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Executives

Prakash Mathew Verghese - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Richard C. White - Chairman, Chief Executive Officer and President

Analysts

Joseph A. Maxa - Dougherty & Company LLC, Research Division

Joel D. Luton - Westlake Securities LLC, Research Division

Joshua Cheung

Global Geophysical Services (GGS) Q3 2013 Earnings Call November 6, 2013 10:00 AM ET

Operator

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Global Geophysical Services Q3 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference to our host, Mr. Mathew Verghese, CFO. Sir, you may begin.

Prakash Mathew Verghese

Thank you. Good morning, and welcome to the Global Geophysical Services Third Quarter 2013 Earnings Conference Call. Today's call is being webcast and a replay will be available on Global's website. The press release announcing the third quarter results is also available on Global's website.

I would like to remind our audience that some of today's comments include forward-looking statements reflecting Global's views about future events and their potential impact on performance. These matters involve risks and uncertainties that could impact operations and financial results and cause our actual results to differ materially from our forward-looking statements. These risks and uncertainties are discussed in Global's Form 10-K for the year ended December 31, 2012, and other recent current reports on Form 10-Q and Form 8-K.

Our comments include non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures is included in the press release announcing the third quarter results, which, as I have mentioned, can be found on our website. Now I'll turn the call over to Richard White.

Richard C. White

Thank you, Mathew, and good morning, everyone. Mathew will take you through the numbers for the third quarter in a few minutes. I'll focus my commentary on the progress we've made against the priorities I laid out when I took the CEO role 1 year ago and the more tactical measures we've taken to get where we are today.

We began this year with a backlog of $101 million that was heavily weighted to our Multi-client Data Library business. Total backlog had suffered a sequential decline from multiple quarters. And the mix of our backlog provided limited visibility to margin and cash flow generation. Importantly, we needed to reverse the practice of outspending cash flow as the company has done over the last 3 years. To do this, we needed to reduce our balance sheet commitments to new Data Library programs, keeping those programs cash-neutral with 2013.

With a reduced emphasis on new Data Library programs, we turned our focus to building proprietary backlog across diversified set of geographies. We needed to capture more value from our existing Data Library assets by realizing higher late sale revenues. We also needed to remain diligent on identifying noncore business activities and their associated costs to reduce those in an orderly manner. Lastly, we needed to refinance our senior credit facilities within the year as we had scheduled maturities in late 2013 and early 2014.

I'm pleased to say we're on track with these objectives in the third quarter and have several notable accomplishments to report. First, we were able to refinance our senior credit facilities during the third quarter, extending the maturities into late 2016. It is important to note that to accomplish this refinancing, we first needed to prove that we could build a strong order book of a proprietary program, build a path to capture higher value from existing Data Library assets, and live within the boundaries that we set for Data Library investments for 2013. On the matter of building non-Multi-client backlog, we steadily built our Proprietary backlog across this year, and we exited this quarter with 95% of our backlog weighted to Proprietary programs.

Geographically, our order book continues to be internationally weighted with equivalent contributions coming from our Latin America and our Europe, Africa and Middle East regions. In North America, we continued to build on our order book of Proprietary programs and completed the majority of our planned Data Library investment for 2013 in the third quarter, thereby making those assets available to focus on new margin-generating programs.

Turning to the performance of our existing Data Library assets. We experienced another solid quarter Data Library late sales, building on the success we reported previously. Data Library late sale revenues for the 9 months ended September 30 were $64 million and improved on the record late sales performance we reported in the second quarter. We continue to believe we've chosen the right data marketing and distribution partners. And the late sales performance since the first quarter speaks for itself. We are continually evaluating the value generation potential of our Data Library assets with our new partners and remain optimistic that together we can build on success we've realized this year.

Our E&P Services division has seen significant growth versus the same period in 2012. We've expanded our suite of products and services from a heavily weighted emphasis on processing Multi-client surveys to a Proprietary-focused, full-service microseismic -- full-service surface and microseismic processing, interpretation, reservoir analysis and unconventional consulting business. In addition to our core processing centers in Houston, Dallas, Denver and Calgary, we recently opened up satellite processing centers in Rio and Bogota with an additional satellite processing center to expected to open in Dubai in early 2014.

Now I'll speak to our ongoing evaluation of our core businesses and cost structure. Today, we announced our strategic decision to exit the line clearing and ocean bottom cable marine businesses. These business lines have been underperforming for some time and were a drag on margins. I expect these moves to reflect positively in operating and EBITDA margins going forward as we continue to evaluate our cost structure and hone our focus on our core business.

Each of the accomplishments I've outlined today are an integral part of Global's strategy to generate cash margin across the mix of service offerings in support of our broader goal of strengthening the balance sheet. The strong free cash flow in the quarter and the effectively cash-neutral position achieved through the 9 months ended September 30 are evidence that we are moving in the right direction. The accomplishment of these milestones reflects, first and foremost, on the dedication and focus of the team here at Global. To continue building on this success, we must remain diligent and faithful to the priorities I laid out when I accepted this role, which are: to create an excellent customer experience; to grow our people; to expand our market position; to integrate our service portfolio; to unlock the value of our assets; and to manage capital better.

Now let me give you a brief update on our operations. In North America, we're currently operating 2 data acquisition crews in the Lower 48 and begun the mobilization of 1 crew to Alaska, which is expected to begin operations on the North Slope during the fourth quarter. During the third quarter, these crews were completing planned Data Library and Proprietary programs in basins across the Lower 48. In the Eastern Hemisphere, we're continuing to operate in the Kurdistan region of Iraq, began operations in Kenya and we are in the early mobilization phase of our work in Libya. Within Latin America, our activities remain focused in Colombia, Brazil and Paraguay. During the third quarter, we were able to add programs within each of these markets and currently have 2 crews operating in Colombia with Brazil and Paraguay each having 1 crew in operation.

While we're encouraged by the progress we have made to date, we are mindful that more work lies ahead. We have stated for the past 3 quarters that 2013 will be a transitional year for Global. And there is no question we are a different company today than we were at the beginning of the year. With that, I'm going to let Mathew run through the numbers for the quarter.

Prakash Mathew Verghese

Thanks, Richard. Today, we reported third quarter revenues of $70 million, a 10.6% sequential increase from second quarter revenues of $63.3 million. Revenues for the third quarter were comprised of $41.4 million in Proprietary Services, $14.5 million in Multi-client precommitments and $14.1 million in Data Library late sales.

Consistent with our objective to rebalance the mix of our revenues, year-to-date Proprietary Service revenues were $95.6 million, a 2.7x multiple from our starting backlog of $35.2 million as of January 1. In addition and as previously outlined, we continue to work through the balance of Multi-client new program activity that had been contracted at the start of the year. We have recognized year-to-date Multi-client precommitment revenues of $56.9 million, a 0.9x multiple against starting backlog of $66 million as of January 1.

We also continue to benefit from the strong contributions from our completed Data Library assets. Year-to-date Data Library late sale revenues increased to $64.3 million on a gross basis and $53.2 million, net of library commissions. Year-to-date net Data Library late sale revenues are at higher levels than in any prior annual period.

The company's order book continued to evolve as expected and was $190 million as we exited the third quarter. As of September 30, Proprietary Services backlog increased $180 million, a 3% increase over the second quarter. Since the start of the year, Proprietary Services backlog has increased over 500%, consistent with our objective to allocate data acquisition capacity and assets toward a greater weighting in this segment. The split of backlog between domestic and international operations was 28% and 72%, respectively. We would expect between $80 million to $100 million of our backlog to flow through revenues in the next 2 quarters.

Let me shift gears and walk through the margin progression of our 2 segments. For the third quarter, EBITDA margins in our Proprietary segment were 17%, excluding the charges for the shutdown of our marine activities and the effect of our line clearing operations. As we previously noted, we expect EBITDA margins for our Proprietary segment to increase by up to 800 basis points over the next several quarters. Our Data Library segment generated cash EBITDA margins of $13.1 million or 46% during the third quarter. Cash EBITDA for the segment is computed by deducting Multi-client cash investment, Data Library commissions and noncash Data Library revenues for the period from Data Library revenues. Through the end of the third quarter, year-to-date cash EBITDA increased to $34 million compared to $29.4 million during the comparable period of 2012.

As we had previously noted, noncash depreciation and amortization charges continue to significantly burden operating income and EPS. Through September 30, 2013, year-to-date D&A charges, inclusive of Data Library impairments, were $123 million or 56.7% of revenue. This compares with 2012 D&A charges, inclusive of Data Library impairments, of $107 million or 38% of revenue through 9/30.

The company has also made further progress in reducing its cost structure. During the third quarter, SG&A declined to $11.5 million. Stripping out noncash items, mainly stock-based compensation, SG&A during the quarter was approximately $9.3 million, below our quarterly target of $10 million that we had established by year end.

In our press release, we noted several factors driving our loss per share for the quarter. Primarily, these items are costs associated with the shutdown of our marine activities, charges related to the divestiture of our line clearing operations and valuation allowances booked against certain deferred tax assets. Taken together using a normalized tax rate of 35%, these items drove $0.32 of the quarterly loss. As we previously noted, the $123 million noncash D&A burden for 2013 has been the principal factor driving the net loss position for the quarter and the full year.

Let me make a couple of observations about the company's debt and capitalization profile. Our key balance sheet priority for this year has been to term out the maturity of our debt. As we announced on September 30, we completed the refinancing of our senior credit facilities. The refinancing extended the maturities that were scheduled to occur within 1 year as we ended the second quarter out into late 2016. As of the second quarter, roughly $80 million related to the previous senior credit facilities were recorded as current liabilities in our balance sheet. As of September 30, we've reclassified these liabilities to long-term debt, reflecting the extension of term associated with the refinancing.

Let me now turn to cash flows. During the third quarter, the company generated positive cash flow, including $11.6 million of free cash flow for the quarter. And on a year-to-date basis, we are essentially at breakeven cash flow. Year-to-date, our investments in PP&E have been more than offset by proceeds from the sale of assets. Equally important, we've wrapped up the majority of our Multi-client data acquisition commitments for the year with limited balance sheet usage in support of those programs.

By reconfiguring the revenue mix, altering the cost structure and maintaining discipline in our investments, we have gone from negative $39 million of cash flow during the first 9 months of 2012 to breakeven cash flow over the first 9 months of 2013. This progression is consistent with our expectations coming into the year as we begin to act on the strategic priorities Richard outlined earlier. Going forward, we plan to direct free cash flow generation towards: first, increasing overall liquidity; and second, to debt reduction. We expect progress in this regard over the next several quarters. With that, we are happy to take some questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from Joe Maxa of Dougherty & Company.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

Questions I have relate to the cost reductions by the line clearing and marine acquisition businesses. How much is that saving you a quarter, first?

Prakash Mathew Verghese

In aggregate, that's going to reduce the cost structure by roughly $5 million.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

Annual basis?

Prakash Mathew Verghese

No, on a quarterly basis. So we had all-in costs associated with those activities on an annualized basis of a little over $20 million. So that's going to come not entirely out of fixed cost structure because some of those are going to be associated with specific programs. But the reduction to overall fixed cost structure is going to be a little bit over $12 million on an annualized basis.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

Got it. Okay, that's helpful. And Mathew, you've mentioned the backstop or potential backstop amortization charges in prior quarters. What are they at the end of Q3?

Prakash Mathew Verghese

Yes. At the end of Q3, the remaining potential backstop amortization for 2012 is right at $6 million, a little under $6 million. And then it's -- the estimate for 2014 is unchanged from Q2 and is right at $43 million.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

Got it. All right. Richard, as far number of crews in the locations, it sounded like do you have 7 operating currently. And what is your plan for Q4? Are you adding a few more?

Richard C. White

We'll probably stay where we are through the end of the quarter. We've got a lot of programs, a lot of opportunities we're looking at in the first half of next year. But probably through the end of the quarter, we're going to stay where we are right now.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

All right. So what does that tell us as far as where we should be thinking revenue may shape versus Q3 on your Proprietary programs?

Prakash Mathew Verghese

I think Proprietary program revenue, it's reasonable to expect that that's going to be sequentially up.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

Of course. Okay. And as far as the Multi-client revenues, $9 million in backlog now, I mean, certainly that -- does that suggest that's a good number for your precommitment in Q4?

Prakash Mathew Verghese

The precommitment revenue for Q4 is going to be less than that. Of that $9 million, roughly $2.5 million to $3 million of that is going to flow through in the fourth quarter. And the balance of it really is attributable to a noncash data swap that would flow through in future periods but really out in 2014 and beyond. So the precommitment flow-through is going to be fairly limited in Q4.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

And lastly, I'll just ask the late sales. How has that been tracking so far through the quarter? And would you expect that to be sequentially up in 4Q?

Prakash Mathew Verghese

We would expect it to be sequentially higher in the fourth quarter.

Operator

Our next question comes from Joel Luton of Westlake Securities.

Joel D. Luton - Westlake Securities LLC, Research Division

In terms of -- have you drawn on that second loan, Term B, I guess?

Prakash Mathew Verghese

Joel, we have not. That remains -- that particular commitment remains in place through May of next year, and it has not been drawn. And at the time that we put it in place, it was specifically intended to support strategic initiatives that we would be evaluating. And so at present, it has not been drawn and it's unclear whether it would be drawn prior to its expected expiration of that commitment.

Joel D. Luton - Westlake Securities LLC, Research Division

And so it could be a source of liquidity, like just a revolver of some kind, it would have to be used for a specific purpose?

Prakash Mathew Verghese

That's correct.

Joel D. Luton - Westlake Securities LLC, Research Division

And then you all have said that it's your goal to reduce debt by $30 million to $40 million by the end of the year. And I'm looking at it, at your debt levels, and they're staying about the same as they were in the second quarter. Do you still think you could do that by the end of the year?

Prakash Mathew Verghese

It's possible. It is going to be dependent on the continued release of working capital and the timing of converting really late sale generation for our library assets into cash flow. Those have been and remain the drivers. Probably the one difference with respect to plan for free cash flow generation now that we have the refinancing of the credit facilities in places are our overarching objective at this point is to increase the company's liquidity. I think it's been a source of concern on a widespread basis. And so prior to reductions that would obviously have a net debt effect but prior to debt reductions, the principal objective is to increase liquidity and then allocate cash to debt reduction.

Joel D. Luton - Westlake Securities LLC, Research Division

Okay. So do you think your cash position will be building that over the next 2 quarters?

Prakash Mathew Verghese

We would.

Operator

[Operator Instructions] And our next question comes from Josh Cheung of Raymond James.

Joshua Cheung

So quick question. With about 95% of your backlog in Proprietary already, should we expect your margin to increase from this point to 2014? Or how should we think about it going forward?

Prakash Mathew Verghese

Yes. I think on the margins related to Proprietary, our view is that the 17% normalized margin that we had in Q3, that there is uplift from there up to 25% on a go-forward basis. So that's our expectations on the Proprietary side.

Joshua Cheung

25% by the end of 2014 or what kind of...

Prakash Mathew Verghese

No, for 2014 itself.

Operator

And I'm showing no further questions at this time.

Richard C. White

So I wanted to clarify, when Joe asked the question about the 7 crews, I thought you were talking just internationally. But we have 10 crews total, 7 internationally and 3 domestically. So I just want to make sure we clarify that point. But I want to thank our employees across world for their hard work, commitment to excellence and dedicated efforts in providing great service to our customers. We look forward to visiting with you on the next call. Thank you for joining us today. We appreciate it.

Prakash Mathew Verghese

Thank you.

Operator

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you for your attendance. You may all disconnect. Have a great day.

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