MIND Technology, Inc. (MIND) Q1 2019 Earnings Report, Transcript and Summary

Greetings and welcome to 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’s now my pleasure to introduce your host, Mr. Jack Lascar. Thank you, Mr. Lascar. You may begin.

Thank you, Michelle. Good morning and welcome to the Mitcham Industries fiscal 2019 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’s website at mitchamindustries.com or via a recorded instant replay until June 14. 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 07, 2018 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 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 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, 2018. 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, Jack, and good morning, everyone. We would like to thank you for joining us today for our fiscal 2019 first quarter conference call. I’ll start 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. Many of you have probably seen our May 30th press release, which disclosed a significant increase in orders for both Klein’s sonar products as well as Seamap systems and related equipment. Specifically, during the first third of the fiscal year, we have booked $6 million in orders for Klein products, which includes a contract related to a multi-system purchase with the Royal Netherlands Navy. We also have received $6.1 million in orders for Seamap’s seismic source controller and RGPS positioning systems and ancillary equipment. Additionally, we have received orders totaling approximately $1 million for our recently introduced SeaLink towed streamer products, also under Seamap. Given that the orders for Klein already exceed those we booked during the entirety of fiscal 2018, we believe this increased activity may indicate the beginning of recovery in the marine technology business to more normalized levels. Certainly, it substantiates the increasing acceptance of our sonar technology in new applications such as defense, and demonstrates the promise and potential of our portfolio of Marine Technology Products. These new orders will begin impacting our financial results, primarily during the second half of the current fiscal year. Looking at the first quarter, our Marine Technology Products segment was down both sequentially and year-over-year, although Klein posted improved results in both timeframes. The timing of orders, which has a large impact on our results, did not play in our favor this quarter, so the segment as a whole was down. But, given the large influx of orders as well inquiry activity and customer discussions, we believe the Marine Technology Products segment will post much improved performance during the second half of this fiscal year. Now, turning to our leasing business. Activity remains relatively weak with small revenue contributions coming from Russia, South America and Canada. Fundamentals remain extremely challenging. And although our leasing revenues in the first quarter were up sequentially, the increase was entirely offset by much lower lease pool sales. With that, let me now turn the call over to Rob.

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 marine technologies product segment, which include Seamap, Klein, and product sales from SAP, our Australian subsidiary. Revenues for this segment totaled $3.7 million in the quarter compared to $6.9 million in the first quarter a year ago. Seamap revenues were $1.8 million in the quarter, which was down from $4.9 million in the first quarter of last year due to lag in systems sales. Revenues from Klein this quarter were $1.5 million and this was up from $938,000 a year ago. Finally, our SAP product sales were $480,000 in the quarter compared to $1.3 million in the year-ago period. Now included in the amounts I just talked about are about $142,000 in intersegment sales or intercompany sales which are of course eliminated in consolidated results. Revenues from our Equipment Leasing segment, which includes leasing, sales of lease pool equipment and some additional miscellaneous equipment sales, totaled $4 million in the quarter compared to $11.5 million in the first quarter a year ago. And this pullback was almost entirely attributable to unusually large sales of lease pool equipment totaling about nearly $9 million during last year’s first quarter. As you’ll recall , this sale is part of our strategy to adjust the size and composition of our lease pool to better suit the evolving market. Now, let me discuss the profitability of each of the segments. First quarter gross profit for Marine Technology Products segment was $1.5 million compared to $3 million a year ago. This represent gross profit margins of 40% and 43% respectively. And the difference in the margins between the periods is primarily due to differences from product mix, no fundamental differences. In our Equipment Leasing business, I mentioned earlier that we did not have the large sale of lease pool equipment that took place a year ago, although our depreciation expense fell from $4.2 million to $2.7 million year-over-year. As a result, the leasing business reported a gross loss of $235,000 in the first quarter compared to a gross profit of $281,000 in the first quarter of fiscal 2017. Our direct leasing costs were reduced about 2% year-over-year with current quarter costs at $928,000 versus $944,000 for the first quarter a year ago. Our general and administrative expenses were $5.6 million for the first quarter of fiscal 2019 compared to $4.8 million for last year’s first quarter. This increase was mostly due to an additional $400,000 approximately related to the transfer of the acquired sensor and solid streamer technology that we acquired earlier this year as well as incremental ramp-up costs for production and repair facilities in Asia related to these products. We also had a greater level of unabsorbed overhead costs which was a direct result of lower sales in our Seamap segment or Seamap operations. Our R&D expense for this quarter was $370,000 which compares to about $98,000 during last year’s first quarter. During the quarter, we took a $200,000 charge for doubtful accounts which arose due to the settlement of a long-term -- long outstanding account in South America. Our overall operating loss for the first quarter this year was $5.6 million compared to an operating loss of $2.3 million in the first quarter of fiscal 2017. First quarter adjusted EBITDA was a $1.5 million loss compared to a $9 million profit in last year’s first quarter due to the large lease pool sales. We reported a first quarter loss attributable to common shareholders of $6.3 million or $0.52 per share. This compares to $2.9 million or $0.24 per share in the first quarter a year ago. Mitcham’s financial position and liquidity remained very solid. At the end of the quarter, we had over $26 million of working capital that included cash and cash equivalents of about $9 million. And having repaid the entirety of our bank credit facilities last year, Mitcham remains entirely debt free. Let me make just a few comments about our market outlook. While our first quarter was a difficult one, much of the underperformance was a result of project timing as well as the higher incremental period costs that are ramping up as we prepare for the higher activity later this year. Based on our current visibility, we believe the balance of fiscal 2019, particularly the second half of the year will be significantly better led by our much improved outlook for Marine Technology Products and the bookings achieved thus far. Order activity and bookings within Klein and Seamap businesses have been improving. We have been highly encouraged by the order flow as well the level of inquiries and receptiveness from our customers, for several of them noting an improved pricing environment. We’re particularly excited about our SeaLink product line that has generated customer interest after having been introduced so recently. We should begin providing repair and support services to Mitsubishi during the second quarter under the agreement that we entered with them earlier this year. All in all, the increased interest we’re seeing so far leads us to believe that we may be seeing a larger fundamental improvement and market conditions for our Marine Technology Products segment. The market may well be poised for a new phase of growth driven by more favorable demand environment. For the Equipment Leasing business, conditions are still weak for much of the seismic exploration market. However, there should be demand in Europe and South America through the year with possible opportunities for projects and other parts of the world. Given the end of an extended period of oversupply in global petroleum markets, fundamentals now appear more in balance, setting stage for a possible improvement in the future. However, we do not see a sizable recovery in the land seismic activity through the balance of the year and then eventual recovery will likely not return to the same brisk activity levels seen prior to the downturn. Accordingly, we’re consolidating our operations in anticipation of the lower overall level of rental activity across many of our geographic markets. And so, we feel we can still adequately serve them with the reduced asset base and lower overhead cost. We should start to see the effect of these initiatives later this year. As we progress through the year, we will continue to seek opportunities to expand the scope and presence of our marine technology business. Although, we’re certainly pleased with the increasing interest and bookings achieved thus far, there are additional opportunities available in sonar, seismic and hydrographic markets that we intend to pursue. Operator, that concludes our formal remarks. We’ll be happy to take any questions now.

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 KC Capital. Please proceed with your questions.

Good morning, gentlemen.

Good morning, Tyson.

And congratulations on that order flow and getting the bookings as the first step to your growth in the marine side. With the first quarter -- we knew the first half of the year was going to be choppy. And we had to work our way through and navigate through this time period to get to hopefully much better results in the second half of the year. Given your comments, are your second half expectations still intact as well as going into calendar 2019 and we just now got to get ourselves through Q2?

I think that’s very adequate. I think we feel very much of what we did before, feel very good. We’re seeing the order flow now. We actually had the bookings where we talked last time, we thought they are going to come, but they haven’t yet. So that’s encouraging and there’s more order flow –[Multiple Speakers] And soon enough, but before or after that season.

And speaking to that, Guy, I think I heard you say, there is more out there. Bids outstanding, you talked about increased activity. This wasn’t a onetime deal of the orders that you announced last week. What are -- what can you give us as little more flavor as far as what we should expect to come or at least the opportunities you have, when and if they are awarded?

Well, there is -- we’re seeing an increase in things that we had talked about certainly in this past year, as far as more on the program side with Klein, which are multi-year. So, we are starting to see more of those opportunities where certainly from a technology perspective we qualify for those opportunities. We weren’t seeing those a year ago. On the Seamap side, there is an overall bit of an uptick in some optimism which is turning into requests for quotes. And a lot of it is from our installed base of Seamap equipment. So, there is a lot of refreshing of equipment that is happening. I think people have been holding off until they see their backlog, our customers’ backlog increased, which by all accounts looks like backlog is increasing.

Okay. So, for you, the increase in oil prices globally, activity, you’ll probably see the first indications of positive impact in the marine side given the activity that’s going on in the Gulf or off of Brazil, some of those areas that are a little more robust.

Yes. And it’s a little bit more on the international side, outside of Gulf of Mexico.

A couple just book keeping questions. You got all these orders, you’ve got a lot of expansion in the marine side, working capital requirements and kind of how your cash balance plays out over the next couple of quarters, give us a little color there.

I think we feel we’ve got adequate working capital to handle the order flow, if you will. I think Q2 is going to look something like Q1, maybe a little bit of improvement here and there. So, as we get into the back half of the year, we’ll start to turn that around and start to be more positive from a cash flow standpoint. So, we feel pretty comfortable with where we are and stuff. We’re spending a bit of money right now to get to towed streamer products up and running in Asia. But we’re just about there and just about in a position to kick that off.

That’s on schedule.

We’ll start to generate revenue out of that in the near term.

Okay. And any more costs associated with that Asian plant expansion and getting that ready to go? And is that more for your -- the new technology, is that really getting ready to service that Mitsubishi contract?

Only partially, it’s to do that, then as well as to do repairs for others and build new products as well.

Okay. Any scope or any material size to that Mitsubishi contract?

I mean it’s not a game changer. I think for competitive reasons and confidentiality, I can’t talk about specifically of what we thought, –but I mean that’s not going to move the needle by itself. It just gives us enough space to move from.

Okay. And last question, cost cuts associated with the asset consolidation, I think you had what, five or seven different international locations. What are you going down to or what do you anticipate that will reduce your ongoing costs?

I think we don’t see losing any locations entirely, I think we see just changing the scope of some locations that may change over time. I think we are looking in the low-single-digit millions to save on annual basis, but we won’t -- really won’t see that until in full effect until next year. We will start to see the effects later this year.

When we see other companies within the industry, whether it be Dawson [indiscernible] or any of those with their positive comments regarding their seismic crews filling up and almost now getting to a point of filling all their crews, does that lead to any kind of improved optimism on your side that we’re starting with such a low base on the legacy seismic side that one or two contracts can really change things for you?

I mean, yes, there are some encouragements, there are some interesting potential activity out there, but it’s still not going to be anything like it was in the past, just the market is fundamentally different than it was a few years ago. So, yes, we may see some incremental improvement but don’t think we’re going back to 2012.

We don’t have to go back to 2012. We get just the partway there and you’re dramatically…

Yes. Don’t get too optimistic there though.

Sounds good, gentlemen.

Thanks, Tyson.

Thank you. [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.

Okay. Thank you very much. We appreciate everyone joining us today. And we look forward to talking to you after our second quarter. Thank you.