MIND Technology, Inc. (MIND) Q4 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to the Mitcham Industries Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. [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, Michelle. Good morning and welcome to the Mitcham Industries fiscal 2019 fourth quarter and year-end 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 April 11. 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, April 4, 2019. And therefore you're 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 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, 2019. 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 like to turn the call now over to Guy Malden.

Thanks, Jack, and good morning, everyone. We would like to thank you for joining us today for our fiscal 2019 fourth quarter and year-end conference call. I'll begin by making some general comments about the past fiscal year as well as the fourth quarter. Rob will then discuss our financial results in more detail and briefly address our market outlook. I will close with a few final comments and we will then open the call for questions. Fiscal 2019 was a productive year as we moved to realize our strategic vision of repositioning our company as a significant provider of marine technology products. Mitcham's shift towards what we believe to be a more stable hydrographic, oceanographic, survey and defense market worldwide has enabled us to better leverage our asset base and move the company beyond its traditional seismic routes. In doing so we've expanded our opportunities while reducing our dependence on oil and gas activities. Now let me briefly highlight a few of these accomplishments during the year. Over the past fiscal year, we reduced our footprint in both Colombia and Canada scaling down our headcount and physical presence in those countries to accommodate lower levels of activity and allocate assets towards more active areas. We also eliminated our presence in Russia, selling our land leasing operation there. Together with the reductions in Canada and Colombia, we estimate that these actions will reduce our annual overhead cost by roughly $2 million. Beside restructuring our leasing business, we have also made great strides in expanding the product offerings of our marine technology segment. Earlier in the year, we introduced the SeaLink line of solid towed streamer systems which complements our existing line of GunLink source controllers and BuoyLink positioning systems and is particularly well suited for engineering surveys and research applications. SeaLink is based on technology we acquired from Hydroscience Technologies in association with Mitsubishi Heavy Industries. We saw a meaningful year-over-year increase in order bookings and sales for Klein products, including the previously announced sale of two of Klein's 5900 systems to the Royal Netherlands Navy. Though the size and timing of deliveries could be somewhat lumpy, we believe that the increasing level of our customer interest we are seeing bodes well for the potential of our business, and that we are well positioned to pursue new hydrographic and oceanographic opportunities in the United States and abroad. And with that let me make a few observations about the fourth quarter. Although we saw our fourth quarter results contract sequentially, they were up substantially year-over-year. The sequential pullback was entirely the result of project timing-related delays in both Seamap and Klein totaling roughly $2 million. Although the delays were disappointing, I'd like to point out that the underlying fundamentals for our Marine Technology Products segment remained very healthy. Order and inquiry flow has been strong. We are particularly pleased with the high level of interest in our newly introduced SeaLink product line. Based on booked and anticipated orders, our new production facility in Malaysia is quite busy. Now turning to the equipment leasing segment, revenues were up marginally both from a year ago and sequentially. The segment continues to perform a bit better than our projections with the activity in North America, Australia and Asia. And despite the improved financial results, seismic exploration activity remains uncertain. Now before I turn the call over to Rob, I'd like to highlight our recent decision involving our Australian subsidiary Seismic Asia Pacific or SAP as we call it. We have decided to sell this operation and expect to complete the transaction in the very near future. As a distributor and reseller of marine equipment in the Asia Pacific region, SAP no longer fits our core strategy given the evolution of our business, and the returns were no longer attractive. And we now desire to better serve the Asian market. We feel it best to streamline our operation by working more directly with our customers. Therefore we will no longer have a legal or physical presence in Australia. With that, let me now turn the call over to Rob.

Okay. Thanks, Guy. I'll begin as usual by giving a more detailed review of the financial results and then I'll make a few comments about our views on the current and near-term market outlook. As Guy mentioned, we saw sequential reduction in our marine technology results this quarter due to system deliveries being delayed into the first quarter, while our leasing revenues showed some growth exceeding our expectations. Let me start with the Marine Technologies Products segment for some more detail. Revenues for the segment totaled $6.7 million in the quarter compared to $5 million in the fourth quarter a year ago. Seamap revenues were $4.9 million which was up from $2.5 million in the fourth quarter last year driven in part by delivery of the source controller system this year, as well as healthy demand for spare parts and repairs. The SeaLink systems delivery we had anticipated for the fourth quarter was pushed into the first quarter we think. The third quarter revenues from Klein were $1.3 million up from $1.1 million a year ago. Like Seamap, Klein also has system delivery that was pushed into the first quarter. Revenues from our equipment leasing segment increased about 2% to $5.5 million in the quarter compared to $5.4 million in the fourth quarter a year ago. The increase is mostly due to improved leasing activity in North America, Australia and Asia although other equipment sales also posted large year-over-year revenue increase. Lease pool sales however were down substantially from a year ago. We continue to monitor market conditions and execute on our strategy of adjusting the size and composition at our lease pool. Let's discuss the profitability of each of the segments for a moment. Fourth quarter gross profit for our Marine Technology Products segment was $2.2 million compared to $1.3 million a year ago. This represents gross profit margin of 33% and 26% respectively. The improved margin this year is the result of both the higher levels of sales with lower fixed cost and the decreased levels at lower margin sales by SAP. In our equipment leasing business, our asset rationalization strategy continues to have a beneficial impact on our depreciation expense which declined to $1.9 million from $2.9 million a year ago. The lower depreciation expense and higher revenues magnified gross profit in the quarter which came in at $1.2 million compared to a gross profit of $91,000 in the fourth quarter of fiscal 2018. Our general and administrative expenses were $5 million for the fourth quarter of fiscal 2019 compared to $5.2 million the last year's fourth quarter. Benefits from our restructuring of our leasing operations were offset to some extent by incremental costs associated with the new product offerings. Our R&D expense for the quarter is $302,000 as compared to $865,000 during last year's fourth quarter. Our overall operating loss for the fourth quarter this year was $2.5 million compared to an operating loss of $7.7 million in the fourth quarter of fiscal 2018. As Guy mentioned, we have recently decided to sell our SAP business. Since we have made that decision to do so as of the end of the fiscal year, accounting rules require that we recognize any anticipated loss from the transaction as of year-end. So the financial impact of this was approximately $500,000 loss. Also in the fourth quarter we recognized an allowance related to certain prepaid foreign income taxes due to change in tax laws within that related jurisdiction. This resulted in a charge of approximately $1.2 million in the quarter. These two non-cash charges had an impact of roughly $0.14 per share in the fourth quarter. Our fourth quarter adjusted EBITDA was $111,000 profit compared to a loss of $1.2 million the last year's fourth quarter. Mitcham's financial position and liquidity remained strong. At the end of the quarter, we had about $29 million of working capital that included cash and cash equivalents of $9.4 million and Mitcham's capital structure remains entirely debt-free. Now let me make just a few comments about our outlook for the near-term and intermediate term. The marine technology products segment continues to experience a healthy level of inquiries and order activity. As of January 31, our backlog of firm orders for this segment was approximately $8.7 million, up from $2.3 million at the same time last year. Now as I have emphasized on previous calls, the levels of backlog at the point in time isn't necessarily indicative of results in subsequent periods, since the size and delivery period of individual orders can vary significantly. That said, our backlog is up markedly, both year-over-year and sequentially and we continue to see favorable signs in the marketplace and are encouraged by the order flow subsequent to yearend by the number of bids and quality of discussions that we're having with customers. All-in-all it remains our belief that the marine business will continue to trend favorably and gain strength during the year. We expect SeaLink to make more substantial contribution in fiscal 2020 as high-risk 3D capabilities make it well-suited to a number of hydrographic industry applications and multiple parties have shown interest in the technology. For Klein, we expect the continue deliveries related to increase [ph] in order books. Given our current visibility, we believe that equipment leasing in early fiscal 2020 will continue the generally improved level of activity we saw in the fourth quarter with some pockets of opportunity in Europe and elsewhere. So overall looking at the current fiscal year, our fiscal year 2020, we expect solid improvement in overall fiscal 2019, expect to generate positive operating income and positive EBITDA. Now with that, I'll call things -- turn it back over to Guy for a few closing comments.

Thanks, Rob. Fiscal 2020 should be a good year for our marine technology products as we have seen strong interest in the marketplace for them and are having productive discussions with a number of navies regarding our technology. We are very encouraged by the demand for our SeaLink product line and believe our current backlog and the level of inquiries for this product is an affirmation of this technology. Also as we mentioned last quarter increased marine exploration activity including ocean bottom nodes surveys is yielding greater number of inquiries for our source controller and RGPS positioning systems. Klein is also expected to be a strong contributor to the year. We have some promising technology developments in the works that have the potential to truly differentiate Klein from its competitors. We will review more about these developments in the coming weeks. But suffice it to say that we believe that this technology has a number of compelling differentiators relative to the current field. And 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 Kansas City Capital. Please proceed with your question.

Good morning, gentlemen.

Good morning, Tyson.

Hi, Tyson.

Given the expectation of some fairly healthy growth and to really see some meaningful turns here in the financials as we go forward, in your own guide post, as you look forward to hitting your targets, where do you think you need to be by the next earnings call in like backlog or order activity to stay on track with your expectations?

Well, Tyson, quarterly-to-quarterly determination is a little bit difficult. I think we feel pretty good about the year as a whole. As you well know, some of these orders are sizable and therefore we have a pretty significant impact in any given quarter. So I'm not sure we have a given goal for a quarter overall. I think we would like to see backlog continue to increase. But if you -- if you make deliveries and then don't get the next order until two weeks after the end of the quarter, it may not be that -- looked that way. So I think we just want to see continued acceptance of the products in the marketplace, continue the level of discussions and inquires we're having rather than any specific goal from a backlog standpoint.

Would you at least say that the next three months are key months as far as getting or gearing [ph] those contracts?

No, not necessarily, no. Again -- so actually as you're dealing with governmental entities, timing can be difficult. So trying to predict it within a month or so is I think risky to do. So I don't think three months are necessarily indicative one way or another.

Got it. Regarding the SAP sale, it looks like that brings in what $2.2 million in cash once the deal is completed. We think it's about $3 million in sales but those sales really have minimal margin.

Yes, the cash amount is not quite that much. There's some different terms in that transaction, but yes that will be a net positive for us sure, overall.

Okay. The recent large countermeasure mine program that Belgium awarded, the main contractor was not the person you were with. Are you still able to get part of that contract? And are you really tied with the other bidder which was outbid and going forward in other contracts?

Well, I want to answer carefully for competitive reasons obviously. In that particular tender we actually were involved with multiple bidders not just one and the -- that's a very, very large program I think you should may know it's over EUR1 billion program. So we were relatively small part of that potentially. I think the -- all of the bidders are still trying to understand exactly what's happened there and what's going to happen going forward, lots of moving pieces. It's true that it's probably likely that we will not participate in that at this point at least. But that in no way impairs or impacts any of our other programs that we're chasing of similar nature. So there a number of other tenders that were involved in and that really has no impact on that. And so we're still very confident about those.

The new technology that you plan on announcing in the near future was that something that is -- can be translated into sales and then immediate or is that something that you're going to announce and then actually getting approval, getting, all the regulatory issues out of the way where people can indeed buy that?

No, we've actually gone through all of that. And so this can translate in a fairly short period of time this year into sales. So the short answer is yes, that will translate into sales we believe during this year.

And during the quarter you made an announcement where you've increased the depth of human capital some nice hires that you made within the industry. Just comment on what you think that does for the company?

This increases our district. I think it allows us to address some markets more effectively with some of the activity we've been seeing, we needed some people to have some more bandwidth if you will. But also it kind of allows us to look for other areas. One of our study builds is to expand our technology base. And with Thomas in particular, he helps us do that, that's really his primarily mandate is to help us find ways to expand our product offerings and our technology offerings.

Particularly in defense and security side.

Okay. And the last question for me is given the amount of activity in the pipeline, are you doing any builds -- pre-builds just to allow that we don't get tied on your production schedules?

Yes.

Yes, a little bit. As I've said, careful balance you have to look at. But yes we are doing some of that.

But we're not doing anything that we haven't done in the past. We always look at our pipeline and look at the long lead time items and we're carefully managing that.

All right. Thank you, gentlemen.

Thank you. [Operator Instructions] Our next question comes from the line of Ross Taylor with ARS Investment Partners. Please proceed with your question.

Yes, thank you, gentlemen. Following up on Tyson's question, could you guys address the competitive environment that you're seeing in your various segments? And then also since you're really not in the quarter-to-quarter business you're in the process of turning the company around. Can you give us an idea of what we should be benchmarking you guys against over the next say 12 and 24-month period from either a backlog and/or a revenue perspective?

Well, I need to answer the last question first. First, you need to be looking for increased order activity. So I think increasing sales I think not necessarily any specific numerical goal. But I think continued growth for the products business is important. And we can see that we continue to have a good pipeline of order activity. As I said earlier specific timing of orders and specific backlog numbers I think can be misleading. So I wouldn't get too focused on that, but just say continued progress in that regard. As far as competitive landscape it really -- it varies in the sonar side. There is a variety of competition and sonar is a very, very broad marketplace. At least today we're planning a relatively narrow band with that. In some programs we will compete against the big guys, but other times the major defense contractors. But other times we'll partner with those guys. We see a lot of that happening. There are a lot of mom-and-pops if you will or smaller private companies I should say that we compete with from time-to-time. On the seismic side it's a much smaller arena. Certainly in the streamer business there are only a couple of players. And one of those we really don't compete with very directly. And [every so] often we'll cross paths but not very often. And for the source control or RGPS positioning systems there's really only one or two other players. So we really have a very strong market position there.

Trying to be a little less amorphous in your guidance, what's it going to take to or should we expect to see you build or push the company to where you get to positive earnings and what kind of ability to generate meaningful free cash flow? I think listening to Tyson's question it seems that kind of what he's looking at, you guys are transitioning this business. I think everyone recognizes that the nature of your contracts are not -- you can't control the tempo and the timing and particularly you're dealing with bureaucracies, whether they be big companies or governments. But the idea is say we want to see improved -- improved is a rather open word. And if we're looking out three years should we expect -- can you guys double the top line of this company? Or how long would it take for -- do you think it would take for you to double the top line of this business?

Well, first off, I think as I said in my comments our prepared remarks, we expect positive operating income and positive EBITDA this year. So that's the magnitude of improvement we're trying to see this year and we think we'll see. As far as and overall top line growth I think there are opportunities to grow it substantially. Given the fact that we're changing the business, I think it's important to kind of focus on the technology product side because some of the leasing business is going to go away. So I think it's really you need to focus on the technology products segment. And if -- can we double that in three years? I think that's achievable, I do.

Okay, good. Thank you very much and good luck.

Okay. Thanks.

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.

Hey, Michelle, thanks very much. We'd like to thank you for joining us on our call today and for your interest in Mitcham Industries. And we look forward to talking to you again at the conclusion of our first quarter.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.