Mitchell Services Limited

Good morning, everyone, and thank you for joining us today for the Mitchell Service half-year result. My name's Alan Chan from Bridge Street Capital. Joining us from the company, please welcome Executive Chair Nathan Mitchell, CEO Andrew Elf, and CFO Greg Sotala. We will have a Q&A session at the end of the presentation, so if you could enter all questions into the Q&A, and I'll address them The webinar is being recorded and will be circulated afterwards. On that note, Andrew, over to you. Thank you.

All right, Alan, thanks very much for the introduction, and thanks very much, everyone, for joining us today and for the interest in the company. I'll move straight to slide four, the market profile, and just take the disclaimer as being read. Obviously, there you can see the shares and market cap and major holders. Obviously, Mitchell Group being Nathan Mitchell and Dream Challenge, Scott Tunbridge, another one of our non-exec directors. Just moving on to slide five, the summary for the first half. Look, a very good half for the business and significantly improved half on half year on year when looking at EBITDA through to profit after tax and return on capital. And certainly, I think as Greg goes through the financial slides, he'll It'll certainly provide some additional colour on what's driving those improvements. Also, and importantly, down there in the middle, the winner of a prestigious National Safety Award, which I'll touch on again a little bit more in a moment. So just on slide six, the overview, obviously the high prices for commodities are still driving demand for drilling services, particularly for highly skilled drilling services, either mine services work or depot work or specialist type work of different natures. So we say here that inflationary pressures are continuing to ease. Really best to break that up into two parts to give it a little bit more colour, one from a labour perspective and two from an inputs perspective. We also make the point there that the market in exploration has softened a little bit. So you've sort of seen lithium and nickel come off. I know a small drilling company up in Mount Isa called Tull has gone into administration. Another drilling company up in North Queensland is selling some rigs and reducing their size. Junior capital raising's not bad through November, December, but down in January. It's obviously the wet season too, so things are a bit slow in that space. So certainly when you then look at some of those things that are happening and take it back to how labour's looking, Certainly, what we're seeing with labour is less pressure than what we have seen in the past, and certainly from more the senior employee perspective, we wouldn't anticipate any great movements in labour expense into the future. Obviously, it's going to be more lower end in what Fair Work decides to do. From an input perspective, certainly a big input cost for us is drill rods and things that are made of steel, and those prices have been fairly flat. things like that. So all in all, from an inflation perspective, the outlook for us is certainly a lot better than it has been. And then obviously that exploration market is not a large part of our business. Obviously a majority of our business, as I say there, is with the global mining majors on their mine sites. And so certainly that being the case with commodity prices, they're certainly very busy. The revenue split, a bit more of a movement towards the surface, a little bit of a change in mix of work. Gold still that's circa 40% of the book roughly and as I said there 80% of the work is predominantly mine site related. So we're still quite busy and looking like it's going to be another good half for us in the second half and importantly as well we've got no exposure to lithium ore or nickel in the business so that hasn't impacted us whatsoever with some changes there. Just operationally on seven. The surface fleet, effectively booked out, demand is strong, and again, as I said, those people that are producing and making good money and they're very busy. Rigs that we have got available to us are predominantly underground rigs. They're obviously a lot smaller, don't invoice as much, and it is a more of a, generally, a more of a commodity-style drilling, still aspects of specialist drilling. So rig count in that area does increase and decrease in the ordinary course of business. We've had a few come off in Victoria, and then post these results, also 31 December, this year so far, there's been a couple heading out again. So all in all, we expect that rig count and demand for services to remain strong. We talk about rainfall. There's been rain around, but we've been fairly lucky so far. It hasn't really hit us where it hurts, which is good. And that's obviously driven that performance in regards to either DAR and down to the MPAT line as well. In regards to that safety award, it was the National Health and Safety Team of the Year Award, a very prestigious award. And importantly, against all companies from all industries and organisations of all sizes. So we're certainly up against some of the big boys and girls and a great win for our team and really talks to some of the great things that we're doing. And I'll hand over to Greg first.

the financial slides. Thanks, Andrew, and morning, everyone. Looking at the profit and loss on slide eight, the company has produced a strong first half result with earnings leverage beginning to play out. EBITDA increased by over 20%, $20 million for the half, with improvements driven from increased margins as opposed to top line revenue growth. The margin performance was driven by a variety of factors, most notably the absence of adverse weather conditions a favorable shift in the mix of work, and recent price increases across the contract book. The most significant improvements, though, were below the EBITDA line, with a company reporting earnings before tax of $6.2 million, significantly improved versus the circuit break-even position of the prior period. The $6 million improvement reflects the $4 million EBITDA improvement, as well as material reductions in depreciation and interest costs, as debt levels continue to decrease and CapEx levels continue to normalize. And I'll touch on both of those points as I move through the presentation. Looking at slide nine, increased pre-interest and tax earnings together with the normalizing asset base represent very favorable conditions for significant return on invested capital numbers. And we've certainly seen that in 1H24 with return on invested capital over 15% up exponentially versus 2% in 1H23. We expect to at least maintain these ROIC levels as the business continues to allocate CAPEX sensibly in accordance with capital management objectives that Andrew will outline later in the presentation as well. Slide 10, looking at the balance sheet, the solid first half profit performance has meant that the overall balance sheet has remained strong. Importantly, given the relatively stable operating rig count and the usual seasonal dip in December, has meant that the working capital position in December of $20 million was significantly improved versus the $27 million position in June. This $7 million improvement has driven material increases to cash flows and significant reductions to net debt, which I'll also highlight as we move through. From a cash flow perspective on slide 11, the company generated operating cash flows of over $24 million in 1H24. at an EBITDA to cash conversion ratio of well over 100%. This exceptional performance was driven largely from three factors, being the improved EBITDA performance, the significant working capital improvement as highlighted on the previous slide, as well as a 30% reduction in interest costs given the rapid debt reductions over the same period. Worth highlighting too, as we've pointed out previously, that the business doesn't expect to pay income tax until at least the end of FY25, having benefited from the recent ATO instant asset write-off program. Looking at slide 12, I touched earlier on the significant debt reduction, and that's certainly highlighted on this slide. Net debt is essentially halved in six months from $17.6 million in June to $9.1 million currently. Almost all of the debt is traditional equipment finance, a pricing that was fixed prior to the rate rises. And that's highlighted in the blended average cost of funds figure being circa 5.7%. On a net debt to trailing EBITDA basis, leverage has now dropped to its lowest level in recent times, being 0.25 times. We do make the point there that given the upcoming dividend in March and the seasonal working capital requirements associated with increased activity levels post-December, net debt will likely increase in the short term. However, the company remains on track to reach its June 2024 net debt target of no more than $15 million. And finally, for me, just in terms of CAPEX on slide 13, the company remains committed to its capital management strategy, which includes the application of sensible limits to growth CAPEX. In line with the strategy and following the completion of the organic growth strategy, overall CAPEX levels have begun to normalize in recent years. with 1H24 CapEx of $9.7 million, largely in line with the expectations and slightly increased versus 1H23 levels. Given the relatively high level of utilization across the business, maintenance CapEx continues to support high levels of availability across all equipment. And we do make the point there finally that any second half CapEx requirements will be expected to be funded through cash.