Mitcham Industries' (MIND) CEO Rob Capps on Q4 2018 Results - Earnings Call Transcript

Mitcham Industries, Inc. (NASDAQ:MIND) Q4 2018 Earnings Conference Call April 11, 2018 9:00 AM ET

Executives

Mark Roberson - Investor Relations

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

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

Analysts

Tyson Bauer - KC Capital

Operator

Greetings and welcome to Mitcham Industries Fiscal 2018 Fourth Quarter and Full Year 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’s now my pleasure to introduce your host, Mark Roberson with Dennard Lascar. Thank you, Mr. Roberson. You may begin.

Mark Roberson

Thank you, operator. Good morning and welcome to the Mitcham Industries fiscal 2018 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 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 April 25. Information on how to access the replay was provided in yesterday’s earnings release. Information reported on this call speaks only as of today, Wednesday, April 11, 2018 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 with 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 yesterday 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 Malden

Thanks, Mark and good morning everyone. We would like to thank you for joining us today for our fiscal 2018 fourth quarter and year end conference call. I will begin by making some general comments about the past fiscal year as well as the fourth quarter. Rob will then discuss our financial results in more detail and address our market outlook. We will then open the call for questions.

While fiscal 2018 proved to be another challenging year to the extent that our financial results did not meet our expectations, we made significant progress in repositioning Mitcham as the significant provider of marine technology products. Shifting our focus towards the more stable hydrographic, oceanographic and defense markets around the world has enabled us to leverage our existing resources and assets and transform Mitcham into a stronger, more viable company for the future. Although this effort has been underway for some time, we have recently made a decision to formally change the name of our equipment manufacturing and sales segment to better reflect its operations. Effective immediately, this segment will now be known as our marine technology products segment. In concert with this greater emphasis on marine technology, we have also made some necessary revisions to our financial reporting. These include the breaking out of our R&D expenses in the income statement, which had previously been a part of SG&A. We believe that these changes are more appropriate for our revised business structure given our emphasis on marine technology.

Now turning back to our 2018 performance, we accomplished a great deal to strengthen and improve Mitcham’s competitive position and growth prospects. Let me briefly highlight some of these milestones. During the past fiscal year, we paid down all of our outstanding debt obligations and effectively strengthened Mitcham’s capital structure to yield greater financial flexibility and improved liquidity. We also made progress in rebalancing and redirecting our leasing business both in terms of capital deployed as well as our own risk exposure. We did this by working with our customers and suppliers to better share their risks and rewards of this volatile business. This new leasing paradigm include our recent worldwide partnerships with seismic equipment manufacturers such as INOVA Geophysical and Langfang Dynamic Technologies, both of which expand Mitcham’s offering of onshore seismic acquisition instrumentation.

Finally, we acquired new technology to broaden our product line to better serve the marine technology market. In February, we acquired the IP and related assets of Hydroscience Technology Inc. and in March introduced the SeaLink line of marine sensors and streamer system that are based on this technology. We partnered with Mitsubishi Heavy Industries on this acquisition. They provided financing for this transaction through the purchase of our 9% Series A preferred stock and we have agreed to provide ongoing support services to Mitsubishi for equipment they previously purchased from Hydroscience. This transaction led directly from the introduction of our new SeaLink towed streamer products this past March which are highly complementary to our GunLink source controller and BuoyLink positioning systems.

SeaLink enables us to offer more complete line of marine technology products to the oceanographic and hydrographic industries. These new offerings will also be fully supported through our Seamap facilities of which we are currently in the process of expanding. Given all these changes that are taking place over the past fiscal year and combined with the larger overall strategic realignment we have implemented for years now, it’s clear that Mitcham is a very different company than it has been in the past. Our decreased exposure to the cyclical oil and gas exploration market, greater access to more stable longer term opportunities in the oceanographic, hydrographic and defense markets as well as our clean balance sheet and enhanced liquidity have all been of tremendous benefit of the long-term prospects of the company. With that, let me now make a few key points. Despite a challenging fiscal 2018 for Klein, we believe the Marine Technology Products segment will post improved performance this fiscal year. Based on recent bookings and inquiry activity as well as industry projections by third-party research providers, we believe Klein is poised to post significantly improved results for this year.

Now turning to our leasing business fundamentals remain challenging as we are continuing to see low levels of demand for seismic exploration equipment. Although our overall leasing segment revenues in the fourth quarter were up sequentially, the increase was wholly driven by much higher lease pool equipment sales rather than any meaningful improvement in leasing activity.

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

Rob Capps

Okay. Thanks Guy. I will begin by giving a more detailed review of the financial results then I will make some comments about our views on the current and near-term market. Let me start with our Marine Technology Products segment which includes Seamap, Klein and product sales from SAP, our Australian subsidiary. Revenues for this segment totaled $5 million in the quarter compared to $6.9 million in the fourth quarter a year ago. Seamap revenues were $2.5 million in the quarter which was down from $4.4 million in the fourth quarter of last year. Sales from Klein for the quarter were $1.1 million, this compares with revenues of $1.7 million a year ago. And finally our SAP product sales were $1.7 million in the quarter compared to $1.5 million in the year ago period.

Now including the amounts I have just talked about are about $281,000 in intra-segment sales which of course will get eliminated in our consolidated results revenues. Revenues from our Equipment Leasing segment which includes our leasing business and sales of lease pool equipment and some additional miscellaneous equipment sales totaled $5.4 million in the quarter compared to $5.7 million in the fourth quarter a year ago. The pullback was attributable to lower leasing activity. Lease pool equipment sales were flat with a year ago, but increased sequentially to $3.1 million. This was part of our strategy to adjust the size and composition of our lease pool to better suit the evolving market. As a result, we took the opportunity to sell certain of our equipment during the quarter. We do anticipate – currently anticipate some additional sales in fiscal 2019, but that was the magnitude of those in 2018.

Let me discuss the profitability of each of the segments briefly. Fourth quarter gross profit of our marine technology products segment was $1.3 million compared to $3.3 million a year ago and this represents gross profit margin of 26% and 48% respectively. And the difference in the margin between the periods is primarily due to under-absorbed manufacturing overhead costs due to the lower sales in the current period. In our equipment leasing business, gross profit was positively impacted by our ongoing lease pool sales and reduced lease pool additions as depreciation expense has been dramatically reduced falling from $5.8 million on last year’s fourth quarter to $2.9 million this quarter. As a result, the leasing business reported a gross profit of $91,000 in the fourth quarter compared to a gross loss of $6 million in the fourth quarter of fiscal 2018 or ‘17 revenue. Our gross leasing costs rose moderately year-over-year with current quarter cost at $1.1 million versus $1 million for the fourth quarter a year ago.

Our general and administrative expenses were $5.2 million for the fourth quarter of fiscal 2018 compared to $4.6 million for last year’s fourth quarter, but the increase is primarily due to cost associated with various restructuring activities. As Guy mentioned, we have broken out our research and development cost as a part of our initiative to highlight our marine technology product segment and the ongoing development efforts tied to that business. Previously, R&D expenses part of our SG&A expenses that has now been separated out in the income statement, our R&D expense was $864,000 this quarter and that compares with $356,000 spent during last year’s fourth quarter.

Now, during this fourth quarter, we also had several non-recurring items I’d like to highlight. There is a provision for doubtful accounts receivable of about $1 million, which rose due to the prolonged weakness in the seismic business and it also reflects negotiations to settle certain longstanding accounts for a cash payment at a discount to the total amount. There is also a $1.5 million charge for goodwill impairment related to our Klein unit of roughly $600,000 of inventory adjustment tied to the consolidation of our operations and the decision to make certain products end-of-life. Now, this additional expense inventory adjustment flowed through our cost of goods sold. Now, I have discussed about our SG&A expenses included about $400,000 of incremental cost associated with our various consolidation efforts.

Our overall operating loss for the fourth quarter this year was $7.7 million compared to an operating loss of $8.9 million in the fourth quarter of last year’s fiscal year. Our fourth quarter adjusted EBITDA was $1.2 million as a loss compared to $2.6 million profit in last year’s fourth quarter. We reported a fourth quarter loss attributable to common shareholders of $8 million or $0.60 per share. Now, if you exclude the impact of the special charges I just mentioned, we have reported a net loss of about $4.5 million or $0.37 per share. This compares to a loss of $10 million or $0.83 per share in the fourth quarter a year ago. As Guy mentioned, Mitcham’s financial position and liquidity remained very solid. At the end of the quarter, we had over $25 million of working capital and that included cash and cash equivalents of about $10 million. And having repaid the entirety of our credit facilities during last fiscal year, we have remained entirely debt free.

Let me conclude with just a few comments about our market outlook. Fiscal 2018 was a challenging year, but it also represented a period of transition as we positioned Mitcham for growth in the future. Because of these efforts, Mitcham has become a very different company from its origins and we believe it is now much better suited to address the market going forward. We will have less need to purchase equipment and our capital expenditures look more focused on acquiring technology to expand our products. Based on our current visibility, we believe fiscal 2019 will be a better year. This is mostly due to our outlook for marine technology products.

Order activity and bookings in this segment have been improving and we have been highly encouraged by pending orders and the level of inquiries we have been seeing. We are also very excited about product line of marine centers and streamer systems that we have recently introduced. The interest we have seen so far in this is encouraging. We expect these products to begin contributing later in fiscal 2019 once our repair and production facilities for the new products were operational. And regarding Klein, although it’s not performed as we had anticipated and challenges do remain, we are confident that this will be a better year. We are very encouraged by the activity in the bookings and inquiries across the board in the marine technology products segment.

Finally, the worldwide solar industry has been down for roughly 2 years. An independent study indicates it is poised for growth in the coming years. So, although the timing and pace of improvement for our marine technology products is uncertain, it’s likely it will appear sometime later this year. For the equipment leasing business, demand remains quite sporadic. However, there should be continuing demand in Europe and improving demand in South America through the year. There maybe some additional opportunities for projects to other parts of the world to North Africa and the Middle East and with continued gains in public process, fundamentals may improve through the year. However, land leasing activity is expected to remain well below historical levels. Although many significant aspects of our transformation efforts have been completed, we are continually looking for ways to enhance the value proposition for our marine technology business, rebalance our leasing operations towards our a less capital intensive and more risk adverse business model and better utilize our broad geographic footprint.

That concludes our formal results – our formal remarks rather. And I will be happy to take some questions operator, if you will open that up.

Question-and-Answer Session

Operator

Yes. Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Tyson Bauer with KC Capital. Please proceed with your question.

Tyson Bauer

Good morning gentlemen.

Mark Roberson

Hi Tyson.

Rob Capps

Hi Tyson.

Tyson Bauer

Alright. A couple of quick questions, in regards to the expectation of the lease pool sales you have on the balance sheet $23 million, you sold $12.5 million which is the bulk of where your cash came from at the end of the year, as we go forward you have mentioned that we lost about $12.5 million, with the $10 million cash balance you are starting the year with, with some additional sales and what are you looking for free cash flow expectations, so we can kind of gauge going through the year, where are you thinking you are going to stay in as far as financial liability and supporting that growth on the marine side?

Rob Capps

Well, if I can understand the question, we do anticipate being positive cash flow this year, so we would – during the balance of the year. So we would anticipate enhancing that liquidity position. So there is not a need if you will to necessarily sell additional lease pool equipment, if the opportunity rises we will.

Tyson Bauer

So you will be free cash flow positive even without additional asset sales?

Rob Capps

Yes, what we believe, yes.

Tyson Bauer

Okay. So you are in a reasonably good position there, the thought process here with this transformation was have enough liquidity available from that lease pool, build up a cash balance, by the exact same time grow that marine technology side to be self sustaining I think the number thrown out previous causes to try to target getting to the $40 million level as quick as we can, you talked about improved results, is that improvement get you to that kind of run rate by the end of the year or are we looking at a 2-year timetable, where do you think or when and how do you think we can get up to that level?

Rob Capps

We think we will get in the back half of the year we can get to a run-rate there. Obviously, the new product lines are going to take some time to contribute because we are just not operational with those production facilities yet. In some of the order activity, Seamap is more back-end loaded so by the time we get to the end of the year, we do think we will be at that run-rate, yes.

Tyson Bauer

But you have the bookings and the activity now that provides that confidence to get you towards that $10 million level on a quarter basis?

Rob Capps

I wouldn’t say we have backlog necessarily, it’s firm backlog as far as the bookings in hand and inquiry activity and expected bookings, yes, we got the confidence.

Tyson Bauer

Okay. Where do you think we are going to fall in that depreciation in that remaining lease pool and can you give us an idea of what’s remaining in the lease pool?

Rob Capps

I mean there is still significant assets in the lease pool for competitive reasons I don’t want to give specifics. I think you can look at the fourth quarter lease pool depreciation not only you will see dramatic decline going into this year to just give you some sense of magnitude. So I think we feel fairly stable at this time in the lease pool with maybe a few adjustments here and there.

Tyson Bauer

And on the $23 million on the balance sheet for the lease pool, how accurate is that reflect what you believe is the market value?

Rob Capps

We believe market value would stay there. We are confident of that.

Tyson Bauer

Okay. Thank you, gentlemen.

Rob Capps

Yes. Thanks Tyson.

Operator

[Operator Instructions] Our next question is from Richard [indiscernible] with Longbow Partners. Please proceed.

Unidentified Analyst

Good morning. The marine technology sales being under expectation in both the fourth quarter and the year, what would you ascribe that to what happened?

Rob Capps

I think the shortfall is primarily a declined level and there is a number of factors there. We have seen the market depressed in the last two years. There are some significant programs with the U.S. and foreign navy which have been slower to develop than we had anticipated. And I think just those two factors combined are probably the biggest issues.

Unidentified Analyst

I see, okay. And when does these new streamer product plant get up and running?

Rob Capps

It will be later this year and second quarter.

Unidentified Analyst

Okay, thank you.

Rob Capps

You bet.

Operator

And our next question is from Tyson Bauer with KC Capital. Please proceed.

Tyson Bauer

Good afternoon. I jump right back in. We had a couple of larger contracts that were awaiting the sea award, could you provide us with status update on what those are or the timetable there?

Rob Capps

Certainly, one of them, we have a global award. We can’t announce specifics yet, but yes, I guess that’s part of the confidence we have going forward.

Tyson Bauer

Okay. And that was one of the multiyear?

Rob Capps

Correct. Yes, correct.

Tyson Bauer

Okay. When do you think you will be able to provide specifics or will you – is it an appropriation situation?

Rob Capps

It’s a matter of getting through the procurement process in this foreign navy.

Tyson Bauer

Okay. A lot of this growth in the marine tech is that you are coming into this, you bought some smaller companies with some technology, are you just really trying to capitalize on the industrial or in the industry growth or you are trying to be part of that pie that’s growing or do you have certain technologies that allows you to take market share and if so who are you taking it from?

Rob Capps

We think we do have technologies that allow us to take market share and expand our market. Some of that comes from some of the big guys, big defense contractors as these entities try to find a cheaper solution to some of their issues and I will say some of the direct competitors we think we can take market share from them as well.

Tyson Bauer

So, your approach is to tailor your solution to the customer and also you think you have an advantage as far as pricing?

Rob Capps

For sure, in some areas, we think we do, just because of the nature of our solution, but yes, I mean, we have tried to identify where we think there is a demand in the market that we can – our technology addresses and try and wrap through that specifically.

Tyson Bauer

Okay. The SeaLink, the new product that was announced, was that something that was pulled through by demand by your customers that wanted you to provide a full suite of a system to them and they were having to fulfill that with another company’s technology or a system or is that something that you are pushing through to try to capitalize and get the full value add proposition of selling a complete system to somebody, how does that work as far as the development and of course do you already have indications of orders to deliver later this year?

Rob Capps

It’s probably more the latter. The technology which fits well what we already do to same customer base or selling into these same guys already, so it was easy to expand that. This gives us a much bigger product offering for complete solution. Yes, so it does make the sale process easier from that standpoint, more of a bundled offering to the customer. And yes, we do have specific demand that we are looking at both later this year and going into next year and beyond.

Tyson Bauer

Okay. And when you talked about you felt that you had the correct capitalization for this year, does that also imply that we would not need to dip into any further preferred shares use if you saw something attractive or otherwise you would try to buy another financing means?

Rob Capps

Yes, I mean, I wouldn’t say we wouldn’t necessarily look at the preferred shares. I mean, as you know, it’s a small company which you need to raise capital, you need to raise capital. So, that’s something we will just assess as we go through it. And we do have other opportunities we see down the road. So we think that we will be in need for capital at some point, but there is not suppressing need today obviously.

Tyson Bauer

Okay. But from a purely operational from what you have planned on the assets you have currently, you are well positioned financially to take care of your own needs.

Rob Capps

We think so, yes.

Tyson Bauer

Alright. Thank you.

Operator

There are no further questions. At this time, I would like to turn the floor back over to management for closing remarks.

Rob Capps

Okay. I would just like to thank everyone for joining us today for your support at Mitcham and we look forward to talking to you after the end of our first quarter for fiscal ‘19 in just a few weeks.

Operator

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