MIND Technology, Inc. (MIND) Q2 2018 Earnings Report, Transcript and Summary

Greetings and welcome to the Mitcham Industries Second 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 now begin.

Thank you, Michelle. Good morning and welcome to the Mitcham Industries fiscal 2018 second 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 September 22nd. Information on how to access the replay was provided in yesterday’s earnings release. Information reported on this call speaks only as of today, Friday, September 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 second quarter press release, which is on our website. Now I would like to turn the call over to Guy Malden.

Thanks, Jack and good morning everyone. We would like to thank you for joining us today for our fiscal 2018 second 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. Looking at our second quarter results, I could say that the overall trends we saw during the first quarter continued. Our Equipment Manufacturing and Sales segment posted solid results. The ongoing effort to expand the size and scope of our equipment manufacturing business as well as reduce our exposure to oil and gas exploration activities continues to pay off. However, the land size of business remains in a prolonged slump, although inquiry and bid activity seems to be improving relative to what we’ve seen over the last two years. Taking a closer look at our segment performance. Our manufacturing business posted strong revenue gains both sequentially and year-over-year. Now keep in mind that revenues from our equipment manufacturing business can exhibit large quarter-to-quarter variances due to the size and complexities of system deliveries. This quarter we had a CMAC system delivery to an institutional customer in Asia which helped drive an increase in revenues. During our previous call, you might recall that our client business had a number of orders shift to the right. This quarter revenues from client got a moderate lift from some of those delayed orders as results improved sequentially. Although we are pleased with the improvement, revenues for this part of our business are still below our expectations. However, we believe these conditions should improve going forward as we have recently seen increases in order bookings. Overall, the manufacturing business continues to confirm our strategy to expand Mitcham’s presence in the marine industry into applications beyond oil and gas. By pursuing this new strategy, we not only diversified the business and gained new opportunities and markets previously unavailable to Mitcham, but also built upon our manufacturing capabilities to greatly expand and enhance the company’s long-term prospects. Moving now to the Equipment Leasing segment. Revenues were down markedly both sequentially and year-over-year as seismic exploration activity remains weak and our leasing business revenues are at a historical low. We are continuing to explore opportunities to redeploy capital out of the lease pool and to reposition our leasing business in light of the current environment. Now despite lower activity in the leasing business, we do see some moderate improvement in bids and inquiries. We also have some project scheduled to begin in the second half of the year and have recently received inquiries for seasonal projects for the upcoming winter. Of course, much uncertainty remains over many of these projects. Overall, however, the balance of the year should be one of moderate improvement. Although, the seismic leasing market has been very challenging, our repositioned company means that we are much less levered to the downside yet remain positioned to benefit from the eventual recovery. And with that, let me turn the call over to Rob.

Hey. Thanks, Guy. I will begin by giving more detailed reviews of the financial results and then I'll make some comments about our views on the current and near-term market. Let me start with the equipment and manufacturing sales segment, which includes of course Seamap, Klein and product sales from SAP, the Australian subsidiary. Revenues for this segment totaled $9.6 million in the quarter compared to $5.8 million in the second quarter a year ago. Seamap revenues were $7.5 million in the quarter, up from $2.2 million in the second quarter of last year. Sales from Klein this quarter were $1 million, and compares with revenues of $2.3 million a year ago. As Guy mentioned earlier, we had a sequential increase in Klein revenues although not to the levels we had originally hoped for. We expect revenue improvement through the balance of the year based on our current visibility from improved bookings and additional traction in international markets. Our SAP product sales were $1.6 million in the quarter compared to $1.3 million in the year ago period. Now including the amount I've just mentioned above, about $500,000 of intra-segment sales which of course are eliminated in our consolidated results. Revenues from our equipment leasing segment which includes our leasing business, sale of lease pool equipment and some additional miscellaneous equipment sales totaled $1.3 million in the quarter compared to $2.9 million in the second quarter a year ago. Now let me briefly discuss the profitability of each of the segments. Second quarter gross profit for our manufacturing and equipment sales segment was $3.7 million compared to $2.6 million a year ago. This represents gross profit margin of 39% and 46% respectively. Now the difference in these margins between the period is primarily due to differences in product mix. In our equipment leasing business, we had a gross loss of $3.1 million compared to the gross loss of $4.9 million for the second quarter of fiscal 2017. Our gross loss was strongly impacted by depreciation costs which are the single largest component of our leasing business cost structure magnifying the negative impact of lower sales and operating profit. We did however have much lower lease pool appreciation cost this quarter versus a year ago due to reduced lease pool additions over the last two years as well as sales of equipment. Our direct leasing cost continued to shrink through the implementation of our ongoing cost reduction and business for exploration efforts as well as low overall levels of activity. The current quarter cost of $540,000 versus $785,000 for the second quarter a year ago. Our general and administrative expenses were $5.1 million in second quarter of fiscal 2018 compared to $5.4 million from the last year's second quarter, again due to our ongoing cost containment efforts. Our overall operating loss for the second quarter this year was $5 million compared to an operating loss of $8.3 million in the second quarter of fiscal 2017. Our second quarter adjusted EBITDA was at $260,000 loss compared to $567,000 loss in last year's second quarter. We've reported the second quarter loss attributable to common shareholders of $5.5 million, that's $0.46 per share. This compares to a loss of $9.6 million or $0.80 per share in the second quarter a year ago. Mitcham's financial position and liquidity remain very solid. At the end of the quarter we had over $27 million of working capital that included cash and cash equivalents of over $7 million. We generated over $3 million in cash flow from operating activities during the quarter alone. May as you recall we already paid the entirety of our bank credit facilities last quarter, therefore Mitcham remains entirely debt free. Now while our financial results were not yet reflected, we are pleased with the progress we've made in repositioning Mitcham and responding to the changes in our historical business. We feel confident that our financial performance in fiscal 2018 will exceed last year’s mostly due to the contribution of the equipment manufacturing and sales segment. We continue to see a good deal of opportunity in hydrographic, oceanographic and defense applications, [indiscernible] conventional seismic applications. We've been working diligently to expand our exposure to global marine industry and increase our manufacturing business. This remains a primary strategy to fulfill for company’s strategically for the company. We have and will continue to investigate opportunities to expand this part of our business by adding to our product portfolio. We're also working to re-exist our leasing business. We believe that by working closely with our customers and suppliers, we can develop a lower risk business model that emphasizes our strategic strengths in the seismic industry. We continue to experience signs of a slow recovery in the seismic leasing business as there remains a reasonable level of bid and acquiring activity. As a result, the second half of this fiscal year and will show some level of recovery, with most of the benefit likely tend during the fourth quarter. Reposition of Mitcham is still a work-in-progress but we are making real progress. Our clean balance sheet, and positive cash flow provides us with the flexibility to deal with the challenges and to take advantage of opportunities. We’re confident, our ongoing efforts to implement this strategic realignment for the company will dividends and will be reflected in improving financial results. That concludes our formal remarks. Operator, we’ll be happy to take any questions.

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

You talked about the five-completion business changing that to be a little more -- where we’re not spending a huge amounts CapEx and having a lower risk model there. How is the seismic lease business sitting here with the long-term strategic view of the company? And does that imply that is your lease pool equipment still current with the industry demand or you’re taking a different pathway on servicing the needs of the industry?

Well, first answer, the equipment that we have in our lease is still is current and still meet the needs of the industry and so there is no issue there. There are changing demands in the industry, which our equipment does meet those demands, that are things that developing that we look to do other things as well into CapEx as to other types of equipment from time-to-time to meet the demands of the customer. All we have today still meets those demands and is still in demand, is still being rendered.

If that’s the case is there a disconnect between what we see on evaluation place in the lease pool versus now that you’ve depreciated it down, but not necessarily had as much use as you may initially had anticipated. What’s kind of that missing value component between and whether it shows up on the books and what you view the true market value of it is?

Yes. That’s a tough question. I mean, clearly, we believe that the true value is an excess of the book values. So, we have no impairment and are very confident of that. What is the delta Tyson, that I definite one to address, and want to say, but we do think there is a difference there and we are -- the true values is well in excess of the book value?

And do you look at that lease pool as a source of cash flow? If you see something on the equipment manufacturing side, that may require more capital, are you using it as a funding agent if needed?

Well, I’m not sure I’ll put it quite that way. I think we do look at opportunities to what’s the best way to derive value out of lease pool, do you sell it as we have sometime in the past or do you continue to rent it. So, I don’t think any specific opportunity or need for capital would drive those decisions. I think those decisions can be independently made.

[Operator Instructions]. There are no further questions at this time. I would like to turn the call back over to management for any closing remarks.

Hey, thanks Michelle. We would like to thank you once again for joining us on this call and your interest in Mitcham Industries. We look forward to talking to you again at the conclusion of our third quarter. Thank you very much.

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