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TGC Industries, Inc. (NASDAQ:TGE)

Q1 2014 Earnings Conference Call

April 28, 2014 09:30 ET

Executives

Jack Lascar - Dennard Lascar Associates

Wayne Whitener - President and Chief Executive Officer

Jim Brata - Chief Financial Officer

Analysts

Veny Aleksandrov - FIG Partners

Joel Luton - Westlake Securities

Evan Richert - Sidoti & Company

Rebecca Simmons - DRZ Inc.

Operator

Good morning, ladies and gentlemen and thank you for standing by and welcome to the TGC Industries First Quarter Earnings Conference Call. During today’s presentation, all parties will be in listen-only mode. (Operator Instructions) And as a reminder, this call is being recorded today, April 28, 2014.

I would now like to turn the call over to Jack Lascar. Please go ahead sir.

Jack Lascar - Dennard Lascar Associates

Thank you, Craig. Good morning and welcome to the TGC Industries’ first quarter 2014 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 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 via webcast by going to the Investor Relations section of the company’s website at tgcseismic.com or via a recorded instant replay until May 12. 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, April 28, 2014 and therefore you are advised that time-sensitive information may no longer me 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 10-K for the year ended December 31, 2013. 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.

Now, I will turn over the call to Wayne Whitener.

Wayne Whitener - President and Chief Executive Officer

Thank you, Jack, and good morning everyone. Thank you for joining us today for our first quarter 2014 earnings call. I will make some initial comments and Jim Brata will provide you with financial details. Then I will conclude with some remarks about the market and business going forward.

We saw improvements in revenue and margins in the first quarter led by our strong performance in Canada, while the Canadian winter season began relatively slowly as we noted in our fourth quarter earnings release and call, we produced strong first quarter results in Canada as the winter season unfolded. We achieved this as part of the fact that the overall seismic market in Canada was weaker this year than last year.

The oil and gas companies in North America appear to be emphasizing more development and production activities rather than exploration in seismic work. We operated six crews in Canada for most of 2014 first quarter, scaling back to four crews as Canadian spring breakup began. By mid April, we had to shutdown two more crews and now with the winter season essentially over, we have no crews operating in Canada by the beginning of May.

In the U.S., we continue to see challenging conditions in the first quarter and we operated four crews compared to nine crews a year ago. We expect a gradual improvement in the U.S. seismic demand to the remainder of 2014 even though we believe there is overcapacity in the industry at this time.

I will now turn the call over to Jim Brata who will review the financial results and then I will return with some final remarks about our outlook for the rest of this year.

Jim Brata - Chief Financial Officer

Thank you, Wayne and good morning. Revenues for the first quarter of 2014 were $48.8 million compared to $63.2 million in the first quarter of 2013. As Wayne mentioned, we operated four crews in the U.S. in this year’s first quarter compared to nine crews in the U.S. in the first quarter of 2013. In Canada, we operated six crews for most of the first quarter and ended the quarter with four crews as the winter season began to wind down. We operated six crews in Canada for the entire first quarter of 2013.

Cost of services in the first quarter of 2014 was $33.9 million compared to the $43.2 million in the first quarter of 2013. Included in this year’s cost of services is a reserve expense of approximately $670,000 or $0.02 per diluted share associated with site clean-up costs related to the ending of the Canadian winter season. In the first quarter of 2013 we recorded a reserve expense for the same purpose of approximately $1.3 million. Cost of services as a percentage of revenues from the 2014 first quarter was 69.5% compared to 68.4% in last year’s first quarter.

Gross profit was $14.9 million in the first quarter of 2014 compared to $20 million in the first quarter of last year. Gross profit margin was 30.5% compared to the 31.6% in the first quarter a year ago. Selling, general and administrative expenses were $2.6 million in the first quarter of 2014 compared to $2.4 million in the same quarter of 2013. As a percentage of revenues SG&A expenses for the first quarter of 2014 and 2013 were 5.4% and 3.8% respectively. Depreciation and amortization expense for the 2014 first quarter was $5.1 million compared to $6.7 million a year ago. As a percentage of revenues depreciation and amortization expense was 10.4% in this year’s first quarter compared to 10.6% in the first quarter of 2013.

Interest expense was $182,000 for the first quarter of 2014 compared to the $320,000 a year ago. Net income in the 2014 first quarter was $4.3 million or $0.19 per diluted share compared to the net income of $6.4 million or $0.29 per diluted share in last year’s first quarter. We have recorded income tax expense of $2.7 million in the first quarter and effective tax rate of 39%, this compares to an income tax expense of $4.2 million and effective tax rate of 40% a year ago. EBITDA in the first quarter of 2014 was $12.3 million compared to $17.6 million in the first quarter of 2013. As a percentage of revenues EBITDA in the first quarter of 2014 and 2013 was 25.1% and 27.8% respectively. An EBITDA reconciliation table was provided in our earnings release issued this morning.

And now I will highlight some balance sheet items as of the end of the first quarter of 2014, we have long-term debt of $5.4 million, cash and cash equivalents of $15.3 million, our current ratio is 1.7:1, working capital is approximately $23.5 million and finally we have generated approximately $3.2 million in cash from operations. And with that I will turn the call back to Wayne for some closing comments.

Wayne Whitener - President and Chief Executive Officer

Thank you, Jim. Before we go to questions I would like to briefly summarize where we stand today. Our backlog at the end of the first quarter was approximately $43 million mainly comprised of U.S. work. This compares to $40 million at the end of last year’s first quarter. While this level of backlog gives us good visibility into the second quarter and the beginning of the third quarter, the U.S. market for seismic data acquisition remains competitive. The positive news is that several oil and gas companies have indicated the potential for several significant projects in coming months. Inquiries and biddings have remained steady since the beginning of the year, but the pace of contract awards, have been slow.

We are currently operating four crews in the U.S. and based on client demand we anticipate adding more additional crew in June. The Canadian winter season is now over and we will have no crews operating in the early May. In light of the current market conditions we continued to temporarily manage our cost structure and build cash in order to maintain a strong balance sheet which we have accomplished over the past year. We remain cautiously optimistic about seismic data acquisition activities in 2014 as preliminary indication from clients point to slightly higher seismic data acquisition spending. In closing we remain well positioned within the industry we have the most advanced state-of-the-art equipment available. We have a strong capital structure and ability to generate cash and we are prepared to capitalize on improvements in the marketplace.

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

Question-and-Answer Session

Operator

Thank you very much. (Operator Instructions) And our first question does come from the line of Veny Aleksandrov with FIG Partners.

Veny Aleksandrov - FIG Partners

Good morning.

Wayne Whitener

Good morning, Veny.

Jim Brata

Good morning.

Veny Aleksandrov - FIG Partners

My first question is about the U.S. You cite in your prepared remarks that you expect going to do in 12 months and your thinking about fifth crew in June? Do you find any in here, can we add more than the fifth crew, can we go to a sixth crew later in the year or that was planned on this mix or this might or might not happen in the next couple of months?

Wayne Whitener

Well of course adding additional crews beyond the – this fifth crew depends on our success right on getting some contract signed. So right now we were of course very confident we’re going to put out the fifth crew in sometime during June and if we’re successful in some additional contracts that are in the Q there it’s possible we put – could put out our additional crews sometime before the end of the year.

Veny Aleksandrov - FIG Partners

Okay. And how many channels are due to come (indiscernible) growth come in the operating in ‘12?

Wayne Whitener

We are probably averaging right around 10,000 channels per crew.

Veny Aleksandrov - FIG Partners

Per crew, okay.

Wayne Whitener

Yes.

Veny Aleksandrov - FIG Partners

Okay. And then Canada, I am sorry I missed that. So you started the quarter with four crews you went immediately to six and then Q2, how did you wind them down, how many we’ve had working at the very beginning of fifth crew?

Wayne Whitener

Well we started the year in January with six crews.

Veny Aleksandrov - FIG Partners

Okay.

Wayne Whitener

And by the end of the quarter we were down to four crews and we’re winding down with the last crew this week in Canada.

Veny Aleksandrov - FIG Partners

Okay. So we’re going to have some work in Q2 from Canada?

Wayne Whitener

Yes.

Veny Aleksandrov - FIG Partners

Okay.

Wayne Whitener

Yes.

Veny Aleksandrov - FIG Partners

And then the last – in the past year somehow some work has been – shelf life has been showing ups in Canada in the summer. Are you – you’re there on a possibility we can get some of that or we don’t know yet?

Wayne Whitener

We don’t know yet.

Veny Aleksandrov - FIG Partners

Okay.

Wayne Whitener

In the past we have had some work and we have the equipment up there to do some work as opportunity present itself.

Veny Aleksandrov - FIG Partners

Okay, thank you so much.

Operator

And our next question does come from the line of Joel Luton with Westlake Securities.

Joel Luton - Westlake Securities

Good morning. What was your CapEx in the quarter?

Jim Brata

It was $1 million.

Joel Luton - Westlake Securities

Okay. And do you have any expectations for the year?

Jim Brata

We’re on a maintenance CapEx program right now. So it’s going to be between $3 million and $5 million.

Joel Luton - Westlake Securities

Okay. And also with the Canadian job then you leased some equipment and if so what happens up it mean is the lease essentially over with the jobs winding down or do you retain control of that equipment?

Wayne Whitener

We did lease some equipment up there. We do have control over that equipment. So we’ll be using some of that same equipment next year. It is possible we might be using some of that equipment here in the U.S. during the third and fourth quarter possibly.

Joel Luton - Westlake Securities

Okay. And do you all have any guesses on Canada this coming season or is it just too early to say?

Wayne Whitener

It’s too early to say as far as what Canada is going to look like this next season.

Joel Luton - Westlake Securities

Okay, okay. Thank you.

Operator

And our next question does come from the line of Evan Richert with Sidoti & Company.

Evan Richert - Sidoti & Company

Good morning guys.

Wayne Whitener

Good morning.

Evan Richert - Sidoti & Company

I know you talked about the market in the U.S. being competitive and I know you don’t give guidance on gross margins. But I was wondering if you can talk directionally about what you think they will be for 2014 relative to 2013?

Wayne Whitener

Well like I say as you mentioned we don’t give guidance, but we’re looking at, we operated four crews last year. And we anticipate operating four crews here in the U.S. basically for most of this quarter and then be going into five crews in the end of this quarter going into the fourth quarter. So we’re seeing some pressure on the margins just due to the overcapacity within the space at this time, but we don’t give out really any real guidance on gross margins.

Evan Richert - Sidoti & Company

Okay, great. And just one last question, I know you said you seem to be seeing just talk about some customers and we are seeing some potential bidding for some bigger project, is that one or two specific customers or is that kind of across the board people that bidding on deals right now?

Wayne Whitener

It’s kind of across the board. What we are seeing from several of our clients, like I say it seemed to be a little bit slow from the time that we have submitted our bid proposal to the time that jobs are being awarded or whether they are getting awarded or not, but we are optimistic that things will pickup in the second half of the year here.

Evan Richert - Sidoti & Company

Alright, thanks. I will hop back in the queue.

Operator

(Operator Instructions) And our next question does come from the line of Rebecca Simmons with DRZ Inc.

Rebecca Simmons - DRZ Inc.

Hi, thanks for taking my questions.

Wayne Whitener

Good morning.

Rebecca Simmons - DRZ Inc.

I wanted to know if you could give a little more color on what you are hearing from your customers, what’s their sentiment right now and the commentary you are getting from them?

Wayne Whitener

Well, it’s a little bit mixed. A lot of our clients have been in the drilling mode and are in the acquiring land mode and that sort of thing, but we are starting to see a moving back towards additional seismic allotted in the shale plays. We are actually seeing some activity in the dry gas areas again. So, as I mentioned, we are somewhat optimistic about the second half of the year.

Rebecca Simmons - DRZ Inc.

Okay. So looking at the opportunities you are seeing right now, I mean, it sounds like directionally you should start to get some improvement in the backlog, I mean is this kind of level I know typically maybe a seasonal low, is that the way to think of it or how should we kind of think about going forward just directionally?

Wayne Whitener

Yes. Our backlog is not where we would like it normally this time of year it’s a little bit higher compared to this time last year. As I mentioned earlier, we had 40 million, so we are up $3 from the same time last year. Last year was not really a robust year for us. So, we hope to see improvements going forward here in this quarter to improve the backlog and improve the number of crews and opportunities for the company.

Rebecca Simmons - DRZ Inc.

Okay, great. And then lastly, how should we think of your cash base, I know you have talked about being in maintenance mode, should we think of that as building and what your priorities are there?

Wayne Whitener

Yes, that’s the main thing right now. We are in maintenance CapEx and we probably anticipate that staying in that mode unless we get demand for services that would require us to look at adding additional equipment to the company. So, we have remained flexible in that mode.

Rebecca Simmons - DRZ Inc.

Okay. And overall, priorities for cash, is just building up cash, right now?

Wayne Whitener

Right now, yes.

Rebecca Simmons - DRZ Inc.

Okay. Alright, that’s all I have. Thank you.

Operator

And at this time, there are no further questions. I would like to turn the call back over to management for any closing comments.

Wayne Whitener - President and Chief Executive Officer

We’d like to thank you for joining us and look forward to talking to you again next quarter.

Operator

Thank you. Ladies and gentlemen, that will conclude the conference call for today. We do thank you for your participation. You may now disconnect your lines at this time.

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