Dawson Geophysical Co (DWSN) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the TGC Industries' fourth-quarter earnings conference call.

During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS). This conference is being recorded today, Monday, February 26, 2007.

I would now like to turn the conference server to Jack Lascar of DRG&E. Please go ahead, sir.

Thank you, Heidi. Good morning, everyone, and welcome to the TGC Industries' fourth-quarter and year-end 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 added to the Company's e-mail distribution list, please call our office at 713-529-6600 and relay that information to us, or you can send me an e-mail with that information at jlascar@DRG-E.com. If you would like to listen to a replay of today's call, it is available via webcast by going to the investor relations section of the Company's Web site at www.TGCseismic.com or via a recorded instant replay until March 12. The information was provided in this morning's earnings release.

Information reported on this call speaks only as of today, February 26, 2007. 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 opportunity, 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 express 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 SB for the year ended December 31, 2005, and on Form 10-Q SB for the first, second and third quarters of 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. Please note that the contents of our conference call this morning are covered by these statements.

I will now turn the call over to Wayne Whitener.

Thank you, Jack, and good morning to everyone. I'd like to welcome you to our 2006 fourth-quarter and year-end conference call.

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

We're pleased to report strong 2006 results, a year in which we continued to see rising demand from our customers. I would like to take a couple of minutes and discuss with you the highlights of the year. We had a very good year in terms of revenue growth with annual revenues increasing 120% to almost 68 million. Income before income taxes increased 95% to 13.6 million. Our net income increased 31% to 8.1 million. We reported 2006 diluted earnings per share of $0.51, an increase of 13%, which included a 15% increase in the average number of shares used to compute diluted earnings per share in '06 versus '05.

Our EBITDA for '06 increased 127% to 23.9 million, mainly due to our depreciation expense almost tripling to 9.5 million as a result of approximately 43.4 million being invested in seismic equipment in '05 and '06, primarily for the five additional seismic crews in both years. During 2006, we added three new seismic acquisition crews, each using new ARAM ARIES recording system. We ended the year with eight crews. We purchased 15 new vibrator vehicles, along with other equipment for our crews. We continue to provide our crews with new state-of-the-art equipment to optimize productivity of our crews and equipment in meeting our customers' growing needs. Currently, we have six ARAM ARIES recording systems along with two Opseis Eagle systems and at the end of the year 2006, we had 45 vibrator vehicles. As previously announced, we ordered six more vibrator vehicles and will take delivery of all these units in the first quarter of this year.

As we announced in May of '06, we acquired the assets of Highland Industry, a Houston-based company operating the shot-hole seismic drilling business. This enables us to better serve our shot-hole contract customers and have more control over our contract scheduling and reduce some of our third-party charges. As previously announced, we ordered two more shot-hole drilling rigs and will take delivery of these units in the second quarter of this year, giving us a total of 11 shot-hole drilling rigs.

For the fourth quarter of '06, we reported income before income taxes of 3.5 million, net income of 1.9 million, or $0.12 per diluted share, on revenue of 20.1 million. However, several of our crews working in the Midwest were affected by inclement weather experienced in the second half of December. This had a negative effect on our cost of services in the quarter, which in turn affected our gross margins. Unfortunately, the bad weather has continued into the first quarter of 2007 and will adversely affect some of our results.

As far as outlook for '07 is concerned, we continue to see strong interest from both our current customer base and potential new customers for seismic acquisition services onshore in the U.S. and look forward to continued growth.

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

Thank you, Wayne.

I will start with the fourth-quarter results. Revenue for the fourth quarter were 20.1 million compared to 9.9 million in the fourth quarter a year ago, an increase of 103%. The year-over-year increase in revenue was primarily due to eight seismic acquisition crews operating during the fourth quarter of '06 versus five operating for most of the fourth quarter of '05, as well as ongoing improved productivity of our crews.

Cost of services in the '06 fourth quarter was 12.2 million compared to 5.7 million in the '05 fourth quarter. Gross margin was 40% compared to 42% a year ago. Depreciation expense was 3.1 million compared to 1.3 million a year ago, primarily due to the addition of new equipment for the three crews added in 2006.

Fourth-quarter income from operations was 3.6 million compared to 2.2 million in the fourth quarter a year ago.

Interest expense in the fourth quarter was 173,000, essentially flat with 174,000 a year ago.

Income before income taxes in the fourth quarter was 3.5 million compared to 2 million in the fourth quarter a year ago.

Net income for the fourth quarter of '06 was 1.9 million or $0.12 per diluted share, compared to net income before dividend requirements on preferred stock of 2.5 million or $0.16 per diluted share in the fourth 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.

EBITDA in the fourth quarter of '06 rose 95% to 6.8 million, and EBITDA margin of 34% from 3.5 million and EBITDA margin of 35% in the 2005 fourth quarter.

Now, looking at our full-year results, our revenues were 67.8 million, a 120% increase over 2005 revenues of 30.9 million. Cost of services for 2006 were 40.8 million for 2006 with 18.1 million in 2005. 2006 operating income was 14.4 million compared to 7.3 million in 2005. Interest expense for 2006 more than doubled to 781,000 from 365,000 in '05. 2006 income before income taxes was 13.6 million, a 95% increase over 2005 income before income taxes of 7.0 million in 2005.

Net income for 2006 was 8.1 million or $0.51 per diluted share compared to 6.2 million before dividend requirements on preferred stock or $0.45 per diluted share in 2005. The average number of diluted shares used to calculate earnings per share in '06 increased 15% from the number of shares used in 2005, mainly due to a secondary offering that was completed in the fourth quarter of 2005.

We showed strong growth in EBITDA for the year which increased 127% to 23.9 million, a 35% EBITDA margin from 10.6 million, a 34% EBITDA margin in 2005.

Now, turning to the balance sheet, at year-end 2006, we had long-term debt of approximately 3.1 million, cash and cash equivalents of approximately 9.4 million, a current ratio of 1.1, and working capital of approximately 1.2 million.

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

Thank you, Ken.

As we have stated before, we continue to expect strong capital expenditures from the oil and gas industry in '07. Most projections are that the seismic spending will increase at least 9 to 12% over the '06 levels, a substantial portion of that spending increase expected to occur in areas where we are currently working or have worked recently, such as the Midcontinent, Gulf Coast, Permian Basin, Fayetteville shale, and the Rocky Mountain areas.

Operationally, we're very well-positioned and we end the year with approximately 60 million in backlog. We currently plan to spend 10 million in CapEx in '07, primarily for additional equipment for our eight crews. Also, because of the capital investment we made in '06 for new vibrator vehicles and ARAM ARIES recording systems and the previously announced planned capital investments in the first half of 2007, our depreciation expense of 2007 is likely to increase significantly over 2006.

With eight seismic acquisition crews operating a field, we now have over 32,000 channels available recording channels to our clients. Based on what we're hearing from our customers, we remain very optimistic about the outlook for '07.

This concludes my formal remarks and we will take any of your questions at this time.

Thank you, sir. Ladies and gentlemen, at this time, we will conduct the question-and-answer session. (OPERATOR INSTRUCTIONS). Karen Green, Oppenheimer.

Just a question on your use of free cash flow looking out into 2007. Wayne, I know you mentioned about $10 million in CapEx that you have slated. But can you give us an idea? You're still going to be 14 or $15 million free cash flow positive even after that 10 million, in terms of what you're looking at, what you're looking to do with the cash? Maybe comment a little bit if you're also considering a special dividend or a stock dividend similar to what you did last year.

What we're looking at on the 10 million that we currently have under CapEx approved this time is to increase the capacity of our crews with the additional channels. We are all so looking at of course opportunities going forward to see if opportunities are there to expand on our crew count and additional channels on that horizon. That door of course is still open. We went, last year, back to the Board of Directors, got additional CapEx expenditures to put out additional crews as opportunities presented itself last year. We expect to be reviewing that this year as well.

As far as last year, we paid a 5% stock dividend and the Board is reviewing what they plan on doing this year. That may be a possible option for the Board to rule on.

If you were to add an additional crew demand-warranted this year, is that something that you would have to go out and acquire new trucks? I know you just mentioned that you have six you're taking delivery of in the first quarter.

Well, right now, by the end of the first quarter, we will be up to about 49 vibrator units. It depends on the contract mix. If we keep one crew on dynamite work all year, then we have significant vibrator vehicles to supply the rest of the crews with what their needs are in the vibroseis application. If the opportunity comes up that it's an additional vibroseis crew, then we will have to acquire additional vibrator units to go along with the acquisition equipment.

The delivery times on the ARAM systems, are they still running about three months?

It's about three months, three months on the vibrators and three months on the acquisition equipment.

The cost of the new ARAM ARIES system at this point?

Around 4 million.

That's all I had. Thanks.

(OPERATOR INSTRUCTIONS). Karen Green, Oppenheimer.

I was just wondering if you can comment on the mix of backlog in terms of what percentage is dynamite.

Last year, our mix ended up being 75% vibroseis, 25% dynamite. As it stands right now per what we have in our backlog, about 18% of our business is dynamite.

Great. Can you also just comment a little bit on pricing trends over I guess sequentially and year-over-year as well?

Sure. We have seen a small price increase here in '07. Mainly, we will see the impact on that in the second and third quarters of '07. I'm going to say anywhere--it depends on the particular job but anywhere from 2 to 4% price increase from '06 levels.

Thanks, Wayne.

We have another question. We do have a question from [Bob Johnson] with (indiscernible) Capital.

I wonder if you could just outline a little further in regards to the acquisition you referred to in the dynamite area. What percentage of your requirements might that in-house operation cover as compared with, say, the 18% backlog that you alluded to in terms of dynamite-type work?

Well, basically, what the capacity of the Highland acquisition gives us as well as the two additional drills, new drills that we're taking delivery of in the second quarter, basically it keeps one crew operating on dynamite. Kind of depending on how the dynamite falls, when the work comes in and when it is scheduled, it is still possible that we will have to use a third-party contractor and outsource the drilling for additional vibroseis work. But basically what we're set up to do is to operate these drills in front of one dynamite crew and be able to keep them on full capacity doing dynamite throughout the year.

Just one further question in that regard--what's the geographical disbursal of that particular operation compared with the rest of your operations? Are you constrained by virtue of the fact that you're only with one crew?

Well, no, we are able to--any of our crews that are set up are able to either go between vibroseis and dynamite. As I mentioned, if we have more than one crew that is basically dedicated to dynamite, we would have to outsource some of the additional drilling to subcontractors. Of course, the thing that kind of dictates whether we do vibroseis or dynamite is the terrain and requirements of the client. Most of our dynamite work is in the Gulf Coast area, of course, Louisiana, Mississippi, Arkansas, those type of areas.

Okay, fine. Thanks.

(OPERATOR INSTRUCTIONS). I'd now like to turn the conference back to management for closing remarks.

I'd like to thank everybody for tuning into the conference call. We're very optimistic about '07. At this time, we will end our conference. Thank you.

Thank you, sir. Ladies and gentlemen, this concludes the TGC Industries fourth-quarter earnings conference. Thank you for your participation. You may now disconnect.