TGC Industries, Inc. Q3 2008 Earnings Call Transcript

Oct.20.08 | About: TGC Industries, (TGE)

TGC Industries, Inc. (NASDAQ:TGE)

Q3 2008 Earnings Call

October 20, 2008 9:30 am ET

Executives

Karen Roan – DRG&E

Wayne A. Whitener - President, Chief Executive Officer and Director

James Kevin Brata - Vice President and Chief Financial Officer Designate

Analysts

Neal Dingmann - Dahlman Rose & Co.

Karen David-Greene - Oppenheimer & Co.

Terese Fabian - Sidoti

[Kerwin Dutton – KLV Investment Management]

Bob Johnson – [Sadwith]

Operator

Welcome to the TGC Industries third quarter earnings conference call. (Operator Instructions) At this time I’d like to turn the conference over to Karen Roan with DRG&E.

Karen Roan

We appreciate your joining us today. Your host will be Wayne Whitener, President and Chief Executive Officer, along with Chief Financial Officer, Jim Brata.

Before I turn the call over to management I have a few items to cover. If you would like to be added to the company’s email distribution list, please call DRG&E’s office at 713-529-6600 and relay that information to us or you can send me an email with that information at kcroad@drg-e.com. If you would like to listen to a replay of today’s call, it is available via web cast by going to the Investor Relations section of the company’s website at www.tgcseismic.com or via a recorded instant replay until November 3. Information about how to access the replay was provided in this morning’s earnings release.

Information reported on this call speaks only as of today, October 20, 2008 and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay.

Before we begin let me remind you that certain statements made by management during this call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements regarding the company’s future performance are forward-looking statements. These forward-looking statements are based on management’s current expectations and include known and unknown risks, uncertainties and other factors, many of which the company is unable to predict or control that may cause the company’s actual future results or performance to materially differ from any future results or performance expressed or implied by those statements.

These risks and uncertainties include the risk factors disclosed by the company from time to time in its filings with the SEC including in its annual report on Form 10K for the year ended December 31, 2007. Furthermore, as we start this call please 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 these statements.

I will turn the call now over to Wayne Whitener.

Wayne Whitener

Jim Brata will provide you with the financial details. As many of you know, our former CFO, Ken Uselton, recently retired and Jim joined us in June of this year to fill that position. We are very pleased to have Jim on board. He will begin with the financial highlights and then I will come back with some comments.

James Brata

Revenues for the 2008 third quarter declined 11.0% to $21.6 million compared to $24.2 million in the third quarter of 2007. The revenue decline was primarily due to the following reasons: We had an unusually low amount of shot hole work in the quarter and shot hole works typically generate higher revenues and lower margins because they contain higher third party costs.

Also the two crews idled in the second quarter did not get back into the field until the second half of July. The two hurricanes that hit the Gulf Coast in August and September impacted some of the crews in the field.

Cost of services in the third quarter declined 2% to $13.4 million from $17.0 million in the third quarter a year ago primarily as the result of the unusually low amount of shot hole work that I mentioned previously. Cost of services as a percentage of revenue was 62.0% in the 2008 third quarter versus 70.1% a year ago. As a result, our gross profit margin improved substantially to 38.0% from 29.9% in the third quarter of last year. Gross profit was $8.2 million compared to $7.2 million a year ago, a 13.0% increase.

SG&A expenses were $1.1 million in the 2008 third quarter, relatively the same as the 2007 third quarter. As a percentage of revenues, SG&A expenses remained low at 5.2% in the 2008 third quarter compared to 4.4% a year ago.

Depreciation and amortization expense increased 18.8% to $3.5 million from $2.9 million in the third quarter a year ago as we continue to invest in new equipment for our crews. Third quarter 2008 income from operations increased 10.3% to $3.6 million compared to $3.3 million in the third quarter a year ago. Income from operations as a percentage of revenues increased to 16.7% compared to 13.5% in the third quarter a year ago.

Interest expense in the third quarter was approximately $245,000 versus $146,000 a year ago as we continue to purchase and finance new seismic equipment. Income before income taxes in the third quarter increased 7.6% to $3.4 million compared to $3.1 million in the third quarter a year ago. As a percentage of revenue, income before income taxes was 15.6% in the 2008 third quarter compared to 12.9% a year ago. The effective tax rate for the third quarter was 44.5% compared to 41.5% in the third quarter of 2007.

Net income for the third quarter was $1.9 million compared to $1.8 million in the third quarter a year ago. As a percentage of revenue, our net income was 8.6% for this year’s third quarter compared to 7.5% in last year’s third quarter. Fully diluted earnings per share were $0.11 versus $0.10 in the third quarter of 2007 and all per share amounts in all periods have been adjusted to reflect the 5% stock dividend declared March 20, 2008 to shareholders of record as of April 14, 2008 and paid April 28, 2008.

Third quarter 2008 EBITDA increased 14.3% to $7.1 million and EBITDA margin of 32.7% from $6.2 million and EBITDA margin of 25.5% in the third quarter of 2007.

Now for a brief review of our nine months results. Revenues for the first nine months of 2008 were $62.6 million compared to $64.5 million in the same period of 2007, a 2.9% year-to-year. Cost of services for the nine months was $40.8 million versus $42.6 million a year ago, a 4.2% decline. As a percentage of revenues, cost of services for the first nine months of 2008 was 65.1% compared to 66.0% in the same period last year.

As a result the gross margin for the first nine months was 34.9% compared to 34.0% a year ago. Net income year-to-date was $4.7 million or $0.27 per diluted share versus $5.2 million or $0.30 per diluted share in the same period a year ago.

EBITDA for the first nine months of 2008 was $18.8 million. That is an EBITDA margin of 30.0% compared to $19.1 million and EBITDA margin of 29.6% a year ago.

Now turning to the balance sheet, our balance sheet is strong and we continue to generate cash. At the end of the third quarter we had long-term debt of approximately $11.8 million, cash and cash equivalents of approximately $17.2 million, current ratio of 1.7 and working capital of approximately $14.2 million.

With that I’ll turn the call back to Wayne.

Wayne Whitener

Before we move to your questions I would like to make a few comments. As you know there is a worldwide financial crisis. This crisis could affect some of our clients’ credit facilities. We have also seen downturn pressure on commodity prices. These two factors could cause contract cancellations and a slow down in geophysical activity.

In talking with our clients they are cautious but optimistic. To date the current uncertainties in the financial markets have not had an impact on our business. We believe the fundamentals for domestic oil and gas exploration will remain at substantial levels.

Two weeks ago we announced the purchase of a new ARAM Aries Recording System along with the expected deployment of our ninth crew. The decision to deploy this crew was made several months ago in different financial times. This equipment is compatible with our other ARAM systems and will enhance the company’s capabilities. At this time we are still reviewing the merits of deploying an additional crew.

The company has a strong balance sheet and at this time our cash exceeds total debt. We feel with the new equipment, our cash position, our credit facility and backlog makes us ready to weather any storm that might come our way. We feel it is extremely important to remain very transparent to all of our investors in these unsettling times.

This concludes my remarks and now we will take any questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Neal Dingmann - Dahlman Rose & Co.

Neal Dingmann - Dahlman Rose & Co.

Given your comment about clients being somewhat cautious which is natural in this market, as you said today you have plans or what is your plans as far as adding more channels and more equipment in this market as you sit today?

Wayne Whitener

As I mentioned, we have already purchased the equipment for the ninth crew which gives us additional capabilities even if we don’t put out our ninth crew. I think of course like anybody right now we are going to be very cautious on capEx spending and we will continue to review the market conditions out there.

Neal Dingmann - Dahlman Rose & Co.

What are you seeing these days as far as bidding activity sort of regionally speaking? Are areas like Kansas, Texas or Arkoma area what are you seeing in different regions as far as bidding activity? Has that slowed down as well? If you can give us some color on that.

Wayne Whitener

We really haven’t seen a slow down on bidding activity at this time. Of course most of our business at present is mid-continent in the Rockies and the Gulf Coast areas. Of course a lot of the bids we are working on now are bids we received two weeks ago so as far as bid activity it remains at strong levels. We are also adding to the backlog with the contracts. So right now we are not seeing really any impact, not to say that can change due to the conditions of the last two weeks.

Operator

The next question comes from Karen David-Greene - Oppenheimer & Co.

Karen David-Greene - Oppenheimer & Co.

Can you just give us a little bit more color as to what the deployment of the ninth crew is contingent upon and also when you take delivery exactly of that equipment?

Wayne Whitener

We have already taken delivery of the equipment and we are prepared to put that crew out some time between the first week of November to mid November. Of course that is contingent on our record backlog at this time which is roughly 80-82 million. We are monitoring our clients to make sure we are not going to see any cancellation on contracts or any pull backs for 2009. We are still monitoring that to decide whether we are going to put this crew into service or not. As it stands today we have substantial work for that crew for the fourth quarter and first quarter but we still want to continue to monitor that over the next few weeks here to make a firm decision.

Karen David-Greene - Oppenheimer & Co.

Are you going to be replacing this crew with the [off] size or is this truly going to be an incremental crew?

Wayne Whitener

This will be an incremental crew if we put it out as such. Of course as mentioned we can take this equipment and spread it out amongst the seven ARAM crews we presently have to expand their capability and improve productivity by those crews as well. So we can go either way with this equipment we have purchased.

Karen David-Greene - Oppenheimer & Co.

On the contract cancellations can you walk us through the general provisions in your contract and how much visibility you have in terms of if anyone had to give you if they were going to walk away from something?

Wayne Whitener

I would say each contract, of course, is unique to itself. We have what we call a power contract which has provisions in there for 30 days written notice of cancellation. Not all clients sign our contracts. A lot of the clients we have to sign their general agreements. So there are different agreements depending on the contract itself. I will say that we have not had in the past normally any contracts that have been cancelled except possibly due to some failing land positions which is very rare. But, I think these are extreme times and we have to stay in very close contact with our clients, very close contact with our investors to make sure we don’t have any surprises and hope to keep our backlog fully intact.

Operator

The next question comes from Terese Fabian – Sidoti.

Terese Fabian - Sidoti

I have a question on the balance sheet and payment terms for your clients. The accounts receivable account is up in the third quarter from the second, up a little bit from end year. Is that due to payment terms or is that a timing issue?

James Brata

That is pretty much a timing issue. Our receivables are very good. We have had no bad debts.

Terese Fabian - Sidoti

Payment on your contract work, is it up front or is it 1/3 down? How does that work?

James Brata

It is progressive payments and that varies from contract to contract as well. Normally we will have 1/3, 1/3 and 1/3 on the contracts.

Terese Fabian - Sidoti

On your current liabilities account, which is also up, can you break out the short-term debt number on that and is the rise in that due to anything in particular or is that also timing?

James Brata

The current portion of long-term debt is $5.5 million. As we talked about earlier we have bought new equipment which is causing that number to go up.

Terese Fabian - Sidoti

On payment for the new equipment what is your plan and what is your expectation on interest expense for the next couple of quarters? Will that be going up, down or the same?

Wayne Whitener

We have very favorable terms on the equipment. We finance that equipment with GE Capital for 48 months on a simple interest loan at 6%. We feel like that was very favorable terms. Interest expense will be going up the next two quarters.

Operator

The next question comes from [Kerwin Dutton – KLV Investment Management].

[Kerwin Dutton – KLV Investment Management]

My question is about the future price of natural gas as best you can in your own mind project and how that can affect the demand for your services. Kind of a general gut feeling comment about that.

Wayne Whitener

Prices where they are at this time are still at levels we expect exploration activity to continue at substantial levels. The overall forecast is a variable one. I think of course we go back and we say if we have a cold winter in the Northeast it will have an impact on natural gas prices which I expect that to be the same there. Of course a lot of our business anywhere depending on any given time probably 60-70% of our business is in the natural gas exploration market. We are what I would say very into what happens in the natural gas market. I think that the people that are looking somewhat long-term, 12 to 18 months out are still very bullish on what is going to happen with natural gas. I hope that answers your question to the best of my ability.

[Kerwin Dutton – KLV Investment Management]

What prompts kind of a general term of the optimism you just expressed in the industry for natural gas?

Wayne Whitener

I think that natural gas is a domestic energy product. I think people are looking to convert from a lot of coal to natural gas. The overall outlook looking out looks to be very strong for the natural gas market. That said, if you look several months back people were very concerned about the amount of oil and imports that we were having on our energy for domestic. So, I think that if you followed a lot of the stuff with Chesapeake and T. Boone Pickens, I think a big part of the answer to the energy problem is natural gas for the future.

Operator

The next question comes from Bob Johnson – [Sadwith].

Bob Johnson – [Sadwith]

In regards to the record backlog could you give us some sense as to proportion as to how far out that would represent on a normal schedule? Is it 2, 3 or 4 quarters and would the level of backlog have a bearing on your decision to deploy that ninth crew?

Wayne Whitener

The present backlog of 82 million takes us into the second quarter of 2009, even by adding the ninth crew. Back on the decision of the ninth crew I think a lot of it depends on our conversations with our clients to ensure their level of continued exploration and how they see short-term long-term.

Bob Johnson – [Sadwith]

Could you give us any flavor as to how much of an emphasis your work is in the respective big shale plays that are getting the bulk of the attention and then if there is flavor on the size or significance of quality of the average customer you are dealing with as opposed to marginal players?

Wayne Whitener

Like I say, we have crews deployed in the Kansas market which depending on where you are at could be shallow oil or shallow gas. That market seems to remain strong. We have some work in the Hanesville shale area. We are moving a crew into the Fayetteville shale. We have crews working in the south Texas market which have been very busy in that market. We have some, as I mentioned I think in the last quarter, we are seeing some visibility of some very large 3D’s. These 3D’s are of substantial size and are basically funded by a very strong seismic data broker. So, we have that as well as our repeat customers that we have had a very good relationship. I believe last year about 45% of our business was repeat customers. So we feel that our backlog is strong. We feel like the client base is strong but we also realize this is probably prices that a lot of companies have not faced previously. So we are attuned to what this crisis is going to have an effect on the price as well as our clients.

Operator

The next question comes from Karen David-Greene - Oppenheimer & Co.

Karen David-Greene - Oppenheimer & Co.

I was wondering if you could give us the short-term debt number at the end of the quarter.

James Brata

$5.5 million.

Karen David-Greene - Oppenheimer & Co.

Could you just talk a little bit about pricing and pricing by region and give us an update as to where that stands?

Wayne Whitener

Of course pricing has been pretty well the same that we saw in the second half of last year and what we have seen in 2008. I don’t know if the current market conditions will put any downward pressure on our margins. We haven’t been in this crisis at this level long enough to see what the impact, if any, it is going to have on our margin. As it stands right now with our current backlog we feel like we are at very good margin levels. What happens going forward will remain to be seen.

Operator

The next question comes from Terese Fabian – Sidoti.

Terese Fabian - Sidoti

Do you have a number on the cost of the hurricanes and the severe weather in the second quarter period? Were you able to put anything together on the loss days or impact on utilization there?

Wayne Whitener

Not really. We had the one hurricane, Faye that went over Florida and moseyed around. We had two crews in Mississippi that had days affected on it. Of course Ike we had crews in south Texas where we did pick up some equipment and leave the coastal area. We were down by Corpus Christi so fortunately we didn’t have any direct hit or damage to our equipment or to personnel. So it would be hard to say exactly how many days were contributed exactly to the hurricanes.

Terese Fabian - Sidoti

On the timing of seismic work and beginning of drilling for your customers, is it generally a 6-9 month period from the end of your work until a driller would start working?

Wayne Whitener

I think a lot of that depends on the areas in which we are working. Normally it is a lot shorter than that. I know when we work in the Barnett shale we have drilling rigs on site almost 30 days from the time our seismic was completed. In other areas there is somewhat longer time, but normally the drilling operation comes very quickly after the data is acquired and the interpretation is done.

Operator

At this time there are no addition questions. I’d like to turn it back to management for any closing remarks.

Wayne Whitener

That concludes management remarks. We appreciate your time and investment in TGC.

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