Dawson Geophysical Co (DWSN) 2011 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. At this time, all participants are in a listen-only mode. Following the presentation, there will be a question and answer session and instructions will be given at that time. (Operator instructions).

As a reminder, this call is being recorded today, October 31, 2011. I would now like to turn the call over to Jack Lascar. Please go ahead, sir.

Thank you, Craig. Good morning and welcome to the TGC Industries third-quarter 2011 conference call. We appreciate you joining us today. Your hosts are Wayne Whitener, President Chief Executive Officer; and Jim Brata, Chief Financial Officer.

Before I turn the call over to management, I have a few items to cover. 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 website at www.tgcseismic.com, or via a recorded instant replay until November 14. Information on how to access the replay was provided on this morning's earnings release. Information reported on this call speaks only as of today, Monday, October 31, 2011, 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 filing with the SEC, including its annual report on Form 10-K for the year ended December 31, 2010.

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 those statements.

I will now turn the call over to Wayne Whitener.

Thank you, Jack, and good morning to everyone. Thank you for joining us for our third quarter 2011 conference call.

By now, I'm sure most of you know that the proposed merger of agreement between TGC and Dawson has been terminated. At TGC's special meeting of shareholders on October 27, 2011 TGC did not receive the necessary vote for approval of the merger agreement. Approval of the merger agreement required an affirmative vote of at least 80% of the TGC common stock to shareholders as of August 29, 2011.

Also, as previously announced, the volume weighted average price of Dawson common stock during the 10 consecutive trading days ending on October 25, 2011 was less than the $32.54 and TGC and Dawson were unable to come to a mutual agreement on a new exchange ratio. As a result, TGC terminated the merger agreement.

Now, as far as the agenda is concerned, I will make some brief comments on the quarter, and Jim Brata will provide us with the financial details. Then I will conclude with some final remarks about our market outlook.

Onto our quarterly results, we're pleased to report a solid third quarter. Our US operations performed well and we operated eight crews there for the entire quarter. We're making progress in penetrating new regions, and during the quarter we operated in several shale basins throughout the United States.

In addition, as we stated on our second-quarter call, we were awarded some work in Canada late in the second quarter and as a result operated two crews there for the entire third quarter. This winter season in Canada, which usually impacts us most during the fourth and first calendar quarters, appears to be shaping up especially as a strong one. Overall, we operated 10 crews in North America during the third quarter.

We generated solid year-over-year revenue growth again this quarter with third-quarter revenues up 36% and nine-month revenues up 47%. Our North American backlog showed very strong growth with a 50% increase from $56 million in the second quarter to $83 million as of the end of September.

Our quarterly EBITDA roughly tripled from a year ago to almost $7 million and our year-to-date EBITDA increased 170% reaching $26 million.

I will now turn the call over to Jim Brata, who will give you a detailed review of our financial results, then I will return with some final remarks.

Thank you, Wayne, and good morning everyone. Revenues for the third quarter of 2011 increased 36% to $31 million from $22.8 million in the third quarter of 2010, reflecting the ongoing strength in the US land seismic market.

We operated eight crews in the US for the entire 2011 third quarter compared to six crews for the entire quarter of 2010. In Canada, we operated two crews for the third quarter compared to essentially one crew operating in last year's third quarter.

Cost of services in the third quarter of 2011 was $21.7 million compared to $18.9 million in the same quarter a year ago, a 15% increase. Due to a solid year-over-year revenue increase, improved margins and more vibroseis work, cost of services as a percentage of revenue in the third quarter declined to 70% from 82.9% in last year's third quarter.

As a result, gross profit increased nearly 140% to $9.3 million from $3.9 million in the third quarter of 2010. Gross profit margin increased to 30% from 17% in the third quarter of last year.

Selling, general and administrative expenses were $2.4 million in the third quarter of 2011 compared to $1.6 million in the 2010 third quarter. As a percentage of revenues, SG&A expenses were 7.9% compared to 6.9% a year ago. We incurred approximately $572,000 of transaction costs in the quarter related to the recently terminated merger agreement. This amounts to about $0.02 per share. Excluding these transaction costs, SG&A as a percentage of sales would have been approximately 6.0%.

Depreciation and amortization rose 29% to $5 million compared to $3.9 million in the 2010 third quarter, reflecting the new equipment we have purchased over the past year to meet the increased demand from our customer base. As a percentage of revenues, depreciation and amortization fell to 16% compared to 16.9% in the third quarter a year ago.

Interest expense in the third quarter was $192,000 compared to $187,000 a year ago. Net income was $1.0 million, or $0.05 per diluted share, compared to a net loss of $1.3 million or a $0.07 loss per share in the third quarter a year ago. We recorded income tax expense of $0.7 million for the third quarter of 2011 and effective tax rate of 38%. This compares to an income tax benefit of $0.4 million and effective tax benefit rate of 26% in the same quarter a year ago.

EBITDA for the third quarter tripled to $6.9 million which is an EBITDA margin of 22.1% compared to $2.3 million and EBITDA margin of 10.2% in the third quarter of 2010.

Adjusted EBITDA, which excludes transaction-related costs for the third quarter of 2011, was $7.4 million. An EBITDA reconciliation table is provided in our earnings release issued this morning.

Now I will briefly review our nine-month results. Revenues for the first nine months of 2011 grew 47% to $111.5 million from $75.6 million in the comparable period of 2010. Cost of services in the first nine months increased 28% to $77.9 million from $60.9 million in the same period a year ago.

As a result of the strong first nine months revenue growth, cost of services as a percentage of revenues decreased to 69.9% in the first nine months of 2011 from 80.5% in the same period of 2010.

Gross profit for the first nine months of 2011 more than doubled to $33.5 million, a 30% gross profit margin compared to $14.8 million, a 19.5% gross margin in the first nine months of 2010.

SG&A expenses year to date were $7.2 million or 6.5% of revenues compared to $5.0 million or 6.6% of revenues in the first nine months of 2010. Excluding year-to-date transaction costs, SG&A expenses as a percentage of revenues dropped to 5%.

Net income for the first nine months of 2011 were $7.4 million or $0.38 per diluted share compared to a net loss of $1.9 million or $0.10 loss per share a year ago. Excluding this year's $0.05 from transaction costs, earnings per diluted share were $0.43.

EBITDA through the first nine months of 2011 increased 170% to $26.3 million or 23.6% of revenues compared to $9.8 million or 12.9% of revenues in the first nine months of 2010. Adjusted EBITDA, which excludes transaction related costs for the first nine months of 2010 were $28.0 million.

Now I will highlight some balance sheet items. As of the end of the third quarter, we had long-term debt of $8.1 million, cash and cash equivalents of almost $22 million. Our current ratio was 1.7 to 1. Working capital was approximately $18.1 million. And finally, we generated approximately $30 million in cash from operations. And with that, I will turn the call back to Wayne.

Thank you, Jim. Before we go to our questions, I would like to briefly summarize where we are today.

Despite continued financial instability and commodity pricing volatility, we remain in the midst of an upcycle in our industry and are continuing to experiencing improved market conditions in both the USA and Canada. Canada remains an important region for us days on preliminary feedback from our customers and the increased levels of inquiries and bids going out to the field.

We expect another strong winter season in Canada which should drive top-line and earnings growth during the next couple of quarters. And in the US, our low cost structure combined with the latest technology embedded in our crews is giving us the opportunity to enter new shale plays. We stay very close to our customers in order to address their needs. As a result of that and in response to increased demand, we anticipate having eight acquisition crews operate in the US and adding two additional crews in Canada during the fourth quarter for a total of 12 crews.

In light of the substantial increase in our backlog which provides us very good visibility into the first half of 2012 and in response to customer demand, we anticipate adding more equipment in order to increase the operating efficiencies of our crews.

In summary, with our current backlog, strong financial position and increased crude capability along with the flexibility to quickly respond to the needs of our clients, we're well-positioned to take advantage of the strengthening seismic market in the USA and Canada.

We are confident in our ability to grow the Company and improve shareholder value as a stand-alone entity.

This concludes my formal remarks and with that I will take any questions.

(Operator Instructions) Veny Aleksandrov, Pritchard Capital Partners.

Good morning, Wayne and James.

Good morning, Veny, how are you?

Good, thank you. So my first question is on Canada. You said that you ramp up to (technical difficulty) in Q4?

Yes.

How much are all of these crews fully commissioned under the current backlog?

Would you repeat the question. I'm sorry, I couldn't hear you there.

Yes, there was some noise, I'm sorry. Are all of these crews fully contracted under the current backlog?

Yes, yes they are.

Okay. And do we have visibility for Q1?

Yes. We do.

And is there a chance we can go up six crews from four in Q1?

Yes. We were anticipating operating five to six crews in the first quarter.

Thank you. And then my second question is, you had impressive gross margins this quarter and Jim touched base on that. But, can you give us more details on how you reach these margins and how sustainable they are?

Well, you know, things have improved on the margin side. I think if you go back, normally operations in Canada in the second and third quarter were relatively non-active. This year, we did have some activity. Even though earnings in Canada were not positive in the second and third quarter, they were contributing to the overall Company. And we had very good operations in the US in the second and third quarter, which improved margins availability.

Thank you. And if I can ask one more question on the equipment side, you were mentioning that you were going to be adding new equipment. Can you give us more details of what you were thinking? Is this going to be ARAM or wireless and over the time frame?

Well, we just added another 3000 channels of GSR wireless system to our crews in the US. We are going to be adding wireless to our operations in Canada. We also expect to add wireless to -- to additional crews in the first half and -- of 2012. So we're expecting to add quite a bit of capacity to our crews in Canada and the US.

Thank you so much, and I will (inaudible) in the queue again. Thank you.

Thank you.

(Operator Instructions) Veny Aleksandrov, Pritchard Capital Partners.

Thanks. So going back to the US, you said that you do not experience any weakness. This means that you have not seen any clients saying they're not going to shoot seismic. On the contrary, the strength is continuing?

That's the way it appears to us. Our backlog is very strong. Pricing has been very steady. So we feel that we will be operating eight crews over the course of the remainder of this year and we will start the new year 2012 with eight crews operating in the US.

Any indication we might start seeing improvement in pricing?

Well, we have seen improvements in pricing. It's a little bit slow here in the US. We have seen significant increases in pricing in Canada, and so we are very optimistic for the fourth quarter and going into 2012.

Okay. And my last question is -- can you give us how much of the current backlog is US and how much is Canada?

At present, about $20 million of the backlog is in Canada. As you know, Canada is somewhat different than what it is in the US. Normally, we have visibility in the US of about six months, where in Canada it's much shorter due to the fact that a lot of the clients wait until later in the process of the freeze in Canada to award the job. So they do not have near the lead time that we have. But we are very optimistic about US and Canada.

Thank you. I appreciate it.

[AJ Strasser], Cooper Creek Partners.

Hey guys. Hey, Wayne, good quarter there. Thanks for taking my question.

You bet.

Just a few questions if I may. First off on the crew site, can you just review for us what the average crew count in the US and Canada was in Q2? I'm just trying to understand why the -- despite having a ramp-up in crews in Canada, that the revenue for Q3 was in line with the revenue for Q2. So was there less revenue per crew grew in the US? Any explanation of that would be helpful.

Okay. Well, like I say, in Canada we did operate two crews in the second quarter and we have operated about two crews in the third quarter. So it would remain relatively flat. What varies as far as revenue between quarter to quarter is the amount of dynamite work that falls within the quarter. Dynamite work is normally higher revenues but a little bit less margins.

So, we felt like that in the third quarter was very good, considering that we operated the eight crews and the two crews in Canada and we were able to cover any shortfalls coming from Canada.

Okay, so just to clarify, Q2 and Q3 had roughly similar crew counts in the US and in Canada?

Yes, they did.

Okay, so Q2 there was an average crew count of two in Canada?

Yes.

And what do you expect your average crew count to be for Q4 in the US and Canada?

We're saying we believe there will be 12 crews. There will be eight crews in the US and four in Canada.

And that will be on average, not just by quarter end?

Yes.

Okay. Could you explain to us just what the -- on a gross basis, is Canada a drag here on gross margin in Q2 and Q3? I'm just trying to understand a little bit what the margins that you're earning on the US side are?

They are a drag. They're not contributing positive net income, but they are contributing some of the revenue in the overall earnings coming from Canada to help the US. But the US in the second and third quarter definitely carries the ball. But we are seeing that -- a great impact from them in the fourth and the first quarter.

Okay. And just going here on cash flow, can you -- what is your CapEx plan for the year and how much -- what was your CapEx for Q3?

What is that, Jim?

Well, our CapEx for Q3 was $10.2 million; prior quarter, it was $7.0 million.

And so far, our CapEx projection for the fourth quarter is going to be right around $3 million to $4 million.

You would expect to probably generate additional a decent amount of cash flow this year -- free cash flow, that is. And just given the cash balance of the Company, can you talk about how you guys are thinking about cash usages at all? Are you considering possibly a buyback and plan, I mean, with the stock here at these levels? And (multiple speakers) --

Well, I think that the Board of Directors looks at all opportunities to improve shareholder value. We expect to have a significant amount of cash at the end of the year. Of course, as I stated earlier, we anticipate adding additional equipment to our crews, possibly adding another crew; that is a possibility. So, we haven't finalized our CapEx for next year, but we expect it to be relatively bullish to add to our capabilities in the US and Canada.

Okay, and then one last question on Q4, if I may. Given everything that you see in front of you, the fact that the backlog of $83 million is considerably higher than the backlog that you had before Q1 of this year, and the fact that the crew count should be roughly similar to Q1, is there any way that the Company could have a Q4 that is sort of in line with Q1? Or let me ask -- or, asked a different way, is there any reason why Q4 shouldn't look like Q1 this year?

Well, of course, we really don't give guidance, but I will say that, normally, Canada's biggest quarter is the first quarter. And we operated six crews in the first quarter in Canada this year. We're anticipating operating four crews in Canada in the fourth quarter. But I will say that the margins look very good and we're very optimistic on being able to get the crews in the field and then being very productive in the US and in Canada.

Are the margins in Canada on those four crews better than the margins in Canada were in Q1?

I would say that they are comparable, maybe a little bit better.

And are the US crews now operating at better margins than they did in Q1?

Yes they are.

Thank you again for taking my question and congratulations on a solid quarter.

Thank you.

(Operator Instructions). And at this time, I'm showing no further questions in the queue. I would like to turn the call back over to management for any closing comments.

Well, thanks, everyone, for joining us for the third quarter earnings call. We're very appreciative of our stockholders' support and we look forward to you being on the next conference call for year-end. Thank you.

Thank you very much. Ladies and gentlemen, this does conclude the conference for today. We do thank you for your participation. You may now disconnect your lines at this time.