Dawson Geophysical Co (DWSN) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the TGC Industries' first-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 Friday, April 20th, 2007. I would now like to turn the conference over to Jack Lascar, of DRG&E.

Good morning, everyone, and welcome to the TGC Industries' first-quarter 2007 conference call. We appreciate you joining us today. Your host this morning 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.

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 website, at www.TGCseismic.com, or via a recorded instant replay until April 27th. The information was provided in this morning's earnings release.

Information reported on this call speaks only as of today, April 20th, 2007 and therefore you're 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 operation, cash flow, funds from operation, financing plans, gross margin, business strategy, budget, 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 filings with the SEC, including in its annual report on Form 10-KSB for the year ended December 31st, 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 content of our conference call this morning is covered by these statements. I will now turn the call over to Wayne Whitener.

Thank you, Jack. Good morning, everyone. I would like to welcome you to our 2007 first-quarter conference call. As far as the agenda is concerned, I will provide you with highlights of the quarter and Ken Uselton will provide you with financial details. Then I will come back with some final comments.

We had a fairly good start to the year, despite the challenges posted by weather early in the quarter. First quarter revenues rose to $18.6 million, a 26% increase over last year's first quarter. This increase is primarily due to the operation of eight seismic crews this year versus six seismic crews the first quarter of last year. However, as we've mentioned in our fourth-quarter conference call, snow and ice conditions did impact us during January and February in parts of Colorado and Kansas, idling five of our eight crews for an average of 15 days per idle crew in the quarter. Also we acquired approximately $23.6 million in new equipment since March 31st, 2006, and as a result our depreciation and amortization expenses almost doubled in the first quarter.

For the remainder of the year we expect solid demands from our customer base, and therefore add to our crew capacity during the quarter. We purchased six new vibration vehicles, two new shot-hole drilling rigs, and 4,000 additional ARAM ARIES recording equipment, all of which were delivered by the end of the second -- will be delivered by the end of the second quarter. This equipment not only increases our capacity but it also improves the efficiency of our crews.

Last November, we began operating eight crews; except for the idle time in the first quarter we have worked through a considerable amount of backlog. However, our backlog remains healthy at $50 million.

Now I would like to turn the call over to Ken Uselton, our Chief Financial Officer, who will give you the detailed financial review. Then I will return for some final remarks.

Wayne covered the revenues, so I'll move on to discuss the costs. Cost of services in the first quarter of '07 were $10.8 million compared to $7.8 million in the first quarter of last year, a 39.3% increase. Cost of services as a percentage of revenues increased to 58.1% in the '07 first quarter compared to 52.5% a year ago. As a result, the gross margin in the '07 first quarter was 41.9% compared to 47.5% a year ago.

Depreciation and amortization expense was $3.3 million compared to $1.7 million a year ago, a 92% increase due to the addition of new equipment that Wayne mentioned earlier.

First-quarter income from operations was $3.7 million, a 22% decrease from $4.7 million in the first quarter a year ago, principally due to higher costs of services and higher depreciation expense. Income from operations as a percentage of revenues declined to 19.7% of revenues from 31.5% of revenues in the first quarter a year ago. The interest expense in the first quarter was $156,000 compared to $196,000 last year.

Income before income taxes in the first quarter was $3.5 million compared to $4.5 million, down 21.6% from the first quarter a year ago. Income before income taxes as a percentage of revenues was 18.8% compared to 30.2% in the '06 first quarter.

Net income for the first quarter was $2.1 million, or $0.13 per diluted share compared to net income of $2.8 million or $0.17 per diluted share in the first quarter a year ago. First quarter EBITDA rose 9% to $7 million, an EBITDA margin of 37.4%, from $6.4 million, an EBITDA margin of 43.2% a year ago.

The effective tax rate for the first quarter of '07 was 40.7% compared to 38% last year's first quarter.

Now I will turn to the balance sheet. As of March 31st, 2007, long-term debt was approximately $2.3 million; cash and cash equivalents approximately $6.6 million, at a current ratio of 1.1, and working capital of approximately $1.5 million.

With that, I'll turn the call back to Wayne.

Thank you, Ken. As we've stated on previous occasions, the fundamentals behind the U.S. seismic industry remains favorable, and we continue to expect very active land acquisition work for the next several years.

Operationally, we remain very well positioned and we currently have enough visibility for the next six months. With eight seismic acquisition crews operating in the field, we now have 36,000 recording channels available to our clients. Based on our discussions we've had with both current and potential new clients, we remain optimistic about the outlook for '07. This concludes my formal remarks. Now we will take any questions.

(OPERATOR INSTRUCTIONS). Karen Green, Oppenheimer.

Good morning, gentlemen. Wayne, I was wondering if you can just comment a little bit on bidding activity and how that compares versus maybe this time last year, or maybe last quarter. Are there certain areas or certain clients that are more or less active?

We're -- of course last year, 60% of our business was repeat business. We're still seeing that type of level this year as well. Bidding activity seems to be pretty constant. As I mentioned, our backlog is at $50 million. And we're seeing new bids coming our way every day. So things seem to be pretty steady right now.

Are you completely booked through the second quarter?

Yes.

So you're booking work right now into the third and to the fourth quarter of 2007?

Yes.

Thank you.

Bo McKenzie, Pritchard Capital.

Congratulations on the good quarter despite the weather. If you look out into the coming quarters, what's the mix of Vibroseis versus dynamite and the mix of turnkey versus contract look like?

Okay. It looks like we're still pretty much on the same schedule as far as about 25% of our business is going to be dynamite, and about 75% Vibroseis. Also, we're still operating two term crews and six turnkey crews.

Okay. And where are the locations of the crews as we stand right now, and where do you see the incremental opportunities coming from?

Well we're doing -- we've got a couple of crews in Louisiana; we've got crews -- a crew in South Texas. Two crews in the Barnett Shale, and then we've got some crews in Kansas and one in Oklahoma.

Are you guys still over in the Fayetteville anymore?

Yes, we don't have a crew there at the moment, but we're doing prep work over there and a crew will be moving back up there to do some additional work.

All right. I'll turn it back over to the Q&A.

(OPERATOR INSTRUCTIONS). [John Weintraub].

Can you give us just a little color on the pricing environment out there, what you're seeing, and any ability of raising prices in this environment?

Right now, things seem to be pretty steady. We had a small increase starting in the fourth quarter of last year, which basically we started seeing the impact of that in the first quarter of '07. Right now, things look to be just pretty steady as far as pricing goes. We're not seeing any major increases on that, but the pricing that we put into effect in the fourth quarter seems to be holding and things seem to be pretty steady on that portion of our operation.

Great. And then just one follow-up question. Any thoughts about capacity expansion from any of your competitors?

Right now I think that seems to be relatively steady as well. We're not -- I don't think we're seeing anything from any of our competitors as far as any major expansions at this time.

Thanks.

Michael Christodolou, Inwood Capital.

A couple of questions. First on the 25% dynamite, how much of that requirement is going to be fulfilled internally by your Highland's operation?

Pretty much most of that. We've gotten to the position now that our drilling operation is just about going to handle what dynamite work we have. Of course that can change depending on some of the additional work that we get going forward. We may have to use some outside contractors, but the work that we presently have under contract that we're working on can be pretty much handled by our internal drills at this time.

Very good. Then in terms of contract terms, was there anything particular about the contractual reasons that you cited where you weren't able to get covered for the weather delays in Colorado during the winter? And more broadly speaking, do you think the market is going to get tight enough in the future that -- in the future winter engagements for teams deployed in places like Colorado in the middle of winter would have some more favorable cost reimbursement terms to you?

Well we do have -- on the crew that we had, we have weather provisions in there. The weather provisions will not totally cover the cost of the crew's downtime. So we're always working on improving weather conditions in our contracts, but that's kind of been one area, Colorado and the Kansas area have been a little more difficult to get a full support behind the weather in those particular areas. And that's mainly due to pressures of competitors up there and basically how they operate.

But we did have protection on all the crews to a certain extent on some weather. But of course, when a crew is down, the best case is they're going to be able to break even or lose a little bit of money. But they have lost the productivity of being able to operate during that time. If you look at the first quarter, we had 75 days downtime between the five crews that were in Colorado and Kansas, so we had some very significant weather problems in January and February.

Thank you very much, keep up the great work.

[Drillon Pahart], [Roth Point Capital].

Thanks for taking the call. Congrats on a good quarter. My question is on the backlog. Can you comment on the backlog? It appears that this is the second sequential quarter of decreasing backlog. So talk about the factors impacting that backlog.

Okay. Well, as you know, at the end of the year, we had about $60 million in backlog. It started in November of the fourth quarter of last year, we put on our eighth crew. So basically, we had eight crews running continuously the first quarter, except for some of the downtime, as I mentioned, due to weather. So we're going through the backlog a little bit faster with the eight crews versus the six and seven crews we've had in the past.

But the backlog remains pretty well constant at $50 million. So we think that's going to be that way and hopefully increase going forward.

Related to that, I guess, is the bid activity. The bid activity that you talked about a little bit earlier, when should you begin to get some final -- I guess contract wins out of this activity?

We're getting some as we speak. We won a couple of nice contracts yesterday, so that's increasing our backlog as well. As I've mentioned, we are booked through the second quarter and we're booking for the third quarter and fourth quarter right now.

So a lot of clients will not allow you to book out much more than six months. So that's a little bit of limiting factor, but at least at this time we feel like the backlog is very steady and adequate to keep all of our crews in operation.

Thank you very much.

Bob Johnson, [Detroit] Capital.

I wonder if you could just give us any guidance in the line of capital spending for the year, and then a related question on your depreciation. Is that straight line, or can you use any kind of accelerated depreciation?

The depreciation is straight line. Basically our CapEx for the year stands at $10 million, which pretty much covers what we've spent so far here in the first and second -- and going to spend in the second quarter, which was new vibration vehicles, 4000 new channels of ARAM ARIES, and other peripheral equipment. We may go back and revisit our CapEx budget depending on opportunities to the Company.

Fine, thanks.

Bill Ganelin, Cottingham Management.

It was on CapEx, he just covered it. I'm fine.

Bo McKenzie.

Wayne, what does it take for you to decide a roll a ninth and tenth crew out there? Is the market growing enough? Obviously with the most recent purchases you've gotten in the ARAM's equipment, you -- I think theoretically with the [doc] house, you'd have enough stuff to be able [to get a] crew. And secondly, when do you hit the end of the life on the Opseis equipment?

As you mentioned, we've just purchased 4000 additional channels of the ARAM ARIES. Our plan is to take that equipment and spread it out amongst the six ARAM ARIES crews that we presently have to increase the capacity on these crews to have them more productive.

As far as a ninth and tenth crew, we're very conservative. And if you look at how we've operated in the past, we have to have the right opportunity by the right client in order to make those decisions, which means that we need to have six months to a year of work dedicated to a new crew to justify putting that crew out.

As far as the Opseis, we anticipate running both Opseis crews all this year. I think at the end of the year, we're going to evaluate and see if we possibly might convert one Opseis crew to an ARAM and then combine the Opseis equipment. But no decision on that has been made and we hope to do that more towards the end of the year.

And then a follow-up, and totally unrelated question. We've seen a lot of consolidation over the years in the oil patch, and I guess I would say from an outside observer that the U.S. [land] seismic market, you and Dawson have got an awfully big share between the two of you. But there's an awful lot of small guys out there. Why are we not seeing industry-wide more consolidation within the business?

I think on our part, there's not really anybody out there that has equipment that is basically state-of-the-art that is basically compatible with us. So a lot of the smaller companies have the older type of equipment, and wouldn't be compatible with us.

I think as you know, probably, Bo, Geokinetics has been doing a lot of consolidation in the industry there. So, so far, we have left that up to Geokinetics to continue to do consolidation on their part.

Thanks a lot, guys, and looking forward to the next one.

(OPERATOR INSTRUCTIONS). Karen Green.

Wayne, could you give us a little bit more clearer idea of the timing of the deliveries on the incremental fixed trucks, the shot-hole drilling equipment as well as the 4000 channels?

The vibrator units, we've already taken delivery of those units here in the first quarter. We took delivery of the 4000 channels, the ARAM ARIES here on April the 9th. And we're expecting the two shot-hole drilling units to be delivered in the month of May.

So all in combination, that should really translate into higher productivity and possibly higher incremental margins throughout the following quarters, if you have very good weather conditions?

That is our hopes.

Could you also, Ken, give us a number on short-term debt, please?

Let me check. Approximately $4.3 million at the end of March.

Okay, great. And long-term was $2.3 million?

Correct.

Thanks, Ken.

Michael Christodolou.

Wayne, just to follow up on an earlier question about the consolidation. Could you walk us through kind of the pros and cons of buying a new ARAM, which you know you'll get a long-life use of versus buying a mom-and-pop, where I guess in theory -- I don't know if it would come with any backlog or a book of business, but you're probably not buying as quality equipment. Can you walk us through what those trade-offs are in terms of, again, acquiring versus just growing organically like you're doing?

Like I say, as I mentioned, there's a lot of smaller companies out there. Basically they're using equipment that's 94, 95-bit inch type of equipment.

I'm sure as you know about our business, basically we're a computer company that operates a computer that does subsurface mapping. So you can imagine the difference in computers between 1995 and 2007. So a lot of -- there's a lot of state-of-the-art technology difference between the older equipment and the new equipment. You have less -- of course less downtime and less repairs. So, so far it's made more sense for us to grow organically than it has to try and look at other opportunities out there with some of the smaller contractors.

To further clarify though, these mom-and-pops, it's unlikely, right, that they would probably have some exclusivity with a major oil firm that somehow you'd have to buy them to get that relationship, or they probably don't own any of the data either, right? So there's, again, no other reasons why you would want to buy one of these mom-and-pops. Is that --?

That's pretty much correct. Because like I say, most of the E&P companies that we would be definitely interested in is probably going to be using a company that is strong financially and has the newer equipment.

Thanks very much.

At this time, I'm showing no additional questions in the queue. I'd like to turn the call back over to management for any closing remarks they may have.

We'd like to thank you for joining us and look forward to talking to you again on the next quarter. Thank you.

This does conclude the TGC Industries' first-quarter earnings conference call. You may now disconnect. We thank you for using AT&T Teleconferencing.