Mitchell Services Limited

Thank you for standing by and welcome to the Mitchell Services full year results presentation. 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'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd 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 that this call is being recorded. Thank you. I would now like to welcome Andrew Elf, Chief Executive Officer, to begin the call. Andrew, over to you.

Thanks very much and welcome, everybody. Thank you very much for dialing in. Just to let everybody know, I've got Nathan Mitchell, our Chairman, with us today, and Greg Sotala, our Chief Executive Officer. Chief Financial Officer and Company Secretary. Greg and I will run through the presentation and Nathan may jump in with some points as well and then we'll open up for questions at the end and please just direct your question to the relevant person, it would be appreciated. So we'll just start off on page 2, the disclaimer, we'll take that as being read and move straight on to page 4, the market profile. So as you can see there, obviously Nathan Mitchell, Chairman, speaks for the Mitchell holding and Scott Tunbridge, the founder of Decor, speaks for the dream challenge, 7.5% holding and obviously Solpax at 4.6% have been a long-term and supportive shareholder across their journey. Just from a valuation perspective there, the market capitalization, it certainly looks low versus traditional valuation methodologies. We are covered by QValue by Morgans and I'd certainly encourage people to have a look at some of those papers and research and learn a little bit more about the company. Just moving on to page five, the business summary, a lot of the key metrics there moving in the right direction. It was a good year for the company, some challenges along the way as can happen, but it's certainly a very strong finish. Average operating ring cap was up and obviously the mix of work combined with contract rates drove the increase in revenue per year. And pleasingly, when some of the wet weather and other things were out of the way in that second half, that evened out percentage. Even though it was at 17% for the year, it was up above 20%, which is a bit of an internal target that we have and we've spoken to people about before. And pleasingly, it led into profit after tax, some good cash flow. and return on capital as well. From a safety performance perspective, very proud of our safety culture and our safety performance and I think we're industry leading in that regard and again the clients we've got expect that. Just moving on to page six, the overview. Commodity prices have still remained strong. and as has the demand for drilling services particularly in some of the highly skilled specialist drilling services such as mine service work that we complete. Inflationary pressures are beginning to ease and certainly labour remains tight but that's certainly in a better position than it has been too. The capital investment program in regards to the ELEC 160s is complete. They've been mobilized, they're out there working, they're generating a return. That's been a very good investment for the company. The timing was right. It was a big decision to make that the timing was right. We got the right of benefit from a tax perspective. We bought the rigs before prices went up. They were fixed interest rates with Navon Equipment Finance and we beat the supply chain crunch. We've been able to reduce crew numbers on those rigs from three to two because of the technology on the rigs and it's certainly enabled us with the automation and less manual handling. increase our FEMA participation on those rigs as well. The revenue streams of the business are very high quality and certainly positions us very well in the year ahead. It's looking like another very busy year ahead and earnings should only increase. We're working with global mining majors. That represents 90% of our revenue. We're working on long life, low cost mines that are are busy through the cycle, those majors budgets are flat to up and they're certainly very busy on their existing mine sites which we work at and Brownfields work. The revenue 50-50 surface underground goals about 40% of the revenue mix and 80% plus of our work is from that particular part of the mine life cycle which is linked to those operating mine sites. Point seven, the operational update. That first point we've already covered with the LS and the second point. It's certainly where Nathan and I have been after the field. We've seen those rigs operating. We're very happy with how they're going. The other points I made, it's been great to get out on the ground and see them working and really validate our decision. Obviously, we had the rainfall. Throughout the year, it's looking like it's certainly going to be a drive here and ahead, probably fair to say, moving from one weather type to another, and certainly some contract variations from clients that were predominantly driven by change in strategy as to how they were going to drill deposits out and things like that. What I would say is the team is very, very strong. They've got a fantastic team. and I think managing the things that we can control. We've done a wonderful job. We can't control the weather, and we can't control some client strategic decision-making. We certainly had a good run in that second half, less disruptions, and it certainly shows what the business can do when it hits its strats. Year-on-year, COVID, hopefully a thing of the past, and inflation certainly easing. And at the same time, as I mentioned there at the bottom, So as we sit at the moment, there's really only probably one contract left to reset and that will be done at the end of this calendar year. The balance of our contracts have rates under 18 months old and that's certainly made a difference to our performance as well.

Looking at the profit and loss on slide 8, as Andrew continues operational update, the business delivered breakout operational with financial performance in the second half of the year. The performance was driven by a variety of factors, again as Andrew mentioned earlier, most notably the absence of adverse weather conditions using inflationary pressures and material price increases across most of the contract book. A couple of interesting points to note on slide 9, the first being that the second half increase in earnings before tax was greater than the increase in EBITDA over the same period, demonstrating the fact that incremental EBITDA is dropping to the bottom line. but also highlighting the ongoing reductions in depreciation, amortization and interest as capital expenditure and debt continue to fall. The second point to note is almost all of the $7.6 million full-year profit was generated in the second half, which talks to the full-year earnings potential of the business when market and weather conditions are favorable. Looking at slide 9, increased interest and tax earnings together with a reducing PP&E base represent very favorable conditions for significant return on invested capital and we've certainly seen that in FY23 with return on invested capital 12.5% for the year up exponentially versus the 1% in FY22. We expect this trend in ROIC to continue as the business continues to allocate CapEx sensibly in accordance with capital management policy objectives that Andrew and possibly Nathan will outline later in the presentation. Slide 10, looking at the balance sheet, the impressive second half performance from a profit perspective has led to a much stronger balance sheet with overall net assets increasing by nearly 10% and net current assets increasing by 25% compared to the June 2022 position. Even more significantly from a balance sheet perspective is in relation to the improvement in net debt, which I'll highlight a little later in the presentation. From a cash flow perspective on slide 11, cash flows from operating activities were $35.6 million for the year, up 60% versus FY22. The significantly improved cash flow performance was driven by the improved EBITDA, obviously, but also from the significantly improved cash conversion ratio as temporary working capital requirements began to normalize. Two items here worth highlighting, the three-year earn-out arrangement in relation to the deep is now complete, so FY24 cash flows will be free of any such payment, noting that FY23 cash flows included an earn-out payment of approximately $2 million. The other point to highlight is that the business doesn't expect to pay income tax until at least FY25, having benefited from the recent ATO Instant Asset Write-off Program, which from a timing perspective coincided with MSV's previous organic growth and capital investment strategy. Looking at slide 12, I touched earlier on the fundamental balance sheet improvement in relation to debt reduction and that's certainly highlighted on this slide. Net debt is essentially halved in 12 months from $39 million in FY22 to $17.6 million currently. On a gross debt trailing EBITDA base, leverage has now dropped to well under one times. and the business remains on track to reach its net debt target of $15 million by the 30th of June 2024. Worth noting as well that almost all of the debt is traditional equipment finance, a pricing that was fixed prior to the recent rate rises and is highlighted in the blended cost of funds figure being 5.4%. Looking at capital expenditure on slide 15, the recent investment program together with material levels of capex spent in previous years, have meant that the business is now able to reduce its ongoing capex without compromising on machine availability or safety. And this is highlighted on the chart that shows a significantly reduced FY23 capex compared to spending FY22. And again, as mentioned previously, the timing of the larger capex spent in FY22 has allowed the business to take advantage of the significant cash tax benefits that we'll obviously receive from the ATO.

And moving on to slide 14, the capital management update. I won't cover those points that Greg's already touched on, but I think it's fair to say that the board's got an interest, and Nathan could talk to this, about continuing returns to shareholders via dividends from NPAT that's generated. We can do that up to 75% of NPAT. If we do sell any more sets, there is the ability to continue buybacks. But importantly, that last point there, and I think the team should be very proud of this, that we've returned approximately $8.5 million to shareholders based on the final dividend that's been announced today and also the share buyback as well and split roughly $4 million buyback and $4.5 million on the dividend. Moving on to page 15, again, some of these points already covered, but net debt down materially. Obviously it's going to be a straight line to $15 million at 30 June 2024. It's going to go up when dividends are paid and then down as the business produces cash accordingly. CapEx allocation will remain sensible but will take opportunities where it makes sense to do so. Dividends announced today, fantastic and the buybacks at $4 million representing a 4% reduction of shares in the register which is again another fantastic result. So why invest in Mitchell? I think number one, our people and the brand and our culture. The brand, the Mitchell brand itself has been around for over 50 years. We've got a fantastic culture. It's a great place to be and work. Our safety performance is second to none. The fleet is excellent. We've done a lot of hard work in that regard. The clients, they're the global leading mining majors and and they're excellent to work for. The capital management strategy is now delivering and again buybacks, dividends and net debt reduction. As I mentioned at the start of the opening that the price versus traditional valuation metrics are still quite low so it does represent an opportunity. I'd certainly encourage people to have a read of the Q-Value research and Morgan's research. That concludes the presentation.

We can open it up for questions. Please moderator.

And at this time, I'd like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile any questions.

Again, if you'd like to ask a question, please press star one on your telephone keypad now.

We do have a question from the line of Daniel Sweeney from QValue Research. Please go ahead.

Hey, guys. Can you hear me? Yeah, yeah. How are you going, Daniel?

Good, thanks. Yeah, great to see the business performing well. I just wanted to clarify a couple of things, if I could. Firstly, how should we think about the dividend policy in terms of first half, second half split going forwards? So how should we think about the dividend policy in terms of being applied to the first half, second half going forwards? Does it just apply smoothly across the year or do you expect to be more second half weighted?

The board's got the ability, Daniel, to pay up to 75% of the end pad that the business generates. So I think when we get to the half year, business would have generated X and it would be up to Nathan and the board to decide. You're talking about the next year?

Yeah, a year ahead.

Yeah, exactly.

I think we just take it as we're going. A lot of it all depends upon around the January, February wet weather seasonal issues and just depends on how well we're going. I think you've seen this year. It's always usually a soft start because of that wet weather. Obviously, the climate's changing all the time, but traditionally it's been always a slower start and a better finish. And so I think we've just got to go with how the business is performing and then just make the decision at that point. I think it really comes back to this time of the year, how we do it.

Okay, thank you. And in FY24, what's the utilisation rate looking like like on the new 12 large diameter rigs.

Sorry, just to clarify, the 12 rigs are the LF160s? Yeah, exactly. Large diameter rigs, sorry. So they'll be booked out all year, those rigs.

Okay, thank you. And also, just finally on CapEx, what should we be expecting for CapEx in the year ahead?

I think, Daniel, from my perspective, capex in FY23 was sort of 12 and a half. I think 15 is probably a reasonable number to assume from a maintenance capex perspective. And as we sort of pointed out in the capital management policy, growth capex will be limited where it makes sense to do so and only really undertaken if there's a significant revenue earning opportunity on the other side. $15 million or thereabouts is probably an appropriate number.

Right. Okay. Thanks, Gus. Thank you. There are no further questions at this time.

I would like to thank our speakers for today's presentation, and thank you for joining us. This now concludes today's call. You may now disconnect.