Ion Geophysical Corporation (IO) 2002 Q1 法說會逐字稿

Thank you for standing by. Good morning. All participants will be in a listen-only mode until the question-and-answer session of the conference.

This conference is being recorded at at Input/Output. If anyone has any objections you may disconnect at this time. I would like to introduce the host for today's call, Mr. Tim Probert. Mr. Probert, you may begin.

Thank you, .

Good morning and welcome to our first quarter conference call. Your hosts for today . As you start the call please refer to the statement regarding forward-looking statements incorporated in our press release issued earlier today and please note that the contents of our conference call are covered by this statement.

Our agenda this morning -- a brief industry activity perspective, followed by a review of our quarterly results, an update on some of our key strategies initiatives, followed by a little guidance on the '02, followed by a question-and-answer period.

From an individual perspective a lot of key continue to show activity trends. Our averaged 25, 25 for the quarter for an average of 25th three last quarter, but still well below an average of almost 30, 26 in the first quarter of 2001.

something during the quarter, averaging about 233 in although it remains below the average price of 254 per MCS last quarter and 645 per MCS in the first quarter of 2001. averaged 818 rigs during the first quarter, down 186, or 19 percent from last quarter, then 321 or 28 percent from last year's first quarter.

National activity dropped two percent from last quarter to 731 but rose one percent from the first quarter last year. Canada increased seasonally about 105 rigs sequentially with rig counts averaging 383, but dropped 26 percent from last year's first quarter level of 515.

We shall continue to go to levels of seismic activity last quarter. Intentional softened, averaging about 112 for the quarter and from 120 the same quarter a year ago, and down four percent sequentially.

African activities remain stable. Asian activity picked up, much like European activity softened.

A significant slowdown took place in the Middle East where active crews dropped 16 percent year-to-year and 12 percent sequentially. This is a particularly significant reversal of an upward trend in the area of large crude deployment.

China and Russia remain fairly active.

U.S. activity was flat sequentially, with active line crews averaging 38 compared with 39 the last quarter, below the 44 recorded in last year's first quarter. This first quarter of activity average, in fact, was the last recorded in the last decade. In activity averaged 36 crews of 14 crews sequentially but down from the 50 per average in the first quarter last year.

Marine seismic activity was also soft. U.S. Marine activity dropped to 16 active vessels compared to 18 last quarter and 17 a year ago.

And the international marine fleet averaged approximately 43 active vessels in the quarter and from 50 last quarter and 63 in the first quarter last year. All seismic activity during the quarter was disappointing with an unfavorable year on the comparison when almost every market in geographic .

Our first fiscal quarter of 2002, has been a challenging one for us in that our results reflected a generation in the industry fundamentals I just discussed. And the consequent reductions in spending patent of our primary customer, contractors. will discuss the quarter in a little more detail.

Thanks, Tim.

First quarter sales were at $3.2 million, down $12.2 million or about 29 percent from last year's first quarter, and down $29.9 million or about 41 percent sequentially.

The increase is primarily attributable to a decline in land seismic activity as our customer's respond to as Tim just described.

In addition, land sales suffered due to lack of revenues associated with the mobilization of large new crews in the Middle East, as we were saying, in the past couple of years. this quarter were $17.7 million, a decrease of $2.2 million or about 37 percent from last year's first quarter, and a decrease of $24.6 million or about 58 percent sequentially.

Marine sales of $12.6 million by $2 million or about 14 percent, compared to last year's first quarter increased $3.7 million or about 40 percent sequentially. profit rate this quarter was 23 percent compared to 38 percent in both our prior quarter and in last year's first quarter.

The decrease in gross profit rate is primarily due to substantially lower manufacturing volumes resulting from the lower sales.

Lower manufacturing volumes means that more of our fixed and semi-fixed manufacturing costs charged at a expense to cost of sales rather than served end inventory.

These properties were also effected by service costs and other period costs associated with substantial reductions in force. beginning this year, the inclusion of third party sales commissions and cost of sales rather than as a selling expense.

Our land division gross profit rate was about 10 percent this quarter compared to about 40 percent last quarter and 33 percent last year's first quarter.

Marine Division gross profit rate was about 42, I'm sorry, 48 percent this quarter, compared to about 39 percent last quarter and 31 percent in last year's first quarter. Despite the materially lower sales, inventories at the end of the quarter were actually down slightly from year end, at about $68 million.

We're talking our to curtail manufacturing, the recognition of lower product demand. SG&A expenses were $7.2 million for this quarter, down $1.6 million from last quarter and up $600,000 from last year's first quarter. These decreases principally reflect lower compensation spent due to reductions in personnel, the lower accruals for profit based and sales based, and sender compensation plans.

Lower SG&A expenses also reflect the reclassification of third party sales commissions as costs of sales rather than selling expense. As a percentage of revenues, SG&A expenses increased to about 24 percent this quarter compared to 17 percent last quarter, and 18 percent on the first quarter of last year because of lower sales supply.

At the end of the quarter full time and temporary employees totaled about 820, representing a reduction of over 300 people since December 31, 2001. Of this reduction over 80 were full-time employees.

We are carefully monitoring the markets for our products and will take the steps necessary to appropriately size our business, reflecting anticipation of near term revenues.

Research and development expense this quarter was about $7 million, a $500,000 reduction from both last quarter as well as the first quarter of last year.

Despite the downturn we are continuing to fund ongoing projects, that we expect will result in significant incremental near term revenues. We expect a running rate for R&D expenses to decline slightly throughout 2002 as work on our digital sensor and new land acquisition system is completed.

Our operating loss for this quarter was $7.5 million compared to operating income last quarter of $1.9 million and small operating loss in the first of 2001 of $200,000. Evened out was a negative $4.5 million partially offset by reductions and working capital. Initiation improvisation was $3 million for this quarter, a $1.5 million reduction from last quarter.

About $1 million of this reduction reflects the elimination of the amortization's good will. Capital expenditures during the first quarter were about $1 million.

We reported an income tax benefit of $2.7 million this quarter, compared to an expense of $1.1 million as before and $1 million during last year's first quarter. Our income tax provision reflects an anticipated 37 percent effective tax rate for the current year.

We are pleased to say that our balance sheet remains strong at March 31, 2002. We had about $98 million in cash on hand comparative to $102 million at year end. Our accounts and notes receivable decreased $10 million for last quarter to about $38 million while the inventories climbed slightly $68 million at quarter end despite the revenues.

We'd now like to discuss progress and the execution of our strategy. First we want to from our core business. Secondly, monetizing on individualized assets and growing the business through acquisitions and alliances. And thirdly bringing key technology initiatives to fruition that supports identifiable industry trends.

Today we'll focus on an update of the status of our key technology developments, notably our progress in the commercialization of .

Following an extremely successful year of pilot commercializing in the year 2001, our commercialization efforts are now underway in three important sectors.

Firstly, in early March we are very pleased to announce a alliance with to utilize technology to acquire the land seismic of America. Under the terms of the alliance I have contributed the use of equipment to shoot both profit and lively data.

The alliance completed for Southern Canada was an approximate 3,400 station or 10,200 channel to line acquisition system. And the second server was completed in mid-April.

For the additional propriety what we expect -- to stock first . And we are very pleased with the demand for the system at this point. Under the terms of the alliance I required and I will have access to these lively data sets. In addition to the revenue share in model, we expect to sell systems in the traditional during the balance of the year.

used for our pilot program with last year in North America is busy outside North America in pilot commercial programs and international operations in several geologic basins.

Secondly, a prototype ownership system is under development that will utilize both technology and a new patented packaging system. Marine testing is expected to take place in Q3 this year to establish the value of new design and confirm operational efficiencies.

Thirdly, for the application the first monitoring was installed this quarter in the Middle East. These already include both conventional analog and the technology to aid us in the evaluation of the performance of the system for the upcoming quarters. Based on growing interest in the seismic monitoring of reservoirs we anticipate additional sales to develop for delivery in the second half of the year.

Finally our retreatable tool, an eight level vertical seismic profile or VSP tool has performed very well with . As a comparison this eight level tool has approximately 10 times the number of receiver levels as traditional one line tools.

The device is currently in analog form and has been used to shoot a number of very high resolutions today in California and Alaska.

We're up to $7 million prices in the single multi-world survey. In the future we anticipate technology. Also applied men to fully exploit additional technology recently executed in agreement with for the provision of thereby medical applications.

This agreement, in addition to agreements with and continuing for , was executed over the last six months.

Provided the opportunity to generate incremental revenues and associated higher volumes to reduce the cost of our is about seismic and other applications, we continue to believe that our platform including the applied will generation about $8 million to $11 million in revenues for 2002, with substantial growth thereafter.

Now with respect to our for 2002, the first quarter North American drilling activity climbed over 27 percent from the first quarter last year. All international activity was essentially flat. Both providing downsize surprised us with incident reductions in seismic activity. Consequently, the industry enters the second quarter with diminished expectations for the first half of the year.

specifically anticipates that revenues and earnings for Q2 will now be in the same ranges they experienced in the fiscal year. We'll remain cautiously optimistic of our second half since actual evidence seems to indicate an activity growth in Q2.

We're optimistic that strengthening fundamentals will be widely anticipate the second half recovery, although today we can't predict timing or strength of the recovery.

In conclusion this has been a very challenging quarter for the company. We focused on managing our cost structure and balance sheet, and at the same time have continued to invest in those technologies which have excellent potential providers, substantial leverage, as the cycle begins to turn.

We'll now be very happy to take any questions you may have.

Thank you.

At this time we are going to begin the question and answer sessions. If you would like to ask a question, please press star one. You will be announced prior to asking the question. If you would like to withdraw the question you may press star two. Once again, to ask a question, please press star one. Our first question comes from .

Sir, you may ask your question.

Yes, good morning, Tim and .

Good morning, Scott.

Tim, you kind of indicated here that the second half of the year is let's call it, you're optimistic but still uncertain. Where are you looking for in terms of your drivers that'll indicate that your business will indeed get better the second half of the year?

I think looking at two things for us, .

Firstly, we want to see that is welcomed and has started to reverse direction, i.e. to increase this devise us with an indication that really there's an increase requirement for an inventory of prospects.

And secondly, the coincident increase or reversal, the downward trend in terms of oval seismic crew activity, which we've been experiencing.

As I think I mentioned in the call, the current quarter I believe reflects the lowest average seismic group at any time in the last decade or so. And so it's really a reversal of rig canned activity will be a significant benefit to that.

Tim, over in the Mid East you probably have a lot better clarity on that seismic market than we do, but if you look at the rig count in that market it's actually doing, you know, better, yet seismic activity or at least sales of equipment in that market is down.

Can you comment a little bit about what do you think is fundamentally different in the Mid East today than six months ago and what do you think happens there over the next six to 12 months?

Yeah, I think there have been clearly some very significant projects which have been on the board, particularly in Saudi Arabia for the development of their gas.

And I don't think it's any secret that a number of those developments are moving a little more than we originally anticipated. Certainly the general expectation was for a continued upward trend in Middle East seismic activity to accommodate exploration associated with the first major programs. Originally anticipated, I think, to come on stream during the second half of the fiscal and they'll probably host until the first part of next year.

OK, my last question, I'll let others get on in here. , when you look at your fixed cost and your manufacturing facility, is there anything you can do -- we're looking at the sales to be flat here. Is there anything you can do, or want to do to reduce those fixed costs so that your margins are improved here in the second quarter?

Yes, Scott as we've talked about, we're continuing to look for opportunities to down source some of our manufacturing processes which will certainly lower the fiscal offset print that we have. Maybe some of the others have, you know, had a positive effect, it won't have a significantly positive effect on the second quarter of this year, it certainly will position us better in the future.

In terms of what we're doing to address, you know, second quarter issues, we're continuing to evaluate each manufacturing facility to the degree to which we really want to be able to maintain through the , and/or certainly evaluate forward cost reduction.

, we actually went back to those -- nothing prior to your time there depends on there, but you go back to when revenues were around $30 million, all of $33 million in a quarter, we saw very similar gross pocket margins. I guess, you know, my question is, you know, is there some sort of, you know, revenue mix difference here. Because I know you guys have taken out a lot of costs in the system.

Just kind of curious, you know, any time revenues go to this type of gross profit margin we can anticipate or things, you know, actually different going forward?

It was a bit of a mixed component this quarter, . We were particularly effected by lower sales and two of the land product areas that are fairly manufacturing . Our analog sensors and the land energy sources, there was probably an unusual high degree of a lot of sale and expense this quarter.

OK. Thank you.

Yes, may ask a question.

Good morning. Kind of picking up where Scott left off there, let me turn it around and ask if you've got revised estimate as to what your break even revenue run rate might be now that you've taken such a significant head count reduction in the first quarter?

We have looked at that, Jeff, and we think we are bringing down the breaking rate. I don't have a number to give you at this point but we do think we're making progress in turning some revenue down.

I guess, in the first quarter it's not clear when exactly the head count reductions took place. Is it fair to assume we didn't see much of the positive impact from those head count reductions reflected in the first quarter results?

Yeah, most of those reductions were towards the middle to latter part of the quarter.

OK.

And so the positive effects of the compensation reduction is partially offset by the severance expense.

Right. OK. So we have yet to see kind of how big that might be? Again somewhat related to Scott's questions, I mean, generally we kind of think about the seismic activity slightly preceding the recovery in drilling activity and we seem to at least now be experiencing a market in which it's at best coincident and possibly even, as you're suggesting, Tim, a lag to drilling recovery.

Any comments on what might have happened? Why that relationship may have changed so much?

That's a very good question. I mean, I think that historically your assertion is quite correct. It has historically been a leading indicator. It was a leading indicator, I think, until probably for the, round about, you know, 1998 time frame. From 1998 it's been a coincident indicator and currently it appears to be moving to the lighting indicator to category.

I'm afraid I'm somewhat at a loss to explain specifically where that is taking place other than to kind of review the statistics.

I do feel, you know, the sort of anecdotal indications are that there is some degree of shortage of prospects and some geographies which will kind of indicate that we may with an uptake in the drilling activities see a sharp coincident move in crew cams. But I'm afraid that is, I think that's lonely.

Mm, OK. And the last question -- I will apologize in advance for perhaps, you know, running too far ahead of the current situation, but, you know, you've described that a current environment which is clearly challenging level of activity in the U.S. land market that are at decade long lows are you beginning to, you beginning, you know, think more broadly about, you know, what other action the company may be able to take?

Either of a consolidation nature within the existing market or, you know, you commented about the applied . Is there any increase in the attention being given to alternative markets?

Well, I think, let me answer that question in a couple of ways. I mean, firstly let's capturize the company's position historically to, you know, if we can certainly focus into the front end expiration activity. And I think clearly our efforts, particularly in terms of our strategy I think very squarely moving us at company towards great balance between the front end expiration activity, appraisal and development activity through particularly through our ocean bottom activity, and into development and laundering activity is focused on the in well activity that I discussed a little bit earlier.

So, very clearly we have a strategy which is the effect of which is to move this company from being solely dependent on front end seismic expiration to a better balance for the field. That's point number one. And point number two, we have, I didn't not much time but we have an acquisition and alliance strategy and a relatively strong balance sheet, which provides us with developing to preferentially strengthen that direction as opposed to perhaps maintain this quota front end expiration geophysics arena.

With respect to the third part of the question, relating to and alliances specifically in the sector, obviously that's something, Jeff, that we're all very mindful of and sort of keeping an active out to move on those possibilities.

OK, great. Thank you.

you may ask your question.

Hi, guys.

Morning, John.

Morning, John.

It sounds like you are closer, if not already there, to having a press schedule for , is that the case?

That's absolutely right. You know we're basically commercializing the product in the three markets we discussed. It is true today that in the sort of in, well, and the ocean bottom marina, John, and we're probably a little premature in sort of an oceanic kind of Viking strategy in those particular sectors, but we have drafted a marketing sales strategy for that in land application.

And as you know, initial commercial and focus is in land and here we've devised a strategy whereby we're price at a slight premium to high channel event P way systems which are typically selling for anywhere in the sort of $1300 to $1500 per channel range and including sensors.

And we'll separately charge for those systems, multi component capabilities either the one ton figures and ongoing from that little basis.

And clearly as I mentioned we will work on a pricing strategy for and in well applications as, as well as those markets evolve. The only thing that I will kind of comment on those two markets is on a price to cost basis, both the and in well applications, you know, operate a, somewhere between a two times and a 3.5 times cost in price multiplies to regular land applications, which is obviously somewhat a more straight forward to execute.

Right. When you're talking, let's just talk about this stuff that you've got available today, I, you know, land. When you're talking about a one time fee is that some of the advisors say something and can go shoot as many as they want, or they pay a separate license fee, multi component fee shoot?

You know, what we're trying to do here is to price the basic system at a slight premium to the high channel so that it's an agreeable comparability between cells and the existing analog systems. And then an additional fee, will be told the requirements for the specific market. North America operates very differently than China, for example, to be able to capture the value of or some kind of licensing incremental fee.

I guess, I don't mean to be , but I guess if someone came to you right now and said can you spec down a price for an entire system that I can then just go off and shoot this forever, would you be able to do that? Could you share with us what that would be?

Absolutely. And we have a number of quotes standing right now for four systems dials. So that certainly is something in which we have already -- we have worked on. And as to pricing, as I said, the base pricing is kind of really somewhat specific, John. And, you know, I think it's an area that I prefer to keep a little confidential, John, at the present time.

OK. And a completely different question, just something I'm curious about, your comment on or your response to. I've actually heard from some people who say that, you know, the pricing whether it's all or natural gas came back a heck of a lot faster from sort of where we were in December to where we may be today.

And that, in fact, it came back, it's come back so fast that in many cases oil companies or energy companies has sort of dusted off previous prospects that they had shot and prepared but which might not work at $3 gas or $20 oil, but it might work under the current environment. And that, in fact, demand for seismic might go a little bit better if you had a modest easier price here. Do you have any view on that?

Yeah, I think I was sort of alluding to that a little bit earlier.

I think what you're hearing comments that, you know, shortage in prospects and there are some prospects on the shelf. And, you know, clearly with respect to technologies like , you know, I believe that they are probably more valuable in most price scenarios than they are necessarily in a pricing scenario where we have very, very ghoulish prices, simply because, you know, you have to work harder to make those prospects, make it on .

So I do believe that, you know, your position probably has some validity, yeah.

OK. Thanks.

Thank you.

Yes, you may ask your question.

Yes, . Just a few follow-ups. For one I just wanted to understand the big change in the outlook for the quarter, let's say, from in the last conference call.

I'm wondering was it the Middle East that was the biggest component of what you saw, or simply just broadly speaking, lower than expected events, of perhaps merger in the thinking as well?

I guess it's three, a couple questions there. Let me answer the last one first. merger, I really don't think that had a significant impact yet.

And, you know, the deal hasn't closed and until there's time to go -- those are very limited communication between the two companies. So I, to this point, no impact. Though clearly as we go forward, any time you do put two companies together, you know, there is an impact that takes off effect.

Their inventory, what they have, and support, and clearly there is some proceeding impact that will bringing them forward into the balance of the year. I would say that the second issue made a more rapid decline in activity than what we had anticipated. Probably marketing in general.

I think estimates and to a lesser seismic activity type been steadily tumbling from the rest of October time frame to present. So I think we definitely will kind of course up a little bit in the, sort of, like, expectations been slightly more active scenario. And thirdly, the Middle East has had a significant impact.

It has been a steadily growing market and general expectations were for it to continue to be a slowly growing market, particularly if the large became active in in another location. And that clearly, in our view, is something that is going to take a lot of it to fruition. It's probably going to be delayed by a minimum of six months, possibly slightly longer before those activities get kind of swarming into the full year.

So I would say in the second half of the year that has a, really it's been something which should have an impact this quarter too, but these activities definitely have had an impact on our outlook. As far as our outlook for the second half of the year is concerned, you know, we obviously have a little bit of a fuzz out there in terms of sort of seeing how quickly this will bounce back.

Just in the last couple of days we've kind of seen that , here at least, to have been testing which is a good sign. And, you know, for and for stuff to move in the other direction will have at this stage in the second quarter will have a significant impact on the second half.

And since our expectations for the year overall I think we still feel, you know, pretty comfortable to be within the range of the current annual estimates which have been established for us to select, you know, perhaps provide you somewhat with a frame for, a frame of reference for the year at this point.

OK, and aside from the Middle East could -- you were talking about some of the geographic outlooks in the other areas you talked about China and Russia and OK. Could you talk about the different regions?

Yeah, I'll certainly do that. , do you want to touch on China and Russia initially?

Sure, I mean, this quarter we had a good sale activity with to region. Perhaps it's a percentage of revenues a little bit higher than political.

China was of a good market, of course. We talked to to his comments the continuing in relatively decent activity levels in both of those markets. The Middle East, as we talked about, is quite . North America was average, I would say. And we had, you know, relatively decent activity in Europe. So yeah Russia and China are, you know, still good, very good markets for us. Middle East down quite a bit. And areas more or less average.

OK. And also you mentioned your comments about they expect from a revenue, so I was just wondering if you could give us any kind of guided springs on that?

Yeah, I think what I said under the was, you know, we had said in our last conference call that we expected to generate revenue this year of $8 million to $11 million.

And I think we'll all feel good about that estimate. And, you know, we expect to see some fairly significant acceleration thereafter.

You know we have been very, very pleased with the introduction of the fully commercial system, the initial system with our jobs, you know, completed two jobs already this year and it looks quite good.

So, I think we're feeling fairly confident about that now.

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