MIND Technology, Inc. (MIND) Q2 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the Mitcham Industries Second Quarter Fiscal 2017 Conference Call. At this time, all participants are in a listen-only mode. A brief 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, Carol Coale of Dennard Lascar. Thank you, Miss Coale. You may now begin.

Thank you. Rob. Good morning and welcome to the Mitcham Industries Fiscal Year 2017 Second Quarter Conference Call. We appreciate all of you joining us today. Your hosts are Guy Malden, Co-Chief Executive Officer and Executive Vice President of Marine Systems; and Rob Capps, Co-Chief Executive Officer and Chief Financial Officer. Before I turn over the call to management, I have a few items to cover. If you would like to listen to a replay of today's call, it will be available for 90 days via webcast by going to the Investor Relations section of the company's website at mitchamindustries.com or via a recorded instant replay until September 22. Information on how to access the replay was provided in yesterday's earnings press release. Information reported on this call speaks only as of today, Thursday, September 8, 2016 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 and 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, 2016. 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 those statements. I would now like to turn the call over to Guy Malden.

Thanks, Carole, and good morning, everyone. We would like to thank you for joining us today for our fiscal 2017 second quarter conference call. I'll begin by making some general comments about the quarter. Rob will then discuss our financial results in more detail, and address our market outlook. We will then open the call for questions. Turning now to our second-quarter results. Our 2 segments produced different results during our second quarter. The equipment leasing segment, both land and marine, remained weak and unfolded essentially as we had anticipated. The equipment manufacturing and sales segment generated improved results over last year second quarter. In the leasing segment, we saw a continuation of the themes we discussed during our prior call. While we are seeing indications of improvement for the second half and coming year, it will take time for those opportunities to be reflected in our financial results. That being said, we did see a year over year improvement in our revenues. This improvement was mostly driven by our Equipment Manufacturing and Sales segment, which benefited from the addition of Klein Marine Systems as well as improved equipment sales from SAP. Our Seamap business was roughly flat with last year, despite the ongoing downturn in the oil and gas industry. Our leasing segment continues to reflect sluggish conditions in the seismic market, as revenues were down substantially both sequentially and year over year. As we've emphasized before, E&P companies and contractors remain focused on preserving cash and minimizing expenditures. However, more stable commodity prices and slowly improving market fundamentals have started to generate an increasing level of inquiries, and we have been in several significant projects in various parts of the world. We therefore anticipate some improvement in our leasing segment in the back half of fiscal 2017 and into fiscal 2018. Now, during the second quarter, we had very little land leasing activity in both North America and in Russia. However, we do have some visibility into the coming fall and winter Canadian seasons, as there are projects being planned, and we have received inquiries from our customers. Although we don't think these inquiries are indicative of a return to historical activity levels in Canada, they at least show some potential for possible upside later in the year. Though down from year ago levels, European revenues more than doubled sequentially, which was the result of a project starting up that had been delayed from the first quarter. The European region is another market where we are seeing a number of projects and upcoming bids. Latin-America saw both sequential and year over year revenue increases due to work that we are doing in Colombia. Although the region is still very challenging, there is on-going work being done there and we have seen numerous small projects crop up. However, these projects are somewhat sporadic, and we don't believe they indicate a broad based improvement in the overall Latin American market, but this does represent another data point that we can leverage for possible improvement in the second half of the current fiscal year. We are also seeing bidding opportunities in both hemispheres. The timing and scale of these projects are uncertain, but they have the potential to make a significant contribution to our leasing business. Looking at the Marine leasing market, our revenues were down both sequentially and year over year. We do not foresee any material improvement in general market conditions as the marine industry remains mired with surplus equipment, and there is little to suggest the conditions will change in the near future. That being said, there are a number of opportunities that arise from time to time that we are pursuing. So overall, we continue to expect the leasing business to remain weak compared to historical levels throughout the balance of the year, although there are opportunities within certain markets that have the potential to provide incremental upside to our second half results. Our equipment manufacturing segment revenue as a whole is more oriented towards commercial and military applications, and as such is expected to generate strong results going forward. In addition, the Seamap business, which has traditionally been closely tied with oil and gas industry, has begun to successfully shift towards more government and commercial projects. Our strategy of moving the manufacturing business towards new markets has helped to mitigate some of the volatility that comes with the energy business, and we believe that will also be an important engine for growth, even after the oil and gas industry recovers. And with that, let me turn the call over to Rob.

Thanks, Guy. I'll give you a more detailed review of the financial results, and then I'll make some comments about our view of the current and near term market. First, let me draw the lines of business within our Equipment Leasing segment, which includes our leasing business, sales and lease pool equipment and some additional miscellaneous equipment sales. Revenues for the segment as a whole totaled $2.9 million in the quarter compared to $4.8 million in the second quarter a year ago. Activity was lower in nearly all of our geographical regions, except for both Latin-America and Europe, which provided the bulk of our core leasing revenues in the quarter. As Guy mentioned, although fundamentals for the leasing business are still weak, and based on our visibility into select markets, we do expect the second half of the year to improve versus the first half. Our Lease Pool Equipment sales revenues were $1.3 million in the quarter, compared to $172,000 in the same quarter last year. We do believe there are opportunities to sell certain Lease Pool Equipment over the balance of this fiscal year, and we’ll pursue those opportunities. Let me now turn to our Manufacturing and Equipment sales segment, which include Seamap, Klein and product sales from SAP, our Australian subsidiary. Revenues for the segment as a whole totaled $5.8 million in the quarter, compared to $2.8 million in the second quarter a year ago. Seamap revenues were $2.2 million in the quarter, which is roughly flat with the $2.3 million in the second quarter of last year. Sales from Klein were $2.3 million, and there were no comparable sales a year ago since we acquired Klein in December of last year. Our Klein sales were largely to customers and highly recognized oceanographic industries that are unrelated to the oil and gas industry. Finally, our SAP products sales were $1.3 million compared to $514,000 in the year ago period. SAP largely benefited from favorable project timing as the quarter to quarter variances from order timing can have a sizeable impact on the revenues there. Let me discuss the profitability of each of the segments briefly. Once again, our gross profit in the Equipment Leasing segment were strongly impacted by the high fixed cost of depreciation, which magnified the negative impact of lower sales on our operating profit. Therefore we reported a gross loss of $4.9 million compared to a loss of $4 million in the second quarter of fiscal 2016. Once again, however, we did have lower lease pool depreciation cost of $6.7 million this quarter versus $7.6 million a year ago due to the reduced lease pool additions over the last 2 years. Our ongoing cost reduction and business rationalization efforts have continued to reduce our direct leasing cost. The current quarter cost of $785,000 versus $1.1 million for the same quarter a year ago. Second quarter gross profit for our Manufacturing and Equipment sales segment was $2.6 million compared to $1.4 million a year ago. This represents a gross profit margin of 46% and 49% respectively, and the difference in the margins is primarily due to changes of product mix. Our general and administrative expenses were $5.4 million for the second quarter of fiscal 2017 compared to $5 million in last year second quarter. The cost increase was due to the additional expense of Klein, which was not present last year. Without Klein, the SG&A would have climbed about 7% year over year. Our overall operating loss in the second quarter this year was $8.3 million compared to operating loss of $8.8 million in the second quarter of fiscal 2016. Our second quarter adjusted EBITDA was a loss of $597,000 compared to a profit of $764,000 in last year’s second quarter. Reported second quarter loss attributable to common shareholders of $9.6 million or $0.80 per share. This compares to a net loss of $5.8 million or $0.49 per share in the second quarter a year ago. Now you should note that in the second quarter last year, we had recognized the benefit of certain tax loss carry forwards. In the beginning of the fourth quarter last year, we stopped recognizing those benefits. That's the difference in tax expense. Let me make just a few comments about our liquidity and balance sheet. Mitcham's overall financial position does remain strong. At the end of the quarter, we had over $24 million of working capital that included cash and cash equivalents of $3.5 million. Despite the very challenging conditions in the energy industry, we generated $1.3 million in cash flow from operations in the quarter, and about $3.1 million of cash flow from operations in the first half of the fiscal year. Through the first half of the year, we’ve reduced our outstanding debt by $11 million. Contributing to this was about $7 million in net proceeds from our recent 9% cumulative preferred stock offering. This brings our net balance, which is debt less cash balances to about $6 million. Let me conclude our prepared remarks with a discussion of our current market outlook. Although conditions remain challenging within the energy industry, we are seeing opportunities that give us confidence in the future prospects for our leasing business. Our Equipment Manufacturing segment is becoming a bigger part of our overall business, and our focus on new markets, including many of them unrelated to oil and gas expiration should provide a strong foundation for continued improvement. There are significant opportunities for collaborations among Seamap, Klein and SAP. We also see significant opportunities to further grow the segment through new markets, new products and potential acquisitions. Given our visibility and inquiries from customers, as well as improving market fundamentals in the oil and gas markets, we believe that the table has been set for an upturn in our leasing business. Although we anticipate some improvement in the second half, we believe the bulk of the gains will likely happen during the coming fiscal year. As we said during our prior call, we expect continued improvement in our Equipment Manufacturing and Sales operation over the balance of this fiscal year by all 3 units. We expect results for this segment in the last half of this year to exceed those in the first half. On the expense management side, we’ve made significant reductions in our overhead structure over the past 18 months. We are however constantly looking for other areas to improve our efficiency and therefore reduce cost. Therefore with the expectation of some improvement in leasing and solid results from the Equipment Manufacturing business, we expect to generate positive EBITDA in the second half, and be cash flow positive for the full year. Given the improved outlook, our solid capital structure and the expansion of Mitcham's scope under the commercial and governmental markets, we feel we’re in much better position as a company to thrive during the eventual recovery, while also being better able to handle future cyclical downturns that will inevitably return in the energy industry. That concludes our formal remarks. Operator, we’ll now open the call for questions.

[Operator instructions]. Thank you. Our first question comes from the line of Tyson Bauer with KC capital. Please proceed with your question.

Good Morning gentlemen. Just going to ask, get a little more characterization to your comments in regards to improvement, which is a relative term as we’re going to the second half of the year, and the next fiscal year. When you talked about general interest as opposed to maybe a handful of needle moving type projects at these levels, which are more of an all or none type of project that you can bid on, what are you seeing as far as what’s needed to create a more of a broader general interest other than obviously pricing in the global markets? Are there other factors involved that can stimulate that activity and interest beyond just seeing oil go $50, $60 or above?

Tyson, I think that the driver is only at exploration and so it’s expectations for pricing, or probably the most important thing. I think we see as we’ve mentioned, in certain areas of the world, we are seeing activities start to pick up, more projects being planned. We think that’s because of the stability in the energy market, the relative stability. Let’s keep this relative. Does oil have to go to $60 or $75? No, but I think we have seen a continued confidence among the E&P companies and the national oil companies that prices have stabilized and are not going to get worse and that the fundamentals are improving, even though they haven’t turned entirely yet and there are still some negatives that come up with the positives. I think it’s -- overall longer term expectation is going to drive the activity, especially outside North America.

So when we see the last couple of seasons, winter seasons in the northern hemisphere, obviously Russia widely publicized whether they are going to maintain their coal down production and Canada obviously has not had any robust activity recently whatsoever. What gives you that confidence that even though we have indications of interest, turning those actually into projects and deliveries would occur?

Well of course there is some risk that they don't happen, but I think we were having this conversation 4 months ago. There were no inquiries. There were no projects being planned or projects being cancelled, and we are aware of projects that are in the planning stage. I mean they are being bid to the contractors. They are doing permitting work, things of that nature, so there's strong indications that things are going to happen. Now, is there some risk that the fundamentals change and those could get canceled? Yeah, there’s some risk for that, but I just think the activity level we're seeing is not just in one or two areas. It’s in multiple parts of the world that we're seeing some of this activity. Not going back to 2012 activity levels, so don’t get me wrong, but coming off of where we have been it's a significant change.

Last question. You talked about commercial and military opportunities going forward. Are those off the shelf purchases of existing products that you have that you don't have those long lead times or catering the product to specific applications? Or are we diving into things that need to get approved by the DOD or other companies that kind of drags out that whole procurement process?

Yeah, Tyson this is off the shelf. All of these projects do not require DOD, Department of Commerce or any kind of BIS expert approval, which is of course good for us, and it’s all standard products.

All right. Thank you gentlemen.

[Operator Instructions] Thank you. Our next question is from the line of Mark Brown with Seaport Global. Please proceed with your question.

Good morning gentlemen. I first wanted to -- Hey Rob. I just wanted to check -- It's interesting that you mentioned that you're getting more inquiries from some customers and bidding on some new projects. I don't know if you have any specifics you can share with us around some of those projects. I know that there are confidentiality issues, but perhaps maybe whether these are from national oil companies or independents or IOCs or any detail that you can provide.

Sure, yes. We do want to be guarded with some of the information. It's in multiple geographic areas around the world, and it is -- of course our inquiries are coming from the contracts, [slightly] contractors, both indigenous contractors as well as those who operate in a multinational environment. The underlying projects are a combination of independents, large super majors and NOCs. So I didn’t give you a very specific answer but that's -- it's kind of across the board.

Okay. No, that's helpful. And just your CapEx, I was just curious how we should think about that going forward assuming the same sort of activity levels or maybe a slight uptick in activity from fiscal Q2. What kind of CapEx assumption should we be thinking about including lease pool additions, if any?

It’s very minimal. I think we've had $0.5 million so far this year and it won’t be much more than that going forward. I think we're -- we did guide towards around $1 million for the full year.

Maintenance CapEx.

Yeah, it’s maintenance CapEx or -- if we had a project come up and we needed some particular piece of equipments to allow us to get some of our other equipment out, we might consider that, but it’s going to be very, very limited.

Okay. To what do you attribute the Seamap resiliency when you look at year over year results? It’s just a little bit surprising that that’s held up as well as it has.

Mark, we've got a significant install base, particularly with the geophysical contractors in the oil and gas sector. So you've got a lot of people maximizing the assets they do have so they're sparing up those repair business parts, et cetera. We still have some installations ongoing with one large contractor, their proprietary version of one of our large products at Seamap, so a combination of all of that has allowed the Seamap the luxury if you will of kind of a steady business through this downturn.

Yeah. I think the other thing we’ve seen, Mark, some of our newer projects and things we’re foreseeing today even are non-oil and gas related. They're more in the hydrographic arena survey vessels, some governmental research institutes, things of that nature.

Multi-purpose vessels where you've got hydrographic oceanographic side, and seismic on one platform.

And I was curious on that front, the non-O&G, what type of -- how much visibility do you have? Is it sort of a quarter by quarter, or do you see -- have any ability to see longer term?

That's longer term mainly because these projects, in particular the government directed projects have long lead times, not only in the budgeting process, but also the procurement process for equipment. Some of these projects are actually new build vessels, so you've got some lead time there and some fairly good visibility.

Is this primarily US government and US military applications, or is it other countries that you would provide services?

It's other countries. Some of the client business is US military based and US military related, but I would say the majority of it is other, outside of the US.

Okay. Thank you.

[Operator Instructions] Thank you. Mr. Capps, there are no further questions at this time, and I’d like to turn and forward back to you for closing remarks.

Thank you, Rob. I’d like to thank everyone for joining us today, and we look forward to talking to 3 you in months at our third quarter call. Thanks very much.

Ladies and gentlemen, thank you for your participation. You may now disconnect your lines at this time, and have a wonderful day.