MIND Technology, Inc. (MIND) Q3 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the Mitcham Industries Third Quarter 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, Mr. Jack Lascar. Thank you, Mr. Lascar. You may begin.

Thank you, Audrey. Good morning and welcome to the Mitcham Industries Fiscal 2017 third 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 www.mitchamindustries.com or via a recorded instant replay until December 22. 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, December 8, 2016 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, 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 these statements. I would now like to turn the call over to Guy Malden. Guy?

Thanks, Jack and good morning, everyone. We would like to thank you for joining us today for our fiscal 2017 third 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 third quarter results. Although, our financial results do not reflect it, we believe we are seeing signs of improving conditions within both segments of our business. The Equipment Manufacturing and Sales segment generated slightly lower sequential revenues. Approximately $4.5 million of orders that we had anticipated shipping in the third quarter were delayed due to a combination of third-party suppliers' inability to provide certain equipment and some internal engineering and manufacturing issues. The year-over-year decrease was also magnified due to higher than normal Seamap system sales during the last year's third quarter. However, our outlook and overall optimism for the segment continues to rise. We expect our fourth quarter results in the Equipment Manufacturing segment to be much improved. Some of the third quarter shipment delays were related to our next generation sonar products. As is often the case with new products, we did experience some delays from our initial expectations. However, we believe these issues have been resolved and we are now shipping orders for these products. Due to a more stable nature of the non-oil and gas related contracts within our equipment and manufacturing business, we have greater visibility than perhaps we have had historically. Based on our bookings and the many opportunities available worldwide, we are optimistic for even stronger results in the next fiscal year. We recently received two significant orders for the coming year and are seeing more proposals and bids on projects outside the oil and gas space. These opportunities are mostly in the government and institution markets outside of North America. We are not only seeing a greater number of them as we continue to penetrate new markets and add new customers, but we are also seeing the scope of some of these projects become larger as well. In short, our transformation away from being solely dependent on the cyclical energy industry and pursuing opportunities in the hydrographic, oceanographic, environmental and defense industries has not only enabled us to survive the downturn, but also leverage our core engineering and manufacturing strengths to open opportunities that were previously unavailable to us. Turning now to our Leasing segment. Our equipment leasing revenue both land and marine remained weak, but we posted improved sequential results due to increased activity in Latin America and continued work in Europe. As we mentioned in our last call during the second quarter, we began to see early signs of potential pockets of opportunity on which we maybe able to capitalize. However, we believe it would take time for those opportunities to be reflected in our financial results. In the third quarter, we begin to see some of those opportunities manifest themselves, although, the improvement in the overall leasing market remains muted. So while we are heartened to see sequential improvement, I should note that activity in the leasing business is still well below year ago levels and that the overall seismic market remains in a fragile state and mired in uncertainty due to the upheaval the industry has gone through over the past two years. Now that being said, we've seen an increased number of inquiries in anticipation of more favorable market conditions. We have been on many of these projects for the most part outside of the U.S. and expect these efforts to have some positive impact during fiscal 2018. Looking at the geographic areas of interest during the third quarter, we again saw very little land leasing activity in North America or from Russia. With the winter season in Russia and Canada drawing near, our preliminary assessment is that neither of these areas will generate any material improvement from last year's winter season. European revenues are continuing to show sequential improvement. Although, they remain below year ago levels. The sequential increase was due to a project that it started up last quarter and has recently been completed. Now that same equipment is scheduled for another project beginning earlier in the New Year. Overall, the European region is an area that shows promise as there are number of projects and bids there. Latin America is another area that is one of the brighter spots for our leasing business. We again saw both sequential and year-over-year revenue increases due to work that we are doing in Colombia. We are seeing a number of project opportunities in areas such as Brazil and Bolivia in addition to Colombia that could benefit us in fiscal 2018. Elsewhere in the world, we are also seeing incremental opportunities in North Africa, the Middle East and Asia. While those opportunities are a bit more speculative and uncertain, they do hold some promise for additional work going forward. Now in the Marine leasing market, our revenues were down from last year, but up sequentially. During the third quarter, we benefited from some small projects that drove the increase, but this was not indicative of any substantive change in market conditions. The Marine industry is still being weighed down by abundance of surplus equipment, so it's unlikely that the market environment will change dramatically in the near future. So for the Leasing segment as a whole, we expect the fourth quarter to be sequentially better than the third quarter. And with that, let me turn the call over to Rob.

Thanks, Guy. I’ll begin by giving you a more detailed review of the financial results and then I'll make some comments about our views on the current market and near-term market. Let me start with our Equipment and Manufacturing sales segment, which include Seamap, Klein and product sales from S.A.P. or SAP, our Australian subsidiary. Revenues for this segment as a whole totaled $5.3 million in the quarter, compared to $10.1 million in the third quarter a year ago. Seamap revenues were $2.5 million in the quarter, which is down from the $10 million in the third quarter of last year. We had one large order that we had anticipated shipping in the third quarter slipping to the fourth quarter due to late arriving customer supply components. Last year’s third quarter also benefited from the deliveries in very sizable orders. Sales from Klein this quarter were $2 million as there are no comparable sales a year ago since we acquired Klein in December of last year. Our Klein sales were mostly to customers outside the oil and gas industry. As Guy mentioned, Klein’s results in the quarter were negatively affected by few engineering and manufacturing issues related to new products. These issues caused us to miss our original scheduled permission for shipping certain orders. And we believe these issues have been resolved and we are now starting to make up ground. Finally, our SAP products sales were $1.4 million in the quarter compared to $151,000 in the year ago period. SAP benefited from favorable project timing as quarter-to-quarter movements and the timing of shipments kind of a sizeable impact on revenues there. Now included in the amounts I've just talked about, our intra-segment sales of about $600,000 and I know these are eliminated in our consolidated results of course. Revenues from our Equipment Leasing segment, which includes our leasing business, sales of lease pool equipment and some additional miscellaneous equipment sales, totaled $2.8 million in the quarter compared to $5.7 million in the third quarter year ago. Activity was lower in nearly all of our geographic regions with the exception of Latin America which provided the majority of our leasing revenues this quarter. As Guy touched on earlier, although, the fundamentals for the leasing business are still weak. We expect the business to perform slightly better during the fourth quarter compared to the third. Our lease pool equipment sales revenues were not material in the third quarter. We do believe that however there are opportunities to sell certain lease pool equipment in the coming months and we will evaluate those as they arise. Now let me briefly discuss the probability of each of the segments. Third quarter gross profit for our Manufacturing and Equipment sales segment was $2.4 million compared to $5 million a year ago. This represents a gross profit margin of 45% and 49% respectively. The difference in the margins between the periods is primarily due to the differences of product mix and in this year’s period some unexpected completion costs related to a multi-year program at Klein. Once again, our gross profit in the Equipment Leasing segment was strongly impacted by the high fixed cost of depreciation, which magnifies the negative impact of lower sales on our operating profit. Therefore, we reported a gross loss of $4.4 million compared to comparable loss of $3.2 million in the third quarter of fiscal 2016. Once again, we did have lower lease pool depreciation cost of $6.4 million this quarter versus $7.3 million a year ago due to the reduced lease pool additions over the last two years. Our ongoing cost reduction and business rationalization efforts as well as lower levels of activity contributed to the reduced direct leasing cost which with current quarter cost at $739,000 versus $1.2 million for the same quarter a year ago. Our general and administrative expenses were $5 million for the third quarter of fiscal 2017 compared to $4.4 million in the last year’s third quarter. The cost increase was due to the additional expense of Klein, which was not present last year, of course. Without the effects of Klein, the SG&A would have declined about 5% year-over-year. Our overall operating loss for the third quarter this year was $7.7 million compared to an operating loss of $6 million in the third quarter of fiscal 2016. Our third quarter adjusted EBITDA was a loss of $513,000 compared to a profit of $4.6 million in last year’s third quarter. We reported a third quarter loss attributable to common shareholders of $7.5 million or $0.62 per share. This compares to a net loss of $5.8 million or $0.48 per share in the third quarter a year ago. Let me make just a few comments about our liquidity and balance sheet. Mitcham's overall financial position does remain solid. At the end of the quarter, we had almost $17 million of working capital that included cash and cash equivalents of about $3.2 million. Despite the very challenging conditions in the energy industry, we generated over $600,000 in cash flow from operations in the quarter, and about $3.7 million in cash flow from operations during the first nine months of the fiscal year. During the first nine months of the year, we’ve reduced our outstanding debt by $11.8 million. Contributing to this was about $7 million of net proceeds from our 9% cumulative preferred stock offering in June. This brings our net debt balance, which is debt less cash balances to about $5.4 million as at the end of the quarter. As of today, in fact that amount is about $4.6 million. Let me conclude our prepared remarks with a discussion of our current market outlook. First and foremost, we currently anticipate improvement in our fourth quarter results as compared to the third quarter. Projected shipments, including those delayed from the third quarter will, we believe, result in higher revenues from our Equipment Manufacturing and Sales segment. We also expect marginal improvement in our Leasing segment. As we move into fiscal 2018, we expect continued slow improvement in our leasing business, but see a number of exciting opportunities for our Manufacturing business. In fact, as Guy mentioned, we are recently awarded contracts to supply equipment for two new-build vessels in Asia. These projects, which are not related to traditional seismic contractors, total about $7 million and are scheduled for delivery in fiscal 2018. Overall, our strategic intent going forward is to continue to diversify our sales away from dependence on only the oil and gas industry and focus on growing our Equipment and Manufacturing business represents an increasing non-energy opportunities. On the expense side, we’ll continue to look for ways to reduce our overhead cost and operate more efficiently. Given all these factors, we do expect to generate positive EBITDA in the fourth quarter. Our capital structure remains solid, and we believe that it positions us to take the most – make the most of any opportunities that are likely to arise from this strategic direction. We continue to explore a number of these opportunities. Based on the factors we've discussed earlier, the picture has become one of greater optimism, not in small part due to our strategic repositioning of the Company and the manufacturing business as well as the recent improved stability in the oil and gas markets. That concludes our prepared remarks and we would be happy to take your questions. Operator?

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Tyson Bauer with KC Capital. Please proceed with your question.

Good morning, gentlemen.

Hey, Tyson.

When you talked about the $4.5 million in delays, do you expect to recoup that full amount in Q4, plus your normally scheduled business? Or are we seeing a shift to the right, where we pick up some of that in Q4, but we'll just kind of move some of that into fiscal Q1 and then forward?

For the most part we’ll pick that up in the fourth quarter.

So between Q3 and Q4 it will pretty much be on schedule as what you originally thought after Q2?

Pretty darn close.

In regards to the Asian contracts that you picked up for delivery in fiscal 2018, any time table there to those? Are those later in the year? And then also, the purpose of those is it more scientific-based that they are going to use them for, or do you know?

Yes, we do know Tyson, right now it looks like Q1 and Q2, there's two separate systems. It is more scientific-based. These are combination hulls, in other words multipurpose hulls as we spoken in previous calls that have seismic capability, but more importantly hydrographic, oceanographic capabilities. So it’s a combination of equipment and they're obviously outside, as we said outside of North America.

Is the margin profile better for some of these industries outside of oil and gas, or is it pretty much consistent across the board?

I think they're very consistent across the board.

Okay. Now that we have the elections, I always feel compelled to ask a Trump question.

Okay.

There has been talk about undoing some of the executive orders regarding shutting down the expiration in the Gulf Coast closer to Florida, West Coast, Arctic Circle, some of these other topics that have been kind of closed off. Does that give you more optimism that those could be reopened, or doesn't that matter if it is reopened if there is nobody interested in exploring those areas?

Yes. I think it all comes down to exploration budgets. That’s the key.

It’s certainly not bad news, but I don't know that by itself is caused to have celebration.

We have seen some easing in Mexico with Pemex regarding foreign investment and other players, giving them a little more control. Does that help you out in the Western Gulf to maybe stimulate some activity down there?

Potentially there's been a lot of activity offshore in the Western Gulf particularly Mexico, with a lot of our current customers acquiring multi-client data et cetera, et cetera. We don't necessarily benefit directly from that on the leasing side. All those vessels for the most part have our Seamap equipment onboard, so there is some benefit there. Is it directly tied to sales? Probably not. But the continued focus in Mexico both onshore and offshore, onshore in particular with lease sales and things like that could have some potential impact on the leasing side, right.

When you talk about the initial inquiries that you are starting to see a pick up in activity, especially maybe in Europe and some of these other areas, are those typically the larger entities. Do you have the wherewithal to kind of be first in exploration, or are these some of the smaller wildcatters that can take on a little more risk in speculation?

Well, it’s a combination, but I think typically it tends to be the larger entities, although not necessarily super majors, but you certainly have the NOCs involved in many cases, in some of the larger entities. So I think the stuff we are seeing outside of North America in particular tends to be a little more financially stable into these involved.

Okay. And last question in regarding the defense contracts, obviously a longer duration than usual in procuring those contracts based on budgets and other things; do you have an idea of scope, time table, when you may get those initial contracts? And also, are you authorized to sell to foreign governments for their defense programs, or is this U.S. only?

No it's combination, it is U.S. Navy, but it's also foreign navies as well and of course, we do go through a complete vetting process through Department of Commerce and Department of State as far as license requirements et cetera, et cetera for export. And that is a process. We know the process extremely well and so when these projects do come to even a bidding stage, we start the export license vetting process at that time. So we kind of keep things running concurrently.

Okay. Thank you, gentlemen for my one question and one follow-up.

Thanks, Tyson.

[Operator Instructions] Our next question comes from the line of Greg Hillman with First Wilshire Securities. Please proceed with your question.

Hey. First of all, could you give a little more detail or color on Latin America in particular? Like Colombia, whether could it get much bigger than what it is and maybe some other countries, like Argentina, for example for your traditional equipment leasing business?

Well, I think I wouldn't characterize Colombia is getting bigger from – I think we're seeing a little bit more stable. There are a number of projects scheduled to take place in the coming year, so we're – I think feeling little more confident about it, a little more stable business there. Again, not going back to the 2012 levels, let's be clear about that. I think outside of that there are some pockets and potentially very large projects in areas such as Brazil and Bolivia as we mentioned. And so those are kind of happen or they don't happen, but there certainly is activity planned there. Argentina is a bit of a different animal. It's a difficult market for lots of reasons, although it is improving. For most part of the seismic activity there has been conducted by one entity and so we have not done business in Argentina for some time, although it is potentially a market for us going forward.

Okay. And on the non-oil side, could you just talk a little bit about what is the synergy between Seamap and Klein? And can you talk about the R&D effort at both those companies and how they go about R&D, whether it is just customer focus, or whether there is any more blue sky type stuff.

Sure. Greg. First of all between Seamap and Klein there are some customers that crossover and these are the customers that are the institute's that provide some amount of seismic, it may not be traditional oil and gas seismic activities, but more earthquake monitoring et cetera. So you've got equipment on hulls that are both for non-oil and gas earthquake monitoring type activities as well as hydrographic and oceanographic activities. We may have talked about this before, but the synergy between the two companies. If you look at the electronics packages, they're in housing, they're in a very high shock environment, you've got power and telemetry issues that are basically the same, you get data up to a top side unit. So when you actually look at the systems, what we're trying to accomplish with data out in the ocean they're very, very similar. From a project engineering perspective, there is a mechanical platform and electronics platform and then a top side with a graphical user interface that you can plug in a number of third-party software and hardware. What we've started to do is crossover between the two engineering groups on light type projects where we can crossover resources particularly on the mechanical side to begin with. As opposed to customers, it's more about products, as opposed to a customer focus.

Okay. And just another question on border security for countries, or even the United States border. For example, can use your hydrophones or not I guess your traditional seismic equipment to detect tunnels at the border of Mexico and the United States?

I mean traditionally or historically we don't believe our equipment has been used in that application. Again, those are both geophones and hydrophones have different frequency. Klein has a product called waterside security that provides a platform for port security monitoring, offshore platform monitoring from a vessel intrusion, diver detection et cetera, which is starting to gain a bit more traction. We've got very high hopes that moving forward certainly in the political environment around the world that this product will see some additional traction.

Okay. And is it being used in the United States, or it's just being used outside of the United States right now?

Both.

Okay. Thanks gentlemen.

Okay, Greg.

Thanks, Greg. End of Q&A

[Operator Instructions] I'm showing no further questions at this time, so I will turn it back to management for closing remarks.

Thank you. We’d like to thank you once again for joining us on this call, and for your interest in Mitcham Industries. We look forward to talk to you once again at the conclusion of our fourth quarter.

Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference. You may disconnect your lines and have a wonderful day.