MLG Oz Limited (MLG) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to MLG's First Half FY '24 Financial Results. I guess, just to kick the meeting off and give everyone a high-level overview. If we look to the half, what we saw out of the business was some continued strong delivery from the underlying business, which was, I guess, from our perspective, exactly what we expected. What we did see across the half was some challenges around project ramp-up and timing, and we've spoken to that in some of our previous presentations. But at a high level, what we did see is top line growth from a revenue perspective of $268 million (sic) [ $268.6 million ]. We saw a slight growth in our EBITDA and NPAT half-on-half and that NTA has continued to grow. We will talk to it in more detail throughout the slide pack, but I just want to highlight the fact that from our perspective, we did land exactly where we expected. And we're very encouraged by the fact that the underlying business has continued to perform and being able to sort of weather some of those challenges that have come from a project commencement and timing of those projects starting and having to wait and hold assets and people across the half. If we look to the highlights, guys, at a high level, as I said, revenue was up some 20.3%, and that really came in the back end of the half. We'll talk to that in a little more detail, but -- as we get through the slide pack, but we did sort of brief the market and flagged the fact that we were carrying some costs across the first part of the half, and that was predominantly related with fleet and people waiting for project commencements. What we saw in the back end of the half was that it starting to be deployed. That allowed us to, I guess, hold our employee position with consistent numbers and flex with the requirement of contractors across that period. But more importantly so, as we came out of the back end of the half, we're really starting to see that contribute, which is a sensational result for the business. We did see that capital equipment continued to flow through with circa $29 million (sic) [ $29.2 million ] spent across the half. We do expect that to taper off now as that fleets go on to work. And we've now gotten ahead of the curve from a capital and fleet management perspective. So the second half, we expect to see a reduction in that number. Across the half, we did choose to purchase an accommodation facility located in Kalgoorlie to give us that sort of competitive advantage. Accommodation market is very constrained in that neck of the woods at the moment and having access to accommodation allows you to be able to leverage your position, and we are doing that today. And more importantly, that NTA is up to $1.02, which is an 8% or 8.5% rise compared to the prior corresponding period. Just sort of touching on those employee numbers. As we spoke to earlier -- or as I spoke to earlier, we did hold our numbers across the half, and that was a conscious decision based around the fact that we're holding some fleet and some people in preparation for project commencement. We will lean back into that now and continue to grow. The reality of it is that as we got into the back end of the half, we did see some of those projects that had some timing-related issues through project approvals and just principal decisions received sort of start to kick in and the revenue start to flow-through in the back end of the half. We're now in a situation whereby our [ NTI ] programs and our employee pathways are delivering for the business on an as-required basis. And we expect to see those numbers grow as we push into the second half and start to maximize those opportunities when we redeploy that fleet to. Staff retention continues to be a challenge across the wider industry, and we're very focused on ensuring that we can improve our numbers. We have seen an improvement across the half materially in terms of turnover rate dropping, but we are still continuing to maintain focus as the level of activity, particularly across the gold and still the iron ore space remains high. And in terms of compound annual growth, I guess, just to highlight, guys, we've spoken about our CAGR in detail across previous result reporting periods. And this half has been no different in that -- that we continue to grow. We did see a large amount of that ramp-up come in the back end of the half. And hence, at the top line, we saw that flow-through. We are expecting a materially stronger second half for the business and expecting to see that CAGR continuing to run on. For those of you that aren't across the MLG story, what do we do and how do we do it? Well, it's -- our business model is one that's built around the processing of minerals and in particular, gold, which puts us in a very good spot right at the moment. We have an operating model that is built on 4 pillars being our bulk haulage, crushing and screening, civil and mining and our construction materials that really wraps itself around a centralized processing facility. You would have heard a lot of our customers that are talking about the hub-and-spoke model over the last few years as they optimize their processing infrastructure and drive development of satellite ore sources. The likes of Genesis and Ramelius and Gold Fields have been big users of that philosophy along with Northern Star. And they've sort of formed a key part of our growth story really. And we're continuing to see that roll on. We've had the recent announcement of Genesis bringing on the Mt Morgans facility, and we're looking at what we can do around the wider Gold Fields region at the moment with all of our customer bases. They ramp not only processing infrastructure volumes, but also grade profile and unlock resources that are economically viable at the current gold price. In terms of the footprint that we operate in, as I sort of alluded to just now, the large focus for us has been across the gold industry for a large portion of our existence. However, we do have an exposure to the Pilbara through our crushing and screening division within the iron ore sector. And we've also got a large construct materials development -- construction materials contingent that deals to civil infrastructure and road type environments of supplying aggregates and sands and so forth for not only road sealing, but concrete and so forth. If you look at our order book and where our revenue is coming from, it's an array of both mid and Tier 1 mining houses, large proportion of gold, obviously, circa 85%, 86% of our revenue coming out of gold at the moment. We do expect to see the iron ore contribute a little bit more across the second half as we're ramping back up within our crushing division, and we'll talk to that in a little more detail as we get into the slide pack. But large focus and exposure to gold, and that is driving an unprecedented amount of demand as we look to those customers starting to unlock their underlying resource portfolios and drive production volumes. The key part for us, the other thing that map highlights is just the geographical spread. I guess, for those of you that are across our story, you would have known that we had some challenges sort of a few years ago with just dealing to the inflationary pressures and so forth that the whole of the mining service sector was being subjected to. The investment in technology, both in hard technology on our fleet, GPS monitoring and in-situ cameras, dovetailing into a bespoke set of software has allowed us to generate a reporting platform that is second to none. We have live reporting across the whole of our business that allows every one of our operations to provide us with a P&L on a 7:00 every morning basis for the previous 24 hours and where they are month to date. Huge amounts of transparency, huge amounts of capacity to be able to hold our staff to account around key sets of deliverables and one that allows us to drive the business on a day-to-day basis. With that, I'll hand over to Phil.

Thanks, Murray. Look, as Murray described, revenue growth has been strong in the half, and we continue to see that over time. What we've seen in this half, though, is that the haulage and site services business really is starting to grow strongly, and you'd understand that in terms of the demand from our clients for more production. And we're seeing those revenues strongly up, and those projects are really performing very well. They're certainly performing at a higher margin than we've historically had, and that's starting to kick through, but this half is also showing that we did have lower crushing revenue. And that crushing revenue is a combination of timing factors. 12 months ago, in the same half, we had a significant project with Bald Hill that had been going for almost 2 years. And we've just finished a number of campaigns leading into the half. So we had a bit of a timing issue. As we sit today, though, all but one of those fleets back in operation and the other one is getting ready to be deployed as well. So we're starting to see the crushing revenues come back in line, and that's what we expect in the second half, and that will contribute strongly into the margin continuing to grow through that second half and into next year. Across the group, we are very consistent now. We're seeing the sort of -- similar sort of results across all of our projects, and we're starting to see that each project now is performing as Murray just described with a lot more granularity in our systems. We're able to see what those projects are doing and hold people accountable to it, and that's giving us a result that's starting to be more consistent. We have talked about and we continue to be focused on margin, and we will continue to see margin rise. But in this half, it's been pretty flat in the last 6 months. And the margin in the previous period and the prior corresponding period was a factor of that higher crushing volume that we had. So this is really a bit of a stabilization 6 months, but we'll see it continue to grow into the second half. As Murray said, we're expecting a stronger second half. In terms of the balance sheet, we continue to grow our net tangible assets. They're up to $1.02. Net assets at $135 million (sic) [ $135.8 million ]. We've got a very good fleet. It's a fairly young fleet, and we continue to acquire the equipment that we need and what our clients are needing. And as Murray described, some of the constraints in this half has been due to the fact that we have invested heavily, that $29 million of CapEx did come in this half. The second half is expected to slow a little bit in capital, probably near the sort of $20 million mark for the half. And as a result, there's a couple of things happen as well. We also acquired an accommodation block in Kalgoorlie. This is a very strategic asset. It means that we are able to eliminate a number of rental houses that we've been managing across the Kalgoorlie site, and ultimately be able to centralize the accommodation for us and run catering as well a lot of those sites were just outsourcing to local pubs and bars. And this makes it a lot more efficient and a lot more effective for us to run. So that's now in our fold and will continue to be an important part of it. And as I said, that gearing ratio of 1.4x is expected to lower to probably near 1.1x by June as we see profit increase, and we continue to repay debt and lower our CapEx in the second half. When you look at the debt position, it's funded pretty much 17% by big banks and 30% by OEMs with a little bit was finance companies in the middle. When you look at the breakdown of the $77.5 million debt, you've got $66 million (sic) [ $66.4 million] in equipment finance. These are all higher purchase contracts over 3- or 4-year terms. They're all at fixed rates. They're all actually very economically sensible in terms of the interest rates that we get charged for. And it also gives us a multi tenor book because, each of the contracts is financed on each individual asset that we purchase. So they all have different maturing dates and part of the lowering of net debt in the second 6 months is the fact that we've got some contracts rolling off in the next 6 months. We actually will pay a lot of CapEx out in the next 6 months. And as our actually new equipment purchases slows, we'll see that gearing come back in line again with last year. In terms of those facilities, we've got almost $50 million -- just over $50 million of available facilities. So we do have plenty of liquidity in equipment finance, and that set us up for future growth in the future if we need to acquire more equipment. As we said, the accommodation facility was purchased, so that's increased debt for this period. And then the working capital is just a function of the overdraft. We have a $19.8 million overdraft. At December, it was slightly overdrawn. It was $8.7 million overdrawn. I'll talk about that in the next slide as to why that was overdrawn so much. We typically do try and run that down to as much cash as we can on hand. But on the 31st December, and you'll see it in the cash flow on the next slide, we did have a significant amount of money that came in from our clients just the day or 2 days later after the half year-end. So we had about $12 million was received in the first week of January and not actually in December. If you applied that back to that operating cash flow, you'd see we'd probably be in the 90% sort of cash conversion. But because that was a large amount, and it was received in that first week of January, everyone was having a nice Christmas, it has lowered our cash conversion for this half. I don't see that as an issue whatsoever. We've received all of those funds in now, and it will continue to come back to sort of more normal around that 90% cash conversion rate that we've seen historically, and that is what we expect for the full year. As mentioned, the CapEx was $13.1 million in sustaining. That sustaining CapEx is really where we are changing our material components or improving our underlying fleet and making sure we reinvest to our existing fleet, and we'll continue to do that as we go forward. We've got a very large fleet. Fleets do age over time. So we do need to reinvest some capital into that. But importantly, we did spend $16 million on growth CapEx. And that is, as Murray described earlier, it was a strategic decision to acquire an expansion in our fleet in anticipation of where the market is at the moment, which is that it has a high demand for that fleet, and we want to be able to service that market demand. Plus the accommodation facility gave you the total CapEx of $3.7 million across the half. So all in all, we are very comfortable with where the balance sheet and cash flow sits. Obviously, we would have liked a stronger cash flow for the half, but the reality is it's timing, and that will improve as we go forward. I'll hand back to Murray just to take us through the outlook.

So in terms of what sits in front of us, I guess I spoke to the fact that we did see some of that holding cost fall-through to the first half, but that was very much planned from our perspective in terms of having fleet ready to go. What was unplanned was the timing of our actual counterparties commencement of those particular operations. What we saw in the back end of the half is those projects start to ramp up and that fleet and equipment go to work. So where we sit today is one whereby we still have some capacity to be able to service our underlying customer base as they continue to grow, and we have capacity to flex for them, but we are starting to get to the upper end of available fleet. As we sit, we'll see in a few weeks' time, the commencement of the Westgold South operations. For those that you saw -- or for those of you that didn't see this morning, we announced that the market has a 3-year agreement with West Gold to leverage our Gold Fields base fleet to service their Southern Gold Fields operations. We are seeing this increasing demand that continues to flow-through, particularly around the gold space where we would get a phone call a day from a potential producer or one of our existing customers, saying, hey, we want to bring this particular asset online. How do we go about doing that? So in terms of the wide MLG business and what this next half has in front of us, we have a strong underlying set of operations that have increased margin from a haulage perspective that have delivered strongly across the half and will continue to deliver strongly into the second half. We see that additional contribution coming through from those remobilized crushing plants and the kickoff of a series of new civil operations. So we're expecting to see a material uptick in the second half that will deliver both growth at the top line, but more importantly, profitability growth to both on a percentile basis and a total number. But in terms of the outlook post that 6-month period, we are seeing this huge inbound demand, particularly around the gold space that we expect to continue to see flowing through. And that's across the whole of our service offering, be it open pit mining, be it crushing and screening, bulk haulage and site services. We are seeing a huge amount of inquiry, and we expect to see that incremental growth continue. If you look back through some of our previous slide packs and look at the longer-term history of the business, our business typically grows in 24-month blocks. We'll have a big sprint. We'll have a consolidation period and then another sprint. The last 6 months has really been a reflection of that, and it's been back more in line with the way we've continued to grow. From our perspective, we're very pleased with where we sit. We would like to have seen some of those projects come on sooner, but we are pleased with the point of view as we're being prepared. We've seen the back end of the half, having those projects contribute both at a top line, but more importantly in the bottom line, and we're seeing that -- we're expecting to see that to flow-through in the second half and more importantly, into the following financial year. So in terms of highlights guys, from an outlook perspective, strong underlying business Importantly, the haulage business, which has been a challenging one for us from a margin growth perspective has delivered consistently, that crushing business will and is coming back online and a huge demand from our underlying customer base. So very, very comfortable with where we're at. Very, very comfortable where the business is at in terms of managing the variability that has come across the period. And this result is really a reflection of the consistency that they're able to deliver subject -- when there's things like project commencement start up and so forth that are out of their control from a timing perspective. So well placed, looking forward to the next 6 months and are expecting to see the second half come home with a nice wet sale. And with that, I might open the floor up to some questions.

So I mean, at the FY '24 result, you sort of guided to revenue and EBITDA to grow year-on-year, but you did mention limited NPAT growth depending on project timing. Just can't understand how you're thinking about NPAT growth for the full year. I know you've got a pretty significant D&A component now. So should we expect that to go backwards a little bit year-on-year? Or are you still maintaining that limited growth guidance?

Look, I think it's -- we're going to be working hard get it back to the same number, Nick. Just because of the timing of these projects, we had anticipated, then some of these projects would have started a couple of months earlier, and that would have made this half slightly stronger. We did $11 million in NPAT last year. We've done $4.1 million this half. As we've said, we expect a stronger half, but whether we could double that is the debate. And we're going to have to see how the second half unfolds. But it should get pretty close. I mean, I think we're probably thinking that we're pretty flat at an NPAT level unless, as we know, there's quite a few projects that they're trying to push us through some more things. So I think it's going to be that challenge of how much more can we squeeze out of the second half just in a timing sense. But I think it's going to be pretty much in line with that FY '24 NPAT, whereas EBITDA and other metrics are probably a little bit higher.

Awesome. That's helpful. And, just like looking into FY '26, I mean, you mentioned crushing and [ civil's ] revenue are on the up and projects have commenced, which is going to increase your margin into the second half '25. Just trying to understand whether they are long-dated contracts and whether we can sort of assume that FY '26 will be a high margin year as well or at least even first half '26.

Yes. Most definitely, so the work that we're mobilizing into, Nick, does run out across FY '26.

Okay. Awesome. And so you guys would be relatively comfortable with us sort of extrapolating your 2H margin into FY '26.

Yes. Yes.

Got a Q&A from Oliver [ Creighton ].

I just put it in the chat there, but I've said, first off, I appreciate the growth in revenue after the first -- over the past few years. It's great to see capture multiple different revenue streams. But firstly, both the subcontractor charges and other employee expenses are trending up as a percentage of revenue. So this is actually having quite a big impact on margins. Just wondering what the justification of this is? And how is MLG looking to lower these as a percentage of revenue?

So from a labor perspective, that's a direct correlation to obviously, profitability, where, I mean, the other big piece is the labor high component. So were very focused on transferring contract labor and increasing our underlying MLG head count, which does materially contribute. We sort of put a slight halt on that across the half, Oliver, because we had some project timing delays that were sort of standing -- or had a standing there again we'll -- whilst we've got an underlying employee base and we've got an element of contractors fulfilling a piece. We don't want to continue to bolt more permanent employees in whilst we're waiting for projects to start. Now that in the back end of the half, those projects started to ramp up more materially, where we're now turning our focus back to driving, the -- I guess, the crossover from removal of those contractors back to MLG employees, and that's the one that has the biggest effect on the labor cost. And the second piece, the subcontracted charges, combination of things. So some of that is project timing commencement and gold price-related items where a client picks a phone up and says, "Hey, we need to shift this 0.5 million tonnes from 300 kilometers away, we want to start tomorrow." Obviously, we don't run a [ taxi rank ] road train high service. So in that situation, we transition with some subcontractor fleet and a combination of ours, and then we work through that to push our own fleet in over time. We see a material reduction in that. Obviously, we've got 1 project at Edna May that's got a large MLG fleet on it. That project comes to end of life in the next few months. And that fleet transitions back across to be able to drop out a large amount of the subcontractor costs that sit across the business. We will continue to utilize subcontractors for that sprint capacity and the short-term needs. So we don't expect it to see it materially uptick. This recent half as there are recent 2 halves with the ramp-up in gold price has had a lot of that short term ad hoc stuff starting to -- or required us to flex to our customers' needs. But we very much have a plan in place in terms of Edna May fleet coming out. Some of that will go into the Westgold South operations, but the remainder of it would take out a large portion of those subcontracted costs. So we do expect to see that reduce.

Okay. That's good to hear because at the moment, it's running at always 9% of revenue. The subcontractor charges, whereas in the last half year, it was closer to 7%. So...

Yes, very much material impact. In some cases, we get clawback from that from our clients. In other cases, not so much. But that's becoming a more and more robust discussion as the gold price gets higher and they're looking to unlock these things in a more timely manner.

So we're probably not going to see a material drop in the next half year because it's a contract rolling over at the end of May, it will more likely be a financial '26 [indiscernible].

Correct. Correct.

All right. Last question, probably more of a comment. Just -- I think the market is pretty aware of the related party transactions that occurs at MLG. Now I'm not going to go into specifics, but it tends to be around the $1.5 million per half year. And whilst these are done at arm's length contracts, I believe as the major shareholder, Murray, and also the amount of performance rights you have for increasing the share price, I believe it's 10% per annum, you get 2 million shares or so. Just I think most shareholders would appreciate this number trending down in the next few years. I think even if the works can be contracted elsewhere, I think there's plenty of opportunity for you to create value for other shareholders and yourselves outside of these related party transactions.

So we don't have any related party labor hire transactions, Oliver. That's all third party.

It's not labor, I know. It's -- but you've got purchase of prime movers.

So we had some legacy fleet that we're 100% transitioned over, that was owned in another entity, that was private, and that's all been washed out, and it's been purchased entirely by MLG, via a third-party auditor process to make sure that it was at market effective rates. The only thing that's left is some property lease that for industrial properties that are leaseback from myself personally to MLG. And in every circumstances, they're independently verified through third-party auditors and third-party valuers at every lease period. So personal exposure and related party transactions from myself have materially reduced compared to where they were sort of 2.5 years ago. And outside of those, the actual property leases, there is no more transactions being entered into or entertained by the group in terms of related party transactions. So we are very cognizant of where the market sees that and views it and have been effectively working through a process of unwinding those particular items that potentially create the questions.

Got another question on the Q&A from [ Mohammed].

Far away, Mohammed. You there Mohammed. Sorry, we're unable to hear you, Mohammed, if you're asking your question. [Technical Difficulty].

I've got another question if no one else is going to jump in if that's right. Where is the business -- what's the 3-year goal for the business? Like where does MLG want to be? Because obviously, there's a limited amount of gold mines in the Kalgoorlie region and across Australia generally. Is the plan to sort of optimize become the major player in the field and then return capital -- sorry, return earnings to shareholders? Or is the plan to be taken out eventually? What's -- where do you see the business in 3 to 5 years?

No, I think that we still have a material amount of growth in front of us. And it's one -- I guess, our 3-year plan from a strategy perspective is built around unlocking value through the integration of our service offering. And it's really been about getting the scale to be able to do that, and we're starting to see that flow-through now. We expect and anticipate that we still have a material amount of growth in front of us. We are fielding inbound inquiry from the wider resources sector, be it across iron ore and copper and so forth around the integrated model supporting processing infrastructure. The challenge that we've had is being able to grow at a sustainable rate and be able to procure the fleet and the people in a timely manner to maintain that growth and fund that growth. So where do we see ourselves in 3 years' time, Oliver? I think we see ourselves with far more vertical integration, still a reasonable amount of, I guess, exposure to gold, but also one that sees us spreading that across other jurisdictions, Pilbara, potentially Queensland, but one that really sees us leveraging that open pit mining, crushing and screening and haulage in a more combined way in support of our customer base.

Guys, just the Westgold contract that looks like you've obviously renegotiated that, so I'm assuming there's some rate increases there. But across the portfolio now, are you happy with where all the contracts are? Or are there further kind of further rate improvements to come through in the portfolio?

Yes. I guess for clarity, Sam, it wasn't a renegotiation. We weren't currently conducting those works with Westgold. That is a new piece of work completely. So there's been some smaller local contractors conducting that. And as part of a wider strategy, Westgold have looked to us to help them unlock value there. Yes, I can tell you that it was negotiated at current market rates. So we are expecting to see that materially contribute to us across -- not so much this half. Obviously, we don't start for another sort of 4 weeks' time. But as we transition into next financial year, we expect to see that hitting its full run rate. I think if we look across the whole of the underlying business, it's easy to stand back and say, [ Rod ] you had a 10.9% margin last half, 10.9% margin this half. But importantly for us, what we did see across the whole of the business is every single one of our operations performing and performing consistently. It's no secret that the bulk haulage piece of the business has been the lower margin piece. And in the past, it's been supported by the crushing and screening division. The crushing and screening division, just through a series of timing-related items had projects sort of washing off right at sort of the early part of this half and then starting to ramp up at the back end of the half. What we saw across that is the capacity -- or the growth in margin within our haulage business, in particular, lift, and that carried the crushing and screening division across that half. So with the contribution of the crushing and screening starting to deliver again and the underlying haulage business continuing to grow in profitability, and we are seeing that continue to grow in profitability month-on-month. And the fact that we have a very consistent delivery now across that part of the business where there was variability that existed 12 months ago, we're confident that we're going to see that start to contribute to those margins growing on a percentile basis. And given that we're looking at top line growth as well, we expect that to have a material impact in a positive way on our EBITDA.

[ Matt Middlemas ] here. I was just wondering, some of your profit share opportunities that you've been talking about, I guess, on those smaller open pits that are starting to become economic. Just wondering how you're assessing those? And I guess, are there benchmarks in place to actually make them worthwhile for you guys to enter into?

Yes. There's been a few benchmarks just recently. The biggest challenge with that at the moment with a AUD 4,600 gold price is the expectation of the owner of that particular asset. But more importantly, the unlocking of processing infrastructure to be able to process it. I can tell you, we are across a few of those as we speak and are actively working through getting the finalized -- getting to a point where we can get to a now on or go-type decision, but they are really sort of reliant upon finalizing a processing infrastructure capacity. Now the fortunate part about our group is, obviously, we are providing the key support services to the majority of processing infrastructure across the whole of the Goldfields region of WA. And that does give us an automatic in to be able to open negotiation and discussion with our client base around how we access some time at that processing infrastructure. But to say that market is hot at the moment is probably an understatement, Matt. There is a huge amount of activity around trying to unlock these particular assets and a lot of jostling around getting access to processing infrastructure. And what is fair and equitable value to be delivered to both the underlying resource owner, but also ourselves as the entity that can bring that particular asset to commercial realization. We're close mark, but we're not quite there yet is the short answer.

Any other questions? Or we might wrap it up there if there's no more. No more. Okay. Thanks, everyone. I much appreciate it. All the best for the rest of the week. I'm sure you've got lots of other results to go through, and we'll talk to you shortly.

Appreciate your time. Thank you very much, guys.