MIND Technology - Earnings Call - Q1 2020
June 6, 2019
Transcript
Speaker 0
Greetings, and welcome to the Mitcham Industries Fiscal twenty twenty First Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Dennard.
Please go ahead, sir.
Speaker 1
Thank you, operator. Good morning, everyone, and welcome to the Mitcham Industries fiscal twenty twenty first quarter conference call. We appreciate all of you joining us today. Your hosts are Rob Capps, Co's Chief Executive Officer and Chief Financial Officer and Guy Mauldin, 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'd like to listen to a replay of today's call, it will be available for ninety 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 13. 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, 06/06/2019, and therefore, are advised that time sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. 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 by the 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 its annual report on Form 10 ks for the year ended January 3139. 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 Mauldin. Guy?
Speaker 2
Thanks, Ken, and good morning, everyone. We would like to thank you for joining us today for our fiscal twenty twenty first quarter conference call. I'll begin by making some general comments about the first quarter. Rob will then discuss our financial results in more detail and briefly address our market outlook. I will close with a few final comments, and we will then open the call for questions.
Let me start by making a few observations. Our results were up on a year over year basis with consolidated revenues rising almost 30 due to gains in the Marine Technology Products segment as well as improved activity in our leasing business. On a sequential basis, we did see revenues pull back from Q4 levels, but the results were consistent with our expectations with a couple of exceptions. The bulk of the sequential pullback was in the Leasing segment with lease full sales and other equipment sales accounting for most of the shortfall. On a year over year basis, the Leasing segment was roughly flat with a large increase in leasing revenues being counterbalanced by decreases in lease pool and other equipment sales.
Areas of relative strength for the Leasing business include Alaska, the lower 48 states and Columbia. The Marine Technology Products segment was also down sequentially, though to a lesser extent than the Leasing segment. However, its performance was much improved over last year's fiscal first quarter. The sequential contraction was largely due to two factors. First, the sale of our Australian subsidiary SAP, which successfully closed during the first quarter, reflected a commensurate drop in revenues compared with Q4.
Second, only half of the roughly $2,000,000 in delayed deliveries that we expected to realize during the first quarter were in fact completed during that time. However, I'd like to note that we've recently finished the balance of those deliveries and this will benefit our second quarter results. On a year over year basis, the segment was up strongly due almost entirely to a large increase in C MAP revenues. And we continue to be very pleased with the order and inquiry flow we've been experiencing from our marine technology products. Our value added technology has driven robust levels of orders through the first quarter, and Q2 levels so far have actually been even stronger.
Demand for our Sealing product line continues to trend very well and Klein's revolutionary new side scan sonar technology, MAX, has been extremely well received. This revolutionary development has garnered a good deal of interest in the industry due to its compelling combination of superior image quality and increased efficiency. And we fully expect to see incremental sales from Klein sometime in the second half of the year. And with that, let me now turn the call over to Rob.
Speaker 3
Okay, Guy, thanks. I'll begin by giving you a more detailed review of the financial results, then I'll make some comments about our views on the current and near term market. Now let me start with the Marine Technologies Products segment. Revenues for this segment totaled $6,000,000 in the quarter compared to $3,700,000 in the first quarter a year ago. C MAP revenues were 4,300,000 in the quarter, which was up from $1,800,000 in the first quarter of last year.
First quarter revenues from Klein were $1,600,000 up from $1,500,000 a year ago. Now as Guy mentioned, Klein and C MAP had certain orders that we had expected to deliver in the first quarter, but instead were completed early in the second quarter. In the Equipment Leasing segment, revenues decreased 3% to $3,900,000 in the quarter compared to $4,000,000 in the first quarter a year ago. While leasing activity improved due to strength in North America and Colombia, this was offset by lower equipment and lease pool sales, which were both down substantially from a year ago. And we are actively monitoring the market conditions and have remained steadfast on our strategy of adjusting the size and composition of our lease pool to suit both the seismic market and our longer term goals.
Let me now discuss the profitability of each of the segments. First quarter gross profit for our Marine Technology Products segment was $2,500,000 compared to $1,500,000 a year ago. This represents a gross profit margin of 4140% respectively. The improved margin this year is a result of both the higher levels of sales absorbing more fixed cost, particularly related to our Malaysia facility and decreased levels of lower margin sales by SAP. In our equipment leasing business, we continue to see reductions in our depreciation expense due to our ongoing asset rationalization strategy.
Depreciation expense in the first quarter was nearly halved to $1,400,000 from $2,700,000 a year ago. The lower depreciation expenses and flat revenues enhanced gross profit in the quarter, which came in at $1,300,000 compared to a gross loss of $235,000 in the first fiscal quarter of last year. Our general and administrative expenses were 5,200,000 for the 2020 compared to $5,600,000 for last year's first quarter. Now included in the cost this quarter were about $298,000 related to SAP, and these costs will not be recurring. Still, the year over year improvement reflects our ongoing restructuring of the leasing business and the lessened impact of start up costs related to our new products and related operations.
Our R and D expense was $315,000 this quarter and this compares with $370,000 spent during last year's first quarter. Our overall operating loss for the first quarter this year was $2,500,000 compared to an operating loss of $5,600,000 in the 2019. Our first quarter adjusted EBITDA was a $61,000 profit compared to a $1,500,000 loss in last year's first quarter. Financial position and liquidity remained strong. At the end of the quarter, we had about $27,000,000 of working capital, which included cash and cash equivalents of approximately $8,000,000 Mitcham's capital structure remains debt free.
Now let me make just a few remarks about our near term outlook. The Marine Technologies product segment is experiencing a growing level of inquiries and order activity driven by our recent introduction of innovative new products such as C Link and MAX. As of April 3039, our backlog of firm orders for this segment was approximately $11,000,000 That's up from $8,700,000 at January 3139. Furthermore, we've already booked approximately $5,100,000 in additional orders since the end of the first fiscal quarter, continuing the strong momentum set this year. Now these new bookings include orders for our MAX technology, which has been gaining greater awareness and exposure in both military and commercial markets worldwide.
Now keep in mind that due to the widely varying order sizes and delivery periods for our products, Backlog tends to be a bit of a blunt instrument in extrapolating quarter to quarter results. However, as a broader indicator of overall demand and general market conditions, we believe it can be informative. We think the growth we've seen both sequentially and year over year is a favorable indicator for our longer term prospects and financial results. Although managing our backlog carries inherent executional risk in the form of balancing our production capabilities with the influx of new orders, we are confident we can successfully navigate these challenges and fully realize our strategic vision for the marine technology products business. It remains our firm belief that the Marine business will continue to gain strength through the year and exceed its prior
Speaker 2
year performance.
Speaker 3
SeaLink is expected to make more substantial contributions through the year as its backlog has been very strong and we already have booked enough orders to keep our new production facility in Malaysia busy through most of the balance of the year. Klein will continue deliveries related to recent order bookings and we will also pursue bidding opportunities and discussions with new and existing customers to further promote awareness of the many benefits of Klein's technology. Going forward, we should also continue to see cost savings and some incremental margin improvement in the Marine segment due to the completed sale of SAP, whose sales generally carried a lower margin. For the equipment leasing business, though conditions are still tenuous, they have generally been trending better than we anticipated with some pockets of opportunity in Europe and elsewhere. That said, it is likely we'll see some sequential pullback in Q2 based on our current visibility.
And for the current fiscal year, we continue to expect solid improvement over fiscal twenty nineteen and do expect to generate positive operating income and EBITDA. With that, I'll turn the call back over to Guy for a few closing comments before we take your questions.
Speaker 2
Thanks, Rob. Overall, this fiscal year is shaping up to be an improvement over the prior year. As the growing level of worldwide interest we've been seeing from our line of marine technology products indicates that the long term prospects for Mitcham hold great promise. Our newest products, such as SeaLink and Max, are gaining greater traction in the industry, and we have found a good deal of receptiveness and demand for the benefits of our technology. Since many of these products are still in the introductory phase, we have focused our efforts on educating and informing our customers about the many demonstrated advantages our systems have to offer relative to existing technology.
In doing so, we've been laying the foundation for greater industry awareness, exposure and market growth, while aggressively pursuing opportunities in the hydrographic, oceanographic and defense markets. As Rob mentioned earlier, there is some level of execution risk in the attainment of additional orders, as we commonly have to deal with both government and commercial customers, all of whom have their own unique circumstances and procedures. On the government side in particular, procedures and timing can oftentimes be rather opaque and uncertain. Now with that in mind, it's safe to say that more substantial revenue gains will likely appear in the second half of the fiscal year. As I've said during previous calls, we are continuing to see an increase in ocean bottom nodal surveys, which may spur activity in the marine seismic market and has a good likelihood to drive additional inquiries for our source controller and RGPS positioning systems.
Though our current backlog does not include a significant amount related to source controller systems, our visibility suggests that we may see an increasing number of such orders through the balance of the year and beyond. So overall, we feel good about our position in the marketplace and are very optimistic about the future of our business. Now that concludes our formal remarks. We'll be happy to take any questions now.
Speaker 0
Thank you. We'll now be conducting a question and answer session. Our first question today is coming from Tyson Bauer from KC Capital. Your line is now live.
Speaker 4
Good morning, gentlemen.
Speaker 2
Good morning,
Speaker 5
Just a couple of
Speaker 4
clarification questions. We're keeping the guidance positive op income. Obviously, that leads to a fairly substantial EBITDA change from a year ago. The confidence that you must have in those delivery schedules given orders would have to be in hand or you expect them to be in hand here shortly in this quarter to be able to make those numbers? Give us a little flavor or color on what you're seeing in the market.
You obviously had a big order intake in the month of May. The source controllers are not in the backlog. I would expect those to be in backlog this quarter when you announce the next conference call. And you talked about being at capacity and production. All those things put together, are we looking at a very substantial inflection point as we get toward that Q3 quarter?
Speaker 3
Yes. I think that's right, Tyson. I mean, obviously, there needs to be that inflection point. And based on the backlog we see now and also the order flow that we're seeing that's not actually in hand yet really gives us some strong confidence. And that's really on the source controller side.
Guy, maybe you want to talk about that a bit.
Speaker 2
Sure. Rob. Tyson, I'm actually in London, calling in from London. I'm at the EAGE, which is our big European conference for the industry. We're seeing generally just a bit of an uptick in optimism.
Everybody's feeling a bit better and quite positive about things going forward. Backlog numbers are up for our customers. It looks like a higher level of confidence in the activity going forward from prospect basis, including increased visibility into projects for next year. We're a good sense from our customers of what they're starting to plan for, which would include both upgrades to source controllers and new source controllers on some of the shooting vessels to support the ocean bottom node surveys that we have been talking about for the last couple of quarters. So I think we're starting to see things fall into place.
So I would agree, would expect to see as we get through Q2 into Q3 that we'll have a lot better visibility on that and things are sort of shaping up the way we had anticipated.
Speaker 4
And on those systems, we're talking multimillion or $1,000,000 plus in those systems. So we have some big lumpiness that could come into backlog just from that activity.
Speaker 3
Yes, that's exactly right. And Tys, we just to give you a sense of our confidence, we actually are building a couple of systems now. We have that much confidence that we're going to see those orders. That's not something we normally do, but we feel pretty comfortable right now to do that.
Speaker 4
Okay. There's been a lot of discussion. You touched on the ocean bottom surveying, a lot of commentary on multi shooting, which seems to be the new, way and new technology way of going about shooting these surveys. Is that also that push in the industry helping you out and giving you that confidence that you're in the right spot?
Speaker 2
Yeah, absolutely. And again, with source controller technology, with the additional shooting capabilities, not just random firing, but larger sources, more sources, you're seeing an emphasis on more shooting vessels. So that would turn into opportunities for us on the source controller side, as well as the RGPS tracking system side as well.
Speaker 4
The bookings that you've done about $13,500,000 thus far including what happened in May, you're going to have to repeat or double that to hit some of these targets that you're providing. Is that something that we should or that we'll have to see within the next two, three months?
Speaker 3
No, not that quickly necessarily. Some of the stuff is much more quicker turnaround. And again, since we're building some things now, we can have shorter delivery times you might normally think. So it doesn't have to be in the next three months necessarily.
Speaker 4
Okay. But I
Speaker 3
think we will see some of that activity though.
Speaker 4
And the last one, Max Technology, you introduced it in one of the shows. Just give us a sense of the industry response and who are we seeing that response from? Is it from the oceanographic survey companies? Is it more military? And is it being utilized more as an add on feature?
Or is it replacing a current technology? Just what are the dynamics that have given you the confidence that you've got a home run potentially here?
Speaker 3
Well, think the answer is yes. Let me answer first and then Guy you can jump in. We're seeing broad reception both survey companies, rental houses, military applications. We are continuing to demo the system in a number of arenas. So again, it's very, very broad.
And it is both applications for an add on to an existing program or system as well as total replacement. So there are a couple of different embodiments of the technology at this point. Guy, you want to expand on that?
Speaker 2
Yes, sure will. We actually have POs in hand. And these are specifically for replacement units with utilizing the added capability that MAX has provided. So we're kind of seeing start out of the box with replacement units for some older sonar technology. We fully expect that to continue.
And as Rob said, it's both the survey companies or for survey operations as well as the rental houses to be used as a rental product. There's several large rental companies that are showing great interest in that technology. The other side of it, we're continuing to do demos not just on the commercial side, but on the military side. There is certainly a vehicle, a military vehicle application for this technology as we discussed in the past. And we're moving forward on a demo schedule to showcase some of that for military applications.
So we feel pretty good about being right on schedule with the rollout, and we're starting to see some POs track in.
Speaker 4
And are you teaming up with any other larger entities to help distribute this technology?
Speaker 3
I mean, the answer is no, think, in what you mean the question. Certainly for the vehicle applications, we provide the payload for someone else's vehicle. We don't provide the vehicle itself, AUV or something like that. So in that regard, we are partnering up. But we are not working with anyone for the direct distribution of just the MAX technology other than our normal rep network.
Speaker 4
Okay. Thank you, gentlemen.
Speaker 3
Yes.
Speaker 0
Thank you. Our next question today is coming from Ross Taylor from ARS Investment. Your line is now live.
Speaker 5
Thank you and congratulations on all the good news that you guys are releasing. You commented the fact that you're building some of the source controllers for inventory. Are the costs of those builds in the numbers you reported for the last quarter? Or will they show up in the numbers for the next quarter?
Speaker 3
They'll show up as an expense or cost when we actually deliver. So those costs are in inventory right now. So we've actually built inventory.
Speaker 5
Okay. So they actually do show up right now in the inventory. Also, how big do you think the total addressable market for source controllers is going to prove out to be?
Speaker 3
Oh gosh. It's a bit of a niche for sure within a niche market. So it's not huge. It's not like an iPhone. But there are dozens and dozens of vessels, shooting vessels and survey vessels that are potential applications for this.
So that's there it's $1,000,000 to $2,500,000 per vessel. And if there are, I don't know, 50 potential vessels I'm making that number up, but that's in the ballpark. It gives you a sense as to the total installed base, if that gives you a sense of things. So it's not $1,000,000,000 market for sure, but it's tens of millions for sure.
Speaker 5
Okay. And will you talk about you made a hire recently from I believe Teledyne. Will you talk about how that addition to your staff has changed your organization and how you see it opening up relationships with people like Teledyne and others inside the space where you can become the player, the add on to other people's vessels, vehicles?
Speaker 3
Sure. Sure. Actually we've made two hires from Teledyne. One is a sales position for primarily our CMAT products, which really just expands our sales capabilities. But I think what you're alluding to is Thomas Merlin, who we is our now Vice President and Chief Business Development Officer.
And that's really a strategic move to find new markets for us, new product applications, new technology applications. And I think Thomas has a wealth of contacts and knowledge in the industry and definitely opens up some opportunities for us to not only sales channels but also perhaps some partnering opportunities, things of that nature. So I think it really is a game changer for us. And as we kind of go through the coming months, we'll see some of that impact, believe.
Speaker 5
Okay. And I want to put forward the idea that as you get orders, you don't need to wait until the next quarterly conference call to let people know. I think that this is one of those issues that having investors aware of things as they come in to show that you're getting this traction will reward investors. And I think that will be something that people are welcome as opposed to waiting for three months to hear whether or not we were able to sell anything or bring anything through in the next few weeks.
Speaker 2
That's good point. Very good point.
Speaker 5
Great. Thank you. I'll give it back in case Tyson has more questions.
Speaker 0
Thank you. Ladies and gentlemen, we've reached the end of our question and answer session. I'd to turn the floor back over to management for any further or closing comments.
Speaker 3
Okay. Thank you very much. I'd like to thank everyone for joining us today, and I look forward to talking to you at the end of our second quarter. Thanks very much.
Speaker 0
Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day.
Speaker 3
We
Speaker 0
thank you for your participation today.