Mitchell Services Limited (MSV) Earnings Call Transcript

Good morning, everyone, and thank you for joining us this morning. My name is Allen Chan from Bridge Street Capital Partners. And today, I'm here to host Mitchell Services for their full year results for FY '25. The webcast is being recorded and we'll have time at the end of the present for Q&A at the end. Today, we have CEO, Andrew Elf; and CFO Greg Switala to present their results. Andrew, over to you.

Thanks very much for the introduction, Allen, and thanks very much, everyone, for joining us. I'll take the disclaimer as being read and just move straight to the market profile slide. Sadly, Nathan can't be with us today. He's just traveling. So it's Greg and I, but certainly, happy to obviously take questions, as Allen said at the end of the presentation. And Nathan, our major holder there, 19.9% Mitchell Group; and Scott Tumbridge, the founder of Deepcore that was acquired in 2019 at 7.6% and then obviously, still a good percentage of ins and then obviously retail investors after that. On the summary page for '25, obviously, a tougher year financially for many reasons that we'll discuss as we go through the presentation. But importantly, I think the business is doing a very good job controlling what it can control. And certainly, our focus moving into the current year is improving that net profit after tax number. So in overview, look, it was a transitional year. We had our quarterly call in recent times. So there's not a huge amount of surprises in what's been released today. But it was a transitional year as we replaced utilization with projects that we won. And importantly, we rewon all the major contracts that were expiring in FY '25, certainly talks to the good job that the teams are doing. And '26, pleasingly, we entered the year in '26 with mobilizations and ramp up and a lot of that investment and spending behind us and those jobs that we have won are starting to deliver some returns to the business. Importantly, there is significant leverage that exists within the business when utilization normalizes, and we'll talk to that more as we go through this presentation. But again, just the quality of the business and who we work for, a majority of that revenue from the global mining majors. Our revenue is split 50-50 surface underground. Gold is sort of 45% of revenue and looking positive given its price in the year ahead and a majority of our revenue is generated from mine sites, near mine type work. And importantly, the very good work that's been done over the last few years to strengthen our balance sheet certainly gives us optionality and held us in good stead throughout the last year. Operationally, the utilization that was down was due to a number of factors, some of which are very much out of the business' control, including some client incidents and mining corporate activity, predominantly Anglo, Peabody and Newmont Newcrest. The rain has been quite amazing over the last year or so. And again, some challenges in that coal sector just with low prices and corporate activity. But the new projects are a real positive, and I think the team has done a wonderful job to win them and then to execute on them accordingly. The PNG work is going really well, and the client is extremely happy. That project is performing really well as we would expect. The Loop business, which I'll talk about in a minute, has completed its first project and proven the concept, and we've got a second client underway now, which is fantastic. And then a couple of multi-rig, multiyear contracts underground surface with large miners as well that have been mobilized and are performing well. We put a slide in here just talking to operational history. Obviously, the leverage, the upside that does exist in this business when utilization normalizes we really did demonstrate that in '23, '24, and you can see the number of shifts there. Obviously, with some of those mines having challenges and rain and other things, that shift count dropped as did the earnings in the current year. But obviously, if we can increase that shift count, get more rigs out, we've shown we can do it. And certainly, the business does generate some very good cash when that utilization and that leverage plays out. That net debt has decreased significantly over recent years. We have returned significant funds to shareholders. And again, the fleet is in great shape. We've got a good team, good clients and gold is strong. The coal price is bouncing back a little bit. And the Peabody have said they're not going to progress with Anglo. So again, the balance sheet gives us optionality. We've done it before. And this is an important slide to show that we're focused and we're going to do everything we can to try and improve those earnings in the current year ahead of us. So just touching on the Loop business a little bit more as it says there, it's a 50-50 JV between Mitchell and Talisman. And it was established in 2004. And that business offers end-to-end decarbonization solutions to companies in a variety of sectors. And really, it's about decarbonization strategy, emission reduction pathways, including financial and carbon modeling. So a lot of that front-end type work, a lot of operational readiness and engineering work, health and safety work systems and program approvals. So there's a lot more to this business than just drilling. Obviously, there's a lot of leasing with government bodies for funding, assisting people with regulatory submissions and peer review of other EIS submissions that the companies have put together that Loop would review too. So certainly, it's quite a lot of things it does. Obviously, since it started its primary focus has been on mining operations and predominantly linked to the reducing fugitive greenhouse gas emissions under the federal government's safeguard mechanism legislation. And really, the focus has been on the coal sector in that regard. So gas reservoir characterization and gas production modeling, infield gas operations, including, but not limited to gas and gas drainage and gathering and other sort of proprietary technical solutions that we've proven on the first project. And potentially, in the longer term, beneficial use and offtake opportunities for gas on some of those client sites with business partners that may be specialists in some of those areas. So it's obviously completed a successful trial program with the first client, the second client has been secured, and we're going through some of those front-end with them at the moment and hopefully out in the field towards the end of this calendar year or early next year. So this business does represent a very strong growth opportunity for the business. It's ahead of where we thought it would be. We're excited about it. The first project went really well. But it is a new sector. It will take time, and it's not going to happen overnight. So we're going to keep chipping away. And then hopefully, over time, some of those opportunities start playing out more for the company. So I'll hand over to Greg to sort of run through some of the financials and then we'll get on to some of the other slides at the back end.

Yes, Andrew, and morning, everyone. From a profit and loss perspective, there's not much that hasn't really been covered by Andrew, to be honest, with that decrease in profitability, attributable to the lower utilization as well as those investments into replacement projects. Importantly, all ramp-up and mobilization associated with those projects is complete and the business enters FY '26 with clear air and on a ex mobilizations basis. From a return on invested capital perspective, obviously, that lower number is driven by the lower EBIT. But it is worth noting there, just the lower asset base as well FY '25 compared to FY '24, which then should translate into stronger return on capital numbers on normalization of earnings. Looking at Slide 14, the balance sheet, the overall net asset number decreased. You can see there largely a result of the modest FY '25 NPAT number as well as the $4.3 million dividend payment, which related to a final dividend for FY '24. Also flagged in the most recent quarterly update. Working capital has increased mainly as a result of increased inventories to service new projects. But that now should begin to normalize as those projects commence and mobilizations behind them. There's a later slide in the pack that outlined the company's debt position, which I'll run through in more detail. But fair to say the balance sheet is in good shape with optionality to capitalize on opportunities as they present. And we make the point there that there's no intention to raise equity for any reason. From a cash flow perspective, the lower earnings and increased working capital requirements has obviously drove the lower operating cash flows and conversion for the year. Note, in the earlier comments around the normalization of that working capital. We do expect conversion rates to improve into FY '26. A significant reduction in interest payments there was a result of the decrease in gross debt, and there were no income tax payments given the legacy tax loss position largely as a result of the instant asset write-off. Worth noting, however, that those legacy tax losses have now been fully utilized, and the company will commence income tax payments in FY '26. So Slide 16 really talks to the earlier comments around the balance sheet being in excellent position. But gross debt now is the lowest level that it has been since June 2015, and it comprises entirely of equipment finance facilities with a blended average cost of debt of sub 7%. Importantly, and these sort of comments just tie in to what we say earlier about the flexibility and the balance sheet provides optionality. We've got access to $15 million worth of working capital facility as well as an additional $20 million in headroom in the equipment finance lines there as well. Finally, from a capital perspective, the business remains committed to applying sensible limits on growth CapEx where it makes sense to do so. You can see there the majority of the FY '25 CapEx really related to the main CapEx, which is required to support the high level of equipment availability. We make the point there as well. We'll continue to monitor the size and composition of the fleet, and if and when it makes sense to do so, have a look at opportunistic asset sales which has served the business well in previous years.

Thanks, Greg. And really, just sort of a few slides now to wrap up before we start taking some questions. But really, what we want to do is optimize long-term growth of the business and focus on those returns for shareholders. And again, there, we talk about improving the profitability of the business, which is a focus for us even given the previous year, keep identifying opportunities that exist within the sector and then looking at opportunities with clients offshore where it makes sense to do so. Obviously, the balance sheet is strong, as Greg has said, and if we can make some good earnings, then shareholder returns can come back accordingly. And we make the point here that would most likely be by buyback given where the share price currently sits. Importantly, again, that operational leverage that exists within the business is significant upon normalization of utilization. So look, in summary, it's a quality brand. It's got a long history, sort of quality revenue streams, good clients, good teams, good rigs. It is well set as a business, F '25, tough year in many respects, but I think the team managed it well. and did well to win those jobs and get those other jobs out. And now we're going to make the most of that in the current year ahead of us. We've spoken about those projects in the year and now that they're performing. Obviously, that gross debt significantly down, as Greg said, to the lowest level in a long, long time. And that balance sheet will really give us the ability to move forward in a sustainable manner and take opportunities as they come and the leverage I've touched on already. So Al, we might hand it back to yourself, open it up for some questions.

Fantastic. Thanks, Andrew and thank you, Greg. The first question comes from Daniel. Can you provide some color into the CapEx spend in FY '25 of $20.5 million which is up from the $17.6 million spend in FY '24. What should we expect for FY '26?

Thanks, Daniel. I think in terms of color on the FY '25 CapEx. Really a function of all those factors that tie back to the EBITDA number, namely a significant number of mobilizations and demobilizations and the amount of rigs involved. So you had rigs coming back from projects that had ceased, you had rigs that needed a bit of CapEx spend in advance of going out to some of those new projects. And when you have movements to that extent, involving as many rigs as that, that's part of the reason for the CapEx spend, which from a maintenance CapEx perspective was sort of up year-on-year. For all, and again, sort of tying back to the EBITDA comments, we enter FY '26 with clear air with all of the mobilizations and sort of ramp-ups behind us. So what you should see is a decent enough decrease there. Can't call out an exact number. But certainly, if it plays out in terms of the stability of those jobs now, that CapEx spend should start coming down from a maintenance perspective. And then the normal sort of outlier or caveat on growth CapEx is really going to be a function of some of those growth opportunities and probably point to Loop as being the primary driver there. If we do get the step in the contract potentially and to the extent that, that needs new CapEx that will drive the growth.

Daniel also, could you also revise the indication of what D&A should be in FY '26.

I think we're starting to see a level of normalization, saying the level of normalization in the past, the D&A number for reasons well explained in the past was higher than the maintenance CapEx number. I think you're starting to see that those 2 become -- could conversion and become a lot similar. And in the same way, I think the year-on-year D&A number is going to start stabilizing as well. So I don't see -- certainly it's not going to go up, but I don't see any significant decreases either. I think roughly the same '26 compared to '25.

Thanks, Greg. Question from Nick. Can you clarify what the $2.7 million on the decarbonization revenue is given Loop is equity accounted uptake, it's not Loop. So can you clarify what this is and how it fits in?

It's a good question. Happy to take that one. Yes, Loop is equity accounted. And so therefore, you wouldn't expect to see revenue and costs, et cetera, to the extent that it relates to Loop. Just to clarify the structure of that arrangement, though, it's a 50-50 joint venture between ourselves and Talisman. But the service offering that Loop provides is essentially outsourced back to the shareholder partners. And so what I mean by that is the consulting work that Loop provides is essentially done through Talisman and the drilling that it provides is done through Mitchell. So that $2.7 million revenue that you see there is genuine Mitchell Services revenue. But obviously, the client there is the Loop JV who then contract it to the client in this instance, Coronado. Hope that makes sense.

Just follow-up. Given the successful completion of the first pilot the JV project Client 1. Is there a reason that client has not continued on additional resources?

Look, it's -- Nathan has spoken about it previously that you see some similarities between this opportunity developing and what you saw in the early days of the unconventional energy sector. People start with a pilot, they drill a fuels, they do some testing. They go back and write reports and then it sort of goes the wheels turn and you go back and you do a bigger one, someone else does one, and then sort of it starts gaining some momentum, some acceptance and then sort of larger, more ongoing type opportunities come up. So I think to answer the question, it's early days. It was the first client, first holes completed, the first lot of engineering work, et cetera. It's -- no one is really going to grab it and keep it running on the first pass. So as I said, it would take time, but it went really well importantly, which is good.

Another question from Nick. Any update on the status of Grosvenor it was reported Anglo close to reopening.

Look, I certainly can't sit here and provide detailed dates on client sites. I think a lot of the information that we get is secondary and they've kept their cards pretty close to their chest with with Moranbah North and Grosvenor just on the basis of the potential sale and there's obviously other factors at play for them. But we are back in underground at Moranbah North, which is great with one rig. And obviously, it's Anglo's intention to get that mine up and running. And with Grovener, I don't have any updates. I can provide. I'm sorry. But again, it's Anglo's intention to get back in there and get going again. But as to how long that could take or when that may be, I couldn't say, sorry.

Thank you. Just a question on Loop. Maybe to Greg, can you talk to the current impact of Loop's JV with profitability?

So I think talking about this year just gone in FY '25, you'll really see the impacts come through in 2 areas, and it sort of relates to the previous question as well. Number one, you'll see the equity accounting portion, which would be a share of Loop's profit or, in this case, a small loss, given Loop was in start-up mode, but you're sort of talking tens of thousands of dollars as opposed to anything more meaningful there. And then as well as the profit for Mitchell to the extent that it relates to the drilling services provided. So we called out the $2.7 million of revenue that was obviously earned. But I don't think it's appropriate to sort of call out the the margin associated with that on this call, but that margin will obviously form part of the FY '25 number. And then it's really -- it's too early days to be calling out how that might extend into FY '26.