Guy Malden - Co-Chief Executive Officer, Executive Vice President Robert Capps - Co-Chief Executive Officer, Chief Financial Officer Jack Lascar - Investor Relations.

Tyson Bauer - KC Capital Richard Dearnley - Longport Partners Ross Demont - Rainin Group.

Greetings and welcome to the Mitcham Industries second quarter conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require Operator assistance during the conference, please press star, zero on your telephone keypad.

As a reminder, today’s conference is being recorded. It is now my pleasure to introduce Jack Lascar. Thank you, Mr. Lascar, you may begin..

Thank you, Rob. Good morning and welcome to the Mitcham Industries fiscal 2019 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 Malden, Co-Chief Executive Officer and Executive Vice President of Marine Systems.

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 via recorded instant replay until September 13.

Information on how to access the replay was provided in yesterday’s earnings release. Information reported on this call speaks only as of today, Thursday, September 6, 2018 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 its annual report on Form 10-K for the year ended January 31, 2018.

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. I would now like to turn the call over to Guy Malden..

Thanks Jack, and good morning everyone. We would like to thank you for joining us today for our fiscal 2019 second quarter conference call. I’ll start by making some general comments about the quarter. Rob will then discuss our financial results in more detail and address our market outlook. We will then open the call for questions.

Looking at our second quarter results, things played out largely as we anticipated, although our leasing business showed some incremental improvement. Our marine technology products segment continued the momentum of the first quarter with revenues up 62% sequentially.

Revenues were lower year over year due to the fact that there was a large Seamap system sale to an institutional customer in Asia during last year’s second quarter. As we’ve said before, the timing of these orders has a large impact on our results, and that negatively impacted Seamap in Q2.

I would note, however, that we are seeing heightened demand for spare parts and repairs at Seamap as it appears that many customers are attempting to increase their operating capacity in response to improved backlog in their business.

Klein grew both sequentially and year over year, and given our robust booking activity that we discussed a few months ago as well as improving inquiry activity and customer discussions, we strongly believe that the marine technology product segment will experience substantially improved performance for the second half of this fiscal year.

Turning to our leasing business, although activity is still relatively weak, fundamentals may be firming up a bit as we have seen an increase in possible opportunities in certain markets.

During the quarter, we saw some expected contraction from the first quarter, although revenue is up from last year’s second quarter with contributions coming from Europe as well as North and South America. With that, let me now turn the call over to Rob..

Thanks Guy. I’ll begin by making a more detailed review of the financial results, then I’ll make some comments about our views on the current and near term markets. Let me start with the Marine Technology Products segment. Revenues for this segment totaled $6 million in the quarter compared to $9.7 million in second quarter a year ago.

Seamap revenues were $3.8 million in the quarter, which is down from the $7.5 million in the same quarter last year due to there being no system sales during the quarter versus the large one last year that Guy just mentioned.

We did begin providing repair and support services to Mitsubishi under the agreement we entered earlier this year, although the revenue contribution this quarter was nominal. Second quarter revenues from Klein were about $1.6 million, and this is up from $1 million a year ago.

Included in those amounts I just talked about are $134,000 in intra-segment sales, which of course are eliminated in our consolidated results. Revenues from our equipment leasing segment totaled $2.5 million in the quarter compared to $1.3 million in the second quarter a year ago.

The increase is mostly due to improved leasing activity as well as greater lease pool sales. As you will recall, these sales are part of our strategy to adjust the size and composition of our lease pool to better suit the evolving market. Now let me discuss the profitability of each of the segments briefly.

Second quarter gross profit for marine technology products segment was $2.7 million compared to $3.7 million a year ago. This represents gross profit margins of 44% and 39% respectively.

The improvement in gross margin was primarily due to differences in product mix as we had a greater level of spare parts and repair work, which carry a relatively higher margin. In our equipment leasing business, our depreciation expense fell to $2.4 million, or $3.8 million year over year.

With a lower depreciation expense and higher revenues, the leasing business reported a much lower gross loss of $801,000 in the second quarter compared to a gross loss of $3.1 million in the second quarter of fiscal 2018.

Our general and administrative expenses were $5.5 million for the second quarter of fiscal 2019 compared to $4.8 million for last year’s second quarter. In the current quarter, we had approximately $587,000 of start-up costs related to the new SeaLink product line without any meaningful offsetting revenues.

We also had a higher level of unabsorbed overhead costs which was a direct result of lower Seamap sales. R&D expense was $312,000 for the quarter. This compares to about $240,000 spent in last year’s second quarter.

Our overall operating loss for the second quarter this year was $4.6 million compared to an operating loss of $5 million in the second quarter of fiscal 2018. Our second quarter adjusted EBITDA was a $1.2 million loss compared to a $261,000 loss in last year’s second quarter.

We also reported a second quarter loss attributable to common shareholders of $5 million or $0.41 per share. This compares to a loss of $5.6 million or $0.46 per share in the second quarter a year ago. Mitcham’s financial position and liquidity remain very solid.

At the end of the quarter, we had about $24 million of working capital, and that included cash and cash equivalents of roughly $7 million. As you know, having repaid the entirety of our bank credit facilities last year, Mitcham remains entirely debt free. Let me conclude our formal remarks with just a few comments about our market outlook.

The second quarter began to exhibit some of the improvement in our marine technology business that we have been anticipating. While the project timing as well as start-up related costs weighed on our results, Mitcham is now much better positioned to take advantage of the many opportunities that we see in the global marine, sonar and seismic markets.

As it stands now, we believe the second half of the year will be much improved over the first half.

This is based on the high visibility of orders already booked for the year which we discussed during last year’s call, as well as the many additional opportunities that we are seeing in oceanographic, hydrographic, defense, seismic, and security markets.

We think Seamap will show significant improvement as there will be at least two system deliveries in the second half of the year, and revenue related to the Sealink product line will start to ramp up in the third quarter. We also expect Klein to benefit from deliveries related to recent order bookings, which we discussed last quarter.

Based on inquiries from current and potential new customers, it appears that the overall market fundamentals for our products have improved recently. We’re particularly pleased with our customers’ response to our Sealink marine data acquisition system, which represents our newest technology offering.

Through the course of our sales and marketing efforts, we’ve seen an abundance of potential opportunities to increase product penetration for Sealink as the technological benefits of this product align well with needs of end users, such as research institutes and survey companies.

For the equipment leasing business, while the seismic exploration conditions are still relatively weak, we continue to experience demand in Europe as well as in North and South America.

I also should note that as part of our efforts to consolidate our operations, lower overhead costs and improve asset utilization, we have significantly reduced our cost structure in certain markets.

Specifically, we have dramatically reduced our headcount and physical presence in Colombia and Canada, and as of August 31 have eliminated our presence in Russia. We believe we’ll see the benefits of these initiatives later in the year and estimate these actions will save the company about $2 million on an annualized basis. The U.S.

land market may show gradual improvement going forward, but since most contractors already have an existing pool of underutilized seismic equipment, any benefit to Mitcham would be minimal until such excess supply is absorbed. The upcoming winter season should yield solid activity in Alaska and some improved activity in Canada for us.

The fundamentals in the commodities market are trending more favorably. We continue to emphasize that we do not see a sizeable recovery of land seismic activity in the balance of this year, and when the eventual recovery is fully underway, activity will not return to the levels seen prior to the downturn.

These circumstances are of course the main catalysts behind our strategic repositioning of the company.

The emphasis on our marine technology products segment and the re-balancing and rationalization of our equipment leasing segment are actions we are proactively taking to address fundamental and long-lasting challenges to the seismic leasing business.

In doing so, we have substantially decreased our exposure to the oil and gas markets while also having gained much greater access to more stable and numerous opportunities in the oceanographic, hydrographic, defense, and maritime security industries.

While we do maintain leverage to a recovery in the seismic market, our company’s future growth is now being driven by the development and introduction of new and innovative technology to the marine markets and their multi-industry options.

We believe this revised model is a much more attractive value proposition for our customers and for our shareholders. That concludes our formal remarks. Operator, we’ll be happy to take any questions..

[Operator instructions] Thank you. Our first question comes from the line of Tyson Bauer with KC Capital. Please proceed with your questions..

Good morning, gentlemen..

Hey Tyson..

Rob, are you willing to reaffirm your--in the last call, you talked about getting to a $40 million annual rate on revenue for the marine products.

Is that still the case at this point?.

We’ve not changed our outlook at all on that. Things are evolving, unfolding very much as we thought they would..

Before you had included an order number, bookings number. We don’t have that this time.

Can you give us a little more color on the activity you experienced during the quarter and that pipeline as we enter the second half?.

Well, we continue to chase a number of opportunities. I don’t have the bookings number at hand for the quarter.

We have added new orders certainly, but as we’ve said before, we do have good visibility going forward for a number of things, even though the order may not be booked as of yet, so it gives us good confidence for the balance of the year and actually going into the next year as well..

Yes, and we’re starting to look at opportunities for next year as well, Tyson..

Okay. On the cash management side, obviously we started up Singapore and now Malaysia.

Where do you see that by year-end, and will that dramatically change as we get into more activity in the third or fourth quarter?.

Yes, for sure, because as we’ve said, we’ve been spending money and there’s essentially no revenue to offset that, so we are as we speak providing services from that facility, repair services right now, so we will start to build revenues in the third quarter and actually deliver a new system in the fourth quarter, so we definitely will see that start to turn around..

Okay.

The SeaLink, you made a comment - the take rate there, and has that really become kind of the industry standard now where any new vessel or dramatic upgrades have tended to lean toward that system?.

I’m not sure you could say that just yet. I think we certainly compete with anyone out there, especially in the markets we’re chasing, the 3D high res..

Yes. It’s a little bit of a different market as well. You’ve got the survey market, 3D high res market, versus the big multi-streamer deep water marine seismic market, Tyson, so the work we’re looking at is survey market and high res 3D..

To get you out of more of that oil and gas, or is that just included within more of that oceanographic and surveying and scientific side?.

Yes, I mean, there is some separation there. When you talk about the survey market, it’s wind farm related, unexploded ordnance on the defense side, so it is outside of oil and gas..

Okay, and Klein--.

The configurations are different, the technology configurations are a bit different than blue water, deep water marine..

Yes, so that’s a market we’re trying to [indiscernible] at this point..

Correct..

Do you anticipate Klein will have a full recovery to really the year when you bought them, to get back to that level or beyond that pathway by the end of this year?.

Yes, we do think that, without saying specifically where the numbers are going to be, but I think we’re definitely going in that direction and there’s lots of interesting things going on there..

Okay. You mentioned you’re out of Russia.

Does that mean you’re servicing it from another location, or you’re just no longer doing business in Russia?.

If we see an appropriate opportunity, we will service from other locations; but we do not have a physical presence in Russia any longer..

Okay, thank you, gentlemen..

[Operator Instructions] Our next question will be coming from the line of Richard Dearnley with Longport Partners. Please proceed with your questions..

Good morning.

Will the repairs business support the cost structure of Malaysia all by itself, or what kind of revenue do you need there to cover the overhead?.

As we increase the installed base, the repair business can support that operation, probably. Not sure we want to give a specific target as to--a revenue target for that area, but we think as we get towards the end of this year, that facility will be self-sustaining..

It’s a combination of repairs and new production..

Yes, so it’s both..

Okay, thank you. I was reading about the Sparton SSQ-125A Sonobuoy business.

Do you have any exposure to that?.

No, we don’t..

Okay, thank you very much. .

The next question comes from the line of Ross Demont with Rainin Group. Please proceed with your questions. Mr. Demont, please proceed with your question..

Sorry about that. Congratulations on your traction, guys. A quick question on gross margins on the repair business and then on the parts and service business.

Can you give us a sense of the profitability there--or the gross margins there in both of those?.

Our gross margins overall are in the high 40s. I think if you do the repair business, it’s a little bit beyond that, probably in the low 50s roughly, and it varies from product to product but just to give you a sense of things. Obviously for repairs, [indiscernible] typically. .

Yes.

Can you remind us then of the revenues per system for Seamap - I guess you said we’d have two delivered, or at least two in the back half of the year, and then revenues per system for Sealink?.

Well for Seamap, it can go from low end $200,000 to high end $2.5 million..

Yes, so depending on the technology, $200,000 to $300,000 to $2.5 million to $3 million. SeaLink, same thing - it’s $300,000 or $400,000 up to several million, again depending on size and scale. .

Great. At some point, it might be helpful to--well, it’d be nice for investors to better understand, I don’t know whether that’s through a different metric, how much business you’ve sort of booked, but maybe that’s not a metric we’re ready to start giving at this point.

But it’s very hard for us to see through, other than just looking at your wording, and understand how much the business has turned and how much growth we can expect, so something to think about. .

Okay, point taken. I’ll see what I can do about that..

Thanks very much..

The next question is coming from Tyson Bauer with KC Capital. Please proceed with your questions..

Thank you.

On that $2 million annual savings, are you expected to be at that rate by the fourth quarter, and will we see some of that in the third quarter trickle in?.

You’ll see some trickle in, in the third quarter, and yes, we should be at that rate by the fourth quarter. .

Okay.

On the two system deliveries, just for clarification for the Seamap, does that include any Sealink or are we not expected to make a Sealink delivery this year, and that falls into your next fiscal year?.

Those two systems are source controllers only, no SeaLink. We are planning on making a small SeaLink delivery, a new system by year-end - that’d be Q4..

Okay, so you’ll have one--so you’ll have two Seamap source control deliveries, you’ll have one Sealink system delivery this year?.

Correct..

Okay. .

Those are booked orders at this point..

Yes, those are booked orders. .

So Sealink, is that the only order you have thus far, or are you--you know, give us a little flavor? You’ve had a good reception to that product.

Can you provide us a little more color on how well that reception is?.

For sure. We have numerous repair orders in process, so we’re doing repairs not only for Mitsubishi but for other customers who have that product today, and we have numerous prospects that we’re pursuing at this point.

It’s early days on that, so some of the specifics we’re not ready to talk about yet, but there are numerous things we’re chasing there..

Yes, the priority was getting the facility set up, ready for repairs and then production, and then certainly the sales effort has been stepped up as we’ve gotten the facility up and running..

Okay. It sounds like you have high conviction or confidence on hitting some of these numbers by the end of the year.

Is that because it’s in backlog or it’s committed, whether it’s a firm order or not, but you have a firm commitment that you will be making these deliveries?.

It’s a bit of both, but it’s more of the committed backlog, the firm backlog..

Okay, I’ll just echo what Ross said, then. If we have that commitment and that firm backlog, a number would have probably been helpful, similar to what you gave in the second quarter--or the first quarter..

Understood..

All right, thank you, gentlemen..

The next question is coming from the line of Richard Dearnley with Longport Partners. Please proceed with your question..

I was just going to ask about that bookings or backlog number, but I think the previous question took care of it. Thank you..

Thank you. At this time, I would like to turn the floor back to management for closing remarks..

We’d like to thank you again for joining us on the call today and for your interest in Mitcham, and we look forward to talking to you again at the end of our third quarter. Thanks very much..

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