MIND Technology, Inc. (MIND) Q1 2018 Earnings Report, Transcript and Summary

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

Thank you, Rob. Good morning and welcome to the Mitcham Industries Fiscal 2018 first quarter conference call. We appreciate all of you joining us today. Your hosts are Rob Capps, Co-Chief Executive Officer and Chief Financial Officer; and Guy Malden, Co-Chief Executive Officer and Executive Vice President of Marine Systems. 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 website at mitchamindustries.com or via a recorded instant replay until June 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, June 8, 2017 and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay. However, before we begin with the opening remarks, I’d like to remind the participants that some of the statements we’ll be making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. I therefore refer you to our latest 10-K filing and other SEC filings. Our comments today may also include non-GAAP financial measures. Additional details and a reconciliation to the most directly comparable GAAP financial measures, can be found in our first quarter press release, which is on our website. Now I would like to turn the call over now to Guy Malden.

Thanks, Jack and good morning everyone. We would like to thank you for joining us today for our fiscal 2018 first quarter 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. Our overall first quarter results were better than expected, although this was largely driven by a large sale of lease pool equipment as we continue to redeploy capital into higher return investments. Overall, the size of business remains challenging, though this is becoming less of an issue due to the repositioning of the company towards more attractive areas. Taking a closer look at our segment performance, our manufacturing business held stable, both sequentially and year over year. As you know, revenues from our equipment manufacturing business can be subject to large quarter to quarter variances due to both the timing of large system deliveries from Seamap, as well as the flow of orders coming in through Klein and SAP products sales. The SAP, Seismic Asia Pacific our subsidiary in Australia. This quarter, we had a Seamap system delivery to a new build, high direct vessel in Asia, counteracting a decrease in client sales as we saw a number of client orders shift to the right. We are certainly benefiting from the diversification of our manufacturing businesses, with their own portfolio of products, technologies and end markets. Our manufacturing business continues to be the primary growth driver for Mitcham Industries. We are experiencing increased level of bids and proposals in government and institutional markets, both in the US and abroad and we believe the segment is poised to show improved performance this fiscal year versus last year. Moving now to equipment leasing. As was the case during the four quarter, although our overall leasing segment revenues in the first quarter were up both year over year and sequentially, the increase was almost entirely due to higher lease pool equipment sales, rather than any meaningful improvement in leasing activity. We continue to redeploy capital out of the lease pool to better position Mitcham in the manufacturing business and to decrease our overall exposure to seismic exploration activity. Exploration activity continues to languish and our current visibility gives no clear indication that conditions will significantly change in the near future. And we are seeing some improvement in inquiries and project bids for seismic work in the marketplace, which gives us some encouragement. However, these opportunities carry a high degree of uncertainty. Overall, we continuous to expect that any meaningful improvement in leasing activity will be slow to develop. With that, let me turn the call over to Rob.

Okay. Thanks, Guy. I’ll begin by giving a more detailed review of the financial results, then I'll make some comments about our views on the current and near term market. Let me start with our equipment and manufacturing sales segment, particularly Seamap, Klein and product sales from SAP, the Australian subsidiary that Guy mentioned. Revenues for this segment totaled $6.9 million in the quarter compared to $7.2 million in the first quarter a year ago. Seamap revenues were $4.9 million in the quarter, which was flat with the first quarter of last year. Sales from Klein this quarter were $938,000, which compares to $2.1 million a year ago. Based on production and delivery schedules going into the year, we did expect a bit of down quarter at Klein. However, as Guy mentioned earlier, we did see some expected Klein orders to the right and we believe these deliveries will positively affect, impact our results in coming quarters. Our SAP product sales were $1.3 million in the quarter compared to $480,000 in the year ago period. Now including the amount I've just mentioned are about $203,000 in Intra-segment sales, which are of course eliminated in our consolidated results. Revenues from our equipment leasing segment, which includes our leasing business, sales of lease pool equipment and some additional miscellaneous equipment sales and services, totaled $11.5 million in the quarter, compared to $4.5 million in the first quarter a year ago. The year over year gain was driven entirely by lease pool equipment sales, which came in at 48.8 million compared to $906,000 in the same quarter last year. One of our strategies has been to rebalance our lease pool and redeploy capital in the high return investments. This quarter, we took advantage of opportunities to sell certain underutilized land seismic equipment. We'll continue to evaluate opportunities to redeploy our capital and anticipate making additional sales. However, it is unlikely that any further sales this fiscal year will be the same magnitude as those in the first quarter. Let me discuss the profitability of each segments briefly. First quarter gross profit for manufacturing and equipment sales segment was $2.9 million compared to $3.2 million a year ago. And this represents a gross profit margin of 42% and 44% respectively. The difference in margins between the periods is primarily due to differences in product mix, reflects a higher proportion of sales coming from SAP, which do carry a generally lower gross margin. In our equipment leasing business, gross profit was heavily impacted by the large equipment sales, which led the segment to a profitable quarter. The leasing business reported a gross profit of $281,000 in the first quarter compared to a gross loss of $3.5 million in the first quarter of fiscal 2017. We again had lower lease pool depreciation cost of $4.2 million in the quarter versus $6.9 million a year ago due to reduced lease pool additions over the last two years and sales of equipment. We expect this trend to continue as more equipment becomes fully depreciated. Our ongoing cost reduction and business rationalization efforts, as well as lower levels of activity, contributed to sequential reduction in direct leasing costs. Total lease costs are still up year over year, with current costs at $944,000 versus $752,000 in the first quarter a year ago due to some costs associated with certain sub leased equipment. Our general and administrative expenses were $4.9 million for the first quarter of fiscal 2018 compared to $5.3 million for the last year's first quarter. This reduction reflects our ongoing cost containment efforts. Our overall operating loss for the first quarter this year was $3.3 million, compared to an operating loss of $6.3 million in the first quarter of fiscal 2017. Our first quarter adjusted EBITDA was over $8.9 million, compared to $2.2 million in last year’s first quarter. We reported a first quarter loss attributable to common shareholders of $2.9 million or $0.24 per share. This compares to a loss of $6.4 million or $0.53 per share in the first quarter a year ago. Let me make just a couple of comments about our liquidity and our balance sheet. At the end of the quarter, we had over $26 million of working capital, that included cash and cash equivalents of over $2 million. We generated over $1.1 million in cash flow from operating activities during the quarter. As I mentioned during our prior call, during the first quarter, we repaid all remaining balances on our bank credit facilities, therefore Mitcham remains entirely debt-free today. In conclusion, we feel confident that our financial performance in fiscal 2018 will exceed the prior year, particularly in our equipment manufacturing and sales segment. As Guy mentioned earlier, we are seeing quite a lot of opportunity in (indiscernible) historical seismic application, such as capitulated work. Specifically, we’ve been making inroads with the US Navy and seeing additional work in defense related industries throughout the world. These markets have the potential advantage of our manufacturing business. While the manufacturing business has certainly helped to diversify Mitcham beyond the seismic exploration, it's important to keep in mind that we’re still in the process of developing this business by looking at further strategic realignment and better leverage offering capabilities. To that end, we're closely examining the market for opportunities to build up on our manufacturing capability capabilities, expand our technologies, products and market presence. With additional scale, we believe we can better position Mitcham to access higher growth products and markets. The seismic leasing business will likely remain highly challenging throughout the balance of the year. We do still see signs of a possible recovery as there remains a reasonable level of bidding and inquiry activity, with some of these projects being quite sizable. While the extent of any such recovery is very uncertain, I’d remind you that any incremental improvement commands a significant impact on us due to the operating leverage within our leasing business. We feel the company is now much better positioned to go in non-oil and gas related markets and with the opportunity to take advantage of our seismic leasing business when exploration activity eventually recovers. Our debt free capital structure also enables us with the financial flexibility to weather any additional market adversity, or to invest in new growth opportunities. In short, we've managed not only to survive a downturn and distort proportions, but also been able to emerge from that as a stronger, more capable company with better growth prospects and a leaner financial and operating structure. That concludes our prepared remarks. Operator, we’ll be happy to take any questions.

[Operator Instructions] Our first question is from the line of Tyson Bauer with KC Capital. Please proceed with your question.

Good morning. Quick question. On the lease pool sales, was there any particular mix or was that to a single purchaser that bought that kind of quantity? And then what impact does that have on the lease pool depreciation as we go forward?

It was a series of transactions and it will have some impact on lowering depreciation going forward. So we expect it to sort of trend down - to continue to trend down I should tell you as we go towards the balance of the year. But it was a series of transactions.

It was a fairly broad mix of age or type of equipment?

Yes it was. There were - not getting into specifics for competitive reasons, but there was a - there were two or three different types of equipment involved and they were in different geographic areas as well.

Okay. For the leasing equipment size, are we kind of where we were a couple of years ago where we have that opportunity for some major one off contracts that can really make a quarter or two quarters for you, but overall you're still kind of under the haze of what we've been seeing the last 12 months?

Yes. I think that's a good way to put it. I mean there's no doubt that, it doesn't take much as you well know to really trust banks with one or two contracts. But those are uncertain at this point. So I think as well.

And at this point is the northern hemisphere as we - obviously that’s a ways away. Is that still, nothing really there as a catalyst that you can see at this point that would get that going, even if certain areas that have been typically closed off by the federal government may reopen?

I don't see anything that would have been a direct impact like that. I mean certainly it would be positive, but we can't see any direct impact in the near term.

As far as the equipment sales, the roll out as we kind of go through the year for modeling purposes, any major delivery schedules in one quarter versus another? Is there a fairly even rollout and recognition of revenue as we go through fiscal ‘18?

I can be a bit lumpy as you know. It kind of depends on when we actually end up delivering or more importantly, when a customer looks at delivery sometimes. So it’s not necessarily even throughout the year.

We have some visibility, certainly on the manufacturing side. Our schedule of deliveries through the year, but as Rob said, it does tend to get a little bit lumpy.

Okay. Are you seeing anything percolate in Europe, especially Eastern Europe at this point as some renewed activity is suggested in the marketplace?

There certainly is activity in Eastern Europe, no doubt about that and there’s a lot of civil bids, projects being bid and again, just the issue of who wins them and what equipment they need and how much equipment is in the marketplace already.

All right. Thank you.

Our next question is from the line of Mark Brown with Seaport Global. Please proceed with your question.

Hey Guy and Rob. Was just curious. How should we think about the lease pool equipment sales going forward? I know that's usually obviously opportunistic and ad hoc, but should we think in terms of where you've averaged over the last two quarters or how would we think about modeling that?

I think I’d probably model lower than that because this quarter is going to skew that average pretty dramatically. We would expect some additional sales this year as we've seen in the past. So I think what I would probably do is try and go back to historical, last couple of years and so half of this first quarter effect.

Okay.

Some indication.

And with the client orders pushed to the right, I just - was that - can you - is there any details you can provide in terms of what the situation was there and what - is that a temporary push or uncertain whether that will actually come to fruition?

We feel pretty comfortable it’s going to come to fruition. It's a combination of delays in deliveries and then also delays in orders being placed. These are governmental entities in many cases so you have budget issues, so when they can actually place orders. But we're not seeing things go away at all. Yes. We knew it was going to be, the first quarter especially and actually the first half, be a little bit lighter for the client side going into the year. That was pretty clear going into it.

Particularly, I want to stress, Mark, particularly, as Rob said, government, also these institutes, we've got very good visibility on projects, very good visibility on some of the delivery. It does move around again based on budget and if there are any delays on their end, then they start slipping equipment delays. So things haven't gone away but it is a slide to the right.

And then just on the leasing side, it seems like your tone was not any more optimistic than it had been. You're seeing some sort of gradual improvement, but it's very uncertain. I'm just curious where are you getting inquiries from customers? What types of markets? Are you still hearing customers calling in and just at least scoping out possible work?

We’re actually pretty over a pretty broad geographic area. I mean some in North America, certainly Latin America, Eastern Europe, North Africa. So one area that we've not seen much activity yet is Russia still. That’s still pretty uncertain going into the balance of the year.

Okay. Good. Well, that's very helpful. Have a good one guys.

[Operator instructions]. The next question will be coming from the line of Ross DeMont with Rainin Group. Please proceed with your question.

Hi guys. Good quarter. Quick question about the equipment sale. I guess you sold that equipment for about 44% more than its carrying value, than its net book value. Is that a good proxy for the difference between the economic value of our portfolio and the carrying value? Do you think that’s reflective of the remaining lease pool?

Wow. That's an interesting question. I think it’s at least that. I mean I think certainly the economic value is no less than as indicated by that and actually could be more I think. I think I should give it …

(Indiscernible).

(Indiscernible) it was closer to the value.

Okay, that's helpful. And then in the press release, there was the comments which I think we've heard for a couple of quarters here which is equipment sales remain below expectations. I know you're careful and cautious about providing forward looking statements. Can you provide a backward looking statement? In other words, what were expectations?

I’d prefer not to do that as far as specific. I mean it’s - you kind of compare, looked at last year, we expected to be along those lines perhaps.

Okay. I mean maybe - I know it's hard. I'm just trying to get a sense of when we bought Klein, however long ago that was, we added it with our existing Seamap. I thought that if you added those two together and put a little growth on them, we’d trend towards $40 million annual revs. But we haven't seen a quarter that clocks at that run rate. Is that way off what this thing could be doing? Is it …

No, it’s not. It’s not way off at all. I think we still see that same trend. We just - that issue of just timing of things.

Okay. Super. Thanks for taking my questions.

[Operator instructions]. Thank you. At this time, I will turn the floor back to management for concluding remarks.

We would like to thank you once again for joining us on this call and for your interest in Mitcham Industries. We look forward to talking to you again at the conclusion of our second quarter. Thanks.

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