Mitchell Services Limited

Good morning, everyone. Thank you for joining us today. My name is Alan Chair for Bridge Street Capital, and we are hosting Mitchell Services. They are here to present their four-year results. We have Executive Chair Nathan Mitchell, CEO Andrew Elt, and CFO Greg Satala, which talk us through the presentation. We will have a Q&A at the end, so if you could put all your questions into the chat, and I'll address them after the presentation. Andrew, over to you. Thank you.

Thanks very much, Alan, and hello, everybody. Good morning, and thanks very much for joining the Mitchell Services full year results call. Obviously, I'll go through some slides. Nathan certainly had his comments along the way, and Greg as well. And as Alan said, we'll open up for some questions at the end. We'll take the disclaimer on page two as being read as the agenda three. page three as well, and just move straight to the market profile. So we can see there, obviously, the number of shares slightly down year on year with the buyback that's been in place. Share price, obviously, has traded in a fairly wide range throughout the year and just off a little bit in the last little bit. The holdings there, obviously, Mitchell Group, Nathan Mitchell, Executive Chairman and Dream Challenge, Scott Tunbridge, one of our other directors and the founder of DeepCorp, that we acquired back in 2019. A pretty good register of institutional investors for a company of our size and then obviously the retail investors there as well. Just moving on to slide five, a summary of the business. I'm not going to go through every single metric there other than to say there's a couple of key ones heading in the right direction. Operating cash flow, a fantastic result and up year on year and return on capital again, another good result. profit after tax over $9 million, and importantly, a national safety award against all the companies of different sizes and different industries. And certainly our safety performance and our culture within the business is something that we're very proud of. So a good year for the company in summary there from a numbers perspective. From an overview perspective, you can see some of the clients there on the right. Obviously, we make the point towards the bottom of the slide that over 90% of our revenue is from the global major miners and the relevant splits of revenue, surface, underground, gold, et cetera. But demand for drilling services, there is a continued demand. We re-won all of our key expiring contracts in 24, so that's certainly a credit to the team and the quality of the service that we're providing. Inflationary pressures have eased. I think that's pretty well publicised across the industry. The drilling services market, certainly for majors and producers, is stronger than exploration. Exploration remains soft. The business has no exposure to lithium or nickel and obviously we've got those high-quality revenue streams from those high-quality clients that helps us generate that strong cash flow. Importantly, when you look at where commodities are at the moment, gold represents about 40% of our book, and gold is, from a price perspective, very high. Operationally, on page seven, the customer base remains strong. As I said, we've re-won the major contracts that we need to re-win. Obviously, albeit with fewer operating rigs, and that's come through in recent quarterlies. We have been awarded some new contracts in recent times, which is fantastic. Good wins with some new clients as well, including Whitehaven at Dornier and Blackwater, the old BMA assets out there. But the market is expected to soften due to a couple of factors outside of our control, namely the underground fire event at Grosvenor. Again, that's been well publicised. It's a site that we are operating at and We've got a couple of surface rigs going out to do some investigatory slash remediation work at the current time. It is the client's intention to conduct some investigation works and hopefully get back out there again like they did after the last incident. But obviously those assets are for sale as well. So we say here that second point, mining industry corporate activity, obviously rig counts are affected by that transaction as well. And then as mentioned previously, that general market for junior explorers is a little bit softer and you certainly see that in the equity markets. And then again, once the equity side of things improves, it takes the lag time, sort of six to nine months or so for that money to then go into the ground. But importantly, the EBITDA for the year 40.4, slightly lower than the previous corresponding period based on that decrease in utilization. some very strong numbers overall coming through. And again, importantly, a very strong material growth opportunity for the business does exist and certainly pleasing to put these next few slides into the pack for the first time and to tell people a little bit more about this opportunity that we've got in front of us. So again, we've called it Loop and again, it's a partnership between ourselves, Mitchell Services and Talisman. It's a 50-50 joint venture. You've obviously got over 50 years of brand and drilling experience on the Mitchell side and then obviously you've got the expertise and technical focus that Talisman bring on the other side and certainly that operational experience in coal mining, both surface and underground. Really, the aim of this business is to reduce emissions from fugitive gases and then to recycle that waste by using the gas where possible. So we purchased a rig. It's currently clearing customs. We've hired a CEO for that business called Vitesh Megan. He was previously working for Tees, running over a billion-dollar business operations in Queensland. And obviously, a key part of this business is linking in the drilling and the gas management and drainage with operational activities. So hopefully we get some good traction and the aim is to try and get that rig running with a client early next year once it's cleared customs and been set up. So importantly on the next slide with Luke, it is a full service offering from start to finish with Talisman and with Mitchell together. from a decarbonisation strategy perspective and modelling and gas reservoirs, gas content through to operational readiness and then actually conducting the work on the ground and draining the gas and infield management. And again, there's potential downstream opportunities longer term as well. So it's quite an exciting opportunity for the company, but it will take time to develop and it will come And again, there's a couple of slides in here, probably more for those that aren't attending today that can sort of read through these at their leisure and get a bit more of an understanding of it. But it really is that government legislation that has driven the change, the safeguard mechanism legislation. And that basically, the long and short of it is, you're either going to pay a tax if you don't reduce your emissions, or you can do the drilling and reduce your emissions. And at this stage, our modelling certainly shows that in a majority of cases, it's a a case-by-case, mind-by-mind basis, but it's certainly going to be cheaper to drain and manage the gas than it is to pay the tax and certainly more socially acceptable as well. So, Nathan, I'm not sure if you've got any comments on this opportunity and what you've seen previously in your career with things like this.

Yeah, thanks, Andrew. Yeah, I think, look, it's an exciting opportunity for Mitchell Services and Talisman. I think this is something... that's been in the winds for a number of years, even decades. The opportunity around waste gas previously just hasn't been there in the market. And it's something that we've been looking at for a long, long time. And this safeguard mechanism opens that door for us. I think for us, it's around what we saw back in the early 2000s in the start of the CSG industry. Obviously, it will start small and grow. We'll obviously be first mover in this industry. And so we're looking to really grab hold of this and drive it forward over the next 12 months and ongoing. So hopefully we see a number of rigs post the first one. That's the plan. But again, I think it'll be driven by our customers and how we can offer them a full turnkey solution. So it's an exciting time for the business.

And look, we're certainly not going to sit here today and answer questions on what's the total available market, how many rigs and all this sort of thing. It's not there yet. It's early days. It's going to take time. It's going to be choppy. But it is a material opportunity. We can certainly say that. We're talking tens of rigs at least at a minimum if this thing gets going.

So just running through the FY24 financial results, despite EBITDA remaining relatively flat, the company has produced strong post-tax earnings with profit increasing by 21% to $9.2 million for the year. This improvement essentially was driven by the reduced DNA as well as lower finance costs given both the normalization of CapEx and the significant reduction in net debt. And I'll touch on both of these points as I move through the pack. Looking at slide nine, increased pre-interest and tax earnings together with the reducing PP&E base represent favorable conditions for strong ROIC numbers. And we've certainly seen that again in FY24 with return on invested capital over 16% up from 12% in FY23. Slide 10, looking at the balance sheet, the strong profit performance has meant that the overall balance sheet has continued to remain strong. And from a working capital perspective, the solid EBITDA performance, and a reduction in operating rigs has driven a $7 million improvement from $27 million last year to $20 million currently. This improvement has driven material increases to cash flows and significant reductions to net debt, and I'll also highlight those points as we move on. From a cash flow perspective on slide 11, the company generated record operating cash flows of over $43 million, at an EBITDA to cash conversion ratio of well over 100%. This exceptional performance was driven largely from three factors, namely the strong EBITDA performance, the significant working capital improvement as highlighted on the previous slide, as well as a 40% reduction in interest costs given the rapid debt reductions over the same period. Worth highlighting too that the business doesn't expect to pay income tax until at least the end of FY25. having benefited from the ATO's instant asset write-off program in relation to CapEx in FY21 and 22. Looking at slide 12, I touched earlier on the significant debt reduction, and that's certainly highlighted on this slide. Net debt is essentially reduced by 90% to $1.9 million in June, and with the deep core acquisition facility now fully paid, gross debt comprises entirely of equipment finance facilities, with pricing that was fixed mostly prior to the rate increases that we've seen in recent years. And that's highlighted in the blended average cost of growth debt figure being about 5.7%, as you see there. On a net debt trailing EBITDA basis, operating leverage is now practically zero. And probably just worth noting there, just given the upcoming dividend in September, of about $4.3 million. Net debt at the end of FY25 Q1 will likely represent an increase versus the 1.9 figure at June, and we'll report on that as per normal in the quarterly that comes out in October. Finally, from a financial perspective, just looking at capex on 13, the total capex in FY24 was $17 million and largely in line with expectations. Andrew and Nathan will talk to capital management later in the presentation with the company continuing to apply sensible limits to growth capex under a balanced framework. Growth capex in FY24 was limited to that decarbonisation rig that Andrew spoke about earlier, as well as one new LS160.

Thanks, Greg. And just following on from Greg's comments there, I think the allocation to these four pillars has been excellent. The company, the last few years, has done what it said it's going to do. And I think this slide really does highlight the delivery of that. And in particular, the last point down the bottom, the significant reduction in net debt from $40 million to just under $2 million and $17.7 million to dividends and buybacks to shareholders. So I think that's been a fantastic effort by the company, by the team, good strategy and good timing. And I think just onto the strategy for 25, I might hand over to Nathan and let him talk a little bit about this one and capital management and things like that.

Thanks, Andrew. I think, and key again, and we say this every year and every quarterly, everything's about timing. And I think yet again, we are seeing, and we've said in there, some softening in the exploration market. And again, I think the decision-making 12 months ago or longer to reduce debt right down again was excellent timing by the board and the team. And, you know, whilst we're still busy and we're still winning a lot of work, we're seeing, you know, it's definitely a softening in the Western Australian market. So strategy for this year is to continue what we're doing. We're going to focus on the capital allocation, the buyback, still looking at dividends, obviously winning contracts that are profitable. and looking after the clients that make us the money. So they're the key structures for the business. The decarbonisation, we're excited, but obviously that won't really kick in until sometime next year and then probably post that in the years to come where we'll see some real change. But suffice to say, this next 12 months, I think we're in a very good position whether things continue to remain the same or soften or grow. We've got a position of a debt position where we can accelerate into it or take advantage of potential company mergers or changes or buys or purchases that we see potentially coming in the future or not coming in the future. So as we said before, I think the inflationary pressures have eased a bit. I think not to say that the costs are coming down, but they're not going up, which is great. I think the dividends that we did last year, I think were excellent, and also the buybacks. Again, those four pillars that we talked about last year, we will continue to look at those four pillars and really just allocate. The start of the year is already just starting this year, and I think we'll continue look at that as we go through the year, how we allocate those buybacks and how we allocate those dividends going forward. So yes, we see some choppy wins ahead, but I think we're in an excellent position depending on what happens in the market. So unfortunately, we've had the issue with our client at Anglo. That's never great for us. They're never great for our customers. So that's something we're dealing with at the moment. But as Andrew said before, we've got a couple of rigs going back out there now. So that should kick back in again. So all in all, I think 2025 is going to be still good for us.

Now, that's great. Thanks, Nathan. And look, just to wrap up in summary, and Nathan's probably covered most of it there, obviously, year on year, You know, NPAT, return on capital, materially graded, debt down, you know, returns to shareholders and significant reductions in debt. You know, the demand is there for drilling, but again, a little bit choppy. FY24, we've re-won major contracts, account, and we're doing a good job, good safety, good culture. Clients are generally pretty happy. You know, inflationary pressures of ease and things are flat, as Nathan said. It's a fantastic brand. It's been around a long time. It's very well respected and we're going to be here for many more years to come. Again, we've spoken about the contractual side of things and utilization. But again, most importantly, and just to reiterate what Nathan said, we've got options available to us. We've done the hard work the last few years and we're in a good position, whichever way things go. And certainly, if opportunities come, we'll jump in them, whatever they may be. Alan, I'll hand back to yourself for the questions.

Thanks, Andrew. Thanks, Nathan. Thanks, Greg. Okay, so I guess the first question that has been voiced is around the buyback. I guess there is questions around shareholders suggesting that at these levels you should be a little bit more aggressive. You've mentioned that you've got $25,000 in shares per day. Is there a thought process that you'd possibly uptake in daily buying or what's the methodology? Yes, current share price, what's your view?

I think at this stage we're continuing to do buybacks. Again, it's really around trying to be a measured approach to buybacks versus dividends. you know, not going too hard into one, not going too hard into another. So I think, and I know people have said that, you know, are we putting a ceiling at our price? I don't think so. I think at the moment we're not focusing on the buybacks per se, we're focusing on the business. The buybacks, I think, are something that's to the benefits for the shareholders, but fundamentally we need to run the business and generate profits and profits And so that's the key at the moment. I suppose it's early for us in the year. And so we've only just finished budgets going forward for 2025. And I think we'll see what happens. But as I say, we like buybacks. It's good for the shareholders that are hanging around and staying in the business. Yeah, I think it will continue at this stage.

Thank you. A question from Daniel C. What are your expectations for CAPEX and depreciation in FY25?

Thanks, Ellen. Certainly from a depreciation perspective, I think reasonable to sort of assume a number that's in line with FY24, which was $25.7 million or thereabouts. CAPEX is, to be honest, a slightly harder one to answer just given given some of what Andrew was speaking about earlier in terms of fluctuating rig numbers and opportunity pipeline, et cetera. But based on where we are now, I'd sort of say, again, a number that's probably in line with the $17 million in FY24, but that's going to be a little bit more fluid and it will play out depending on how operating rigs plays out and tender pipeline, et cetera. Thanks, Greg.

Another one from Daniel. The dividend-to-PAT ratio was 94%, FY24, which is above the policy of up to 75%. How should we think about dividend policy in FY25?

I might start with just commenting on the first point. So, yes, the broader policy is 75%. Just given everything we've sort of spoken about now in terms of that rapid debt reduction, the very favorable cash flows, et cetera, there was clearly an argument to push that to 94. So I would certainly sort of see that as a one-off. Subject to any further comments from Nathan, I think that 75% of NPAT numbers is probably reasonable going forward. Obviously, there is the concept of the buyback there and pending what the share price does. So the quantum of the dividend, therefore, at 75%, will be very dependent on what the NPAT number is. And similar to my comments earlier around CapEx, there's probably, fair to say, a level of uncertainty around exactly what that'll be. So impossible for us to call out an anticipated dividend number on this call.

I think you're right, Greg. I think 75% is – we put that there for a reason. I think that's where we'd be. I think last year was obviously good cash flow numbers, so we pushed it up. But I think for the future going forward, I would budget on 75%.

Thank you. Just one for me, Andrew. You mentioned new contracts, Whitehaven. Can you provide some more colour on those contracts? Are there any other new contracts that you could talk about?

There's a couple of others that are good as well. They're still going through the process so I probably can't say too much about who they are or where they are but certainly I think again rigs increase and rigs decrease. through the life of long-term contracts with large miners at different sites for various operational or strategic corporate reasons. That's what we're seeing. Commodity prices in copper, gold and other commodities we work in are still very strong. Some of these things we've seen are out of our control and just a natural part of things. The team has won some good contracts on the flip side, which is a good thing. But you're always going to see costs as rigs come off and costs to get rigs out and that sort of thing. So those things do impact the profitability of the business in the short term, but certainly set you up for the longer term. So again, I think that low debt position we've got really gives the optionality, as Nathan said, to take advantage of things as they come up and then to manage the business come what may in the future.

Thank you. Another one from Daniel. Employee costs have been steady at $62 million to $63 million over the last three halves. Should this continue in FY25, excluding any

Yeah, I certainly think so. We've spoken about inflationary pressures, we've spoken previously about where we think things are from a wages perspective and to summarise that with the exception of some lower level roles within the business, wages are essentially flat. on a per-employee basis. A flat wage number is a good number to work on in terms of what FY25 will bring. At a growth number, though, it is going to be dependent, obviously, on what that rig count looks like. So at a lower rig count, you know, potentially that number actually reduces. Conversely, you know, if we do pick up some of those wins, then it'll increase. But on a like-for-like, per employee basis based on the sort of wages inflation, flat is, that's good.

Yeah, and important on the top line side of things, all of our contracts have been reset now. There's no legacy contracts left out there free to sort of inflation increase that we saw come through. Contracts have been reset, rates have been reset. They're certainly not going up anymore, but they have been reset to manage that that increase in labour cost that we have seen, but as Greg says, they're now flat.

I think also importantly, the 4.75% increase in wages really doesn't affect us going forward.

No, that's right. And just to add flavour to that, so yeah, Fair Work came out and mandated a circa 4% increase, but just given the fact that the vast majority of employees are well above award levels in this organisation, doesn't apply.

Thank you. I have a question, Daniel. With cash tax payments potentially coming back online at FY26, what sort of cash tax payment should we assume relative to payout tax expenditure?

Without giving guidance in terms of what that profit number is, it's going to be very difficult to answer, to be honest, because it's going to largely be a function of profit. And as we sort of said, that's at this stage probably a little bit difficult to do. The best way I can explain that timing difference though is to, there's about $12 million in ongoing depreciation that will not be allowed a tax deduction, sort of the flip side of the benefit that we'd received previously. So for purposes of anyone's modeling, $12 million of that $25 million, there won't be a tax deduction on, but the rest, as I sort of said, is going to be a function of profitability and very hard to call at this early stage in F125.

Thanks, Greg. Just back on rig accounts, with Grosvenor, do we know the outcome of those rigs there? Are they sort of still I guess not being digitalised, and I guess the next question on that would be, are there any rigs up for sale in your fleet?

Oh, look, certainly the first point I'll answer is just the rigs for sale. There's always rigs coming and going in the business. We're always recycling assets, buying some, selling some. There might be rigs. might be cars, pumps, compressors, you know, trucks, whatever. So there's always going to be assets coming and going. And again, timing with those is important, you know, to get the best dollar you can. Where you send them is also important, whether they go overseas or to Western Australia, more so than flooding your own backyard, so to speak. So that's the first thing. On Grosvenor, you know, again, the surface rigs are sort of going back to do a little bit of work. The underground rigs obviously are stuck down underground. And again, until we know more information, it's really difficult to say where to from here with that. I mean, last time it took the client 18 months to get open up and running again. How long this time? We don't know. So, you know, we've obviously got some commercial discussions ongoing with the client regarding those rigs, but, you know, certainly can't disclose any of that. here at this current time.

Thanks, Andrew. Question from Daniel. Do you have any comments on the recent takeover bid from Dynamic Group?

Yeah, I'm surprised the cattle industry is getting into the drilling industry. Actually, we're surprised by it, to be honest.

Thank you. If there are any further questions, please address them in the chat. Otherwise, I will give it back to Andrew and Nathan for final remarks.

Thanks very much, Alan. Thanks, everyone, for being on the call. Thanks for the questions. Obviously, we've got an upcoming roadshow, so please contact Alan if you're interested in some one-on-one meetings. We're obviously covered by Morgan's, covered by QValue, so if you're interested in reading that research, please do. But importantly, just to sum it up, a really good few years for us to get into this position. Couldn't be prouder or happier of what the team has achieved and where the balance sheet now sits. And I really think that the company, you know, with the team it's got, the assets it's got, and the decarbonisation opportunity ahead of us for Talisman, I think the future's really bright. So certainly looking forward to some good times ahead. You know, we'll work through some of the challenges we face with the market and some of those headings.

Yeah, I couldn't agree more with what Andrew's just said. I think 2024 is an excellent year for us. Again, year on year, it's been great. Again, I thank the team and the whole board for what has been a great year, great strategy. As I said before, 2025 should still be a good year. As I said, we are seeing some choppy weather across the whole industry in Western Australia and across here. Hopefully, so far, we've been fairly secure from it. Obviously, the Anglo one hurts us. But overall, I think I'll move it upward for 2025 and 2026. Fantastic.

Well, again, thank you, Nathan, Andrew, and Greg. Well done.

Thanks, Alan. Appreciate it. Thanks, Alan. Thanks, mate. Thank you. Bye-bye.