Good day and welcome to the Mitchell Services conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the star one again. For operator assistance throughout the call, please press star zero. Finally, I would like to advise all participants this call is being recorded. Thank you. I would now like to welcome Nathan Mitchell, Executive Chairman, Andrew Elf, CEO , and Greg Switala, CFO and Company Secretary. I would now hand over to Andrew, our first speaker, to start off the presentation. Andrew, over to you.
Thanks very much. Good morning, everybody. Thank you for joining us, and thanks for the interest in Mitchell Services. I'll just move through the first few slides and take the disclaimer as being read and move straight to page 4, Market Profile. Obviously, the 2 points here, Nathan Mitchell, our Executive Chairman and major holder with us here today. We'll certainly open up for questions at the end of the presentation and feel free just to address your questions to Nathan. Obviously, Scott Tumbridge, a 7.3% holder, Dream Challenge, and that was the business we acquired back in 2019, Deepcore on the board there as well. Just moving to the business summary on page 5.
I'll just run through these boxes at a high level, and we'll talk to it more as we move through the presentation. This is obviously the half year summary. Revenue up and heading in the right direction and CapEx down as we've finished our major capital investment program now. All 12 of those rigs have been delivered, ramped up, transported to site, and are now working and generating a return with global major miners. The average operating rig count, whilst it did tail off toward the end of the calendar year, was strong in that H1 and certainly is improving again at the current point in time. Debt has peaked and reduced materially in the H1 and will continue to do so towards our target at the end of calendar year 2024.
Obviously, the share buyback has been on foot and was AUD 1.5 million in buyback payments as at the end of December. That number is around about AUD 1.8 million as at today, and it's still on foot. Just onto page 6. This is a slide that we put out there previously, and we expect a material increase in revenue and EBITDA in FY 2023. Even though we had a couple of challenges in the first half, we stand by this at the current time, notwithstanding factors that could impact us that may be out of our control, such as weather or other things. Certainly on the revenue side, you know, we're looking good. Then in EBITDA, you know, is certainly coming as we, as we move forward.
I certainly think the business is in a wonderful position, you know, and is continuing to grow and use the high-quality assets that we do have. Just on page 7. Again, I won't run through that list of customers, but worth noting a majority of our revenue is from those global mining majors, approximately 90%. The commodity prices are still high. There is a strong demand for drilling, particularly in the steelmaking coal sector. Certainly, we have had some minerals contracts slow down or reduce, and coal contracts start up and increase. A little bit of a pivot within the business that did impact the EBITDA with ramp up, ramp down to move rigs across into coal and where that stronger demand was.
Obviously, people would be aware that the utilization's pretty good at 81%. Obviously, there's opportunity to further improve that as we move forward. There's obviously been inflationary factors within the business as well. Those two factors combined are providing us with an opportunity to, you know, to re-tender and reset our prices when we have negotiations coming back. Nathan will probably talk a little bit about that as we move through the preso. The capital investment program is complete. The rigs are out and generating returns. I mean, that's been a very successful project for us, and we can talk more to that as we go through the presentation. Those rigs already are around about AUD 200,000 more each to buy now than what we paid for them. 200 times 12.
Interest rates are a lot higher than what we locked our fixed interest equipment finance payments at for those rigs when we bought them. I think the board and the team made a very good decision in that investment. The last point there, obviously, the high-quality revenue streams, 90% from the majors. You know, we're split 50/50 surface, underground. Gold's around about 50% and obviously 80% of the revenue's from mine sites and things like that. Just while I'm on this page, Nate, I don't know if you've got any views or comments on the market or
Yeah. Thanks, Andrew.
or other things, mate.
Yeah, I think, certainly. Look, I think timing's everything. You know, looking back now, the decision that we made to buy those, that new fleet, at the low interest rates before the inflation really grabbed hold has been excellent. I think, again, timing's so important to everything we do in this industry, the ups and downs. Obviously, we've seen coal really accelerate over the last couple of years, we're still seeing that growth in the energy sector. I think with what's happening in, you know, Ukraine and the war, that's probably gonna stay reasonably high for the foreseeable future. Certainly, a lot of interest coming back in that sector.
Thankfully, we run, you know, across the board between, you know, minerals and energy. We're not focused on one or the other. We probably don't see the highs of the highs in the mineral sector as some other contractors do, and we don't see the lows and the low. The ability to be able to switch from one or the other. Obviously, inflation, you're probably hearing a lot of that, and we're all seeing it in our day-to-day lives. Inflation is bite, it does bite. Has bitten a lot of us in wages and in supply chain and fuel. Luckily, we don't pay for a lot of fuel. Our clients pay for fuel. Still those costs have increased significantly.
Flights, as we all know, traveling around Australia, have certainly increased significantly, with exclusively with Qantas, and those costs have gone up. Luckily for us, you know, those costs obviously increased probably 12 months ago or 6 months ago, but we are seeing rollover, and Andrew will speak to that more. We're seeing rollover of contracts, and we're getting those price increases to offset those inflationary costs. As like everything, it's about timing. You know, your input costs don't always equal your increase in invoices. There is a lag period, and I think some of that's you'll see in these figures today. You know, the, Andrew and Greg will talk of the one-offs that we've had issues with.
Overall, I think December's always a tough month with wet weather. Always has been, I think we're going back to traditional sort of wet weather that we've seen over the years. I think it's looking fairly good going forward from now on. We're pretty happy with the rest of the year at this stage with the rig fleet count. Overall, I think the, you know, the mining industry as a whole looks pretty good.
Thanks, Nathan. I agree. I think, there's a very positive outlook and again, we've just gotta have to have a couple of things go our way and there some really good results coming through. Just moving on to some of those operational updates that Nathan spoke about on page 8, obviously the main thing with those LF160s to note is that they are with global mining majors. Those companies want the best tech, the new gear, et cetera. We've certainly given it to them and they're well and truly booked up for the long term, those rigs. They're gonna be a really good thing for us moving forward. Multiple new and expanding contracts expected to be EBITDA-accretive for the balance of the financial year. The heavy lifting has been done.
We've contracts have ended, contracts have started, rigs are ready, rigs are out, including the 12 LFs, they're out there making some money. The last point on this page is a pretty important one too, that we've now got 3 large diameter rigs out, they're expected to remain fully utilized until at least mid-year, hopefully longer. That's highly specialist work, large rigs, you know, specialist crews, they do generate a good return to the company. That's certainly gonna give us a kick as we move forward as well. The rain in the first half of the year, unprecedented rainfall and multiple severe events. Obviously, we do the best we can, even places where clients made rainproof drilling pads for us got washed away, you know.
It was tough from a rain perspective and obviously, you know, we just gotta do the best we can during that time. Disappointingly, we did have one safety incident. you know, the client had to do an investigation there before we could get going again, and that sort of impacted us there. Again, our safety performance in this business far exceeds industry averages. We're very proud of our safety record. We wouldn't be working for those global mining majors and generate 90% of our revenue from them unless our safety record was exemplary. The thing that we're very happy about is that employee will make a full recovery, and he's looking forward to getting back out into the field with his mates and getting back on the rigs.
COVID, a lot less than previous years, positively as well. All in all, a couple of things that got us, but generally we're in very good shape. Strong bookings looking forward, strong demand. you know, it should be a good time ahead of us.
Looking at the profit and loss on slide 9. As Andrew mentioned earlier in his operational update, increased operating rigs and number of shifts led to an increase in revenue of approximately 20%. The business generated an EBITDA for the period of AUD 16.6 million. Whilst that represents a solid performance, the EBITDA did not increase in line with the increase in revenue, as Nathan mentioned earlier, due to overall inflation pressures and key temporary factors including severe wet weather events, contract variations and an unfortunate but isolated safety incident. Importantly, with an average operating rig count of 81 and with recent awards of new or expanding contracts, the business is well positioned heading into the second half of FY23.
At an NPAT level, it should be noted that the acquisition-related amortization of customer contracts ceases from February. Given that the capital investment program is now complete and ongoing CapEx is expected to decrease, the depreciation charge is expected to reduce accordingly, heading into FY24. Slide 10, looking at the balance sheet. The business is well funded to capitalize on its recent organic growth strategy and has no intention to raise equity for any reason. From a working capital perspective, the temporary increase in net working capital of approximately AUD 3 million was largely due to increased inventory levels associated with the new LF160 fleet.
December's trade and other receivables were higher than traditional December levels, largely due to a delay in payments from a major mining client as part of an upgrade to its global accounts payable processes, which has been rectified post period end. From a cash flow perspective on slide 11, the gain generated solid operating cash flows, noting that the increased working capital requirements, as outlined on the previous slide, have resulted in a cash conversion percentage that is lower than previous trends and longer term expectations. Cash flows from financing activities includes payments of approximately AUD 1.5 million in the form of the on-market share buyback, that, as Andrew mentioned earlier, is still currently on foot.
Andrew Elf and Nathan mentioned earlier that the benefits around the timing of the LF160 purchases, obviously from a cost of asset perspective and also from a financing cost perspective. Importantly, the business doesn't expect to pay any income tax now until at least the end of FY24. That's as a result of being able to benefit from the ATO's instant asset write-off program, for which those 12 rigs qualify for. Gross debt per Slide 12, which previously peaked at AUD 43 million in June following the completion of the investment program, with H1 2023 performance delivering a gross debt reduction of approximately 15%.
The blended cost of debt of 5.2% remains in line with previous reporting periods due to the majority of debt being fixed, prior to the recent, interest rate rises that we've all seen. We expect the current trend of debt reduction to continue through the end of FY23, with the company remaining on track to reach its longer-term net debt target by the end of FY24, being AUD 15 million.
Just on to slide 13 with the capital expenditure there. Obviously, the teams have done a wonderful job getting those electrics delivered and out into the field and working. As Greg Switala said, we get the benefit of the instant asset write-off, and you can see the material reduction in CapEx year on year. Obviously, it's important to note that, you know, we always spend what we have to spend on CapEx to ensure our fleet is and remains world-class for those major clients we work for. Again, as I said, the heavy lifting and the spending is predominantly done. Really it's a case now we've got a fantastic fleet available to us.
You know, it's up to us now to go out, use it and generate some cash for shareholders. The capital management update on page 14. Again, this is something we've put up previously, but the company's obviously committed to prioritizing a portion of that free cash flow to reduce leverage, as Greg said, by the end of that financial year, the target of AUD 15 million. And then obviously maintenance CapEx as required, and then growth CapEx, you know, limited, but where it makes sense to do so. Surplus cash, obviously, pending performance is where we really wanna try and give something back to the shareholders and the dividend policy there. You know, up to 75% reported post-tax profits in dividends. Just on 15, how are we going against that capital management plan?
You know, what is our performance to date? Well, debt is down. It's peaked, it's down, materially down. As Greg says, we'll continue to do so and on track to that target of AUD 15 million, you know, within the next year or two. Sensible CapEx limitation, obviously well down. Payments to shareholders, obviously. We've got that share buyback on foot and we've touched on that throughout the presentation already. We're on our way. We just gotta keep generating some good results, and we can only see that improve as we continue to move forwards. Lastly, why invest in Mitchell Services? I think, you know, we've spent a lot of money on the fleet. It is a world-class fleet. The client base, similarly is very strong.
The revenue and earnings growth will increase from here, as Greg said, with the depreciation, reducing the amortization of customer contracts dropping off, that all falls straight through to net profit before tax. Again, we'll get some of those one-offs behind us, will also lead to a better EBITDA performance. We're focused on that capital management strategy. I think it's an excellent strategy. Again, from a price perspective, I think it's cheap as chips. You know, I think at where we're trading at the moment versus net tangible assets and traditional multiples, I think it certainly represents very good value. Really that's the presentation. We'll open it up for questions. If there's any questions, please.
At this time, I would like to remind everyone in order to ask a question, press star then the number 1 on your telephone keypad. We'll pause for a moment to compile the Q&A roster. Your first question comes from the line of Tom Sartor from Morgans. Your line is now open.
Good morning, gents. Thanks for your time. A few quick ones from me. Just on the fourth quarter, you look like you've sort of missed out on AUD 2 million-AUD 3 million of EBITDA there. Can you just quantify how much of that may have been linked to the unplanned demobilizations? Perhaps if you can give us some color on number of rigs, why that occurred and should we expect, you know, these unplanned events here and there as a, as a nature of the game type event in contracting? Thanks.
Thanks, Tom. I think, yeah, you're right. I mean, AUD 10 million in the first half and sort of AUD 6 odd in the second. The balancing item really is weather contracts and the safety incident to get us back to that sort of level, no doubt. I mean one of them, you know, was a contract with Newcrest in Western Australia, at Havieron. We recently signed a 2-year contract extension with that client, going really well, doing a good job. There was a new lens of that Havieron deposit we were gonna drill out from the surface for them. They made a corporate strategic decision to drill that from underground at a future point in time, once the portal's in.
Again, change in corporate strategy, and again, there's 3 rigs there that we had to take from Western Australia, you know, back to Alice Springs. A couple are heading somewhere else and a couple back over this way. You know, similarly, you know, other clients like Mount Isa, Glencore, you know, we're expecting a rig to run through to mid this year. I sort of said, "Oh, no, we're just gonna wind it up at sort of Christmas." A few little things like that, and then you've got to grab that rig, grab the people, the crew, and send them back out to another job. That's always happening in our business. You know, it's always stop. We've always got things stopping, starting, moving.
What actually happened in that first 6 months was that was happening at the same time we were getting those large diameter rigs ready to go out, those mine services rigs that we spoke about. You sort of had a combined effect of rigs getting ready to ramp up and go out. Rigs sort of coming off and moving, combined with the wet weather and the safety incident. A few things that sort of all came together at once. Certainly when you look, you know, as of today and looking forward, counts back up, rigs are going out, everything's running well, no safety issues. You know, we've got a good pathway ahead of us to 30 June.
I think, Tom, Nathan here. Also just Christmas time is never a great time. December period, January, it's sort of a double whammy in that case where you've already got a pretty poor month as it is going in and coming out, going into December, coming out of January, like all businesses really. Then you have those sort of things plus the weather. Yeah, there is always going to be this sort of issues in the business. I suppose this time of the year is always probably the worst. Just having those is a double hit at the same time. Then you've got inflationary issues of, you know, significant costs now in transportation to go from one side of Australia to the other, when you're demobilizing like that.
You know, it's much easier to demobilize when you're in the Bowen Basin or you're in, you know, Mount Isa back to Roma or something like that, versus, you know, from one side of Australia to the other with, you know, 20 pieces of trucks.
No worries. That's good color. Thank you. Looks like your average revenue per operating shift is sort of at a three-year high. I'm curious about the amount of runway you think there's still to the upside in terms of rates. Just noting that the competitive environment you might be seeing more, you know, rigs that were with some junior companies start to come back into the market given the fundraisings in that segment seem to be tapering off a bit. I'm curious about whether the competitive environment is still really tight or if you think there's good runway in rates.
I think the always the important thing to consider when looking at our revenue per shift is the mix of the work. I think what you've seen with the introduction of the 12 LF drill rigs, Tom, is 12 surface rigs. And as we move into this second half with those mine services rigs coming on, they're surface rigs as well. Probably in that, in that first half, a little bit of a change in the mix of the work as those LFs went out at a higher proportion of surface work where the capital costs are higher and the revenue per shift is higher, driving that number a little bit as well. I think as Nathan said, with inflation, we are getting rate increases and resetting the book.
A lot of good work is being done there by the team. As Nathan says as well, there's still work to be done, and we're focused on that. I think certainly revenue per shift, I think in H2 will continue to go up again as that higher proportion of surface work combined with some rate increases flows through. You know, on the market itself, Nathan, maybe you wanna comment on your views on the competitive landscape there?
I think it was a bit of a softening at the end of last year in the gold market. Certainly I think I also think a lot of the large guys, you know, tier one guys locked in last year. When this year we're probably seeing more of the smaller guys. They tapered off last year I think and they seem to be coming back again strong. There was this period, I think between sort of November and now where the juniors were sort of had gone quiet. Not that they're very much about business, and this is what I'm hearing in the sector. That seems to be accelerating again, which is good to see.
I think gold's sort of going, obviously what's happening with again in Europe, you know, people have got their eyes on gold. If things happen for the worst, then I think gold price will continue to climb. I think the juniors are starting to get a bit of wind in their sails. For us, I think, you know, as Andrew said, we've sort of probably rerated 30% of the book. There's still more to go. Clients are open to accepting higher rates, which you can see in the mixes. Costs I think have started to peak. You know, we saw serious headwinds in pipe and consumables last year. I think that's started to come off now.
Prices are, there's excess capacity starting to show and pricing is starting to show where it's more, become more stable, which is good on a go forward. Overall I think we're reasonably where the market is.
No worries, gents. You've answered my questions. Thanks for the detail. I'll pass it on. Cheers.
Thanks, Tom.
Your next question comes from the line of Alex Anderson from A&J Anderson Management. Your line is now open.
Yes, I am a shareholder with 900,000 shares. Looking at the increase in number of rigs that you have working, it would appear that you're buying market share. You've got a gross margin of 15%, and that is not really adequately giving a return to shareholders. Please comment on that comment?
Alex, I think we never buy a market. There's no benefit in us to keep rigs spinning for the sake of them spinning. My father always said to me, "If you're not making any money, you might as well park them on the side." That stands true today. I think, you try and, you know, get the rig working on good margins, otherwise don't get it working. I mean, if there's rigs sitting on the side, on the sideline, it's because we don't want them to work, or the contracts that are there aren't good enough, or we didn't win because our profits were too high. You know, I think more the focus for us is trying to put them into the best possible place, the longest term contract.
You can see what's happened in December with, you know, with turnover of contracts. It does hurt, you know, short-term contracts eat away and erode, leave it very, very quickly, especially when it's unexpected. Longer term contracts, multi-year contracts, especially for a listed company, when we have to answer to our shareholders, are far better for us as a company than short-term contracts like tier two, tier three clients. Otherwise, we're always asking the question of, you know, why does the proper margins go up and down like a yo-yo? Certainly we don't buy a contract, that's for sure. We're not in the business to just to spin pipe.
I think, also just to touch on what Nathan said, I think the capital management plan demonstrates that we're focused on returns to shareholders and, you know, we're heading in the right direction with our returns and the performance of the business. I think, the business is generating cash, debt is coming down, the buyback is on foot. With the amortization dropping off, depreciation, some of those wet weather and other things behind us, you know, it is definitely the board's intention to put some dividends. You know, really, I think the business is in the best shape it's ever been. I really do believe that. I think, you know, the next couple of years are gonna be very good for us.
Okay. Thank you for that. My second comment is that I look on myself as a longtime shareholder. The share buyback program does really nothing for me. You spent over AUD 1 million. I would have preferred you to have kept the cash and hand it out as a dividend. A share buyback I'm not a temporary shareholder, how, you know, the percentage profit on the share buyback for me is damn all.
I understand, Alex. I'm a long time shareholder as well. I'm not going anywhere in the future. We're both in the same boat there. At the share price of, you know, AUD 0.35-AUD 0.40, it's pretty cheap. My belief is that at some point down the future, we will be paying good dividends. At that point, you and I should be getting more dividends and better dividends. That's my plan. I'm hoping it's the rest of the shareholders' plans. At the moment, to me, it seems a better option to buy those shares back at AUD 0.35 than to give it out. That's because I'm a long-term shareholder. I'm not looking at it from a short-term position.
Okay. Thank you.
If you would like to ask question, you can press star and 1 on your telephone keypad. There are no further question at this time. I turn the call back over to our presenters.
No, all good. Thanks very much. Thanks everyone for joining. Appreciate the interest. Thanks to those that asked questions. Appreciate it.
This concludes today's conference call. You may now disconnect.