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Edited Transcript of MIND earnings conference call or presentation 6-Sep-18 1:00pm GMT

Q2 2019 Mitcham Industries Inc Earnings Call

HUNTSVILLE Sep 7, 2018 (Thomson StreetEvents) -- Edited Transcript of Mitcham Industries Inc earnings conference call or presentation Thursday, September 6, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Guy M. Malden

Mitcham Industries, Inc. - Co-CEO & Executive VP of Marine Systems

* Jack Lascar

Dennard Lascar Investor Relations, LLC - President and Managing Partner

* Robert P. Capps

Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director

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Conference Call Participants

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* Richard Dearnley

* Ross D. DeMont

Rainin Group, Llc - Director of Research

* Tyson Lee Bauer

Kansas City Capital Associates - Senior Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Mitcham Industries Second Quarter Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

It is now my pleasure to introduce Jack Lascar. Thank you, Mr. Lascer. You may begin.

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Jack Lascar, Dennard Lascar Investor Relations, LLC - President and Managing Partner [2]

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Thank you, Rob. Good morning, and welcome to the Mitcham Industries Fiscal 2019 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'd 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 September 13. 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, September 6, 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 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, 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 these statements.

I will now like to turn the call over to Guy Malden.

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Guy M. Malden, Mitcham Industries, Inc. - Co-CEO & Executive VP of Marine Systems [3]

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Thanks, Jack, and good morning, everyone. We would like to thank you for joining us today for our fiscal 2019 second 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.

Looking at our second quarter results, things played out largely as we anticipated, although our leasing business showed some incremental improvement. Our Marine Technology Products segment continued the momentum of the first quarter, with revenues up 62% sequentially. Revenues were lower year-over-year due to the fact that there was a large Seamap system sale to an institutional customer in Asia during last year's second quarter. As we've said before, the timing of these orders had a large impact on our results and that negatively impacted Seamap in Q2. I would note, however, that we are seeing heightened demand for spare parts and repairs at Seamap, as it appears that many customers are attempting to increase their operating capacity in response to improved backlog in their business.

Now Klein grew both sequentially and year-over-year, and given our robust booking activity that we discussed a few months ago as well as improving inquiry activity and customer discussions, we strongly believe that the Marine Technology Products segment will experience substantially improved performance for the second half of this fiscal year.

Now turning to our leasing business. Although, activity is still relatively weak, fundamentals may be firming up a bit, as we have seen an increased possible opportunities in certain markets. During the quarter, we saw some expected contraction from the first quarter, although revenue was up from last year's second quarter, with contributions coming from Europe as well as North and South America.

And with that, let me now turn the call over to Rob.

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [4]

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Thanks, Guy. I'll begin by making 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 the Marine Technology Products segment. Revenues for this segment totaled $6 million in the quarter compared to $9.7 million in the second quarter a year ago. Seamap revenues were $3.8 million in the quarter, which is down from $7.5 million in the second quarter of last year because there've been no system sales during the quarter versus a large system sale into Asia last year.

We did begin providing repair and support services to Mitsubishi under the agreement we entered earlier this year, although the revenue contribution this quarter was nominal. Second quarter revenues from Klein were about $1.6 million, this was up from the $1 million a year ago. Included in those amounts I've just talked about are $134,000 in intersegment sales, which of course, are eliminated in our consolidated results.

Revenues from our equipment leasing segment totaled $2.5 million in the quarter compared to $1.3 million in the second quarter a year ago. The increase is mostly due to improved leasing activity as well as greater lease pool sales. As you'll recall, these sales are 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 briefly.

Second quarter gross profit for Marine Technology Products segment was $2.7 million compared to $3.7 million a year ago. This represents gross profit margins of 44% and 39% respectively. Improvement in the gross margin was primarily due to differences in product mix, as we had a great level of spare parts and repair work, which had a relatively higher margin. In our equipment leasing business, our depreciation expense fell to $2.4 million or $3.8 million year-over-year. With the lower depreciation expense and higher revenues, the leasing business reported a much lower gross loss of $801,000 in the second quarter compared to a gross loss of $3.1 million in the second quarter of fiscal 2018.

Our general and administrative expenses were $5.5 million for the second quarter of fiscal 2019 compared to $4.8 million for last year's second quarter. Now in the current quarter, we had approximately $587,000 of startup costs related to the SeaLink product line, without any meaningful offset in revenues. We also had a higher level of unabsorbed overhead cost, which was a direct result of our Seamap sales.

R&D expense was $312,000 for the quarter, which compares to about $240,000 spent during last year's second quarter.

Our overall operating loss for the second quarter this year was $4.6 million compared to an operating loss of $5 million for the second quarter of fiscal 2018.

Our second quarter adjusted EBITDA was a $1.2 million loss compared to a $261,000 loss in second last year's second quarter. We also reported a second quarter loss attributable to common shareholders of $5 million or $0.41 per share. This compares to a loss of $5.6 million or $0.46 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 about $24 million of working capital, that included cash and cash equivalents of roughly $7 million. As you know, having repaid in entirety of our bank credit facilities last year, Mitcham remains entirely debt free.

Let me conclude our formal remarks with just a few comments about our market outlook. Second quarter began to exhibit some of the improvement in our Marine Technology business that we've been anticipating. While the project timing as well as startup related cost weighed on our results, Mitcham is now in a much better position to take advantage of the many opportunities that we've seen in global marine, sonar and seismic markets. As it stands now, we believe the second half of the year will be much improved over the first half. This is based on the high visibility of orders already booked for the year, which we discussed during last year's call, as well as the many additional opportunities that we are seeing in the oceanographic, hydrographic, defense, seismic and security markets. We think Seamap will show significant improvement, as we expect there will be at least 2 system deliveries in the second half of the year. And revenue related to Seamap product line will start to ramp up in the third quarter. We also expect Klein to benefit from deliveries related to the recent order bookings, which we discussed last quarter. Based on inquiries from current and potential new customers, it appears that the overall market fundamentals for our products have improved recently. We're particularly pleased with our customers' response for the SeaLink marine data acquisition system, which represents our newest technology offering. In the course for our sales and marketing efforts, we've seen an abundance of potential opportunities to increase product penetration for SeaLink, as the technological benefit of this product match well with needs of end users such as research institutes and survey companies.

With the equipment leasing business, the seismic explorations activities are still relatively weak, we continue to experience demand in Europe as well as in North and South America. I also should note that as a part of our efforts to consolidate our operations, lower overhead cost and improve asset utilization, we have significantly reduced our cost structure in certain markets. Specifically, we have dramatically reduced our headcount and physical presence in Colombia and Canada and as of August 31, have eliminated our presence in Russia. We believe we'll see the benefits of these initiatives later in the year and estimate that these actions will save the company about $2 million on an annualized basis.

The U.S. land market may show gradual improvement going forward but since most contractors already have an existing pool of underutilized seismic agreement, any benefit to Mitcham will be minimal until such excess supply is absorbed. The upcoming winter season should yield (inaudible) activity in Alaska and some improved activity in Canada for us. The fundamentals in the commodities market are trending more favorably, we continue to emphasize that we do not see a sizable recovery of the land seismic activity in the balance of this year. And when the eventful recovery is fully underway, activity will not return to the level seen prior to the downturn. These circumstances are, of course, the main catalyst behind our strategic repositioning in the company. The emphasis on our Marine Technology Products segment and rebalancing and rationalization of our equipment leasing segment are actions we are proactively taking to address fundamental and long-lasting challenges in the seismic leasing business. And doing so, we have substantially decreased our exposure to oil and gas markets, while also having gained much better access to more stable and numerous opportunities in the oceanographic, hydrographic, defense and maritime security industries. While we do maintain leverage to have recovery in the seismic market, our company's future growth is clearly now being driven by the development and introduction of new and innovative technology to the marine markets and our multi-industry auctions. We believe this revised model is a much more attractive value proposition for our customers and for our shareholders.

That concludes our formal remarks and, operator, we'll be happy to take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Tyson Bauer with KC Capital.

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Tyson Lee Bauer, Kansas City Capital Associates - Senior Analyst [2]

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Robert, you're willing to reaffirm your -- in the last call, you talked about getting to a $40 million annual rate on revenue for the marine products. Is that still the case at this point?

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [3]

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Yes, we have not changed our outlook at all on that. Things are evolving or unfolding very much as we talk a little bit.

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Tyson Lee Bauer, Kansas City Capital Associates - Senior Analyst [4]

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Before you had included an order number, bookings number, we don't have at this time, can you give us a little more color on activity you experienced during the quarter and kind of the pipeline, as we enter the second half?

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [5]

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Well, I mean, we continue to chase a number of opportunities. I don't have the bookings number at hand for the quarter, we have added new orders, certainly. But as we've said before, we do have a good visibility going forward for a number of things, even though the order may not be booked as of yet. So it gives us good confidence for the balance of the year, and actually going into the next year as well.

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Guy M. Malden, Mitcham Industries, Inc. - Co-CEO & Executive VP of Marine Systems [6]

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Yes, we're starting to look at opportunities for next year as well, Tyson.

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Tyson Lee Bauer, Kansas City Capital Associates - Senior Analyst [7]

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Okay. And on the cash management side, obviously, we started with Singapore and now Malaysia, where do you see that by year-end? And will that dramatically change, as we get into more activity in the third or fourth quarter?

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [8]

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Well, yes, for sure. As we've said, we continue to spend money with essentially no revenue to offset that. So we are, as we speak, providing services from that facility repair services right now, so we will start to bill revenues in the third quarter and actually, deliver a new system in the fourth quarter, so yes, we definitely will see that start to turn around.

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Tyson Lee Bauer, Kansas City Capital Associates - Senior Analyst [9]

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Okay. And the SeaLink, you made a comment, the take rate there and has that really become kind of of the industry standard now where any new vessel or dramatic upgrades have tended to lean toward that system?

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [10]

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I'm not sure you could say that just here, and, I think, we certainly compete with (inaudible) out there, especially in the markets we're chasing at 3D high-res.

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Guy M. Malden, Mitcham Industries, Inc. - Co-CEO & Executive VP of Marine Systems [11]

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Yes, so it's a little bit of a different market as well. You've got the survey market, 3D high-res market versus the big multi-streamer deepwater marine seismic market, Tyson. So we're looking at survey market and high-res 3D.

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Tyson Lee Bauer, Kansas City Capital Associates - Senior Analyst [12]

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So it'd get you out of the more than oil and gas or is that just included within more of that oceanographic and surveying and scientific side?

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Guy M. Malden, Mitcham Industries, Inc. - Co-CEO & Executive VP of Marine Systems [13]

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Yes, I mean, there is some separation there. When you talk about the survey market, it's wind farm related, unexploded ordinance on the defense side. So it is outside of oil and gas. The configurations are different, the technologies -- configurations are a bit different than blue water, deepwater marine. So that's a market we're only trying to paint right at this point.

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Tyson Lee Bauer, Kansas City Capital Associates - Senior Analyst [14]

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Do you anticipate Klein to have a full recovery to really the year when you bought them to get back to that level or beyond that pathway by the end of this year?

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [15]

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Yes, we do think that without saying specific where the numbers are going to be, but I think, we're definitely going in that right direction. And there's a lot of interesting things going on there.

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Tyson Lee Bauer, Kansas City Capital Associates - Senior Analyst [16]

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Okay. And you mentioned you're out of the Russia, does that mean you're servicing it from another location? Or you're just not longer doing business in Russia?

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [17]

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If we see appropriate opportunity, we will service from other locations, but we do not have a physical presence in Russia any longer.

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Operator [18]

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(Operator Instructions) Our next question will be coming from the line of Richard Tierney with Longport Partners.

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Richard Dearnley, [19]

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Will repair business report the cost structure of Malaysia all by itself? Or what kind of revenue do you need there to cover the overhead?

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [20]

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As we increase the installed base, the repair business can support that operation probably. Actually we don't give a specific target as to -- a revenue target for that area, but we think by the -- as we get towards the end of this year, that, that facility will be self-sustaining.

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Guy M. Malden, Mitcham Industries, Inc. - Co-CEO & Executive VP of Marine Systems [21]

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It is a combination of repairs and do production.

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Richard Dearnley, [22]

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Okay. And the -- I was reading about the Sparton's SSQ-125A Sonobuoy business. Do you have any exposure to that?

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Guy M. Malden, Mitcham Industries, Inc. - Co-CEO & Executive VP of Marine Systems [23]

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No, we don't.

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Operator [24]

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The next question comes from the line of Ross DeMont with Rainin Group.

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Ross D. DeMont, Rainin Group, Llc - Director of Research [25]

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A quick question on gross margins on the repair business, and then, on the parts and service business. Can you give us a sense of the profitability there or the gross margins there on both of those?

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [26]

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You know, it's -- all of those margins overall are in the high 40s, thank you to repair business, it's a little bit beyond that, probably in the low 50s, roughly. And it varies from product to product, but just to give you a sense of things. And then (inaudible) much discount, typically.

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Ross D. DeMont, Rainin Group, Llc - Director of Research [27]

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Can you remind us that of the revenues persisting for Seamap? I guess, you said we have 2 delivered or at least 2 in the back half of the year, and then, revenues per system for SeaLink?

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [28]

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Well, for Seamap, it can go from low end of $200,000 to the high end $2.5 million.

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Guy M. Malden, Mitcham Industries, Inc. - Co-CEO & Executive VP of Marine Systems [29]

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Yes, so it's depending on the technology, $200,000 to $300,000 to $2.5 million to $3 million. SeaLink, same thing, it's $300,000 or $400,000 up to several million, again depending on the size and scale.

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Ross D. DeMont, Rainin Group, Llc - Director of Research [30]

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Okay, that's great. At some point, it might be helpful to -- it would be nice for investors to better understand. I don't know whether that's due to a different metric how much business you've sort of, booked but maybe that's not a metric we're ready to start giving at this point. But it's very hard for us to see through other than just looking at your boarding and understand how much the business has turned and how much growth we can expect?

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [31]

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Okay. Point taken. We'll see what we can do about that.

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Operator [32]

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The next question is coming from Tyson Bauer with KC Capital.

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Tyson Lee Bauer, Kansas City Capital Associates - Senior Analyst [33]

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On that $2 million annual savings, are you expected to be at that rate by the fourth quarter? And will we see some of that in the third quarter trickle in?

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [34]

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You'll see some trickle in, in the third quarter and yes, we should be there right by the fourth quarter.

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Tyson Lee Bauer, Kansas City Capital Associates - Senior Analyst [35]

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Okay. And on the 2 system deliveries, just for clarifications, for the Seamap, does that include any SeaLink or are we not expected to make a SeaLink delivery this year and that falls into your next fiscal year?

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Guy M. Malden, Mitcham Industries, Inc. - Co-CEO & Executive VP of Marine Systems [36]

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That -- those 2 systems are source controllers only, no SeaLink. We are planning on making a small SeaLink delivery, a new system, by year-end in the Q4.

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Tyson Lee Bauer, Kansas City Capital Associates - Senior Analyst [37]

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So you'll have 1 -- so you'll have 2 Seamap source control deliveries, you'll have 1 SeaLink system delivery this year?

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Guy M. Malden, Mitcham Industries, Inc. - Co-CEO & Executive VP of Marine Systems [38]

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Correct.

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Tyson Lee Bauer, Kansas City Capital Associates - Senior Analyst [39]

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Okay. And those are booked orders.

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Guy M. Malden, Mitcham Industries, Inc. - Co-CEO & Executive VP of Marine Systems [40]

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Yes, those are the booked orders.

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Tyson Lee Bauer, Kansas City Capital Associates - Senior Analyst [41]

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So, SeaLink, is that the only order you have thus far or are you -- give us a little update. We had a good reception to that product, can you provide us a little more color on how well that reception is?

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [42]

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Sure. So we have numerous repair orders in process. So we're doing repairs not only for Mitsubishi but for other customers who have that product today, and we have numerous prospects that we're pursuing at this point. Early days on that, so there's -- and some of the specifics we're not ready to talk about yet but there are numerous things we're chasing now.

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Guy M. Malden, Mitcham Industries, Inc. - Co-CEO & Executive VP of Marine Systems [43]

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Yes the priority was setting -- getting the facility set up ready for repairs and then production and then the sales effort has been stepped up as we've got the facility up and running.

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Tyson Lee Bauer, Kansas City Capital Associates - Senior Analyst [44]

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Okay. It sounds like you have a high conviction and confidence on hitting some of these numbers by the end of the year. Is that due because of end backlog or it's committed, whether it's a firm order or not, but you have a firm commitment that you will be making these deliveries?

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [45]

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A bit of both, but probably more of the committed backlog. Yes, the firm backlog, yes.

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Tyson Lee Bauer, Kansas City Capital Associates - Senior Analyst [46]

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Okay, I'll just echo what Rob said then, if we have that commitment and that firm backlog, a number would've probably been helpful, similar to what you gave in the second quarter -- or the first quarter.

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [47]

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Understood.

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Operator [48]

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Your next question is coming from the line of Richard Danley with Longport Partners.

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Richard Dearnley, [49]

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I was just going to ask about the bookings or backlog number, but I think the previous question took care of it. Thank you.

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Operator [50]

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At this time, I would like to turn the floor back to management for closing remarks.

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Guy M. Malden, Mitcham Industries, Inc. - Co-CEO & Executive VP of Marine Systems [51]

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I would like to thank you again for joining us on the call today and for your interest in Mitcham. And we look forward to talking to you again at the end of our third quarter. Thanks very much.

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Operator [52]

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Thank you. 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.