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TGC Industries, Inc. (NASDAQ:TGE)

Q4 2013 Earnings Conference Call

February 24, 2014 09:30 am ET

Executives

Wayne Whitener – President & Chief Executive Officer

Jim Brata – Vice President & Chief Financial Officer

Karen Roan – Dennard Lascar Associates (NYSE:IR)

Analysts

Veny Aleksandrov – FIG Partners

Joel Luton – Westlake Securities

Evan Richert – Sidoti & Company

Operator

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the TGC Industries Q4 Earnings Conference Call. (Operator instructions.) This conference is being recorded today, Monday, February 24, 2014. And I would now like to turn the conference over to Karen Roan of Dennard Lascar Associates. Please go ahead.

Karen Roan

Thank you, Katia. Good morning and welcome to the TGC Industries Q4 and Year-End 2013 Conference Call. We appreciate you joining us today. I am joined by your host Wayne Whitener, President and Chief Executive Officer, and Jim Brata, Chief Financial Officer.

Before I turn over the call to management I have a few items to cover. If you would like to listen to a replay of today’s call it will be available by webcast by going to the Investor Relations section of the company’s website at www.tgcseismic.com or by a recorded instant replay until March 10th. Information on how to access the replay was provided in this morning’s earnings release.

The information reported on this call speaks only as of today, Monday, February 24, 2014 and therefore you are advised that time-sensitive information may no longer me accurate as of the time of any replay listening.

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 10(k) for the year ended December 31, 2013. Therefore as we start this call please also refer to the statement on 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.

Now I’ll turn over the call to Wayne Whitener.

Wayne Whitener

Thank you, Karen, and good morning everyone. Thank you for joining us today for our Q4 2013 earnings call. I’ll make some initial comments and Jim Brata will provide you with some financial details, then I’ll conclude with some remarks about our markets and business going forward.

The past year has been a challenging one as we’ve faced decreasing demand for our seismic services since early last year. As the year went by it became clear that our customers were allocating capital away from seismic data acquisition into developing and production activities. As a result we have had to idle crews to align our resources with current demand but have kept our key personnel in place to maintain our ability to get crews back in the field as quickly as possible as demand requires.

The soft demand continued into Q4. In addition to challenging market conditions we also experienced severe weather conditions in many of our key markets in the US and in Canada during Q4, which delayed the beginning of the Canadian winter season. Our backlog has remained relatively steady and we were able to sequentially increase our US crews from three crews at the beginning of Q3 to five crews in Q4.

We ended Q4 with five crews in the US. This compares to nine crews operating in the US in Q4 last year. In Canada we operated three crews during Q4 compared to four crews in 2012 when we began the quarter with four crews and ended with five crews.

Our Canadian operations were impacted by softer activity as well as delays and interruptions due to harsh weather conditions and government land permitting. As a result our Canadian crews were intermittent during the quarter causing additional mobilization and stand-down costs. As a result, our revenues went down approximately 67% during Q4 which negatively affected our margins.

The good news is that the activity in Canada has started to pick up and we expect a good remaining winter season there. Since the end of Q4 we have placed three additional crews back in the field in Canada. Overall we’re currently operating ten crews in North America, six in Canada and four in the US. Our backlog currently stands at $63 million, consistently above US and Canadian work.

I will now turn the call over to Jim Brata who will review the financial results and then I’ll return with some comments.

Jim Brata

Thank you, Wayne, and good morning. Revenues for Q4 2013 were $18.7 million compared to $57.0 million in Q4 2012. As a reminder, Q4 2012 was a record Q4 in terms of revenues and earnings.

We operated five crews in the US in this year’s Q4 compared to nine crews in the US in last year’s Q4. In Canada we operated three crews compared to beginning the quarter with four crews and ending with five crews in Q4 2012.

Cost of services in Q4 2013 was $17.7 million compared to $40.8 million in the same quarter a year ago. Cost of services as a percentage of revenues in Q4 2013 was 94.3% compared to 71.5% in Q4 2012.

Gross profit was $1.1 million in Q4 2013 compared to $16.3 million in Q4 a year ago. Gross profit margin was 5.7% compared to 28.5% in Q4 a year ago. The year-over-year gross margin decrease was due to lower revenues along with the expense of having crews in the field delayed or interrupted by severe weather and land permitting delays in Canada.

Our selling, general and administrative expenses were $2.4 million in Q4 2013 compared to $2.3 million in Q4 2012. Depreciation and amortization expense was $5.5 million compared to $6.9 million in Q4 2012. As a percentage of revenues, depreciation and amortization expense was 29.5% in this year’s Q1 compared to 12.1% in Q4 2012.

Interest expense was $188,000 in Q4 2013 compared to $349,000 a year ago. We reported net loss of $4.7 million or $0.21 per share compared to net income of $4.2 million or $0.19 per diluted share in last year’s Q4.

We recorded an income tax benefit of $2.3 million in Q4, an effective tax benefit rate of 33%. This compares to an income tax expense of $2.6 million, an effective tax expense rate of 38% a year ago.

EBITDA was negative $1.3 million in Q4 2013 compared to $14.0 million in Q4 a year ago. An EBITDA reconciliation table is provided in our earnings release issued this morning.

Now I will briefly highlight our full-year results. For 2013 revenues were approximately $135 million compared to $196 million for 2012, which was a record year for revenues and earnings. Cost of services was $108 million compared to $135 million last year. As a percentage of revenues cost of services was 80% compared to 69% in 2012.

Gross profit for 2013 was $27 million compared to $61 million in 2012. Gross margin in 2013 was 20% compared to 31% in 2012.

Selling, general and administrative expense was $9.6 million in 2013 compared to $8.8 million a year ago. As a percent of revenues, 2013 SG&A expense was 7.1% compared to 4.5% in 2012.

Depreciation and amortization expense in 2013 was approximately $25 million compared to $26 million in 2012. As a percentage of revenues, depreciation and amortization expense was 18% in 2013 compared to 13% in 2012.

We recorded a net loss of $6.3 million or $0.29 per share in 2013 compared to net income of $15.7 million or $0.72 per diluted share in 2012.

EBITDA for the full year 2013 was $17 million, an EBITDA margin of 12.8% compared to $52 million, an EBITDA margin of 26.6% in 2012.

And finally, I’ll highlight some balance sheet items. As of the end of 2013 we had long-term debt of $7.4 million, cash and cash equivalents of $16.1 million. Our current ratio is just above 2:1. Working capital is approximately $17.7 million, and finally we generated approximately $23 million in cash from operations for the full year 2013.

And with that I’ll turn the call back to Wayne for some closing comments.

Wayne Whitener

Thank you, Jim. Before we go to questions I would like to briefly summarize where we stand to date. Inquiries have been increasing since the beginning of 2014 and bidding remains steady. In fact, our customers are making faster contract decisions this year as compared to last, which is a good sign this early in the year.

In light of the current market conditions that we have mentioned in previous calls we continue to carefully manage our cost structure and build cash in order to maintain a strong balance sheet which we have accomplished over this past year.

As Jim mentioned we generated cash from operations of $23 million in 2013 and ended the year with approximately $27 million in cash and accounts receivable. Based upon our backlog and current operations, the increased level of inquiries, and the feedback from our clients we anticipate that 2014 will provide better operating results than last year.

This concludes my formal remarks. I’m willing to take questions.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator instructions.) Our first question comes from the line of Veny Aleksandrov with FIG Partners. Please go ahead.

Veny Aleksandrov – FIG Partners

Good morning. My first question is on the outlook. You were saying that bidding activity is improving and contract signing is improving. If we look at the backlog yes, it’s flattish but I would think that in the backlog there is less Canadian-related work and more US work. Is this correct and are you starting to sign contracts?

Wayne Whitener

Yes, most of the backlog that you see is US backlog. And like I say, we are seeing contracts signed quicker than what we’ve seen previously.

Veny Aleksandrov – FIG Partners

Okay. In terms of weather we have had some very bad weather in Q1 so far. Have you been affected in the US?

Wayne Whitener

We’ve had some impact on weather. You know, we’re doing some work up in the Montana area and we’ve had some impact on weather up there, but fortunately we have weather in our contracts so we’re being supported by our clients on that. In Canada the weather’s kind of leveled out somewhat up there and we’re able to, as I mentioned, put crews back in the fields. So we’re operating six crews in Canada at this time and weather seems not to be a factor for the at least immediate Q1.

Veny Aleksandrov – FIG Partners

And I know it’s still too early but from where we stand do you think it’s going to be a long winter or a short winter, or are we going to go well into March in terms of Canada?

Wayne Whitener

Well, it appears it’s been pretty cold up there so maybe it’ll take longer for things to thaw out, so we’re expecting a medium to a longer winter in Canada.

Veny Aleksandrov – FIG Partners

Okay, so March and if we’re lucky we can go into (inaudible). Okay, my last question is the use of cash. You said that you have almost $27 million on the balance sheet. Any change of plans, any plans for the use of cash or…

Jim Brata

Not at this time. We’re going to remain on the maintenance CAPEX unless opportunities present themselves to make additional capital expenditures to increase the opportunity for the company.

Veny Aleksandrov – FIG Partners

Okay, and I have here the actual last question – it seems like interest is returning in the US. Canada is seasonal so I know that the winter is almost ending but in the US with the high gas prices it looks like the business is turning. Is this your take and is this what you’ve tried to communicate to us in the press release?

Wayne Whitener

Yes. Like I say, we’re seeing natural gas prices up over $6.00, I think that’s going to spur definitely some people looking back at some dry gas areas which would bode quite well for us and the seismic business.

Veny Aleksandrov – FIG Partners

Thank you so much.

Operator

Thank you. Our next question comes from the line of Joel Luton with Westlake Securities. Please go ahead.

Joel Luton – Westlake Securities

Yes, good morning. Exactly what was your CAPEX in Q4?

Jim Brata

In Q4 CAPEX was $1 million.

Joel Luton – Westlake Securities

Okay. And what’s maintenance CAPEX again?

Jim Brata

Maintenance CAPEX is about $2 million to $3 million per year. We ended the year, for the full year we had $2.5 million in CAPEX.

Joel Luton – Westlake Securities

Okay. And how many crews in Q1 last year did you have in Canada and the US operating?

Wayne Whitener

We had five crews in the US and three crews in Canada in Q4 last year. In Q1 last year we had nine crews in the US and six crews in Canada, a total of 15 crews in Q1 2013.

Joel Luton – Westlake Securities

Okay, so that means you had more crews operating a year ago in Q1.

Wayne Whitener

That’s correct. Right now we’re operating ten crews – six crews in Canada and four crews in the US.

Joel Luton – Westlake Securities

And as the year pans out do you anticipate that… The comparisons obviously should get easier as the year pans out given you had, really the second half of the year kind of fell off the cliff for you in ’13. You should have easier comparisons as this year progresses.

Wayne Whitener

Yes, yes. We should. We had a record year in 2012 so yeah, comparisons should be closer. Correct.

Joel Luton – Westlake Securities

Okay, thanks a lot. That’s all I have.

Operator

Thank you. (Operator instructions). Our next question comes from the line of Evan Richert with Sidoti & Company. Please go ahead.

Evan Richert – Sidoti & Company

Good morning, guys, most of my questions have been asked. I was just wondering if you could touch a bit on the permitting issues. Is this anything unusual or just typical seasonal stuff in Canada?

Wayne Whitener

That’s a one-off deal, Evan. We have a particular job that we were working on up there that had special conditions, and so normally in Canada we don’t have any permit problems. So that was a one-off deal.

Evan Richert – Sidoti & Company

Okay, great. And just to reiterate the sentiment, you do have confidence that demand has bottomed out in 2013 and from what you’re seeing in 2014 there should be some kind of rebound?

Wayne Whitener

That is our hope. It appears to be that way. We are seeing contracts signed so we’re optimistic going into 2014.

Evan Richert – Sidoti & Company

Okay, great, and one last thing: how important is… Last year you paid a cash dividend – is that something you’re still considering for this year or you’re going to hold off?

Wayne Whitener

Well, we’ll review that with the Board of Directors and make a decision later on in the year here.

Evan Richert – Sidoti & Company

Okay, thanks. That’s it from me, guys.

Operator

Thank you. (Operator instructions.) Thank you, and I am showing no further questions at this time. I’d like to turn the call back over to management for any further remarks. Please go ahead.

Wayne Whitener

We’d like to thank everyone for being on the Q4 and year-end call and we appreciate your interest in the company. Thank you.

Operator

Thank you. Ladies and gentlemen, this does conclude the TGC Industries Q4 Earnings Conference Call. If you would like to listen to a replay of today’s conference please dial 303-590-3030 with access code #4662796. Thank you for your participation, you may now disconnect.

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