Ion Geophysical Corporation (IO) 2015 Q3 法說會逐字稿

Greetings, and welcome to the ION Geophysical third-quarter earnings call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Karen Abercrombie, VP of Corporate Communications. Thank you. You may begin.

Thank you, Adam. Good morning, and welcome to ION Geophysical Corporation's third-quarter 2015 earnings call. We appreciate your joining us today. As indicated on slide 2, our hosts today are Brian Hanson, President and Chief Executive Officer, and Steve Bate, Executive Vice President and Chief Financial Officer.

Before I turn the call over to them, I have a few items to cover. We will be using slides to accompany today's call. They are accessible via a link on the investor relations page of our website, Iongeo.com. There, you will also find a replay of today's call.

Moving on to slide 3, information reported on this call speaks only as of today, November 5, 2015, and therefore you are advised that time-sensitive information may no longer be accurate at the time of any replay.

Before we begin, let me remind you that certain statements made during this call may constitute forward-looking statements which are based on our current expectations and include known and unknown risks, uncertainties and other factors, many of which we are unable to predict or control that may cause our 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 ION from time to time in our filings with the SEC, including our annual report on Form 10-K and in our quarterly reports on Form 10-Q. Furthermore, as we start this call, please refer to the disclosure regarding forward-looking statements incorporated in our press release issued yesterday. And please note that the contents of our conference call this morning are covered by these statements.

I will now turn over the call to Brian, who will begin on slide 4.

Thanks, Karen. Good morning, everyone. Let me start off by saying this is going to be a quick call today. The results being reported this earning cycler are pretty consistent, with companies almost universally focusing on cost reduction and cash management throughout this downturn. So we will be brief, focus on our business and spare you a dissertation on macroeconomics. This should free up time for a more meaningful Q&A discussion at the end of the call.

Yesterday, we reported third-quarter revenues of $67 million and adjusted net loss of $17 million, or $0.10 per share. While our revenues were down 37% year over year, our overall adjusted loss per share improved by $0.05 as a result of our cost-saving initiatives from earlier in the year. I will elaborate on this later in the call, but during the quarter, we further scaled down our businesses but we won't realize the benefits of this reduction until end of the fourth quarter.

As we indicated on our second-quarter call, we anticipated our third-quarter revenues would be up over the first two quarters as we began acquisition on our industry-funded MexicoSPAN program. We completed acquisition in late October and are currently processing the data. Our clients are very pleased with the quality of the fast-track data we have delivered so far.

That said, the virtual shutdown in exploration spending has had a negative impact on all parts of our business, and we were managing through this downturn by employing strict cost controls and spending discipline.

During the first half of the year, we announced staff reductions totaling 25% of our workforce. During the third quarter, we reduced our employee headcount by an additional 25% and implemented additional cost control measures. A majority of the reduction has occurred in September, so had very little cost savings impact into our third-quarter results. Once complete later this year, these third-quarter cost controls will yield an estimated additional $40 million in annualized savings over the reductions we've already reported on this year.

While we have taken out costs across the Company, we have appropriately scaled our businesses to reflect our current revenue streams while still maintaining all of our core capabilities. Consistent with our asset-light strategy, we are ready to scale up or down as business dictates.

In our multi-client business, we have seen almost a complete shift from new venture underwriting to light sales. While have a number of attractive projects on the radar for 2016, this shift could prove challenging for new venture projects as we intend to maintain our strict underwriting standards.

Our third-quarter data processing sales were slightly lower than expected, and we expect continued pressure on the data processing business for the balance of this year and throughout 2016.

In our software business, we are carefully monitoring the risks of further vessel stacking, as that may result in reduced levels of activity in that business.

And on the Ocean Bottom Services front, interest remains high, and we are continuing to move multiple project tenders due to sales cycle. Our contract negotiations and permitting are slow in the current environment, and we are seeing E&P companies pushing projects out, making start dates uncertain.

With respect to the current status of the WesternGeco lawsuit, last week the Court of Appeals ruled in ION's favor, declining WesternGeco's request for a rehearing at the Court of Appeals level. Now that the Court of Appeals has ruled, the case will either be appealed to the Supreme Court or returned to the trial court for implementation of the judgment, which at this point is approximately $22 million.

With that, I'll turn it over to Steve to walk us through the financials, then I'll wrap up before taking questions.

Thanks, Brian. Good morning, everyone. As Brian mentioned, our third-quarter revenues were down 37% year over year. While we experienced declines in our systems and software revenues of 70% and 39% respectively, the result of continued increases in vessel capacity, our solutions segment revenues increased by 15%. This increase in solutions revenues was the result of acquisition on our new ventures MexicoSPAN program and an increase in data library revenues primarily from our South American data libraries.

Similar to the last two quarters, our ocean-bottom services segment contributed no revenues this quarter, as the crew has been idle since completing a survey in the fourth quarter of 2014. We have cold stacked the vessels and our crew, reducing our fourth-quarter cash burn rate to approximately $3 million, but we have continued to maintain our ability to quickly mobilize the crew.

In September, we implemented further cost-savings initiatives which, due to the late-quarter execution time frame, had very little cash savings impact on our third quarter. We estimate the cash savings impact to our fourth quarter will be approximately $5 million net of severance payments. Once completed, these cost-savings initiatives will yield an estimated $10 million in quarterly savings starting in the first quarter of 2016.

As a result of our increases in revenue compared to the prior two quarters, we reported a positive adjusted EBITDA for the third quarter of $8 million, while our year-to-date 2015 adjusted EBITDA was negative $60 million compared to a positive $83 million in the prior-year period.

During the quarter, we had a use of cash of $29 million. At September 30, our total liquidity was $128 million consisting of cash and cash equivalents of $88 million and the $40 million available on our recently amended revolving credit facility. Our net debt, defined as total debt less our cash balances, was $98 million at September 30, 2015. We believe that our cost-reduction initiatives have significantly scaled our businesses to align with current market conditions, and we'll continue to stay focused on cost discipline and cash conservation as we complete the fourth quarter and look towards 2016.

With that, I'll turn the call back to Brian.

Thanks, Steve. The downturn on exploration spending has affected all parts of our business, requiring us to maintain strict cost control. Looking ahead, we believe the exploration landscape in 2016 as it impacts our business will be similar to that of 2015. Our objective during this period is to maintain our strategic capabilities and advance our key R&D initiatives while minimizing our cash burn. We believe we have moved quickly and cut deep, as we don't believe we will see early signs of recovery in our area of the industry until 2017.

With that, we'll turn it back to the operator for Q&A.

(Operator Instructions) Brian Taddeo, Baird.

Two things. First, can you just talk a minute about from a cash flow perspective, given all the cuts you made, do you think you've gotten your point now where you can keep EBITDA in positive territory and potentially free-cash-flow-positive going forward?

And then second thing is if you could comment a little bit about the $25 million stock buyback that the Board approved. Just curious with bonds where they are trading now, why that was the, I guess, approved use of funds -- or why that was preferred, I guess, in terms of use of funds at this point. Thank you.

Sure, Brian. To your first question, this is a very lumpy business, and we are still -- we are picking it -- we are picking through it quarter by quarter. So I can't tell you with any degree of confidence that we'll be in EBITDA-positive territory quarter after quarter after quarter. I think some quarters are going to be better than others. So we are playing it quarter by quarter.

On the second question, it's real simple in my mind. When I see a $0.26 stock, that's probably the most ridiculous thing I've seen in 10 years at ION. So if people want to sell stock at $0.26, we will take it back.

Should we take from that -- this action the fact that you are pretty comfortable with your current liquidity position that you're going to -- that you can handle the debt maturities and you have no concern about the debt maturity coming up?

No, Brian. I think what you can take from it is we think it's ridiculous to see our stock trading at $0.26 and $0.30 and $0.35. So if people want to sell it at that, we will buy it back.

Okay. Thank you.

Rudy Hokanson, Barrington Research.

Could you talk a little bit more about the reference you made on new ventures that, in talking to clients, it sounded like that there were programs that some clients are looking at? Nobody was making any definitive commitment, but that there may be some activity in new ventures. And if that -- I did hear that correctly, what do you think their criteria will be on whether or not they would move forward? Is it just the price of oil, or are there other issues going on in terms of government approvals or lease sales? Again, realizing everything is intertwined.

Rudy, if you step back and think in the broad scheme of things over multiple years, there are certain areas of the world that are still extremely attractive for oil and gas companies to get access to data, too. And an example would be what's going on with -- in the Gulf of Mexico today for Mexico. As we see Mexico open up, that's one of the sweet spots in 2015 where capital has flowed into projects there simply because it's been closed for so long that all companies want to know what's there. And there are other areas around the world that are like that, that have very similar profiles that are potentially opening up.

As for the funding of those projects, I see that being difficult in 2016. I think that we have to see a period of commodity price increases. I think we've got to see a little bit of balance sheet repairing before I think we're going to see oil companies get back in front of underwriting programs like that. So in order to do programs like that, I think we're going to have to be a whole lot more creative on how we de-risk them and how we get them underwritten probably in less traditional methods. But it will be a while, in my opinion, before we will see oil and gas companies step up to the levels of underwriting that we saw in the 2010 to 2013 time frame.

Okay. Let me ask the question a little different way. And that is with your clients, the oil and gas companies, understanding that their survival is having a long-term perspective, what do you see going on within their departments that do interact with you in terms of being able to make long-term plans right now given this expectation of perhaps not being able to fund anything in 2016? Or let's say, being able to fund a minimal amount of activity.

The oil and gas companies, quite frankly, aren't thinking long term; they are thinking short term. They are reacting to commodity prices. They are trying to fix their cash flow issues. And they are going to be focused on that until they can repair their balance sheets. So I think it's -- I don't think they are thinking long term.

I think what's -- obviously, I think what's going happen is demand will outstrip supply at some point in time. Commodity prices will repair, and we will have the proper level of funding that can afford to do the type of exploration and production work that we need to do to maintain our reserves. But that's a several-year type issue, not a 2016 one.

Okay. Thank you very much.

Phyllis Camara, Pax World Funds.

The first thing, what's going on with the ocean bottom? And I think I may have missed that you were saying that you had, I think, laid off a number of people. Was it in the ocean bottom group? And I thought you had a couple of contracts that you were bidding on. And if you haven't laid them off, are you still bidding on -- are those contracts still in the works?

Sure, our layoffs have been across all of our businesses. So we reduced our overall workforce in the last nine months or so by 50%. And we have cold stacked our crew, but that crew is cold stacked in a way that we can fire it back up pretty quickly. And we are --

Cold checking was in the crew of the ocean bottom business?

That's correct. We only have one active crew that we operate. Otherwise, we are a very asset-light business. So we are -- we continue to negotiate on two different tenders or two different contracts, and we are participating in a number of tenders, quite frankly. It feels like the ocean bottom -- the ocean bottom market itself, the projects are out there, it's just that they seem to have been delayed. A lot of them have been pushed out about a year. So, stuff that we expected that we would probably have done this year is looking more like it's moving into 2016 -- or late 2016. I have a -- I just don't know how to read it right now because things are just moving extremely slowly inside oil companies.

Okay. Okay. And then on the Mexico contracts that you were doing in the third quarter -- and I think you said in the press release that you are reviewing the data that you got -- is that going to then impact fourth-quarter numbers a little bit as well? And then after fourth quarter, we won't see any revenue from that -- from the Mexico contract?

No, the way our programs work, when we shoot a program and put the data on the shelf, that data has an economic life of many years. For example, our book life of data is no more than four years. But several quarters we can point to, we've had 25%, 30% of our sales as a result of data that's over four years old. So it's kind of -- it's a product that just keeps on giving. So if an oil company wants to take a look at what's going around and going on in that basin, whether it's today or in 2020, we've got the data set to sell that.

Okay, okay. So we probably won't see the bump in revenue that we saw in the third quarter going forward?

No, the fourth quarter in our business is always the hardest to predict. If there's discretionary capital at the oil companies, they tend to spend it on data, and they tend to spend it on data somewhere in the last two weeks of the quarter. So I have gained 10 years in this business. One thing I've learned is never try to predict how the fourth quarter is going to end out.

Okay, okay. And then -- I'm sorry, one last question, too, about the -- it was good that the Court of Appeals affirmed the WesternGeco lawsuit. When are you going to have to pay I think is it $27 million? When are you expecting to pay that $27 million award?

It's $22 million, and I don't know the answer to that. To the extent it's appealed to the Supreme Court and the Supreme Court picks it up again, that could be a very protracted period. To the extent that it's relegated back to the District Court, that again is at the discretion of how quickly the District Court moved.

And if you remember the first round, when we were at the trial court level on the first round of this thing, between the timing of when the jury ruled and when the judge put out the final judgment, it was something like 14 or 15 months. So it's hard to predict how the District Court is going to move it. It could be quickly --

Okay. Okay, so I thought maybe WesternGeco would just drop the whole thing, but you don't think they're going to.

No, they absolutely will not drop the whole -- they won't drop it at all. They're going to see it through.

Okay, okay. Thanks.

Ariel Rothman, Tegean Capital.

Just, I guess, in light of -- similar to the first line of questioning, I guess I'm just kind of curious on the stock buyback as well. I know your stock is -- it seems exceedingly cheap, but just given that you guys are going to burn over probably $100 million of cash this year and you project next year to be somewhat similar to this year, and you also said visibility is not great, how do you justify buying back stock in that kind of environment just given the lack of visibility? And you obviously have the WesternGeco liability still and you've got a pretty short debt maturity.

Ariel, I think I've said all I'm going to say about the stock repurchase program at this point.

Okay. But are you -- I guess you are comfortable with liquidity to think that that's -- yes, that you are okay with that just given the --? How much do you think the cash flow burn would be next year? I know you have taken out costs in terms of the $40 million of savings, but you're probably going to burn over $100 million this year. So that still looks like a good part of your liquidity. If you burn the same rate, gets used up next year. Am I thinking about that right, or is there something else I should think of in terms of the cash burn potential for this year?

I recommend you go back and review the script from the last couple of calls. And I think what you will hear is we feel strongly we've got a scalable business. We've taken appropriate measures to scale it. And I can't predict what 2016 is going to look like, so I'm focused on the fourth quarter right now.

Okay. Thanks for taking the question.

Dan Abramowitz, Hillson Financial Management.

I just want to follow up maybe to ask the question a different way. I hear what you're saying about the stock being ridiculously cheap and if someone is willing to sell it at these prices, you're going to buy it. But just asking the question a different way, if you have the excess capital to do that, last I checked, your bonds were trading in the mid-50s. Why would you not be equally anxious to permanently reduce your debt and your interest expense? If a bond holders is willing to sell you -- allow you to pay them back at $0.50 or $0.60 on the dollar, I would think that would be very attractive as well. And every dollar that you eliminate of debt because you are buying at a discount obviously goes from the bondholder interest to the stockholder's value. So asking the question that way, why would that not be a priority as well?

Dan, you sound like you're bondholder, but I'm not going to comment further on the stock repurchase program.

(technical difficulty)

(Operator Instructions) (technical difficulty) Thank you, ladies and gentlemen. We have no further questions in queue at this time. I would now like to turn the floor back over to management for closing remarks.

Well, thank you for attending our call, and look forward to talking to you on the fourth-quarter call.

Thank you, ladies and gentlemen. This now concludes the teleconference for today. You may now disconnect your lines at this time.