Dawson Geophysical Co (DWSN) 2007 Q2 法說會逐字稿

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

During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (OPERATOR INSTRUCTIONS). This conference is being recorded Monday, July 23, 2007.

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

Thank you, Eric. Good morning, everyone, and welcome to the TGC Industries second-quarter 2007 conference call. We appreciate you 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. You can find my e-mail address on all TGC press releases.

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 July 30. The information was provided in this morning's earnings release.

Information reported on this call speaks only as of today, July 23, 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, result of operations, cash flow, funds from operations, financing plans, gross margins, 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 of 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 SB for the year ended December 31, 2006.

Furthermore, as we start this call, please also refer to statements regarding forward-looking statements incorporated in our press release issued this morning. 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, and good morning to everyone. I'd like to welcome you to our 2007 second-quarter conference call.

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

Our second-quarter results were adversely affected by severe flooding conditions in the Mid-Continent and Southwest areas of the United States. Although our revenues increased substantially to 46% from the second quarter of 2006, our business mix was more heavily weighted towards lower-margin shot-hole contracts. In addition, our 8 seismic crews were idled for an average of 11 days each during the quarter with significantly lowered operating income.

We had an unusually large amount of lower-margin shot-hole contract work in the quarter, which added to the revenue growth. Over 40% of the second-quarter revenues were derived from shot-hole contracts, compared to 20% in the second quarter of last year. Revenues on shot-hole contracts are typically higher than on vibroseis contracts, but costs are higher due to third-party costs associated with the shot-hole contract work as a percentage of revenue.

Despite the weather impact, second-quarter EBITDA rose 3% to $6 million, 27.6% of revenues from $5.8 million, 39% of revenues a year ago.

As far as costs are concerned, the weather significantly increased our cost of services, and thus negatively impacted our gross margins. Among the 8 crews, a total of 88 days were lost due to weather in the quarter. While we do have some weather provisions in our contracts, these do not totally cover the cost of the crews' downtime.

We ended the quarter with a backlog of approximately $60 million, which gives us excellent visibility into 2008.

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

Thank you, Wayne. Wayne covered the revenue, so I will move on to discuss the cost.

Costs of services in the second quarter was $14.8 million compared to 8.4 million in the second quarter of last year, a 76.9% increase. Cost of services as a percentage of revenue increased to 68.3% in the second quarter of '07, compared to 56.3% a year ago. This increase was primarily due to the ongoing cost to support the eight partially idled seismic crews and the higher third-party costs associated with the additional shot-hole contracts. As a result, gross margins were 31.7% compared to 43.7% a year ago.

Depreciation and amortization expense was $3.5 million compared to $2.2 million a year ago, a 60.8% increase, due primarily to the addition of approximately $22.5 million in new equipment purchases since June 30, 2006.

Second-quarter income from operations was $2.5 million, of 32.2% decrease from $3.6 million in the second quarter a year ago, principally due to higher cost of services and higher depreciation expense. Income from operations as a percent of revenue declined to 11.3% of revenues from 24.3% of revenues in the second quarter a year ago.

Interest expense in the second quarter was $191,000 compared to $213,000 a year ago. Income before income taxes in the second quarter was $2.3 million compared to $3.4 million, down 33.6% from the second quarter a year ago. Income before income taxes as a percent of revenues was 10.4% compared to 22.9% in the '06 second quarter.

Net income from the second quarter was $1.3 million or $0.08 per diluted share, compared to net income of $2.1 million or $0.12 per diluted share in the second quarter a year ago. The effective tax rate for the second quarter was 41% compared to 39.7% a year ago.

Now, for a brief review of the first six months, revenues for the first six months of '07 were $40.3 million compared to $29.7 million in the first half of '06, a 35.8% increase. Cost of services for the first half this year was $25.6 million compared to $16.1 million for the same period last year, a 58.8% increase. Cost of services as a percentage of revenues increased to 63.6% in the first half of '07 compared with 54.4% a year ago. As a result, gross margin for the first six months was 36.4% compared to 45.6% a year ago.

Net income for the first six months was $3.4 million or $0.21 per diluted share, compared with $4.8 million or $0.29 per diluted share for the first six months last year.

EBITDA for the first half of this year was $12.9 million, or 32.1% of revenues, and $12.2 million or 41.1% of revenues for the same period a year ago.

Now, turning to the balance sheet, as of June 30, 2007, we had long-term debt of approximately $2.7 million, cash and cash equivalents of approximately $5.6 million, a current ratio of approximately 1.0, and working capital was approximately 500,000.

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

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

Operationally, we are very well positioned with over 36,000 channels available to our clients. With a current backlog of approximately $60 million, we have great visibility into early 2008. We continue to be optimistic about the outlook for the remainder of '07 and into '08.

This concludes my formal remarks. We will now take any questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS). Neal Dingmann, Dahlman Rose.

Good morning, Wayne. Say, a question on the backlog that you mentioned. Obviously that looks to be at great level. Can you give any color as far as sort of location and the type of work on that backlog? I mean, is it going to be somewhat similar locations to where you are now and the 40% shot-hole will -- is there any way to determine sort of that backlog? Is that sort of the clients' call going forward or maybe just some color around that backlog, if you could?

Sure. Like I said, we have approximately $60 million in backlog. The work is pretty much where we have been working, no really new areas, all the way through the Mid-Continent of the U.S. and then into the Gulf Coast. Looking forward on this, we're looking at about 20% of that to 25% of that work being dynamite work at this time.

Okay. Then just to follow-up on -- it looks like, now that you have the crews, DD&A is running a little bit higher. Would you say, going forward, the last quarter or two, that's been a pretty good when rate on the DD&A?

That's of course our expectations. Of course, we are, as you can see from the first half of the year here, we are at the mercy of the weather, so --.

Absolutely.

We've had some continued weather. Of course as you know, in South Texas, there's been flooding and we have a couple of crews working down there at this time. So we are still having some additional weather impact at this time.

Okay, if I could just ask one last follow-up on -- it looks like, to me, your cash flow, discretionary cash flow still looks quite strong. I know it looked -- I think on the last call, you mentioned that most of your CapEx had been spent. At a certain point, you'll determine sort for the remainder of the year if you want to add some more channels, or do you have enough I guess optimism maybe is the word for the remainder of year to decide what you want to do or how do you want to redeploy some of this cash going forward?

Right now, we anticipate spending $10 million in CapEx for the year. Most of that $10 million has already been spent. It is possible that we will review the capital expenditures later on in the year but at this time, we anticipate holding our capital expenditures at the $10 million run-rate.

Karen Green, Oppenheimer.

Thanks. Good morning, gentlemen. I just wanted to get an idea, on average, Wayne. How many crews did you have working on dynamite during the second quarter?

We had two to three. We had two all quarter and then a third one partial of the quarter.

Okay. You are still operating nine shot-hole drilling units. That should really equate to you being able to do how much of the dynamite work in-house?

With the drills we presently have, that will keep one crew completely busy with dynamite work.

Okay. Then looking at the revenue numbers, I mean they were really very close to what we had in the forecast; it was just the operating cost I guess due to weather. Is there any way I guess that, going forward, maybe negotiating with your clients, you could try to get more weather? Is that something you guys are working towards or is it more the industry norm and that is they that you think it will remain? It's just that this was an area, a quarter, rather, that just was so plagued with rain it was very unusual?

Well, of course, I think, if you look at so far in '07, we've seen some very unusual weather for the Mid-Continent part of the U.S. as well as the Gulf Coast. We always try and negotiate the best weather protection that we can get. Of course, we are at the mercy of what the market will bear, whether it's us or one of our competitors.

Of course, the clients, since the first of this year, have beared a lot of weather and of course we're getting push-back from them, trying to get some relief on the weather coming back from our clients. So that's always an ongoing negotiation on our contracts and we try and get the best we can but there's just no way that we're going to get enough weather protection in order to cover all expenses associated with weather. But I think, if you go back and you looked -- we've lost over 88 days of weather here in the second quarter and we were still able to do $0.08. I guess it's not as bad as it could have been.

Right. Just looking at your backlog, certainly Neal touched upon it -- very, very strong $60 million. That visibility -- when does that take you through, in terms of bookings? You mentioned early '08 but when are you just completely booked out, you know, every crew? Is that October/November time frame?

Yes. You know, we have some crews that's booked out of course through the year, and then we've got some crews that are booked into October, first part of November time frame.

Okay. Just once again touching upon the redeployment of cash, I mean, do you think that you would be more likely to redeploy your free cash flow into an incremental new crew or are you more likely to maybe get rid of one of the older, like the Opseis, and just go forward with another ARAM and just kind of keep eight crews? What are your thoughts on that?

Well, right now, we still feel like we're having good results with the Opseis, and we are able to keep it in operating condition, so we feel like, as long as the crew is performing up to what we hope it will do, that we plan on keeping it active. So, I think, if we were to do anything in the future, it would probably be add additional crew at some point.

Great, that's all I have. Thanks, gentlemen.

Bo Mckenzie, Pritchard Capital Partners.

I was talking to some people over at [CGG] the other day who said they've actually managed to negotiate out pretty much all of the weather risk, given the fact that they see really tight market conditions internationally. My guess is that, if you look at your backlog, you look at the backlog that Dawson has got, that Geokinetics has got, there's a very tight market out there in the U.S. I know you're getting push-back from customers, but are there moves underway to try to minimize further exposure to weather-related stuff? What are the most recent terms? Are you still on ten weather days a month or what?

Sure. As I mentioned, we are always trying to negotiate the best possible weather that we can. Basically, we're seeing variances, depending on the area that we're working, as far as what weather conditions we can negotiate. We have different weather contracts in the Kansas area than what we do in the South Texas area, so that's a constant variance there.

I think, if you go back and -- you're talking about CGG. Probably internationally, they may have possibly some more push-back on that because a lot of that stuff is on term contracts. Our best weather protection is our term contracts, but like I say, we are keeping one to two crews on contracts, the rest are on turnkey, so that's a constant negotiation on the weather.

I think, if you look at -- I believe Geokinetics announced that their second quarter was negatively impacted by weather as well, so I think you're going to see most of our competitors that are in our part of the world, that they are going to have some negative impact from the weather. So, I don't think there's any way to negotiate weather out completely with our clients.

All right. Well, thanks a lot.

(OPERATOR INSTRUCTIONS). [Charles Hosa], Lazard.

My question is, in this quarter, it looks like, in your press release, you say 40% of revenues derived from lower-margin shot-hole contract business. Can you explain to me what drives that kind of increase in that area of that business, and what would change that going forward?

Well, you know, the terrain in the contracts that we are working in dictates what type of energy source that we're going to be using, so it just kind of depends on the contracts that we have. I think, if you look at last year, 20% of our business was shot-hole contracts.

Also, you need to look at -- a lot of the weather was on our vibroseis crews, which means that we had low revenue from the vibroseis crews, which in turn upped the percentage of revenue on the dynamite work. So we kind of got hit from two directions there. So, we feel like, going forward, that probably, as I mentioned earlier, that the dynamite work we presently have in the backlog is somewhere around probably 20%, 25% of the business going forward.

Okay, so just one follow-up so I'm clear -- when you look at your backlog, can you kind of forecast what percent of revs are going to be the shot-hole versus the other, going forward?

Well, we can kind of -- yes, we can kind of forecast that. I'm saying probably 25, roughly 25%, going forward, would be shot-hole.

Of course, if we have weather that impacts the vibroseis operation, that could increase to 30% to 35% of revenue, if the vibroseis revenue is impacted by weather.

Bo Mckenzie.

Wayne, I live down here in Texas, too, and I know it has been raining like mad so far through July. Any kind of read on what the excess idle days were so far this month from the crews out there because of weather?

No. You know, like I mentioned, we do have two crews that are working in South Texas that have been negatively impacted by the weather. We have other crews of course working in the Barnett Shale and in Kansas that have been less affected in the month of July. But as far as the number of days, we're really not giving that information out at this time.

All right, thanks.

Neal Dingmann.

I just wanted to ask you if you can just touch upon this quick. As far as the turnkey or the type of contracts, do you see any -- I guess going forward will those continue to be the same as far as the total of eight crews, which will be turnkey, etc.?

Well, right now, we've got one crew that we feel like will be term for the rest of this year and possibly going into '08. We've got another crew right now that's on term. That crew has gone from turnkey to term and back and forth. It will be on term probably for the next couple of months and then probably go back on turnkey. So the second term crew will be on and off between term and turnkey between now and the end of the year.

I'm not I guess digging too much on now what would historically have you seen as far as margin difference between the two? Has it been substantial, or not really?

Yes, you know, the term of course is dayrates, so there's less of an upside on the term versus a turnkey. Of course, when you have as much weather as we've had this year, you know it's really a little bit more of an upside on the term work. So, it's good to have a combination of both. Of course, we continually look at opportunities to look at the work on a term or a turnkey basis.

I see. So is it fair to say that let's say the weather at least is -- if you classify something as normal through the remainder of the year, that you would probably see higher margins on the six turnkey crews?

That's correct.

Okay, thanks, Wayne.

[Bob Johnson], [Situet] Capital.

Good morning. I wonder if you could just walk through an example of the extra costs involved in a dynamite hole, so we could get some sense of the margins between the two, as compared with one another, that you might anticipate.

Then as a corollary of that, is it such that you might decide not to do some dynamite work, given that you've got a backlog that extends out and there's a lot of business around? Let someone else do it and have better margins on the rest of the business, or is that impractical?

That's impractical because we have to service our clients and of course dynamite work is kind of a big part of our area in the Gulf Coast. Most of the Gulf Coast work is going to be dynamite.

To kind of give you some type of an idea on basically same parameters versus a vibroseis versus a dynamite job, a vibroseis job would be getting 30,000 per square mile, as an example. On a dynamite job, using basically the same parameters except the dynamite energy source, we would be getting 42,000 per square mile for the dynamite work. 12,000 of the 42,000 would be third-party charges, which would be explosives, drilling, and additional survey involved with the shot-hole work. So basically we're still getting 30,000 for the dynamite crew as well as the vibroseis crew. It's just that you have additional cost, which shows up as revenue in the dynamite work.

(OPERATOR INSTRUCTIONS). At this time, I am showing no additional questions in the queue. I would like to turn the call back over to management for their concluding remarks.

Okay, thank you. We appreciate you being on our quarterly conference call, second quarter of 2007. We look forward to talking to you again.

Ladies and gentlemen, this does conclude the TGC Industries second-quarter earnings conference call. You may now disconnect and we thank you for using AT&T Teleconferencing.