MIND Technology, Inc. (MIND) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Mitcham Industries Fourth Quarter Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Wednesday, April 4, 2012. I would now like to turn the conference over to Karen Roan of DRG&L. Please go ahead.

Thank you, Alicia. Good morning, and welcome to the Mitcham Industries Fiscal 2012 Fourth Quarter and Year-end Conference Call. We appreciate all of you joining us today. Your hosts are Bill Mitcham, President and Chief Executive Officer; and Rob Capps, Executive Vice President and Chief Financial Officer. Before I turn over the call to management, I have a few items to cover. If you would like to listen to a replay of today's call, it will be available for 90 days via webcast by going to the Investor Relations section of the company's website at www.mitchamindustries.com or via a recorded instant replay until April 18. Information on how to access the replay was provided in yesterday's earnings release. Before we begin, let me remind you that certain statements and information in this conference call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company's forward-looking statements involve significant risks and uncertainties and assumptions that could cause actual results to differ materially from the company's historical experience and its present expectations or projections. Known material factors that could cause the company's actual results to differ from projected results are described in the company's filings with the SEC. Existing and prospective investors are cautioned not to place undue reliance on forward-looking statement, which speak only as of the date hereof. Investors are encouraged to refer to our earnings release from yesterday, which contains a more detailed disclaimer. Now I would like to turn over the call to Bill Mitcham.

Thanks, Karen, and good morning, everyone. We'd certainly like to thank for joining us today for our Fiscal Fourth Quarter 2012 and Year-end Conference Call. I'll start by making a few general comments about the quarter and the year before turning the call over to Rob, who will discuss our financial results in more detail. I will then conclude with a discussion of our market outlook before opening the call for questions. Well to state the obvious, we had an exceptional fourth quarter and fiscal year. The positive momentum in the worldwide seismic market continued throughout the year and strong market demand along with our geographic expansion, larger and broad-based lease pool and increased utilization resulted in another record quarter and a record year in terms of total revenue, core leasing revenue, net income, earnings per share and EBITDA. The quarter include the following highlights versus one year ago and for the fourth quarter, total revenues of $37 million were up 88%. Core leasing revenues were up to 87% to over $23 million. EBITDA more than doubled to $22.5 million. Net income at $10.2 million was more than 5x higher, and we reported $0.77 per diluted share versus $0.17 a year ago. For the full year, our total revenue of $112 million was up 58% from last year, breaking the $100 million level for the first time. Equipment leasing revenues of $70 million were up 90%. EBITDA was $63.5 million for the full year. Net income increased fivefold to $24.3 million, and we reported diluted earnings per share of $2.02. The fourth quarter, like the third quarter, exceeded nearly all of our financial metrics, including leasing revenues. This is the first year in our history that the first quarter has not produced the highest quarterly leasing revenues. Everything came together for us in the fourth quarter in terms of new opportunities and the timing of projects. It allowed us to take advantage of our greatly expanded lease pool and geographic presence. During the fourth quarter, primary areas of strength for our leasing business were the U.S., particularly in the shale plays; Latin America; parts of Europe, such as Turkey, as well as Morocco; and North Africa. We saw the winter season kick off in both Canada and Russia and therefore, had contributions there from this area in the quarter. Our marine leasing business continued its robust performance, contributing significantly to the quarter. Seamap, our marine manufacturing segment, continued its strong performance, delivering 1 GunLink 4000 and 2 BuoyLink systems during the quarter and continued to see strong levels of service and repair work. Over the past several years, we had purchased over $200 million of new, more advanced and diverse equipment for our lease [indiscernible]. We've enhanced our geographical diversification and capacity as well. We not only have more equipment available but we have it available in more markets, especially internationally. This strategy has positioned us well for the growing global seismic market, as strong activity and demand have led to higher utilization of our equipment. We believe our fiscal 2012 financial results are an affirmation of our strategy. During fiscal 2012, we took steps to broaden our international footprint, opening a new facility in Budapest, Hungary to better serve the Eastern European market, North Africa and the Middle East. This facility is up and running, and we're contracting business there. We also expanded our repair and operating facility in Bogota, Columbia so that we can quickly accommodate increased seismic exploration activity in Latin America. In response to the growth in our marine leasing business, we have greatly increased the size of our facility in Singapore and opened a new marine leasing office there. The expanded facility has more space available for repair and the staging of marine leasing assets, as well as provide Seamap with critically needed space for its expanded manufacturing business. With that, I'll turn the call over to Rob, who will give you a more detailed review of the financial results. And after Rob's discussion, I'll return with some final comments.

Okay. Thanks, Bill, and good morning, everybody. As usual, I'll begin by discussing the top line of each of our 2 operating segments, which are equipment leasing and Seamap. I'll then follow up with a discussion of the profitability of each segment, and then I'll conclude with a discussion of consolidated results and our financial position. Let me start with the equipment leasing segment which includes not only our core leasing business, but also non-Seamap equipment sales such as occasional sales from our lease pool, new seismic equipment we acquired from third parties, sales of heli transport equipment from our AES subsidiary and sales of new Hydrographic and Oceanographic equipment of our Australian subsidiary, SAP. Our revenues in this segment were up 90% year-over-year to $29.7 million as a result of ongoing strength in our core leasing business. On a sequential basis, segment revenues increased 36%. In our core leasing business, which excludes any equipment sales, revenues for the fourth quarter were up 87% to $23.7 million. Now the strength in leasing revenues was widespread, with significant year-over-year gains in the U.S., Latin America land markets, line rentals in the European region in North Africa, as well as marine leasing. Our Canadian and Russian operations did contribute to the quarter, as the winter season began late in the fourth quarter. And we expect most equipment in these targets remain fully utilized through at least the first couple of months of our first quarter 2013. We did see improved utilization in the fourth quarter and going into the first quarter of fiscal 2013. Essentially, all our land recording channels were committed during these periods. Now that doesn't mean that every channel was generating revenue every day in this period, but it does mean they were almost all allocated to contracts. Our sales of lease pool equipment increased to $3.4 million in this quarter compared to $972,000 in the same quarter last year. In this year's fourth quarter, we sold 2 used land recording systems to existing customers. Other equipment sales from the third quarter were $2.6 million compared to $2 million in the fourth quarter year ago. This is comprised of sales of SAP and sales of heli-picker equipment. Now let me talk about the top line results of our Seamap segment which, again, designs, manufactures and sells a variety of products and systems used primarily in marine seismic applications. Seamap revenues for the fourth quarter of this year were $7.3 million, that's 78% from a year ago. As Bill mentioned earlier, we delivered 1 GunLink 4000 system and 2 BuoyLink systems during this quarter. There were also substantial aftermarket sales consisting of other equipment such as streamer weight haulers and billable termination and replacement parts, service and repair work. Now let me discuss the profitability of each of these segments. Gross profit for the equipment-leasing segment was $18.1 million for the fourth quarter compared to $6.8 million in the same quarter a year ago. The fourth quarter gross profit margin in the leasing segment was 61% compared to 44% a year ago. The improved gross profit margin is primarily due to higher leasing revenues and despite higher depreciation charges. Our lease pool depreciation expense increased 27% over the fourth quarter a year ago due to additions we made in our lease pool in fiscal years 2011 and 2012. The gross profit of our Seamap segment was $2.9 million for the quarter compared to $2.5 million in the same quarter a year ago. The gross profit margin for Seamap in the 2 periods was 44% and 50%, respectively. But the year-over-year decrease is primarily attributable to a higher proportion of system sales versus recurring service and repair work, which typically carry higher margins. Now let me briefly discuss other items in our P&L. General and administrative expenses for the fourth quarter were $6 million compared to $4.5 million in the fourth quarter of last year. This increase reflects higher costs related to the increased levels of activity and expanded operations. However as a percentage of revenues, G&A decreased to 16.1% in this year's quarter from 22.6% in last year's fourth quarter. Also during the fourth quarter of this year, we recorded a net provision for doubtful accounts of $428,000 related to the collection of uncertainties for certain customers. Our overall operating profit for the fourth quarter with both segments was $14.6 million or 39% of revenues compared to $3.3 million or 17% of revenues in the fourth quarter last year. Our tax expense for the quarter was $4.5 million; that's an effective rate of about 31%. That compares to roughly $1 million or a 37% effective rate in the same quarter a year ago. Now our effective tax rate in this quarter is lower than the U.S. statutory rate of 35% primarily due to the effect of lower tax rates and foreign jurisdictions. Our fourth quarter EBITDA was $22.5 million or 61% of revenues. This compares to $9.1 million or 46% of revenues for last year's fourth quarter. Our adjusted EBITDA in the fourth quarter, which excludes stock-based compensation, was $22.7 million against 61% of revenues compared to $9.2 million or 47% of revenues for the same period last year. But please keep in mind that EBITDA and adjusted EBITDA are non-GAAP measures and are reconciled to reported income and cash flow provided from operating activities in the financial tables in yesterday's earnings release. Overall in the quarter, we generated net income of $10.2 million or $0.77 per diluted share. This compares to a net income of $1.8 million or $0.17 per diluted share in the last year's fourth quarter. Now finally, let me make just a few comments about our financial position and then I'll turn the call back to Bill. During fiscal 2012, we acquired about $68 million of new lease pool equipment. This included Sercel 428 land recording systems, DSU3 component land recording systems, UNITE cable-free systems, downhole seismic equipment and additional marine equipment. This is a substantial increase over the prior year's equipment purchases, which totaled about $31 million. Our financial liquidity position remains solid. We continue to generate good cash flow from operations, which amounted to almost $36 million in fiscal 2012. As of year end, we had over $41 million in working capital, cash and cash equivalents of over $15 million, which included some restricted cash. And as of January 31, we had about $12.6 million outstanding in our $35 million revolving credit facility. With our solid liquidity position, strong balance sheet and credit capacity, we believe that we remain in an excellent position to further capitalize on market opportunities as they arise. And with that, I will turn it back to Bill.

Thanks, Rob. I'll say it again; we're very pleased with our record fourth quarter and fiscal 2012 performance. Over the past 2 years, we've implemented a strategy to increase the size and breadth of our lease pool, expand our geographic footprint and improve asset utilization. That strategy combined with an improving global seismic market continues to produce tremendous benefits. With over 70% of our revenues generated outside of the U.S., our financial performance is not totally dependent on North American natural gas prices. West Texas Intermediate and Brent crude prices are over $100 a barrel, and we anticipate continued strength in the demand for seismic acquisition equipment in both North America and the international markets. Our favorable outlook for our fiscal 2013 is driven by the growing demand for oil in both developed and emerging economies, increased CapEx programs by the major independent IOCs, NOCs and the impact of oil prices on oil prices have continued political instability in several oil-producing areas. In addition, the market for natural gas outside of North America creates some really intriguing possibilities. Last year's CapEx of $68 million was a reflection of our confidence in the expected performance of our business. We do not have a specific CapEx plan for fiscal 2013, as we tend to be more reactive to the market conditions. However, we currently expect to add between $35 million and $40 million in new lease pool equipment in the current fiscal year. Subsequent to January 31, we've already spent about $14 million on additional equipment and with those purchases, we currently have more than 220,000 land channels in our lease pool as well as new marine equipment, downhole seismic tools and a variety of other supporting peripherals needed to operate a complete land or marine seismic acquisition operation. We continue to see steady activity in the oil and liquids-rich plays of the North American land market. Our marine leasing business, which has had a record year, is likely to see this trend continue driven by healthy E&P spending and renewed activity in the Gulf of Mexico. Internationally, demand for land seismic acquisition continues to increase in Latin America, Europe, Pacific Rim and North Africa. As a result, we continue to expand the geographic breadth of our operations by establishing operating facilities in new locations as conditions warrant. Our most recent expansions in Colombia, Hungary and Singapore are contributing materially as we move into fiscal 2013. We think that Europe, with its shale play activity, has the potential to become an increasingly important part of our worldwide operations, and it should allow us to expand our reach in Eastern Europe, North Africa and the Middle East in a much lower operating cost. The expansion of our operating facilities in Singapore not only allows us to more effectively address the marine oil market, but it also provides Seamap with additional resources and capabilities. South America will continue to be a very important area for us, and our expanded facilities and capabilities in Colombia provide us an ideal base from which to exploit these opportunities. Fiscal 2013 has started well for us. Seamap entered the year with a strong backlog and expectations for another record year. While the first quarter should be quite strong for Seamap, we may see some significant quarter-to-quarter fluctuations in their results due to our customers' delivery schedules. The winter season in Russia and Canada appear to be quite good for us on the land rental side, and activity in South America, the United States and Europe continues. Due to a very strong fourth quarter, we had to reposition a great deal of equipment early in the first quarter. Because of that and the timing for new projects, our first quarter could experience some softness relative to the first -- fourth quarter in certain geographic regions. Now let me just say that one more time, this is not a market issue, it's purely timing of projects and repositioning of equipment. We fully expect our first quarter results to be a new record, better than any previous first quarter. Looking at fiscal 2013, the fundamentals of our business are every bit as strong as we saw in fiscal 2012, and we're very excited about the future. Overall, we will remain ideally positioned to capitalize on the growing demand for higher resolution imaging requiring greater density and a need for substantially larger channel counts on each crew. We have the world's largest total lease pool of seismic equipment, strategically positioned across geographic areas that are projected to have high levels of seismic exploration activity on an ongoing basis. I'd like to close by talking about Mitcham's most important assets: Our more than 160 employees around the world. It's this group of talented, energetic and dedicated people who are truly the ones responsible for the success that we have enjoyed this past year and that we anticipate will help drive our future success. Without them, none of this would be possible. I want to thank each and every one of you for all your personal contributions. Alicia, that concludes our formal remarks, and we'd be happy to take any questions.

[Operator Instructions] Our first question is from the line of Veny Aleksandrov with Pritchard Capital Partners.

My first question is on the U.S. You had a very strong quarter in Q4. You're guiding to strength internationally next year, and you're saying that you're confident with the U.S., but what do you see in Q1? Do you any slowdown in activity?

As far as in the U.S., you mean?

As far as the U.S.

I think in -- as it relates to our business, I think we could see, as Bill said, some softness in the U.S. versus Q4 just because Q4 was so strong, and we had to reposition equipment coming off contracts in Q4. Having said that, I think we continue to see good activity in the U.S.

Thank you. And talking about Q1, I understand that you had some repositioning and some softness in some regions. But at the same time, you had 2 months contribution from Canada and from Russia from their winters. So cost will probably be a little bit up and some softness, but you have strength in these 2 regions. So can we think about at least flat results with Q4 and probably a slight improvement?

I'm sorry, I didn't hear the back end of the question.

Do we expect flat results in Q4?

Well as I said earlier, I certainly think we'll see another record first quarter. We did have to reposition some equipment, but we don't see -- we haven't seen much of a slowdown, Veny. And you're right, I mean, first quarter for us is -- starts February and March, and we're fully utilized in Russia and in the Canadian market. So we certainly expect to have a very good first quarter.

Perfect, just wanted to clarify that. And my last question is on the Seamap. You're talking about a very strong order book, and it's a combination probably of new equipment and some maintenance parts. Is this correct?

Actually, the order book is primarily for new equipment. As far as the backlog that we see going into end of the year, we really don't maintain much of a backlog for service or repair work. It kind of comes in as it comes in. So most of the backlog is for new systems.

The next question is from the line of Novid Rassouli with Sidoti & Company.

So a couple of questions. It seems like ever since you guys entered South America, demand has just been very robust. You've been continually adding channels. I think you're up to about 35,000 now. I'm just curious if you guys see a point of saturation or you could still take another 10,000, 15,000 channels. Just waned to get some color in that region.

Well, I can tell you when we started last March putting equipment in there, we thought 15,000 was a pretty good lick, but that didn't last long. As you said, we have about 35,000 channels there now. Most of that is in Colombia, but we also have some equipment in Brazil. We have some in other parts of South America. And I mean we've got some opportunities to add some more equipment. It could take, I think -- I think it takes some more equipment from us and maybe another 10,000 channels this year.

Okay. And how is Europe different than South America? I mean, could we see Europe mimicking South America? I know it's much earlier there in the cycle for them and they're just getting rolling, but I was wondering if you could give us kind of a time line of what we might see unfold in Europe.

Well, I don't expect to see the same rollout that we had in South America. I mean, there's still a lot of -- there's still a lot of lease sales and things going on in the shale plays. I don't -- I mean, we have -- we're fully contracting business out of there. We have about 10,000 channels that are either working or moving there. But I don't see that jumping up to be 35,000 or 40,000 channels in 1 year. I think over the next couple of years you'll see that, as there's more people entering that market over there. But I wouldn't expect that to happen this year all at one time.

[Operator Instructions] The next question is from the line of Georg Venturatos with Johnson Rice & Company.

Just wanted to touch a little bit on the Canadian and Russian winter season. If we can get a little more detail on maybe how many channels were deployed there, and just maybe some timing on when we really got that winter season kicked off and how long it might last?

Well, when is it going to start melting the snow? Actually, Georg, some of that equipment in Canada has started back. Russia we've not seen much come back.

There'll be some coming back in the next couple of weeks.

But we usually see the first 2 weeks of that where most everything starts moving back in the Canadian market, although we've contracted some work, some 15-day work and some 20-day work still towards the end of the season. But for the most part, we'll see that we had the advantage on some of that going out in January, maybe even some early in December or late in December. We ruled out January, but February -- certainly, February and March were full utilization months. And we'll see some of that -- we'll still see some utilization in April.

Okay, great. And just on channel preference and what you've seen from customers, has there been more of a desire for multi-component type channels with higher resolution in the shale plays? Or any particular increase over the last couple of quarters to cable-less channels that you have to reunite?

Well, we're seeing -- we're certainly seeing more of an increase or more requests for cable-free equipment. And DSUs, our digital sensors, may never fully utilize. And there's a winter in the Canadian tar sands and whatnot. So we see some requests for -- from the shale plays. Not -- didn't see a whole lot last year, a couple of big projects. One big project towards the end of the year. I would expect that the coming year we'll see more of that in the shale plays, or certainly we're hoping so.

Okay, great. And then lastly, just on Seamap. And you touched on this, just the slight downtick sequentially in margin. It sounds like that's mostly the lower proportion of revenue coming from the high-margin aftermarket business. How should we kind of expect that to look out to next year? I'd imagine we should see some fluctuations on a quarterly basis. But should we continue to expect maybe higher margins than what we saw in Q4?

For sure. I think if you kind of look at the overall yearly margins from last year, that'll give you pretty good guide to go with. It's just a product mix issue in a particular period. So overall, there's no fundamental change in the margin situation. So kind of look to the full year, that will give you pretty good guidance, I think.

[Operator Instructions] And the next question is from the line of Tyson Bauer with PTC capital.

Quick question. You talked about a strong Q1 for the Seamap sales. Have you made deliveries of systems or have planned deliveries of systems that you could elaborate on relative to what you delivered in Q4?

Without getting too specific, I mean, we certainly have made deliveries and have planned deliveries. I mean, we would expect Seamap to be every bit as strong in Q1 as Q4, if not more so.

Okay. Are you looking, as you enter into fiscal '13, a better backlog of systems on order than you started fiscal 2012?

Yes, most certainly we do.

And you talked about the Gulf of Mexico reinitiating activity. Any other particular areas or anything that you're seeing that's really driving that? And is this a multi-year growth cycle that you're seeing on the marine side?

Well, I think the -- let me answer that in a couple of different ways. I think as it relates to us particularly, the Gulf has not been a big contributor recently for obvious reasons. And I don't think it's going to make things go off the charts. So I think it's more widespread, and we're seeing that everywhere. And I think there a lot of trends in the marine seismic industry right now which are pretty positive. There's some new builds announced, issues about capacity shortage, things of that nature. So I think the outlook for the marine industry in general is definitely taking a big uptick in the last few months.

Okay. But no particular regions in -- that you'd highlight?

No, none that really overshadows another, really across the board.

There are no further questions at this time. I will turn it back over to management for any closing remarks.

Thanks, Alicia, and thank all of you once again for joining us on this call and for your interest in Mitcham. We certainly look forward to talking to you again after the conclusion of our first quarter.

Ladies and gentlemen, this does conclude the conference call. If you'd like to listen to a replay of today's conference, please dial (303) 590-3030 and enter in access code of 4522783. Thank you for your participation. You may now disconnect.