MIND Technology, Inc. (MIND) Q4 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the Mitcham Industries’ Fourth Quarter Update Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the conference over to Mr. Jack Lascar. Thank you Mr. Lascar, you may now begin.

Thank you, Manny. Good morning and welcome to the Mitcham Industries’ fiscal 2015 fourth quarter update conference call. We appreciate all of you joining us today. Your hosts are Rob Capps, Executive Vice President, Chief Financial Officer and Interim Co-Chief Operating Officer; and Guy Malden, Executive Vice President and Co-Chief Operating Officer as well. Before I turn over the call to Rob, 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 at www.mitchamindustries.com, or via recorded instant replay until March 24. Information on how to access the replay was provided in yesterday’s release. Information reported on this call speaks only as of today, Tuesday, March 10, 2015; 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 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, 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. Now, I’d like to turn the call over to Rob.

Yes, thanks, Jack. Thanks. Good morning everybody. Thank you all for joining us this morning for our fiscal 2015 fourth quarter update conference call on such short notice. As you saw in the press release issued yesterday, based on preliminary un-audited financial results, we’re anticipating our fourth quarter total revenues to be between $13 million and $15 million, but the leasing revenues to be between $8 million and $10 million. We also are expecting the loss before income taxes of between $10 million and $12 million for the fourth quarter of 2015. As anyone who follows the oilfield service industry knows, there has been a dramatic decline in spending by oil and gas companies due to the rapid decline in world oil prices over the past few months. As a result, we – almost every else in the seismic sector are experiencing lower activity than previously anticipated. Fourth quarter leasing revenues are significantly below those in the third quarter of fiscal 2015, below the fourth quarter of fiscal 2014 and below our earlier our expectations. This short fall could be primarily attributable to three factors: the cancellation of projects in Canada, the impact of renegotiated pricing of Russian contracts and a one quarter delay in the start-up of the significant project in Europe. Let me expand on each of these. When we do have some projects ongoing in Canada and a significant project in Alaska, the winter season in Canada has been very weak this year. And we had expected weakness compared to last year and we – but we did expect to rely a handful of additional projects in Canada. However, these projects were canceled some literally at the last moment and this has had a significant negative impact on our leasing revenues. In Russia, due to the recent decline in the value of the ruble and the decline in world oil prices, our Russian customers found themselves under significant pressure and a viability of many projects came into question. To observe the existing business for this winter season, we agreed to reduce the pricing of certain contracts. All of which have been originally negotiated based on U.S. dollars. And these projects are moving forward and are currently in progress, although at reduced rates. I think it’s worth noting that the recent trade sections did not at the end of the day materially impact our land business in Russia, this year. And the number of projects this winter seems to be somewhat comparable to prior years. In Europe, we expect that the large project that was ongoing in the third quarter to continue to the fourth quarter and into fiscal 2016. However, again to uncertainty arising from the decline in oil prices, the extension of that project and a follow-on projects – again follow-on projects were delayed. Since then, we have negotiated contracts extension that will continue too much of this fiscal year that new contract started last week. Nevertheless, it was a significant impact in our fourth quarter leasing revenues. Now in addition and anticipated sale by Seamap was postponed until the first quarter of fiscal 2016 due to delay in the delivery to the customer of a third-party provided items were part of the order. Combined these items resulted in a significant short fall from our expected revenue for the quarter. Also in light with market conditions within the seismic industry as evidenced by recently announced results by others. We think it’s become more likely that some of our customers will experience difficulty in meeting all of their financial obligations. While we have not had any significant customers fail [ph], we do expect to make a provision for additional doubtful accounts receivable in the quarter due to higher probability that some customers will not be able to fully satisfy their obligations to us. We also were negatively impacted by the sharp and rapid strength on the U.S. dollar during the quarter. We encourage significant foreign exchange losses as a result of the strength in the U.S. dollar versus the euro, the Russian Ruble and Colombian peso. Now significant portion of these losses are non-cash accounting charges, but the effective results nonetheless. Due to these recent losses and unexpected near-term softness within the seismic industry and expected near-term softness, we are evaluating the recoverability of certain deferred tax assets such as loss carryovers and foreign tax credits. This evaluation could result in the establishment of valuation allowances related to those assets. Now, this is partly because of unexpected results, we do estimate that we do generate free cash flow in the quarter. During the fourth quarter, we also reduced our outstanding indebtedness by $8.3 million and since January 31, have reduced by another $1.8 million. This gives us more than $33 million of additional liquidity under our revolving credit agreements. We believe we are comfortably in compliance with all the provisions of our credit agreements and expect to remain so during fiscal 2016. In response to the current market environment, we have been implemented some cost reduction measures. The effective of which is not even reflected in our operating results and we are evaluating other steps. Leased pool additions during the fourth quarter of this year were $1.7 million. We’ve also reduced our capital expenditure outlook for fiscal 2016 and currently expect to add no more than $5 million total lease pool during the coming year. This compares to about $12 million for all of fiscal 2015. From a market standpoint, we continue to see pockets of opportunity, with potential prospects in Alaska, Europe, North Africa, the Middle East, the Pacific Rim and Latin America, and we are experienced a recent uptick in inquiries for the rental of marine equipment. With that said we still expect softness in the seismic market to continue in the fiscal 2016 and currently expect our total revenues for fiscal 2016 to be less than that for fiscal 2015. Despite the expected decline in revenues, we do expect to generate free cash flow during fiscal 2016. And we’ve managed through these challenging times for and believe that our strong balance sheet which provides stability and flexibility and prudent cost cutting strategies, will position us well for the eventual rebound in the seismic space. We also think that we’re well positioned to take advantage of the opportunities that often arise in market conditions such as this. Manny with that’s our prepared remarks, we’d be happy to take any questions we have from the callers.

Thank you. We will now be conducing a question-and-answer session. [Operator Instructions] Thank you. The first question is from Veny Aleksandrov with FIG Partners. Please go ahead.

Good morning.

Hi, Veny.

Good morning Veny.

Good morning. My first question, I couldn’t – I couldn’t drive down quickly enough. Seamap you said that orders got delayed?

Yes, correct.

Okay is the order delivered now and how does the year look for now on [ph]?

Yeah, the order has been delivered and going forward the first half of the year looks very busy, second half is sort of on our original forecast.

And, when you say very busy, busy as 2014 or busier than 2014? That means 2015, I’m sorry, fiscal 2015.

Yeah, sure, at any course we’re not going to try to give guidance at this point, you understand that what we’ve done is on preliminary results so for.

Okay.

I think from a Seamap standpoint though we’re seeing the activity levels not too different than last year.

Okay. And in terms of rental marine equipment and some possibilities out there, can you talk a little bit more on what kind of equipment you’re referring to?

Yes, it’s everything from Seamap products, as far as source controllers and our BuoyLink, a lot of inquiries about air guns and streamer.

Okay.

People adding additional streamers on to multi-vessel operations.

Okay, great. And if we look at your results, a lot of the P&Ls for Q4, you are talking about losing $10 million to $12 million but there are some items that are not repeating probably then not operating. Is there anything that you can – do you have an approximation how much these items are that – not the bad debt but the receivables that you are adjusting and then the exchange rate impact. How much impact of the $10 million to $12 million was?

Okay, I will tell you that of course we will give detailed results in a month when we actually report the quarter.

Okay.

And understand these are preliminary numbers that – I think it’s safe to say that, at least half of that loss is related to either the receivables or the FX issues.

Okay. Yes, that is very helpful. Thank you so much, appreciate it.

You bet.

[Operator Instructions] The next question is from [indiscernible] with Midwood Capital. Please go ahead.

Hi, good morning. Just a couple of items. Can you give well let’s know where the net debt stands, not as of in today but as of the end of the quarter?

End of the quarter, let’s say $16 million, $24 million, $25 million I’ll call it.

That’s the net number?

Oh no, no I’m sorry, net will be that $20 million, sorry.

Okay. And then how about – and then we’ve been buying maximum shares, where is the share count now?

Right at 12 million, just over 12 million shares out.

Okay. Sort of overtime our EBITDA margin had just gone between sort of 35% to 50%, is that still a relevant range even in this sort of the pretty depressed environment?

Well, [indiscernible] I think this certainly goes to bottom end of that as you well know that margin is driven commensality by leasing revenues. We have a top line since 90% of that leasing revenue drops to the pretax line, or EBITDA line. So I think it is a relevant range but understanding there is still some weakness in the leasing side of the business, which we think will continue for a while, but when we see the recovery, which we do think is going to come; we’ll see those margins back to where they were before.

Okay. Then in the given the CapEx guidance for 2016, have you sorted all about how much net debt can come down assuming we don’t buyback shares, how much net debt can cone down in this year?

Yes, I think what our board being very specific about that but [indiscernible] we’ll say we do expect to generate free cash flow in 2016 so would expect we could bring that number down significantly.

Okay. And what are your thoughts on continued share buybacks and then we brought them back higher and I know the environment is probably got worse than we had hoped. And these levels are – where we’re going to open today, would you continue to buyback shares?

Well, I mean, yes. We have the program placed for that purpose.

Okay.

I mean we are – that’s in a track in use of capital given all the other factors that we have to take into consideration.

Okay. Thanks taking my questions.

You bet.

The next question is from [indiscernible]. Please go ahead.

Yes, my follow-up question related to Latin America, what happened in Latin America during your revival?

It is very hard to say…

Is there any developing [ph] activity that you see lately or is it’s the same thing?

I think it’s been fairly subdued recently. We did – it was actually in fiscal 2015 wasn’t all that bad. There were some fairly significant projects in Latin America. I think there’s – the opportunity for some significant projects that’s coming here, but to say whether or not they will come about we’ll have to wait and see. I can say the fourth quarter it was pretty subdued.

Okay.

But partially that’s seasonal. It’s a rainy season in Columbia, so we tend to be a little bit slower right now.

Right, thank you. And then Russia, there was pressure and you talked about it this season you need to try to save your contracts. How about going forward towards your [indiscernible]?

Well, I think that remains to be same to some degree – with the same situation. I think we’d feel like the business is there, I think, as things stabilize that will allow us to negotiate the contracts going in on a more favorable basis. So, we don’t come in and redo them as we do this year but I think there is still some uncertainty there.

Thank you. I appreciate it.

Thank you. The next question is from Chris Bamman of Sidoti & Company. Please go ahead.

Good morning gentlemen.

Hi, Chris.

Just real quick, what did you say that CapEx was going to be for 2016?

$5 million, no more than $5 million at this point.

Okay. And just with regard to the provision for doubtful accounts, are you going to try and cover all that with this provision or do you think the environment to the point where maybe you could see additional provision for doubtful accounts further down the road?

Well, obviously, we certainly want to cover any contingencies at this point. I mean if things are pretty smooth right now, so I think we’re – we hope we’re in a bottom of things, could they get worse, I guess they could, but we hope we’re in a bottom of things, could they get worse, I guess they could but we certainly are trying to be conservative at this approach right now.

Okay. That’s it for me. Thank you.

You bet.

Thank you. [Operator Instructions] There are no further questions. I would like to turn the conference back over to management for any closing remarks.

Okay. I just thank everyone for your interest in Mitcham and for calling in this morning. We look forward to talking to you again in about a month when we report our fourth quarter full year results. Thanks very much.

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and thank you for your participation.