MIND Technology, Inc. (MIND) Q2 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the Mitcham Industries’ Fiscal 2016 Second Quarter Results 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 Ms. Jenny Zhou. Thank you. You may begin.

Thank you, Jessie. Good morning and welcome to the Mitcham Industries' fiscal 2016 second quarter conference call. We appreciate all of you joining us today. Your hosts are Guy Malden, Executive Vice President of Marine Systems, and Interim Co-COO; and Rob Capps, Executive Vice President, Chief Financial Officer and Interim Co-COO. Before I turn the call over to management, I have a few items to cover. If you 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 September 17. Information on how to access the replay was provided in yesterday's earnings release. Information reported on this call speaks only as of today, Thursday, September 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 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, 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 would like to turn the call over to Mitcham’s Executive Vice President of Marine Systems, and Interim Co-COO, Guy Malden.

Thanks, Jenny, good morning everyone. Also present this morning is Bill Mitcham, our Chief Executive Officer. We would like to thank all of you for joining us today for our fiscal 2016 second quarter conference call. I’d like to begin by reviewing the performance of various parts of our business during the second quarter. Rob will then discuss our financial performance and will conclude with a discussion of our market outlook. Then, we’ll open the call for your questions. Turning now to our second quarter performance, as we had expected, our leasing business showed significant year-over-year declines due to the very challenging industry conditions. However, revenues from our Seamap segment were much less than we anticipated due to unexpected shipment delays. Specifically, roughly $6 million worth of orders were delayed into the third quarter. As a result, sales from Seamap were a fraction of what we had expected, although we should see the full benefit of these orders in our third quarter results. In our leasing business, the seismic market continues to be impacted by low exploration activity and overcapacity in the seismic acquisition business. Low commodity prices and uncertainty have caused E&P companies to focus on preserving liquidity and cash flow and therefore reducing exploration spending. These factors negatively impacted our second quarter results beyond the seasonal pullback we’ve historically seen in our second quarter. Now, looking at our various geographic markets, we saw pervasive weakness in land seismic activity throughout the Western Hemisphere. The US remains a very tough market as the overcapacity issue is particularly pronounced here, and although there is some work going on, it is at a much reduced level. As we mentioned during our prior call, Canada continues to be impacted by dramatically lower activity, although we normally see a big drop off in the second quarter revenue from Canada. Turning to Latin America, exploration activity has been very slow for essentially the same factors that affected North America. There has not been a repeat of certain large projects in which we participated last year. While we did post a small sequential gain over the first quarter, on a year over year basis, Latin America showed the single largest decrease in terms of absolute dollars within our leasing business and revenues remained about a fraction of what they were a year ago. Now, there is possibility of some projects coming up in the second half, although they remain uncertain at this point. In Europe, we’ve seen better activity levels in other regions as we have a large ongoing anchor project that should run through the end of calendar 2015, with a possibility of additional related work going into 2016. There were also some smaller projects in this region that contributed additional revenue as well. In Asia Pacific, we’ve also seen activity decline due to the global slowdown. Now, a bright spot was Russia and the CIS, which was up from year ago levels, although down from the first quarter due to normal seasonal decline. Some smaller projects in this region have continued past the normal winter season, and there have been some encouraging signs that the next winter season will remain very active. In our marine leasing business, although the industry is still dealing with ongoing consolidation as well as the availability of excess equipment and continuing vessel cannibalization, our revenues were again up both sequentially and year over year. Although we have been steadily ranking marine equipment and continue to field inquiries for future projects, activity is still well off historical levels, although performance in this business appears to have stabilized. Turning to our Seamap segment, as I mentioned earlier, we had three orders totaling about $6 million slipped from the second quarter into the third. In the case of two of the orders, the customer was not ready to accept delivery on the equipment when originally scheduled. As to the third order, we encountered some production delays partially due to late delivery from a supplier. These issues have all been resolved and we anticipate shipping all of these systems this quarter. With the impact of these delayed orders and other previously scheduled shipments, we anticipate a much improved third quarter for Seamap. With that, I’ll turn over the call to Rob who will give you a detailed review of our financial results and some remarks about our outlook for the second half of this year.

Thanks, Guy. Good morning everyone. I’ll start by discussing the top line of each of our two segments, equipment leasing and Seamap, and then followup with the discussion of the profitability of each of these segments and then conclude with a discussion of our consolidated results and our financial position. First, let me review our equipment leasing segment. Our leasing revenues in the second quarter were $4.5 million, down 45% from last year’s second quarter and down 60% sequentially. As Guy touched on earlier, our year-over-year decline was driven mostly by weak results from Latin America. Both with the exception of Russia and Europe, all of our geographic regions were down over that period due to lack of exploration activity and equipment overcapacity. Our marine leasing business was up both year over year and sequentially, despite the fact that it remains a good dealor equipment available with the continuing consolidation within the industry. Nevertheless, we continue to experience some uptick in inquiries for the rental of marine equipment. Sales of leasable equipment were at $172,000 this quarter compared to $1.3 million in the same quarter last year. Other equipment sales, which excludes heli-picker equipment as well as sales from SAP, oceanographic, and hydrographic equipment, were $633,000 compared to $2.3 million in the same quarter a year ago. Now, let me turn to our manufacturing business, Seamap. Revenues were $2.3 million compared to $7.7 million in the second quarter of last year. As Guy mentioned, three orders that were originally scheduled to be delivered during the second quarter slipped into the third quarter due to a variety of reasons. We did see sales in other products and aftermarket services such as spare parts and repair work, however, that business has been negatively affected by the generally weak environment in the industry. Now, let me talk about the profitability of each of the segments. The gross profit in our equipment leasing segment in the second quarter was impacted by negative operating leverage due to our seasonally lower [indiscernible] revenues and the relatively higher levels of depreciation. As a result, we reported a gross loss of $3.9 million this quarter to the segment, which compares to gross loss of $382,000 in the second quarter of last year. Gross profit in the second quarter from our Seamap manufacturing business was $1.2 million compared to $3.8 million for the same quarter a year ago, and this represents a gross profit margin of 55% and 47%, respectively. Our general and administrative expenses for the second quarter were $5 million compared to $6.7 million in the second quarter a year ago, 25% reduction. This reduction reflects our ongoing efforts to right size our operations and streamline our cost structure to better deal with the industry’s challenging conditions. We made an additional provision for doubtful accounts receivable of $600,000 in the second quarter. This does not relate to any specific customer, but reflects the generally higher risk in today’s challenging business environment for all participants in the seismic industry. Our overall operating loss in the second quarter this year was $8.8 million. This compares to an operating loss of $4 million in second quarter of fiscal 2015. The tax provision for the quarter was a benefit of approximately $2.5 million, which is an effective rate of about 33%. Our second quarter adjusted EBITDA was $679.000 compared to $5.8 million in last year’s second quarter. We reported a net loss for the second quarter of $5.8 million, or $0.49 per share. This compares to a net loss of $3.3 million, or $0.26 per share, in the second quarter a year ago. Now, let me make a few comments about our liquidity and balance sheet. During the second quarter, we added about $700,000 in lease pool equipment, bringing our year to date purchases to about $2 million. We expect the lease pool additions to total no more than $4 million for the full fiscal year. Mitcham's financial position remains strong. At the end of the second quarter, we had approximately $36 million of working capital, including cash and cash equivalents of $2.8 million. Our cash flow provided by operations totaled approximately $5.2 million in the second quarter, about $11.6 million in the first half of fiscal 2016. Year to date adjusted EBITDA is around $7.9 million, which results in free cash flow of about $4 million. During the first half, we reduced our outstanding debt by more than $12 million and since the close of the quarter, we’ve reduced by another $1.3 million, bringing our net debt balance which is debt less cash balances to about $10 million. Let me conclude my remarks by discussing our current market outlook. With conditions on global seismic market still largely in a protracted downturn, our outlook remains consistent with that of our first quarter call. Despite some isolated opportunities in certain markets, we continue to expect a generally lower level of lease revenue in this fiscal year relative to fiscal 2015. Currently, there are just too many unfavorable factors and too little visibility for us to make any [indiscernible] to our projections. Given the uncertain environment, oil and gas companies appear unwilling to spend significantly on exploration right now. As we’ve mentioned before, in a tough environment with lower commodity prices what little money is spent will usually be directed towards development activities. Therefore, with the abundance of headwinds in the energy industry, it is likely [indiscernible] future seismic exploration get pushed further to the right. In short, we believe that until there are clear signs of recovery underway and the industry again gains a sense of confidence in it, exploration activity will continue to languish. However, despite an unfavorable market, we continue to manage our business in rationalize operations for were feasible while also leveraging those parts of opportunities that may come along. Our positive adjusted EBITDA and free cash flow which were achieved despite the worst quarter we’ve seen in recent memory, are testament to our ability to weather these challenges and emerge as a stronger player when the cycle inevitably turns. In terms of where these opportunities might come from, there is still activity in the US, with their remains challenging and should remain so through the rest of the year. For the upcoming winter season, Alaska looks somewhat promising based on inquiries from our customers and it’s possible that Alaska's activity will be comparable with the previous year. However, looking at the Canadian season, we haven’t seen any indications that they will be improved from over the prior year. The winter season in Russia and CIS looks encouraging based on our inquiries. We expect to see equipment demand that is comparable to last year, or possibly even a little better. The volatile exchange rates in [APAC] continue to be a challenge; we’re optimistic about the upcoming winter season on Russia and about opportunities in other parts of the CIS. Similar to North America, we don’t expect the Latin America revenues to match those of the prior year. Conditions here are difficult, not only with low commodity prices [indiscernible] seismic driven as well as a host of economic, logistical, regulatory and security issues that have to be dealt with. That being said, there is potential for some big projects in the second half of the year in countries such as Columbia and Brazil, which could improve results compared to the first half of the year. Europe has been performing substantially well for us than most other markets. We believe that market will remain relatively solid for the balance of the year and have some upside potential. We still have equipment available that we can use to fulfill incremental demand or potentially redeploy for Russia for the upcoming winter season. Based on various customer inquiries there appear to some emerging market opportunities in other markets, primarily in Eastern Hemisphere. We’ll continue to seek how to pursue those opportunities. As you will summarize from our earlier comments, our Seamap business [indiscernible] large uptick during the second half of this fiscal year, including the deliveries now scheduled for the second half of the year for customers in China, which appears to be a growing market for us. Based on our current visibility into the second half, Seamap revenues for all of fiscal 2016 should be roughly in line with the previous year. So with the possibility for marginal uptick in rentals for the third quarter as well as scheduled Seamap deliveries, the third quarter should be an improvement over the second. Our fourth quarter rental revenue might show some further improvements simply by virtue of the normal seasonal improvement we’re seeing. We also expect improved revenue from the sales of oceanographic and hydrographic equipment by our Australian subsidiary in the second half of fiscal 2016. Despite the expected improvement from our second quarter results, it is certain that the environment will remain challenging throughout the industry for the balance of this year and into next year. We’re accustomed to dealing with these cyclical downturns while manage through these difficulties and be well positioned for the eventual upturn. We continue to balance the streamlining of our cost structure with a need to maintain the presence necessary to pursue new business. In terms of cost reductions, we now have to find a balance between structural cost reductions and our ability to take advantage of new opportunities that are likely to emerge. In that vein, you may recall that during the last call, we reduced headcount and working hours in some locations and the executive team has reduced their salaries as well. We will continue to look for ways to control our operating cost. We’ve limited our capital expenditures and have reduced our indebtedness with our available cash flow. We have not taken advantage of the recent severely depressed value of our common stock to repurchase shares, but focused on preserving liquidity and maintaining financial flexibilities. It’s likely we will continue this approach at least in the near term. We think it’s important to maintain adequate operational and financial capacity to fully participate in cyclical upturn. Jessie, that concludes our formal remarks. We'll be happy to take any questions now.

[Operator Instructions] Our first question is coming from the line of Ross Demont with Midwood Capital.

The $6 million of deferred Seamap revenues, should we infer from that that we’re going to have a $6 million a quarter, next quarter in Seamap, whether it’s $6 million on top of normal order rates for Seamap?

$6 million on top of the viable order rates.

And then the increase in Australian subsidiary, can you just give a little bit more – maybe quantify that a little bit more?

I think last year we did around $8 million or so of [indiscernible] at that levels this year, slightly below that, as you can see, it’s been very minimal in the first half of the year. Safety orders probably has been backend loaded , those are sales to governmental licensees and things of that nature. So that it just tends to...

Asia Pacific.

Yes.

[Operator Instructions] Our next question is coming from the line of Georg Venturatos with Johnson Rice.

Just one or two, actually touch on Seamap as well, you talked about the deferred shipments that we’ll see in 3Q that didn’t hit the second quarter, you talked about the additional shipments as well in the back half of the year, was there anything incremental that we got in the quarter, sorry if I missed this, beyond what we talked about last quarter in terms of expectations for system deliveries?

No, there’s not, Georg.

And then thought it was interesting, you also saw the opportunities for equipping some new and reconfigured vessels, anything further you can talk about there in terms of timing or what’s kind of changing in terms of the environment and willingness to see some of your equipment use there?

Georg, there are some things that we had scheduled on hold still coming out. We don’t have a tremendous amount of visibility into next year, obviously, but things are continuing to track as we had expected from our last call.

I think, Georg, we’re seeing some potential opportunities in some markets, again mainly in the Eastern Hemisphere for some additional vessels or equip some additional vessels, I’m not implying there are new builds necessarily. So early days, we’re a little bit encouraged that there is some activity out there.

And then last one from me, you did mention Canada, at least early indications not encouraging, any kind of quantification you could even guess at this point in terms of what we might see year over year or how you see that season shaping up at this point?

It’s tough to say, of course, we had minimal activity in Canada last winter. So I just can’t see it much better from what we’re seeing right now. That can always change, of course, pretty quickly, but based on the inquiries today the projects that we know are planned, there just isn’t a lot going on up there. Not that there's nothing, but just not enough to generate much demand.

And I guess last one, Rob, probably better for you, on expectations second half from an operating cash flow perspective?

I think we’ll see – it should be positive, I think, you've got to kind of do the math from where we were in the first quarter. We did some operational improvement, also generation of cash flow from inventory, because the $6 million in orders that’s being shipped or essentially finished, so we’ve got an inventory build that you'll see in the balance sheet that we should liquidate, if you will, in about half a year. I think we’ll still be positive.

The next question is coming from the line of Veny Aleksandrov with FIG Partners.

My first question is on Seamap, without going into details that you might not want to go into, the two contracts that were delayed, was it operational issue that the clients were not ready or was it from [indiscernible] issues?

It’s all operational issues, Veny, without going into much detail, they’re going on to new vessels and just want at the site rate to take on equipment.

Sounds like that needed more time, it does not [indiscernible]. And in terms of Russia, you said that you have early indications, and I understand how early it is, and it’s just indication about how you – based on these invitations, do you see a normal winter or how much stronger than last winter or very stronger?

I think we see the potential for it bit stronger than last year.

And how many channels do you have in this market right now?

It’s a moving target [indiscernible] address that specifically right now for competitive reasons.

It appears we have no further questions at this time, so I’d like to turn the floor back over to management for any additional concluding comments.

Okay. We want to thank you once again for joining us on our call today. Great to have Bill back with us today. And we look forward to talking to you going after the conclusion of our third quarter. Thanks.

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