Jack Lascar - Dennard, Lascar Associates Robert Capps - Co-Interim Chief Executive Officer and Chief Financial Officer.

Ken Sill - Seaport Global Tyson Bauer - KC Capital Sheldon Grodsky - Grodsky Associates.

Greetings and welcome to the Mitcham Industries third quarter conference call. [Operator Instructions] I would now like to turn the conference over to Mr. Jack Lascar. Thank you, Mr. Lascar. You may now begin..

Thank you, Manny. Good morning and welcome to the Mitcham Industries fiscal 2016 third quarter conference call. We appreciate all of you joining us today. Your host is Co-Interim Chief Executive Officer Rob Capps. 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 via webcast by going to the Investor Relations section of the company's website at www.mitchamindustries.com, or via a recorded instant replay until December 23. 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, December 9, 2016; and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay 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 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, 2015.

Furthermore, as we start this call, please also refer to the statement regarding forward-looking statements incorporated in our press release issued yesterday, and please note that the contents of our conference call this morning are covered by these statements. With that behind us, I would like to turn the call over to Rob Capps..

Thanks, Jack, and good morning, everybody. We'd like to thank all of you for joining us today for our fiscal 2016 third quarter conference call. Let me begin by making a few general comments about the quarter and market conditions before moving on to our financial performance in detail. I'll then open up the call to your questions.

Turning now to our third quarter performance. Our leasing business continues to reflect the ongoing weakness that has characterized the overall seismic exploration market over the past several quarters. Leasing revenues were down materially from a year ago, and sequentially revenues were down moderately.

On the other hand, our strong Seamap results reflected ongoing demand for our products and the benefit of three orders that were delayed from the second quarter, as revenues were up markedly both sequentially and year-over-year.

In our leasing business, we're still seeing the lingering issues that have long been weighing on the industry that is very little exploration activity and an abundance of available seismic equipment. Our North American revenues posted a small sequential improvement, but both the U.S.

and Canada remained at very depressed levels in terms of overall activity and are below year-ago levels. In the U.S., given current oil prices, record crude stocks and continued high production levels, there has been a little new exploration activity.

And with so little visibility into the timing of the recovery in prices combined with tenuous financial position that many E&P companies find themselves in, we believe that activity won't return in any meaningful way, until fundamentals stabilize and the market gains greater confidence with sustained higher commodity prices.

Canadian activity remains weak. There will likely be sequential improvement in the fourth quarter, although the winter season has been shaping up much as we anticipated, that is similar or possibly weaker than last year. There will be probably some sporadic jobs of short duration, but overall the Canadian market is showing no sign of improvement.

Similar to North America, our Latin American business is also being negatively impacted by unfavorable macroeconomic conditions. Revenues were down both sequentially and year-over-year, although there are some quotes pending that may provide work in the fourth quarter and beyond.

Russia and the CIS were down from a year ago and from the second quarter as our previous quarter benefited from some smaller projects continuing past the normal winter season. Based on enquires and current orders being processed, activity in the Russian winter season does look encouraging.

Economic sanctions against Russia have made doing business there more difficult and have negatively affected our business there. We still expect solid activity from Russia this winter. However, projects have been late to firm out this year.

Our European leasing business was roughly flat in the second quarter and we continue to see steady activity in the region. As was the case during the second quarter, Europe remains a better performer for us than most other markets.

There is a large anchor project there that we expect will run through the rest of this calendar year, and we remain hopeful that there will be an extension of this project in the next year. In addition to this contract, there were some incremental projects that contributed to our revenues in Europe as well.

Activity in the Asia-Pacific region and the Middle East was down substantially, both sequentially and year-over-year. There has been some work in Australia, but overall activity has been down in this area. However, we are foreseeing some projects in this region for fiscal 2017.

While our marine leasing business saw sequential improvement, it continues to be negatively impacted by the ongoing oversupply of seismic equipment in the market. In response to market conditions, numerous marine seismic contractors have stacked vessels, further adding to the excess of equipment in the industry.

Though activity remains tepid, we continue to see isolated opportunities in the marine market. During the third quarter, Seamap delivered equipment to several projects, including three digital source controller systems.

You will recall that we expected to deliver these three orders in the second quarter, but they are delayed due to customer requirements. Now, let me give you a more detailed review of the financial results, beginning with the Equipment Leasing segment.

Our leasing revenues in the third quarter were $4.3 million, down 70% from last year's third quarter and down 6% sequentially. Most of the year-over-year decline was driven by U.S.

land activity as well as continued slowdown in Latin America, although all of our geographic regions were down markedly during that period, with the exception of Canada, which came in about flat.

Our marine leasing business was down about 4% from last year's third quarter and up 14% sequentially and continues to perform solidly, despite there being a good deal of equipment available in the market. Moving to our sales of leasable equipment, revenues were $1.3 million in the quarter compared to $475,000 in the same quarter last year.

Other equipment sales, which include heli-picker equipment and sales from our SAP, oceanographic and hydrographic equipment, were $344,000 compared to $2.4 million in the same quarter a year ago. Let me turn to our manufacturing business, Seamap. Revenues were $9.9 million in the quarter compared to $5.8 million in the third quarter last year.

This reflects the impact of the orders deferred from the second quarter that I just mentioned. Now, in addition to these system sales, there were also incremental sales and services, including aftermarket sales, pushing [ph] system replacement parts, engineering services, and ongoing supported repair services.

Let me talk about the profitability of each of the segments. The gross profit of our equipment leasing segment in the third quarter was heavily impacted by the high fixed cost of depreciation, which combined with lower lease revenues, exerted strong negative operating leverage on our profitability.

Because of this, we reported a gross loss of $3.3 million in our leasing business, which compares to $4.1 million gross profit in last year's third quarter.

Third quarter direct cost related to equipment leasing decreased to $1.2 million from $2.3 million on last year's third quarter, due to the lower levels of activity and our ongoing cost reduction efforts and efficiency initiatives.

Gross profit in the third quarter for Seamap manufacturing business was $5 million compared to $2.8 million a year ago, and this represents a gross profit margin of about 50% and 49%, respectively. Our general and administrative expenses for the third quarter were $4.4 million compared to $6.2 million in the third quarter a year ago.

This is a 29% decrease and reflective of the reductions in headcount, work hours, and salaries, as we bring our cost structure in line with the reduced levels of activity. For this quarter, we also had a $2.1 million contract settlement charge, which is related to the contract termination of the late Mr. Mitcham.

The charge had no cash impact on the third quarter and involves the accelerated divesting of stock options as well as deferred cash payments. The after-tax EPS impact for this charge was about $0.14.

Also in the third quarter, we did make provision for doubtful accounts receivable of $600,000, reflecting the impact of generally weak conditions within our industry. Our overall operating loss in the third quarter this year was $6 million. This compares to an operating profit of $194,000 in the third quarter of fiscal 2015.

During the third quarter, we had roughly $445,000 in foreign exchange losses incurred by our subsidiaries overseas, resulting from the strengthened U.S. dollar compared to the local currencies. Our tax position for the quarter was a benefit of about $746,000. This is an effective rate of about a 11%. And this rate is lower than U.S.

statutory right, due to the effect of valuation allowances for certain deferred tax assets and lower tax rates of foreign earnings. Our third quarter adjusted EBITDA was $4.2 million compared to $9.8 million in the last year's third quarter. We reported a net loss for the third quarter of $5.8 million or $0.48 a share.

This compares to a net loss of $397,000 or $0.03 per share in the third quarter a year ago. Now, let me make a few comments about our liquidity and balance sheet. During the third quarter, we did not make any significant additions to our lease pool. For the full fiscal year, we now expect our lease pool additions to total no more than $3 million.

Mitcham's overall financial and liquidity position remain strong. At the end of the third quarter, we had over $34 million in working capital, which included cash and cash equivalents of about $4.6 million.

Our cash flow provided to operations totaled about $2.2 million in the third quarter and about $13.9 million in the first nine months of fiscal 2016. Our year-to-date adjusted EBITDA is $12.6 million, which results in free cash flow of about $10 million.

During the first nine months of fiscal 2016, we reduced our outstanding debt by more than $14.5 million bringing our net debt balance, which is debt less cash balances, to about $8.5 million as of today.

We also recently amended our revolving credit facility, where we reduced the commitment from $50 million to $40 million and extended its maturity through August of 2017. Let me conclude my remarks with a discussion of the current market outlook.

For the fourth quarter, although the market remains very challenging, we will probably see a sequential improvement in rental revenue, due to the seasonal upswing coming from Russia, Canada and Alaska. We reported out during our previous call, inquiries in Russia, as well as Alaska, have shown promise.

Although, Canada remains extremely weak, we should still see marginal fourth quarter revenue increase. We are also likely to see improving our oceanographic and hydrographic equipment sales in the fourth quarter.

Although, on Seamap, we'll see good results in the fourth quarter due to at least one anticipated system delivery, it will not be as strong as the third quarter. Given the uncertainty surrounding commodity prices and the heavily curtailed spending of E&P companies, we have little visibility coming into the coming year.

For the foreseeable future, it's very likely that the environment for seismic exploration will remain extremely challenging one. Although catalyst sparks a sustained drilling oil prices and the market gains sense of security in underlying fundamentals, we really don't believe there can be any sizeable recovery in the seismic equipment market.

Despite the ongoing problems as that weigh on the seismic exploration, we do see sporadic opportunities, particularly overseas. We remain in discussions with customers and industry contacts. In our Seamap business, there may be some longer term opportunities available for us in the Far East.

In the meantime, our focus remains on current sizing our business and preserving cash flows to manage through what looks to be for a long downturn. I'd like to point out that despite the severely depressed market we're dealing with, Mitchan has continue to generate positive cash flow and reduce our leverage.

On a more strategic level, we're also examining ways to strengthen and diversify our business in anticipation of eventual recovery. Given the difficult pricing environment and challenging economic, asset prices have compressed a good deal and have started to become more attractive.

We may take advantage of some of the new opportunities that have been brought about by the turmoil in the industry. Because we've remained disciplined in our cost management and liquidity preservation, we have a flexibility to execute transactions that we feel are in the long-term interest of the company and it can build on our core capabilities.

In short, we aren't simply passively waiting for the market to bail us out, but are actively streamlining our operations, while also positioning ourselves to emerge as a stronger company. That would conclude our formal comments. Manny, I'll be happy to take any comments that the listeners have..

[Operator Instructions] The first question comes from Ken Sill of Seaport Global..

Couple of questions, on Seamap, you had three systems delivered plus some other business in Q4, and you're saying you've got one complete system being delivered -- I'm sorry, in Q3, got to get that right, and one system coming in Q4.

So I think based on last quarter conference call, there was $6 million in revenue deferred from last quarter into this quarter, which means --.

That's about right..

That's about right, so should we be looking for something between Q3 and Q2 or closer to Q2 in terms of revenue for Q4?.

Between the two, fairly closely Q2 than the Q3, I'm not thinking about that level though..

And then, give a little bit more color on the provision for doubtful accounts. I guess we've had these for the last couple of quarters.

So is this a specific customer or just an increase in the provision based on AR and what's going on?.

It's not a specific customer, Ken. It's more recognition of the -- we know some of our customers are under stress, so we just think it's prudent to provide a bit more as we go forward..

And what would be the after-tax impact to that one?.

I mean, roughly $400,000, $450,000, something like that ballpark..

And then we can go over -- I need to talk to you offline about some of the regional leasing numbers.

But it's interesting when you talk about seeing opportunities for some of these systems internationally and for Seamap in Asia, and I know you don't have a lot of visibility, but what do you think with the market today, the timing would be to kind of getting better visibility or seeing some of these potential things turn into actual business? When should we be looking for that?.

That's tough to say, Ken. As you know, projects tend to be delayed these days. Things move to the right a bit, so it's really hard to say when that can happen. We could see some things turn up in the near-term as we get into the New Year, but you just don't know for sure..

The next question is from Tyson Bauer of KC Capital..

A couple quick questions. Given your type of business, D&A is such an important line item. As we go forward, we had very minimal additions this year. Given your normal depreciation schedule, your ramp down can be rather quick, which is very important to your cash flow operations.

Give us an idea of that D&A schedule ramp down, and when does that accelerate as we get into 2016, 2017, if we're still kind of in this slower period for the industry?.

I don't have the exact numbers in front of me. You can kind of see that we went down from $8.6 billion last year's third quarter to $7.2 million this year’s. So that's a pretty dramatic decline. We certainly will continue to see that differential as we go into next year and probably accelerate slightly, just to give you a sense of magnitude..

And we get out to -- normally what is it, four years on the equipment?.

No, and it's anywhere from 3% to 7% or probably average of about 5.5% is good..

I'm within the range.

Talk about assets and given pricing in the industry, is there a risk given that short life of asset life, where we could see some write downs if this were to persist for a longer term?.

We don't think so, Tyson, that's something we look at very carefully every quarter. So we just don't think so. Given our depreciation schedule, we just don't see exposure there..

And this may be looking forward a little bit, but you get into your seasonal slow period in the summer months given the comments you made on some of the regions this past quarter, would it be fair to expect that we will not be able to maintain positive cash flow through those summer months?.

I wouldn't necessarily say that..

And does the situation now that we have with Canada and North America and those things, even though we're not making money at this point in time, the tax situation, do we have to do any tax considerations as we get into the end of the year if we have expectations for further losses?.

I'm not sure, I quite understand the question..

Just wondering if we have to reverse any kind of tax accounts or otherwise?.

Again, that's something we look at very carefully every quarter. We have provided some valuation allowances in certain jurisdictions, but not all. And so again, we thank where we are today, we're in a good shape on that. That is something we look at every quarter..

The next question is from Sheldon Grodsky of Grodsky Associates..

I assume that you guys are quite grateful that you went into this downturn with very little debt on your balance sheet. So I congratulate you for that. The first question, it was a kind of enigmatic news item I saw about you registering to sell preferred stock.

Could you give any insight into that? Is that tentative, or what's the idea?.

Sheldon, we are in registration on that, so I really can't comment too much on that filing. But we didn't file an S-1 for the potential sale of some preferred stock. It's in process now, and I really, because the registration process, can't comment on them..

Second question, you may have touched upon this already, in the question about writing off equipment, how difficult is it to preserve your equipment when it's idle? Do you just put it in a warehouse in a controlled environment and you don't have to do too much else?.

That's basically right. I mean it is very easy to maintain. We always -- whenever equipment comes off a job it's always repaired and put back in top operating condition. So you can put it on the shelf and it just sits there. So there is no danger of deterioration or things of that nature..

And then in terms of operating expenses, et cetera, you mentioned that the headcount is down and you mentioned that there are salary cuts.

Do you think you've already made cuts to the bone in operations, or is there still a little bit left that can be cut, as this depression goes forward?.

Well, Sheldon, we think we've taken the appropriate steps to date to even where we are today. There is always more you can do, I mean you know that, and there's always something else to be done and we'll continue to kind of evaluate the circumstances and the situation in light of the business we have.

We're comfortable as to where we are today at least..

The next question is from Ken Sill of Seaport Global..

Just wanted to follow up, in terms of some housekeeping here. Your SG&A, talking about costs, has come down quite nicely.

How do you think that's going to move forward in Q4? And even as we move into next year, is there going to be any change in accruals that are going to cause that SG&A number to bounce around a little bit over the next couple of quarters?.

Not too much, Ken. I mean there's a little bit of seasonality to our SG&A, in terms of audits, things of that nature. So it tends to bump a little bit in the fourth and first, but nothing dramatic. There is still some of the things we did earlier in the year, we didn't fully see the impact in the quarter.

But for the most part, I think it's going to be pretty comfortable..

So just we're kind of where it's going to be for the next two quarters anyway?.

Yes..

Thank you. We have no further questions at this time. I would like to turn the conference back over to management for any closing comments. End of Q&A.

I'd just like to thank everyone for joining us today. And I look forward to visiting with you on our fourth quarter call next year. Thank you..

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation..