Dawson Geophysical Co (DWSN) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the TGC Industries' third-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, October 20 of 2008.

At this time, I would like to turn the conference over to Karen Roan, with DRG&E. Please go ahead.

Thank you, Vance. Good morning and welcome to the TGC Industries' third-quarter 2008 conference call. We appreciate your joining us today.

Your host will be Wayne Whitener, President and Chief Executive Officer, along with Chief Financial Officer Jim Brata.

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 an e-mail to me with that information at kcroan@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.TGC seismic.com, or via a recorded instant replay until November 3. Information on how to access the replay was provided in this morning's earnings release.

Information reported on this call speaks only as of today, October 20, 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 performance 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-K for the year ended December 31, 2007.

Furthermore, as we start this call, please 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 now turn the call over to Wayne Whitener.

Thank you, Karen, and good morning to everyone. I would like to welcome you to our third-quarter 2008 conference call. Jim Brata will provide you with the financial details. As many of you know, our former CFO, Ken Uselton, recently retired and Jim joined us in June of this year to fill that position. We are very pleased to have Jim on board. He will begin with the financial highlights, and then I will come back with some comments.

Good morning. Revenues for the 2008 third quarter declined 11.0% to $21.6 million compared to $24.2 million in the third quarter of 2007. The revenue decline was primarily due to the following reasons.

We had an unusually low amount of shot hole work in the quarter, and shot hole contracts typically generate revenues and lower margins because they contain higher third-party costs. Also, the two crews idled in the second quarter did not get back into the field until the second half of July. And the two hurricanes that hit the Gulf Coast in August and September impacted some of the crews in the field.

Cost of services in the third quarter declined 21.2% to $13.4 million from $17.0 million in the third quarter a year ago, primarily as a result of the unusually low amount of shot hole work in the quarter that I mentioned previously.

Cost of services as a percentage of revenue was 62.0% in the '08 third quarter versus 70.1% a year ago. As a result, our gross profit margin improved substantially to 38.0% from 29.9% in the third quarter of last year. Gross profit was $8.2 million compared to $7.2 million a year ago, a 13.0% increase.

SG&A expenses were $1.1 million in the '08 third quarter, relatively the same as the '07 third quarter. As a percentage of revenues, SG&A expenses remained low at 5.2% in the '08 third quarter compared to 4.4% a year ago.

Depreciation and amortization expense increased 18.8% to $3.5 million from $2.9 million in the third quarter a year ago, as we continue to invest in new equipment for our crews.

Third-quarter 08 income from operations increased 10.3% to $3.6 million compared to $3.3 million in the third quarter a year ago. Income from operations as a percentage of revenues increased to 16.7% compared to 13.5% in the third quarter a year ago.

Interest expense in the third quarter was approximately $245,000 versus $146,000 a year ago, as we continue to purchase and finance new seismic equipment.

Income before income taxes in the third quarter increased 7.6% to $3.4 million compared to $3.1 million in the third quarter a year ago. As a percentage of revenues, income before income taxes was 15.6% in the '08 third quarter compared to 12.9% a year ago.

The effective tax rate for the third quarter was 44.5% compared to 41.5% in the third quarter of '07.

Net income for the third quarter was $1.9 million, compared to $1.8 million in the third quarter a year ago. As a percentage of revenues, our net income was 8.6% for this year's third quarter compared to 7.5% in last year's third quarter.

Fully diluted earnings per share were $0.11 versus $0.10 in the third quarter of '07. All per-share amounts in all periods have been adjusted to reflect the 5% stock dividend declared March 20, 2008, to shareholders of record as of April 14, 2008, and paid April 28, 2008.

Third-quarter '08 EBITDA increased 14.3% to $7.1 million, an EBITDA margin of 32.7%, from $6.2 million, an EBITDA margin of 25.5% in the third quarter of 2007.

Now for a brief review of our nine months' results. Revenues for the first nine months of 2008 were $62.6 million compared to $64.5 million in the same period of 2007, a 2.9% decline year-to-year. Cost of services for the nine months were $40.8 million versus $42.6 million a year ago, a 4.2% decline. As a percentage of revenues, cost of services for the first nine months of 2008 was 65.1% compared to 66.0% in the same period last year. As a result, the gross margin for the first nine months was 34.9% compared to 34.0% a year ago.

Net income year-to-date was $4.7 million or $0.27 per diluted share versus $5.2 million or $0.30 per diluted share in the same period a year ago.

EBITDA for the first nine months of 2008 was $18.8 million. That is an EBITDA margin of 30.0%, compared to $19.1 million, an EBITDA margin of 29.6% a year ago.

Now, turning to the balance sheet, our balance sheet is strong and we continue to generate cash. At the end of the third quarter, we had long-term debt of approximately $11.8 million; cash and cash equivalents of approximately $17.2 million; current ratio of 1.7; and working capital of approximately $14.2 million.

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

Thank you, Jim. Before we move to your questions, I would like to make a few comments.

As you know, there is a worldwide financial crisis. This crisis could affect some of our clients' credit facilities. We have also seen downturn pressure on commodity prices. These two factors could cause contract cancellations and a slowdown in geophysical activity.

In talking with our clients, they are cautious, but optimistic. To date, the current uncertainties in the financial markets have not had an impact on our business. We believe the fundamentals for domestic oil and gas exploration will remain at substantial levels.

Two weeks ago, we announced the purchase of a new ARAM ARIES recording system, along with the expected deployment of our ninth crew. The decision to deploy this crew was made several months ago in different financial times. This equipment is compatible with our other ARAM systems and will enhance the Company's capabilities. At this time, we are still reviewing the merits of deploying an additional crew.

The Company has a strong balance sheet; and at this time our cash exceeds total debt. We feel with the new equipment, our cash position, our credit facility, and backlog makes us ready to weather any storm that might come our way. We feel it is extremely important to remain very transparent to all of our investors in these unsettling times.

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

(Operator Instructions) Neal Dingmann with Dahlman Rose.

Morning, Wayne, good quarter. Say, I was going to ask you, Wayne, given your comment about clients being somewhat cautious, I guess, which is natural in this market, as you sit today do you have plans -- or what's your plans as far as adding more channels, more equipment in this market, I guess, as you sit today?

Well, as I've mentioned, we have already purchased the equipment for the ninth crew, which gives us additional capabilities even if we don't put out our ninth crew.

I think of course like anybody right now, I think we are going to be very cautious on CapEx spending. We will continue to review the market conditions out there.

Okay. Then -- go ahead, Wayne, I'm sorry.

That is all.

Okay. I was going to ask you on -- so what are you seeing these days as far as bidding activity sort of regionally speaking? Are there areas like Kansas, like the Texas or Arkoma area? What are you seeing in different regions as far as bidding activity? Has that slowed down as well? Or what kind of a -- if you could give us some color on that.

We really haven't seen a slowdown on bidding activity at this time. Of course, most of our business at present is Midcontinent, a little in the Rockies and the Gulf Coast areas.

Of course, a lot of the bids that we are working on now are bids that we received two weeks ago. So as far as bid activity, it remains at strong levels. We are also adding to the backlog with the contracts.

So right now, we are not seeing really any impact. Not to say that -- that can change due to the conditions of the last two weeks.

Okay, thanks.

Karen David-Green with Oppenheimer.

Thanks. Good morning, Wayne, and welcome, Jim.

Thank you.

I had a question. Can you, Wayne, just give us a little bit more color as to what the deployment of the ninth crew is contingent upon, and also when you take delivery, exactly, of that equipment?

We have already taken delivery of the equipment, and we are prepared to put that crew out sometime between November, first week of November, to mid-November.

Of course, that is contingent upon our record backlog at this time, which is roughly $82 million. We are monitoring our clients to make sure that we are not going to see any cancellation on contracts or any pullbacks for '09, and we are still monitoring that to decide whether we are going to put this crew into service or not.

As it stands today, we have substantial work for that crew in the fourth quarter and first quarter. But we still want to continue to monitor that over the next few weeks here to make a firm decision.

Now are you going to be replacing this crew with the Opseis? Or is this truly going to be an incremental crew?

This will be an incremental crew if we put it out as such. Of course as mentioned, we can take this equipment and spread it amongst the seven ARAM crews that we presently have to expand their capability and to improve productivity by those crews as well. So we can go either way with this equipment that we have purchased.

Okay. Then one last question. On the contract cancellations, can you walk us through the general provisions in your contract and how much visibility you have, in terms of if anyone had to give you if they were going to walk away from something?

Yes, I would say a lot of -- each contract of course is unique to itself. We have what we call our contract, which has provisions in there for 30 days written notice of cancellation. Not all clients sign our contracts. A lot of the clients we have to sign their general agreements. So there is a different agreements depending on the contract itself.

I will say that we have not had in the past normally any contracts that have been canceled, except possibly due to some failing land positions, which is very rare. So. But I think these are extreme times and that we have to stay in very close contact with our clients, very close contact with our investors, to make sure that we don't have any surprises and hope to keep our backlog fully intact.

Great. Thanks, gentlemen, I will reach you for more questions later.

(Operator Instructions) Terese Fabian, Sidoti.

Yes, thank you. I have a question on the balance sheet and payment terms for your clients. The accounts receivable account is up in the third quarter from the second. It is up a little bit from end-year. Is that due to payment terms, or is that a timing issue?

You can go ahead on that, Jim.

That is pretty much a timing issue. Our receivables are very good. We have had no bad debts.

Payment on your contract work, is it upfront or one-third down, one-third mid? How does that work?

It is progressive payments, and that varies from contract to contract as well. But normally we will have a third, a third, and a third on the contracts.

Okay. Then a question on your current liabilities account, which is also up. Can you break out the short-term debt number on that? Is the rise of that due to anything in particular? Or is that also timing?

Go ahead, Jim.

The current portion of long-term debt is $5.5 million. As we talked about earlier, we have bought new equipment which is causing that number to go up.

On payment for the new equipment, what is your plan? And what is your expectation on interest expense for the next couple of quarters? Will that be going up, down, staying?

Well, we got very favorable terms on the equipment. We finance that equipment with GE Capital for 48 months on a simple interest loan at 6%. So we feel like that was very favorable terms.

Interest expense will be going up -- what -- the next two quarters.

Yes.

Thank you, I will reach you also. Thank you.

Kerwin Doughton with KLD Investment Management.

Good morning and nice quarter. My question is about future price of natural gases, as best you can in your own mind project; and how that could affect the demand for your services. Just kind of a general, I guess, gut feeling comment about that.

Sure. Prices, where they are at this time, is still at levels that we expect exploration activity to continue at substantial levels. The overall forecast is a variable one.

I think, of course, we go back and we say, well, if we have a cold winter in the Northeast, it will have an impact on natural gas prices, which I expect that to be the same there. Of course, a lot of our business -- anywhere from, depending on any given time, probably 60% to 70% of our business is in the natural gas exploration market. So we are, what I would say, very into what happens in the natural gas market.

I think that the people that are looking somewhat long term, 12 to 18 months out, are still very bullish on what is going to happen with natural gas. I hope that answers your question to the best of my ability.

What -- may I ask one brief question again, another brief question?

Sure.

What prompts kind of in general terms the optimism that you just expressed in the industry for natural gas?

Well, I think that natural gas is a domestic energy product. I think people are looking to convert from a lot of coal to natural gas. The overall outlook going -- looking out looks to be very strong for the natural gas market.

That said, if you look several months back, people were very concerned about the amount of oil and imports that we were having on our energy for domestic. So, I think that if you followed a lot of the stuff with Chesapeake and T. Boone Pickens, they feel like that a big part of the answer to the energy problem is natural gas for the future.

Thank you very much.

Bob Johnson, Satuit.

Good morning. In regards to the record backlog, could you give us some sense of proportion as to how far out that work would represent on normal schedule? Is it two quarters, three quarters, four quarters?

Would the level of backlog have a bearing on your decision to deploy that ninth crew?

The present backlog of $82 million takes us into the second quarter of 2009, even by adding the ninth crew.

Back on the decision of the ninth crew, I think a lot of it depends on our conversations with our clients to ensure their level of continued exploration and how they see short-term, long-term.

Okay, fine. Just if I might, could you give us any flavor as to how much of an emphasis your work is in the respective big shale plays that are getting the bulk of the attention?

Then if there is a flavor on the size or significance or quality of the average customer that you are dealing with as opposed to marginal players.

Well, like I say, we have crews deployed in the Kansas market, which depending on where you're at could be shallow oil or shallow gas. That market seems to remain strong.

We have some work in the Haynesville Shale area. We are moving a crew into the Fayetteville Shale. We have crews working in the South Texas market, which are -- been very busy in that market.

We have some, as I have mentioned, I think that in the last quarter, we are seeing some visibility of some very large 3-Ds. These 3-Ds are very substantial size and are basically funded by a very strong seismic data broker. So we have that, as well as our repeat customers that we have had a very good relationship. I believe last year about 45% of our business was repeat customers.

So we feel that our backlog is strong and we feel like that the client base is strong, but we also realize that this is probably a crisis that a lot of companies have not faced previously.

So we are attuned to what this crisis is going to have an effect on the business as well as our clients.

Thanks for the comments and keep up the good work.

Karen David-Green, Oppenheimer.

Yes. Jim, I was wondering if you could give us the short-term debt number at the end of the quarter, please.

$5.5 million.

Great. Then Wayne, can you just talk a little bit about pricing, and pricing by region, and give us an update as to where that stands?

Well, of course pricing has been pretty well the same that we saw in the second half of last year and what we have seen in '08. I don't know if the current market conditions will put any downward pressure on our margins. We haven't been in this crisis at this level long enough to see what the impact, if any, is going to have on our margin.

But as its downs stands right now, our current backlog we feel like are at very good margin levels. So what happens going forward will remain to be seen.

Great, thank you.

(Operator Instructions) Terese Fabian, Sidoti.

Thank you. Do you have a number on the cost of the hurricanes and the severe weather in the second-quarter period? Were you able to put anything together on the lost days or impact on utilization there?

Not really. We had the one hurricane, the Fay, that kind of went over Florida and moseyed around. We had two crews in Mississippi that had days affected on it. Of course, Ike, we had crews in South Texas, where we did pick up some equipment and leave the coastal area. We were down by Corpus Christi, so fortunately we didn't have any direct hit or any damage to our equipment or to personnel.

So it would be hard to say exactly what -- how many days were contributed to exactly the hurricanes.

Okay, thanks, Wayne. Then I have a question on the timing of seismic work and beginning of drilling for your customers. Is it generally a six- to nine-months period from the beginning -- or from the end of your work until a driller would start working?

I think a lot of that depends on the areas that we are working. Normally it is a lot shorter than that. I know our work in the Barnett Shale, we had drilling rigs on site almost 30 days from the time that our seismic was completed. In other areas, there is a somewhat longer time.

But normally the drilling operation comes very quickly after the data is acquired and the interpretation is done.

Thanks a lot. That's helpful.

Thank you. At this time there are no additional questions. I would like to turn it back to management for any closing remarks.

That concludes the management remarks, and we appreciate your time and investment in TGC.

Thank you. Ladies and gentlemen, this does conclude our conference for today. Thank you for your participation and for using ACT Teleconferencing. You may now disconnect.