U.S. Markets close in 4 hrs 29 mins

Edited Transcript of MIND earnings conference call or presentation 6-Dec-18 2:00pm GMT

Q3 2019 Mitcham Industries Inc Earnings Call

HUNTSVILLE Jan 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Mitcham Industries Inc earnings conference call or presentation Thursday, December 6, 2018 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Guy M. Malden

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

* Robert P. Capps

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

================================================================================

Conference Call Participants

================================================================================

* Tyson Lee Bauer

Kansas City Capital Associates - Senior Analyst

* Mark Roberson

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings, and welcome to Mitcham Industries' Third Quarter Fiscal 2019 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mark Roberson with Dennard Lascar Investor Relations. Thank you. Mr. Roberson, you may begin

--------------------------------------------------------------------------------

Mark Roberson, [2]

--------------------------------------------------------------------------------

Thank you, Sherry. Good morning, and welcome to the Mitcham Industries Fiscal 2019 Third Quarter Conference Call. We appreciate all of you joining us today. Your hosts are Rob Capps, co-Chief Executive Officer and Chief Financial Officer; and Guy Malden, co-Chief Executive Officer and Executive Vice President of Marine Systems.

Before I turn the call over to management, I have a few items to cover. If you would like to listen to a replay of today's call, it will be available for 90 days via webcast by going to the Investor Relations section of the company's website at mitchamindustries.com or via a recorded instant replay until December 13. Information on how to access the replay was provided in today's earnings release. Information reported on this call speaks only as of today, Thursday, December 6, 2018, and, therefore, you're advised that time-sensitive information may no longer be accurate at 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, 2018.

Furthermore, as we start this call, please also refer to the statement regarding forward-looking statements incorporated in our press release issued earlier this morning, and please note that the contents of our conference call this morning are covered by these statements.

Now I would like to turn the call over to Guy Malden.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Mark, and good morning, everyone. We would like to thank you for joining us today for our fiscal 2019 third 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 briefly address our business outlook. I will close with a few final comments, and we will then open the call for questions.

Looking at our third quarter results, we saw broad-based improvement in both our Marine Technology Products segment and our leasing segment. This improved performance is slightly better than originally anticipated and reflects the positive impact from the strategic steps we have taken over the past several years. Our Marine Technology Products segment continued to build on the momentum set through the first half of the year as revenues were up 55%, both sequentially and year-over-year.

As we've emphasized in the past, the timing of system orders can have a sizable impact on our results. This played in our favor during this past quarter as we had a Seamap digital source controller delivery in the quarter, and we continue to experience healthy demand for spare parts and repairs at Seamap as customers are increasing their operating capacity in response to improved backlog in their business.

Finally, our new SeaLink marine data acquisition system began contributing revenues in the quarter and should gain greater traction going forward. We expect our SeaLink repair activity to continue to ramp up in the fourth quarter and beyond.

In addition, increased Marine exploration activity, including ocean bottom node surveys, is resulting in a greater number of inquiries for source controller and RGPS positioning systems.

Klein continues to gain traction in the sonar market, roughly doubling its revenue both sequentially and year-over-year. The third quarter's results were helped by the delivery of our flagship 5900 side scan sonar system for the Royal Netherlands Navy. You may recall that we announced the receipt of that order earlier this year. We are experiencing a pickup in activity at Klein and are receiving an increasing level of inquiries from our continued engagement with various navies, in addition to hydrographic and oceanographic organizations.

Now turning to our leasing business. We continue to see revenue improvement, with growth both sequentially and year-over-year. I would note that these increases are coming off a very low base as the market remains in a tenuous condition. Now that said, we did see stronger contributions coming from land seismic activity in the U.S., Pacific Rim and Europe. Our ongoing cost restructuring activities also contributed to the improved results for the leasing business in the quarter.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. 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.

Now as Guy mentioned, we did see significant improvement in our financial results this quarter. Most of this improvement was expected based on our forward outlook during last year's last quarter's call. However, the results did turn out to be a bit better than we had anticipated.

Let me start the details with our Marine Technology Products segment. Revenues for this segment totaled $9.3 million in the quarter compared to $6 million in the third quarter a year ago. Seamap revenues were $5.5 million in the quarter, which is up from $3.7 million from the third quarter of last year due to the delivery of a digital source controller system, as Guy mentioned. Also, the repair and support services related to the SeaLink product line that we began to provide last quarter are now well underway with a stronger, but still relatively low, revenue contribution in the quarter.

Third quarter revenues from Klein were $3.1 million, up substantially from the $1.5 million a year ago. Included in the amount that I just talked about is about $400,000 in interest segment sales, which are eliminated in our consolidated results.

Revenues from our Equipment Leasing segment increased 97% to $5.4 million in the quarter compared to $2.7 million from the third quarter a year ago. The increase is mostly due to improved leasing activity, although both lease sale, pull sales as well as other equipment sales posted large year-over-year revenue increases. We continue to execute on our strategy of adjusting the size and composition of our lease pool to better suit the evolving market. It is worth mentioning, however, that we are occasionally seeing shortages of certain types of seismic equipment, which is a bit of a change. However, transaction economics remain very challenging and, certainly, over the long-term demand does remain.

Let me talk about the profitability of each of the segments. Third quarter gross profit for our Marine Technology Products segment was $4.4 million compared to $2.8 million a year ago. Now this represents gross profit margin of 47% for both respective periods. While the margin was consistent between the periods, obviously, the much higher sales volume in this quarter allowed us to absorb more of our fixed operating cost and contribute more to the bottom line.

In our Equipment Leasing business, our depreciation expense continues to fall as a result of our asset rationalization strategy, coming in at about $2.2 million this quarter versus $3.6 million a year ago. The lower depreciation expense and higher revenues enabled the leasing business to record a gross profit in the quarter coming in at $851,000 compared to a gross loss of $1.9 million in the third quarter of fiscal 2018.

Our general and administrative expenses were $4.8 million for the third quarter of fiscal 2019 compared to $4.9 million for last year's third quarter despite the effect of increased activity in cost related to the introduction of the SeaLink product line in the fiscal 2019 period. Now these costs declined significantly from the $5.5 million in the second quarter of this year as a result of our various cost reduction initiatives, primarily in the Equipment Leasing segment.

Our R&D expense for the quarter was $175,000 compared to $299,000 for last year's third quarter. Our overall operating loss for the third quarter this year was $349,000. This compares to an operating loss of $4.8 million in the third quarter of fiscal 2018 and $4.8 million in the second quarter of this fiscal year -- or $4.6 million, rather, in the second quarter of this fiscal year.

During the third quarter, the company sold its Russian land leasing operations, including its Russian subsidiary. Now since the company no longer has exposure to Russian ruble to U.S. dollar translation risk, generally accepted accounting principles require that approximately $5.4 million of cumulative translation losses related to the Russian ruble that have previously been in our component of other comprehensive income had to be charged to income in the current period. So this is a noncash charge that resulted in a loss of about $4.9 million or $0.41 per share that we did record in the third quarter of this year. Now if you exclude the impact of this onetime loss related to the sale of the Russian operations, the loss to common shareholders in the current third quarter was $735,000 or $0.06 per share. That's a major improvement from the past several quarters. Of course, this onetime foreign currency translation charge is eliminated in our adjusted EBITDA. So therefore, our third quarter adjusted EBITDA was about $3.4 million compared to a loss of $406,000 in last year's third quarter. Again, a significant improvement over recent quarters.

Mitcham's financial position and liquidity remain very solid. At the end of the quarter, we had about $28 million of working capital that included cash and cash equivalents of about $5.6 million. And of course, with the repayment of our bank credit facilities last year, we remain entirely debt-free.

Let me make just a few comments about our near-term outlook. During the 9 months ended October 31 of this year, our Marine Technology Products segment has expansion increase in both inquiries and order activity. As of October 31, our backlog of firm orders for this segment was about $6.1 million and we expect substantially all of these orders to be completed in fiscal 2019 or in the fourth quarter. Now in the third quarter of this year, approximately $1.7 million in revenues or 20% of segment revenue for the quarter were derived from orders booked and completed during the period. The amount of this book-and-build business, as we call it, can vary significantly from period-to-period. And also, the level of backlog at a particular point in time may not necessarily be indicative of the results in subsequent periods as the size and delivery period of individual orders can vary significantly. So although the backlog for the Marine Technology Products segment has come down sequentially, the number of bids and quality of discussions we're having with both our current and potential new customers in the oceanographic, hydrographic, defense and security markets gives us confidence that the longer-term health of the marine business remains intact and will continue to trend favorably and gain strength to the coming year.

Although SeaLink-related revenues were relatively low in the third quarter, and are comprised almost entirely of parts and repair biz work, we anticipate there will likely be a small system delivery in the fourth quarter, in addition to increase in our repair work. SeaLink should begin making more substantive contributions in the coming year as its high-risk 3D capabilities make it ideally suited to the multiple hydrographic industry applications, and a number of parties have shown interest in this technology. For Klein, we expect to continue deliveries related to recent order bookings, with fourth quarter results roughly in line with the third quarter.

We mentioned during our previous call that we have dramatically reduced our footprint in Colombia and Canada and now have eliminated our presence in Russia. We estimate that these and other actions will save the company roughly $2 million on an annualized basis. With our current visibility, we believe that the Equipment Leasing in the fourth quarter and early 2020 -- fiscal 2020 will continue the generally improved level of activity we saw this quarter. As a result of all these factors, the overall improvement in our third quarter performance is expected to carry into the fourth quarter. We are confident that a very strong foundation has been set for the coming year and we'll be able to more fully reap the benefits of our ongoing efforts to expand the global marine markets.

With that, I'll turn over things back to Guy just for a few closing comments before we take questions.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Rob. We are excited about the prospects for our marine technology products in the coming year, as we have seen activity begin to ramp up, which we believe will set the stage for stronger performance in fiscal 2020.

As mentioned earlier, one noteworthy development that we are seeing in the marine seismic acquisition market is the growing demand for ocean bottom nodes, or OBN. This increasing activity is driving demand for source controller and RGPS positioning systems for the multiple-source vessels that these surveys require. Now OBN technology does compete with towed streamer in some applications. However, I would remind you that our focus with the SeaLink product line is on 3D high-resolution and engineering survey market, not deepwater oil and gas related exploration.

Several navies have shown interest in Klein sonar systems as there appears to be a trend towards more affordable, commercial off-the-shelf solutions, such as those offered by Klein. Our recent success with the Royal Netherlands Navy and certain other Western navies is an indication of this. We are pursuing a number of other opportunities for similar applications with a number of navies around the world.

Now turning to the Equipment Leasing business. Although seismic exploration activity is still somewhat sluggish and well below historical levels, there are pockets of demand in Europe and the Americas. Of course, the high degree of risk and volatility in the seismic market was the main driver behind our strategic repositioning of the company towards proprietary marine technology products and away from equipment leasing. While we're certainly pleased with the results of this strategy thus far, our work in repositioning Mitcham and rebalancing its cost structure is still in progress. This means that we will likely take further strategic actions in the future to better position the company in serving its markets, reduce costs and improve investment returns.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question is from Tyson Bauer with KC Capital.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Guy, could you expound a little more on what's really some of those drivers on the marine side, as in why is the OBN market all of a sudden picking up and looking so prosperous next year? And in addition, your new single-tow point product that you announced in the spring, any further developments as new vessels are being built and marine is picking up on that take rate?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sure, Tyson. Let me back up to OBN market. There's been an uptick that we've seen, particularly in the second half of this current year, in project awards in the OBN world. A lot of these projects have been talked about, discussed and budgeted in the past year, 1.5 years that are finally coming to fruition. So you've got a lot more of this node work that's spring-boarding off of a lot of the streamer multiclient work, where some of the oil companies, particularly the majors, are honing in on reservoirs and want to expand on the data that they've got over those blocks with a higher degree of accuracy, capability and imaging, which is the ocean bottom node technology. So you've got -- there's a lot more projects that have been awarded. It looks to be a lot more projects that are going to ramp up for next year. And this is driving our customer base to -- particularly our ocean bottom node customers, to line up quite a bit more backlog. Now along with this, the requirement for additional shooting vessels with higher degree of technology on it, in other words, the digital technology to support the different random shooting patterns that have become sort of involved with a lot of these types of surveys, it requires the digital shooting system that we've got. So there's a combination of vessels being rigged, vessels being upgraded from an analog controller to a digital or a semi-distributed digital controller that are in our product lines. So that's that answer. Your -- the second part of your question related to -- I think was related to SeaLink?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Correct. The new single-tow point and how that's been received and order activity?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

It's been received very well with both current customers that had older Hydroscience-type systems and then potentially new customers, particularly on the engineering, and they're calling it engineering seismic and the engineering survey guys, where you've got a lot of activity in wind farm development, pipeline engineering survey-type route survey discernment, where this technology can be utilized, short streamers, multiple streamers up one tow point. And again, we're very well set up, very short group interval, very well set up to apply this technology into that market, again, which is, well, outside of the towed marine streamer 3D market.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

In recent news, the Secretary of Interior is expected to open up ANWR to seismic activity, one of the last large areas that has been relatively left untouched. Is that something that is -- that you would find yourself a participant in those activities? And how do you see that playing out?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, I think -- yes, I mean, the answer is yes. I think we could be a participant in that, I mean, that we've been active in Alaska, and we've got customers who are active in Alaska, some good customers active in Alaska. So I think that would be a positive for us. I think it's good for the industry and, I mean, it's good in general. So we see that definitely as a positive development for us.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. And in regards to backlog, and you talked about a lot of bidding activity and things picking up, you're at liberty to kind of give us a gauge on the amount of bids outstanding that maybe are in process or you're waiting to hear on awards or otherwise, and how that compares, what you're seeing now as to prior periods.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I think I prefer not to give specific amounts, but it's many times our firm backlog. Sorry to say that. And I see activity is definitely on the uptick. It's definitely higher at this point than it was 9 months ago even.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. So year-over-year and even sequentially, it's continued to ramp up?

--------------------------------------------------------------------------------

Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, Executive VP of Finance, CFO & Director [11]

--------------------------------------------------------------------------------

Yes, yes. We're seeing the size of some of these projects get larger as well.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

(Operator Instructions) There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. We'd like to thank you, once again, for joining us on the call and for your interest in Mitcham, and we look forward to talking to you again at the conclusion of our fourth quarter next year. Thank you.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.