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Edited Transcript of MIND earnings conference call or presentation 6-Apr-17 1:00pm GMT

Thomson Reuters StreetEvents

Q4 2017 Mitcham Industries Inc Earnings Call

HUNTSVILLE Apr 6, 2017 (Thomson StreetEvents) -- Edited Transcript of Mitcham Industries Inc earnings conference call or presentation Thursday, April 6, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Guy Malden

Mitcham Industries, Inc. - Co-CEO and EVP of Marine Systems

* Jack Lascar

Dennard Lascar Associates, LLC - President and Managing Partner

* Robert P. Capps

Mitcham Industries, Inc. - Co-CEO, CFO, EVP of Finance and Director

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Conference Call Participants

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* Tyson Lee Bauer

Kansas City Capital Associates - Research 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 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, sir, you may begin.

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

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Thank you, Melissa. Good morning, and welcome to the Mitcham Industries Fiscal 2017 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 website at mitchamindustries.com or via a recorded instant replay until April 20th. 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 6, 2017, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay.

Before we begin, let me remind you that certain statements made by management during this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and include known and unknown risks, uncertainties and other factors, many of which the company is unable to predict or control that may cause the company's actual 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 the annual report on Form 10-K for the year ended January 31, 2017, that will be filed this afternoon.

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.

With that, I would like to turn the call over now to Guy Malden.

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Guy Malden, Mitcham Industries, Inc. - Co-CEO and EVP 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 2017 fourth quarter and year-end conference call. I'll begin by making some general comments about the past fiscal year and also the fourth quarter. Rob will then discuss our financial results in more detail and address our market outlook. We will then open the call for questions.

Although fiscal 2017 was a year clouded with continued uncertainty in the oil and gas markets, we believe we made significant progress in repositioning our company. During the earlier stages of this protracted cyclical downturn, we made a strategic decision to diversify Mitcham beyond sole dependence on our traditional oil and gas business. We implemented this by building upon our engineering and manufacturing strengths, offering new products and services and by expanding our presence in new markets and new geographies.

Many of our products and services are well suited to the hydrographic, oceanographic and defense industries as well as other marine seismic applications. The acquisition of Klein just over a year ago was an important step in the process. When combined with our existing Seamap and SAP businesses, we have a solid platform from which to continue to grow this segment.

Now our traditional seismic Equipment Leasing business has been the most impacted by the downturn in oil and gas exploration activities. Despite the disappointing financial results in this segment, we believe we have made progress here as well.

During the past year, we resized and reconfigured our lease pool of equipment, adjusted our cost structure and found new ways to serve our customers. We also made significant progress over the last several months in further solidifying our financial position and flexibility. We have recently repaid all outstanding debt and during the year issued some preferred stock to provide an additional source of growth capital. And Rob will cover that in more detail later in the call.

So overall, we've accomplished a great deal over the last several months. We believe these measures will yield benefits for years to come and make Mitcham a stronger, more robust company that is positioned to take advantage of a number of growth opportunities and better able to handle future cyclical downturns in the energy space.

And with that, let me now turn your attention to our fourth quarter results.

Our Equipment Manufacturing and Sales business, as a whole, was roughly flat year-over-year and up sequentially. Both Seamap and SAP posted sequential increases, but Klein experienced some lingering impact from order delays that we discussed on our last call.

As you may recall, during the year, we introduced our next generation of sonar products that meet the needs of an increasing number of customers. As is often the case with new product launches, we did encounter some difficulties and delays that caused us to miss our originally projected shipment schedules. Some customers delayed orders, awaiting for those issues to be resolved. Now we believe these issues have now been addressed, and we are returning to our expected delivery schedules.

As of January 31, our backlog for the manufacturing segment stood at $12.5 million, more than a 40% increase compared to about $8.7 million a year ago. We expect essentially all the work to be done during the current fiscal year. With the product design and the manufacturing issues largely behind us, a strong book of business and an increased level of proposals and bids in overseas government and institutional markets, we believe the segment is poised to show much improved performance this fiscal year.

Now turning to our leasing business. We're continuing to see widespread weakness in seismic exploration activity. Although our overall leasing segment revenues in the fourth quarter were up both year-over-year and sequentially, the increase was due to higher lease pool equipment sales rather than improvement in our leasing activity. Leasing demand was depressed in essentially all geographic regions, but Canada and Latin America were the largest contributors to the quarterly results.

Now we do see the continuing trend of increased bid and proposal activity that we've mentioned in our last call, but we expect that improvement in the leasing activity will be slow to develop.

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

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, CFO, EVP of Finance and Director [4]

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Thanks, Guy. I'll begin on making a more detailed review of the financial results, and then I'll make some comments about our views on the current and near-term market.

Let me start with our Equipment Manufacturing and Sales segment, which includes Seamap, Klein and product sales from SAP, our Australian subsidiary. Revenues for this segment totaled $6.9 million in the quarter, compared to $6.8 million in the fourth quarter a year ago. Seamap revenues were $4.4 million in the quarter, which was down from $4.9 million in the fourth quarter of last year. Sales from Klein this quarter were $1.7 million; this compares with $527,000 a year ago, although last year, that quarter only included 1 month of revenues as we acquired Klein in December 2015.

Our sales for Klein were mostly to customers outside the oil and gas industry. As Guy mentioned earlier, client results were again negatively impacted by some lingering engineering and manufacturing issues related to new products. We believe these issues have now been resolved and expect clients' revenues to begin showing the benefit of these delayed deliveries.

Finally, our SAP product sales were $1.5 million in the quarter, compared to $1.3 million in the year-ago period. Now included in the amount I've just talked about are about $830,000 of intra-segment sales, which are, of course, eliminated in our consolidated results.

Revenues from our Equipment Leasing segment, which include our leasing business, sales of lease pool equipment and some additional miscellaneous equipment sales, totaled $5.7 million in the quarter, compared to $4.6 million in the fourth quarter a year ago. The year-over-year gain was driven by lease pool equipment sales.

In the leasing business, activity was lower in most geographic regions, although Latin America was up a bit from a year ago, though still down sequentially from the third quarter. Our Lease Pool Equipment sales jumped to $3.1 million in the quarter, compared to $673,000 in the same quarter last year. As Guy mentioned, one of our strategies has been to adjust the size and makeup of our lease pool to the changing market. Accordingly, we took advantage of some opportunities to sell certain equipment during the quarter. We do anticipate further sales in the current fiscal year.

Let me now discuss the profitability of each of the segments. Fourth quarter gross profit for our Manufacturing and Equipment Sales segment was $3.3 million, compared to $3.1 million a year ago. This represents a gross profit margin of 48% and 47%, respectively. And the difference is, although small, in the margins between the periods is primarily due to differences in product mix, although the margins for the current year do reflect certain extended completion costs related to a multiyear program at Klein.

In our Equipment Leasing business, gross profit was again strongly impacted by the high fixed cost depreciation, which magnified the negative effect of lower sales on our operating profit. The leasing business reported a gross loss of $6 million in the fourth quarter, compared to a gross loss of $4.3 million in the fourth quarter of fiscal 2016.

We again had lower depreciation cost of $5.8 million this quarter versus $7.1 million a year ago due to reduced lease pool additions over the past 2 years. We expect this trend to continue as more equipment becomes fully depreciated and as we sell some equipment from the lease pool.

Our ongoing cost reduction and business rationalization efforts as well as lower levels of activity contributed to reduced direct leasing costs with current quarter cost at $1 million versus $1.1 million in the fourth quarter a year ago. Our general and administrative expenses were $4.9 million for the fourth quarter in fiscal 2017, compared to $4.7 million for last year's fourth quarter. Now the cost increase was due to the additional expenses at Klein, which was not present for all of last year's fourth quarter, as we just talked about.

During the fourth quarter of this year, we also had expense for doubtful accounts of $750,000. Due to the prolonged downturn in the seismic business, we believe it's less likely that certain accounts receivable will now be collected and therefore made that provision.

Our overall operating loss for the fourth quarter this year was $8.9 million, compared to an operating loss of $11 million in the fourth quarter of fiscal 2016. Our fourth quarter adjusted EBITDA was $2.6 million, compared to $566,000 in last year's fourth quarter. We reported a fourth quarter loss attributable to common shareholders of $10 million or $0.83 per share. This compares to a net loss of $26.8 million or $2.23 per share in the fourth quarter a year ago.

Let me make a few comments about our liquidity balance sheet. One of our guiding principles at Mitcham has always been to maintain a conservative balance sheet with a manageable level of debt. As Guy mentioned earlier, one of our strategies this past year was to further reduce our leverage and dependence upon debt, particularly bank debt. We think we've been very successful in this regard.

During fiscal 2017, we repaid $14.1 million in borrowings and, subsequent to year-end, have repaid another $6.4 million. Therefore, as of today, Mitcham is debt free. We accomplished this through the combination of cash flow from operations, the redeployment of capital from our investment in lease pool equipment, by establishing access to other, more long-term sources of capital, specific at our issue of preferred stock.

So let me put this in perspective. Despite the deepest and most protracted downturn in the oil and gas exploration activity in my 40 years of experience, we've been able to generate $3.6 million in adjusted EBITDA for the year, $3.2 million in cash flow from operating activities and repaid over $20 million of debt. And as we alluded to earlier, during the year we did establish a new issue of preferred stock at a 9% redeemable preferred stock. During the year, we issued 343,000 shares of the stock with net proceeds to us of about $7.3 million.

So in conclusion, we expect improved financial performance in fiscal 2018, particularly in our Equipment Manufacturing and Sales segment. We enter fiscal 2018 with a substantially higher backlog than last year. We've refreshed our line of sonar products, and our pipeline of potential orders is expanding. For these reasons, we're optimistic about the near-term prospects for this part of our business. But even more importantly, we believe there are opportunities to significantly expand this part of our business through new markets, new product development and through acquisitions. We believe there are a number of potential opportunities to acquire or partner with others to gain access to new technology, new products or new businesses. By widening our product offerings, we can serve markets much larger than those we've historically addressed.

Our Seismic Leasing business had a tough goal in the past several months, along with everyone else in the seismic industry, of course. There are, what we believe to be, clear signs of recovery in this business with increased bid and [quarrying] activities. Some of these projects are quite significant. But to be realistic, we think the recovery will be slow to develop. It may be some time, if ever, before our activity in this segment returns to its historical levels.

There have been some fundamental changes in this business, such as competition and pricing levels, that we've had to respond to. That being said, the Equipment Leasing business remains an important component of Mitcham's overall business, one that has in the past and can in the future, make a significant contribution to our overall success.

Although it's been a very challenging time, we are excited about Mitcham's prospects. Our Equipment Manufacturing and Sales segment has what we believe to be very attractive growth possibilities. We expect to make further acquisitions in this space. Our Equipment Leasing segment is poised to participate in the recovery in the oil and gas activity, and we have the financial flexibility and access to new capital to take advantage of these opportunities.

That concludes our formal remarks. Operator, we would like to open the call up to questions, please.

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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 - Research Analyst [2]

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A couple of quick questions. You talked about the importance as the leasing will maintain itself going forward. But have you modified that strategy where you'll be more specific or focused on what you're willing to lease and in what areas as opposed to being a broad-based leasing company where we've seen increases in CapEx to fit the needs of your customer base if and when the recovery does occur?

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, CFO, EVP of Finance and Director [3]

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That's a good question, Tyson. I think we are trying to be much more focused in that business and do a better job of identifying what the needs are of the customers and what the ongoing needs are and, therefore, try to be a little more selective as to who we do business with and what we provide to those customers. That being said, we do still think it's going to be a broad geographic approach. And we think there are opportunities all across the globe, and we see those move around a bit. We're seeing that today. But we are trying to be much more focused. And I certainly don't think you'll see the same level of CapEx in the lease pool that we've seen historically. But we do expect to make additions to that business.

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

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Okay. But it's going to be more and -- where you have a better advantage and given what your core competencies are, unlike before where we saw the big cable, kind of the more older systems that were in place. Or is that something because you've already depreciated those assets down that, that actually does give you a benefit in maybe some lesser-developed areas?

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, CFO, EVP of Finance and Director [5]

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I don't know if that makes that much of a difference, Tyson. Having the investment we have certainly gives us some advantages and certain locations gives us advantages. But it's really not the case where you're seeing a -- you mentioned cable systems, seeing those deployed to less developed areas. That's really not the case. I think all parts of the world, you use kind of latest state of the art when I can. It just depends on what fits those particular areas. But we see demand for cable equipment every day, just as we do for new cable-free stuff.

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

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Okay. Given your outlook and as we start to grow the equipment side a little faster -- and hopefully the recovery comes sooner than later -- but as we focus on the equipment side, the required revenue base to really get that to be a stand-alone operation as we work through the numbers and using kind of a 50% margin basis, it looks like you need to get that to double in a reasonable time frame. Is that how you view this? And if so, is there enough organic opportunities? Or will there be some bolt-ons that are required to get you there?

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, CFO, EVP of Finance and Director [7]

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No. Without getting into kind of what the numbers are, you're right in that we do need additional scale in that business; no secret to that. We talked about wanting more scale there. There certainly are a number of organic opportunities to grow this business, both the new products that we develop ourselves as well as expanding markets. But I think the strategy is one of a combination of those as well as acquisitions of other product lines, other businesses. So I think you'll see both.

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

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Okay. You talked about the increased leasing bid activity or interest at this point in time. We'll see how that goes through the year as far as turning into actual POs. Pricing levels, how depressed relative to the last cycle we were in are we starting out this time around?

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, CFO, EVP of Finance and Director [9]

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Pricing is definitely depressed. It's a difficult number to quantify precisely because the differences in terms and things of that nature. But in some cases, we're seeing pricing approaching 40% less than we would see at the peak. Although, again, that's really all over the board. And it's hard to give a generalization about that. But it's significant for sure.

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

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Okay. And capital requirements, is it really only an events basis if you were to need capital? Or you've got the line, you've got everything set up now, you're starting clean. You can operate through accordingly with the given environment unless some opportunity were to arise. That would be the only -- really the situation where you would have to raise capital again?

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, CFO, EVP of Finance and Director [11]

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(inaudible). We expected to generate internal cash. So growth capital will come from outside. That's going to be (inaudible).

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Operator [12]

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(Operator Instructions) Gentlemen, it seems we have no further questions. I'll turn the floor back to management for final remarks.

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Robert P. Capps, Mitcham Industries, Inc. - Co-CEO, CFO, EVP of Finance and Director [13]

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Okay. Thanks, Melissa. We'd like to thank you all for joining us on this call and your interest in Mitcham. And we look forward to talking to you next time after our first quarter call. Thank you.

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Operator [14]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.