Mitchell Services Limited

Good day and welcome to the Mitchell Services Conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the star one again. For operator assistance throughout the call, please press star zero. And finally, I would like to advise all participants this call is being recorded. Thank you. I would now like to welcome Nathan Mitchell, Executive Chairman, Andrew Els, Chief Executive Officer, and Greg Svitala, Chief Financial Officer and Company Secretary. I would now hand over to Andrew, our first speaker, to start off the presentation. Andrew, over to you.

Thanks very much and good morning everybody. Thank you for joining us and thanks for the interest in Mitchell Services. I'll just move through the first few slides and take the disclaimer as being read and move straight to page four, market profile. So obviously the two main points here, Nathan Miguel our Executive Chairman and Major Holder with us here today and we'll certainly open up for questions at the end of the presentation and feel free just to address your questions to Nathan. And then obviously Scott Tunbridge, 7.3% holder, dream challenge and that was the business we acquired back in 2019, Deepcorp on the board there as well. So just moving to the business summary on page five, I'll just run through these boxes at a higher level and we'll get to it more as we move through the presentation. So this is obviously the half year summary, revenue up and heading in the right direction capex down as we've finished our major capital investment program now. All 12 of those rigs have been delivered, ramped up, transported to site and are now working and generating a return with global major miners. The average operating rig count, whilst it did tail off toward the end of the calendar year, was strong in that first half and certainly is improving again at the current point in time. debt has peaked and reduced materially in the first half and will continue to do so towards our target at the end of calendar year 2024. Obviously the share buyback has been on foot and was $1.5 million in buyback payments as at the end of December and that number is around about $1.8 million as at today and it's still on foot. So just on to page six, this is a slide that we put out there previously, and we expect a material increase in revenue on EBITDA in FY23. And even though we had a couple of challenges in the first half, we stand by this at the current time, notwithstanding factors that could impact us that may be out of our control, such as weather or other things. But certainly on the revenue side, we're looking good, and then EBITDA is certainly coming as we move forward. But I certainly think the business is in a wonderful position is continuing to grow and use the high quality assets that we do have. Just on page 7, again I won't run through that list of customers but worth noting a majority of our revenue is from those global mining majors, approximately 90%. The commodity prices are still high. There is a strong demand for drilling particularly in the steel making coal sector and certainly we have had some minerals contracts slow down or reduce and coal contracts start up and increase. So a little bit of a pivot within the business that did impact the EBITDA which ramped up, ramped down to move roots across into coal and where that stronger demand was. Obviously people would be aware that the utilization is pretty good at 81. Obviously there's opportunity to further improve that as we move forward. There's obviously been inflationary factors within the business as well. But those two factors combined are providing us with an opportunity to coming back and Nathan will probably talk a little bit about that as we move through the preso. The capital investment program is complete. The rigs are out and generating returns. That's been a very successful project for us and we can talk more to that as we go through the presentation. But those rigs already are around about $200,000 more each to buy now than what we pay for them. interest rates are a lot higher than what we locked our fixed interest finance payments at, all those rigs when we bought them. I think the board and the team made a very good decision in that investment. Then the last point there, obviously, the high-quality revenue streams, 90% from the majors. We split 50-50 surface underground. Gold's around about 50% and obviously 80% of the revenue is from mine sites and things like that. And just while I'm on this page, Nathan, I don't know if you've got any views or comments on the market or other things maybe? Yeah, thanks Andrew.

I think certainly timing is everything. Looking back now, the decision that we made to buy that new fleet at the low interest rates before the inflation really grabbed hold has been excellent. timing is so important to everything we do in this industry. The ups and downs, obviously we've seen coal really accelerate over the last couple of years and we're still seeing that growth in the energy sector and I think with what's happening in Ukraine and the war, that's probably going to stay reasonably high for the foreseeable future. It's certainly... a lot of interest coming back in that sector. Again, thankfully we run across the board between minerals and energy. We're not focused on one or the other. We probably don't see the highs of the highs in the mineral sector as some other contractors do and we don't see the lows in the low. So the ability to be able to switch from one or the other. Obviously inflation, you're probably hearing a lot of that and we're all seeing it in our day-to-day lives. Inflation does bite, has bitten a lot of us in wages and in blockchain and fuel. Luckily, we don't pay for a lot of fuel. Our clients pay for fuel. But still, those costs have increased significantly. Flights, as we all know, travelling around Australia, have certainly increased significantly, exclusively with Qantas. and those costs have gone up. But luckily for us, those costs obviously increased probably 12 months ago or six months ago, but we are seeing rollover, and Andrew will speak to that more, we're seeing rollover of contracts and we're getting those price increases to offset those inflationary costs. But like everything, it's about timing. your input costs don't always equal your increase in invoices. So there is a lag period and I think some of that you'll see in these figures today plus the one-offs that we've had issues with. But overall I think December is always a tough month with wet weather, always has been and I think we're going back to traditional sort of wet weather that we've seen over the years. But I think it's looking fairly good going forward from now on. We're pretty happy with the rest of the year at this stage with the reflating count. But overall, I think the mining industry as a whole looks pretty good.

Thanks, Nathan. I agree. I think there's a very positive outlook. have a couple of things go away and there's some really good results coming through. So just moving on to some of those operational updates that Nathan spoke about on page 8, obviously the main thing with those LF160s to note is that they are with global mining majors. Those companies want the best tech, the new gear, etc. We've certainly given it to them and they're well and truly booked up for the long term. Those rigs are going to be a really good thing for us moving forwards. Multiple new and expanding contracts expected to be EBITDA accreted for the balance of the financial year. The heavy lifting has been done. Contracts have ended, contracts have started, rigs are ready, rigs are out, including the 12 LFs, and they're out there making some money. And the last point on this page is a pretty important one too, that we've now got three large diameter rigs out, and they're expected to remain fully utilised until at least mid-year, hopefully longer, and that's highly specialist work, large rigs, specialist crews, and they do generate a good return to the company. So that's certainly going to give us a kick as we move forward as well. The rain in the first half of the year, unprecedented rainfall and multiple severe events. Obviously, we do the best we can, but even places where clients made rain-proof drilling pads for us got washed away. So it was tough from a rain perspective, and obviously we did the best we can during that time. Disappointingly, we did have one safety incident. The client had to do an investigation there before we could get going again and that sort of impacted us there. But again, our safety performance in this business far exceeds industry averages. We're very proud of our safety record. We wouldn't be working for those global mining majors and generate 90% of our revenue from them unless our safety record was exemplary. The thing that we're very happy about is that that employee will make a full recovery and is looking forward to getting back out into the field with his mates and getting back on the rigs. COVID, a lot less than previous years, positively, as well. So all in all, a couple of things that got us, but generally we're in very good shape. Strong bookings looking forward, strong demand. You know, it should be a good time ahead of us.

Looking at the profit and loss on slide 9, as Andrew mentioned earlier in his operational update, increased operating rigs and number of shifts led to an increase in revenue of approximately 20%. The business generated an EBITDA for the period of $16.6 million. And whilst that represents a solid performance, the EBITDA did not increase in line with the increase in revenue, as Nathan mentioned earlier, due to overall inflation pressures. and key temporary factors including severe wet weather events, contract variations and an unfortunate but isolated safety incident. Importantly, with an average operating rig count of 81 and with recent awards of new or expanding contracts, the business is well positioned heading into the second half of FY23. At an impact level, it should be noted that the acquisition-related amortization of customer contracts ceases from February. Also, given that the capital investment program is now complete, and ongoing capex is expected to decrease. The depreciation charge is expected to reduce accordingly heading into FY24. Slide 10, looking at the balance sheet, the business is well funded to capitalize on its recent organic growth strategy and has no intention to raise equity for any reason. From a working capital perspective, the temporary increase in net working capital of approximately was largely due to increased inventory levels associated with the new LS160 fleets. December's trade and other receivables were higher than traditional December levels, largely due to a delay in payments from a major mining client as part of an upgrade to its global accounts payable processes, which has been rectified post period end. From a cash flow perspective on slide 11, the gain generated solid operating cash flows noting that the increased working capital requirements as outlined on the previous slide have resulted in a cash conversion percentage that is lower than previous trends and longer-term expectations. Cash flows from financing activities includes payments of approximately $1.5 million in the form of the on-market share buyback that, as Andrew mentioned earlier, is still currently on foot. Andrew and Nathan mentioned earlier that the benefits around the timing of the LF160 purchases, obviously from a cost of asset perspective and also from a financing cost perspective. But importantly, the business doesn't expect to pay any income tax now until at least the end of FY24, and that's as a result of being able to benefit from the ATO's instant asset write-off program for which those 12 weeks qualify for. Gross debt per slide 12 has previously peaked at $43 million in June following the completion of the investment program, with first half 23 performance delivering a gross debt reduction of approximately 15%. The blended cost of debt of 5.2% remains in line with previous reporting periods due to the majority of debt being fixed prior to the recent interest rate rises that we've all seen. We expect the current trend of debt reduction to continue until the end of FY23, with the company remaining on track to reach its longer term net debt target by the end of FY24 being $15 million.

Just onto slide 13 with the capital expenditure there, obviously the teams have done a wonderful job getting those LF rigs delivered and out into the field and working. As Greg said, we get the benefit of the instant asset write off and you can see the material reduction in capex year on year. Obviously, it's important to note that we always spend what we have to spend on CapEx to ensure our fleet is and remains world class for those major clients we work for. But again, as I said, the heavy lifting and the spending is predominantly done and really it's the case now. We've got a fantastic fleet available to us. It's up to us now to go out, use it and generate some cash for shareholders. The capital management update on page 14. Again, this is something we've put up previously, but the company's obviously committed to prioritising a portion of that free cash flow to reduce leverage, as Greg said, by the end of that financial year, the target of $15 million. And then obviously maintenance capex as required, and then growth capex limited, but where it makes sense to do so. And then surplus cash, obviously pending performance. is where we really want to try and give something back to the shareholders and the dividend policy there, up to 75% reported post-tax profits in dividends. And so just on 15, how are we going against that capital management plan? What is our performance to date? Well, debt is down. It's peaked, it's down, materially down. And as Greg says, we'll continue to do so. And on track to that target of 15 million within the next year or two. Sensible capex limitation, obviously well down, and then payments to shareholders, obviously. We've got that share buyback on foot, and we've touched on that throughout the presentation already. We're on our way. We've just got to keep generating some good results, and we can only see that improve as we continue to move forwards. Lastly, why invest in Mitchell Services? I think we've spent a lot of money on the fleet. It is a world-class fleet. The client base, similarly, is very strong. The revenue and earnings growth will increase from here, as Greg said, with the depreciation reducing, the amortization of custom tax dropping off. That all falls straight through to net profit before tax. And again, we'll get some of those once-offs behind us will also lead to a better EBITDA performance. We're focused on that capital management strategy. I think it's an excellent strategy. And again, from a price perspective, I think it's the cheapest chips. I think where we're trading at the moment versus Net tangible assets and traditional multiples, I think it certainly represents very good value. So really, that's the presentation. We'll open it up for questions. If there's any questions, please.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for a moment to compile the Q&A roster. Your first question comes from the line of Tom Sartor from Morgans. Your line is now open.

Good morning, gents. Thanks for your time. A few quick ones from me. Just on the fourth quarter, it looks like you've sort of missed out on two to three million of EBITDA there. Can you just quantify how much of that may have been linked to the unplanned demobilisations? And perhaps you can give us some colour on number of rigs why that occurred and should we expect these unplanned events here and there as a nature of the game type event in contracting? Thanks.

Thanks Tom. I think you're right. $10 million in the first half and $6 million in the second and the balancing item really is whether contracts and the safety incident to get us back to that sort of level, no doubt. One of them was a contract with Newcrest in Western Australia at Haviron. We recently started a two-year contract extension with that client, going really well, doing a good job. There was a new lens of that Haviron deposit we were going to drill out from the surface for them. They made a corporate strategic decision to drill that from underground at a future point in time once the portal's in. Again, change in corporate strategy and again, there's three rigs there that we had to take from Western Australia, back to Alice Springs, a couple are heading somewhere else and a couple back over this way. Similarly, other clients like Mount Isa, Glencore, we're expecting a rig to run through to mid this year. I said, I know, we're just going to wind it up at Christmas. A few little things like that, and then you've got to grab that rig, grab the people, the crew, and send them back out to another job. That's always happening in our business. It's always stopped. We've always got things stopping, starting, moving. What actually happened in that first six months was that was happening at the same time we were getting those last diameter rigs ready to go out, those mine services rigs that we spoke about. So you sort of had a combined effect of Rick's getting ready to ramp up and go out. Rick's sort of coming off and moving, combined with the wet weather and the safety incidents. So a few things that sort of all came together at once. But certainly when you look, you know, as of today and looking forwards, it counts back up. Rigs are going out. Everything's running well. No safety issues. You know, and we've got a good pathway ahead of us to 30 June.

I think Tom and Nathan here also... Christmas time is never a great time, December period. January is sort of a double whammy in that case where you've already got a pretty poor month as it is going in and coming out, going into December, coming out of January like all businesses really and then you have those sort of things plus the weather. There is always going to be these sort of issues in the business. I suppose this time of the year is always probably the worst. and just having those is a double hit at the same time. And then you've got inflationary issues of significant costs now in transportation that go from one side of Australia to the other when you're demobilising like that. And it's much easier to demobilise when you're in the Bowen Basin or you're in Mount Isa back to Rome or something like that versus from one side of Australia to the other with 20 pieces of trucks.

No worries. That's good colour. Thank you. Looks like your average revenue per operating shift is sort of at a three-year high. I'm curious about the amount of runway you think there's still to the upside in terms of rates. Just noting that the competitive environment, you might be seeing more rigs that were with some junior companies start to come back into the market, given the fundraisings in that segment seem to be tapering off a bit. I'm curious about whether the competitive environment is still really tight, or if you think there's a good run rate.

Yeah, I think always the important thing to consider when looking at our revenue per shift is the mix of the work. I think what you've seen with the introduction of the 12 LF drill rigs, Tom, is 12 surface rigs. And as we move into this second half, with those mine service rigs coming on, they're surface rigs as well. So probably in that... in that first half a little bit of a change in the mix of the work as those LFs went out and a higher proportion of surface work where the capital costs are higher and the revenue per shift is higher driving that number a little bit as well. So I think as Nathan said with inflation we are getting rate increases and resetting the book and a lot of good work has been done there by the team. As Nathan says as well there's still work to be done and we're focused on that. So I think Certainly revenue per shift, I think, in the H2 will continue to go up again as that high proportion of surplus work combined with some rate increases goes through. But on the market itself, Nathan, maybe you want to comment on your views on the competitive landscape?

Yeah, I think it was a bit of a softening at the end of last year in the gold market. Certainly, I also think a lot of the large guys, tier one guys, locked in last year. when this year we're probably seeing more of the smaller guys. They taped it off last year, I think, but they seem to be coming back again strong. So there was this period, I think, between November and now where the juniors had gone quiet. Not that they're very much about business, and this is what I'm hearing in the sector, but that seems to be accelerating again, which is good to see. I think gold's sort of going up. Obviously, what's happening again in Europe People have got their eyes on gold if things happen for the worst and I think gold price will continue to climb. So I think the juniors are starting to get a bit of wind in their sails. But for us, I think as Andrew said, we've sort of probably re-rated 30% of the book. There's still more to go. Clients are open to accepting higher rates which you can see in the boxes. Costs I think have started to peak. We saw serious headwinds in pipe and consumables last year. I think that's started to come off now. Prices are, the excess capacity is starting to show and pricing is starting to show where it's become more stable, which is good on a go forward. So overall I think we're recently where the market is.

No worries, James. You've answered my questions. Thanks for the data. I'll pass it on. Cheers.

Thanks, Tom.

Your next question comes from the line of Alec Anderson from ANJ Anderson Management. Your line is now open.

Yes, I am a shareholder with 900,000 shares. Looking at the increase in number of rigs that you have working it would appear that you're buying market share. You've got a gross margin of 15% and that is not really adequately giving a return to shareholders. Please comment on that comment.

Alec, I think we never buy market. There's no benefit in us to keep rigs spinning for the sake of them spinning. My father always said to me, if you're not making your money, you might as well park them on the side. And that stands true today. I think you try and get the rig working on good margins, otherwise don't get it working. And so, I mean, if there's rigs sitting on the sideline, it's because we don't want them to work, or the contracts that are there aren't good enough, or we didn't win because our profits were too high. I think more the focus for us is trying to put them into the best possible place, the longest term contract. And you can see what's happened in December with turnover of contracts, it does hurt. Short term contracts feed away and erode, keep it dark very, very quickly, especially when it's unexpected. So longer term contracts, multi-year contracts, especially for a listed company when we have to answer to our shareholders, are far better for us as a company than short-term contracts like Tier 2, Tier 3 clients. Otherwise, we're always asking the question of why do the profit margins go up and down like a yo-yo. So certainly we don't buy contracts. That's for sure. We're not in the business just to spin a pipe.

I think also just to touch on what Nathan said, I think the capital management plan demonstrates that we're focused on returns to shareholders and we're heading in the right direction with our returns and the performance of the business. I think the business is generating cash. Debt is coming down. Buyback is on foot. And with the amortization dropping off, depreciation, some of those weather and other things behind us, You know, it is definitely the board's intention to look at some differences. So, you know, really, I think the business is in the best shape it's ever been. I really do believe that. And I think, you know, the next couple of years are going to be very good for us.

OK, thank you for that. But my second comment is that I look on myself as a long-time shareholder. And the share buy-back program does really nothing for me. you spent over a million dollars, I would have preferred you to have kept the cash and handed it out as a dividend. A share buyback, I'm not a temporary shareholder. So how, you know, the percentage profit on a share buyback for me is damn all.

I understand, Alec, and I'm a long-time shareholder as well, so I'm not going anywhere in the future. So we're both in the same boat there. But at the share price of, 35 to 40 cents it's pretty cheap and my belief is that at some point down the future we will be paying good dividends and at that point you and I should be getting more dividends and better dividends. So that's my plan. I'm hoping it's the rest of the shareholders' plans but at the moment to me it seems a better option to buy those shares back at 35 cents than to to give it out, and that's because I'm a long-term builder. I'm not looking at it from a short-term position.

Okay, thank you.

Again, if you would like to ask questions, you can press star and the number 1 on your telephone keypad. There are no further questions at this time. I turn the call back over to our presenters.

All good. Thanks very much. Thanks, everyone, for joining. Appreciate the interest, and thanks to those that asked questions.

Appreciate it.

That concludes today's conference call. You may now disconnect.