Mitcham Industries' (MIND) CEO Guy Malden on Q1 2017 Results - Earnings Call Transcript

| About: Mitcham Industries, (MIND)

Mitcham Industries Inc. (NASDAQ:MIND)

Q1 2017 Earnings Conference Call

June 09, 2016, 9:00 AM ET

Executives

Jack Lascar - Dennard Lascar Associates, IR

Rob Capps - Co-Chief Executive Officer, Chief Financial Officer

Guy Malden - Co-Chief Executive Officer, Executive Vice President, Marine Systems

Analysts

Tyson Bauer - KC Capital

Sam Rebotsky - SER Asset Management

Operator

Greetings and welcome to the Mitcham Industries First Quarter Fiscal Year 2017 Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

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

Jack Lascar

Thank you Melissa a good morning and welcome to the Mitcham Industries fiscal 2017 first quarter conference call. We appreciate all of you joining us today. Your hosts are Rob Capps, Co-Chief Executive Officer and Chief Financial Officer; and Guy Malden, Co-Chief Executive Officer and Executive Vice President of Marine Systems.

Before I turn over the call to management, I have a few items to cover. If you would like to listen to a replay of today's call, it will be available for about - approximately 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 June 23. Information on how to access the replay was provided in yesterday's earnings call.

Information reported on this call speaks only as of today, Thursday, June 9, 2016, 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 and 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, 2016.

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 those statements.

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

Guy Malden

Thanks, Jack, and good morning, everyone. We would like to thank you for joining us today for our fiscal 2017 first quarter conference call.

I'll begin by making some general comments about the quarter. Rob will then discuss our financial results in more detail and address our market outlook. We will then open the call for questions.

Turning now to our first-quarter results. Overall, the first quarter unfolded much as we expected. Our Equipment Manufacturing and Sales segment produced improved results over last year's first quarter, thanks to steady results from Seamap and the addition of Klein Marine Systems.

Results from our Leasing segment were significantly below last year's first quarter, due in large part, to very low levels of business in Canada and Russia this winter season. However, with the recent recovery in oil prices, the seismic market seems to have stabilized and we are seeing indications of renewed activity later this year and into next year.

In the Equipment Leasing business, we continued to manage through an extremely challenging environment, as E&P companies and contractors remain heavily focused on preserving their cash flow and minimizing their expenditures in the face of this extended downturn.

Our Leasing revenues were down both year-over-year and sequentially, as seismic exploration activity continued to languish through the quarter. While the weakness in activity was pervasive throughout all geographic markets, we did see a substantial sequential increase in revenues in the US due to a large Alaskan program that has since been completed.

However, we continue to see very little exploration activity in the US land market and this situation is likely to continue until a more favorable and predictable commodity price environment prevails.

Continuing the trend we discussed during the fourth quarter, we did not experience the usual seasonal benefit from the Canadian and Russian markets. While the weakness in Canada was fully expected, Russian activity was well below our expectations as low oil prices and a weak ruble caused numerous projects to be canceled at the last minute.

Leasing revenues from Europe were also down from last year as well as sequentially, mainly due to project timing issues in which one project ended and another one was delayed into the second quarter. Despite the lumpiness, activity in the European region has generally been more stable than in other geographic locations.

Although Latin America was down both year-over-year and sequentially, we are currently engaged in work there and this should benefit our second quarter results. And based on our discussions with customers in the region, conditions appear to be improving, and we are currently bidding on projects that could positively impact us later in the year.

In the Marine Leasing market, the oversupply conditions that we've long highlighted continued to negatively impact our results. Although there are some isolated opportunities within Marine, we don't currently see any real catalysts that can drive a sustained improvement in activity.

So while we expect the overall Leasing business to remain relatively weak, there are some targeted opportunities within certain markets that have the potential to provide incremental upside to our second quarter and full-year results.

Our Manufacturing and Equipment Sales segment has fared much better. While our Seamap's business is not immune to the current conditions in the energy industry the impact there has not been as great as with our Leasing segment.

The addition of Klein adds a new dimension to our business and both Klein and SAP appear to have solid prospects through fiscal 2017 and 2018. We are pursuing a variety of hydrographic, oceanographic and military opportunities with a number of commercial and government customers around the world. We believe our efforts to diversify Mitcham beyond the oil and gas industry are beginning to pay off.

Seamap is also pursuing a number of projects outside of our traditional oil and gas related markets as well, specifically, hydrographic and geotechnical survey entities that could often utilize many of Seamap's products as well as those of Klein. We are seeing opportunities to supply equipment to a number of such customers in various geographic regions.

The Manufacturing business, along with our continued efforts at managing our cost structure have enabled us to remain cash flow positive despite very difficult industry conditions. We will continue to successfully manage through this downturn and emerge as a stronger entity.

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

Rob Capps

Thanks, Guy. I'll give you a bit more detailed review of the financial results and then I'll make some comments about our view of the current and then near term market outlook as well.

First, let me go over the lines of business within our Equipment Leasing segment, which includes the leasing business itself, sales of lease pool equipment and some additional miscellaneous equipment sales.

The revenues for this segment, as a whole, totaled $4.5 million in the quarter compared to $11.5 million in the first quarter a year ago. There was activity reductions in nearly all areas of our Leasing business, although as Guy mentioned, our US Land business did see the benefit of large projects which has since then been completed.

Though the visibility in the Leasing business is still poor, based on inquiries and pending project bids in selected markets, we think the second half of the year has the potential to improve versus the first half. The improvement will likely come from Europe and Latin American markets, as those two areas are showing some incremental opportunities.

For our Lease Pool Equipment sales, revenues were $906,000 in the quarter compared to $227,000 in the same quarter last year. New Seismic Equipment sales, which include miscellaneous seismic equipment that, I'll remind you no longer include the sales from SAP, our Australian subsidiary were just $29,000 compared to $130,000 in the same quarter a year ago, and we do believe there may be opportunities to sell certain lease pool equipment later this year.

We now turn to our Manufacturing Equipment Sales segment, which includes Seamap, Klein and the product sales from SAP. Revenues for this segment, as a whole totaled $7.2 million in the quarter compared to $5.7 million in the first quarter year ago.

Seamap revenues were $4.9 million in the quarter, which is roughly flat with a $5.1 million earned in the first quarter last year. Sales from Klein Marine were - excuse me, $1.8 million, as there were no comparables a year ago since we acquired Klein at the end of last year. Our Klein sales are largely due to customers in the hydrographic and oceanographic industries and unrelated to the oil and gas industries, as Guy said.

Finally, our SAP product sales in the quarter were $480,000 compared with $560,000 in the year-ago period. I'll touch on a few things about the profitability in the segments. The gross profit in the Equipment Leasing segment was, again, strongly impacted by the high fixed cost of depreciation, which magnifies the negative impact on lower sales on our operating product.

Therefore we recorded a gross loss of $3.5 million compared to a profit of $2.3 million in the first quarter of fiscal '16 last year. However, we've got lower lease pool depreciation cost of $6.9 million this quarter versus $7.7 million a year ago due to reduced lease pool additions over the past couple of years.

As was the case in previous quarters, ongoing cost reduction and business rationalization efforts have enabled our direct Leasing costs to attract at roughly half our year ago levels. With current order cost at $752,000 versus $1.4 million in the same quarter a year ago.

First quarter gross profit for our Manufacturing and Equipment Sales segment was $3.2 million compared to $2.3 million a year ago. This represents a gross profit margin of 44% and 40% respectively, as the difference in the gross profit margins is due primarily to changes in product mix and the effect of revenues from Klein this year.

Our general and administrative expenses were approximately $5.3 million in the first quarter of fiscal 2017, slightly above the $4.9 million in last year's first quarter. This increase was due to the additional expense of Klein, which were not present last year, without that effect, our SG&A this quarter would have declined about 6% year-over-year.

Our overall operating loss for the first quarter this year was $6.3 million compared to an operating loss of $957,000 in the first quarter of fiscal 2016. First quarter adjusted EBITDA was $2.2 million compared to $7.9 million in last year's first quarter.

We reported a net loss in the first quarter of $6.4 million or $0.53 per share, compared to a net loss of $237,000 or $0.02 per share in the first quarter a year ago.

Let me make a few comments about our liquidity and financial position. Our Mitcham's overall financial position remains strong. At the end of the first quarter, we had over $26.3 million of working capital that included cash and cash equivalents of about $2.4 million.

We generated $1.7 million of cash flow from operations during the quarter. As most of you know, we recently completed a public offering of 9% cumulative preferred stock as a result of the net proceeds to us of just over $7 million.

This additional capital further enhances our financial flexibility that will help us take advantage of our opportunities that may arise as we emerge from this downturn.

During the first quarter of fiscal 2017, we were able to reduce our outstanding debt by $2.7 million during the quarter. Subsequent to the end of the quarter, we've reduced it by another $7 million approximately. This brings our net-debt balance, which is debt less cash balances to about $8.0 million as of today.

Let me just make a few remarks about our outlook in the market and how we see things today and going forward. Despite the very challenging conditions within the energy industry, we are very optimistic about Mitcham's prospects going forward.

Conditions in the seismic market are still unfavorable. However, we believe that there are indications that we may well have reached the bottom of this cycle. The recent rally in oil prices may be an early indicator of a more stable environment and we have experienced a recent up-tick in inquiries from customers. Despite the greater optimism in the market, we don't believe that we are likely to see a seismic market meaningfully improve for the balance of fiscal 2017, however.

As mentioned earlier, there are some solid opportunities for the work in Europe and Latin America and as a result, our current expectation is, that the second half of our Leasing business will be likely very similar to last year's second half.

We do expect improvement in our Equipment Manufacturing and Sales operation over the balance of this fiscal year. Based on current and anticipated orders, we expect increases in both Klein and SAP and expect steady results from Seamap.

Our expansion outside the oil and gas related applications and into the new geographic regions is, we believe, paying dividends for us. We expect our Equipment Manufacturing and Sales segment to continue to become a bigger part of our overall business.

The integration of Klein into our company has gone very well, we think. We've identified and begun working on a number of collaborative efforts between Klein and Seamap. We think our combined capabilities will lead to new products and new opportunities for us.

So in conclusion, although a meaningful improvement in the leasing conditions remains elusive for fiscal 2017 there are pockets of opportunity in selected markets. We believe that some of the macroeconomic issues weighing on the oil and gas industry are improving.

In the meantime, we continue to generate cash flow from operations and maintain a solid capital structure. When the oil and gas business cycle eventually turns, we will be well positioned to fully participate. We'll also be much better able to handle future market down cycles in the energy industry due to our strategic shift towards a more balance among our operations.

Operator, that concludes our formal comments. We will be happy to take any questions that our listeners have right now.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Tyson Bauer with KC Capital. Please proceed with your question.

Tyson Bauer

Good morning, gentlemen.

Rob Capps

Good morning, Tyson.

Tyson Bauer

Can you provide a little additional color with kind of the sales cycle and lead times that are involved with Klein and some of your non-oil and gas leasing projects that are more military or other industry oriented?

Is there a normal budget cycle and a normal, where you can see a pretty good lead time of what's out there to bid on and to procure those contracts?

Rob Capps

There is, as you can imagine, with many governmental customers, you do have a longer business cycle or longer…

Guy Malden

Project cycle…

Rob Capps

Yes. And so you do have long-term visibility. There are issues about exact timing as to when things are actually released and when deliveries occur. But you do have much longer-term visibility in industrial projects and so many of these are ongoing projects.

Guy Malden

Multi-year projects with standard products, including a couple of new products that we are introducing.

Tyson Bauer

Okay. So when you give the positive outlook for '17 and '18, that's because a lot of those things are ready existing and in the pipeline. These aren't things that we are hoping to see; these are things in existence?

Rob Capps

That's correct.

Guy Malden

That's right. We may not have a purchase order in hand, but the projects are underway and ongoing.

Tyson Bauer

You made a comment about the possibility of some lease pool sales give you a net working capital benefit, as I'm guessing your CapEx will be de minimis this year any kind of magnitude that you're looking for, a benefit that would help your liquidity throughout this year on recognizing and turning that into cash some of those inventory amounts?

Rob Capps

I think Tyson, we're always looking for opportunities to do something with that. I think I'm reluctant to give you any specific targets on that because those are - tend to be opportunistic. But again, we do think there are opportunities out there, part of it - they are a bit limited but we think they are there.

Tyson Bauer

Okay. And last question. When you did your debt pay down, was there an adjustment to your available credits that corresponded with that pay down, or do you still have the existing $25 million?

Rob Capps

There are - there's no - with the pay down, there is no adjustment, although we are considering looking at the total commitment as to what we can likely utilize. And so we may make an adjustment there just to save commitment fees.

Tyson Bauer

Okay. Thank you.

Rob Capps

No real practical effect is the answer.

Tyson Bauer

Okay.

Operator

Thank you. [Operator Instructions] Thank you. Our next question comes from the line of Sam Rebotsky with SER Asset Management. Please proceed with your question.

Sam Rebotsky

Yes. Good morning, gentlemen.

Rob Capps

Good morning.

Sam Rebotsky

With the difficulty that has occurred with the price of oil and the significant improvements and the rig count has been significantly lowered and having raised the capital, even though you want to raise additional money, do you see - what kind of visibility do you have where today, you might need to raise additional funds, this at one year, two year, what is your comfort level on the ability to hold capital and utilize it going forward?

Rob Capps

Well, Sam, I think, we don't see needs for additional capital as we sit here today. If any needs for additional capital, I think, would be to take advantage of opportunities that might take down the road.

So we're cash flow positive, so we don't have a cash burn issue to deal with, like many people do. So I think we're pretty comfortable with where we are and just think there are some opportunities out there and they are going to continue to look for those.

Sam Rebotsky

And do you see a certain minimum revenue to breakeven on a profit - basically, on a profit basis, not on a cash flow basis and do you see when that may occur?

Rob Capps

I guess I'm just reluctant to make a projection about that. I mean, clearly, you can do the math from the income statement looking backwards. We are taking a number of steps, have taken and continue to take a number of steps to control costs and rationalize the business. I guess just reluctant to make a projection on that.

Sam Rebotsky

As far as the current quarter and as far as a normal quarter, what do you see as the best quarter based on past history and future, the fourth, the third, the second, the first, what do you see where the quarter is going forward what they might…

Rob Capps

That's a good question because historically our fourth quarter - first quarter then our fourth quarter were our two best quarters because of seasonal issues in the leasing business in Canada and Russia. This year, we haven't seen that seasonality. So I think the normal seasonality we've seen historically, I think is not going to repeat itself this year.

So there is no set seasonality that we see in the business for this year. So you really can't - as we said earlier, we think the back half of the year is better - going to better in our Manufacturing and Equipment Sales business due to order flow, but that's not really due to any seasonality.

Sam Rebotsky

Okay. And do you say - as oil is, say in the $50 range, if it's say gets to 60, do you see that being significant, in other ways more increase - I mean, there is going to be more increase in your utilization of your equipment than - and exploring. But is there a certain number that you see that would - should permit you to sort of be over the hump, so to say?

Rob Capps

Well, I mean, the price of oil is important because it impacts the investment decisions of oil and gas companies. That's the real driver. So just because oil gets to 52 or 55 or whatever that, in and of itself, doesn't directly relate to us.

But if that gives the oil and gas companies more confidence and more ability to go explore, than that definitely is to our benefit. So it's an indirect effect.

Sam Rebotsky

Okay. And as far as opportunities, are you looking at anything now or are you waiting?

Rob Capps

Well, we're always on the lookout for things. We think there are some opportunities that are going to become available. So we're always looking, but nothing that's eminent.

Sam Rebotsky

Well, good luck.

Rob Capps

Thanks, Sam.

Operator

Thank you. Ladies and gentlemen, there are no further questions at this time. I'll turn the floor back to management for final remarks.

Guy Malden

Thanks, Melissa. I would like to thank you for joining us for our call this year and for your interest in Mitcham. We look forward to talking to you again at the conclusion of our second quarter. Thanks.

Operator

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

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