Dawson Geophysical Co (DWSN) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the TGC Industries second quarter earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder this conference is being recorded today, Monday July 24, 2006. I would now like to turn the conference over to Jack Lascar. Please go ahead, sir.

Thank you. Good morning, and welcome to the TGC Industries second quarter 2006 conference call. We appreciate your joining us today. Your host today will be Wayne Whitener, President and Chief Executive Officer, along with Chief Financial Officer Ken Uselton. Before I turn the call over to management, I have a few items to cover.

If you would like to be on an e-mail distillation or fax list to receive future news releases, or experienced a technical problem and did not receive yours today, please call DRG&E and provide us with that information. That number is 713-529-6600. If you would like to listen to a replay of today's call, it is available by going to the investor relations section of the Company's website at www.tgcseismic.com, or via a recorded instant replay until July 31, 2006. The information was provided in this morning's earnings release.

Information reported on this call speaks only as of today, July 24, 2006, 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. All statements regarding the Company's future, including without limitation the Company's expected future financial position, results of operations, cash flows, funds from operations, financing plans, gross margins, business strategy, budgets, projected costs and expenses, capital expenditures, competitive position, product offerings, access to capital and growth opportunities are forward-looking statements. 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 filing with the SEC, including in its annual report on Form 10-K SB for the year ended December 31, 2005, and on Form 10-Q SB for the first quarter ended March 31, 2006. Furthermore, as we start this call, please also refer to the statement regarding forward-looking statements incorporated in our press release issued this morning, and please note that the contents of our conference call this morning are covered by these statements.

I would like to turn the call over now to Wayne Whitener.

Thank you, Jack, and good morning to everyone. I would like to welcome you to (technical difficulty) 2006 second quarter earnings conference call.

As far as the agenda is concerned, I will provide you with highlights for the quarter, and Ken Uselton will provide you with financial details; then I will come back with some final comments.

We reported a solid quarter-over-quarter increase in terms of revenue, with second-quarter revenues more than doubling to almost 15 million. Although we have some weather downtime protection in our contracts, some of our crews in Kansas and Texas were negatively impacted by persistent rain in May and June.

Our gross margin came in at 43.7%, lower than last year's second-quarter gross margin of 46.5%. And the first quarter's 47.5% as a cost of services as a percentage of revenues rose due to weather impact on these revenues.

However, we continue to see rising demand for our services, and in the second quarter we deployed our seventh seismic acquisition crew, which was fully operational by the end of April.

We also purchased our fifth ARAM ARIES seismic recording system, which was placed in service with the seventh crew. In addition we entered into a purchase agreement for eight new vibration vehicles during the second quarter, which will be delivered in the third and fourth quarters, and by year end we expect to have a total of 42 vibration vehicles.

So if you look at last year's second quarter, we had three field crews operating using one ARAM ARIES recording system and two Opseis Eagle systems. And this year during the second quarter, we had seven field crews operating, although the seventh crew operated only two months of the first quarter, supported by five ARAM ARIES and two Opseis Eagle seismic recording systems.

During the second quarter we completed the purchase of substantially all of the assets of Highland Industry. Highland Industry, based in Houston, is engaged in the seismic shot-hole drilling business. Currently the drilling phase of our shot-hole business, which is one of the two energy sources used in acquiring seismic data, is being performed by third-party contractors. The purchase of Highland industry's shot-hole drilling rigs and related assets provides us with more control over contract scheduling and reduces third-party charges, thereby improving our gross margins.

Now I'll turn the call over to Ken Uselton, our Chief Financial Officer, who will give you a detailed review of our financial results. Then I will return with some final remarks.

Thank you, Wayne. Revenues for the second quarter were 14.9 million, compared to 7.2 million in the second quarter a year ago. The year-over-year increase in revenue is due to more crews operating during the second quarter of 2006 versus the second quarter of 2005, as well as the improved productivity of our crews, even though our revenue generation in the quarter was hindered to some extent by the weather in both Kansas and Texas.

Cost of services in the 2006 second quarter rose to 56% of revenues, versus 54% of revenues in the 2005 second quarter, which resulted, as Wayne said, in a lower gross margin percentage compared to a year ago.

Depreciation expense was 2.2 million compared to 522,000 a year ago, primarily due to the addition of approximately 24.7 million in new equipment in the past 12 months.

We continue to maintain strict control on our expenses. SG&A was approximately 709,000, or 4.8% of revenues in the second quarter of 2006, compared to 585,000, or 8.1% of revenue (technical difficulty) '05.

Second quarter income from operations was 3.6 million, or 24.3% of revenues, an increase of 62% from 2.2 million, or 31.1% of revenues in the second quarter of 2005.

Interest expense in the second quarter rose to 213,000 from 46,000 last year, primarily due to the increased debt levels associated with the financing of two new ARAM ARIES recording systems, three new vibration vehicles, and trucks for the additional field crews.

Income before income taxes rose by 56% to 3.4 million in the second quarter of 2006, compared to 2.2 million in the second quarter of 2005. Income before income taxes as a percentage of revenues decreased to 22.9% during the second quarter of 2006, from 30.4% during the second quarter of 2005. We recorded income tax expense of 1.4 million in the second quarter of 2006 for an effective tax rate of 39.7%. This compares to tax expense of 396,000, an effective tax rate of 18.1% in the second quarter of 2005. The lower effective tax rate in 2005 was due to utilization of the Company's then-available NOLs, which were fully depleted during 2005. Going forward, we continue to expect an effective tax rate in the range of 38 to 41%. Net income for the second quarter of 2006 increased 15% to 2.1 million from 1.8 million in the second quarter a year ago.

In 2005, our convertible exchangeable preferred stock was redeemed and the senior preferred stock was converted into common stock. As a result, we no longer have any preferred dividend requirements.

After adjustment for the 5% stock dividend, diluted earnings per share was $0.13, compared to $0.14 a year ago. On a pro forma basis, assuming a 39.7% tax rate in the second quarter of 2005, the diluted earnings per share would have been $0.10 per share, compared to $0.13 per share in the second quarter of 2006.

EBITDA in the second quarter of 2006 was 5.8 million, compared to 2.8 million in the second quarter of 2005. The EBITDA margin was 39% in the 2006 second quarter, compared to 38% in last year's second quarter. Our capital expenditures in the quarter were approximately 4.5 million.

Now turning to the balance sheet, at the end of the second quarter we had long-term debt of approximately 4.7 million, cash and cash equivalents of approximately 10.6 million, a current ratio of 1.4, and working capital of 5.3 million.

With that I will now turn the call back to Wayne.

Thank you, Ken. We expect continued strong capital expenditures from the oil and gas companies for the rest of 2006 and into 2007, at the very least. It has been projected that they will spend over $230 billion in 2006, a 15% increase over 2005. And a substantial portion of that increase is being spent looking for hydrocarbons in the Mid-Continent, Gulf Coast and Rocky Mountains, all of which these are areas we are either presently working in or have worked in.

Demand for our services remains strong and our backlog order books reflect customers' commitment well into next year. Based on what we are seeing so far this year, we know we have significant commitment work for all seven crews for the rest of 2006. We are already booking business for 2007 and expect to be operating at least seven seismic acquisition crews for the remainder of the year.

Our focus going forward is to improve the profitability and the productivity of our crews, while maintaining a well-established conservative financial discipline. We have our own survey crews equipped with the latest GPS equipment, and with seven seismic acquisition crews operating in the field, we now have over 25,000 available recording channels. We have 27 vibration vehicles, with another 15 to be delivered in the third and fourth quarter. So, we believe that we are very well positioned for the expected growth ahead.

This concludes my formal remarks and we will now take any questions.

(OPERATOR INSTRUCTIONS). Karen Green, Oppenheimer Funds.

Just a couple of quick questions. Certainly the backlog continues to grow very robust. Just wondering if you're seeing any kind of abatement in terms of bidding activity in North America, or if things are continuing to just move ahead at a very rapid pace.

We haven't seen any pullback by our clients. Bidding activity right at this moment has slowed up a little bit, and that's strictly due to the time of year it is. People are revisiting their budgets and looking at the areas that they want to explore in. And so normally this is a little bit slower time of the year, and then the bids start to increase in the fourth quarter for '07. So our indication from all our clients is they are still going to be very active in '07.

But you're certainly booked for this year. And looking into '07 right now, have you turned down any work because you don't have equipment or crews available?

We have turned down some work. Of course, a lot of that is due to the fact of the timing. People will not allow us to book out much further than the first quarter of '07. People are not willing to wait much longer than that. So to kind of answer your question, if we had a crew available, say, in the fourth quarter, we could have had that -- we could have that crew booked. But right now people are not willing to go out much past the first quarter of '07 and wait on getting their work done.

Just looking at the quarter specifically, can you quantify the weather impact? I know certainly that in Kansas and parts of Texas that that was clearly an issue. But in terms of a revenue number, is there any way you can give us a little bit of guidance on that?

I don't think I can get right into a specific revenue number, because we don't know what type of production those crews would have done if they hadn't been shut down. But we did lose 30 days worth of production in our Kansas operation, and we lost about 11 days in our South Texas operation. So the weather did have a large impact on the second quarter.

You also had operating costs as well that should -- during the startup of the seventh crew. Is that correct?

Yes we did. We had the startup of the seventh crew in the second quarter as well.

Dollar amount, with regards to startup, about 100, 150,000?

Yes. Probably around 100.

[Beau Mackenzie], [Pritchard Capital].

Good quarter. Congratulations on everything up there. At what point do you get confident enough to come out and say maybe it's time to step up with an eighth crew? And let me, I guess, preface that by saying that as we've talked to Dawson, Dawson is encountering much the same market conditions you are. Things are being booked into first quarter next year. What do you need to see visibility step up, and is the equipment available from ARAM if you decide to go forward with an eighth crew?

The equipment is available. If we decided to put out an eighth crew, we could do so in this year. We haven't made that decision yet. We look at the opportunities as they become available. We feel like that if we were to put out an eighth crew, that we could probably do that with, of course, internal cash flow.

The way we evaluate about putting out the eighth crew, or any additional crews, is who is the client and what are the opportunities for the company? And we evaluate that every week and see what opportunities are there for us. We haven't decided yet on additional crews this year, but we are monitoring that. And when that decision is made, of course, we will make an announcement to the public.

If you were to go with vibroseis for the next crew, given the amount of vibrators you've taken delivery of or are still on order, how much incrementally would it cost to bring the next crew out? Is it going to be less than 7, 5 or 6 million or so?

Yes, it would be, because back -- one of the biggest lag times right now in our industry is the vibrators. We ordered vibrators in the fourth quarter of last year that we're taking delivery of. We ordered an additional eight vibrators in the first quarter of this year, and we'll be taking delivery of those vibrators between -- actually starting this week and through the end of the year. The total number of new vibrators that we're getting with this order is 15 vibrators. So yes, to answer your question, if we were to put out another crew, we would have the vibroseis units available already on order and available for our use.

Where are you seeing the most incremental demand come from? Particularly with Fayetteville seeming to get some interest here, some of the things that are going on up in the Appalachians and stuff, are there areas out there that have had relatively small amounts of 3-D, and maybe some recent 2-Ds that you see as emerging that are offering the industry the potential to suck up a bunch more capacity?

Of course the Fayetteville Shale, which we have a crew up there at this time, is going to be very active next year. We're doing some 2-D work at this moment up there to set up for 3-Ds to be done in the fourth quarter, and 3-Ds into next year.

I will say that we're seeing somewhat of a shift. We're seeing quite a bit more dynamite work this year than what we encountered last year. Of course, that's one reason we bought the Highland drilling operation, is to be better able to schedule the drilling operation. We anticipate in the third and fourth quarters of this year about $15 million in dynamite work, which is a significant increase from last year. Of course, that is due to where the clients are working, which is the Gulf Coast and Louisiana, and other areas that doesn't allow you to use vibroseis techniques.

I guess the last thing, Wayne -- it looked like the backlog was up ready nice. You wouldn't happen to know what they were at the end of the first quarter and what they were a year ago --? I seem to remember the first quarter was about 45; I could be wrong there. But I don't remember one from a year ago, in terms of backlog.

The first quarter was like 40, 45 million. And I don't remember right offhand, but I was thinking we were around 30, around 30 (multiple speakers)

(multiple speakers) this time last year?

Yes. I believe 25 to 30, somewhere in there.

(OPERATOR INSTRUCTIONS). Michael Christodolou, Inwood Capital.

Given your statement that some customers are reluctant to book something beyond the first quarter of '07, I was curious how far out your 65 million in backlog kind of goes.

The 65 million takes us out into the first quarter of '07, not with all the crews totally booked, but with a large majority of the crews booked.

Andrew Halperin, [Beaver] Capital Corp.

Wayne, it looks like your revenue first quarter versus second quarter is about flat. Are you finding that you have any ability to increase your pricing for the crews? And if so, how do you project that this will impact revenue in the third and fourth quarters?

The one reason that revenue was relatively flat between first quarter and second quarter is (technical difficulty) we had very good weather and had all the crews very productive. We were, of course, weather-impacted in the second quarter, as discussed. Also, we had some dynamite work in the second quarter, which, basically, when we do dynamite work, it somewhat SKUs the margins, because revenue is higher and the percent margin is lower on the dynamite work.

As far as increases, we are going forward on our turnkey work. We're able to get some increases here in the third and fourth quarter. We're already working on increasing margins for '07 on new work that we're bidding at this time. So we expect on the turn jobs to pretty much remain at current levels through '06, and we are hopeful to increase the rates for our two turn crews in '07.

Did you have any additional questions?

No, not at this time. Thank you.

(OPERATOR INSTRUCTIONS). Sherwin Prior, NorthPointe.

Good quarter. Two quick questions. First, what was cash flow from operations for the second quarter?

We're going to have to let you know on that.

Second question -- I think you mentioned that your contracts have some weather downside protection. Can you give a little bit more color on exactly how that mechanism works?

The way that works, we have -- in our contracts we'll have a basic weather day that we charge a client. And basically what that weather day does, it pretty much covers our costs on that date, but it doesn't cover the lost production that we would incur on a day where a crew is not working. So it helps the impact as far as the loss of revenue to the Company, but it doesn't totally cover the loss of revenue and the profit that is made by a crew that is active in the field.

So thus far into the current quarter, have there been any days lost due to weather?

Yes, we've lost some days here, mainly in South Texas at the first part of the month here. But things, of course, have dried up. And we're hitting the drier weather now with the longer days, so we're optimistic about the weather. Hopefully we don't have any hurricanes come into the Gulf that would impact our business.

Last question from me. You mentioned the dynamite work was higher revenue, lower margin. How would the acquisition of Highland help with the margin picture kind of going forward?

When I meant margin, that's percentage margin due to the higher revenue. Basically when you do dynamite work, you have third-party that is in the revenue that is basically a pass-through item, which is a percentage of the revenue number. So with the Highland acquisition, it will not cover all the drilling that we have to get done between now and the end of the year, but it will help offset some of that cost. So (technical difficulty) instead of us paying a contractor, basically we'll have done that in-house, and that will have an impact on our margins on the dynamite work going forward.

Thanks a lot for answering questions, and good quarter. Thanks.

Management, there are no further questions at this time. Please continue with any closing remarks you may have.

We thank you for joining us, and we look forward to talking to you again next quarter.

Thank you, sir. Ladies and gentlemen, this concludes the TGC Industries second quarter earnings conference call. If you would like to listen to a replay of today's conference call, please dial 303-590-3000, and enter access code 11066246, followed by the #. You may now disconnect, and thank you for using AT&T teleconferencing.