MIND Technology, Inc. (MIND) Q3 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to the Mitcham Industries' Third Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Karen Roan of Dennard Lascar. Thank you, you may begin.

Thank you, Jesse. Good morning, and welcome to the Mitcham Industries' Fiscal 2015 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 the call over 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 by webcast by going to the Investor Relations section of the company's website at mitchamindustries.com or via a recorded instant replay until December 24. 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 10, 2014, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. Before we begin, let me remind you that certain statements made by the 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, 2014. Furthermore, as we start this call, also please refer to the statements 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. Now I would like to turn over the call to Mitcham's President and CEO, Bill Mitcham.

Thanks, Karen, and good morning, everyone. I think Karen's got a better part than we have. We'd like to thank all of you for joining us today for our fiscal 2015 third quarter conference call. I'll begin by making a few general comments about the quarter and our markets. Rob will discuss our financial performance in detail, and at that we'll open the call for questions. We are very pleased that we have delivered both year-over-year and sequential double-digit growth in our leasing revenue business despite a very soft seismic market. Our U.S. leasing revenue results were up strongly from a year ago. You heard that right, the U.S. leasing. U.S. leasing revenues results were up strongly from a year ago. And it was the single-largest contributor to our third quarter leasing revenues. This improvement was driven by a large job that we began and completed in the third quarter. However, the U.S. market is still weak with limited visibility, and we think there's still an excess of capacity in this market. There are pockets of opportunity in the form of pending projects, very sporadic and I can -- you could bet that we are outsizing every one of them. The E&P companies have -- are continuing to emphasize return on investment and cash flow generation in the face of lower commodity prices. Now we're seeing more on the development and less and less on exploration activities. We think the recent volatility in crude price oil -- in crude oil prices will likely exacerbate this. Marine activity remains very subdued, although we will see some of the typical seasonal fall and pickup. We do have some opportunities in Canada and Alaska for the winter that may contribute to our results, but the overall market in Canada this winter is probably weaker than last year. There have been some projects canceled recently at this point. Actually, we had trucks in our yard being loaded with equipment to go to the field, and they were stopped in our yard and lowered. Our international markets performed well, and we continue to expect those markets to be key contributors to our leasing business in the first -- in the fourth quarter in the coming year. Price was up substantially from a year ago, as we have been able to obtain some early work ahead of the coming winter season. We've been able to navigate the sanction issues at least on the land side and everything to import additional equipment into Russia for the coming winter season. Based on orders currently being processed, we expect Russian activity in the winter season to be solid, the results were in line or slightly better than last year. So far, the drop in the oil prices and the decline in the rubles have not impacted our upcoming project. We're certainly keeping an eye on them right now. As we mentioned last quarter, the sanctions have had a significant impact on our marine leasing business. In our Latin American business, you may recall that 2 projects in our second quarter were delayed due to permitting issues at the local levels. Both of these projects began in the third quarter have now been completed, bolstering our revenues for the region to more than double from a year ago. Despite an improved third quarter and a longer-term positive outlook, we expect some sequential moderation in our Q4 revenues from that region. There are some sizable jobs coming in for bid in the region, but activity is sporadic and unpredictable as permitting and regulatory challenges continue. While we're here at Mitcham have seen some improvement in Colombia, it remains a very difficult operating environment for our customers. So it is just getting hammered by the oil companies. Our European leasing business continued to produce steady growth in the quarter, mainly due to 2 large jobs, one of which will continue partially into the fourth quarter. Activity in Europe continues to be healthy, and there are still good opportunities, particularly in Eastern Europe. However, we expect our Q4 European results to be slightly lower than Q3 as activity in that region remains slow during the winter months. We also saw improved activity in the Asia Pacific region and the Middle East. In the Pacific Rim, performance is dictated by the timing of projects, and it appears that Q4 revenues from that region may be lighter than they were in Q3. However, the longer-term characteristics of this region remain intact. Marine leasing business continues to be negatively impacted by the ongoing oversupply of seismic equipment in the market and industry consolidation. The 3 largest marine contractors have all recently announced plans to reduce the size of their fleets, which will likely contribute to even more oversupply in this situation. While we see some bid activity, we expect initiatives in the markets to be difficult for the rest of this year and well into fiscal 2016. Our Seamap business improved year-over-year, but there were no major system deliveries in the quarter. The sales were comprised of spare parts in aftermarket business. We mentioned last quarter that the weakness in the marine leasing market could cause changes in our customer delivery plans for our Seamap products. We currently anticipate system deliveries that we have expected from the fourth quarter to be delayed until at least the first half of fiscal 2016. However, no orders have been canceled at this time, and we have had no indication from our customers that, that would happen. So we still very, very -- feel very confident that it will get delivered and just need a time frame it moves out. Our Digishot Sleeve gun product lines, which we acquired in the second quarter, have continued to perform in line with our expectations. And we expect they will contribute significantly in the fourth quarter results. So to summarize, the overall seismic market remains soft and uncertain. However, there are opportunities in new regions around the world and in new regions of the world. But they're sprag and they're hard to find. And as I said before, we're looking at every nook and cranny. We have seen a number of large projects recently and that trend appears to be continuing. This makes forecasting our leasing pool a little more difficult with a smaller number of larger contractors. Conditions remain challenging due to low commodity prices. In fact, the oil and gas companies are focusing on managing cash flows. At this point, we expect our fourth quarter equipment leasing revenues to be similar to the third quarter. However, please keep in mind that the timing of the kickoff of contracts, particularly of the Canadian and Russian winter seasons, can have a significant impact on our leasing revenues, both positive and negative. This industry slowdown in seismic market is not the first that we've been through, and it certainly won't be the last. We managed through a challenging time by redeploying the equipment to higher use areas but the world and opportunities to cut the cost were improving, which will position us for the eventual return and rebound in seismic exploration. And believe me, there's always been a rebound. We will continue to focus on serving the most normal active markets with an eye towards gaining incremental business whenever and wherever those opportunities arise. With that, I will turn over the call to Rob, who will give you a detailed review of our financial results.

Okay. Thanks, Bill, and good morning, everyone. Let me begin by discussing the top line of each of our 2 segments, which are equipment leasing and Seamap. Then I'll follow with a discussion of the profitability of each of the segments and conclude with a discussion of our consolidated results and financial position. First, let me talk about the equipment leasing business. Our core leasing revenues for the third quarter were $14.3 million, that's up 81% from last year's third quarter and up 74% sequentially from the second quarter. All regions, with the exception of Canada, posted year-over-year and sequential gain. As Bill said, the largest-single factor contributing to the increase was a sizable third quarter job in the U.S. that will not impact the fourth quarter. Similarly, there were some significant jobs in Latin America, which will not continue into the fourth quarter. Leaving the leasing equipment sales -- lease equipment sales, revenues were $475,000 this quarter compared to $3.2 million in the same quarter last year. Our other equipment sales, which include heli-picker equipment sales from our Australian subsidiary SAP, $2.4 million this quarter compared to $3.7 million in the same quarter a year ago. And now turning to our manufacturing business, Seamap. Revenues there were $5.8 million in the quarter compared to $5.5 million in the third quarter a year ago. As Bill said, there were no large system deliveries during the quarter due to customer shipments schedules. So Seamap's revenues declined solely and sales from aftermarket equipment, replacement parts, engineering services and ongoing support and repair services. As Bill mentioned, our recently acquired product lines didn't contribute as much as we expected, boosting operating as much as we thought they would. Let me now discuss the profitability of each of the segments. Gross profit for our equipment leasing segment was $4.1 million versus $2 million in last year's third quarter. This resulted in gross profit margins of 24.1% and 13.3%, respectively. Sizable improvement in the profitability was primarily driven by higher leasing revenues and a positive operating leverage inherent in the high fixed cost structures that we have. This higher profitability was partially offset by higher direct cost related to equipment leasing. These costs increased to $2.3 million in the third quarter of this year from $1.5 million to last year's third quarter with the cost of subleasing certain equipment, as well as cost to reposition our equipment from one geographic region to another. As Bill alluded to earlier, we have responded to a significant amount of reposition, once you get that [indiscernible], a response to shift in demand. And most of this movement involved moving equipment from Latin America to Europe or Russia. Additionally this quarter in a couple of instances, we needed to supplement our existing inventory of equipment in order to completely meet our customers' demand and ensure that we're able to utilize the existing equipment that we had. Now product reach, the amount of purchase this additional equipment. However, given the current uncertainty in the seismic industry, we thought it more prudent to temporarily sublease the equipment even though it had a negative short-term impact on our results. And moving on to gross profit in the third quarter of our Seamap manufacturing business was $2.8 million compared to $3 million a year ago. This represents gross profit margin of 49% and 53%, respectively. Overall, gross profit in the third quarter was $7 million compared to $5 million in the last year's third quarter. This represents an overall gross profit margin of 31% compared to 24% a year ago. Now let me just touch on a few other items on the P&L. General and administrative expenses for the third quarter were $6.2 million compared to $6.1 million in the last year's third quarter, down from $6.7 million in the second quarter of this fiscal year. The third quarter fiscal 2015, we had other expenses totaling about $387,000. Now this consisted primarily of $900,000 in foreign exchange losses that are offset by miscellaneous gains, including the favorable settlement of contractual obligations. Of the foreign exchange losses incurred at our foreign subsidiaries and branches are due to the strengthening of the U.S. dollar against those currencies. In the quarter, we had income tax expense of $57,000 despite having a loss before income taxes. This was due to the effective of foreign withholding taxes that we're not able to credit against other income taxes. Overall, we reported net loss for the third quarter of $397,000 or $0.03 a share. That compared to a net loss of $2.6 million or $0.21 a share in the third quarter a year ago. Keep in mind, however, that last year's third quarter did include a provision for of $1 million, which had about a $0.07 EPS effect on our bottom line. In the third quarter this year, adjusted EBITDA was $9.4 million or 41% of revenues. That compares to $4.8 million or 24% of revenues in last year's third quarter. But keep in mind that adjusted EBITDA is a non-GAAP measure and is reconciled to reported income and cash provided by operating activities in the financial tables in yesterday's press release. As we mentioned last quarter, with the ongoing challenges in the seismic industry, we continue to look for ways to implement some cost cutting in our operations. However, there's a large fixed cost component in our structure that limits our latitude in taking aggressive actions during market downturn. Now I'm going to make a few comments about our financial position, and then we'll take your questions. In the third quarter, we did not make any significant additions to our lease pool. Through the first 9 months of the fiscal year, we purchased under $11 million in new lease pool equipment. For the full year, we now expect our capital expenditures to total about $12 million. This is a reduction from our previous guidance of $15 million due to the ongoing weakness of the [indiscernible] market. During the third quarter, we purchased 693,700 shares of our common stock as a part of our share repurchase program, which completed the 1 million share program previously authorized. Our total cost for these 1 million shares was about $12 million. We continue to believe that the repurchase our own stock is a good use of capital, especially the prices we've seen recently, which is less than tangible book value. So accordingly, we expect our Board of Directors will consider authorizing additional purchases in the near future. Mitcham's overall financial and liquidity position remain strong. At the end of the third quarter, we had over $53 million in working capital that included cash and cash equivalents of $9.1 million. We generate $16.5 million of cash flow from operations in the first 9 months of fiscal 2015. And as of October 31, we had approximately $24.5 million of unused capacity under our revolving credit facilities. As Bill said in his comments, now this is not the first downturn we've seen. We feel that we're well experienced and well equipped to deal with the current market conditions. As just mentioned, we have a strong financial position and good liquidity, which provides us with a great deal of flexibility. Our peak conditions is such that we're overseeing or experiencing offering opportunities for those who are able to take advantage of them, and we think we're in that position. Maximizing our return on capital and return to shareholders over the long term remains our key focus. And Jesse, with that, I think we're ready to take any questions.

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

My first question is on Russia. So you said that you expect to go to into there. Can you talk a little bit more about did you have any impact from the embargo and you talk about foreign exchange losses and the majority of this coming from Russia?

Sure. So as far as the embargo and the sanctions, they've had an impact and there is a limit or some restrictions on what we can move in there, especially on the marine side. However, we've been able to -- of course, we already had equipment in Russia, so that wasn't affected. But there's other equipments that we had in other parts of the world, which weren't impacted by the sanctions. There's forward to be able to move additional equipment in the country and to serve the contracts. So that's the reason we think we'll be at least as good if not a bit better than last year. From a foreign exchange standpoint, actually, most of the losses were not coming out of Russia. But most of the losses that we incurred are a result of items, which are not because of the weakness of the installer, but because of the foreign currencies such as Colombian pesos, such as the euro, even, the Australian dollar weakening. And since we have -- our foreign subsidiaries have certain obligations stated in those currencies that has an impact from an accounting standpoint. As far as risk is concerned, obviously, the ruble has been under a great deal of pressure recently. We have looked at some things to do to hedge our position there. Fortunately, many of our contracts for the coming season are U.S. dollar denominated. And so we actually are paid -- although we're paid in rubles, the amount of the payment is determined at the payment date. So we really don't have U.S. dollar exposure for most cases. And in those cases, where we do actually bill in rubles. And we're looking at some opportunities to bring cash back on an expedited basis to mitigate that risk. But I think we're getting our arms around that right now. But in short answer to that, the dismal losses were not ruble related this time.

And then on the marine side, how should we think about the cycle? How long do you think the cycle and the downturn will last from your previous historic experience?

Well, we during the downturn? [indiscernible].

That's a good question, Veny.

Everything you read -- Veny says everybody's just writing off next year. Okay. So from there, '17, '18.

Yes, I think, certainly, most people are thinking 2015 -- calendar '15 is going to be a pretty tough year in the marine side. If you look at what PGG, PGS, and most recently, [indiscernible] have announced. I mean, they're certainly putting a lot of capacity out of the marketplace, which will work itself through eventually. But I think it's going to be -- it's going to take next year to work itself out.

Absolutely.

And the last one is just a confirmation. So my understanding is that leasing -- equipment leasing revenues are going to be flattish Q4 over Q3. The U.S. job is not there, but Russia's kicking in and some Canada. And this -- and there might be job that might affect those jobs up or down. Is this correct?

That's true. Just keep in mind that, as Bill said, our current view is we think we'll be flattish. But we're going into the Russian and the Canadian winter seasons. And other job actually kicks off and the start of January 1 or January 20 has a big impact, or the start of the December 15. So those sorts of things can have a big impact because these are very large jobs many times. So just keep that in mind.

Our next question is coming from the line of Georg Venturatos with Johnson Rice.

I just wanted to touch on Seamap. Obviously, with the marine environment that we're looking at, just wanted to get your thoughts on obviously, this aftermarket spare parts business has always produced really nice margins. In this type of environment, do you think those are sustainable at current levels? Obviously, this last quarter was strong again.

Yes, I think so, George. I mean just kind of based on the activity there are some things aren't going to happen, aren't going to be as robust. But people are still operating. I mean that's the thing to remember. There's still a lot of vessels out there in the water. And there are lots of surveys being done right now.

That sounds and they got keep their equipment running.

Exactly right.

And in times like this, they're not out buying brand new equipment. They're repairing what they have and put a band aid on it whatever it takes. That's even more so, in terms of when you look at repairs and after repair service.

Exactly right. I think the other thing to remember, Georg, is even though these guys are taking capacity out of their fleets, they're retiring older vessels. They're still looking to upgrade technology. I mean, there are still new vessels that are coming out. So we still have opportunities to equip new vessels, and I think there are opportunities to reequip some additional or existing vessels with newer technologies. So it's not all bad news for us in this environment although certainly, we'd rather see it go another direction.

Some of those vessels that they're taking out, some of the heating vessels have some -- they have equipment that was trailing there in the '70s and '80s.

Yes. So this is definitely older equipments coming out.

We need that junk out of the market anyway.

That makes sense. That's helpful. And then I guess you mentioned a few regions that you're optimistic on potentially in '15. I guess we've heard some of your commentary on Latin America and Europe more recently in the last few quarters. But I guess, any color you could give on what you're seeing, I guess, as potential opportunities in Alaska and Asia Pacific as well?

Well, I think, Alaska, frankly, is they're kind of projects specific. I mean, there are couple of things that are going to be done this winter. It looks like that will have some opportunities on.

Start in March, April, May.

Yes. So there, certainly, is just going to be some opportunities there. But I think, overall, I think you're going to see weakness there as you do in Canada. But Latin America was really a mixed bag. Again, this past year, we really were fortunate with some projects and there are some other large projects being planned for this coming year. And it remains a very difficult environment. As Bill said, the Colombian contractors are having a tough time with the oil companies, especially Ecopetrol. It's a tough environment because of weather cold and permitting and the community relation issues. So it's having a tough time, but there are some pockets of opportunities. So it's a bit of a mixed bag. I think as Asia -- as far as Asia Pacific goes, it's really kind of steady as it goes. We've seen kind of a steady level of business there, and it looks like there's going to be some continued opportunities like that, maybe not all in the same places, but Australia other parts of Southeast Asia, it looks like there's some opportunities coming up. So it's a tough thing to really describe very precisely because it is such a mixed bag right now.

[Operator Instructions] Our next question is coming from the line of Mark Brown with Global Hunter Securities.

I was just curious on the ION Geophysical marine assets that you acquired. If you could give us an update. I don't know if you can tell us the revenues that you're generating from that business now that it's integrated into your full -- your financials. And just what the prospects are for China and the growth and penetration of that market?

Yes. So I think -- for some competitive reasons, I think, we don't want to give precise numbers on those, which I think we were...

We're pleased.

Yes, so we were looking I think he and I talked and others have talked about and written about looking for revenues into sort of the $3 million to $5 million range of the business. I think we're certainly well eying for that. Again, aftermarket business, spare parts repairs, things of that nature. As far as China, I think, we're pretty pleased here. We have some specific opportunities that we're pursuing right now that are very -- look very promising. So we think we'll see some contribution out of China and these new relationships very soon, maybe even in the third -- in the fourth quarter. Well, I think we were pleased about the relationships we've developed and kind of the reception we've gotten from those customers. So we're feeling pretty good about that.

Good, good. I had a quick guidance-type question on lease pooled depreciation expense. Should we model that as flat going forward? Should that be declining somewhat? I just wanted to see if you had any color?

It's going to be declining, but slightly. I think you'll see a significant decline until we get into next year. So slightly in the next couple of 3 quarters.

Okay, good. And then on your share repurchase, the -- it sounds like that's something that you're interested in re-upping your authorization and taking advantage of the share price and evaluation. Curious, how much leverage are you willing to put on your balance sheet in order to pursue more share repurchase in the future?

Yes, that's a great question. I think, we -- as you know, we are very debt adverse. So I think we want to be pretty limited as to going out and levering up just about buyback stock. However, if we see we can buy the stock out of cash flow and we have to temporary lever up because of working capital flows, then we're certainly willing to do that. And frankly, we've done some of that in this past year, last few months.

It was 12 million times 9.

Okay. I'd like to thank everyone for joining us on this quarter's call. And [indiscernible]

Before you toss that, I just like to say that this is Karen Roan's last call, and she's hosted almost every call for the last 6 years and done a fantastic job. We're going to miss her. She's going to ride off into the sunset. She's going to play poker. We can say you can play with your dogs and your kids. But thank you sincerely from the bottom of our hearts. Thank you, Karen, for everything that you've done for us.

Thanks, Bill.

Okay. Everybody, we'll talk to you on the fourth quarter call in a few months.

Thanks.

Ladies and gentlemen, this concludes today's teleconference. We thank you for your participation, and you may disconnect your lines at this time.