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Edited Transcript of MIND earnings conference call or presentation 4-Apr-19 1:00pm GMT

Q4 2019 Mitcham Industries Inc Earnings Call

HUNTSVILLE Apr 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Mitcham Industries Inc earnings conference call or presentation Thursday, April 4, 2019 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 Associates, 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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* Ross Taylor

* 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 Fourth Quarter Earnings Conference Call. (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.

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

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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.

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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 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.

The 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 groups. 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 reductions in Canada and Colombia, we estimate that these actions will reduce our annual overhead costs 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 2 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 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've 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.

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

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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 on 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 Technology 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 system delivery we had anticipated for the fourth quarter was pushed into the first quarter, we think. 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 of our lease pool.

Let me 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 a gross profit margin of 33% and 26%, respectively. The improved margin this year is a result of both the higher levels of sales [and showing 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 magnify 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 $5.3 million the last year's fourth quarter. Business from our restructuring of our leasing operations were offset, to some extent, by incremental cost 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 a change in tax loss within that related jurisdiction. This resulted in a charge of approximately $1.2 million in the quarter. These 2 noncash 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 in 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've emphasized on previous calls, the levels of backlog at a 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 from the marketplace and are encouraged by the order flow subsequent to year-end 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 a 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 to continue deliveries-related decrease 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 and overall, over fiscal 2019, expect to generate positive operating income and positive EBITDA.

Now with that, I'll turn call things -- turn it back over to Guy for a few closing comments.

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Guy M. Malden, Mitcham Industries, Inc. - Co-CEO & Executive VP of Marine Systems [5]

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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 node surveys, is yielding a 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 reveal 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.

Now that concludes our formal remarks. We'll be happy to take any questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Tyson Bauer with Kansas City Capital.

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

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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?

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

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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, if some of these orders are sizable, 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 make deliveries and then don't get the next order until 2 weeks after the end of the quarter, it may not be that -- look that way. So I think we just want to see continued acceptance of the products in the marketplace, continue the level of discussions and inquiries we're having rather than any specific goal from a backlog standpoint.

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

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Would you at least say that the next 3 months are key months as far as getting or fearing those contracts?

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

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No, not necessarily. No. Again -- so actually as you're dealing with governmental entities, your timing can be difficult. So trying to predict it within a month or so is, I think, risky to do. And so I -- no, I don't think 3 months are necessarily really indicative one way or another.

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Tyson Lee Bauer, Kansas City Capital Associates - Senior Analyst [6]

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Okay. 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.

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [7]

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

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Tyson Lee Bauer, Kansas City Capital Associates - Senior Analyst [8]

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The recent large countermeasure of 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?

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [9]

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I'll 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. That's over a $1 billion -- EUR 1 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. There are 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 we're involved in, and that really has no impact on that. So we're still very confident about those.

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Tyson Lee Bauer, Kansas City Capital Associates - Senior Analyst [10]

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

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

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No. We've actually gone through all of that. 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.

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

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

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [13]

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These increases are -- been straight -- 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 stated goals is to expand our technology base. And with Thomas, in particular, he helps us do that, and really his primarily mandate is to help us find ways to expand our product offerings and our technology offerings.

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Guy M. Malden, Mitcham Industries, Inc. - Co-CEO & Executive VP of Marine Systems [14]

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Particularly in defense and security set.

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Tyson Lee Bauer, Kansas City Capital Associates - Senior Analyst [15]

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

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Guy M. Malden, Mitcham Industries, Inc. - Co-CEO & Executive VP of Marine Systems [16]

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Yes.

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

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

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Guy M. Malden, Mitcham Industries, Inc. - Co-CEO & Executive VP of Marine Systems [18]

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Look we're not doing anything and 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.

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Operator [19]

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(Operator Instructions) Our next question comes from the line of Ross Taylor with ARS Investment Partners.

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Ross Taylor, [20]

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Following up on Tyson's questions, 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 your 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 periods from either a backlog and/or a revenue perspective?

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [21]

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Well, 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 you can see that we continue to have a good pipeline of order activity. And as I said earlier, specific timing of orders, specific backlog numbers, I think, can be misleading. So I wouldn't get maybe too focused on that, but just see continued progress in that regard.

As far as competitive landscape, it really -- it varies in the sonar side. It's -- there is a variety of competition and sonar is a very, very broad marketplace. And at least today, we're playing in 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. Every so often, we'll cross paths, but not very often. And for the source controller and RGPS positioning systems, there's really only 1 or 2 other players. So we really have a very strong market position there.

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Ross Taylor, [22]

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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 this 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's 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 when you're dealing with -- we often see whether they'd be big companies or governments. But they either say, we want to see improved -- improved is a rather open word. If we're looking out 3 years, should we expect -- can you guys double the top line of this company? Or how long would it take for you -- do you think it would take for you to double the top line of this business?

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [23]

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Well, first of all, I think as I said in my -- our comments or 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 segments. And if -- can we double that in 3 years, I think that's achievable. I do.

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Operator [24]

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(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.

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [25]

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

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Operator [26]

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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.