MIND Technology, Inc.
Q4 2015 Earnings Call Transcript

Published: 8 Apr 2015

[Operator:]

Greetings and welcome to the Mitcham Industries’ Fourth Quarter 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. I would now like to turn the conference over to your host Mr. Jack Lascar. Thank you, sir. Please go ahead.

[Jack Lascar:]

Thank you, Melissa and good morning everyone and welcome to the Mitcham Industries’ fiscal 2015 fourth quarter and year-end conference call. We appreciate all of you joining us today. Your hosts are Rob Capps, Executive Vice President and Chief Financial Officer and Co-Chief Operating Officer; and Guy Malden, Executive Vice President, Marine Systems and Co-Chief Operating Officer. 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 www.mitchamindustries.com, or via recorded instant replay until April 22nd. 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 08, 2015; 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 these 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, 2015. 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’d 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 2015 fourth quarter and year-end conference call. I will 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. As you all know, the oil service industry has been affected by drastic spending cuts in response to a rapid and extended decline in commodity pricing. As a result of these cuts and the overall weak energy market, the seismic industry in general has seen a decrease in activity. Last month we outlined some sizeable headwinds that we expected would put downward pressure on our fourth quarter financial results. These headwinds included the cancellation of projects in Canada, the impact of renegotiated pricing of Russian contracts, and a one quarter delay in the startup of a significant project in Europe. In light of our earlier discussion, our fourth quarter financial performance was very much in line with those preliminary observations. We anticipated that our fourth quarter total revenues would be between $13 million and $15 million and then came in at $15 million. Our core leasing revenues were expected to be between 8 million and 10 million and they were 9.6 million. We were also expecting a loss before income taxes of between 10 million and 12 million and the final pretax figure came in at 10.7 million. Looking at our core leasing revenues results were down both year-over-year and sequentially due to the soft seismic market. Historically in the fourth quarter we have benefitted from a seasonal uptick in activity in Canada and Russia which then carried into the first quarter. This year that uptick was not nearly as large as in prior years. By our estimates there have been no more than 15 seismic crews working in Canada this winter. This compares to more than 40 crews three years ago which gives you some idea of the general decline in activity. Going into the fourth quarter we knew activity in Canada was going to be down but we did expect to benefit from some specific projects that were planned. As we mentioned to you on our call last month, most of the projects were cancelled at the last minute some literally as the equipment was leaving our facility. On the other hand, our general level of activity in Russia has actually been strong. However, the impact of a contract renegotiation I previously mentioned has offset much of that benefit. Activity there as elsewhere has been under pressure due to the combination of low oil prices as well as the declining value of the Ruble. Since our contracts there were originally based on U.S. dollars, we reduced our pricing on certain Russian contracts in order to preserve existing business for this winter season. Additionally, thus far we have not seen any material impact on our land rental business from trade sanctions that are currently in place. The U.S. market remains very weak with limited project visibility combined with a good deal of excess capacity in the market. With CNP companies continuing to focus on rationalizing their operations and emphasizing returns, cash flow generation and preservation, U.S. land activity has been very slow but there remained some areas of opportunity we are pursuing. Currently we do have a large project in Alaska that will lessen some of the negative impact on our first quarter results. In Europe the extension of a large ongoing project was delayed due to the decline of oil prices. However that project restarted last month and will not only benefit our first quarter results but also most of fiscal 2016 as well. Latin America was actually the largest contributor to our fourth quarter leasing revenues with work being done in Peru, Brazil and Columbia. There remains a sizeable amount of uncertainty in Latin American market and despite some sporadic opportunities activity has slowed down during the first quarter. Our Marine leasing market is still being heavily weighed upon by an oversupply of seismic equipment as well as industry consolidation. During the fourth quarter we began to experience an increase in the enquiries for the rental of certain Marine equipment and this may yield nominal improvement in Q1. While this is a favorable development, it remains to be seen whether this really represents a true shift in market fundamentals. The general conditions in the seismic industry do impact our Seamap operations as well. However, we are in continuing discussions with our customers regarding new products and new features in existing products. We think this is an indication that marine seismic contractors are committed to improving technology even in this challenging environment. We have existing and pending orders from new digital source controllers as well as RGPS positioning systems. These orders are for both new build vessels and for upgrades to existing vessels. The impact of the product lines we acquired from ION last May continuing to meet our expectations. Also China has become a more important market for Seamap and we see the possibility for a more business in that area. With that let me turn the call over to Rob.

[Robert P. Capps:]

Okay, thanks Guy. Let me give you guys a little more detail on our fourth quarter and full year results. Our leasing revenues for all of fiscal 2015 actually increased over fiscal 2014 to 48.3 million. However, in the fourth quarter we saw leasing revenues decline from 9.6 million as compared to 12.3 million in the fourth quarter of fiscal 2014. The full year increase in lease revenues was driven by improvement in land leasing in United States, Latin America, the Middle East, and the Pacific Rim as well as improvement in our downhole leasing business. These increases were partially offset by lower land leasing activity in Canada and Russia and lower Marine industry. In the fourth quarter fiscal 2015 all areas declined over the previous year with exception of Middle East and downhole leasing. I think Guy has pretty much touched on all the major factors that have impacted the fourth quarter there. The leasing activity of fiscal 2015 can be characterized as largely consistent of few of the larger projects. This is a trend that is likely to continue into fiscal 2016 as we do see upcoming opportunities for limited number of large projects. As you would expect in this environment, opportunities for the sale of lease equipment are not as prevalent in fiscal 2015 as in prior years. For the full year these sales totaled about 3.2 million as compared to 6.9 million of fiscal 2014 and in fourth quarter lease drill sales were less than $300,000. Seamap revenues were 3.8 million in the quarter compared to 8.7 million in the fourth quarter a year ago. Now there are no large system deliveries during the quarter so revenues were largely comprised of sales of replacement parts, services, ongoing support, and repair. As we mentioned last month, anticipated sale of Seamap was postponed until the first quarter of fiscal 2016 due to the delay in the delivery of third party items that were part of the order. And this order was delivered in the first quarter of fiscal 2016. The full year Seamap revenues declined to 23.3 million compared to 25.1 million in fiscal 2014. The industry downturn did impact the overall order level and certain anticipated projects were delayed recurring [ph] issues. In most cases these projects are going forward and will benefit our fiscal 2016 and beyond. The lower fiscal 2015 revenues of Seamap were partially offset by the impact of the product lines we acquired in May of last year. Other equipment sales first consists largely of sales of hydrographic and oceanographic equipment from our Australian subsidiary were also down year-over-year both for the full year and for the quarter. Now the math for these products is generally not driven by activity within the seismic industry, so the decline there really reflects deployment of straight orders and budgetary issues within governmental agencies primarily in the Pacific Rim. And there we have as a new products and are optimistic for improved fiscal 2016 in this particular space. Let me discuss the profitability of each of the segments for a moment. Gross profits from our equipment leasing segment in the fourth quarter was actually a loss of 251,000, compared to a profit of 4.1 million in the fourth quarter of fiscal 2014. The decline was primarily due to negative operating leverage as the impact of seismic [ph] cost is magnified in an environment of falling revenues. Of course our largest fixed cost is depreciations which now is 8.2 million in the fourth quarter of fiscal 2015 versus 7.5 million in the fourth quarter of fiscal 2014. The fourth quarter depreciation actually was lower than in the third quarter as we are beginning to see the impact of our reduced lease drill additions in fiscal 2015. Gross profit in the fourth quarter for Seamap manufacturing business was 2 million compared to 4 million a year ago. This represents a gross profit margin at 53% and 46% respectively. And the fourth quarter 2014 margin was lower really due to product mix. You will see for the full year, Seamap gross profit margin was 51% which is comparable to that in 2014. Our general and administrative expenses were approximately $6 million for the fourth quarter of fiscal 2015 that is up from $5.5 million than last year's fourth quarter and down from $6.2 million in the third quarter of this year. During the fourth quarter we began to implement programs to reduce cost in our industry downturn which included reducing headcount and other personnel cost. But the impact of these measures are not yet reflected on our operating results but we should sort of see this -- start seeing this impact in this fiscal year and we are continuing to explore ways to further reduce cost. During the fourth quarter two unusual expenses I would like to highlight. There was a pre-tax charge of 2.9 million related to provision for doubtful accounts receivables which is based on our review of more challenging commissions within the industry as well as some customer specific factors. Our other expenses for the quarter totaled about $2.6 million most of which consisted of foreign exchange losses due to the dramatic and rapid strengthening of the U.S. dollar against the Euro, the Russian Rubel, and the Columbian Peso. And finally during the quarter we had an income tax benefit of 1.5 million which is in effective rate of 14%. But this amount was impacted by valuation allowance related to certain deferred tax assets which amounted to about $1.4 million and which reduced the tax benefit we would otherwise have seen. Our fourth quarter adjusted EBITDA was $700,000 compared to $30.4 million from last year’s fourth quarter. Without the impact of [indiscernible] I just mentioned adjusted EBITDA would have been about 4.5 million in this year’s fourth quarter. Keep in mind that adjusted EBITDA as a non GAAP measure has reconciled and has reconciled reported income and cash provided by operating activities in the financial tables in this week’s press release. We reported a net loss for the fourth quarter of $9.2 million or $0.76 per share, this compares to net income of 1.8 million or $0.14 per diluted share in a fourth quarter a year ago. Adjusted for the onetime items I just mentioned, our adjusted net loss was approximately $3.8 million or $0.33 per share. We will make a few comments now about our financial positions. During fiscal 2015 we purchased roughly $12 million on new lease equipment. And as we stated last month, a lot of industry conditions we have reduced our expected lease pool purchases additions -- our lease pool purchases for fiscal 2016. We now expect additions to our lease pool in fiscal 2016 to be no more than $5 million. In January as you know the Board authorized a repurchase program for up to 1 million shares of common stock through the end of calendar 2015. And this is in addition to the 1 million share of repurchase program that was completed in fiscal 2015. During the fourth quarter, we did not purchase any of our common stock under this program. We may make additional purchases under this new program based on market conditions, liquidity, and other opportunities for capital. Mitcham’s overall financial position remained strong. At the end of the fourth quarter we had over $44 million of working capital that included cash and cash equivalents of 5.4 million. We generated over $25 million in cash flow from operating activities during all of fiscal 2015. But as of January 31st we had over 33 million of unused capacity under our revolving credit facilities. During the fourth quarter we actually reduced our outstanding debt by $8.3 million and since then we have reduced to buy another $2 million. We always thought to maintain a consorted capital structure at excessive leverage. We believe this approach provides us with the financial flexibilities to navigate challenging environments such as the one we found ourselves in today. Let me make -- finally just to make a few comments about our market outlook. For the broader market we continue to see pockets of opportunity in Europe, North Africa, the Middle East, the Pacific Rim, Latin America, and Alaska. As stated earlier there also have been increased inquiries from – equipment rentals. However, the overall seismic market remains very soft that will also continue to fiscal 2016 with full year revenues currently expected to be less than fiscal 2015. North America and Canada in particular appear to be most affected by the seismic activity reduction. There are areas of opportunities in the region. There is no guarantee that project will proceed or that we will have an opportunity to provide equipment to them. Latin America, we also expect seismic activity to be reduced from fiscal 2015. Many projects in the region that benefitted fiscal 2015 won’t continue in the fiscal 2016. The low oil prices may jeopardize the viability of some of the planning projects. There also remains substantial legislative and regulatory security hurdles in countries such as Columbia heading further and starting [ph] activity in the region. So far this quarter we’ve already seen much less activity there relative to the fourth quarter. Now overall activity in Russia has been relatively healthy but oil prices as relative evaluation of Rubel have added an additional layer of uncertainty. The renegotiated contracts that were brought on by these conditions have allowed us to award loss of business met at the cost of lower revenues. These issues in combination with the ongoing political strive make it difficult to project how the Russian market will do during the next fiscal year. However, the first quarter appears to be on track to yield sequential improvement. Europe should continue to present opportunities for us in spite being afflicted by the same factors that were impacting all markets. We anticipate some risk, we have allocated more of our equipment there during fiscal 2015. Despite the fact that we anticipate a generally weak first quarter should show sequential improvement due to the start of the European projects late in the fourth quarter and that runs through most of the fiscal year. Based on discussions we have had with our customers there maybe also additional some significant projects planned for fiscal 2016 in the Middle East, North Africa, Asia, and the Pacific Rim. Although I would even moderate these expectations based on the same qualifications I have just mentioned. For fiscal 2016 Seamap is expected to perform roughly in line with its performance over the last prior fiscal year. Although the timing of revenues is depended upon customer delivery schedules. Seamap's backlog is actually up to 7.7 million from 5.5 million this time last year. We will also have some delivery schedule in China this year which is a direct result of a recent acquisition of the ION Marine Source product lines. I would also like to note as Guy mentioned we have had online collaborative efforts with customers regarding product development. This has the potential to yield further opportunities for our equipment manufacturing business going forward. In our conclusion, this year's [indiscernible] will be difficult given our strong balance sheet, liquidity, and strong cash flow generation as well as our global footprint and geographic diversity who are managing through this downturn as we have in similar cycles and position ourselves to pursue opportunities wherever they present themselves. That concludes our prepared remarks. Operator we would like to open the call up to questions right now.

[Operator:]

[Operator Instructions]. Thank you. Our first question comes from the line of Georg Venturatos with Johnson Rice. Please proceed with your question.

[Georg Venturatos:]

Hey, good morning guys.

[Guy Malden:]

Hey Georg.

[Robert P. Capps:]

Good morning Georg.

[Georg Venturatos:]

Hey Rob, so at first maybe we could touch on Seamap, was nicely surprised to hear about the backlog there. Obviously we will see that order in Q1 that got postponed, just wanted to see if you could talk about the timing of the remaining backlog. I mean do you see considerable risk to this and I guess do you typically have a little more visibility on when those might land on a quarterly basis?

[Robert P. Capps:]

I think the -- thanks for that, surplus in the backlog, that means we have firm orders [ph] in hand. So I think there is little if any risk on both those things happening and the time of…

[Guy Malden:]

Absolutely, yes.

[Robert P. Capps:]

I think as we said earlier backlog is a bit misleading and that we always sell a lot more in a year than our backlog in place. So when things are most around the backlog, that's pretty much in the bag.

[Georg Venturatos:]

Okay, good to hear. And then on the margin front, obviously the quarter was nicely back into kind of the low mid-50s, sounds like that was largely product mix driven on the aftermarket side but any reason to think that margin profile gets pressured even in this environment as we work through 2016, it didn’t seem that way but just wanted to check with you on that?

[Guy Malden:]

Not really Georg. We expected to remain pretty constant.

[Georg Venturatos:]

Okay, great. And then on the equipment leasing side, obviously seeing some tougher times in North America and Latin America but you did mention the pockets of opportunity Europe, North Africa, and Middle East as well, just wanted to get your general sense on with customers you are talking to there, general direction of duration and size of the projects that maybe out there and also just if the preference towards wireless versus cable based has changed in this environment either?

[Robert P. Capps:]

I think the -- as far as the size and duration, I think -- as I mentioned we are tending to see larger projects that maybe not that much longer but they are not two week projects, they are several months projects. So I think we are tending to see larger and longer deals and that's kind of what we saw last year. That helped drive last year a lot which is kind of a good news, bad news and that you know you hit those things and they have a big impact but there are fewer of them to get. So still not quite by nominal. But if there is some aspect of that. Now think that continues and some of the deals we see out there are pretty large deals but there just aren’t as many of them. So it makes it tougher to chase. As far as the wireless uptake I don’t think there is any real change there. There are parts of the world where wireless is prevalent and sort of North America at this point, but other parts of the world such as Europe and Russia, so there is some wireless used so they are not prevalent and we don’t see any indications of that. The wire still seems to be the preferred technology in those parts of the world.

[Georg Venturatos:]

Okay, great and last one for me and I’ll re-queue but obviously some positive moves on the debt reduction side in the quarter. I believe you had mentioned expectations at least for free cash flow positive situation in 2016, is that still the case, I didn’t know if I missed that on this call?

[Guy Malden:]

I didn’t say that specifically but we do expect that in fiscal 2016.

[Georg Venturatos:]

Great, thanks a lot guys.

[Guy Malden:]

Thanks George.

[Operator:]

[Operator Instructions]. Our next question comes from the line of Veny Aleksandrov with FIG Partners. Please proceed with your question.

[Veny Aleksandrov:]

Good morning guys.

[Guy Malden:]

Good morning Veny.

[Veny Aleksandrov:]

Hi, my first question is on the European contract that just started initial assets kind of benefit for the rest of 2016 do you have any pricing pressure over there or pricing pressure is Russia specific?

[Robert P. Capps:]

I think there is some pricing pressure throughout the world, sort to say. I mean there is excess capacity in the market place that puts some price -- pressure on pricing. The European issue -- the Russian issue was really more we believe valuation related and that hasn’t spilled over into Europe.

[Veny Aleksandrov:]

Great and in terms of Russia again, because of contracts for renewal though of course there was the exchange rate problem, is there any change or you are going to be continuing to offer products in Russian low end [ph] plus trade exchange risk?

[Robert P. Capps:]

Well of course these contracts are ongoing through this winter season so they are just now wrapping up as we speak in the end of April. So they’ll continue on Rubel basis. What happens next year as we get into the winter season we’ll have to see. And what do we have in the summer tends to be -- for that area tends to be more cosmic staying in places like that and those are dollar contracts. But again that’s not a lot of business typically. So it remains to be seen what it is when it starts next year.

[Veny Aleksandrov:]

Perfect and one last question because somehow I missed the Seamap delivery did you say it’s going to benefit Q1 2016?

[Guy Malden:]

That’s correct.

[Robert P. Capps:]

Yes, that’s right.

[Veny Aleksandrov:]

Thank you. Thank you so much.

[Robert P. Capps:]

You bet.

[Guy Malden:]

Thanks Veny.

[Operator:]

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

[Tyson Bauer:]

Good morning gentlemen.

[Robert P. Capps:]

Hey Tyson.

[Guy Malden:]

Hi Tyson.

[Tyson Bauer:]

Can you give us a sense of that decline on the lease pool depreciation given we are going to have a dramatically less additions throughout the year, just give us a sense of how far that’s going to fall off?

[Robert P. Capps:]

Well I think if you kind of look to the Q3 to Q4 decline I think you’ll see something kind of maybe not quite that dramatic during the balance of the year but you will see some of that towards that magnitude. So certainly not more than that but approaching that kind of quarter-to-quarter going through next year if that helps.

[Tyson Bauer:]

It does. Also on the Seamap with the backlog, a lot of those placements on new bills that gives you that certainty that they will be put into service versus upgrade of existing seismic ships?

[Robert P. Capps:]

Yes Tyson, it is new bill, it’s a combination but in one particular case the new bill had already been split from last year. So that’s on schedule, our deliveries in China again are slightly less affected and perhaps out in the western world on deliveries and those are on schedule. So we got a combination but again we feel pretty confident that everything will remain on schedule.

[Tyson Bauer:]

And that 7.7, that is for deliveries in fiscal 2016 correct?

[Guy Malden:]

That’s correct.

[Tyson Bauer:]

Okay, do we have a backlog that expands further because we know the new billed schedule?

[Guy Malden:]

I mean no form backlog. Again backlog does is a firm PO in hand, so certainly there are orders that we expect that will continue beyond 2016, but they are not levels put our backlog here.

[Tyson Bauer:]

Okay, you already sound a little surprised are you seeing as much activity as you are in Marine side with drivers in China, can you expand on what exactly those drivers are that is causing that increased activity for that region?

[Guy Malden:]

I think first of all, I think we are seeing certainly some of the larger contractors that are turning to us for rental equipment. Their CAPEX has been very restricted and now they are actually requiring maybe some rental equipment for short periods of time, that’s part of it. From our perspective we’ve got the correct, the right equipment in the right locations to take advantage of some of this. Again as I think we talked about previously it’s for Seamap equipment, in particular BuoyLink and some government 2000 equipment that are readily available. So there is a combination of some of the smaller players but particularly some of the larger players that need some rental equipment just due to their own CAPEX restrictions.

[Tyson Bauer:]

In South America given the problems with the Columbian Peso and the Real and the political unrest in Peru as they figure out their regulations, is it all as if we are taking a year off from Latin American activity then we go back to where we were a couple of years ago?

[Robert P. Capps:]

I don’t know if it is that way. But certainly we don’t see as much going on that -- certainly going on this year as we did last year. But there a couple of pretty large projects in parts of the world down there so just a matter of do they go forward and can we participate in them. So I wouldn't say they are taking a year off, but it is certainly going to be lower activity than we saw last year than what we see today.

[Tyson Bauer:]

We are about a year remove from Pemex trying to incentivize larger players coming in and helping develop the Mexican market place especially offshore, any activities or anything you can add to the activities in that market given its close proximity?

[Robert P. Capps:]

I think from the landside let me address that first like most people believe that we don’t see much even in fiscal 2016 or 2015 on the landside. I mean really the as I recall the first bid round that enrolls land prospects is round three. So that’s not out yet, so I think the way you stand on the road before you see much in the landside. On the marine side there is stuff happening.

[Guy Malden:]

There is stuff happening but there is currently a large Pemex project that is being undertaken and there is also some current multi-client work that is underway and they are going to be continuing multi-client obviously for the next standing up for the next bid rounds. We don’t generally provide any kind of rental equipment in the multi-client world that seems to be self contained. So for marine I think it’s going to be down the road as well.

[Tyson Bauer:]

Okay, could you see in the future Mexico being similar to Canada or maybe something smaller like Alaska as they develop that marketplace?

[Robert P. Capps:]

Well, certainly there is a lot of potential there and there is a lot of uncertainty too.

[Tyson Bauer:]

Alright, thank you gentlemen.

[Operator:]

[Operator Instructions]. Ladies and gentlemen thank you. We’ve come to the end of our allowed time for questions. I’d like to turn the floor back to management for any final remarks.

[Jack Lascar:]

Okay thanks operator we’d like to thank everyone for joining us today, and look forward to seeing you again at our first quarter conference call. Thank you.

[Operator:]

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