MIND Technology, Inc. (MIND) Q3 2018 Earnings Report, Transcript and Summary

Greetings and welcome to the Mitcham Industries Third Quarter Fiscal 2018 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, Mark Roberson, Dennard Lascar Investor Relations. Please go ahead Mark.

Thank you, Kevin. Good morning and welcome to the Mitcham Industries fiscal 2018 third 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's website at mitchamindustries.com or via a recorded instant replay until December 21. 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 7, 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 reconciliations to the most directly comparable GAAP financial measures can be found on our third quarter press release, which is on our website. Now I'd like to turn the call over to Guy Malden.

Thanks, Mark and good morning, everyone. We would like to thank you for joining us today for our fiscal 2018 third 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. Now turning to our Q3 results; there were no major surprises as our overall financial results for the third quarter were very similar to our second quarter, and generally in line with our expectations. Our equipment manufacturing and sales segment was up year-over-year but down sequentially. As you may recall, during the second quarter we had significant Seamap system deliveries as this drove a sizeable improvement in our Q2 equipment manufacturing revenues. Now client revenues are still tracking below our expectations at this point but we still see a number of promising opportunities that give us optimism for the fourth quarter and the coming year. Bookings and order activity have picked up and we are seeing an increased number of enquiries and pursuits in the marketplace. Despite the quarter-to-quarter swings that characterized the manufacturing business, it has continued to validate our strategy of moving aggressively into the marine technology industry and expanding our scope beyond oil and gas markets. Had our primary focus remain strictly on seismic equipment leasing, it's fair to say that Mitcham would not be in as favorable position and would also not have access to the many worldwide opportunities that current you've seen. Turning now to the equipment leasing segment; revenues were down slightly from a year ago but more than doubled sequentially. However, I should point out that this dramatic improvement was coming off a historical low in Q2 which amplified the sequential gains. The bulk of the increase was due mainly to marine rentals, although there were other select areas of improvements in North and South America, as well as Europe. Despite the sequential improvement in revenues, overall seismic exploration activity is still in a very fragile state and companies are hesitant to commit to new programs. For the winter season, we should see moderate activity in certain areas, although we are not expecting much from the Canadian market. We continue to explore opportunities to redeploy capital out of the lease pool and to reposition our leasing business for the longer term. And with that, let me turn the call over to Rob.

Thanks, Guy. I'll begin by giving a more detailed review 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 our equipment and manufacturing sales segment, which includes Seamap, Klein and product sales from SAP, our Australian subsidiary. Revenues for this segment totaled $6 million in the quarter compared to $5.3 million in the third quarter a year ago. Seamap revenues were $3.7 million in the quarter, up from $2.5 million in the third quarter of last year. And sales from Klein this quarter were $1.5 million, compared to about $2 million a year ago. As Guy mentioned earlier, we had a sequential increase in Klein revenues although there is still [indiscernible] expectations at this point. We anticipate a better fourth quarter for Klein based on our current visibility of improved bookings in order activity, several promising program opportunities, and additional traction in both domestic and international markets. Our SAP product group sales in the quarter were $1.1 million compared to $1.4 million in the quarter a year ago. Now including the amounts I've just mentioned or about $288,000 in intra-segment sales which of course are eliminated in our consolidated results. Revenues from our equipment leasing segment which included our leasing business, sales of lease pool equipment and some additional miscellaneous equipment sales totaled $2.7 million in the quarter compared to $2.8 million in the third quarter a year ago. Now let me discuss the profitability of each of the segments. Third quarter gross profit for our manufacturing and equipment sales segment was $2.8 million compared to $2.4 million a year ago. And this represents a gross profit margin of 47% and 45% respectively. The differences in these margins between the periods is primarily due to slight differences in product mix. In our equipment leasing business, we had a gross loss of $1.9 million compared to a gross loss of $4.4 million in the third quarter of 2017. Our gross loss was impacted by depreciation costs which are the single largest component in our leasing business cost structure magnifying the negative impact of lower sales and operating profit. That said, our lease pool appreciation cost nearly halved in terms of absolute dollars from a year ago. This is due to few lease pool additions over the past few years, as well as our equipment sales over our lease pool. We've moved into more of an asset line model that enables us to have monetized certain lease pool assets, make more use of our recent rental partnership agreements thereby reducing our asset base and investing in less capital. Our direct leasing cost for the current quarter were about $858,000 versus $739,000 in the third quarter a year ago reflecting the cost of sublease certain equipment particular projects as opposed to buying their equipment. Our general and administrative expenses were $5.2 million for the third quarter of fiscal 2018 compared to $5 million for last year's third quarter. We had some increased business development activities in the quarter which contributed to the slight increase. Our overall operating loss for the third quarter this year was $4.8 million compared to an operating loss of $7.7 million in the third quarter of fiscal 2017. The improvement largely reflects our efforts to take cost of our business including the lower depreciation expenses associated with our reduced inventory. Our third quarter adjusted EBITDA was a $406,000 loss compared to $513,000 loss in last year's third quarter. We've reported a third quarter loss attributable to common shareholders of $5.5 million, that's $0.46 per share. This compares to a net loss of $7.5 million or $0.62 per share in the third quarter a year ago. Mitcham's financial position and liquidity remained very solid. At the end of the quarter we had $27 million of working capital that included cash and cash equivalents of about $6.5 million. And finally, having to repay the entirety of our bank credit facilities during the first quarter of this year, Mitcham remained entirely debt-free. Now let me give you a few concluding remarks on our market outlook. Our third quarter was in many ways a continuation of the conditions we saw in the second. We currently anticipate that the fourth quarter will show improvement from both our equipment manufacturing and equipment sales, and leasing business. This momentum should carry through into the coming year as well. Based on our current visibility, order activity and bookings have been picking up, although we don't anticipate any Seamap system deliveries in the fourth quarter, we are seeing some promising opportunities and enquiries in hydrographic, oceanographic and defense markets where luckily the yield of incremental upside for clientele for SAP. As we emphasized previously, the relevance of our marine technology business and its expansion to the global marine industry re-range our primary focus, it will be the foundation for the growth of our Company going forward. As such, we will continue to enhance the scale of this business by actively pursuing opportunities to expand our product offerings to further cultivate our technology expertise and to access additional markets. This may come from our own internal efforts, acquisitions are alliances with other parties that our endeavors were heavily extended on the development and expansion of this business. Our leasing business remains tied to a slowly recovering seismic exploration market. We've also made progress on lowering the risk of this business for implementing the new leasing model that enables us to retain upside leverage as the market slowly recovers. Our recent partnership with INOVA Geophysical is a prime example of this as this enables Mitcham to lease a number of INOVA's onshore seismic acquisition products on a worldwide basis. This partnership gives Mitcham access to INVOA's new seismic acquisition technologies, previously [indiscernible] to us and that leverages our global footprint to ex-slide [indiscernible] to global markets. Overall, this type of partnership represents departure from our old leasing model as in keeping with our strategy of rationalizing Mitcham's asset base. As we said during our previous call, there are signs of a slow recovery in the seismic business with a moderate level of enquiry activity. As a result, there may be some internal upside in the fourth quarter with a possibility of additional asset sale from our lease pool as well. Now in conclusion, our ongoing efforts to strategically reposition Mitcham have yield a good progress to the year as equipment manufacturing and sales have become a larger and larger portion of our revenues. Now there is still a good deal of work to be done, Mitcham has come a long way in developing a measure of independence from the cyclicality of the oil and gas exploration business while maintaining enough presence in this markets to participate in recoveries. That concludes our formal remarks. Operator, we'll be happy to take any questions right now.

[Operator Instructions] Our first question today is coming from Tyson Bauer with KC Capital. Your line is now live.

I was surprised you're willing to call the bottom on the lease side and the seismic side in Q2, Q3; so hopefully you're seeing some things percolate with the oil price and some of these things opening up. You talked about activity, enquiries and those type of things as heading into the quarter; we're already kind of the first part of December. Don't those things have to firm up or be in place here, relatively in a short time table to make those deliveries to get that on the ground and get that in process; so should you have a better feel in the next one to two weeks, how that quarter is going to look?

Let me clarify a couple of things a little. In last year, the enquiries and pursuits that we are referring to are on the other segment, the manufacturing equipment and sales on Seamap, so that's a lot of activity. But to your specific question about the leasing side, I mean, it's not quite as dramatic as it has been in the past because the cold weather markets, Canada and Russia, just aren't as active as they have been in the past; so it's not quite the same situation where you got to have the stuff out in the ground by December 15 or by the first of the year to give any revenue in the quarter, that's not so much the case right now. Having said that, we do have some firm activity in those markets, I mean we have firm business in Russia this winter, not a lot but we do have business there. So I think we are seeing some of that activity and I think that gives us little bit of confidence that maybe we've seen the bottom now, granted it's still a pretty slow recovery. I mean, we've seen the bottom, we might still see the bottom because we don't get too far off it but headed in the right direction, at least, relative safe.

You talked about increased lease pool of sales, are you willing to put any kind of number to that? And also what impact in as we go forward on the lease pool depreciation, we must be getting down to a minimal level here pretty soon.

Yes, we've not put a number on it. You know those things kind of happen or they don't. Certainly, we see the same levels we saw early in this year, just to give you a sense of magnitude. And I think we're reaching a point where we're going to -- there will be some incremental reinvestment in the lease pool, again, not nearly the levels we've seen historically, obviously. So yes, you're right, we are going to see lease pool appreciation continue to trend down a bit. I don't have the exact number but [indiscernible] see next year but it's definitely low, obviously this year.

You talked about Klein being a little below, your internal projections last couple of quarters, that should improve as we get into the current quarter. And going forward, any rationale or any reasoning you can put on that, it gives us a little more color on what kind of held you back a little bit and why we're now kind of breaking through that and starting to get out of that business that you thought you're going to get originally?

A lot of these opportunities are government entity driven or maybe programmed. To a certain extent there is little bit of moving target, now some of that has shifted to the right, not that it's gone away. We're starting to see sort of combination of lot of sales efforts that we started earlier in the year in the fourth quarter than moving into next year, and that's really what's kind of driving it. There is a -- it's a bit of a different customer base, and a lot of times these budgets are little bit more fluid and they tend to shift.

So just to clarify, what we mean by programs, especially with the Navy's [ph] of the world; they will have a program where we're going to buy 10 units over two or three or four years. So once we've kind of secured that business, you've got really good visibility going forward and that's the sort of thing that have been shifting us through us to the riders impacted our results today but we're seeing those things start to form.

For example, this year some of the program opportunities that were forecast for this year have actually moved into next year and that's driven by those particular navies in the world.

Does that give you a firm backlog or has it not quite worked that way that you're in the program, you know what's coming, the ultimate customer still has to be appropriated funds to see that program through. But is it something that's in your hands?

Yes. You know, we'll consider it backlog when the contract has been executed. In other words, the program has been funded and we've got it signed up.

In the tax reform bill, part of it to get the Senator from Alaska to agree, in part was opening up, drilling up there doesn't matter. Does anyone want to drill?

Yes, I think so, yes. I think it does matter, and we've seen activity there, both on and offshore. In recent periods, it's been little bit quiet this year, I think we'll wait to see what happens there.

I think the interesting aspect to that is the National Petroleum Reserve because that is right now next door to some large fields and that could spur some activity. Again, we've not seen much activity in the last two years.

The tax reform impact; any initial pros and cons given your business model, how that works in the leasing business? Getting into the equipment manufacturing where you do have a little R&D if you do develop it internally, that's not deductible; anything that you've been able to clean out of that from your auditors that impacted you positively or negatively?

Not really given our present circumstance, not really. We have significant loss carry forwards which was a reduction in rate become theoretically less valuable, kind of oxymoron. But from a financial standpoint, we fully reserve those anyway, so there is really no impact for us. So, the bottom line is not really.

[Operator Instructions] We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further closing comments.

We would like to thank you once again for joining us on the call and for your interest in Mitcham. And we look forward to talking to you again at the conclusion of our fourth quarter. Thanks very much.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.