Ion Geophysical Corporation (IO) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the ION Geophysical first-quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions).

This conference is being recorded today, Thursday, May 6 of 2010, and I would now like to turn the conference over to Jack Lascar of DRG&E. Please go ahead, sir.

Thank you, Britney, and good morning, and welcome to the ION Geophysical Corporation's first-quarter earnings conference call. We appreciate your joining us today. Your hosts today are Bob Peebler, Chief Executive Officer, and Brian Hanson, Executive Vice President and Chief Financial Officer.

Before I turn the call over to management, I have a few items to cover. If you would like to get on a e-mail distribution list to receive future news releases or experienced a technical problem and didn't receive yours yesterday, please call us at 713-529-6600 and let us know.

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.iongeo.com or via a recorded instant replay until May 20. The information was provided in yesterday's earnings release.

I should also point out that we will be using some PowerPoint slides to accompany today's call. They are accessible via a link on the homepage of ION's website.

Information reported on this call speaks only as of today, May 6, 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. 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 results or performance to differ materially 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 its annual report on Form 10-K for the year ended December 31, 2009 and its quarterly reports on Form 10-Q.

Furthermore, as we start this call, please refer to the statement regarding forward-looking statements incorporated in our press release issued yesterday, and please note that the content of our conference call this morning are covered by this statement.

I will now turn the call over to Bob Peebler.

Thanks, Jack, and good morning. We were very pleased to have finalized our INOVA joint venture at the end of last quarter, and I am confident that we will gain significant benefit for a share of the land business that will flow from the venture.

In addition, we now have a much stronger balance sheet, including a greatly reduced debt load going forward. Although we had some significant one-time charges related to closing the transaction that Brian will review in detail, our underlying business results during the quarter were generally what we expected and were close to our internal plans.

As expected, our equipment businesses, both land and marine, were slow, as our contractor customers continue to postpone equipment buying decisions until their excess capacity is absorbed with increasing activity. The good news is our customers' businesses do seem to be slowly strengthening in certain areas, and we are starting to see our pipeline of opportunities beginning to grow.

One additional drag on our land business in the first quarter was the fact that a sizable portion of the China market was on hold, waiting for the joint venture to close. For the first time in a long time, we had zero business during the quarter from our Chinese customers.

Even though China was weak in the first quarter, we saw real momentum in other regions, with Mexico standing out as a strong example of the success we are having with an integrated solutions approach that directly targets the E&P operators.

As most of you know, Pemex is the sole E&P operator in Mexico. During the first quarter, Comesa, Pemex's part-owned seismic subsidiary, finished the third in a series of full-wave seismic surveys using FireFly. Comesa's productivity improved steadily throughout the three projects, which were conducted in a diverse array of operating environments, including mangrove swamps and urban areas.

Our GXT Imaging Solutions Group are processing the data and working side-by-side with Pemex to interpret both conventional and full-wave seismic data to optimize decisions related to exploration and reservoir development.

In addition, and not directly related to these FireFly surveys, GXT also entered into a long-term processing contract with Pemex that will provide GXT with more visibility into the revenue stream to Mexico over the next several years. Moreover, it may open up additional opportunities for ION, both in processing and our other business lines.

Another positive first-quarter development is that for the first time in roughly two years, we are beginning to see some early signs of buying activity among land contractor customers. One early indicator in the strengthening we are seeing is in our Sensor geophone business. Sensor has a significant market share and has a solid presence in a number of key markets, particularly North Africa and the Middle East.

Geophone sales are a good indicator of the health of the land business, as they are semi-expandable and sales usually swing with overall industry activity. We feel they are somewhat of a lead indicator for the business, and even though we had a very slow first quarter in Sensor, we do see our Sensor geophones pipeline really picking up.

We have also introduced a new-generation extended-life geophone that provides the same quality improved durability, so we expect to pick up some market share starting this year.

Our Marine business is still benefiting from our leadership in our steerable streamer technology, with DigiFIN continuing to be well-received by the industry. We don't see any reason for that trend to change, as we are hearing more and more success stories from both contractors and oil companies.

Also, Concept's Orca installed base continues to expand, as complex surveys such as wide azimuth are dominating the high end of 3D surveys, and Orca is essential for our customers' productivity in these types of surveys. As an indication of Concept's system success, their 2010 first quarter was their best ever first quarter in their history.

Our data processing business continues to be strong. One excellent trend in this area is our ability to lock in long-term data processing contracts, like the one I mentioned earlier for Pemex, which gives us even more visibility into our market and future revenue streams.

GXT's backlog of contracts also is a strong indicator of our customers' faith in our ability to continue to provide excellent service and quality and maintain our position as the innovation leader.

In addition to our strong marine depth imaging business, including Reverse Time Migration, we are also gaining strength in our dedicated full-wave processing business, and are a leader in helping explorers and engineers optimize their drilling activity in the emerging shale plays of North America and, in the future, of Europe and China.

We are also seeing even more opportunities for our full-wave technologies, both acquisition systems and processing, as lower natural gas prices are creating a need for more productivity and smarter decision-making among the oil and gas companies investing in unconventional reservoir development.

Our multi-client business still benefits from our technology leadership in processing. For instance, in Brazil, we have leveraged our expertise in deep, subsurface imaging to generate a BrasilSPAN data library that explorers in our regions are using to tune their exploration programs.

We added additional data to our BrasilSPAN library in the first quarter and are working with a number of oil and gas firms that are attempting to identify analog prospects on both sides of the South Atlantic. They are looking for the ancient conjugate ties when the African and South American Continents were connected, that if properly understood and reconstructed, may allow them to find similar prospects in offshore Africa to those found in Brazil and vice versa.

Another major basin span focus area for us is in the Arctic, where we have implemented a total solutions approach that leverages a tool kit of processing methods, operational techniques and marine equipment. This unique integrated approach has given us a significant competitive advantage in our Arctic operations, as we are able to offer the E&P companies that are exploring offshore Alaska, Canada and Greenland a solution that lets them better evaluate high potential areas that may never have had modern seismic shot, at least not for several decades.

I am proud that we managed to continue our Arctic operations last year, even though we were in stress financially. We believe that we are going to benefit this year and even more in 2011 and beyond because of the pioneering work we performed during our Greenland span program in 2009.

Related to our multi-client business, we had a much stronger first quarter in data library sales compared to the same period last year, and we feel this bodes well for the rest of the year. That, combined with the significant increase in our new ventures business, where we are executing several new programs, should result in a solid increase for 2010 over last year.

Wrapping up, I want to emphasize our goal for 2010 is to get the Company back to profitability. Even though, as we expected, we had a slow start so far, we feel we are on path to achieve our profitability goal for 2010. Having closed the joint venture transaction on time, as planned, is a very good first step.

We have growing confidence that the world economies are slowly healing and high expectations that the oil business will follow with strengthening energy prices and investment programs. Net-net we think the table has been set for a much stronger 2011.

I have heard several of my peers in the industry talk about how they expect we are at the beginning of another three- to five-year growth cycle, and I agree with them. We are well-positioned, as any new cycle will likely have a strong emphasis on new technology in areas such as the shales, the Arctic, the sub-salt plays of the Gulf of Mexico and the South Atlantic.

We plan to take advantage of this coming up cycle by continuing our focus on costs, as we have throughout the last year, but also continuing to innovate and roll out the latest technologies that both oil and gas companies and contractors require to efficiently and safely acquire and process seismic data in the most challenging operating environments.

We are also excited to work with our partner, BGP, in assuring the success of INOVA and to cooperate in other areas where it makes business sense for both companies.

With that, I will turn the call over to Brian.

Thank you, Bob. Good morning, everyone. Let me start off with a quick visual on the numbers. We thought it would be helpful to provide a consistent look each quarter at our trailing 12 month revenues in the quarter most recently ended and compare that to the trailing 12 month revenues from the year-earlier period.

I don't want to dive into all the numbers, but I think this chart does highlight some of the macro trends in our business. For instance, you can see the strength in our data management business during the downturn. Conversely, you can really see the revenue falloffs in our land and marine equipment business lines.

ION Solutions declined through all the falloff was due to lower data library sales and lower revenues from new ventures. GXT data processing actually increased during the period. We'll plan to show this slide on a consistent basis during future calls.

Next, I wanted to highlight some of the big items in the quarter. As everyone is aware, in late March, we closed on our joint venture with BGP, creating INOVA Geophysical, and simultaneously refinanced our debt. We paid off a revolver balance of $118 million, the term loan balance of $102 million and the amended and restated subordinated seller note of $35 million. Additionally the ICON-secured equipment financing debt of $18 million was assumed by INOVA Geophysical.

We also entered into a new, undrawn revolving credit facility with $100 million capacity and a new term loan agreement for $106 million. At March 31, 2010, we have no balance outstanding on the revolver compared to $118 million outstanding on our previous revolver at the end of 2009.

In total, our debt balance is currently $115 million, with $107 million classified as long-term debt. This deleveraging of our balance sheet was significant and marks a shift in the tide as we anticipate significantly lower interest expense and other debt-related costs. With the debt refinancings, our liquidity and working capital improved dramatically, and we ended the quarter with $46 million in cash on hand.

In addition to the changes in our balance sheet, we also had a quarter that was consistent with our internal expectations. As Bob mentioned, we anticipated that this quarter was going to be softer, as most of our first quarters are. We also anticipate that the remainder of the year will see growth across all of our business segments. However, despite the overall softness of the quarter, we still had record first-quarter revenues in both our Data Management Solutions segment and in Data Processing Services.

Our Marine Imaging Systems segment is projected to have improved results for the remainder of the year due to anticipated continued market improvement, which will likely increase our customer demand. Our Data Library sales, which are historically low in the first quarter of the year, were strong this quarter, exceeding sales in every single quarter for all of 2009.

We are also continuing to expand our new venture programs and anticipate building activity in this sector as well. So overall, the quarter was as expected, with each of our segments showing promise for improvement in 2010, positioning ION for 2011.

As you've already seen in the earnings release, we have three special items totaling $44 million that I would like to point out specifically. The first charge is a $38 million loss relating to the disposition of the land division. This loss is mainly composed of foreign exchange rate effect of $21 million on our four net assets contributed to INOVA Geophysical. The remaining difference is comprised of professional fees directly related to the closing of the joint venture and related transactions.

Secondly, as part of all of the refinancings I mentioned earlier, we wrote off $10 million of deferred financing charges. Finally, we realized a net gain of $4 million related to our warrant with BGP, which included a gain of $13 million related to the fair value change in the warrant, partially offset by the continued accretion of the debt discount of $9 million.

The warrant expired unexercised on March 25. However, accounting rules require that we recognize the change in fair value from January 1 to March 25 on our income statement. The remaining balance of the warrant of $32 million was reclassified to equity on March 26. With the closing of the INOVA Geophysical transaction, we are not currently anticipating any more material joint-venture-specific expenses. If you remove the impact of all these special items, our EPS for the first quarter improved to a loss of $0.09 per share.

As Bob and I have mentioned before, our overall goal is to return to profitability again for 2010. 2009 was incredibly volatile, which made our ability to forecast quarters very difficult. We were constantly surprised as anticipated business evaporated within each quarter. However, we are now seeing the volatility greatly reduced, with anticipated business in the quarter materializing rather than evaporating, de-risking our near-term projections. We believe this is a great lead indicator of the improving health of the market and a precursor to increasing sales volumes.

While we still believe it is premature to return to providing guidance, we do want to issue some general guidelines related to specific line items. Interest expense is anticipated to be approximately $5.5 million to $7.5 million for the last three quarters of 2010. With the formation of INOVA Geophysical, we anticipate that our intangible asset amortization will likewise decrease by approximately $1.5 million per quarter to approximately $2 million per quarter, excluding investments into our multi-client data library.

Our effective tax rate is anticipated to be between 24% and 28% for 2010. Also, beginning in the second quarter, we will [be beginning] to provide improved metrics in addition to the new table provided in this quarter's earnings release. Our goal is to provide improved visibility into ION for shareholders.

Finally, I wanted to give an update on how we are accounting for the joint venture. In the first quarter of 2010, we removed the contributed land businesses from our financial statements and reflected our investment in INOVA Geophysical of $119 million as a separate asset on our balance sheet.

We are accounting for INOVA Geophysical under the equity method of accounting. Under this method, we will record our proportionate share of the joint venture's earnings or losses in our income statement as part of Other Income and Expense.

Because the financial statements of INOVA Geophysical are not expected to be sufficiently timely for us to apply the equity method currently, we will record our share of earnings of INOVA Geophysical on a one fiscal quarter lag basis. Thus, the first full-quarter results of INOVA Geophysical will be included in our filing for the three and nine months ended September 30, 2010.

We will also provide in our quarterly reports the financial results of the joint venture to again provide better transparency into our operations.

With that, we will open up the call for questions.

(Operator Instructions) Daniel Burke, Johnson Rice.

Question on your commentary on BGP, as well as other Chinese customers being absent in Q1, obviously likely to return. Could you maybe separate out the behavior or how you expect BGP's behavior to be different than maybe your other Chinese customers? Actually, more curious about the other customers out there. What pace do you think that the sales ex-BGP return?

Well, one is there are several seismic contractors in the oilfields that belong to CNPC that are not owned by BGP. So BGP is owned by CNPC, so therefore the joint venture is also a part of CNPC. So that there is quite a potential volume of business that is related to those companies.

In addition to that, CNPC is owned by the Chinese government, as well as Sinopec. And if you go down that side, there is also purchases that will likely make by some of the Sinopec customers. So I think we believe there is just going to be a natural tendency to want to buy from INOVA, since it has a strong presence with the Chinese.

Okay, great. That's useful. Then another question. For second quarter, you continue to talk positively about the penetration of both Orca and DigiFIN into the higher-end vessel market. And I guess is there any way to think about that in terms of how penetrated your technologies are into those two markets at this point, just in terms of projecting how long that benefit will really carry forward?

One is much of the DigiFIN sell and the Orca sell is back into an installed base. You also have some -- we still have some new vessel sales that are going on. There are still coming in. So you have sort of that separation between new vessels and installed base.

And I'm not going to give you absolute specifics, but I would say we are not even close to half yet on the penetration for DigiFIN into what is available. And you also have the phenomenon of the increase in streamer going -- increasing in the numbers of streamers in the water. So you can also have a phenomenon where you may have a boat that's a six-streamer vessel that becomes an eight-streamer vessel and then that opens up additional market.

So we are not -- so we certainly see further penetration over the next two, three years likely with that product line. And then as you build up your installed base, you start getting the spares, repairs and those things going on.

Great. And then if I could squeeze one more in, just on the accounting side, Brian. I think as I understood your explanation, we won't see INOVA results sort of included in an ION press release until Q3 2010. And so I guess my question would just be, in Q2 2010 then, on the P&L side, what are we going to see? I think I might have missed that part of the tutoring.

For the second-quarter results, you will see essentially five days of INOVA Geophysical's results included into the second quarter. Those five days will be represented by -- that's from March 25 through April 1. That's the period when INOVA was formed in the first quarter.

Okay, great. That's helpful. Thank you very much.

(Operator Instructions) [Jim Macari], Neuberger Berman.

Good morning, Bob and Brian. I was just wondering if you could give us some early color on how the merger with BGP is going, how the -- what kind of start we're getting at the JV, those sort of things. A little color on cultural fit and management.

One of the things we did all through the first quarter was to assemble the team, get the leadership team in place. It's a mix of BGP folks and ION people. The CEO was appointed. He's a guy by the name of Steve Bate, who came out of the ION side. Steve was running the Land division for us, and before that he was running the Sensor division. So good, experienced guy.

That team was put together and actually they finalized the operating plan for 2010 and their five-year plan over that three-month period. So there was a lot of intense work where the teams were actually working together, both in Beijing and Houston and Calgary to get that pulled together.

I'm frankly quite pleased with the quality of work and also the work that team has done working together. And then obviously, you have to carry down into the organization.

I think the one thing that is really different than many joint ventures, this is not a case where two companies come together and then put people together to create something brand-new. This is the case where we sold slightly more than half of what we had in existence to BGP, and then they put in some assets to join into that group.

So for many, many people in the organization, not a whole lot has changed except the ownership. Their bosses are still the same. The things they are working are still the same. So it is not all that disruptive.

What I've also seen is a significant interest, as you would expect, from our Chinese customers, both the existing BGP, CNPC companies. And our teams are over there right now; that's what they are doing, is going around the oilfields and, along with some people from BGP, to start talking about people and INOVA and what they can purchase and different things.

So I'd say, Jim, we are quite happy. We think it is progressing nicely, and considering it just came together, I don't think it could be better than it is.

All right, great. Thank you.

Daniel Burke, Johnson Rice.

I just had one other follow-up. You mentioned Sensor specifically. I guess Sensor will stay at ION, obviously. Is there a way to maybe break out how Sensor and some of the legacy land businesses staying with ION performed in Q1, just to start getting the run rate there, since we will obviously begin to see that a little more obviously each quarter going forward?

You know, Daniel, since it is probably not a big enough entity to break out as a separate line item, as a revenue segment, we will probably treat it more as -- we'll probably integrate it into one of our segments. You can imagine, that Sensor business is essentially a product line. So by giving that much disclosure on a product line, there is a lot of competitive pricing information that would flow out of that.

Fair enough. Just thought I would try. And then I guess just for the last one, again, just revisiting the thought that we are going to see to some extent some lagged results out of INOVA, I was wondering if you could address the ability you will have to kind of qualitatively speak to sort of sales levels realized in the current quarter. Which is to say, I guess, when you report in July, will you have the ability to at least speak on the call to what went on in Q2?

We are actually evaluating that as we speak, so it would be tough to make a commitment today. But we are taking a look at what we can -- what we will be able to talk about on the -- real-time on the calls.

Okay, well, great. Any and all disclosure will be appreciated. Thanks, guys.

There are no further questions in the queue. At this time, I would like to turn the call back to management for any closing remarks.

Okay, well, thanks for taking the time to attend the conference call, and I look forward to talking to you during our second-quarter call. Thank you.

Thank you. Ladies and gentlemen, this concludes the ION Geophysical first-quarter earnings conference call. Thank you for your participation. You may now disconnect.