Dawson Geophysical Co (DWSN) 2008 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 opened for questions. (Operator Instructions). This conference is being recorded today, Monday, February 23, 2009.

I would now like to attend the conference over to Karen Roan of DRG&E. Please go ahead.

Thank you, Brittany. Good morning and welcome to the TGC Industries fourth-quarter 2008 conference call. We appreciate you joining us today. Your host will be Wayne Whitener, President and Chief Executive Officer; and Jim Brata, Chief Financial Officer. Before I turn the call over to management, I have a few details 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 Web site at www.TGCseismic.com, or via a recorded instant replay until March 2. 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, Monday, October 23, 2009. 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 over the call to Wayne Whitener.

Thank you, Karen. Good morning, everyone. I would like to welcome you to our fourth-quarter 2008 conference call.

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

Let me begin by commencing on our crew count. Beginning in the fourth quarter, we announced that we had purchased and taken delivery of our eighth new ARAM ARIES seismic recording system and disclosed plans to employ our ninth seismic field crew. For most of the fourth quarter, we had eight crews operating with our ninth crew working the last two weeks of December.

The global economic slowdown, the difficult credit environment and declining commodity prices certainly present challenges for our company and our industry. These conditions have caused some projects to be delayed, reduced in size or in some cases canceled as E&P companies are reducing their capital budgets in the face of a lower demand for oil and gas. However, we expect to have all nine crews operating during the first quarter. Having said that, we've maintained a strong relationship with our customers and stay in close contact with them. You should expect us to act quickly, if needed, to preserve our financial flexibility by adjusting our crew count and/or utilization. At year end, we had a backlog of approximately $67 million.

As far as our financial highlights, gross profit margins rose in both the fourth quarter and the year. Fourth-quarter gross margins rose to 37% from 31% in the fourth quarter of 2007. For the year, gross margins were over 35% compared to 33% last year.

Fourth-quarter EBITDA rose over 8% from the same period a year ago.

We ended the year with a strong balance sheet with cash at a record high, $24 million, exceeding our long-term debt by $12 million. We continue to generate cash and generated cash flow from operations was approximately $34 million during 2008.

Now, I will turn the call over to Jim Brata who will give you a detailed review of our financial results. Then I will come back with some final remarks.

Good morning.

The revenues from the 2008 fourth quarter declined 6.7% to $24.1 million compared to $25.9 million in the fourth quarter of 2007.

(inaudible) services in the fourth quarter decreased 15% to $15.1 million from $17.8 million in the fourth quarter a year ago, primarily due to a lower amount of shot-hole work during the quarter. Shot-hole contracts accounted for 18% of revenues in the 2008 fourth quarter, compared to 36% of revenues in the fourth quarter of 2007. Shot-hole contracts typically generate higher revenues but have a lower margin than Vibroseis contracts because they contain higher third-party costs.

Costs of services as a percentage of revenues was 62.7% in the '08 fourth quarter versus 69% a year ago. Our gross profit margin improved to 37.3% from 31% in the fourth quarter of last year. Gross profit $was 9.0 million compared to $8.0 million a year ago, a 12% increase.

Depreciation and amortization expense increased almost 25% year-over-year to $3.8 million from $3.0 million a year ago as we invested $21.7 million in new equipment during 2008 to upgrade the productivity of our crews. Fourth-quarter '08 income from operations was $3.8 million, compared to $4.0 million in the fourth quarter a year ago, a 4% decrease. Income from operations as a percentage of revenues was 15.7% compared to 15.3% in the fourth quarter a year ago.

Interest expense in the fourth quarter was $314,000 versus $111,000 a year ago as we continue to purchase and finance new seismic equipment.

The effective tax rate for the fourth quarter was 37.1%, compared to 38.5% in the fourth quarter of '07.

Net income from the fourth quarter was $2.2 million, compared to $2.4 million in the fourth quarter a year ago. As a percentage of revenues, net income was 9.1% for this year's fourth quarter, the same as last year's fourth quarter.

Earnings per diluted share -- shares were $0.13 versus $0.14 in the fourth quarter of '07. 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.

Fourth-quarter '08 EBITDA increased 8% to $7.6 million and EBITDA margin of 31.4% from $7.0 million, and EBITDA margin of 27.0% in the fourth quarter of 2007.

Now I will briefly highlight our full-year results. Our 2008 revenues were $86.8 million compared to $90.4 million in 2007, a 4% decline. Cost of services for 2008 were $55.9 million, compared to $60.4 million in 2007 as a result of less shot-hole contract business in 2008 than in 2007. As a percentage of revenues, costs of services decreased to 64.5% in 2008 compared to 66.9% in 2007, primarily due to a lower amount of shot-hole work. Shot-hole contracts accounted for 20% of revenues in 2008, compared to 36% of revenues in 2007.

Our gross profit margin improved to 35.5% in 2008 from 33.1% in 2007. Gross profit was $30.8 million in 2008, compared to $30.0 million a year ago, a 3% increase. Depreciation and amortization expense rose 9% in 2008 to $13.9 million from 12.7 million a year ago. Income from operations for 2008 was 12.5 million or 14.4% of revenues, compared to $13.3 million or 14.8% of revenues in 2007.

Interest expense rose to $930,000 in 2008 from $605,000 in 2007, as we continued to purchase and finance new seismic equipment during the year.

The effective tax rate for 2008 was 39.9% compared to 40.3% in 2007.

Net income in 2008 was $6.9 million compared to $7.6 million in 2007.

Earnings per diluted share were $0.40 versus $0.44 in 2007. 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.

2008 EBITDA was $26.4 million, an EBITDA margin of 30.4%, compared to $26.1 million, an EBITDA margin of 28.9% in 2007.

Our balance sheet remains strong, and we continue to generate cash, generating cash flow from operations of $33.9 million in 2008. At the end of the fourth quarter, we had long-term debt of approximately $11.5 million, representing 22.7% of our capital. We had cash and cash equivalents of approximately $24.1 million, a current ratio of 2.0, working capital of approximately $17.0 million, and book value per share of $2.89.

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

Thank you, Jim. Before I take any questions, I will briefly summarize.

We are obviously cautious regarding the current economic environment, which has reduced the demand for oil and gas and therefore the capital expenditures for oil and gas exploration. So far in 2009, however, we have not materially been impacted by the lower capital budgets of E&P companies. We have seen a slowdown in demand for our future services, and we are staying in close contact with our clients in order to act quickly to any new developments.

Our overall long-term outlook remains positive, despite the current downturn, as the need for seismic services continues in order to reduce the finding and development costs of oil and gas for E&P companies. In this current economic climate, we are keeping a close tab on our cost, and we will keep our expenditures on capital equipment to a near maintenance level while still optimizing the crude productivity.

As previously stated, we ended the year with $24 million of cash and we have a $5 million bank line of credit, which is fully available. This facility, coupled with our cash position, enhances our liquidity financial flexibility. We believe we are well-positioned financially and operationally to withstand the economic downturn.

With that, I will take any questions.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). Terese Fabian, Sidoti & Company.

Good morning. I have a question on how the outlook appears to you compared with other downturns in the seismic cycle. How does the current period look at this point in time compared with a couple of years back when seismic took a downswing?

Well, of course, right now, as mentioned, we anticipate operating all nine crews in the first quarter. We ended the year with $67 million in backlog. We are seeing a slowdown in the future quarters as far as demand for services. Of course, that can change rapidly depending on commodity prices and world conditions.

As far as slowdowns in the past, basically we are not seeing the overcapacity that we've seen in previous downturns. We probably have some of the newest equipment in the industry to better service our clients. So, we feel like we are well-positioned to weather this downturn and we do not feel it's probably going to be as severe as we've seen in the past strictly because of the competition, capacity, and the amount of new equipment that we presently have.

Thank you. A follow-up to that -- do you see seismic as leading or lagging drilling activity? Because the drilling rig count is way down, do you expect seismic would go up before drilling activity goes up or after?

Well, I think what we are seeing right now is due to pricing. We are seeing pressure from E&P companies as far as holding their position, holding their cash. I think that the land drilling operation has seen greater strides in their margins. I think they are seeing greater pressure as far as from the E&P companies as far as holding off on drilling.

As far as the seismic business, we haven't seen the margins that the land drillers have and we are probably somewhat less pressure involved in us as far as holding off doing seismic, as well as pricing concerns. That said, normally what happens as demand for natural gas goes up, drilling rigs start being stacked, demand will come back in the near future for natural gas.

So to kind of answer your question, right now, we are seeing the land drilling rigs probably more so leading the industry as far as shutting those rigs down. So we will probably be more lagging them than probably in front of them.

Okay, thank you. I will queue up. Thank you.

Karen David-Green, Oppenheimer.

Thank you and good morning. I wanted to see, Wayne, if you could just walk us through your contract terms and conditions and just your thoughts on if you see any type of cancellations within the backlog.

Well, right now, we haven't seen any large cancellations. There's been some jobs that have been put on hold, but we still anticipate doing those jobs. Those particular jobs that were put on hold were not of a significant size.

As far as terms in our contract, of course a contract can be canceled with 30 days written notice. But we are not seeing a lot of cancellations, anything along those lines. Probably our biggest concern at this point is future contracts, what demand is going to be for our services and the future pricing for those services.

Great. Can you just walk us through real quickly the location of your crews right now?

Well, we have crews in South Texas. We have accrued in East Texas working in the Haynesville Shale. We have three crews in Kansas; we have a crew in Oklahoma; and also a crew in West Texas. So we are pretty well -- we also have one in Louisiana. So we are pretty well spread out in the midcontinent and the Gulf Coast.

Great. Thanks, Wayne.

(Operator Instructions). Neal Dingmann, [Wonder Lake] Securities.

Say, a question -- I know you mentioned about obviously not bringing any crews out, but you all are sitting pretty well versus some of the other seismic folks as far as just sort of dry powder, etc. With equipment obviously I guess cheaper in these type of markets, does it make sense to add any Vibroseis, anything to add or, you know, I know you mentioned you were sitting pretty well with equipment. Does that mean you really don't need anything to speak of?

I don't think right now, with everything that we are seeing, that we anticipate this year adding very much, very much new capital equipment. There is some equipment that is a little bit newer technology that we are reviewing right now that we may add to some of our existing crews to expedite some productivity. But right now, we are waiting to see how the market looks going forward and of course reserve as much cash as possible.

Okay. My last question, just on a pricing aspect -- obviously with sort of the tough conditions, especially I would think versus some of the private folks that you compete with, are they coming -- are they slashing prices or are you seeing pricing pressure in various regions, or what are you seeing as kind of a collective group with some of your peers? Or does it appear that everybody is sort of maintaining the status quo and trying to hold their prices where at, or are they taking the route to some of the land rigs and slashing prices?

I will say that, so far, we've seen some pricing pressure. Some areas are very little; other areas are more. I will say that so far that not all our competitors are cutting prices. There is one or two out there that are cutting some prices, and we will review those to see how that is going to affect us going forward.

I got you. Thanks, Wayne.

A follow-up question from Terese Fabian, Sidoti & Company.

Thank you, a question on your revenue per crew. Despite having less shot-hole drilling this quarter, if you divide the revenue by the number of crews, almost $3 million per crew which is up from the last two quarters nicely. Does that have to do because you had more turnkey contracts rather than term contracts, or is it just because the weather was good and you did more work? Can you talk about that a little bit?

Yes. Well, I think, in the fourth quarter, we had -- as Jim mentioned, we had more Vibroseis than dynamite from the previous year. Also, we had relatively better weather conditions, so our margins were better as well. Mainly, it's just due to the contract mix and better weather.

Okay. Then in terms of the turnkey and term contract breakdown, how was that in the fourth quarter and what is the view for the first quarter on that?

Everything in the fourth quarter was turnkey. Everything going forward is turnkey.

Thank you.

(Operator Instructions). A follow-up question from Karen David-Green, Oppenheimer.

Wayne, I was wondering if you can just address your cost structure and how much of it is variable versus fixed?

Sure. Well, like I say, if we are doing a reduction in a crew, of course there will be a small amount of key personnel that will be retained and put on our other crews, and the bulk of the labor force would be laid off so we can rapidly contract to meet the demands for services if necessary. Of course, our plan is to keep all nine crews operating, but there's not a tremendous amount of -- the fixed cost is in the depreciation mainly, so we are able to reduce cost very effectively.

Can you tell us, Jim, at the end of the quarter what your short-term debt outstanding was?

Short term -- current portion of long-term debt was $6.0 million.

Was that short-term or long-term?

That's the current portion of long-term.

Operator?

George Melas, MKH Management.

Good morning, gentlemen. A few questions about cash flow -- can you say what was cash taxes paid in '08? If you have minimum CapEx in '09, what would be the cash taxes that you expect to pay in '09?

I'm sorry, I didn't hear them. Would you repeat the question?

Sure, I'm sorry. I am just trying to understand sort of the difference between your GAAP taxes and your cash taxes both in '08 and in '09, and if your capital spending goes down to a minimal level, what impact that has on your cash taxes in '09.

Well, this year, we are going to have a lot of bonus appreciation, which is going to decrease our current taxes. Does that answer your question?

Yes, but then in '09, if your CapEx goes down to sort of a very small level, do you have to pay -- do you also benefit from accelerated depreciation, or would your cash taxes be somewhat similar to your GAAP taxes?

(multiple speakers) through this year.

I am just trying to look at sort of a cash flow for '09.

Well, that accelerated depreciation is only good for this year.

Okay. Then maybe can you talk a little bit about the cash flow from operations in the fourth quarter? Because it was so strong. Were there any particular items there that were sort of unusual?

Nothing really unusual. Cash flow in the fourth quarter was $12.9 million, and the biggest change there is we collected a lot on our accounts receivable and that accounted for about $5.8 million. And then our depreciation increased a little bit. That accounted for almost $3.8 million, so that accounts for pretty much the biggest part of that change from quarter to quarter.

Okay, great, great. Then maybe one question for Wayne -- the number of crews operating in the lower 48, have you seen any changes sequentially in industry capacity?

I would say yes, I believe we've seen a decrease of somewhere between three to five crews, in that range. That's basically in our market area, the lower 48.

Okay, thank you very much.

Terese Fabian, Sidoti & Company.

Yes, thank you. In light of doing all of your work now on turnkey contracts, can you talk a little bit more -- it would make sense that you would get some newer technology equipment to expedite your work, as you said. Can you talk a little bit about what that might be?

Well, we are looking at some ARAM equipment that basically makes some of the field configurations more user-friendly and less burdensome on the field crew. So, if we do purchase some of this equipment, it very well may help expedite the acquisition of our crews. This is new equipment that's coming online. Basically, we are going to be testing this equipment out here in the next 30 days. If we like the equipment, we may very well purchase some of this equipment to expedite the production of our crews.

Would it be conceivable even that you would do the same amount of work with fewer crews if you upgraded to that?

Yes, very, very possible. I mean, what would happen is, if we were to shut down a crew, the good thing about us is that eight of our crews have all the exact same equipment. So, what we are able to do, if we have to shut down a crew, we can take that equipment, spread it amongst our other crews and maximize the productivity of the crews that are left working. So, it's very critical, when we did our CapEx purchase in previous years, that the equipment was all compatible just to foresee these type of situations. So we would expect, if the crew count from ARAM went down that we would hopefully see productivity on the remaining crews go up.

Thank you very much.

Thank you. There are no further questions at this time. I would like to turn the call back to management for any closing remarks.

We have no closing remarks. We appreciate everybody that joined us today and look forward to our next quarterly call. Thank you.

Thank you. Ladies and gentlemen, this concludes the TGC Industries fourth-quarter earnings conference call. If you would like to listen to a replay of today's call, it will be available after 1130 AM Eastern standard Time through March 9, 2009, at midnight Eastern standard Time. You may access the replay system by dialing 303-590-3000 and the entering access code of 11126135, followed by the # sign.

We thank you for your participation. You may now disconnect.