Mitcham Industries' (MIND) Q2 2015 Results - Earnings Call Transcript

Sep. 4.14 | About: Mitcham Industries, (MIND)

Mitcham Industries, Inc. (NASDAQ:MIND)

Q2 2015 Earnings Conference Call

September 4, 2014 9:00 AM ET

Executives

Karen Roan – Dennard Lascar Associates

Robert P. Capps – Executive Vice President-Finance and Chief Financial Officer

Guy Malden – Executive Vice President-Marine Systems

Analysts

Veny Aleksandrov – FIG Partners LLC

Tyson Lee Bauer – Kansas City Capital Associates

Operator

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Mitcham Industries’ Second Quarter Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded.

And I would like to turn the conference over to Karen Roan. Please go ahead, ma’am.

Karen Roan

Thank you, Danny. Good morning and welcome to the Mitcham Industries’ fiscal 2015 second quarter conference call. We appreciate all of you joining us today. Your hosts are Guy Malden, Executive Vice President of Marine Systems, and Rob Capps, Executive Vice President and Chief Financial Officer.

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 by webcast by going to the Investor Relations section of the company’s website at mitchamindustries.com, or by a recorded instant replay until September 18th. 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 4, 2014, 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 its annual report on Form 10-K for the year ended January 31, 2014.

Furthermore, as we start this call, please 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.

Now I would like to turn over the call to Mitcham’s Executive Vice President of Marine Systems, Guy Malden.

Guy Malden

Thanks, Karen and good morning everyone. We would like to thank all of you for joining us today for our fiscal 2015 second quarter conference call. I’m sure you’ve noticed that Bill is not here today. He had surgery a few days ago and is recuperating. I can report that he is back home and doing well and we expect to have him back in the office in a couple of weeks.

Now I’d like to begin by making a few general comments about the second quarter. Rob will then discuss our financial performance and we’ll conclude with a discussion of our market outlook. Then we will open the call for your questions. I think it is no surprise to anyone that the overall seismic industry remains under a good deal of pressure. We saw the normal second quarter pullback in our leasing results as the second quarter is seasonally the weakest of our leasing business.

However, there were some notable areas of year-over-year improvement in our core leasing business or perhaps not quite as much as we had anticipated. As we mentioned in our first quarter call, we expected growth in our core leasing business to come mainly from our international markets this year, and so far activity has basically tracked with those expectations.

For the second quarter, we experienced improved results in Latin America, Europe, the Pacific Rim and the Middle East. We also saw continued strong performance in our downhole business, which is benefiting from the ongoing focus on development activity and some longer-term projects.

Latin America continued to show stronger activity levels and remains one of our primary markets, although this quarter, we saw a pause in activity in Colombia. There were two projects in Latin America that we thought would begin during the second quarter, but they were delayed due to regulatory issues at the local level.

As a result, Latin America was down sequentially, but still up markedly over last year’s second quarter. The good news is that one of those delayed projects has already begun and the other one is expected to start this month.

Now that being said, permitting and regulatory challenges remain an issue particularly in Colombia and we do not expect a significant resumption of activity there until late in the fourth quarter. European seismic market continues to show healthy improvement as we’ve seen an increase in bidding activity in the region particularly in Eastern European countries such as Romania, Bulgaria, Serbia and Croatia.

Channel counts are increasing in Europe, so we are seeing the benefit of not only more jobs, but also a need for more equipment on those jobs. We have also seen some activity in the Middle East, despite political upheaval in the region. We have supplied equipment for two jobs in Kurdistan, one that will be completed very soon and another that should be finished later in the year and we are bidding on other jobs in the region.

Asia Pacific also showed solid improvement in the quarter. Activity in Australia and Indonesia was robust with demand for both cable and wireless equipment in the region. We are also seeing an increase in channel counts there. Activity in the U.S. is still well below levels of a year ago.

However, we do see sporadic activity in certain regions and we have a large job pending in the US. The marine leasing market remains soft as it is still being weighed down by excess equipment in the market. While these conditions have been present for a while, we do not see signs of a turnaround and do not expect any significant improvement for the remainder of this year.

Now turning to our Seamap business, we delivered two of our next generation BuoyLink 4DX systems, as well as one digital source controller in the quarter. We have further system delivery scheduled for the balance of fiscal 2015. The second quarter also reflected results from the sourced product lines that we acquired from ION Geophysical in May.

And with that, I will turn over the call to Rob who will give you a detailed review of our financial results and some remarks about our outlook for the second half of the year.

Robert P. Capps

Okay, thanks, Guy, and good morning everybody. I'll start as usual by discussing the top line of each of our two segments: Equipment Leasing and Seamap, and then follow up with a discussion of the profitability of each of the segments and conclude with a discussion of our consolidated results and financial position before we give it a bit of a wrap up.

First let me review the Equipment Leasing segment. Our core leasing revenues in the second quarter were $8.2 million, up 28% from last year’s second quarter and down 29% sequentially as we would expect. As Guy touched on earlier, our year-over-year increase was driven by improvement in Latin America, Europe, the Pacific Rim, the Middle Eastern and our downhole business.

Now these gains were partially offset by weakness in the U.S. in the marine leasing business. Turning to our lease pool equipment sales, these revenues were $1.3 million in the quarter compared to $3.1 million in the same quarter last year. Our other equipment sales, which include hell-picker equipment and sales from our Australian subsidiary SAP, were $2.3 million in this quarter compared to $5.4 million in the same quarter a year ago.

We’ll now turn to our manufacturing business Seamap. Revenues there were $7.7 million in the quarter compared to $7 million in the second quarter of last year. As Guy mentioned, this quarter included the delivery of two BuoyLink 4DX systems as well as one digital source controller, along with sales of related equipment, replacement parts, engineering services, ongoing support and repair services.

The Digishot and Sleeve Gun product lines that we acquired last May were also contributed to the quarter. Including all transaction and integration cost, these operations were slightly accretive in the quarter and have been performing in line with our expectations. The integration of these operations into Seamap is essentially complete, and we do expect margins from the new source products to improve going forward.

Let me just touch on the probability of each of the segments. First off for our Equipment Leasing segment in the second quarter was impacted by negative operating leverage due to our seasonally lower leasing revenues and higher levels of depreciation. As a result, our leasing gross profit was a $482,000 loss compared to gross profit of $818,000 in the second quarter of last year.

Gross profit in the second quarter from our Seamap manufacturing business was $3.8 million, compared to $3.4 million for the same quarter a year ago. This represents a gross profit margin of 47% and 49% respectively. As I mentioned just a moment ago, we do expect to see some improvement in the gross margin from our recently acquired product lines as those operations are fully integrated into Seamap and those operations.

Our general administrative expenses for the second quarter were $6.7 million, compared to $6 million in the same period a year ago. Now this year’s quarter reflects a lower reimbursement of engineering and develop costs related to product development arrangements that we have with some of our customers. Our tax provision for the quarter was a benefit of approximately $676,000, which is an effective rate of about 17%.

Our effective tax rate is less than the U.S. statutory rate due to the effect of lower tax rates and foreign earnings. However, the core and the year-to-date rates do reflect the impact of foreign withholding taxes, and this can really distort the effective tax rate, and especially in periods of low absolute levels of pretax income. In our second quarter, EBITDA was $5.5 million, or 28% of revenues, compared to $6.7 million, or 32% of revenues in last year’s second quarter.

Now keep in mind that EBITDA is a non-GAAP measure as reconciled to reported income and cash provided by operating activities in the financial tables in yesterday’s press release. We reported a net loss for the second quarter of $3.3 million, or $0.26 per share.

This compares to a net loss of $693,000, or $0.05 per share in the second quarter a year ago. Now last year’s second quarter did include other income of about $1 million that related to the foreign exchange gains at our foreign subsidiaries that was not present this year.

Now given the current weakness in the seismic industry, we are examining ways to reduce our operating cost. But you’ll recall that given our high fixed component in our cost structure, there are some limits as to what can be done in the short-term.

Let me make just a few comments about our financial position. During the second quarter, we purchased about $6.6 million in lease pool equipment bringing our year-to-date purchases to $9.4 million. And most of these purchases have been for wireless land recording channels. For the balance of the year, we expect to continue to selectively add to and rationalize our lease pool based onto customer leads.

However, excuse me, due to continued weakness in the North America market and in the Marine Leasing business, we are reducing our capital expenditure guidance for the full fiscal year to about $15 million. So that’s inconclusive of the $9.4 million we’ve spent so far.

During the second quarter, we did not purchase any common stock as a part of our share repurchase program. Instead we utilized our liquidity both for general working capital purposes, as well as the acquisition of the marine energy source product lines. Through July 31 of this year, we have purchased 306,000 shares as a part of our 1 million share program authorized in April 2013. Future purchases will depend on market conditions as well as other financial considerations.

Mitcham’s overall financial position remains strong. At the end of the second quarter, we had about $48 million of working capital that includes cash and cash equivalents of about $9.4 million. As of July 31, we had an outstanding balance of about $25 million under our $15 million revolving credit facility.

Our cash flow provided by operating activities totaled about $19 million in the first half of 2015. As I mentioned earlier, our second quarter adjusted EBITDA was $5.8 million. I’d also like to highlight that in August, we established a new $15 million credit facility in Singapore for Seamap.

Now this facility provides a much more efficient structure for managing cash, foreign taxes and foreign exchange. This agreement consists of a $10 million term facility, a $3 million revolving credit facility, a $2 million bankers guarantee for a letter of credit facility. We used the proceeds from the $10 million current facility to repay the borrowings under our corporate revolver that were used to partially fund the Marine energy source product acquisition in May.

Let me make just a few comments about our outlook in the market, then we'll open the call up to some questions. As Guy mentioned at the start of the call, our second-quarter results largely developed according to our expectations with a couple of unexpected delays. Geographically, Latin America remains one of our most attractive markets which gives us a good deal of optimism for the future. Although permitting and government bureaucracy will continue to impact the timing of the projects, particularly in Colombia, but the work is there and we do have equipment in the region. Overall, we're optimistic about the business environment there and continue to see healthy demand for seismic equipment.

Europe is another market that has improved considerably over the past year. We expect this region to remain strong through the rest of this year. Eastern Europe has been a big driver of our peak performance in the region and we have recently begun a large job there which it will run through the fourth quarter. The Asia Pacific leasing market have rebounded nicely with increasing activity in rising channel counts. We have moved additional equipment into that area for new jobs. We expect solid demand from the land market such as Indonesia and Australia throughout the remainder of this year.

Our sales and marketing efforts in the Middle East have resulted in more opportunities and we're working on two jobs in that region now and are bidding on others. We'll continue in our efforts to obtain incremental work there going forward. Now as far as Alaska and Canada, there are indications of early activity there for the upcoming winter. However, it is really a bit too early to tell how it will really develop and if we'll see any significant improvement from last year, but that's something we're keeping a close eye on.

In Russia, based on the early feedback from customers, we are currently expecting another solid winter season with activity at least as strong as last year. Trade sanctions imposed by the U.S. against Russia related to the Ukrainian situation has had an impact on equipment that is available on the Russian market. However, based on our current understanding of the U.S. and EU sanctions, we think we will be able to provide the equipment required in Russia for this winter. Nonetheless, we are continuing to monitor this situation very closely.

In the U.S. land market, activity remains soft. Although there are some occasional opportunities, the overall U.S. market remains challenging and should remain so through the rest of the year. We continue to attract for English to remain soft for the rest of the year as we don't see any signs of improvement in light of the oversupplied market. This current weakness in Marine seismic activity could cause some marine contractors to modify their purchasing plans and therefore will impact deliveries or at least the timing of deliveries for Seamap. Longer term, we remain very enthusiastic about customer interest in our Seamap products and are very excited about the new opportunities arising from the acquisition we made in May.

Now in conclusion, despite the down cycle the industry is currently experiencing, we are confident that we'll see improved leasing revenues in the third quarter and are optimistic about the balance of FY15. Danny, that concludes our formal remarks, we'd be happy to open the call up to questions right now though.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Veny Aleksandrov. Please go ahead.

Veny Aleksandrov – FIG Partners LLC

Good morning guys.

Robert P. Capps

Hi, Veny. How are you doing?

Veny Aleksandrov – FIG Partners LLC

Good and I hope that Bill is back soon, I wish him all the best.

Robert P. Capps

(Indiscernible)

Veny Aleksandrov – FIG Partners LLC

I hope – yes, I hope he is back this week. Back to the question, sorry, in terms of Colombia I remember that there was this permitting issue where every operator and every service company had to do the permitting by themselves. But then it kind of got resolved, are we back to the same scenario, is this why we have the permitting challenges?

Robert P. Capps

Yes, Veny I think we just have to recognize this is going to be an ongoing issue in Colombia. And I think what's happened is we got some issues resolved, some jobs going forward and new jobs were queued up, new jobs were [left] and they are working through the permitting issues for those. So I just think it's going to be continuing issue and frankly it’s an issue everywhere in the business. It's an issue in the U.S., it’s an issue in Europe from time to time. So it's a tough situation.

And for our business as the channel counts have gotten larger, therefore the jobs are larger, there's a bigger impact on a delay. But we're still very optimistic about Colombia, there's a lot of work down there, a lot of jobs have been – or projects have been tendered recently, has been ordered recently, so we think as we work through the issues, we'll see that come back. Now we do have work going on there, I'm not trying to say there's no work in Colombia, it's just taking a bit of a pause from what we saw in the first quarter.

Veny Aleksandrov – FIG Partners LLC

Okay, and then when you talk about Marine, the softness expected to continue through end of the year, but can you give us your take on the long-term picture? When are we going to get out of the down cycle? When is capacity going to be exhausted and (multiple speakers)?

Guy Malden

Veny, there is couple of things going on. One is, and we've talked about this, just a tremendous amount of excess equipment that still exists on the market. The other thing that's happening, and everybody has read all this, is several of the large contractors are derigging boats. They're taking capacity out of the market. Now that's going to take some time to remove that capacity. We all believe that once the fleet around the world right sizes, if you will, then perhaps there will be an increasing in pricing which helps our customers and it also helps our Marine Leasing business.

But I think from our perspective, well into next year, the situation won't change from the Leasing perspective. And again I think if everybody in the industry looks towards what's happening with the contractors and as they're all saying, into next year, mid next year and perhaps end of next year before all of the right sizing of the fleets will be completed. There are several holes that are still being – that are still on board for completion. Several of them the schedules have slipped, so we are still seeing some new holes come into the market. But nonetheless, there's more coming out, or plan to be, could be derigged.

Veny Aleksandrov – FIG Partners LLC

Okay and I will requeue but I missed when you said how many more systems you have, what's your backlog to the end of the year? I think you mentioned it on the call and I missed it.

Robert P. Capps

Okay, I'll go ahead and answer that. We said we have additional systems scheduled for delivery, we really usually don't disclose in our [release].

Veny Aleksandrov – FIG Partners LLC

Okay, but you have additional systems scheduled for delivery between now and the (indiscernible)?

Robert P. Capps

Yes, Veny. Yeah.

Veny Aleksandrov – FIG Partners LLC

Okay, okay. Thank you and I will requeue. Thanks.

Robert P. Capps

Okay.

Operator

(Operator Instructions) We’ll take our next question from Tyson Bauer. Please go ahead.

Tyson Lee Bauer – Kansas City Capital Associates

Good morning gentlemen.

Guy Malden

Good morning, Tyson.

Tyson Lee Bauer – Kansas City Capital Associates

A quick question, in lieu of the importance of Canada and what that means later in your fiscal year, when do you think we will have better clarity and do you have contingency plans where you can move systems or channels to other areas of strength like Eastern Europe, those type of places? Give us your philosophy and how you guys are going to have contingency plans in place if we don't have a strengthening of the Canadian and Alaskan markets.

Robert P. Capps

Right, so I think we'll start to get stronger indications as we get into October, November. I think by November you pretty much have to know because you'll have to be staging equipment and that's typically what we see. As far as contingency plans, we can lose some equipment elsewhere such as Eastern Europe or Russia although the sanctions make that a little more complicated these days. But frankly we're already moving some equipment from other areas to Eastern Europe. But there are some things we can do with there.

You can’t take everything that's in Canada and move it to Europe and put it to work necessarily. So if Canada doesn't develop than that is an issue for us for sure and you can’t replace all of that revenue. But that said, the early indications are optimistic, it's just very early days still.

Tyson Lee Bauer – Kansas City Capital Associates

We've seen in years past where one large U.S. contract can swing a quarter. Any indications on this – the reference U.S. contract that's pending of the size of that contract?

Robert P. Capps

Just say it's a significant contract and it is imminent.

Tyson Lee Bauer – Kansas City Capital Associates

Imminent.

Robert P. Capps

Yeah.

Tyson Lee Bauer – Kansas City Capital Associates

Okay. So you have a PO in hand it's just (inaudible) winning award?

Robert P. Capps

No. We are running shift equipment, actually it's –

Guy Malden

Equipment is moving.

Robert P. Capps

Moving today actually.

Tyson Lee Bauer – Kansas City Capital Associates

Thank you gentlemen.

Operator

(Operator Instructions) We’ll take our follow-up question from Veny Aleksandrov. Please go ahead.

Veny Aleksandrov – FIG Partners LLC

Thank you. On the downhole business, you mentioned that everything is going well. Do you need more equipment or are you good for now with what you have?

Robert P. Capps

I think we're good for now with what we have. We're really not looking to add anything to that at this point.

Veny Aleksandrov – FIG Partners LLC

Okay and the Chinese office, is it up and running?

Guy Malden

We’re still in process. We have allocated space there. We also have, along with our current aged structure there, still looking for a more of a technician or an engineer to fulfill our field service role which will be our first step. We also have some planned activity into that market for several of the contractors and again as we just completed integrating the source products into Huntsville for the Sleeve Guns and Digishot, the source controller into Singapore, we fully expect to be ramped up probably between now and the end of the year there.

Robert P. Capps

We actually have people on the ground, representatives on the ground inside and out. We just don't have the representative office opened yet. That's a 6-month process to get this done.

Veny Aleksandrov – FIG Partners LLC

Thank you. And my last question, we heard from a lot of the seismic guys in the space that clients are asking for wireless equipment, do you see the same trend?

Robert P. Capps

In the U.S.?

Veny Aleksandrov – FIG Partners LLC

Yes.

Robert P. Capps

I think its safe to say that in the U.S. and maybe to a lesser extent in Canada also, there is a trend towards wireless equipment and that most of what we see deployed in North America or certainly in the U.S. is wireless. I think as was said before, other markets it's kind of a mixed bag. We see different things in different places.

Veny Aleksandrov – FIG Partners LLC

Thank you, I appreciate it. And please give my regards to Bill.

Robert P. Capps

Okay. Thanks.

Guy Malden

Thanks, Veny.

Operator

This does conclude our question-and-answer session for today. I’d like to turn the call back over to management.

Robert P. Capps

Thanks, Danny. Once again we'd like to thank all of you for joining us on this call and your interest in Mitcham. I know Bill looks forward to talking to you again at the conclusion of our third quarter. Have a good day. Thanks.

Operator

As a reminder, this does conclude today’s presentation. We appreciate everyone’s participation.

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Mitcham (NASDAQ:MIND): FQ2 EPS of -$0.26 misses by $0.23. Revenue of $19.54M (-6.5% Y/Y) misses by $3.14M. Shares -2.31% AH.