Dawson Geophysical Co (DWSN) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the TGC Industries' fourth-quarter earnings conference call. (Operator Instructions). This conference is being recorded today, Monday, March 1, 2010. I would now like to turn the conference over to Karen Roan of DRG&E.

Good morning and welcome to the TGC Industries' fourth-quarter and year-end 2009 conference call. We appreciate your joining us today. Your hosts are Wayne Whitener, President and Chief Executive Officer, and Jim Brata, Chief Financial Officer.

Before I turn over the call 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 e-mail us with that information. 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 March 15. 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, March 1, 2010 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, 2008.

Furthermore, as we start this call please also refer to the statement regarding forward-looking statements incorporated in the press release issued this morning. And please note that the contents of the conference call this morning are covered by these statements.

Now I will turn over the call to Wayne Whitener.

Good morning to everyone. I would like to welcome you to our fourth-quarter conference call. As far as the agenda is concerned, I will make some brief comments on the quarter and year and Jim Brata will provide you with the financial details. Then I will come back with some final remarks.

I will begin by a brief summary of the year. After a strong start to 2009 we began to see weakness during the second quarter as demand weakened and seismic market activity declined significantly in North America. Our overall weakness in the economy and low natural gas prices resulted in reduced demand for our services through the second half of the year, causing a substantial decline in our revenues. We also experienced pricing pressure with -- along with a lower volume resulted in unusual weak margins during the third and fourth quarters.

In response to the weakening demand we aggressively managed our costs, including our crew count to keep them in line with expected revenues. We reduced our crew count from a peak of nine crews in the first quarter to 5 cruise by the end of the second quarter and to the four crews in both the third and fourth quarters.

Also, in mid-October after we closed the acquisition of Eagle Canada, we operated three crews in Canada for the balance of the fourth quarter.

The acquisition of Eagle Canada is an important achievement for our Company. Eagle Canada is a leading provider of seismic acquisition services to the oil and gas industry throughout Canada, and this transaction strengthens our competitive position within the seismic industry. It brings us the diversification into new markets and a new geographical region in which we operate.

Eagle Canada is involved in all aspects of land acquisition and has specific expertise in the acquisition of seismic data in technically complex and logistically difficult areas. It has completed 3D heliportable capabilities. And like TGC, Eagle Canada uses the latest in a ARAM seismic data recording equipment. It has the capacity for five seismic field acquisition crews. Since it also utilizes the latest in ARAM seismic recording equipment to maximize productivity and data quality, its equipment is interchangeable with ours.

Again I will emphasize how pleased we are with the acquisition and to have the good people from Eagle as part of our organization. The integration process is going according to plan and we are currently operating at full capacity in Canada.

Now I would like to point out a few highlights about the fourth quarter and the year. On our third-quarter earnings call I said I thought there were some initial signs of stabilization in the seismic market, and we continue to believe this as we continue to experience increased bidding activity.

First, revenues in our fourth quarter were essentially flat with the third quarter at $15.7 million. We operated four seismic acquisition crews in both the third and fourth quarters. Also, in spite of the severe downturn and throughout 2009 our full year 2009 revenues rose by more than 4% as compared to 2008.

Finally, our gross profit margin in the fourth quarter improved from 12.2% in the third quarter to 14.6% in the fourth quarter. And importantly we are now working rigorously to improve our margins from current levels.

So despite the continual challenging conditions in the oil and gas markets, and particularly the seismic sector, and the ongoing volatility in commodity pricing, we are cautiously optimistic that conditions are stabilizing, and that we will soon begin to see genuine improvement. And of course, we have the ability to ramp up quickly as conditions improve.

As far as our current capacity we are equipped to operate eight crews in the US and five crews in Canada for a total of 13 seismic data acquisition crews using ARAM ARIES systems. Our approximate channel capacity is 67,000 channels. Our total backlog is currently $49 million, consisting of US and Canadian backlog amounts.

I will now turn the call over to Jim Brata who will give us a detailed review of our financial results, and then I'll come back with some final remarks.

Good morning. Revenues for the 2009 fourth quarter where $15.7 million compared to $24.1 million in the fourth quarter of 2008, a 34.7% decline. The large year-over-year revenue drop reflects the severe decline in US seismic activity that occurred throughout 2009.

And, as Wayne said, we responded to this industrywide slowdown by aggressively managing our costs. And during the 2009 fourth quarter we had four crews operating in the field compared to eight crews for most of the fourth quarter of 2008.

Cost of services in the fourth quarter of 2009 declined by 11.1% to $13.4 million from $15.1 million in the fourth quarter a year ago. Because of the substantial year-over-year drop in revenues, cost of services as a percentage of revenues rose to 85.4% from 62.7% in the '08 fourth quarter. As a result, gross profit declined to $2.3 million from $9.0 million in the fourth quarter a year ago. Gross profit margin was 14.6% compared to 37.3% in the fourth quarter of last year.

Selling, general and administrative expenses increased to $2.4 million from $1.4 million in the fourth quarter of 2008. Depreciation and amortization expense was $3.7 million compared to $3.8 million a year ago. As a percentage of revenues, depreciation and amortization expense was 23.7% compared to 15.7% in the fourth quarter of 2008.

We reported a fourth-quarter loss from operations of $3.8 million compared to income from operations of $3.8 million in the fourth quarter of 2008. Interest expense in the fourth quarter was 24% lower than a year ago at $238,000.

We recorded a tax benefit for the fourth quarter of $1.4 million, an effective tax benefit rate of 34.5% compared to income tax expense of $1.3 million and effective tax expense rate of 37.1% a year ago.

We reported a net loss for the fourth quarter of $2.7 million compared to net income of $2.2 million in the '08 fourth quarter. Loss per share was $0.15 versus earnings per diluted share of $0.12 in the 2008 fourth quarter. All share amounts have been adjusted to reflect the 5% stock dividend paid May 12, 2009 to shareholders of record as of April 28, 2009.

Fourth-quarter '09 EBITDA was a loss of $88,000 compared to $7.6 million in the fourth quarter of 2008. An EBITDA reconciliation is provided in our earnings release.

Now I will briefly summarize our full-year results. Our 2009 revenues increased by 4% to $90.4 million from $86.8 million in 2008. Cost of services for 2009 was $65.4 million compared to $55.9 million in 2008, a 16.9% increase. Cost of services as a percentage of revenues was 72.3% compared to 64.5% in 2008.

Gross profit for 2009 was $25.1 million compared to $30.8 million in 2008, an 18.8% decline. Gross margin for a 2009 was 27.7% compared to 35.5% in 2008. SG&A expenses rose to $5.5 million from $4.5 million a year ago. SG&A expenses as a percentage of revenue were 6.1% in 2009 compared to 5.2% in 2008.

Full-year 2009 depreciation and amortization expense was $14.6 million compared to $13.9 million in 2008, a 5.1% increase. Depreciation expense was approximately 16% of revenues in both '09 and '08. Income from operations was $4.9 million in 2009 compared to $12.5 million in 2008. Interest expense rose 9.8% from a year ago to $1 million.

We reported net income of $1.9 million for 2009 compared to $6.9 million in 2008. Fully diluted earnings per share were $0.10 and $0.38 in the years 2009 and 2008, respectively. The income tax expense rate was 51.6% in 2009 and 40.1% in 2008.

2009 EBITDA was $19.5 million, an EBITDA margin of 21.6% compared to $26.4 million, an EBITDA margin of 30.4% in 2008.

As of December 31, 2009, we had long-term debt of $6.5 million, cash and cash equivalents of approximately $25.5 million, a current ratio of approximately 2 to 1, and working capital of approximately $17.3 million.

With that I will turn the call back to Wayne.

Before we go to questions I would like to briefly summarize what we see ahead of us. Currently we have to deal with a difficult North American seismic market during 2009, but we are more optimistic today than we were a few months ago. We are experiencing an increased level of inquiries and we are also seeing an increase in bidding for seismic work.

While we continue to operate in a competitive pricing environment, we are taking steps to vigorously increase our operating margins. We are currently operating six crews in the US, and are at full capacity during the first quarter in Canada, with five crews. We are expecting improvements in our results for the first quarter of 2010; however, the end of the Canadian winter will likely reduce our Canadian crew count for the next several quarters.

So in summary, we are growing more optimistic about the outlook for calendar 2010. We have the equipment, the enhanced geographic diversification, the qualified personnel, the balance sheet and the liquidity to take advantage of the opportunities that are starting to appear as our industry recovers.

I will close by saying that the fundamentals of the industry remain positive, so despite the challenges, we remain committed to our business plan and are optimistic about the future of our industry and our Company. This concludes my formal remarks and we will now take any questions.

(Operator Instructions). Veny Aleksandrov, Pritchard Capital Partners.

I have a couple of questions. First is the backlog. In the $49 million that you announced, if you can think about like that, how much is TGC and how much is Eagle?

Roughly right around $42 million is TGC.

Then my other question is the pickup in bidding activity, is it across-the-board or is it region specific? Can you talk a little bit more about that?

It seems to be pretty much across-the-board, anywhere from the Marcellus in Pennsylvania down through our normal areas, which is Mid-Continent and Gulf Coast.

Did I hear you correct, you are currently -- you currently have six crews in the US, right?

Yes.

And five in Canada. Okay. So are you going to keep working towards improving the utilization of those before deploying more in the field?

Yes, one of our main concerns right now is to work on the margins. And by doing so we might see some lumpiness in our crew count, but we feel like that is one of the most important things right at the moment with the market conditions the way they are.

Okay, thank you so much. I will let somebody else ask a question. Thank you.

Terese Fabian, Sidoti & Company.

I have a question on your revenue per crew. You had approximately six crews working, I guess, the last quarter, and the revenue came in under $16 million, where the previous quarter you had four crews and the revenue came in around $16 million.

No, Terese, we had four crews working in the fourth quarter.

But you had two in Canada -- well, approximately, you had some number in Canada.

Three in Canada for a stub period.

For some portion of it, right?

Yes.

Is there a revenue contribution from that? And how can one look at their generation of revenue per quarter?

Are you talking about the contribution by Canada?

Right.

Jim, why don't you give them what the revenue was for Canada in the fourth quarter.

Revenue for Canada in the fourth quarter was about $4.8 million.

$4.8 million. So then the US crews operated at decreased utilization, is that -- or on different types of contracts?

It was on different types of contracts. We have -- of course, in the US we do more complete works, such as the dynamite in the survey, which is done in-house, where in Canada they are pretty much a record-only operations on a lot of their work.

Then looking ahead, if two crews in Canada generated $4.8 million, up from --.

It was three crews.

Three crews for part of the period.

Yes, stub period, yes.

For a month and a half, or something, two months. Is that a good run rate to use for revenue that one can expect them going forward for this first quarter?

Seasonality.

Well, actually it was -- that revenue is generated by three crews for 2.5 months. And as I have stated going forward we are operating at full capacity with five crews out there. But, of course remember that the Canadian market is very seasonable, so their slow period is going to be the second and third quarters of this year.

Do you think one can expect per-share loss in those quarters because of that, because of the D&A costs and other fixed costs?

I can't really comment on that. I think that goes into forward-looking statements.

Let me ask you a question on fourth-quarter SG&A. It came in substantially above the third-quarter period. What went into that?

Well, we recorded a reserve on a receivable of a slow-paying client during the quarter.

How much was that?

A little bit over $600,000.

So what makes up the other -- the rest of the difference between the third-quarter and the fourth-quarter SG&A?

Well that takes care of over 60% of the difference, and the other difference was just one-off things.

Anything to do with the closing on the purchase?

No.

In terms of seasonality, in the second and third quarter one can expect that Eagle will be doing minimal work, right?

Yes.

Okay, I will queue back up. Thank you.

(Operator Instructions). Andrew Halperin, [Baker Corp.].

I have been following TGC for five or six years now, and maybe going back four or five years there was -- the price of the stock climbed I think because everybody in part anticipated that the addition of more crews was going to generate more revenue and add to the bottom line.

When I look at TGC over the last three or four years I don't see any real growth in the bottom line, and essentially revenues have been flat I would say for the last three years. When you look out to the future do you see that placing additional crews in the field is going to allow you to break out of this sort of channel that you have been in?

Your income in '06 to '08 was about $6.9 million to $8.1 million. So looking at it from the outside, I don't see where growth is coming from in TGC. I would love for you to give me a longer-range view as to whether or not there will be some catalyst or some conditions that will allow you to break out from this.

First off, let me say that if you go back to the first quarter of 2009, we operated nine crews at full capacity. I think if you look at the revenues and earnings in the first quarter, it was a record for TGC. I think you can also go in and take a look at the acquisition of the Canadian Eagle Canada, which is going to add additional revenues and earnings for the Company.

So we feel like that when conditions allow and we are able to get back at full crew count with full capacity that we should have a very strong result resulting from our eight crews in the US and are five crews in Canada.

The rewards to stockholders have not been very great over the last couple of years. I am wondering whether or not, especially since you do seem to have a positive cash flow, whether or not you would -- you have given any thought to instituting a dividend.

We have, of course. Previously we paid a 5% stock dividend in previous years. We are reviewing -- the Board of Directors are reviewing this year whether -- what we are going to do as far as whether we're going to give a dividend or not.

Well, a stock dividend to me is not quite the same as a cash dividend, so perhaps I was unclear. Will the Board be considering a payment of a cash dividend?

Very possible. Of course, you know, in our business since it is very cyclical that cash reserves for us to have access to is very important. So that would be one consideration for the Board. But the Board, I am sure will consider a review of whether to pay a cash dividend or a stock dividend.

Thank you very much.

(Operator Instructions). George Melas, MKH Management.

I wanted to follow-up on Teresa's question, because I'm not sure you sort of addressed it properly. If you look at the revenue in Canada, you say that it is $4.8 million, which means that the revenue for the US crews was roughly just a little bit south of $11 million on four crews. So that gives you revenue per crew during the period of roughly $2.7 million. And it was 4 in the previous quarter. So is there a different mix of work, is the crews getting smaller, or is it pricing? Can you try to clarify some of that?

Part of it is the mix of dynamite versus vibroseis. Also, you are looking at probably the worst pricing conditions, as far as margins go, that were in the fourth quarter. So it is a combination of the mix as well as pricing.

So does that suggest that pricing deteriorated quite a bit from the third -- I guess the work had not -- the work -- I guess, when you do work you have bidded quite a few month earlier (multiple speakers).

Sure, we have about a six-month lag. And if you go back, we had a record first quarter. And then we went from nine crews to five crews, and then went from five crews to four crews. Then we operated four crews in the fourth quarter in the US. So it was a combination of pricing pressures definitely pushing down on the crew count as well as the margins in the US.

Are the size of the crews somewhat similar in terms of channel counts?

Yes, they are about the same. They have been about the same -- the four crews are the same that we have been running previously.

In the same place?

Well, we are in different markets at all times. We have crews that work in the Mid-Continent, West Texas, South Texas, Gulf Coast, so the crews are moving all the time. So it is not really area related, it is more overall pricing pressures in the space.

Then when -- your experience is that usually crew counts will recover first or let's say volume recovers before pricing does, right?

Well, usually what will happen is we will start seeing some movement in the crew activity. Then shortly thereafter we try and work on the margins and pricing. So that has basically been our mode of operation in the past and we expect to continue to do that business plan going forward.

Then the sequence of your effort has been to try to put more crews into the field, which seems to be happening right now in the first quarter as you're going from four to six in the US. And then now you are working more on pricing?

That is correct.

Okay, great. Then one last question. The crews in Canada, are they roughly at the same level of profitability or are there -- right now are there higher gross profit per crew?

They are at higher gross profit during the time that they operate. Because it is seasonal up there at the time they operate the gross margins are very good, but then they have a falloff, of course, in the second and third quarter. So we are hoping to minimize that somewhat this year, but that is normally what happens in the Canadian market.

Great. Sorry, one more question. Is there a way to distinguish the depreciation/amortization by region versus US versus Canada? Do you have that number?

We are doing a -- what, Jim, you are going to do a consolidated statement?

Yes, we are going to be reporting consolidated numbers, and at this time we are not intending to break out reporting by segments.

Can you just -- is there roughly a way to try to understand that number, just to see how much equipment and depreciation there is in Canada?

Let me say this. Right now we have the equipment going back and forth across the border. We are supplying Eagle Canada some equipment right now, and we really haven't gotten far enough into the combining of the two companies to determine the depreciation percentage to Eagle Canada as well as to TGC down here.

It makes sense. Okay, thank you very much.

Terese Fabian.

I would like to just clarify the SG&A line. You said that there was a reserve for bad debt expense and a number of one-offs. If we are looking forward is there a run rate that you could guide us to?

I think we are pretty much going to stay within what we have done in the past. What have we have been running, about $4.2 million, $4.7 million?

Yes.

Somewhere in that range. We will pretty much be back in the -- somewhat in the groove here.

That sounds good. Then a question on the volatility in crew counts. You're saying they might not stay at this level, it sort of depends on the contracts. In terms of the contracts you have now how long do they run forward, your backlog?

In Canada they are running through mainly the first quarter, some into the second quarter. In the US we are running into the end of the second quarter -- first -- beginning of the third quarter maybe.

Do you have a number on the new orders that were placed in the period?

Not right offhand, no.

You gave the cash and long-term debt. What is the current debt number?

That is $7.2 million.

Any tax rate guidance for next year?

Not really. That is a moving target, a little bit, but somewhere around 38% I would guess I would say.

Yes.

Okay. Thank you.

We have no further audio questions. I would like to turn the conference back over to management for any closing statements.

That pretty much concludes our fourth-quarter and year-end conference call. We appreciate you listening to the conference.

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 conference, please dial 303-590-3030 with the passcode 421-6113. ACT would like to thank you for your participation. And you may now disconnect.