Q3 2020 Earnings Call
[noise].
Greetings and welcome to Mitcham industries fiscal year third quarter 2020.
Conference call at this time, all participants are in listen only mode. A brief question and answer session will follow the formal presentation.
If anyone should require operators the students during the conference. Please press star Zero and your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Mr. tended art.
Thank you operator, good morning, everyone and welcome to the Mitcham industries fiscal 2023rd quarter Conference call.
We appreciate all of you joining us today.
Mr. 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 manage with abnormal housekeeping details to run through.
We'd like to listen to a replay of todays call will be available for 90 days via webcast by going to the Investor Relations section of the company's website Mitcham industries Dot com or via a recorded instant replay until December 12 information on how to access. These replay features was provided in yesterday.
He's earnings release.
Information reported on this call speaks only as of today Thursday December 15, 2019, and therefore, you are advised the time sensitive information may no longer be accurate as of the time of any replay listening or transcript free.
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 material materially differ from any future results or performance.
Expressed or implied by these statements.
These risks and uncertainties includes the risk factors disclosed by the company from time to time and as filings with the FCC, including its annual or Form 10-K for the year ended January 30, Onest 2019.
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 and now that the Jaime I'd like to turn the call over to Guy Malden Dot.
Thanks, Ken and good morning, everyone, we'd like to thank you for joining us today for our fiscal 2023rd quarter Conference call.
I'll begin by making some general comments about the third 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 begin by making a few brief comments about quarter.
The third quarter was of market improvement sequentially and slightly better than our recent expectations not just in revenues.
It in operating income adjusted EBITDA and net earnings as well.
On a sequential basis revenues were up 20% from Q2 levels with strong contributions coming from Seamap incline as well as the equipment leasing business.
While seismic leasing conditions are still challenging we are seeing an uptick in certain markets and there are some more favorable opportunities available within areas, such as South America and Europe .
Looking more closely at third quarter results Threed technology product segment drove most of the upside sequential gains.
Order flow business solid and it's mostly track with our expectations.
As you'll recall, we had several news releases last month announcing deliveries and orders of products based on our proprietary Max sonar technology as well as our Bluelinx 40, ex our GPS systems.
These orders will benefit both the current fourth quarter and fiscal 2021.
Further confirmed attraction and increasing awareness, we are gaining in the oceanographic hydrographic defense seismic and maritime security industries.
And while there are opportunities for expansion, both through new customers and new applications of our technology.
There continues to be the overhanging the issue of customers capital availability at least in the seismic industry.
As we mentioned in Q2.
Seamap source controller orders have come in below our projections, both due to more restricted capital and overall global economic uncertainty.
Though these potential orders have been delayed due to industry headwinds. We believe these orders will eventually materialize.
Despite the near term challenges we are pleased with the overall health of the marine market and are very excited about the many opportunities available to us through our marine technology products.
With that let me now turn the call over to Rob.
Thank you Guy.
I'll begin as usual that makena given a more detailed review the financial results then I'll make some comments about our views on the current a near term market.
Let me start with the Marine technologies products segment.
Revenues for the segment totaled 8.1 million in the quarter down 13% from 9.3 million in the third quarter year ago, but that 20% from the 6.7 million in the second quarter. This year.
Seamap revenues rose year over year to 5.7 million a quarter for 5.5 million in the third quarter 2019.
Andrew up 16% sequentially.
Third quarter revenues from client for 2.4 million, a decrease from 3.1 million a year ago, but up 29% sequentially.
Have a year ago period included delivery both of the source controller system as well as sonar system for the Dutch navies humans Hall.
In equipment leasing segment revenues decreased to 2.6 million in the quarter compared to $5.4 million third quarter a year ago.
Although the year over year decline was due mostly to lower seismic equipment sales were also is that declined leasing revenues.
Sequential basis segment was up 21% driven by higher leasing revenues.
Now, let me just discuss the profitability of each of the segments.
Third quarter gross profit for Marine technologies products segment was 3.3 million, which was down from 4.4 million a year ago, but up from $2.8 million in Q2 of this year.
This represents a gross profit margin of 41% compared to 47% last year's third quarter and 42% in the prior quarter.
The slightly compress margins as a result of higher cost decline light it to the introduction of new products, along with some changes in product mix Seamap.
In our equipment leasing business, we again posted year over year reductions in our depreciation expense due to our ongoing asset rationalization strategy.
Depreciation expense and third quarter was you only have to 1.2 million from 2.2 billion, a year ago and as flat sequentially.
Gross profit in the segment for the third quarter was 738000 versus 851000 comparable year ago period and $46000 in the second quarter. This year.
Our general administrative expenses were 4.7 million for the third quarter fiscal 2020, compared to 5 million for last year's third quarter and 4.8 million for this year second quarter.
Year over year improvement reflects lower costs due to both strategic restructuring activities as well as the sale of our SAP in Russian subsidiaries.
Our research and development expense was $629000 this quarter compared to 175000 spend during last year's third quarter and 498000 last quarter. This year.
These expenditures have risen due to our focus on new product development.
R&D expenses have tracked higher as we continue to develop our next technology as well as other initiatives in response to requirements from our commercial and military customers.
We're also pursuing a number of initiatives to partner with others to expand our technology and product offerings.
Our overall operating loss for the third quarter. This year was 1.9 million as compared to the operating loss of 349000 hosted in a year ago quarter, but improved sequentially from 3.1 million loss in the prior quarter. This year.
Our third quarter adjusted EBITDA was at $198000 profit this quarter compared to a 3.4 million profit in last year's third quarter, and a 952000 or lost during Q2 this year.
Missions capital structure remains debt free and liquidity remains good.
As we ended the quarter, we had about 23.5 million of working capital that included cash and cash equivalents of about $4.8 million.
Also like to note that our balance sheet as in the quarter reflects about a $2.3 billion increase in accounts receivable that was driven by order deliveries taking place during the month of October .
It's also worth noting it with the recent uptick in land leasing activity in some areas. We took the opportunity to redeploy some capital into new land nodal technology.
We expanded our equipment lease agreement with Inova Revit reinvest in about $2 million at the capital we freed up in recent periods by filling lease pool equipment.
This new equipment was immediately deployed on multi month lease and is currently on project in Europe .
Now let me make just a few comments about our nurtured near term outlook.
Although source controller orders continue to track below our expectations. The marine technologies products segment as a whole is performing well and has largely been in line with recent forecast.
Our firm order backlog of toward 12.5 million at ended the third quarter decreased from the second quarter backlog of 14 million, but there's still more than double the 6.1 million backlog from year ago at this time.
We think the slight decline from the last quarter is more indicative of project timing within that broader decline in overall demand.
We're still seeing healthy levels of customer interest and ever shown a number of inquiries for technology, such as we like see link and Max as well as far as source controllers.
Next technology in particular has enabled us to differentiate ourselves in the marketplace again solid foothold into new military and commercial markets to previously had been unavailable to us.
Our recently announced contract install Max on a next generation underwater vehicle represents an important milestone into progression of our expansion strategy and a growing the condition of the unique benefits of our technology.
We firmly believe that we'll be able to further leverage our technological technological expertise expand in these markets as our products getting greater traction and awareness.
Our cement business ceilings should make a solid contribution in the current fourth quarter due to anticipated deliveries of towed streamer products.
Regarding the reduced order flow for source controllers.
We continue to pursue opportunities in a market and remain optimistic that will land. These orders. However, given the linked the lead times for certain third party components necessary for these larger systems that will likely take place sometime in fiscal 2021.
Client is continuing to fulfill deliveries for its recent order bookings, including products. Realizing this mix sonar technology.
We're also continue to pursue certain governmental programs that can yield sizable opportunities that can span multiple years.
For the equipment leasing business overall market conditions remain relatively weak, although there is increasing activity in certain markets.
South America activity seem to be slowly recovering and there are opportunities in Europe . Therefore, we expect to see marginal sequential improvement from the fourth quarter.
For the current fiscal year, we continue to expect solid improvement over fiscal 2019, and fully anticipate that we will exit the year generating positive operating income adjusted EBITDA in Q4, setting a strong trajectory for fiscal 2021.
With that let me turn things back over Sky for few close comments before we take your questions.
Thanks, Rob.
The third quarter, largely preformed performed as we expected and all customer budgets and some market segments remain tight we are on track with our strategic plans to build on our momentum in the marine technology space and are excited about where we're headed.
Our ongoing efforts to add new technology and products to our portfolio execute on growth plans in our current markets and expand the markets for our existing product face will strengthen our competitive position in the industry.
And enable us to access more opportunities for growth in the coming years.
As a testament to these actions indeed, oneq look I think that to the orders we've obtained through the year that were driven by our newer products such as Max and ceiling.
These orders were previously have been unavailable to us had we not taken a proactive steps to transform Mitcham recast. The company has some re technology provider and invest in the appropriate technologies to address market needs and attractive business.
Our focus going forward will be the continued improvement of memory technology segment via new product development and enhancements to our existing product line.
The pursuit of multiyear government programs and the creation of business alliances to leverage the technology products and markets of other parties and helping further expedite our expansion into marine markets worldwide.
That concludes our formal remarks, we'll be happy to take any questions now.
Thank you if he would like to ask your question. Please press star one on your telephone keypad confirmation till indicate your line is in the question can you May proceed stock too if you would like to remove your question from the Q and for participants using speaker equipment and may be necessary to pick up your handset before precedent.
Thank you.
Our first question is from cases Bauer with KC capital. Please proceed.
Good morning, gentlemen.
Hi, guys passive.
Rob just looking for a little of clarification on your quote in the press release about positive EBITDA positive operating income in the fourth quarter. We believe we can maintain this in fiscal 2021.
Given the seasonality of your leasing side and the 12 million in from book orders.
To make that comment seems like the pipeline for you as much larger than maybe you expounded down.
To suggest that we can maintain those levels going into next year.
Just give us I think it's fair to say, yes, I understand your question.
Yes, there is some seasonality and leasing business, but it's not what used to be.
And we're seeing that even itself out so the swings out of the leasing side arent as Germanic is we've seen in the past.
But more importantly, I think the the order flow that we're seeing inquiry flow we is quite strong.
Cross that the technology products group.
If you'll notice that the backlog is double what was this time last year.
So it was like Frank $6 million. This time last year so that.
Gives us good confidence that we see things really starting to do continue on a much stronger.
Front, if you think about it we've got two products basically.
Now that we're shipping and contributing that we didnt have this time last year, that's Max and see link.
We did not shipping it newbuilds ceilings as of this time last year. So thats no. Both those things are having getting back so all those things combined gives us confidence.
Okay.
And just.
Backing into how you get to operating income profitability.
Excluding any unusual activity and lease pool sales, if we're only looking at a marginal bump in the leasing side, you're looking at a fairly dramatic increase on the marine tap product revenue line.
Compared to last year, what you did was $6.9 million.
We're looking closer to 12 million around that which is kind of correlates with what the from book was out of the.
Third quarter, but also implies that you have to backfill a lot of that going forward to maintain the level is that what you're seeing in the marketplace.
And as that across the board many products a lot of inquiries or are there. Some large contracts that you have pag that can get you to your targets.
I'd say, it's more across the board and.
Thank you to any one or two particular prospects that are key can I get all habits of joint across the board what's your Morrison.
More significant opportunities out there, which I think we'd be additive to what we're thinking about right now that it's really across the board. If you kind of like why we've maintained backlog.
Yes, the past quarter indicates that we are backfilling that pretty quickly.
Klein margins, you're doing new product introductions, she got additional cost there.
Yes.
What are you looking for is getting back to a normalized level or where do you where should we expect that to get too.
Well I think we've started going back to where we were a year ago higher 40 each.
For gross margins.
I think thats, where it is headed.
That's a diagnostic innocent.
[laughter] incremental segment had a big impact.
And there are some fixed cost.
Your your enthusiasm and this expected inflection point on the financials is not getting around reciprocated and your stock value.
And like a value of the company.
Or is it your belief that with this inflection point on financials. You also reached an inflection point for the company in regards to growth sustainability on your cash flows the not leading capital those kind of things going forward are you, putting a lot of ags into this one quarter.
I Wouldnt overstate that I think we feel good about a quarter, but we feel really good about things longer term as well so if something were to happen unexpected.
I'd be disappointed you, but I don't think that dampens, our enthusiasm whatsoever.
We have a lot of things in works.
We've talked about our some of our partnering opportunities that we really haven't expanded found yet for obvious reasons, but you know there's some pretty Tony things were looking at right now, but then we feel pretty pretty cocky right now.
There's a lot of press on unmanned.
Vehicles for the US Navy and the Marines, whether its overlord for the large vessels to common unmanned vessels at the lower end attracts Taiwan General dynamics. So it's kinda guys that are getting fast tracked contracts without being put out for bid through innovation units and that within the U.S. Navy.
Are you part of that segment that is then those fast track contracts that dealt out for bid and Youve expense to press releases in the last two weeks with the Max technology and related to the U.S. Navy.
Give us a little more color what you can our why we should keep a close eye on that and why that can be a game changer for you.
Honestly, there I can't say a lot about specific programs for obvious reasons.
Security and the competitive reasons.
But your ranking of the unmanned vehicle market is growing very rapidly.
So we certainly see that as a big opportunity for us.
In several areas.
So I guess, just the finest it say that standpoint.
I can't talk about subsidy specifics, we are involved in unmanned vehicle programs and thank the Max technology particular opens lots of doors for us because it is unique high so let me add one more comment Tyson.
A lot of the R&D expense this past year.
Particularly with Max is focused on underwater vehicle.
Applications. So we we've got it so we're going to told by a taoufik expression, but also a vehicle. So we have invested.
Yeah pretty significantly in that space and we're starting to see things payout.
Okay, and similar contracts that we've seen across the pond.
We've seen 20 $30 million contracts multiyear type situations be announced whether they are fulfilled or not we'll wait and see but.
Is that the kind of opportunity you're looking at potentially.
No I hesitate to be too specific.
Everyone knows what is these programs can look like they can be multi year.
And once you're in your in Fourq.
Period of time, so certainly can have a big impact.
Alright, Thank you gentlemen.
Yes.
Our next question is from Ross Taylor.
Our asks investment partners. Please proceed.
Thank you gentlemen, I'd like to pick up a little bit on on.
Mr. Ballers comments and questions. It's my understanding that the Navy was working on a vehicle where they had down selected to potential primes, both of which will require to use your I believe will issue a Max technology and I thought I read somewhere that they had reduced that two one time is that.
The case.
Yeah, Ross, we really can't comment on specifics about that program I think we've kind of said, what we can say about that.
Again, there again, some security issues as well as competitive issues that really keep us from saying too much more about that.
Okay. How unique is your Max technology.
It's it's a it's extremely unique we patent it.
It is.
Game, changing technology and certain from our perspective from the industry's perspective again nobody else is has a product that has this capability, particularly when you made it with their traditional size stance on.
Yes, it looks like I mean, obviously, there's potentially huge military market, both autonomous vehicle and code, but also scientific and commercial markets into seen reticent to talk just about how really significant the military market here at least in the U.S. is can.
You talked to us about how big the commercial market is and what kind of what's the selling cycle like it looks like you do the math from things I've read about this.
The system it looks like it actually probably saves about 40% on the pass rate.
Number of past doesn't need to cover an era.
And so thats and I thought right.
Okay and size of result on and quite honestly you look at some of these things, particularly deep weather.
Yeah, I worked for a defense contractor when the airlines cruise missile was built and that was relatively easy all we had to do is develop the.
Effectively GPS system, which.
Had not existed before it was actually built to allow airwatch cruise missile targeting not allowing you to find your newest grocery store, but there is no ability to do that undersea without mapping until it would strike me as the mapping opportunities are huge.
Going forward and this having such a significant.
Advantage on a lot much lower pass rate would be.
Something that there should be a substantial market opportunity for particularly as the navy decides that needs to map pretty much anywhere at wants to use an autonomous vehicle underwater vehicle, how big is that market.
Oh.
Yes, it's very large hundreds of millions of dollars if not more potentially.
Yes, we address all aspects of it and maybe not yet.
I know you mentioned the commercial markets I mean, we haven't talked a lot about that in this call commercial markets different and that you have enough the multi year.
Multi.
Well most of your programs, we've seen the military side.
But if it's a huge huge market for a survey purposes.
Hi, refund develop more symmetry Heidrick hydrographic survey, there's a lot of pipeline inspection is a lot of.
Commercial applications, which recoveries to talk a surgeon driver whether it's by the containers taught him.
Quite frankly, that's what wouldn't begin shipping Indonesian airliners things like that.
Yes exactly right.
Exactly so I mean, the math is so powerful that if the ability to use your system instead of what they are using and things like that.
Change is really game changing.
Yes, okay. Thanks.
He has got the sales cycle, obviously, you have to displace something else in many cases.
So that makes it a bit longer but I want to touch on one thing from a technology perspective that we haven't we will start talking about for the future with the angle concerning the Max in October fish expression or even on a vehicle. It allows us to look at some other additional technology that we can put on particularly the vehicle.
You know.
That supplements and and.
Enhances.
Right.
Max.
GAAP family Technology, we're going to talk about.
This coming year as as again as we develop some of this someone's additional technology and again.
As we said it before.
Max has allowed us to look at this additional technology, whereas where outmatched, we didnt have the capability do that so yes, we're working on some some additional exciting things based around our Max technology that we're going to be talking about.
Okay, and I talked about I think that I'm glad to hear you say talking about things because I think one of the biggest problems that I see with this.
Jim as an investment is you guys have not been talking enough about what the opportunities any simply put to me at 20 $526 million market cap one day someone perhaps.
The people you.