But certainly, we're very, very confident of getting out before Christmas, of those 10 that I talk about and potentially for -- if we get them out for Christmas great, it's not early in the new year.

From an honest view with the increased cash expected, what does this make the tone.

Look at the moment, it's it's our first quarter. So that's yet to be decided or we do on dividends. I think leave that to the second half of the year. As I said, it's been a great start for on the team. But I think it's early days yet to talk about dividends and what we'll do. We're focusing right now on rig deployments, as I said, it's a busy time for us. Good growth time, super excited with what's happening. So -- but that will come that decision will come in time.

Yes. And I think Nathan has spoken previously, we'll put the money where it needs to go to support the business, whether it's shareholder returns or other. But I think look at last year, it was a [ div ] in H1, and I think [ 2 ] in the second half. And if you think about this year, maybe it looks like it is around like -- last year was sort of the cash came in the first half and to be heavier usage in the second half. And then this year, it's probably the opposite. It's heavier in H1, to Greg's point, with the CapEx and rigs going out. And then it probably is a bit more stable with a lot of cash going to come back in the second half. So the intention is still there to do something. But as Nathan said it's early days, let's see how we go.Allen ChanThank you.

Royce market and rental prices increasing, stable or decreasing. Any comments on the outlook.

I think everything looks pretty flat. There's obviously inflation out there or whatever it is. And that just gets managed in the ordinary course of business, managing your suppliers and your employees and and new clients with contract renewals and CPI increases, et cetera. But the rigs -- the rigs that are out there are pretty good for drilling I think they've all been reset and as our returns will demonstrate that margins are. Okay. So we don't -- a lot of our work is with the global mining majors probably [ 80% ] plus -- they certainly don't allow you to make a super normal profit. So if you're making a good return, that's great, and you can maintain that. And that's how we look at things. But when the market is tougher, they also let you make a return, which is important. -- outside of those major clients, the junior market, the smaller end of town. The demand for rigs is still strong, and that's where your pricing probably moves a little bit more. But -- but again, I think the pricing at the moment. Nathan, I don't know what your thoughts on the market is sort of just solid.

No, I think it's solid. We're not expecting huge price rises, I think. So -- and I think looking at the numbers, we we don't need to continue to push the price up. Yes.

Next [ pet Chris. ] It is 3 parts -- asset matter too. Revenue per shift increased significantly against first quarter '26 and also fourth quarter '26. Is this just from doing higher value work? Or is there something else that has driven increased revenue per shift.

s probably a factor of a few things. Just underlying productivity from a business perspective. The operational teams drilled very well and very successfully. We made the point in the quarter just in terms of some of those previous quarters and the adverse factors that were outside of our control, or certainly in absence of those this quarter. And as Andrew alluded to earlier in answering the previous question around price A lot of those contracts have just recently been repriced as well. So there's that element to it as well. So I'd say, lack of a impacts pricing to an extent and very good underlying productivity.

I would agree with Greg. The productivity side of it is certainly picked up, that's for sure. And the guys are doing an exceptionally good job in the field, not just a bunch of rigs, but most of the rigs are now doing exceptionally good productivity job. And that really goes to the bottom line. So price helps, but really productivity is a much better driver.

The rig timing, we've spoken about our on that I guess the question is whether you can still deliver margins north of 20%, it's probably Part 3.

I mean we touched on that as well, and that's earning to try and do yes.

Next question from Daniel. -- you contemplate any investments in fleet expansion over the next 1 to 2 years.

Look, we've set to people in the investor roadshow and in these calls that it's not our intention to increase the fleet unless we have to unless it makes sense to do so. But if it makes sense to do so, we will. We've got the balance sheet. We've got fantastic clients, and we're going to look after them first and foremost. And if we need more rigs to look after those clients, we'll get -- but do we have intention to go out and buy 15, 20 rigs and throw in the Eastern States market. No, you're going to dispute a look after your good clients, and we'll get what we need to do that.