MIND Technology - Earnings Call - Q2 2020

Transcript

Speaker 0

Greetings, and welcome to the Mitcham Industries Second Quarter twenty twenty Conference Call. At this time, all participants are in a listen only mode. A brief 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 of Dennard Lascar Investor Relations.

Thank you, sir. You may begin.

Speaker 1

Thank you, operator. Good morning, everyone, and welcome to the Mitcham Industries fiscal twenty twenty second 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 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 sections of the company website at mitchamindustries.com or via recorded instant replay telephonically until September 12. Information on how to access the replay features was provided in yesterday's earnings release. Information reported on this call speaks only as of today, Thursday, 09/05/2019, and therefore, are advised that time sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. And 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 and 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 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 those statements. And now I'd like to turn the call over to Guy Mauldin. Guy? Thanks, Ken,

Speaker 2

and good morning, everyone. We would like to thank you for joining us today for our fiscal twenty twenty second quarter conference call. I'll begin by making some general comments about the second 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. Examining our financial performance on a year over year basis, we posted improved results over the prior year's second quarter for the most part, with consolidated revenues rising roughly 7% and gains in the Marine Technology Products segment being partially offset by declines in our leasing business. On a sequential basis, revenues contracted from Q1 levels, but the downside impact was driven almost entirely by a sizable drop in leasing activity, which offset revenue gains posted by our Marine Technology segment. While seismic leasing conditions remain very challenging, there continues to be isolated pockets of opportunity within areas such as Alaska, Colombia and Eastern Europe. Our Marine Technology Products segment drove most of the upside gains, both sequentially and year over year.

During the second quarter, we delivered our first new build SeaLink streamer system and received the first orders for our next generation side scan sonar product, Max. In addition, we also completed the initial phase of C Link repair activity for Mitsubishi, for whom we provide support services as a part of a support agreement signed in early twenty eighteen. For the marine technology segment, we continue to see a number of opportunities for expansion through new customers and new applications of our marine technology. However, we've also seen the pace of firm orders trail our expectations and become somewhat constrained by customers' capital availability, resulting in upgrade decisions being pushed further out. Our CMAP source controller orders, in particular, have not tracked with our projections as we've seen several of those orders postponed, again due to more restricted capital in addition to overall global economic uncertainty.

I'd like to note that despite these impediments, the prospects we've seen through the year have not gone away and are still available. But the realization of these prospects has most probably been pushed to the right as a result of industry conditions. And we believe these orders could potentially be received either later this year or into next year. So in summary, we remain enthusiastic about the overall health of the market and the number of inquiries we have been fielding for our marine technology products. And with that, now let me turn the call over to Rob.

Speaker 3

Okay. Thanks, Guy. As usual, I'll begin by giving a more detailed review of the financial results. Then I'll make some comments about our views on the current and near term market. Let me start with the Marine Technologies Products segment.

Revenues for the segment totaled $6,700,000 in the quarter, up 12% from $6,000,000 in the second quarter a year ago. CMAT revenues rose 29% to $4,900,000 in the quarter, which was up from the $3,800,000 in the second quarter of last year. Second quarter revenues from Klein were $1,800,000 16% increase from $1,600,000 a year ago. Now as Scott mentioned, although we delivered our first SeaLink streamer system, anticipated orders for our source controllers have not yet materialized. We believe these orders will likely occur either later this year or next.

In the equipment leasing segment, revenues decreased 12% to $2,200,000 in the quarter compared to $2,500,000 in the second quarter a year ago. The year over year decline was evenly split between lower equipment leasing revenues and lower lease pool equipment sales. We are continuing to monitor the conditions in the land leasing market and may adjust the size and composition of our lease pool to suit both the sizing market and our longer term goals. Let me just discuss the profitability of each of the segments now. Second quarter gross profit for our marine technologies product segment was $2,800,000 which is flat with a year ago.

This represents a gross profit margin of 42% compared to 44% in last year's second quarter. Now the slightly compressed margin this year is a result of relatively higher amounts of unabsorbed production costs. In our equipment leasing business, we again saw reductions in our depreciation expense due to our ongoing asset rationalization strategy. Depreciation expense in the second quarter was more than half to $1,100,000 from $2,400,000 a year ago. So despite the lower leasing revenues, the lower depreciation expense raised gross profit in the quarter, which came in at $46,000 compared to a gross loss of $801,000 in the 2019.

Our general and administrative expenses were $4,800,000 for the 2020 compared to $5,500,000 for last year's second quarter. 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 the related operations. Our R and D expense was $498,000 this quarter compared to $312,000 during last year's second quarter. And we're ramping up spending as we continue to develop the MAX technology and to respond to specific requirements of programs for our commercial and military customers. Our overall operating loss for the second quarter of this year was $3,100,000 compared to an operating loss of $4,600,000 in the 2019.

Our second quarter adjusted EBITDA was a loss was $1,000,000 loss compared to a 1,100,000.0 loss in last year's second quarter. Mitchum's financial position and liquidity remained very strong. At the end of the quarter, we had about $27,000,000 of working capital that included cash and cash equivalents of about 7,500,000.0. And Mitchel's capital structure remains entirely debt free. Let me make just a few comments about our near term market outlook.

As Guy touched on, despite several project decisions being delayed until later, the Marine Technologies product segment has a robust level of opportunities available. And our newer technology, such as C Link and MAX, are garnering healthy levels of customer interest. As of July 3139, our backlog of firm orders for this segment was approximately $14,000,000 That's up from $11,000,000 as of April 30. These new bookings include orders for our MAX technology. Orders for products encompassing this technology have been stronger than we'd anticipated, and we've gained exposure to both military and commercial programs as a result of this new technology.

As we've said previously, backlog tends to be an appropriate indicator of overall demand and general market conditions, but it's difficult to apply when comparing quarter to quarter results. But despite the short term challenges and some tightening in CapEx budgets, we believe that the overall health of the marine market remains quite sound with bidding activity and the pipeline of prospects improved from a year ago. For our SeaMet business, SeaLink should make solid contributions through the balance of the year due to its strong backlog as order bookings have been more than enough to keep our Malaysian production facility utilized through the rest of this year. Our BuoyLink RGPS tracking systems are also ahead of plan and are exceeding expectations thus far through the year. Now as we mentioned earlier, orders for source controllers have lagged expectations.

We continue to pursue a number of specific opportunities and are optimistic that we will land these orders. However, given delivery times for these large systems, revenue from the sales of these products will likely be less than originally expected in fiscal twenty twenty. Thine will continue fulfilling deliveries related to its recent order bookings, including for MAX related products. We're also actively pursuing certain governmental programs that could have a meaningful impact both in terms of establishing ongoing relationships with these government entities as well as giving a foothold to new markets. Now programs of these types have the added benefit of providing a backlog of orders and ongoing support activities that can encompass multiple years.

For the equipment leasing business, conditions remain relatively weak, but we have seen some pockets of opportunity. We expect to see marginal improvement from the second quarter levels as projects in Eastern Europe, Alaska and Colombia are expected to commence in the third and fourth quarters. For the current fiscal year, we continue to expect solid improvement over fiscal twenty nineteen. However, due to the delay in expected orders that Guy mentioned, it's now unlikely that we will produce positive operating income for all of fiscal twenty twenty, but we do expect to generate positive operating income by the fourth quarter of this year. Now with that, let me turn things back over to Guy to give a few more comments before we take questions.

Speaker 2

Thanks, Rob. Although the expected shortfall in source controller sales and the effect on our financial result this year is, of course, disappointing, this in no way dampens our enthusiasm regarding the prospects for our business. We have continued our efforts to push the benefits of our marine technology products, such as MAX and SeaLink to the hydrographic, oceanographic, defense, security and marine seismic industries. MAX, in particular, has enabled us to leverage our position in the industry into new customers and new applications, which will meaningfully benefit both our near and long term prospects as we continue to expand our presence in the marketplace. One of our objectives is to expand our technology offerings in order to provide more complete solutions to our customers, as well as to enter new markets.

In that regard, we are engaged in a number of internal development activities, and Max is the most visible example of that. However, we are also exploring partnership arrangements with others. It's our belief that in some cases, by working with other companies, we can add to our portfolio of technology and products more economically, and perhaps more importantly, bring such technology and products to market much more quickly. We are currently engaged in a number of discussions regarding these types of arrangements. Now that concludes our formal remarks.

We'll be happy to take any questions now.

Speaker 0

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue.

Thank you. Our first question comes from the line of Tyson Bauer with Kansas City Capital. Please proceed with your question.

Speaker 4

Good morning, gentlemen.

Speaker 3

Tyson. Just

Speaker 4

to touch on that last comment that you made on the partnerships. Is there a financial aspect to those partnerships either favorable to Mitcham or potentially where you would be required to put up some kind of capital to participate in that partnership?

Speaker 3

I mean the answer is yes. There are a variety of potential forms that we're looking at and discussing. They all would have a obviously would hope to have a financial benefit to us over the long term as we're able to take that technology to market. In some cases, there may be some investment required. The way to look at it I think, Tyson, is you're adding new technologies.

So if you're going do it yourself, you're going to make investment as well. So this just is another way of making that investment and maybe we think more economically and again much faster to market. So short answer to your question is there are a variety of forms that these potential deals are looking at.

Speaker 4

Would it be safe to say then that these potential partnerships would include companies, larger than yourself that have established distribution and, relationships present in the markets that they're in?

Speaker 3

I think that's fair to say, yes.

Speaker 4

Okay. To hit your Q4 target, if source controllers are getting pushed to the right and are not going to be as big of a contributing factor as we thought they might be earlier in the year. What needs to happen? And are we then putting a lot of reliance on that new technology sales with the MAX, Klein, some of these other areas to backfill to allow you to meet that guidance goal?

Speaker 3

Actually from a magnitude standpoint, the impact of the new technology of MAX in particular isn't that large this year. There certainly is an impact but it's not that large. So the answer is no there. We see the benefit or the contribution coming from our C Link orders that we're executing on today. And we do think there will be some source controller activity as well as, Boolean activity in the quarter.

Speaker 4

With the source controllers not hitting what you originally thought, is that just due to less mapping occurring, less upgrades by clients, or just less new builds? No.

Speaker 2

It's not new builds. It's all less upgrades. Again, people being capital constrained and staying with the equipment that they have. Requirements for, you know, the newer technology of shooting patterns being pushed to the right as well as far as the impending surveys. So it's kind of all the above.

The only for one thing is not any new builds. There aren't any really new builds coming out, but rather trying to upgrade or add some, particularly on the shooting boat side, some additional resources there.

Speaker 3

Yeah. I mean, what we're seeing, Tyson, we think it's just people are trying to delay CapEx as long as they can. So I'm trying to wait till the last minute.

Speaker 4

Okay. And last one for me, I'll get back in queue is, I think you alluded to this just by your commentary and your outlook, a focus on commercial and government, which I'm guessing has a lot to do with, scientific and military applications. Are these the type of contracts, I think you said multi year, the size of these contracts, are these individually these contracts something that really moves the needle for Mitchum, especially given your small size? And can you provide any kind of timetable or pipeline, that we can watch?

Speaker 3

Sure, I mean, yeah, we think they do move the needle for us. You know, they're not of such a size that all of a sudden we're Raytheon the next day, but they do have or have enough size to have an impact. And I think as importantly as that is, it really establishes ourselves in certain markets and allows us to build from that. So that adds to their importance. There are a number of these we're pursuing now.

A couple of them are relatively near term. We'd like to see something by the end of the year, if not before. So I think keep your eye open through the balance of the year.

Speaker 4

All right. Thank you.

Speaker 0

Our next question comes from the line of Ross Taylor with ARS Investment Partners. Please proceed with your question.

Speaker 5

Thank you. Well, Tyson asked a number of my questions particularly with regard to government and defense. But on a bigger picture basis, is 2020 the year where shareholders should finally see the company crossover from being hopeful to being a company capable of producing sustained top line growth and free cash flow generation?

Speaker 3

Yeah, Ross, we really do think that. I mean, we went into this year, think we're going hit a bit earlier. But again, for the reasons we talked about today, things have been a bit delayed. But we are every bit as enthusiastic and believe as firmly as ever as to where we're taking this thing. And so we really do believe as we enter the fourth quarter into next year, we're going start to show the financial benefits of it.

So we're very, very optimistic about that.

Speaker 5

And you talked about customers pushing decisions and upgrades and buys to the right, but there would be a limit to how far to the right they can push that and therefore are we getting in 2020? Do you think that we're going to get to where they can't really push them to the right any further? Yes,

Speaker 3

I think. But obviously every time something is delayed there's always a risk that it goes away. We haven't seen that happen yet. I want to emphasize that. But that's always a danger that market conditions change such that that need goes away.

We don't think that's going to happen. And we do think we're going to see a lot of these things happen again later this year, but orders are received later this year. It's going be so late in year we just can't execute on them. There are delivery times, especially for ancillary products that just going to push deliveries out into next year.

Speaker 5

Okay. I would say that I think your investors have been, at least up until the last two weeks, very patient, incredibly patient as you guys redirect the company from being kind of a tertiary oil service provider to more of a technology focused company across a wide array of industries. But I think it's important to remember that shareholder patience is not endless and the last couple of weeks have shown us that. And that it's our strongly held belief that this company is easily worth two to three times what it's trading at to strategic investors. And if you're not able to see 2020 be the year that you get this turnaround that we crossed that Rubicon, we would strongly hope that you would think about your shareholders and kind of put us out of our waiting for Godot misery and find a strategic who would, you know, quite honestly take this company for two or three times what it's trading at and not even have to issue an eight ks on the process because the technology you have is valuable.

The opportunities you have are valuable. But quite simply it's clear that, you know, the market doesn't really love small under followed sorry Tyson under followed companies no matter how exciting the long term stories are.

Speaker 3

Okay, understood. Thanks. Appreciate the comment.

Speaker 5

Thank you, sir.

Speaker 3

You bet.

Speaker 0

Thank you. Our next question is a follow-up from Tyson Bauer with Kansas City Capital. Please proceed with your question.

Speaker 4

You recently added or replaced a director with a with a retired admiral. Obviously, with greater focus on to the military and government side of your business, does that open doors for you on the US military or NATO type countries by having that presence?

Speaker 3

Well, I guess it can't hurt. I think the idea of bringing Willy on was to, as we move into these new markets, we wanted some counsel as to not only the technology but how the business is conducted. So I think he will be helpful as to directing us in that regard. I mean, just having him on the board doesn't mean we're going start getting orders. That's just not the way it works.

But I think it will be a definite benefit for us. We're really excited to have him on board. We think he really brings a lot to the table for us. If you kind of look at his background, it really is just perfect for what we need right now.

Speaker 4

And are you forecasting any need for your ATM use on your preferred? Or are we at a point now with the prospects lying in front of you that, that's pretty well closed off, you don't need to use that?

Speaker 3

I wouldn't there's not much left on the ATM, frankly. I I wouldn't necessarily preclude that we wouldn't, kind of finish it up, but it's it's not big dollars at this point.

Speaker 4

Okay. And on some of these deals that you're going after, are are you still a secondary subcontractor to a primary, as we're seeing, I think that's well publicized, where you were a sub with Elbit? Or are you getting into a position where you can be a primary bidder for certain, say, service contracts or others?

Speaker 3

It's it's both. We we are we are the prime on at least one of the projects we're pursuing. But these are both cases.

Speaker 4

And is that a first for you?

Speaker 3

No. No. No. First in

Speaker 2

a few years, but not a first. No.

Speaker 4

That sounds good. Alright. Thank you.

Speaker 0

Thank you. We have reached the end of the question and answer session. I would now like to turn the floor back over to management for closing comments.

Speaker 3

Okay. I'd like to thank everyone for joining us today and look forward to talking to you again at the end of our third quarter. Thanks very much.

Speaker 0

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

Speaker 3

day.