Karen Roan - Senior Vice President of Market Intelligence Billy F. Mitcham - Chief Executive Officer, President, Director and Member of Strategic Planning Committee Robert P.

Capps - Chief Financial Officer, Principal Accounting Officer, Executive Vice President of Finance, Director and Member of Strategic Planning Committee Guy Malden - Executive Vice President of Marine Systems.

Veny Aleksandrov - FIG Partners, LLC, Research Division Ryan Fitzgibbon - Global Hunter Securities, LLC, Research Division Joel D. Luton - Westlake Securities LLC, Research Division Georg P. Venturatos - Johnson Rice & Company, L.L.C., Research Division Tyson L. Bauer - Kansas City Capital Associates.

Good morning, and thank you for standing by. Welcome to the Mitcham Industries Fiscal 2014 First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, June 5, 2013. I'll now turn the call over to Karen Roan of Dennard-Lascar Associates. Karen, please go ahead..

Thank you, Carrie. Good morning, and welcome to the Mitcham Industries Fiscal 2014 First Quarter Conference Call. We appreciate your joining us today. Your hosts are Bill Mitcham, President and Chief Executive Officer; and Rob Capps, Executive Vice President and Chief Financial Officer.

Before I turn over the call to management, I have a few items to cover. If you would like to listen to a replay of today's call, it will be available for 90 days via webcast by going to the Investor Relations section of the company's website at mitchamindustries.com or by a recorded instant replay until June 19.

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, June 5, 2013, 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 those statements.

These risks and uncertainties include the risk factors disclosed by the company from time to time in its filings with the SEC, including in its annual report on Form 10-K for the year ended January 31, 2013.

Furthermore, as we start this call, please also refer to the statement regarding forward-looking statements incorporated in our press release issued yesterday, and please note that the contents of our conference call this morning are covered by these statements. Now I would like to turn over the call to Mitcham's President and CEO, Bill Mitcham..

Thanks, Karen, and good morning, everyone. I would like to thank you for joining us today for our fiscal 2014 first quarter conference call.

I'll start by making some general comments about the quarter before turning the call over to Rob, who will discuss our financial results in greater detail, and I'll will then conclude with a discussion of our market outlook before opening the call for questions.

Our first quarter results were basically in line of what we had anticipated and what we discussed in our last conference call 2 months ago. Our equipment leasing revenues were essentially flat with a year ago despite some temporary headwinds. We think that bodes well for the future. U.S.

land leasing activity continued its sporadic pattern that began early in 2013, and it appears that for now, U.S. exploration spending has shifted more towards drilling activity and away from the seismic programs.

As expected, the issues affecting Latin America land leasing, specifically Colombia, were not resolved in the quarter, but we see that situation improving. And while land leasing activity in Europe was essentially nonexistent in the first quarter, we think it's changing quickly. I'll address each of these more in a moment.

We did experience a decline in marine leasing in the quarter as a result of certain projects being completed and the temporary delays and the start of various new projects. We expect that equipment to be working again by the end of our second fiscal quarter.

Our leasing revenues in Canada, Russia and the Pacific Rim improved from last year's first quarter. And going into the first quarter, we had hoped Canada will be even stronger with some additional working days well into April, but that did not materialize as our Canadian winter season was finished for the most part by early April.

Our Russian and Canadian results were stronger than the year ago despite a couple of negative factors. As we mentioned in our last call, seismic exploration activity in Canada was generally softer than normal with fewer crews working. In Russia, we had a large project canceled in late January.

We mentioned that cancellation of -- the cancellation of that project on our last call, but actually had more impact on our first quarter than our fourth quarter. Our first quarter leasing revenues in the Pacific Rim were considerably stronger than a year ago due to the additional equipment we had deployed to that region.

As we discussed on our last call, due to customer's delivery schedule, Seamap did not ship a GunLink or BuoyLink system in the first quarter. The quarter was comprised entirely of aftermarket business. We expect to ship a GunLink 4000 and 2 BuoyLink systems in the second quarter.

Included in these shipments will be our new BuoyLink 4DX product, which is the most advanced relative positioning system in the industry. We continue to have a favorable outlook for Seamap for the second half of fiscal 2014 and beyond. As I said earlier, we are currently seeing more encouraging signs in our key leasing markets.

Latin America appears to be improving. We're now delivering equipment for 2 jobs for second and third quarter work, and we expect an improved third and fourth quarter in that region. Bidding activity in Europe has picked up substantially from a year ago, and we expect to begin delivering equipment for jobs in that region during the second quarter.

There are encouraging signs in the Russian market with numerous inquiries. In fact, we had just delivered equipment for a multi-month contract in that region. The Pacific Rim and Asia continue in a strong pace. We're in the process of positioning additional equipment in that region, including specialized transitions on equipment.

With that, I'll turn the call over to Rob, our Chief Financial Officer, who will give you a more detailed review of our financial results. And after Rob's discussion, we'll return with some final comments..

equipment leasing and Seamap. I'll then follow up with a discussion of the profitability of each of the segments and conclude with a discussion of our consolidated results and our financial position.

First, let me review our equipment leasing segment, which includes not only our core leasing business, but also non-Seamap equipment sales, such as occasional sales of our lease pool equipment, new seismic equipment we acquired from third parties, sales of heli-transport equipment and sales of new hydrographic and oceanographic equipment from our Australian subsidiary, SAP.

Our quarterly leasing revenues in the first quarter were approximately $20 million, that's down 4% from last year's first quarter.

And the slight year-over-year decline in leasing revenues was primarily due to lower land leasing activity in the U.S., Latin America and Europe, similar to what we saw in those regions during the fourth quarter, as well as a temporary decline in marine leasing as Bill discussed in his opening remarks.

Now these declines were partially offset by higher land leasing revenues in Canada, Russia and the Pacific Rim. Our leasing revenues in Russia and Canada were stronger than last year despite this year's Canadian winter season being softer and the cancellation of the large project in Russia, both of which Bill just mentioned.

Also, as Bill mentioned, leasing activity in the Pacific Rim was stronger this year than the quarter a year ago and last year's first quarter. Sales of new lease pool equipment were $900,000 this quarter compared to $2.3 million in the same quarter last year.

Other equipment sales, which includes heli-picker sales, as well as sales from SAP, were $2.4 million compared to about $750,000 in the first quarter a year ago. Now this increase was due to the SAP sales in the Pacific Rim.

Now turning to our Seamap segment, which designs, manufactures and sells a variety of products and systems used in marine seismic applications. Revenues were $3.9 million compared to $10.5 million in the first quarter of last year.

As expected, Seamap sales were lower than a year ago due to delivery schedules since there are no GunLink or BuoyLink system delivery shipments this year's first quarter. The quarter is comprised solely of other equipment sales and aftermarket business, including replacement parts, engineering services, ongoing support and repair services.

Now let me discuss the profitability of each of the segments. The gross profit from our equipment leasing segment in the first quarter increased 13% to $12.3 million from $10.8 million at first quarter fiscal 2013, despite the decline in leasing revenues.

First quarter gross profit margin in the leasing segment rose to 53% from 45% in the first quarter of last year. The increase in gross margin was due to lower direct cost and lower depreciation expense compared to a year ago.

Lease pool depreciation expense declined 12% a year ago to $7.4 million due to certain equipment becoming fully depreciated and the recent decline in the rate of lease pool additions. Gross profit for the first quarter of our Seamap manufacturing business was $2.2 million compared to $5.9 million a year ago due to lower revenues.

Seamap's gross profit margin rose slightly to 57% from 55% a year ago. Our overall gross profit from the first quarter was $14.6 million compared to $16.9 million in last year's first quarter. Our gross profit margin rose 53% from 49% in the first quarter of fiscal 2013. Okay, now let me turn to just a few other items in the P&L.

Our general administrative expenses were approximately $6 million in the first quarter this year compared to $5.3 million in last year's first quarter. This year's increase reflects lower overhead absorption from Seamap and higher personnel costs, including a stock-based compensation expense.

The tax provision for the quarter was $1.6 million, which was an effective rate of about 20%. As usual, our effective rate is lower than U.S. statutory rate, primarily due to the effect of lower tax rates on foreign earnings.

Our first quarter EBITDA was $15.7 million or 58% of revenues compared to $19.8 million or 57% of revenues in last year's first quarter. But please keep in mind, the EBITDA is a non-GAAP measure and is reconciled to reported net income and cash provided by operating activities in the financial tables in yesterday's press release.

We reported net income in the first quarter of $6.3 million or $0.48 per diluted share. This compares to net income of $8.5 million or $0.63 per diluted share in the first quarter a year ago. Let me make just a few comments about our financial position and then I'll turn call back to Bill.

During the first quarter, we purchased approximately $1.7 million on new lease pool equipment, and we continue to expect our capital spending to range between $23 million and $28 million this year. Of course, that is contingent upon the customer demand developing as we anticipate.

If the expected demand does not develop, we will likely defer much in the planned additions. We do expect to selectively purchase new equipment as we continue to rationalize our lease pool and, therefore, improve our utilization and our return on investment.

Now as you will recall, in early April, our Board of Directors authorized a share repurchase program for up to 1 million shares of our common stock. Upon authorization, we almost immediately began to repurchase shares. Through April 30, we purchased 102,900 shares at a cost of approximately $1.5 million.

We made these purchases in the open market under the Safe Harbor of SEC Rule 10b-18. Accordingly, there are volume and timing restrictions on our purchases. We must suspend the program during our quarterly blackout periods. We expect to continue this program and future purchases will be based on market conditions and other financial considerations.

Overall, Mitcham's financial position remains strong. At the end of the first quarter, we had over $58 million of working capital, cash and cash equivalents of $16.5 million, about $2 million outstanding under our revolver credit facility.

And actually, as of today, June -- or just at the end of today, we've repaid all borrowings under this facility, receiving essentially all of the $50 million facility available to us. Our cash flow generated from operations totaled almost $8.4 million in the first quarter and we continue to generate free cash flow.

And with that, I'll turn things back to Bill..

Thanks, Rob.

As we've said many times before, the underlying fundamentals of the seismic business remain healthy and quite promising, with West Texas intermediate crude over $90 a barrel and natural gas at more than $4 in Mcf, exploration budgets are up in 2013, and primarily -- and preliminary industry estimates are talking about another up year in 2014.

New exploration areas in South America, East and West Africa, the Far East and the Arctic, all support increasing demand for seismic activity. And with our 9 geographically diverse locations, we remain well positioned to take advantage of seismic rental opportunities around the world.

Subject to the overall economic picture, we should directly benefit from any improvement in land or marine seismic activity, as the $190 million of equipment purchases we've made over the last 5 years has positioned us as the premier lessor of seismic equipment, with the ability to respond to our customers' needs with the right equipment on very short notice.

With 90% of our leasing revenues generated outside of the United States, the strength of our international seismic operations is paramount to our success. We see indications of renewed activity in Latin America where we just delivered several thousand channels of both cable and cable-free equipment for second and third quarter work.

Our position in Colombia remains strong, and we currently anticipate a strong third and fourth quarter in Latin America, driven by increased activity and utilization in Colombia, Peru and other parts of the region. In Europe, bidding has picked up considerably and we're seeing improved activity, primarily in Poland, Romania, Serbia and Ukraine.

We're now expecting an improved back half of the year with stronger utilization of our equipment in the region. The Far East and the Pacific Rim markets are stronger than last year, especially in Australia and Indonesia, with additional projects on the horizon.

Our marine leasing business should continue at solid results, reflecting the ongoing attractive fundamentals in the marine seismic market. We believe there are additional opportunities to expand our marine-related business, particularly our Seamap manufacturing operations with new products and services, along with expansion of existing product lines.

The outlook for Seamap was extremely favorable, driven by upcoming licensing rounds in several parts of the world, including the Gulf of Mexico, Brazil, East and West Africa, and newbuilds entering the market between now and 2015.

We expect to benefit from these trends by equipping new vessels and from retrofitting older vessels with our newer, more efficient GunLink and BuoyLink technology.

Based on our current contracted business and feedback from our customers, I'll say once again we believe the fundamentals of the oil and gas business in general and the seismic industry, in particular, remain strong. And we anticipate fiscal 2014 results to be an improvement over fiscal 2013. Carrie, that concludes our formal comments.

We'll be happy to take any questions..

[Operator Instructions] Our first question today comes from Veny Aleksandrov of FIG Partners..

My first question is on Colombia. It's great that there is some work going on there and I heard you shipped several thousand channels already.

Can you tell us a little bit more, is permitting getting easier? Or there are just more jobs available now?.

Veny, I'm not sure it's getting any easier. We're finally seeing some permitting on some jobs that got enough permitting ahead, that they can go and get started on those jobs, which was the result of the 2 jobs that we just delivered. They actually began permitting on those jobs for the first of the year.

So I think we're seeing some headway in that, yes, just not sure how long it's going to really take them to get their arms around it. But I think we're in pretty good shape right now. We've got the 2 jobs that we just delivered and 2 other jobs going..

Great. Okay. And in Russia, summer work. That's, I mean, usually in Russia, during the winter.

Can you elaborate a little bit on the summer work and how many channels we can expect you to ship over there?.

Well, Veny, it's a few thousand channels that we have out now. I don't remember the exact number. It's actually in Kazakhstan, it's where the work will be done. And there are some other discussions going on, some other bids active for some other parts of Southern Russia, maybe even Kazakhstan. So we are -- that's encouraging to us.

That's kind of a bonus for us, to getting utilization of that equipment outside the winter season. So anything we get is a bonus..

Great. And my last question and I'll turn it over. On the Seamap side, Billy talked about 2014 being better than 2013.

Do you have visibility on any big projects? Any big contracts that you're bidding on?.

Well, yes, let me just back up just for a minute, Veny. Veny, what we said was we expected all of Mitcham to be better in 2014..

Okay. I'm sorry. I write it the Seamap side..

Specifically, about Seamap, I keep beating on Guy Malden -- up his projections. But actually -- no, certainly, we expect Seamap to have a good year..

Yes, I think there are several projects that we are actively in discussions on and bidding on and I think, without giving too many specifics on that right now, but there's just a lot of activity right now..

And our next question comes from Ryan Fitzgibbon at Global Hunter Securities..

I'm going to follow up in Veny's question on Latin America.

The incremental channels you plan to put into work, call it Q3 and Q4 this year, can you give us a sense of magnitude as to how many channels that actually will be?.

Yes, of course, we're not adding new channels -- well, not many channels to the region. I think we have about 20,000 channels in the region and we've added another....

5,000..

5,000, I believe, largest channels to that area recently. So that's kind of the inventory down there, if you will. So those -- it kind of gets spread among those 4 jobs you're talking about..

And so those 25,000 channels, should we assume most are utilized in the back half of the year?.

Yes, they are all wireless. We may put some more wireless down there in the next 2, 3 months. Probably 70% of the wire is either out or going out. So yes, and certainly, we'd love to see it all out. There's no doubt that there's some opportunity for that. Again, it's timing, but a big part of that will be out..

Okay, that's helpful. And then same kind of question for Europe. I know, got some channel sitting on the shelf there.

Any sense as to how many could actually go back to work in the back half of the year, if you can land some of these jobs?.

We have one job that we've actually signed the contract on. We're just waiting for the delivery of 9,500 channels. And another little -- smaller job about 4,500 channels, which will take most of the 428 that we have in Hungary..

Yes, and Ryan, we have about 16,000 channels in country right now or in the region right now roughly. And so this will take most of that..

Most of that is not going to start though until August. We're just -- we're positioning the equipment right now. So very little in the second quarter, most of them in third and fourth quarter..

Yes..

Okay, that's helpful. And then, Billy, maybe to follow on to your comment about fiscal 2014 being better than fiscal 2013. The ramp for Seamap is obviously pretty big coming out at Q1.

Should we assume, for modeling purposes, Seamap reflects similar to 2013 levels, that, call it, $32 million and a lot of the growth you're going to see this year is in equipment leasing really coming out of better utilization in Latin America and Europe?.

I think that's fair..

Yes, I mean, I think -- in fact, when we're talking about Seamap being fairly flat or even down a bit in this year for the full year, remember we had such a strong first quarter last year in Seamap. Still, early days, and it kind of depends on timing as to when some of these projects actually hit.

And we're talking about a $2 million plus ticket item, so a slip of 3 weeks here or there can make a big, big difference to how things fall out in a particular quarter. But I think the comment on the leasing side is right on..

Yes, and just to add to that a little bit. What we've talked about and we said, and I'll just say it one more time, it was our customer's request that we didn't deliver anything in the first quarter. They -- just because the timing, and again, when they get the vessels prepared and when they're ready for us, that's the only time we can get there.

So we were ready to ship in the first quarter..

Okay, good to hear. And then last one for me, just in terms of capital allocation for the year, maintaining the CapEx budget.

Can you talk a little bit about what's going in the CapEx budget in the back half of the year? And then with all the free cash flow you guys will generate, should we expect you to keep buying back your stock here? Or what's the actual plan, assuming you don't want to build cash given you have no debt on your books now?.

Right. As far as the CapEx targets, I mean, certainly, wireless equipment will be one thing. We certainly could acquire additional cable channels as well, particularly for the Eastern Hemisphere, still big demand for wired cable channels in that part of the world. So it wouldn't surprise me to buy some cable channels there.

But other than that, they're mostly wireless-related type equipment and a smattering of marine stuff here and there. As far as capital allocation, we certainly do expect to continue to look at our stock as one of the places to put our capital. And you're right, we are generating free cash flow.

Not saying -- don't want to give as to what the target price will be for us, but it's certainly still an attractive use of the capital right now..

And our next question comes from Joel Luton at Westlake Securities..

Just a question on Europe in terms of kind of the change in tone there.

Are you seeing less concern about frac-ing and from a political standpoint? And why do you think the market in Europe is improving from also kind of just an economic standpoint?.

Well, I think most of the work we're seeing is conventional, so I'm not sure that the frac-ing issue has much impact on the work we're seeing right now. I think there's just been a backlog of work because of all the issues last year and we're seeing that backlog start to flush through.

I mean, the political situation in Romania resolved itself and that seems to have helped quite a bit and just new projects being led by the oil companies. And so I don't know not that all the economic issues and the environmental issues are resolved in Europe. I wouldn't read that into what we're hearing or what we're seeing.

But I certainly would say that because of the backlog in business that we've built up, we're starting to see that break loose a bit now..

Okay. And then just one more question. With respect to North America, it seems definitely -- seems to be kind of cooling there.

Could give a little bit more color on the reasons for that and kind of what you see going forward?.

Joel, we was hoping you could help us with that..

You all are the big picture guys..

Yes, I mean, as we said earlier, we just say -- some of what we see is oil companies are moving more towards the drilling side than they are on the seismic side. It's not like they don't know where it is.

I think there's a -- I think we'll see a return, hopefully, in the back half of the year to -- we had a lot of work bid here in the States, a lot of wireless stuff. And so I think we'll see a better activity in the U.S. I mean, the other side of it is, is, I'd said, 90% of our revenue is outside of the U.S.

That doesn't mean we're going to close the door here, but we sure are beating on a lot of doors trying to get in..

And our next call comes from Georg Venturatos at Johnson Rice..

I wanted to touch on the Seamap side. Obviously, the outlook remains strong there. It sounded like last call, it was more of a back-half weighted expectation for the year. Just wanted to check on look, I know -- Q2 looks strong now. We've got 1 GunLink, 2 BuoyLink.

Was that a shift forward from the back half? Or is that incremental to maybe what we were seeing on the order side last quarter?.

No, that's always been in the build side. We've always said, let them move forward..

Yes, yes..

Okay.

So still expect strong pace in the back half in terms of system orders, probably similar to what we're seeing?.

Yes. Right..

Okay, great. You mentioned the BuoyLink 4DX product.

Could you maybe talk about that a little bit and what it kind of gives you in terms of advantage to what you've got now in your offering?.

I'm going to let Guy talk about that and we told him to limit it to 30 minutes. And just to let everybody know, Guy is our Vice President of Marine Services, and he oversees Seamap..

Thank you very much, Bill. Good question, George. Our BuoyLink EX is a relative GPS positioning source and streamer tail buoy and front-end tracking. We have been working, for some time now, on an upgraded version, which we call 4DX, which we have just rolled out. In fact, as Bill said, we will install the first system this next quarter.

Basically, just very quickly, we're now supporting, again from the GPS side, better technology, GPS L1, L2 and GLONASS. In other words, all the satellite constellations that are up there, which provides for a more accurate solution and position accuracy, anywhere from sub-meter down to sub-centimeter.

More importantly, it's integrated into our GunLink 4000. So we use power and telemetry to the GunLink umbilical termination and it's all run up to the fibre optic telemetry. So it's a huge advantage for all the GunLink 4000 users to be able to integrate their BuoyLink or their positioning system and that frees up your spare pairs for other things.

We're able to provide multiple units on each sub-array as opposed -- from a single power and telemetry pair as opposed to, again, utilizing auxillary repairs for each unit on a sub-array. And it's, most importantly, smaller and lighter by approximately 50% than our EX and much more rugged and much more reliable packaging.

So that's an encapsulated version of what we consider to be the main improvement and the main advantage of 4DX over our older EX model..

Georg, we could go on for another 30 minutes, but....

I figured. I appreciate that summary, Guy, that was great..

And you could tell, he was just a little bit excited..

Yes, yes, well, that's good. More on Seamap.

Just in terms of the investment that you talked about in that business, should we expect further product development more being next generation of existing offerings? Or do you think you could expand beyond kind of what you have today?.

Well, certainly, we're looking at some next-generation products. I think that the 4DX is a great example of what we're doing. I think, now, we've got some great products there. But we don't go home at night without thinking about what's the next rollout is. And so certainly, we have some other things in the line..

We're also looking at just outside of our traditional product range, as well. I mean, we're always interested in expanding sort of our manufacturing footprint and anything technology-based that we can utilize and leverage off of our engineering staff that we have, both in U.K. and Singapore..

[Operator Instructions] Our next call comes from Tyson Bauer at KC Capital..

A couple of quick questions on free cash flow. Your lease pool depreciation declined, obviously, as your equipment gets a little older in the pool.

What kind of schedule are we looking at as we go through this year and really going into next year? Are we going to see a market decline in that expense line as we go forward?.

We'll continue to see -- of course, it depends on what we do acquisition-wise. But I would say, we will continue to see some decline, maybe not a market decline this year. As we head into fiscal '15, we may see a bigger impact. But certainly, they'll continue to ratchet down.

But it's not going to be dramatic, again, it will be tempered by what we do addition-wise. But certainly, we'll see that improving, the depreciation decreasing, I should say..

Right.

And regards to that CapEx and the determination of what's going to continue in kind of that $5 million, $6 million, $7 million a quarter spend rate, when are -- when do you make that determination on whether you put in that order or not? And how far in advance do you make those determinations based on what your customers are exhibiting as far as their activity?.

Tyson, that can be all over the board. We could make a decision tomorrow to take delivery for something in the fall or early winter. But more likely, it's going to be late in the summer when we'll start to stir up some of those flames..

And are you obligated to take a certain amount from Sercel or other suppliers this year?.

Under our agreement, we have some purchase obligations under -- with Sercel, but it's relatively minor in the scheme of things..

Okay.

Given in a net number here, you're talking about some activity in Latin America, some strengthening in Europe, mainly in the second half, do you have enough activity, as you see it now, for the second quarter to surpass your leasing -- equipment leasing revenue that you did a year ago?.

About second quarter?.

Correct..

Just remember, that is -- it's our weakest quarter and I don't want to give any real guidance on it, Tyson. It's still early days and it is our weakest quarter and so we'll certainly be a big best time now from the first quarter..

Last year, if you remember, that was an extremely weak quarter that you posted on those revenues..

Yes, we absolutely remember that, Tyson..

Yes, yes, yes..

So is this year any different? Or are we -- it's too early to tell yet?.

Too early to tell..

And that was our final question at this time. I will turn it back to management..

Thank you once again, all of you, for joining us on the call, for your interest in Mitcham. And we certainly look forward to talking to you again after the conclusion of our second quarter..

Thank you, everyone, for joining the Mitcham Industries First Quarter Earnings Conference Call. If you wish to listen to a playback of this conference, please dial 1 (866) 949-7821. At this time, you may disconnect. Have a great day..