Dawson Geophysical Co (DWSN) 2008 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 listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, July 28, 2008.

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

Thank you, Brandy, and good morning and welcome to the TGC Industries second-quarter 2008 conference call. We appreciate you joining us today. Your host will be Wayne Whitener, President and Chief Executive Officer, along with Chief Financial Officer Ken Uselton and Jim Brata, Vice President and Chief Financial Officer Designate.

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 DRG&E's 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 website at www.tgcseismic.com, or via a recorded instant replay until August 11. That information was provided in this morning's earnings release.

Information reported on this call speaks only as of today, July 28, 2008, 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 operation, cash flows, funds from operations, financing plan, 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 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 December 31, 2007. 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 will turn the call now over to Wayne Whitener.

Thank you, Jack, and good morning to everyone. I would like to welcome you to our 2008 second-quarter conference call. I would like to also welcome Jim Brata, our new Vice President, who is expected to become our new Chief Financial Officer after Ken Uselton retires at the end of September.

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

First, I would like to discuss a few highlights of the quarter. As I have mentioned during the first-quarter conference call, we have been bidding and winning some larger projects. Two of these larger projects, our clients experienced delays in their permitting process, so we idled two of our crews for most of the second quarter, which reduced our revenues, increased our costs and negatively affected second-quarter earnings. However, these two crews have been back at work since the middle of July.

The good news is that during the last three months, bidding activity has been very strong. We have been very successful and have been awarded several large contracts in the Midcon and Gulf Coast regions and currently have a new record backlog of approximately $78 million. This is up 70% from the backlog of $46 million we had in late April. And with our current backlog, we expect to have all our crews fully utilized for the second half of the year and well into the first quarter of next year.

Driven by continued strong customer demand and our record backlog, we have ordered another 4000 channels in early July that we expect delivery on this week. With the additional 4000 channels, we will have a channel capacity of approximately 47,000 channels. So we are well positioned for the larger projects we're bidding and winning. The additional 4000 channels will increase our crew productivity and better enable us to meet the growing needs of our clients.

As far as our financial highlights, we ended the quarter with a strong balance sheet with cash exceeding long-term debt. We continue to generate cash, and year to date, we've generated cash flow from operations of about $13.2 million.

Now I will turn the call over to Ken Uselton, our Chief Financial Officer, who will give you some details on the financial results. Then I will return with some final remarks.

Thank you, Wayne. Revenues for the 2008 second quarter decreased 14% to $18.6 million from $21.7 million in the second quarter a year ago. As Wayne said, two crews were idled for most of the second quarter, which negatively impacted revenues.

Cost of services in the second quarter were $12.6 million compared to $14.8 million in the second quarter a year ago, a decrease of 15%. Cost of services as a percentage of revenue was 67% in the '08 second quarter versus 68% in the '07 second quarter.

Our gross margins for the second quarter of '08 were 33% compared to 32% a year ago. SG&A expenses were $986,000 in the '08 second quarter compared to $927,000 a year ago and were 5% of revenues in this year's second quarter compared to 4% of revenues in last year's second quarter.

Depreciation expense was $3.4 million compared to $3.5 million in the same period a year ago. Second-quarter '08 income from operations was $1.7 million compared to $2.5 million in the second quarter a year ago. Income from operations as a percentage of revenues was 9% compared to 11% in the same quarter a year ago. Interest expense in the second quarter was $209,000 versus $191,000 a year ago.

Our income before income taxes in the second quarter was $1.5 million compared to $2.3 million in the second quarter a year ago. As a percentage of revenues, income before income taxes was 8% in the '08 second quarter compared to 10% a year ago. The effective tax rate was approximately 41% in the second quarter of '08 and the second quarter of '07. Our net income for the second quarter was $868,000 or $0.05 per diluted share compared to net income of $1.3 million or $0.08 per diluted share in the second quarter a year ago.

Per-share amounts in all periods have been adjusted to reflect the 5% stock dividend declared on March 20, 2008, to shareholders of record as of April 14, 2008, and paid April 28, 2008.

EBITDA for the '08 second quarter was $5.1 million compared to $6 million in the '07 second quarter and EBITDA margin of 27% in both periods.

Now for a brief review of our six-month results, revenues for the first half of '08 were $41.1 million compared to $40.3 million in the same period last year. Cost of services for the six months this year were $27.4 million compared to $25.6 million for the same period last year.

As a percent of revenues, our cost of services were 67% compared to 64% in the same period a year ago. As a result, gross margins for the first six months of '08 were 33% compared to 36% a year ago. Our net income for the first six months was $2.9 million or $0.16 per diluted share compared to $3.4 million or $0.20 per diluted share for the six months a year ago.

EBITDA for the first half of this year was $11.7 million and EBITDA margin of 29% compared to $12.9 million and EBITDA margin of 32% for the comparable period last year.

Now turning to the balance sheet, at the end of the second quarter we had long-term debt of approximately $7 million, cash and cash equivalents of approximately $12.2 million, a current ratio of 2.1 and working capital of approximately $12.2 million.

Now I will turn the call back over to Wayne.

Thank you, Ken. Before we move to some questions, I would like to make a few additional comments. We continue to see strong domestic capital expenditures from the oil and gas industry. E&P expenditures in 2008 are projected to rise 15% in the United States to $98 billion. This is much higher than previously anticipated. Clearly, the budget's additions are being driven by higher commodity price expectations.

Growth in the E&P expenditures is anticipated to continue into 2009, with gains of at least 10% expected by the majority of companies surveyed. This is a major reason we remain bullish about the strength of the land seismic data acquisition business.

Operationally, we are very well positioned. We currently have $78 million in backlog. Our order book is very strong. And we expect our eight crews to be fully utilized for the remainder of 2008 and well into the first quarter of 2009.

Furthermore, the increased seismic activity we have experienced since the middle of April remains unabated as we continue to see numerous opportunities for additional contracts, including many large contracts indicating our improved competitive position within the industry.

As a result, we will continue to assess our equipment needs on an ongoing basis to ensure that our customers' needs are being met. Based on what we are hearing and seeing from our customers, we remain optimistic about the remainder of 2008 and full year 2009.

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

(Operator Instructions). Karen David-Green, Oppenheimer.

(technical difficulty) with regard -- you certainly had a very large build in backlog, very impressive. In terms of looking at the pricing dynamics and the contract terms of the contracts that you just signed, can you kind of compare and contrast that to maybe where it was a year ago?

I will say that the newer contracts that we are signing and are successful on are much larger than what we've seen in the past. Of course, that makes better margins for us, since we have less windshield time and less moving around once we're able to move onto these jobs. On the negative side, it takes longer to get these larger jobs prepared. But we feel like, going forward, that we should see some definite margin improvement with the larger jobs that we're successful in getting onto.

Great. And then in terms of, given the outlook that you have for the remainder of the year and into '09, at what point do you reevaluate and reassess your crew count and maybe consider adding an additional crew?

Well, the way we pretty much review that, of course, is we make sure that our existing crews are fully booked and that the work in front of them is at a level that they are prepared, that they are able to work at full capacity, if possible, with the eight crews.

Beyond that point, we continue to look for other opportunities from possibly some of our very good clients. Also, we look at some new areas that possibly we were looking at moving into. So if our eight crews are fully booked and the work is prepared in front of them, we definitely look at opportunities to add additional crews, possibly in new areas, for some of our very good existing clients.

Great. And Wayne, what are the delivery times right now on the ARAM equipment?

Approximately three months.

Terese Fabian, Sidoti.

I have a question on the composition of your backlog. Is it still basically turnkey, and if so, do you have some better weather provisions in there?

Basically, the majority of our backlog at this time is turnkey. And we have been able to improve on some of our weather protection on these contracts.

I know you said that you're going to be evaluating your equipment needs as you go along. But in the work that you are doing, is it basically all 3D, and is any of it coming from the new shale plays that we're hearing talk about?

All the work at present, 90% of the work that we're doing right now is all 3D. We are working in some shale areas, the Fayetteville shale and some of the shale plays in Louisiana. We do anticipate possibly working in the Appalachian regions and some other regions in the Rocky Mountains. But at present, the bulk of our work is pretty much Midcontinent/Gulf Coast right at this time.

And just to follow up on that, equipment needs, do you expect you're going to be leasing equipment as you go along, or do you have enough now to cover the crew needs as you see it?

I would say that this year, we have purchased over 7000 additional channels. We have purchased eight new vibrator units. And we anticipate that to be significant for our present crews that we have operating. If we anticipate putting out another crew, it will require of course additional equipment.

Neal Dingmann, Dahlman Rose.

Wayne, two questions here real as far as, on your orders, obviously it looks like, as Karen mentioned, the backlog and your orders are running up quite nicely. What sort of the makeup as far as the type of customers are you seeing? Is it your typical customers? For you, I think it's generally been a bit smaller customers. Or are you seeing a new or larger customer come in?

And then I'm wondering, sort of to go along with that, color as far as the regional makeup -- are you still -- it looks like these days in the last quarter or so, you had less activity in Kansas and you moved more back to the Texas market. Could you give us color both on sort of customer makeup and regional makeup?

Sure, Neal. The customer makeup is roughly -- last year, 45% of our business was repeat business. We are probably seeing that same percentage here going into '08. We are seeing some strengthening in some of the spec companies utilizing us for some of their larger spec jobs. So that is somewhat new for us as far as being successful in working for some of the spec companies on some of their very large jobs.

We are also seeing some additional opportunities in the Rocky Mountain areas. And right now, as far as where our crews are working, we are still very active in Kansas and we are operating four to five crews in Texas at any given time, and also Louisiana and Mississippi. So we are pretty well diverse at this time, and we expect to be possibly active in some new areas going forward.

Does that include, Wayne, when you talk about the new areas, some of the new shale plays? Are you seeing incremental interest there? Are you talking to a lot of those folks in the Haynesville, Marcellus, Mancos, all those areas?

We are definitely looking at those areas, and we definitely have some clients that are interested in those areas. And we are in the mix as far as presenting proposals to those clients in those areas.

Then the last question, Wayne -- you mentioned the eight Vibroseis units. As far as your crews now, is everybody on Vibroseis or do you still have one or two doing some dynamite work?

Well, we are still doing some dynamite work. As you know, we own our own shot-hole drilling operation. That operation has been going very well for us. We expect probably between now and the end of the year that the shot-hole drilling will not be a very significant number for us between now and the end of this year.

Okay, thanks, and I look forward to all the activity.

Veny Aleksandrov, Pritchard Capital Partners.

I have a question about the wells permitting process. Does it take longer now to get the well permit, and do you see this around the country, or the well permitting delay that you saw was specific to these two jobs?

I think that the permitting process is, of course, taking longer. A lot of that is, of course, out of our control. That is being done by our clients. We come in on a lot of jobs after the permit phase and the phases involving the land. And then we come in at that point and then take over the operation. With the larger jobs that we are seeing, it is taking our clients longer to get their land position in place in order for us to get to the position that we're able to take over the job and acquire the 3D seismic.

So, to answer your question, due to the, A., size of the jobs, and B., also we're seeing some type of pushback on landowners because of the value of the crops, when you're talking about value of corn or wheat or any of the crops that are out there, it is taking somewhat longer to acquire the land position in order for us to start our 3D acquisitions.

[Dan McCollum], River Capital.

A question about your recent growth in backlog. Would you say that you're taking market share or you're growing with the market?

I would say that would be both. We are seeing some new clients, as I mentioned, some of the seismic spec companies. We are seeing some increase in backlog along those lines, as well as we're seeing increased activity within the space itself.

Terese Fabian, Sidoti.

I have a follow-up on the tax rate. Do you have a view on what the tax rate will be for the year and for the next quarter?

Ken, you may want to address that.

Probably not at this point in time. I would say if anything, it may be a little higher than it currently is. But we haven't gotten that far.

Okay. But it won't probably be lower?

No, ma'am.

Okay. And then on the depreciation number, do you think it is going to stay sort of level?

It should stay fairly level. We will have some equipment dropping off that becomes fully depreciated in addition to what we have added here recently. I would say you may see a little spike in the third quarter for what we just recently added.

Right, okay. And then just one last question on -- we're entering the active hurricane season, I think about mid-August. And nobody knows what is going to happen. But how will it affect your work if in fact there is a more active landfall of hurricanes?

Well, of course, we have no equipment on the open water, so no, really, exposure on that end. We do have two crews working in the South Texas area. Those crews were slightly affected by the Hurricane Dolly this past week. Basically, there was four days affected on one crew and three days affected on another crew. But both of those crews had weather protection, so it was not very significant.

(Operator Instructions). Karen David-Green, Oppenheimer.

Wayne, could you just walk us through the cost to add another crew? I know you have added a lot of channels. You have added additional trucks. My understanding is you have around 12 shot-hole drilling units. But if you were to add an incremental ARAM system, what would that cost you?

Well, that would pretty much, of course, depend on how we rigged that crew out. I believe if we rigged out a new crew, it would probably be around a 6000-channel crew. So we would probably be looking at an investment of roughly around $8 million to $8.5 million, somewhere in that range.

Okay, great. And then I know that ARAM was recently -- it's been announced that they're going to be acquired by Input/Output. How does that impact you in terms of your relationship with them and your availability to order equipment?

Right now, availability is very good. They are continuing on with their program on building their new equipment, their new ARAM ARIES system as well as their ARAM 3C system. We expect that the ION purchase would probably have a very positive outlook with ARAM as they will be able to take some of their technology and put with some of the ARAM technology to fast-track some of the newer technology that ARAM has been looking at.

So we are kind of excited about the ION purchase. As you know, the deal has not been consummated yet. So we will have to see how that plays out. I think they are anticipating having that consummated by roughly September 1.

Great. And then Ken, could you give us the short-term debt number at the end of this --

It is approximately $4.8 million, Karen.

(Operator Instructions). Sherwin Prior, NorthPointe.

I actually have two short questions. First, you talked about how [year in], the shot-hole will not be significant. But talk about the impact on the cost of those folks that you acquire with that business. And secondly, can you comment on what percentage of the current backlog you think turns into revenue in 2008? Thank you.

To discuss the shot-hole, with this last quarter, the percentage of shot-hole was 26% of revenue. We are operating 12 shot-hole drilling rigs, and we do have one large shot-hole drilling job coming up within the second half of the year, which will pretty much keep all of our drilling rigs on one job for the remainder of the year. But the majority of the eight crews will be doing Vibroseis operations. So we expect the dynamite work going forward to be probably somewhat less than, say, the 29% that we have experienced.

And with respect to the backlog, can you discuss that?

I'm going to say probably just -- this is just a guess on my part -- I'm going to say probably 18% to 20%, possibly.

There are no further questions at this time. I would like to turn it over to management with any closing remarks you may have.

I have no closing remarks. I appreciate everybody's time, and we look forward to the next-quarter conference. Thank you.

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