Thank you for standing by, and welcome to the Mitchell Services Limited full year results presentation. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Andrew Elf, Chief Executive Officer, and Greg Switala, Chief Financial Officer. Please go ahead.
Thanks very much for the introduction and good morning and welcome everybody and thanks for attending the Mitchell Services full year results call. We'll take the disclaimer on page two of the presentation as being read, and we'll move straight to page four and just touch on the market profile of the business. Again, you can see there Nathan Mitchell, Executive Chairman, and name on the door. Scott Tumbridge, Executive Director and founder of Deepcore Drilling, both major holders. And then Soul Patts, again, another major holder, a good name to have on the register. Not too many major changes there in the profile of the business. Just moving on to slide five, the summary for the year. Operating rig count up, shifts up.
Safety performance outstanding. I couldn't be prouder of the team in that regard. I think, industry-leading culture that we have within the business, and certainly driven by, the Critical Control Verification program that we've had in place for some time now. Headcount is continuing to increase, as does the rig count and shifts. That's certainly continuing into the current financial year as well. There are 100 rigs in the fleet and, certainly there you can see that the revenue up and then the percentages coming from those global mining majors, and EBITDA again up year on year. Looking at revenue and earnings growth into 2023. We're saying there that we're expecting a material increase in revenue and a material increase in earnings.
The operating rig count as at the end of June was 84. The average operating rig count was 74.8 through the course of the whole year in 2022. People can start doing their own maths in regards to what that can potentially mean. Certainly from our perspective, I think we're in for a very positive year as a business. On slide seven, you can see there commodity prices have moved around a little bit but still remain very strong. We're certainly seeing budgets increase majority of our clients. There's supply constraints with new rigs and again, that's supporting an increased level of utilization and contract terms and conditions.
Certainly, you know, clients are doing it tough as well with inflation and people, and we're certainly getting better pricing contracts, and supported by the demand for services across the industry. Our pre-ordering and delivery of the LF160 drill rigs has really positioned us very strongly. Those rigs are all in hand, they're all booked. I'd say probably by the end of September, every single one of them will be out in the field, drilling and delivering for us. That's very exciting. Importantly, when you look at our revenue, we've got some logos there on the right that very high quality revenue streams in the business.
I made the point at the start there in the presentation that around about 90% of our revenue does come from global mining majors. The revenue is split 50% surface and 50% underground. Gold's around about 60% of the revenue and 80% of our revenue is sort of derived from on or very close to operating mine sites. Again, those mine sites are low on the cost curve and operate through the cycle given that they're high quality assets of global mining major clients. Operationally, again, I think the team with the things that we can control have done a wonderful job throughout the year. It's certainly been a tough operating environment, you know, given rain, given COVID and those sort of things.
Controlling what we can control, I think the team have done a wonderful job and really set the business up strongly, to move forward into FY 2023. Our capital investment program is now complete. I've mentioned that those 12 rigs will all be operating by the end of September. We've won multiple new contracts. We've expanded contracts and certainly I think they will be material to the earnings of the business. They haven't been announced as individual contracts in their own right, given the size. Certainly cumulatively, I think, you know, heading into this year, that 84 rig and run rate in June, we're very, very well positioned. Client survey results outstanding. You know, the Mitchell brand is a high quality brand.
We're seen as a human drilling services provider working for those major clients. You know, world-class clients want world-class service providers. I certainly think that that's what we're giving our clients what they want. You know, you combine the client results with the safety, the culture and those things, and the assets we've got. I think we're in a wonderful position, as I said, to have a very good year ahead.
Looking at the profit and loss on slide nine, the business generated full year EBITDA of AUD 32 million, representing a 24% increase versus the previous period, despite various factors including multiple rain events, COVID-19, and mobilization costs associated with an expanding contract book. These factors temporarily impacted operating margins with the reported margin of 15% being lower than our longer term targeted benchmark.
This is best illustrated in the utilization graphs per the earlier operational update slide, where you can see the steep increase in rig count towards the final quarter, with the corresponding shift levels remaining relatively flat. The EBITDA improvement in FY 2022 translated into an improvement at the EBIT level, with the business effectively breakeven in FY 2022 compared to an AUD 6 million loss in FY 2021. Included within the FY 2022 numbers is AUD 3 million amortization of customer contracts recognized as part of the Deepcore acquisition accounting. These will be fully amortized in February next year or by February next year, following which there'll be no subsequent amortization expense. Importantly, the business exited FY 2022 with an operating rig count of 84 in June, significantly greater than the FY 2022 average of 74.
As such, we expect revenue and earnings to be materially greater, heading into FY 2023. Slide 10. Looking at the balance sheet. The strengthened balance sheet post last year's equity raising has ensured that the business was able to complete its capital investment program as part of the organic growth strategy. From a working capital perspective, the temporary increase in net working capital of approximately AUD 9 million was largely due to increased inventory and trade receivables off the back of the steep increase in operating rigs and revenue in the fourth quarter of FY 2022. Andrew will outline our capital management strategy later in his presentation, and his update will include the fact the business currently has no intention to raise equity for any reason.
From a cash flow perspective on slide 11, the business has again generated strong 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. Looking forward and given the recent operational ramp up is behind us, we expect FY 2023 cash conversion to normalize. Noting also that the three-year Deepcore earn-out arrangement ends in December this year, and that MSV will not be required to pay income tax until at least FY 2024, given the buildup of tax losses associated with the ATO's instant asset write-off program that is currently in place. Gross debt per slide 12 has peaked at AUD 43 million at the end of the financial year following the completion of the capital investment program.
Given the relatively short amortization profiles of this debt, the company expects debt levels to significantly reduce over the next two years and now has a formal longer-term net debt target of AUD 15 million that it expects to achieve by the end of FY 2024. Importantly, all of the equipment finance facilities were structured on a fixed interest basis, with the majority's contracts finalized prior to the recent rate rises. The company's current blended average cost of debt is approximately 4.8% or 3.4% post-tax, which is unlikely to move materially given that over 80% of the book is equipment finance. Looking at CapEx on slide 13. The operational teams have done a fantastic job in commissioning all 12 rigs on time and with budget.
With these new LF160 rigs comprising the majority of the AUD 27 million growth CapEx reported in FY 2022. Per the recently outlined capital management policy, the business will look to limit future investment to maintenance CapEx only. Noting that the average annual maintenance CapEx over the past two years was approximately AUD 16 million, expects CapEx in FY 2023 to be significantly lower than the FY 2022 levels.
Just on slide 14, you know, taking those factors into account, it's gonna be a strong year in regards to cash generation. We're gonna use those cash flows to reduce the leverage, as Greg said, and there is zero intention to raise equity or increase leverage for any other reason. Just looking at where the business is today, post 30 June, that debt is already coming down. In those boxes there, it's pretty simple. Revenue and EBITDA are up, CapEx and debt down, returns to shareholders up. I think that communication that we've put out there in relatively recent times has certainly been very well received by shareholders. Just to go into that a little bit more detail on page 15, we have released the capital management policy, as Greg said.
That's a primary focus over the next two years, and it's been very well received. Two aspects to it. Number one, a buyback, and where appropriate, if we do sell any rigs, and we have sold a couple in recent times, we'll use those funds to buy back shares. Obviously we're reducing the earning capacity of the business if we are selling any rigs and therefore buy back the stock. That buyback is underway and ongoing, and again, well received. Secondly, dividends from earnings. As we said, cash flow is gonna be strong. Earnings and revenue are gonna increase. That formal dividend policy is now in place.
Up to 75% of post-tax profits can be paid to shareholders in the form of dividend, and it's intended to be declared at the half year results around about February, and intended to be declared at the full year results in August, again. On sixteen, why invest in Mitchell? We've got a world-class fleet. Absolutely no doubt about that. If you have a look at the money we've spent in recent times, the fleet is in fantastic shape. Very high quality, and we're putting that to work with a very strong client base, 90% of which global tier one miners. Revenue earnings are gonna grow materially year-on-year into 2023. We're focused on that capital management strategies over the next two years. Again, debt down, cash strong, returns for shareholders.
I think our equity price is very low versus our net tangible assets. Certainly I think the equity price low versus traditional multiples. Certainly, you know, it is a target of ours, you know, as a team, business board, you know, to return quite a lot of funds to shareholders via dividends and buybacks over the next two years. I'd certainly say to people that if you do your analysis and research and have a look at what the business can do and that target debt level, you can see that it's, I think it's a pretty exciting couple of years ahead for us. In 2022, EBIT, EBITDA and revenue, AUD 213.4 million revenue, AUD 32.2 million, EBITDA up year-over-year. It's a quality brand.
It's got a long history. The brand itself is over 50 years of history, very well regarded. You know, the feedback from clients is good. The safety performance is good. The cash flow is gonna be strong in the year ahead. We're focused on our shareholders over the next two years. They've been very supportive in working with us to grow the business from a handful of people and rigs back in 2013 to where it is now. It's time to give something back. The buyback's in place and happening. You know, the interim and full year dividends are moving forwards. Again, as I said on the last slide, a very compelling, I think, investment opportunity. Thanks very much. That's the end of the formal presentation.
We'll hand back to the moderator to see if there's any questions.
Thank you. If you wish to ask a question, please press star one on your phone and wait for your name to be announced. If you wish to cancel your request, please press star then two. If you're on a speakerphone, please pick up the handset to ask your question. Our first question will come from Tom Sartor from Morgans. Please go ahead.
Good morning, gentlemen. Thanks for the opportunity with the call and the Q&A. Three or four questions for me, if that's okay. Just curious about any potential lingering effects from those forces that knocked you around, second half of last year, so around wet weather and maybe labor availability, working our way through COVID and the flu season. Are those effects abating, or can you talk to how much of those you expect in the coming period?
We did get hit with a little bit of wet weather in the start of July, that last lot of rain that came through. Obviously, the weather since then has been good. Who knows what's gonna happen with the weather moving forward, but I'm certainly praying for less rain. COVID, again, a little bit in July, but certainly a lot better than June. I think you can see in the media now, reported cases on the decrease. We're certainly seeing the improvement in that regard. Again, where does COVID go from here? Difficult to say. I think, Tom, if we can just get a good clean run without some of those things that we can't control happening, you know, it's, we're very well set.
Thanks, Andrew. On slide six, it's pretty easy to kinda well pull out some kinda hard numbers on where those bars sit in terms of HY 2023 guidance. Is that the wrong thing to do in terms of maybe setting a midpoint for where your thinking sits with higher earnings into 2023? Or might those bars reflect, you know, a lower end of a range? They look a little light, but maybe you've built in some conservatism around those forecasts.
Look, I wouldn't. We're certainly not giving guidance, you know, with specific numbers like we have previously. I think, you know, there's a few uncertainties out there with COVID, etc. I wouldn't be potentially looking at the bars as a guide. I'd sort of just be going, "Look, there is gonna be a material increase in the earnings and in the revenue." It's just a. You know, people can make their own decision on what they think that is. But at this stage, you know, it's really looking good, but it's, yeah, tough to give an exact number.
No, fair enough. A few moving parts in there as well. Similar related, I get, I guess, your margins were squeezed this year for reasons that are well explained. The old sort of 20% EBITDA margin target per contract in this environment with higher costs and a bit of disruption, are those 20% type targets still valid?
Yeah, look, from my perspective, Tom, you know, best way to sort of number one, try from a reconciliation perspective, having a look at the 15% margin that we did do, and take it back. I did sort of allude to slide eight, with the graphs, on the operational update slide. As mentioned, you can see the sort of steep increase in rigs, but not necessarily a corresponding increase in shifts, with those lost shifts, I suppose, largely due to the weather, and COVID.
If you sort of back engineer the numbers such that you factored in an average number of shifts per rig. Put that historical average shifts per rig against those rig numbers in the last quarter, then you can sort of start to see how one can go from 15 back to 20. Similar to Andrew's earlier point, though, I suppose yeah, we're not gonna necessarily put a definitive guidance there in terms of whether it's 18, 19 or 20. Safe to say we're confident it's gonna be well north of 15 in terms of what can be achieved.
The target will always be in and around that area, just from an aspirational perspective and from what we try to achieve, I suppose.
No worries. Thanks, Greg. We had a look at ALS's guidance during the week, and the reading between the lines there, it seems like there are some good price rises coming through on the assaying side at least, and kind of extrapolate that into the drilling services. I know you guys aren't WA focused, but can you talk to where rates are and where there might be some movement there in the coming year?
Yeah, they're definitely going up. I think clients are recognizing that they want a good service provider, 'cause, you know, to provide a good service with good gear on their site, they've gotta pay. They're suffering in their own businesses with cost increases and other things, so they actually get it. You know, you combine that with the supply and demand in the sector. There's obviously a high demand for drilling services, and the supply side really isn't responding a great deal, I wouldn't say. I think there's a bit of a squeeze on, and it's leading to improved contract terms and conditions. We're definitely getting price increases within the business.
Again, I think you know, Greg's answer on EBITDA margin was very good, and I certainly think the price increases and the work we've got has held us in good stead. I think those LF160s, 12 of them, they've all gone to global tier one major clients. You know, they're world-leading rigs. They're hands-free, they're automated. They're out there at good prices.
Terrific. Last one from me. I know your clients generally pay your fuel costs, but can you remind me of the other mechanisms you have in place to mitigate cost pressures?
Obviously, if you look at the full year accounts, half year accounts, there's not a huge amount on fuel that's generally provided. That's correct. Again, a lot of flights are also provided. A lot of people probably are seeing that Qantas and some of the other airlines aren't missing you on flights these days. A lot of our flights are covered either by charter or charged back in some instances, so that helps as well. Then you're really after those couple of things. You know, we've had a supply project in-house where we've reduced the number of suppliers and increased volume through suppliers and put more formal contracts in place just to improve our purchasing processes and practices.
That's yielded some benefits for us as well with you know versus price increases. Into contractual side of things with clients, obviously, there's rise and fall provisions within certain contracts. Extensions are generally mutually agreeable, you know, with a rate review, so they're not locked in. We're certainly in a place where, you know, I've said it previously, that around about 30% of the contract book would roll per year, giving us the opportunity to reset rates. I think one thing that's probably important to note, more so now than previous, is that where clients have asked for extra rigs and given the demand for services in some instances, we have been able to secure higher price separate to existing contracted prices to provide additional services.
That's certainly been a handy one for us, as well.
Terrific. Thanks for the detail, gents. Yeah, looking forward to a big year ahead. You look like you're in a strong position. Yeah, thanks, and I'll pass it over.
Thanks, Tom.
Thanks, Tom.
Once again, if you wish to ask a question, please press star then one on your telephone and wait for your name to be announced. There are no further questions at this time. I'll now hand back to Mr. Elf.
All right. Well, thank you very much for attending, everyone. You've let us off very lightly today on the questions versus previous years. Look, we appreciate the interest, appreciate your attendance. Thanks, Tom, for the questions. We'll talk to everybody soon. Thanks very much.
That concludes our conference for today. Thank you for participating, and you may now disconnect.