Good morning, everyone. Thank you for joining us today. My name is Alan Chalmers for Bridge Street Capital Partners, and we are hosting Mitchell Services. They are here to present their full year results. We have Executive Chairman Nathan Mitchell, CEO Andrew Elf, and CFO Greg Switala to 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 will certainly add his comments along the way, and Greg as well. 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 buybacks 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 ChAlange, Scott Tumbridge, one of our other directors and the founder of Deepcore, 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 gonna 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 AUD 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, 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 c.
But demand for drilling services, you know, there is a continued demand, and we re-won all of our key expiring contracts in 2024, 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 publicized, 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. So importantly, when you look at where commodities are at the moment, you know, gold represents about 40% of our book, and gold is, you know, from a price perspective, very high.
Operationally, on page seven, the customer base remains strong. You know, 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 Daunia and Blackwater, who, you know, the old BMA assets out there. But, you know, the market is expected to soften, due to a couple of factors outside of our control. You know, namely the underground fire event at Grosvenor. Again, that's been well publicized.
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 you know 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 you know we say here that second point, mining industry, corporate activity, you know obviously rig counts are affected by 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.
Then again, once the equity side of things improves, it takes a you know a lag time, sort of six to nine months or so for that money to then go into the ground. But importantly, you know, the EBITDA for the year, 40.4, slightly lower than the previous corresponding period, based on that decrease in utilization. But again, you know, 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.
Again, we've called it Loke, 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. We purchased a rig. It's currently clearing customs. We've hired a CEO for that business called Mukesh Magan. He was previously working for Thiess, running over a billion-dollar business operations in Queensland.
Obviously, a key part of this business is linking in the drilling and the gas management and drainage with operational activities. Hopefully, you know, 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. Importantly, on the next slide with Loke, it is a full service offering from start to finish, with Talisman and with Mitchell together, from a decarbonization strategy perspective and modeling, and you know, gas reservoirs, gas content, through to operational readiness, and then actually conducting the work on the ground and draining the gas, and in-field management. You know, and again, there's potential downstream opportunities, longer term, as well.
So it's quite, quite an exciting opportunity for the company, but it will take time to develop, and it will come. And then 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 gonna 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 modeling certainly shows that in the majority of cases, it's a case-by-case, mine-by-mine, you know, basis, but it's certainly gonna 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.
Sure.
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 wings for, you know, a number of years, even decades. You know, the opportunity around waste gas, previously just hasn't been there in the market, and, you know, it's something that we've been looking at for a long, long time, and this Safeguard Mechanism sort of opens that door for us. I think for us, it's around, what we saw back in the early two thousands in the, in the start of the CSG industry. Obviously, it'll 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 you know twelve 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 yeah, no, it's an exciting time for the business.
And look, we're not. We're certainly not gonna sit here today and answer questions on, you know, what's the total available market, how many rigs, and all this sort of thing. We're not. It's not there yet. You know, it is, it's early days. It's gonna take time. It's gonna be choppy, but it is a material opportunity, we can certainly, certainly say that. You know, we're talking, tens of rigs, at least at a minimum, if, if this thing gets going.
Just running through the FY 2024 financial results. Despite EBITDA remaining relatively flat, the company's produced a strong post-tax earnings, with profit increasing by 21% to AUD 9.2 million for the year. This improvement essentially was driven by the reduced D&A, 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 9, increased pre-interest and tax earnings, together with a reducing PP&E base, represent favorable conditions for strong ROIC numbers. And we've certainly seen that again in FY 2024, with return on invested capital over 16%, up from 12% in FY 2023. 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 the reduction in operating risks has driven a AUD 7 million improvement from AUD 27 million last year to AUD 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 AUD 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 FY 2025, having benefited from the ATO's instant asset write-off program, in relation to CapEx in FY 2021 and 2022. 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 AUD 1.9 million at June, and with the Deepcore 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 gross debt figure, being about 5.7%, as you see there. On a net debt to trailing EBITDA basis, operating leverage is now practically zero. Probably just worth noting there, just given the upcoming dividend in September, of about AUD 4.3 million, net debt at the end of FY 2025 Q1 will likely represent an increase, versus the 1.9 figure at June. 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, so total CapEx in FY 2024 was AUD 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 FY 2024 was limited to that decarbonization rig that Andrew spoke about earlier, as well as one new LF160.
Thanks, Greg, and just following on from Greg's comments there, you know, I think the allocation to these four pillars has been excellent. I think the company, the last few years, has done what it's 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, you know, from AUD 40 million to just under AUD 2 million, and, you know, AUD 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, you know?
Yeah.
Nathan. And I think, just onto the strategy for twenty-five, I might hand over to Nathan and let him talk a little bit about this slide and capital management and things like that.
Yeah. 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 12 months ago or longer to reduce debt right down, again, was excellent timing by the board and the team. And you know, while we're still busy and we're still winning a lot of work, we're seeing, you know, there's definitely a softening in the Western Australian market. So strategy for this year is to continue what we're doing.
We're gonna 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 decarbonization, 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 see some, you know, real change. But suffice to say, this next twelve months, I think, we're in a very good position, whether things continue to remain the same, or soften or grow.
You know, we've got a position of a debt position where we can accelerate into it, or, or take advantage of potential, you know, company mergers or changes or buys or purchases that we see or potentially coming in the future or not coming in the future. So as we said before, I think, you know, 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.
Start of the year is, you know, only just starting this year, and I think, you know, we'll 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, you know, some choppy winds 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, you know, never great for us and 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, you know... That should kick back in again.
So all in all, I think, 2025 is gonna be still good for us.
No, that's great. Thanks, Nathan. And look, just to wrap up in summary, and Nathan's probably covered most of it there, obviously, you know, year-on-year, you know, NPAT return on capital, materially greater, 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. FY 2024, we've rewon major contracts that count, and we're doing a good job, good safety, good culture. Clients are generally pretty happy. You know, inflationary pressures have eased and things are flat, as Nathan said. It's a fantastic brand. It's been around a long time. You know, it's very well respected, and we're gonna be here for many more years to come.
Again, we've spoken about the contractual side of things and utilization. But again, most importantly, just to reiterate what Nathan said, we've got options available to us. You know, 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, you know, 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, you know, at these levels, you should be, you know, a little bit more aggressive. You know, you've mentioned that you guys are 25,000 shares per day. Is there a thought process that you'd possibly, you know, uptick in daily volume, or what's the methodology? Just current share price, what are you?
I think it's, look, 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 in 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 of, for the shareholders, but fundamentally, we need to run the business and generate 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 you know, as I say, we like buybacks. It generates 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 FY 2025?
Thanks, Alan. Certainly from a depreciation perspective, I think reasonable to sort of assume a number that's in line with FY twenty-four, which was AUD 25.7 million, or thereabout. CapEx is, to be honest, a slightly harder one to answer, just given some of what Andrew was speaking about earlier, in terms of fluctuating rig numbers and opportunity pipeline, etc .
So, but based on where we are now, you know, I'd sort of say, again, a number that's probably in line with the AUD 17 million in FY 2024, but that, you know, that's gonna be a little bit more fluid, and it will play out, depending on how the operating rigs plays out, and, you know, tender pipeline, etc .
Thanks, Greg. Another one from Daniel. The dividend payout ratio was 94% FY 2024, which is above the policy of up to 75%. How should we think about dividend policy in FY 2025?
I might start with just commenting on the first point. So yes, you know, the broader policy is 75%. Just given everything we've talked about now, in terms of that rapid debt reduction, the very favorable cash flows, et c, there was clearly an argument to push that to 94. So I would, I'd certainly sort of see that as a once-off. Subject to, you know, any further comments from Nathan, I think that 75% of NPAT number is probably reasonable going forward. Obviously, you know, there is the concept of the buyback there, and pending what, you know, what the share price does.
So the quantum of the dividend, therefore, 75%, will be very dependent on what the NPAT number is, and similar to my comments earlier around CapEx, is probably, you know, fair to say, a level of uncertainty around, you know, 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 from me, Andrew. You mentioned new contracts, Whitehaven. Can you provide some more color on those contracts? Are there any other new contracts that you can talk about?
Yeah. 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, you know, again, rigs increase and rigs decrease through the life of long-term contracts with large miners at different sites for various, you know, operational or strategic corporate reasons. And that's what we're sort of seeing, you know, commodity prices in copper, gold, and other commodities we work in are still very strong. So, you know, some of these things we've seen are, you know, out of our control, and just a natural part of things.
But the team has won some good contracts on the flip side, which is a good thing, but you know, you're always gonna see you know, costs as rigs come off and costs to get rigs out and that sort of thing. So that's gonna you know, that those things do impact the profitability of the business in the short term, but certainly set you up for the longer term. So you know, again, I think that low debt position we've got really gives us the optionality as Nathan said, to take advantage of things as they come up and then to manage the business you know, come what may in the future.
Thank you. Another one from Daniel. Employee costs have been steady at AUD 62-63 million over the last three halves. Should this continue in FY 2025, excluding any new contract wins?
Yeah, I certainly think so. You know, we've spoken about inflationary pressures. We've spoken previously about where we think things are from a wages perspective. And yeah, to summarize that, with the exception of some lower level roles within the business, wages are essentially flat. So, on a per employee basis, a flat wage number is a good number to work on in terms of what FY 2025 will bring. At a growth number, though, it is gonna 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, you know, all of our contracts have been reset now. You know, there's no legacy contracts left out there subject to the sort of inflation increase that we saw come through. You know, contracts have been reset, rates have been reset. They're certainly not going up anymore, but they have been reset, you know, to manage that increase in labor costs that we have seen. But as Greg said, 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 flavor 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 organization, doesn't apply.
Thank you. Another question, Daniel. With the cash tax payments potentially coming back online in FY 2026, what sort of cash tax payment should we assume relative to P&L tax expenditure?
Look, it's without giving guidance in terms of what that profit number is, it's gonna be very difficult to answer, to be honest, because it's gonna, you know, largely be a function of profit. And as we've 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 AUD 12 million in ongoing depreciation that will not, yeah, 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, you know, 12 million of that 25 million, you know, there won't be a tax deduction on, but the rest, as I sort of said, is gonna be a function of profitability, and very hard to call at this early stage in FY 2025.
Thanks, Greg.
Just, just on, back on, on rig counts, with Grosvenor, do we know the outcome of those rigs there? Are they sort of still, I guess, not being utilized? And I guess the next question on that would be: Are there any rigs, I guess, up for sale in, in your fleet? Oh, look, certainly, the first point I'll answer is just the rigs for sale. There's, there's always rigs coming and going, in the business. You know, we're always recycling assets, you know, buying some, selling some. It might be rigs, might be cars, pumps, compressors, you know, trucks, whatever. So there's always gonna 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. That's the first thing. On Grosvenor, you know, again, there's the surface rigs are sort of going back to do a little bit of work. The underground rigs obviously are stuck down underground. Again, until we know more information, it's just really difficult to say where to from here with that. I mean, last time, it took the client 18 months to get up and running again. How long this time? We don't know. 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. Another 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 mining drilling industry. So, yeah, actually, we were surprised by it, to be honest.
Thank you. If there any further questions, please, yeah, address them in the chat.
... Otherwise, I'll give it back to Andrew and Nathan for final remarks.
Yep.
Thanks. 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 Morgans, covered by Q Value, so if you're interested in reading that research, please do. But importantly, just to sum it up, you know, 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 decarbonization opportunity ahead of us with 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 chAlanges we faced with the market and some of those headwinds, Nathan.
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. And again, I think thank the team and the whole board for, you know, what has been a great year, great strategy. As I said before, there's 2025 should be—should still be a good year. As I said, we are seeing, you know, we are seeing some choppy weather across the whole industry in Western Australia and across here, but hopefully, so far, we've been fairly secure from it. Obviously, the Anglo one hurts us, but overall, I think, you know, onward and upward for 2025 and 2026.
Fantastic. Well, again, thank you, Nathan, Andrew, and Greg. Well done.
Thanks, Alan. Appreciate it.
Thanks very much.
Thanks, mate.
Thank you. Bye.