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TGC Industries (NASDAQ:TGE)

Q4 2012 Earnings Call

February 25, 2013 9:30 am ET

Executives

Jack Lascar - Partner

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

James K. Brata - Chief Financial Officer, Principal Accounting Officer, Vice President, Secretary and Treasurer

Analysts

Veny Aleksandrov - FIG Partners, LLC, Research Division

Joel D. Luton - Westlake Securities LLC, Research Division

Keith Maher - Singular Research

Rhys Hoyle Williams - Columbia Partners, L.L.C. Investment Management

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the TGC Industries Fourth Quarter Earnings Conference Call. [Operator Instructions] This conference is being recorded today Monday, February 25, 2013. At this time, I would like to turn the conference over to Jack Lascar with Dennard Lascar Associates. Please go ahead, sir.

Jack Lascar

Thank you, Vince. Good morning and welcome to the TGC Industries fourth quarter and year end 2012 conference call. We appreciate you joining us today. Your hosts are Wayne Whitener, President and Chief Executive Officer; and Jim Brata, Chief Financial Officer.

Before I turn the call over to management, I have a few items to cover. If you would like to listen to a replay of today's call, it is available via webcast by going to the Investor Relations section of the company's website at tgcseismic.com or via a recorded instant replay until March 11. Information on how to access the replay was provided in this morning's earnings release. Information reported on this call speaks only as of today, Monday, February 25, 2013, and therefore you're 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 reform -- report on Form 10-K for the year ended December 31, 2011. Furthermore, as we start this call, please also refer to the statement regarding forward-looking statements incorporated in our press release issued this morning, and please note that the contents of our conference call are covered by these statements.

I will now turn the call over to Wayne Whitener.

Wayne A. Whitener

Thank you, Jack. Good morning to everyone. Thank you for joining us today for our fourth quarter and year end 2012 earnings call. I would like to make some initial comments and Jim Brata will provide you with some financial details, then I will conclude with some remarks about our markets and business going forward.

We're extremely pleased with our quarterly and full year results, both of which reached record levels. I will begin by commenting on the quarter, which was a fourth quarter record in terms of revenue, earnings and EBITDA. Revenues increased 44% from a year ago to $57 million, earnings per share rose 18% to $0.20, and EBITDA rose 26% to $14 million. We operated 9 crews in the U.S. for the entire fourth quarter and began the quarter with 4 crews in Canada. As the Canadian winter season progressed, we added an additional crew, ending the quarter with 5 crews working in Canada.

Our U.S. crews are currently working in South Texas, Kansas, the Utica Shale, the Marcellus and the Permian Basin. Our Canadian crews are operating in British Columbia, Alberta and Saskatchewan. During the fourth quarter and through 2012 we benefited from the production of our new equipment and enhanced efficiencies of our crews. Over the past 3 years, we have invested over $100 million in new advanced equipment in order to continue providing our customers with the latest available technology, as well as maintain the optimum crew efficiency. As part of that investment during the last 18 months, we acquired approximately 70,000 wireless channels enabling us to be one of the largest fleets of Geospace wireless data acquisition units in North America. We believe we now have the latest and most technological-advanced seismic acquisition fleet in North America.

At the same time, we have continued to maintain our low-cost structure, as evidenced with our SG&A expense ratio being that in the 4% range for both the quarter and the year. For 2012, we also generated record revenues in terms of revenues, earnings and EBITDA. Annual revenues increased 30% to $196 million. Earnings per share rose 42% to $0.75 and EBITDA rose 40% to $52 million. We ended the year with a backlog of $81 million as we've been efficiently working through our Canadian backlog. Since year-end, we have added an additional crew in Canada and now operating 9 crews in the U.S. and 6 crews in Canada for a total of 15 crews.

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

James K. Brata

Thank you, Wayne, and good morning. The revenues for the fourth quarter of 2012 were $57 million, compared to approximately $40 million in the fourth quarter of 2011. We operated 9 crews in the U.S. during the quarter, compared to 8 crews in last year's fourth quarter. In Canada, we began the fourth quarter with 4 crews and ended with 5, which compares with 4 crews operating in Canada during the entire fourth quarter of last year.

Cost of services in the fourth quarter of 2012, was $41 million compared to $26 million in the same quarter a year ago. The increase is primarily due to higher crew counts, certain land permitting delays and increased shot-hole work. Cost of services as a percentage of revenues in the fourth quarter of 2012 and 2011 was 71.5% and 66%, respectively.

Gross profit increased 21% to $16 million from $13 million in the fourth quarter of 2011. Gross profit margin was 28.5% compared to 34% in the fourth quarter a year ago primarily due to the permitting issues in shot-hole work mentioned above.

On higher revenues, our selling, general and administrative expenses declined 6% to $2.3 million in the fourth quarter of 2012 from $2.4 million a year ago. As a percentage of revenues, SG&A expenses declined to 4% and this year's fourth quarter from 6.1% in the fourth quarter a year ago.

Depreciation and amortization expense rose 38% to $6.9 million from $5 million in the 2011 fourth quarter reflecting depreciation on the new wireless equipment we have purchased in 2012 to meet the requirements of our client base. As a percentage of revenues, depreciation and amortization expense was roughly 12% in the fourth quarters of both 2012 and 2011.

Interest expense in the fourth quarter increased to $349,000 from $209,000 a year ago due to the large amount of new equipment that we had purchased in 2012, which amounted to approximately $57 million. Net income was $4.2 million, or $0.20 per diluted share, compared to $3.4 million, or $0.17 per diluted share, in last year's fourth quarter. We recorded income tax expense of $2.6 million for the fourth quarter and effective tax rate of 38%. This compares to income tax expense of $2.4 million, an effective tax rate of 41% a year ago.

EBITDA for the fourth quarter increased 26% to $14 million, which is an EBITDA margin of 24.5% compared to $11 million and EBITDA margin of 27.9% in the fourth quarter a year ago. An EBITDA reconciliation table was provided in our earnings release issued this morning.

Now I will highlight our full year results for 2012. Revenues grew 30% to our record $196 million from $151 million last year. Cost of services also rose 30% to $135 million from $104 million last year. As a percentage of revenues, cost of services were 68.9% for both 2012 and 2011. Gross profit for 2012 was $61 million compared to $47 million in 2011, a 30% increase. Gross margin both years was 31%. We reduced our SG&A expense by 9% from a year ago to $8.8 million. As a percentage of revenues, 2012 SG&A expense declined to 4.5% from 6.4% in 2011.

Depreciation and amortization expense rose 33% in 2012 to $26 million as a result of our new equipment purchases. But as a percentage of revenues, it held fairly steady at roughly 13% in both years. Operating income for 2012 increased 47% to $27 million from $18 million last year. Operating margin was 13.6% compared to 12% a year ago. We reported record net income of $16 million for 2012, a 45% increase over 2011. And EPS was a record $0.75, up 42% from last year's $0.53. We recorded income tax expense of almost $10 million in 2012 and effective tax rate of 39%. This compares to income tax expense of $7 million in 2011 and effective tax rate of 38%. EBITDA for the year was also a record, increasing 40% to $52 million, which is an EBITDA margin of 26.6% compared to $37 million and EBITDA margin of 24.7% last year.

And finally, I will highlight some balance sheet items. As of the end of the fourth quarter, we had long-term debt of $16.3 million, cash and cash equivalents of $8.6 million. Our current ratio was roughly 1.3:1. Working capital is approximately $12.2 million and finally, for the full year of 2012, we generated approximately $39 million in cash from operations.

And with that, I will turn the call back to Wayne for some closing comments.

Wayne A. Whitener

Thank you, Jim. Before we open the call up for questions, I would like to briefly summarize where we stand to date. We had a total of 15 crews operating in North America by the end, excuse me, we had 14 crews operating in North America by the end of the fourth quarter, 9 in the U.S., 5 in Canada. In early January, we added an additional crew in Canada, so we are currently operating 15 crews in North America. We currently anticipate that we will continue operating 9 crews in the U.S. well into the year.

While we continue to see steady bidding activity, economy and regulatory uncertainties continue to reduce the speed at which new contracts are being signed in the U.S. On the equipment side, we have continued to invest in the latest technology in order to provide our customers with the most advanced equipment. Much of this has been wireless equipment utilized in key market areas in the U.S. and Canada driven by demand for more complex seismic surveys and higher channel counts. We now have approximately 137,000 recording channels, which include 70,000 wireless channels, giving us the ability to field one of the largest fleets of Geospace wireless data acquisition units in North America. We believe we are clearly ahead of the rest of the North American seismic industry in terms of the latest technology and the age of our seismic equipment. As a result, we expect to be more in a cash-building mode this year.

Looking at the first quarter of 2013, we are heading into a seasonality-strong quarter for the year in terms of revenues and profit -- profitability due to the large amount of data we expect to acquire during the first quarter. As a result, and not like -- unlike last year, we plan to incur substantial cleanup costs and personnel costs that will negatively impact the gross margins in the second quarter. In order to reduce the negative impact of the expected cleanup costs during the second quarter this year, we plan to book some of the cost during the first quarter. As a result, we expect our first-quarter results to be lower than last year's first quarter.

In closing, I would like to say that the current oil price environment should support strong levels of exploration in North America in both conventional and shale plays. Our geographical diversification and low cost structure, combined with the new wireless technology, provides us -- positions us well to take advantage of the opportunities ahead of us.

With that, that concludes my formal remarks and I'll take any questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question's from the line of Veny Aleksandrov with FIG Partners.

Veny Aleksandrov - FIG Partners, LLC, Research Division

My first question is on the revenues. I'm just trying to understand, so your revenues were very strong. Was it because you guys were so efficient with the new equipment and you went quicker through the jobs that you had and so realized higher utilizations? Because I remember that we talked about some crews being down in the northeast because of Hurricane Sandy. So you had some negative impact in the quarter, and the same time, revenues were still high?

Wayne A. Whitener

Yes, we had some -- definitely efficiencies from the wireless equipment in other areas. Sandy did impact us some in the fourth quarter. Canada got off to a very good start this year and were able to ramp-up rather fast so we had a good kick from Canada this best, last quarter as well.

Veny Aleksandrov - FIG Partners, LLC, Research Division

Okay. And talking about Canada, I know that the backlog there is much shorter term -- more shorter term than the U.S. one. So from what you're seeing right now, and we're at the very end of February, do you think you'll stay -- the 6 crews will stay in Canada until the end of March, until the end of Q1?

Wayne A. Whitener

Yes, we anticipate that. Also, we're having a very cold winter in Canada this year so that allows us to work even longer into the year. So we are expecting to get a full measure of operations from our Canadian operation through the first quarter into the second quarter.

Veny Aleksandrov - FIG Partners, LLC, Research Division

Okay. That's going to be great. And my last question and I'll turn it back, last year, you had a couple of crews in Canada working during the summer. Do you still intend to keep a couple or you're going to wind down all the siphoning. If there is work, you're going to go back with a couple.

Wayne A. Whitener

Last year in the third quarter, we operated 1.5 crews. We operated -- yes, 1.5. We expect to operate some crews during the second half of the second quarter and some into the third quarter as well.

Operator

Our next question comes from the line of Joel Luton with Westlake Securities.

Joel D. Luton - Westlake Securities LLC, Research Division

Listen, I know you all -- last time I talked with you all, you all expected to cut back CapEx going into '13. What are your capital expenditures expectations for the year?

Wayne A. Whitener

Right now, we're expecting pretty much to stay with the maintenance CapEx. That being said, I review with the Board every quarter to review the CapEx expenditures. If opportunities were to present itself, that could definitely change. But right now, we're looking at starting off the year here with maintenance CapEx since we've spent over $100 million in the last 3 years. Our maintenance CapEx varies between $3 million to $5 million a year.

Joel D. Luton - Westlake Securities LLC, Research Division

So if you saw business kind of picking up more than your expectations, then you might go and increase your CapEx budget?

Wayne A. Whitener

Yes, it depends on the requirement for our services. If we had the opportunity to take on some new business with a very good client, we do have the capital in order to put out additional equipment or meet their -- that client's needs. So like I say, we review that quarterly.

Joel D. Luton - Westlake Securities LLC, Research Division

Okay. And one more question, you said your first quarter you expect it to be down. Are you talking about revenues or just in terms of profitability because of the transitioning the crews out of Canada?

Wayne A. Whitener

Probably more so on the net earnings. Like I say, we're doing a reserve to cover some of the bring-down cost associated with the second quarter even though we don't expect it to be probably as big as it was last year because we're having a cold winter. And so there'll be some staggering to bringing down the crews this year.

Joel D. Luton - Westlake Securities LLC, Research Division

Yes, if I recall last year, everything kind of -- you brought down everything kind of at the same time because the winter ended kind of at the same time throughout Canada. Is that correct?

Wayne A. Whitener

Yes, it was warm -- it was -- it had a warm winter there last year. So pretty much all throughout Canada, the spring thaw started relatively early, which caused us to basically shut down all operations a little bit earlier than we normally would.

Operator

Our next question comes from the line of Keith Maher with Singular Research.

Keith Maher - Singular Research

I had a question about just if you could comment on the overall pricing environment out there. What you're seeing, if things are getting better or worse?

Wayne A. Whitener

I think we're -- they're -- basically, we're not seeing any real large increases at this moment in time. It's probably pretty much -- I'm talking about in the U.S. -- in the U.S. here, it's pretty much what it's been the last couple of years. Things do look like it's going to be pretty brisk. We have a lot of bids right now that are in the mill and so there may be a possibility to increase U.S. prices maybe the second half of the year. So we'll just review that when the opportunity comes available.

In Canada, it's been a little bit softer this year than last year, as far as the number of active crews. But we've been very fortunate to be operating 6 crews. We operated 7 crews there last year but we still think with the 6 crews we'll probably generate around the same type of revenue as we did last year because of the efficiency of the wireless equipment in Canada.

Keith Maher - Singular Research

I had another question about just to understand the $81 million in backlog. Should we take that to mean that, that's almost all U.S. backlog at this point? That you've kind of worked down the Canadian backlogs that you had in the last quarter?

Wayne A. Whitener

No, there's Canadian backlog in there, but the majority of it is U.S. backlog. But there is Canadian backlog in there. Their first quarter in Canada is their largest quarter. So there is Canadian backlog in there as well as U.S.

Keith Maher - Singular Research

Okay. Sure. And one final question, you guys have done a great job, obviously, in managing your SG&A expenses. Is there any comparable effort ongoing with regard just to the cost of services. I mean, you've done a good job. I mean, your overall gross margins have been 31% for the past couple of years, but is there -- I guess what I'm getting at, is there any potential to see a slightly higher gross margin going forward?

Wayne A. Whitener

Sure, I think that depends on the contracts that we have and the productivity of the crew. Our margins are based on -- a lot of it is based on how productive the crews are. So hopefully, we get a break in the weather here to, maybe in the second and third quarter, we can definitely improve margins here in the U.S. if we get a break in the weather here.

Operator

Our next question comes from the line of Rhys Williams with Columbia Partners.

Rhys Hoyle Williams - Columbia Partners, L.L.C. Investment Management

My question really is just a clarification. The timing of the expense shift from the second quarter to the first quarter will artificially depress the first quarter year-over-year, but on the other side, it's going to help the second quarter, correct?

Wayne A. Whitener

Yes, sir. That's correct.

Rhys Hoyle Williams - Columbia Partners, L.L.C. Investment Management

So kind of anything that -- it's not going to affect the year results. It just sort of smooths out the quarterly earnings a bit.

Wayne A. Whitener

Right. It takes the lumpiness out of the quarters.

Rhys Hoyle Williams - Columbia Partners, L.L.C. Investment Management

Right. Right. And then with the second half, you mentioned pricing might even be going up in the second half. That should indicate, then, all things being equal, the third quarter should look very good year-over-year as well?

Wayne A. Whitener

That is our hope.

Rhys Hoyle Williams - Columbia Partners, L.L.C. Investment Management

Yes. Okay. And then obviously, you're very cheap, based on any kind of P/E, price-to-cash flow. With all this cash coming in the door, I realize your liquidity spend in terms of trading, but would you consider buyback? What would you -- or special dividend. What would you consider doing with the cash, assuming you don't do more CapEx, more major CapEx?

Wayne A. Whitener

Right. Our Board reviews that at the end of each quarter. This last year, we paid a cash dividend. It's the first time we have paid a cash dividend. I think that was well received. We've also, in the, we paid a stock dividend. I think that will be reviewed. I think the Board will, of course, take a look at any possible buybacks. But our business is such capital intense that we need to have the capital available when the opportunity presents itself that we're able to quickly take advantage of the opportunities to us to improve the profitability of the company.

Rhys Hoyle Williams - Columbia Partners, L.L.C. Investment Management

So I can read that as kind of a special dividend might be more likely than a buyback?

Wayne A. Whitener

Possibly, yes. I would say yes.

Operator

[Operator Instructions] Next question is a follow-up question from the line of Veny Aleksandrov of FIG Partners.

Veny Aleksandrov - FIG Partners, LLC, Research Division

My last question is the increase in shot-hole work, where do you see more of this happening? Can we expect even more of this type of work?

Wayne A. Whitener

The shot-hole work in the last several years have -- has dropped off from historical levels. Prior to that, we're running anywhere probably mid-30s, as far as percentage dynamite work and we've been running around 13% to 15% the last couple of years. Of course, a lot of that's due where the shale plays are, which is a big part of our work is basically vibroseis-type work. We are seeing some new areas pop up that we're going to be doing some dynamite work on over in the Mississippi-Alabama border area over there, also over in Louisiana. So that's encouraging to see some new areas pop up that will be done dynamite.

Veny Aleksandrov - FIG Partners, LLC, Research Division

Yes, and that is just -- is this like third-party? Does it flow through your income statement? Are you reimbursed by clients on the dynamite work?

Wayne A. Whitener

On the shot-hole work, Veny, normally that is in the bid that we supply to the client. Normally, the shot-hole is more expensive than the vibroseis work strictly because of the additional third-party charge is associated with the shot-hole work.

Operator

And at this time, I'm showing no further questions. I'd like to turn the conference back over to management for any closing remarks.

Wayne A. Whitener

We'd like to thank everybody for joining us and we look forward to our conference call for the next quarter. Thank you.

Operator

Thank you, sir. Ladies and gentlemen, that does conclude our conference for today. Thank you very much for your participation and you may now disconnect.

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