MIND Technology, Inc. (MIND) Q3 2014 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Mitcham Industries Third Quarter Earnings Call. [Operator Instructions] This conference is being recorded today, Wednesday, December 11, 2013. I would now like to turn the conference over to Mr. Jack Lascar. Please go ahead, sir.

Thank you, Damien. Good morning, everyone, and welcome to the Mitcham Industries Fiscal 2013 (sic) [2014] Third Quarter 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 via webcast by going to the Investor Relations section of the company's website or via a recorded instant replay until December 25. Information on how to access the replay was provided in yesterday's earnings release. Information reported on this call speaks only as of today, Wednesday, December 11, 2013, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay. Before we begin, let me remind you that certain statements made by management during this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and include known and unknown risks, uncertainties and other factors, many of which the company is unable to predict or control, that may cause the company's actual future results or performance to materially differ from any future results or performance expressed or implied by those statements. These risks and uncertainties include the risk factors disclosed by the company from time to time in its filings with the SEC, including in its annual report on Form 10-K for the year ended January 31, 2013. Furthermore, as we start this call, please also refer to the statement regarding forward-looking statements incorporated in our press release issued yesterday, and please note that the contents of our conference call this morning are covered by these statements. With that, I would like to turn the call over to Mitcham's President and CEO, Bill Mitcham.

Thanks, Jack, and good morning, everyone. I would like to thank you again for joining us today for our fiscal 2014 third quarter conference call. I'll begin by making a few general comments about the quarter. Rob will then discuss our financial performance in depth before I conclude with a discussion of our market outlook. Then we'll open the call for your questions. As anticipated, we saw sequential improvement in our third quarter core leasing revenues over the second quarter of this year, mostly due to continuing improvement in Europe and increasing activity in the downhole business. However, leasing activity in the quarter remained relatively weak overall and below the third quarter of last year. As we discussed in our second quarter call, this was expected. Rental activity in the U.S. land market continued to be very weak. When we're still seeing capital budgets in the U.S. being allocated to developmental drilling rather than seismic exploration, which was reflected in lower U.S. land results both sequentially and year-over-year. Now there are some glimmers of hope in this area for the next year, however, but I'll talk about that in a little bit. So Latin America continued to be affected by the project delays that we've mentioned in our previous calls. However, we now see definite signs of activity and the region is picking up. Some of the delayed projects have finally started. We've shipped some equipment. New jobs are being scheduled. And we're bidding on some additional opportunities. As we've mentioned on our last call, we have quite a bit of equipment there already and we are adding new wireless equipment to address specific customer demands in that region. The pickup in European seismic activity we saw during the second fiscal quarter continued into the third quarter, and we're seeing healthy activity levels in Europe as bidding in the region has been very brisk. In Russia and Canada, there was very little activity in the third quarter since the winter season typically spans the fourth and first quarters. We expect to see some improvement in Russia compared to last year as activity appears to be somewhat stronger. In fact, we are repositioning some equipment from Hungary into our Russian division for the upcoming winter. In Canada, however, we expect the winter season to be generally weaker than last year, given the visibility we now have and the fact that some oil and gas companies have delayed or canceled projects. However, in response to some specific demand, we have recently deployed newly purchased wireless equipment in Canada, which should contribute significantly to our next 2 quarters' results. The marine leasing business continues to be relatively slow but improving, due to the consolidation and reorganization issues going on amongst some of the Marine contractors, which we mentioned last quarter. Although these issues have caused temporary surplus of marine equipment on the market, we are seeing the business slowly recover; and ultimately, once the surplus equipment has been absorbed, the consolidation should benefit the overall marine market and our marine leasing business. One area of strength during the quarter was in downhole seismic activity. This was -- there was much improved utilization of our downhole and vertical seismic profiling equipment during the quarter and we're seeing improving demand for production and reservoir monitoring equipment in the U.S., Canada, the Middle East and Latin America. Another positive area for us was hydrographic and oceanographic equipment sales from SAP, our division in Australia. SAP is enjoying a very strong year, with sales in the Indonesia, the Philippines and China. Turning to our Seamap business. There were no major system deliveries in the quarter, so sales were comprised of other equipment sales and aftermarket business. We had 1 GunLink 4000 scheduled to ship during the quarter. However, it was -- during the third quarter. However, it was delayed by the customer due to vessel availability issues. So we do expect to ship at lease 1 GunLink 4000 and BuoyLink system to a new-built vessel during the fourth quarter. Now with that, I'll turn it over to Rob, who will give you a detailed review of our financial results.

Okay. Thanks, Bill, and good morning, everybody. I'll begin by discussing the top line of each of our 2 segments, which are Equipment Leasing and Seamap; and then follow with a discussion of the profitability of each of the segments; then conclude with a discussion of our consolidated results and the financial position. First, let me review our Equipment Leasing segment, which includes not only core leasing business, but also non-Seamap equipment sales, such as occasional sales of our lease pool equipment, new seismic equipment we acquire from third parties, sales of heli-transport equipment and sales of new hydrographic and oceanographic equipment from our Australian subsidiary, SAP. Our core leasing revenues in the third quarter were approximately $8 million compared to $11 million in the third quarter a year ago. Now that's down 29%, primarily due to continued low levels of activity coming from Latin America and U.S. land markets, as well as the marine leasing business. But these declines were partially offset by higher land leasing revenues in Europe and Pacific Rim, as well as higher revenues from the downhole business. As Bill said, the Latin American market is showing signs of improvement, which should have a positive impact on our fourth quarter results. The marine leasing business in the U.S. land market is going through challenging market conditions, although we expect the problems affecting the marine leasing business to improve relatively soon. We certainly expect sequential improvement in Canada and Russia over the next few quarters as we move into the winter seasons there. The new wireless opportunities in Canada, as Bill mentioned, should make a significant contribution. However, it's uncertain at this time if this will completely offset the relative weakness we see in Canada compared to last year. Moving on to lease pool equipment sales, revenues were $3.2 million in this quarter compared to $1.9 million in the same quarter last year. Other equipment sales, which include sales from SAP and heli-picker equipment, were $3.7 million compared to $1.1 million in the same quarter a year ago. This revenue increase was driven by sales of SAP and hydrographic and oceanographic equipments to customers in China, the Philippines and Indonesia. As Bill said, SAP is having a very successful year in these areas. Turning to our Seamap segment, which designs, manufactures and sells a variety of products and systems used in marine seismic applications, Seamap revenues were $5.5 million compared to $4.5 million in the third quarter a year ago. And this quarter was impacted by the lack of any large system deliveries due to customer shipment schedules. This was partially offset by sales of aftermarket equipment, replacement parts, engineering services, and ongoing support and repair services. As Bill touched on earlier, an expected third quarter GunLink 4000 shipment was delayed as the customer's vessel was not yet ready to receive the equipment. At this point, it appears that this particular project will not be delivered until the first quarter of next year. However, we do expect to deliver another GunLink 4000 and BuoyLink system to a new-build vessel in the fourth quarter. We also expect to deliver some equipment related to the PGS SourceLink product in Q4, although this will be a small system and result will command lower pricing. Now let me discuss the profitability of each of the segments. Gross profit from our equipment leasing segment was essentially flat between the third quarter of fiscal 2014 versus the third quarter last year with just under $2 million. The gross profit margin of the leasing segment for both periods was slightly above 13%. Gross profit in the third quarter of our Seamap manufacturing business was $3 million compared to $2.8 million a year ago. This represents a gross profit margin of 53% and 58% respectively. Our overall gross profit in the third quarter was $5 million compared to $4.4 million in last year's third quarter. This represents an overall gross profit margin of 24% this year compared to 23% a year ago. And now let me touch on just a few other items in our P&L. Our general and administrative expenses in the third quarter were $6.1 million compared to $5.9 million in the fiscal 2013 third quarter. That reflects slightly higher personnel cost and lower overhead absorption at Seamap. Also in the third quarter, we had a provision for doubtful accounts charge of $1 million, which is primarily related to accounts in Latin America and Southeast Asia, and this negatively impacted our EPS by about $0.07 a share. Also in the third quarter, we had a $517,000 foreign exchange laws, which [indiscernible] our foreign subsidiaries, resulting from the strength in U.S. compared to local currencies. Our tax provision for the quarter was a benefit of $771,000, which is an effective rate of about 25%. We expect our full year effective tax rate to be about 22%. Our third quarter EBITDA was $4.6 million or 22% of revenues. This compares to $6.4 million or 35% of revenues from last year's third quarter. Now please keep in mind that EBITDA is a non-GAAP measure and is reconciled to reported net income and cash provided by operating activities in the financial tables in yesterday's press release. Overall, we reported a net loss for the third quarter of $2.6 million, or $0.21 a share, compared to a loss of $1.2 million or $0.10 a share in the third quarter a year ago. Now if you exclude the impact of the charge for doubtful accounts we mentioned earlier, the net loss would have been $1.7 million or $0.14 a share in the third quarter this year. Let me make just a few comments about our financial position, then I'll turn the call back to Bill. In the first 9 months of this fiscal year, we purchased roughly $15 million in new lease pool equipment. As you may have gathered, based on our earlier discussions of new wireless equipment deployments in Latin America and Canada, we purchased, subsequent to the end of the third quarter, about $29 million of new wireless recording equipment. Based on these and other equipment purchases, we're now increasing our capital expenditure guidance for the full fiscal year to a total of about $45 million. Now we had not anticipated these recent purchases. But as Bill indicated, we had a request related to specific projects. We think these additions will allow us to expand some customer relationships, present the opportunity to address additional markets. We expect to fund these purchases with a combination of our cash on hand and borrowings under our revolving credit facility. Mitcham's overall financial and liquidity position remains very strong. At the end of the third quarter, we had over $56 million of working capital, which included cash and cash equivalents of $24 million. We generated about $19 million in cash flow from operations in the first 9 months of fiscal 2014. As of October 31, 2013, we had exactly $3 million outstanding under our $50 million revolving credit facility. Also during the third quarter, we purchased 45,000 shares of common stock under our share repurchase program. These were bought at an average price of $14.91. And with that, I'll turn things back over to Bill.

Thanks, Rob. And based on a sequential revenue improvement we saw in our core leasing business in the third quarter, the progress in the Latin America and the anticipated seasonal activity in Canada and Russia, we expect a healthy sequential increase in our leasing revenues for the fourth quarter over the third quarter. While the U.S. market remains soft, we do have a specific project underway in the U.S. that will have a very positive impact on our results in the region for the fourth quarter. And although it's still early days, a number of our customers have told us they expect an increase in activity in the U.S. during calendar 2014. The international market holds considerably more promise for us in the near future. Europe is showing marked improvement over last year, although we anticipate a pullback in Europe's Q4 revenues due to normal seasonal patterns. For the coming year, we expect our European business to benefit from some projects that should begin in the spring. North Africa and the Middle East also may yield some incremental opportunities. In the Pacific Rim, the Australian land market continues to perform well. We have some projects there, as well as in Indonesia that are scheduled to begin in the fourth quarter. With Latin America, activity finally showing signs of improvement coupled with a large backlog and greater amount of wireless equipment headed there, we expect increased revenues in this region in Q4 as well as next year. As we've said in the past, Latin America represents one of our best growth markets, and once work restarts and projects are underway, the region should once again become a strong revenue contributor. We expect a healthy upcoming winter season in Russia. But as we mentioned earlier, Canada remains uncertain, with generally weaker activity levels and some job cancellations. We still -- we have or we see some specific -- certain specific new opportunities in Canada, including those related to our new purchases of wireless equipment that will have a positive impact on at least the next 2 quarters. We're very excited about the opportunities that these recent purchases have opened up for us. Not only are we able to address new specific projects in Canada and Latin America, but we also believe there are opportunities to expand our relationships with existing customers and attract new customers in a variety of geographic markets. While [indiscernible] marine leasing activity is still being hampered by an oversupply of equipment, driven by contractor or consolidation, there does seem to be slow, steady improvement in that business. We expect this to continue, and once conditions stabilize, marine leasing should resume growing at a healthier pace. But managing a cyclical business is not only about lessening the effects of a downturn but also about positioning ourselves for the eventual upturn. We continue to rationalize and rebalance our lease pool to better position ourselves for current and future market trends, and we believe this will enable us to take advantage of more opportunities in the coming year. Our recent acquisition of new wireless recording equipment allows us to meet the specific demands of our customers, as well as expand our relationship with existing and new customers in different regions. Many marine contractors are indicating what they believe to be a near-term oversupply of capacity and softening of pricing. However, the long-term outlook is much more positive, and for Seamap, the outlook remains very favorable as we expect to benefit from upcoming licensing grants throughout the world, along with the addition of new vessels coming online. We have GunLink and BuoyLink systems delivery scheduled from fourth quarter and beyond. In the fourth quarter, we will deliver equipment under our new arrangement with PGS, and we expect to see more benefit from this relationship in fiscal 2015, as we begin installing our PGS SourceLink into their fleet of seismic vessels. SAP success in the hydrographic and oceanographic market this year is very encouraging. The market for these products -- for those products in the Pacific Rim and beyond seems to be expanding, and we're very optimistic about our prospects in this area. -- for our business for the coming year. So in summary, we expect to see a sequential improvement in our fourth quarter results. Projects are underway in the Asia-Pacific region, and the longstanding issues that have plagued activity in Latin America are decreasing. Downhole activity is improving and marine leasing appears to have bottomed. Based on all these factors, we anticipate a much improved results over the next couple of quarters. Damien, that concludes our formal remarks, and we'll be happy to take any questions.

[Operator Instructions] Our first question is from the line of Ryan Fitzgibbon with Global Hunter Securities.

I'll start off with a first question on the wireless purchase. I believe that's right around 49,000 channels. Can you help us with really 2 things; one, where is that equipment being dedicated; and then two, is it currently working as of today?

Well, as we said, we've got a big group of equipment or a large channel count going to South America and channel count going to Canada. So is it working today? It's on the way to working... It's not -- it's contracted, but we are not -- we haven't invoiced ... [Multiple Speakers ]

So it's not shooting yet.

Okay. So we should think of kind of the revenue impact from the investment helping you maybe a little bit later on in fiscal Q4 and then the real impact is early next year?

Yes, we'll see part of that stuff in Q4. And certainly, the Canada stuff will get some Q4 impact. And then Q1, the stuff going to South America, may or may not get any Q4 impact, just depends when it gets out in the field.

And then where does the total channel count stand today for Mitcham? And then for those channels, how many are wireless?

Is that a trick question?

Well, don't hold me to this, but let see. It must be -- we must be on 260,000 or so right now, something like that.

260,000...

Yes, something like that.

6,7, 8, 9.

Wireless is 15-plus -- 5 plus 30..., so 55,000 -- 55,000, 60,000.

Second question from me is on Latin America. It's obviously been a challenging market over the last couple of years due to the permit issues and whatnot. Can you help us a little bit with maybe quantify and size the impact of the new jobs that have started and how you see that market actually progressing, maybe over the next 6 to 12 months?

We're stumbling here. So I mean, we're talking about large channel count jobs, meaning 5,000 to 10,000 channel jobs that either have started or are starting. And we see lots of jobs of that magnitude going into next year. But -- I will caution you, but it's still -- those issues are lessening. They're not gone away, though. So there still are jobs that are impacted by all these "permitting issues" that we are seeing some of them resolve themselves in some regions in Latin America, or in Colombia even. We're seeing that the problems not as great as they have been.

One of the things that we've seen, Ryan, is that when we first arrived a few years ago, most of the jobs that we were involved in were 2,000, 3,000, 4,000 channels. They were all cable systems. Now you look at wireless and we've got a 10,000-channel job starting. Oh, that's not true. Well, we got 15,000 channels. So that total job now is -- is around 30,000 channels. Some other jobs we're seeing are 8,000 to 10,000. So they're taking advantage of the wireless, and the norm of 2,000 to 4,000 now seems to be more in the 8,000 to 10,000 because of the wireless. Well, it's certainly easier to get around with the wireless equipment, and so I think we're seeing some bigger opportunities for us, larger channel count opportunities.

That makes sense. But, I guess, to that point, Bill, have any of those jobs actually begun so far in fiscal Q4, or are those just what you see on the horizon for next year?

We have jobs actually we're building today.

Our next question is from the line of Veny Aleksandrov with FIG Partners

My first question is, I'm trying to figure out Canada and Russia together. So Russia is going to be stronger, but Canada is going to be weaker. But then there is wireless equipment, so this is a positive. When we think about year-over-year -- and I know that it's too early and you still have to probably sign some contracts for Canada. But what's your take? Is it going to be flat to Russia plus Canada year-over-year, or a little bit worse or a little bit better?

Well, that's a tough one, Veny. I think, it could be flat year-over-year. It could be up a bit year-over-year. I mean, when you say there is weakness in Canada and there is, as you sit here today, certainly Canada is looking, absent from the new opportunities from the new wireless, is looking much weaker than last year. But there are still a variety of projects that are still out there that haven't been either led [ph] or decided yet. So there certainly is a possibility that we see a lot of uptake here in the last 30, 60 days, even as we get into January, February and see some work get out from the fourth quarter. So it's really, really difficult to tell right now. I think generally, we think it's flat to -- if it's up, it's up normally, I think.

Okay. My next question. You talked a lot about wireless and wireless going to Latin America and to Canada and that it should have meaningful impact. Are the economics different on a wireless contracts that they are on the wireline?

No, not really. I don't think so. No, from our standpoint, not materially different.

Okay. It's the number of channels that you guys always [ph] think as very positive figure.

Right. As Bill said, with wireless, you're seeing -- at least in Latin America, at least, you're seeing the channel count expand pretty dramatically because of the ability to do things with wireless where it didn't make as with cables there. So that certainly has an impact. But I think the overall economics aren't materially different.

Okay. And then my last question on the Seamap side. The sales slipped to the right, but you still had a very good quarter with aftermarket and maintenance and things like that. Was there anything big that you can point to, or [indiscernible] trend?

No, it's just kind of -- the general stuff, again, is there is nothing really large or significant in the quarter, just kind of the normal recurring stuff. Now is that a run rate going forward for the baseline stuff with our system sales? It is hard to say that, because there are still ups and downs for white collar sales and umbilical terminations and things like that. But clearly, we're seeing the baseline of business creep up as the installed base continues to expand.

Yes. There wasn't a big vessel and something stock plant and you had [indiscernible]..

No. No, it was not. No.

[Operator Instructions] Our next question is from the line of Gregg Hillman with First Wilshire Securities Management.

Bill, can you talk about just, I guess, at what price of oil does it affect your company or your business? And I was just wondering if just the improvements in technology bringing on additional supplies of natural gas and oil, in particular, horizontal drilling in that big ship from shale that supposed to cap remote natural gas deposits and compress them right there on the spot. But what's your take on that? And just the price of oil, whether with all the new supply in the United States where the price of oil could head toward $60 a barrel sometimes in the next 5 or 6 years?

Greg, that's a great question for my crystal ball. And I'm not sure that even it has the answer. Frankly, I don't know where that number is. I mean, we've seen that number -- over the past few years, we've seen it go from $140 to $35 and back into the $90s, and I think it's in around a $100. I don't know at what point people -- people being the oil companies say, "That's not it. They're always going to be in the oil and gas business." So does it -- when you look out there at the cancellations today, the cancellations in Canada, you wonder what the hell are they doing. Oil is $100 a barrel. Gas is whatever gas is and they're still canceling projects. You only have a short window every year in Canada, why would you not take advantage of it? I don't know the answer to that.

But in terms of this, what price do you think it affects you or the acryling [ph] activity? What's your sense of what price of oil?

Gregg, this is Rob. And that's really tough for us to know, because it's really what affects of oil companies; what's their hanging point; where they stop their exploration or reduce expiration. That's what really matters. So it's really their perception for things - more than the absolute process a point for profit of oil at any point in time. Oil prices are different in different parts of the world, and I think you're certainly seeing lower pricing in the U.S. right now because of supply issues. But, I think, the worldwide price of oil and gas for sure is very different. And again, when you work 80% plus outside the U.S., so I think that's probably more important point for us, what are the [indiscernible] measures and the national oil companies saying? And again, we have not seen them change their work plans. Do we have specific projects that were later canceled? Sure. But I don't think it changes overall the long-term picture.

Our next question is from the line of Joel Luton with Westlake Securities.

Could you give a little bit more color on what you think is going on in the U.S. markets and any sense of timing when that may start to improve?

No. Joe, I mean -- any other questions? I mean, what we've said in the past and what we -- I mean, when we kind of talk to the people that we know in the oil companies and -- I mean, it looks to us certainly like a lot of that money that they've had, a lot of funds going into seismic has been diverted into completions, more completions. I think when you look at the cost of a 10- or 12-stage frac, that's not cheap and somewhere -- and that money has to come from somewhere. And it cost X number of dollars to drill every well but, it cost a heck of a lot more to -- for a 6 or an 8 or a 10-stage frac than it does just to complete the -- a single completion. So I think we see some of that money being diverted. When does it come back come? I don't know. We certainly over the past few -- I'd say the past few sales meetings, the last month, 1.5 months, we've had a number of inquiries coming out of the U.S. But everything, again, is for first and second quarter of next year, not a whole lot for -- I say the first and second quarter. You talk about first quarter inquiries then you're probably talking about second quarter awards. So -- I mean, although for us it's certainly a pickup in our quoting, it hasn't turned into any jobs yet.

Okay. And one more question. This year, including equipment purchases, you've got a CapEx of $45 million. What -- any expectations for going into '15?

Yes. I mean, at this point, yes, I mean, we don't have any large purchases scheduled for next year. So we expect it to come off that a bit as we sit here today. But it's very early days on that right now to -- [indiscernible we're going to evaluate it as we go forward the next few weeks.

[Operator Instructions] I show there are no further questions at this time. I'd like to turn the conference back to management for any closing remarks.

Well, again, we'd like to thank you for joining us on this call and for your interest in Mitcham. We look forward to talking to you next year, I guess -- in 2014. And with that, we wish everybody a Merry Christmas, Happy New Year. And see you, talk to you soon. Thank you.

Ladies and gentlemen, this concludes the Mitcham Industries Third Quarter Earnings Call. Thank you for your participation. You may now disconnect.