MIND Technology, Inc. (MIND) Q1 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the Mitcham Industries’ First Quarter 2016 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. It is now my pleasure to introduce your host Jenny Zhou. Please go ahead.

Thank you, Kevin. Good morning and welcome to the Mitcham Industries' fiscal 2016 first quarter conference call. We appreciate all of you joining us today. Your host today is Rob Capps, Executive Vice President and Chief Financial Officer and Co-Chief Operating 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 for 90 days via webcast by going to the Investor Relations section of the Company’s Web site at mitchamindustries.com, or via recorded instant replay until June 17th. 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, June 3, 2015; 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 different 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, 2015. 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 Capps.

Thanks, Jenny. Good morning, everybody. We would like to thank you for joining us today for our fiscal 2016 first quarter conference call. I will start by making some general comments about the quarter before moving on to discuss our financial results in more detail. I'll then conclude with a review of our market outlook before we open up for questions. Our first quarter results were largely in line with how we anticipated and discussed on our last conference call less than two months ago. Our core equipment leasing revenue showed sequential improvement over the fourth quarter of last year, this was largely due to our previously mentioned sizable project in Alaska. We mentioned that this project would likely lessen some of the negative impact of our first quarter results and it did. However, even with the benefit of this project, our equipment leasing revenues were below last year's first quarter, primarily due to large declines in activity in Canada and Latin America. Both these markets were marginal contributors to our leasing revenues during the quarter. In over 48 states of the U.S. land leasing activity continued to be very weak. Excess capacity continues to be an issue, in the marketplace and activity remains squarely focused on production related services rather than exploration, as E&P companies focus our cash flows, expense management and returns. As we've discussed before, activity in Canada for this winter season was significantly below historical levels. As a result, there is no seasonal uptick in Canada. Leasing revenues there in the first quarter contracted further from the fourth quarter and are a fraction of revenues from a year ago. Our visibility remains limited; there are some pending projects in North America that could have a positive impact later in the year. In Russia, we saw very good activity levels with more channels deployed than last year, but because the renegotiated contracts that we told you about in our fourth quarter call, improved activity, generated less revenue than last year. Turning to Latin America, first quarter revenues were minimal during the quarter, again reflecting the contraction in exploration activity. As you may recall, the region had previously been the single largest contributor to our fourth quarter leasing revenues. Data acquisition activity there was very quiet for much of the quarters and for much of the quarter only one crew operated in Colombia. In Europe, we normally see a seasonal decline in the region this time of year; however, there actually was a slight sequential gain and revenues more than doubled from a year ago. This was primarily due to the late start of a large [unwind] project that had originally been scheduled to begin in the fourth quarter, but then was pushed to the first quarter. But this project should continue through most of fiscal 2016. The Asia-Pacific region, there a solid sequential and year-over-year gains to revenue as we supplied equipment for land work throughout the region. In marine leasing business, our revenue improved up both sequentially and year-over-year, while the market is still negatively impacted by the industry consolidation the availability of excess equipment and the cannibalization of inactive vessels. However, we have seen some signs of a possible uptick in activity but there is recently been an increased inquiries for the rental of marine equipment. Our Seamap business had no digital source controller or RGPS system sales in the quarter, results did benefit from the sales that had been delayed from the fourth quarter. However, this order did include a number third party supplied components and therefore yield lower margins for our system sales. We expect to see improved sales for Seamap next quarter and in the second half for fiscal 2016. We expect to deliver at least three digital source controllers with the balance of fiscal 2016 including two in China. The orders in China were the result of our acquisition of the ION source product lines which continued to perform to our expectations. In addition to these deliveries, we will see some incremental benefit from engineering work that we are performing for our customer beginning in the second quarter. Now let me talk a bit more about our financial results in some more detail. And first, I'll talk about the equipment leasing business. Our core leasing revenues for the first quarter were 11.2 million down 31% from last year's first quarter but up 16% from last year's fourth quarter. I mentioned earlier, the year-over-year decline was primarily due to much lower land leasing activity in Canada or revenues were down over 90%. Also contributing to the year-over-year decline in revenues was weaker leasing activity, in Latin America region. Revenues were also down in excess of 90%. These declines were partially offset by the revenue gains from large Alaskan project that began during the fourth quarter and is now been completed, as well as activity in Europe and the Pacific Rim. Land activity in U.S. remains very soft, even the hesitance of E&P companies to spend on exploration in this difficult environment. Also, in abundance of capacity in the market makes it substantially more challenging to obtain new business. Nonetheless, positive impact to the Alaskan project enable us to post revenues, exceeded both our year ago and fourth quarter revenues in that region. Our marine leasing business was up year-over-year and sequentially, although the business continues to be impacted by the ready availability of excess equipment due to industry consolidation. Now it's likely these conditions will continue to exert pressure on our marine leasing revenues in the near future. Although, as I mentioned earlier, we are seeing an increase in enquiries and proposals for marine rentals. Revenues from the rental of downhole seismic tools were down in the first quarters compared to the first and fourth quarter of last year. However, it did represent a relatively small portion of our total rental business in all those periods. A project to utilize these tools such as frac offering are subject to many other same economic pressures as traditional seismic projects. Sales of leased pool equipment were $227,000 this quarter compared to 1.1 million for the same quarter last year. Other equipment sales, which include heli-picker sales, as well as sales from SAP, or [Estonian] subsidiary, were $663,000 which is down from 2.4 million from first quarter of last year. Now turning to our manufacturing business Seamap, revenues were 5.1 million compared to 6.2 million in the first quarter of last year. As I mentioned earlier, we delivered one system that had a number of third party components and there were also ongoing sales for other products, since the weight collars and aftermarket business such as support, repairs and spare parts. I'll talk about the profitability for each of these segments for a moment. The gross profit in our equipment leasing segment in the first quarter was 2.4 million compared to 7.7 million at the first quarter of fiscal 2015. The decrease was primarily due to lower leasing revenues and a negative operating leverage inherent in a highest fixed cost structure. In response to slower market conditions, we have reduced headcount where feasible focused on other efforts to reduce operating cost. First quarter gross profit margin in leasing segment was 20% compared to 39% of first quarter of last year. Gross profit in the first quarter for Seamap segment was 2.1 million compared to 3.5 million a year ago. Seamap's gross profit margin was 42% compared to 57% in the first quarter of last year for the reasons I described above. Our general and administrative expenses were approximately 4.9 million in first quarter fiscal 2016, and that’s down from 6.1 million last year's first quarter. This reduction reflects our efforts to reduce cost and including some headcount reductions and the elimination in most incentive compensation. Our overall operating loss in the first quarter this year was $967,000, this compares to an operating profit at 4.8 million in first quarter of fiscal 2015. Also in the first quarter of this year we had other income of $786,000 compared to $189,000 in the first quarter of last year. The amount this year relates almost exclusively to foreign exchange gains, as foreign currencies recovered somewhat against the U.S. dollar. Of these gains, offset the -- partially offset, at least, the foreign exchange loss reported in the fourth quarter of last year. The tax benefit for the quarter was a $155,000 which is an effective rate of about 40%. Our first quarter EBITDA was 8.1 million or 47% of revenues compared to 14 million or 55% of revenues in last year's first quarter. So, please keep in mind, EBITDA is a non-GAAP measure and as reconciled to reported net income and cash provided by operating activities in the financial tables in yesterday's press release. We reported a net loss in the first quarter of $237,000 or $0.02 per share, this compares to net income of 3.7 million or $0.29 per diluted share at first quarter a year ago. Let me make a couple of comments in that our liquidity and balance sheet. During the first quarter, we added about 1.3 million of equipment to our lease pool. As we stated in our prior call, we expect the lease pool additions to be no more than $5 million in this fiscal year. We will continue to rationalize or rebalance our lease pool, better position ourselves for current and future demand. Mitcham's overall finance position remains strong, at the end of the first quarter we had over $45 million of working capital. It includes cash and cash equivalents of $6.2 million. There was $20.4 million outstanding on the credit facilities. Our cash flow provided by operations for the first quarter was 6.4 million. Our first quarter adjusted EBITDA was 7.7 million. During the first quarter we’ve reduced our outstanding debt by $5.8 million consistent we’ve reduced by another 3.3 million that means that as of today our net debt which is outstanding debt less cash balances is less than $12 million. The reductions in our capital expenditures would emphasize paying down debt and strengthening our balance sheet in the face of difficult market environment. I’ll now conclude my prepared remarks by discussing the current market outlook. With our first quarter performing largely in line with our expectations and industry conditions mostly on same trajectories they were several months ago, our outlook remains much the same as during our previous earnings call. We continue to expect lower levels of leasing revenue in fiscal 2016 relative to 2015. Despite the rise in crude prices to the $60 level in last few weeks, oil and gas companies seem to remain focused on controlling cost and enhancing cash flows on returns. That means they will likely continue to maintain tight budgets in the way their expenditures work towards production enhancement rather than exploration. We think this is likely to remain the case until there is a clear evidence of the longer term improvement in commodity prices and it becomes more economically feasible to implement new drilling programs and undertake new seismic exploration. That being said there is seismic exploration taking place and there are opportunities for us. We are aware of a number of potential land projects for various regions, including Europe, North Africa, Russia and the Pacific Rim. There are also potential business in North America and Latin America. We think it’s likely that the profile of our land rental business in fiscal 2016 to be similar to 2015, that is relatively fewer of the larger projects. As I mentioned we are seeing an increase in inquiries within the marine leasing business. We’re encouraged by the activity we’re seeing that visibility is still rather limited and the timing of various projects is even more uncertain. Latin America we don’t expect any substantial pick-up in activity for the year like North America we don’t expect revenues to match last years. After many of the projects were completed last year there has been little new activity. However there maybe some large projects are kept in the second half of the year, and we're still not seeming much uptick in the land activity business in Mexico that should arise from the restructuring at oil and gas industry there, as initial activity is really focused offshore. However, as we get into fiscal 2017 we are hopeful that we’ll see some change there. As you keep in mind that many parts of Latin America continued to be inflicted by with economics, logistical, regulatory and security issues. Although certainly not immune to the factors facing the Western Hemisphere, Europe is holding on better than the most other markets responded the general softness affecting the entire industry. The delayed project begin in the first quarter will continue through most of the year, and we are pursuing other opportunities in the region for our services and equipment. As we move additional equipment to the region last year, we're well positioned to take advantage of any incremental business that should come up. Russia and the CIS is another area seems to be maintaining a high level of exploration activity. Although it’s very early, we currently expect good demand in Russia next winter, and can see some opportunities in other part of the CIS. Of course instability of the ruble and the impact of the trade sanctions not only on us but customers as well, introduce d high level of uncertainty to this region. Based on our discussions with customers and other industry participants there are some other areas such as the Middle East, North Africa, Asia and the Pacific Rim our projects might be started. We’ve also seen some new opportunities coming from India. Other equipment sales, which consists mainly of our oceanographic and hydrographic equipment sold by our subsidiary in Australia, were quite low in the first quarter. We don’t think this is indicative of the full year. Based on orders in hand and the current customers our full year revenues from other equipment sales should be roughly comparable with last year’s levels. We’ve recently added new products to our offering in this area and are opportunistic about our cost prospects. Of course demand for these products is not necessarily depend upon activity in oil and gas industry. Seamap should have uptick in the deliveries during the second quarter through the certain of orders that I mentioned earlier, as well as other deliveries scheduled for the second half of the year. Based on our current visibility we still expect that Seamap revenues in fiscal 2016 will be roughly in line for those in fiscal 2015. The balance of 2016 will be challenging for us, as for rest of the industry. However, we’ve been through these challenges before and believe we know how to manage through them. We’ve responded aggressively to the situation including significantly reducing capital expenditures, reducing cost and refocusing sales activities. We’ve also worked to preserve our liquidity and flexibility by reducing debt while maintaining our credit facilities. In order to control cost we’ve taken a number of specific steps. We’ve limited essentially all into new compensation payments. We’ve selectively reduced headcount and reduced working hours in some locations. Our current headcount is about 15% below what it was this time last year. And recently our executive team accepted a 15% salary reduction. This is an ongoing process and we’re continued to examine ways to control and reduce our cost. In summary we believe the rebound in the seismic exploration activity is inevitable. As in past downturns, we think our customers will generally be more inclined to rent, as opposed to purchase, as their equipment needs begin to increase. The recent uptick in rental enquiries maybe an early indication of this. We firmly that Mitcham Industries is well positioned to take advantage of rebound when it does occur. That concludes our formal remarks, now Kevin we'll be happy to take any questions now.

Thank you. At this time we'll be conducting a question-and-answer session. [Operator Instruction]. Our first question today is coming from Georg Venturatos from Johnson Rice. Please proceed with your question.

Rob one of the things you had talk about some of the rationalization efforts in lease pool side. Can you maybe speak a little bit further to that just in terms of details about what you're looking for equipment wise in terms of rationalization efforts and then also obviously we're looking at minor amount of equipment this year. But maybe talk about what you're focusing on there in this environment as well.

Sure when we talk on rationalization yield that means looking at things that are producing the rental now or we don’t think there is as much ongoing demand and looking to sell that equipment from time to time. As you might imagine in this environment, there is much demand and there is more equipment for sale. But from time to time you do see opportunities for you can take some older equipment and start to sell it and then re-deploy that capital as appropriate. So that’s a sort of thing we're looking at. As far as additions this year what we're really looking to do this year what we've done so far this year is really limit our purchases to items which would enhance or facilitate the rental of existing equipments. So there is some sort of ancillary equipment that will enable us to get our existing equipment out better or in better price that’s a sort of thing that we're looking to buy and kind of limit to that. Beyond that we really don’t really have any clear plans as to what sort of sets we'll add if things come back, I think it really depends on what the market tells us as to what the demand is and what specific products we'll look for.

And then on the balance sheet side obviously generating some pretty nice operating and free cash flow in this environment certainly in last quarter paid down from debt again subsequent to quarter. Where do you looking forward want that cash that balance kind it to be in a perfect world and kind of what should we expect to do with future cash was I guess right now.

In the near-term we're still going to continue to reduce the revolver balance and maintain that liquidity. But there revolver balance is less than 2 million right now and I'll expect to pay that down more in the near-term. As we see that getting lower and actually seeing where we have visibility where we know we can retire that, we'll then start to look to some other deployments of capital. Obviously we have a repurchase program in place, stock is very, very interactive right now obviously and we just want to balance the liquidity needs and the uncertainty in the market place with what is the very attractive used capital and in the stock.

Last one on from me on the Seamap side some margins dip into low 40s this quarter. You talked about the 4Q sale basically transfer into the first quarter impacting margins there. Do you think we can -- is it appropriate to think we can get back to kind of that 50 percentage type run rate that we've seen previously particularly with the orders that we see coming online in the next few quarters.

I think it was hard approach that. We may not get exactly there right away, but I think we'll certainly to approach that. I think that’s one more we had a pretty big impact on the negative side from a margin standpoint. So yes I think we'll start to take back to that area.

Our next question today is coming from Ken Sill from Global Hunter. Please proceed with your question.

I'm curious on the inquires on the marine stuff. It sounds like it's pretty preliminary but it's a positive enough data point that you are willing to talk about it. I guess I've got two questions. What would be the typical timing of increased inquiries translating into orders for more rental equipment?

Ken it can really vary, I mean it can as quickly as a week. But I think the worse thing of things are more likely two, three, four months out what we think.

And that’s kind of what I was getting at it, I mean trying to figure out whether was something that could possibly come in the back half of this year and that sounds like that’s possible.

Yes.

And then what do you need to see to kind of gain confidence? What do you need to see to gain confidence that these inquiries are going to actually start turning into orders? Or is it really just people are talking but it's not an order until it's an order?

And it's not order still it's an order, throughout this downturn projects were scheduled but were cancelled about overcome just the last minute. So that’s the sort of thing we want to guard against. So I think once the orders and years out the door, that’s when we see order.

And I am assuming that the project cancellation wave is pretty much behind us you're not seeing anything like that happening anymore?

Yes certainly it's slowdown, I think people will have a chance to kind of rationalize your budget and know what you're going to do.

And then if the business starts improving. You guys have done a really good job of controlling costs. So it's really just a matter of ramping up to labor hours and the CapEx is not going to be a difficult thing to rebound activity wise?

No not at all, it might be very easy to do.

Our next question today is coming from Veny Aleksandrov from FIG Partners. Please proceed with your question.

My first question on Russia. You said next winter looks okay. What are you basing this on inquires or talks with clients or contracts that you get from this year that are going to continue next year?

Talk our current discussions with our customers. So we've said that recently and had a serious discussion and based on their plans to expect to have activities from us next year comparable to part of this past year has done a bit higher.

And now that you're thinking about some exchange currency risk hedging. Have you done anything in that direction?

We're still working on strategies there and still very difficult thing to do with the ruble in the market to for various reasons some are sanction related those transactions are very difficult to effect right now we are still looking into them.

And Canada is now very early I now that the season doesn’t shape up until late in the summer. But any idea what people are looking at for next year after the fall season this year?

There have been some early inquires some early indications but Veny -- it is very, very early. So I would not too much talk on it.

Thank you. We've reach end of our question-and-answer session. I'd like to turn the floor back over to management for any further closing comments.

Thank you Kevin. Once again we just like to thank you for joining us at our conference call today and your interest in Mitcham Industries. And look forward to talking to you at second quarter conference call. Thank you very much.

Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.