TGC Industries, Inc. (TGE) CEO Wayne Whitener On Q2 2014 Results - Earnings Call Transcript

Jul.28.14 | About: TGC Industries, (TGE)

TGC Industries, Inc. (NASDAQ:TGE)

Q2 2014 Results Earnings Conference Call

July 28, 2014, 09:30 AM ET

Executives

Jack Lascar - Dennard Lascar Associates

Wayne A. Whitener - President and Chief Executive Officer

James K. Brata - Chief Financial Officer

Analysts

Veny Aleksandrov - FIG Partners

Evan Richert - Sidoti & Company

Operator

Good morning, ladies and gentlemen and thank you for standing by and welcome to the TGC Industries Second Quarter Earnings Conference Call. During today’s presentation, all parties will be in listen-only mode. The conference is being recorded today, July 28, 2014.

I’d now like to turn the conference over to Jack Lascar. Please go ahead sir.

Jack Lascar

Thank you, Allen. Good morning and welcome to the TGC Industries’ second 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 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 August 11. 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, July 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 started this call, please refer also 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 now turn the call over to Wayne Whitener.

Wayne A. Whitener

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

After a solid first quarter in Canada, our second quarter results were negatively impacted by the usual seasonal decline associated with the spring breakup and the winding down of the winter season in Canada. Also impacting our second quarter results were the startup costs for our fifth crew, and that crew did not go into the operation until early July.

After operating six crews in Canada for most of 2014 first quarter, all of the Canadian crews have been shut down by the end of April at the end of the winter season, so we operated basically no crews for much of these second quarter, however at the beginning of June, we send one Canadian crew back into the field for summer work.

In the U.S. we operated four crews for the entire second quarter of 2014, a year ago we began with the second quarter with eight U.S. crews and ended the quarter with three. We are currently operating five crews in the U.S. and we anticipate operating those till the end of the year.

Land seismic activity in the U.S. has remained challenging all the year with a soft demand for seismic services and competitive pricing. Despite this ongoing challenging environment, we generated 10.7 million in EBITDA in the first half of the year. Our backlog at the end of the second quarter was approximately $38 million comprised mostly of U.S. work.

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 the outlook and the rest of the year.

James K. Brata

Thank you, Wayne and good morning. Revenues from the second quarter of 2014 were $18.2 million compared to $31.5 million in the second quarter of 2013. As Wayne mentioned, we operated four crews in the U.S. during this year’s second quarter. In the second quarter of last year, we began the quarter with eight U.S. crews and ended with three. In Canada, we had no crews operating for most of this year second quarter since all Canadian crews had been shut down by late April. We did send one crew back into the field in the beginning of June for summer work.

Cost of services in the second quarter of 2014 was $17.7 million, compared to $28.3 million in the second quarter of 2013. Cost of services as a percentage of revenues into 2014 second quarter was 96.8% compared to 89.8% into last years second quarter.

Gross profit was $580,000 in the second quarter of 2014 compared to $3.2 million in the second quarter of last year. Gross profit margin was 3.2% compared to 10.2% in the second quarter a year ago. Selling, general and administrative expenses were $2.2 million in the second quarter of 2014 compared to $2.5 million in the second quarter of 2013.

As a percentage of revenues, SG&A expenses for the second quarter of 2014 and 2013 were 11.8% and 7.8% respectively. Depreciation and amortization expense in the 2014 second quarter was $4.9 million compared to $6.4 million a year ago. As a percentage of revenues, depreciation and amortization expense was 26.6% in this year’s second quarter compared to 20.2% in the second quarter of 2013.

Interest expense was $176,000 in the second quarter of 2014 compared to the $308,000 a year ago. Net loss in the second quarter of both 2014 and 2013 was $4.0 million or $0.18 loss per share. We recorded an income tax benefit of $2.6 million in the second quarter and effective tax benefit rate of 39%, this compares to an income tax benefit of $1.9 million and effective tax benefit rate of 32% a year ago.

EBITDA in the second quarter of 2014 was a negative $1.6 million compared to $747,000 in the second quarter of 2013. An EBITDA reconciliation table was provided in our earnings release issued this morning.

Now I will briefly touch on the first half results. Revenues for this year’s first six months were $67.0 million compared to $94.7 million in the first six months of 2013. Gross profit in the first half of 2014 was $15.5 million compared to $23.2 million a year ago. As a percentage of revenues, gross margin was 23.1% in the first half of 2014 compared to 24.5% in the first half of 2013. Cost of services as a percentage of revenues was 76.9% in the first half of 2014 compared to 75.5% in the first half of 2013.

SG&A expenses were $4.8 million in both the first half of 2014 and 2013. As a percentage of revenues, SG&A was 7.1% in this years first half compared to 5.1% in the first half of 2013. Depreciation and amortization expense from the first half of 2014 was $9.9 million compared to $13.1 million in the first half of last year. As a percentage of revenues, depreciation and amortization expense was 14.8% and 13.8% for the first half of 2014 and 2013 respectively.

Income from operations in the first half of 2014 was $764,000 compared to $5.3 million in the first half of last year. Net income for the first half of 2014 was $248,000 or $0.01 per diluted share compared to $2.3 million or $0.11 per diluted share in the first half of 2013. EBITDA for the first half of 2014 was $10.7 million or 16% of revenues compared to $18.3 million or 19.4% of revenues in the first half of 2013.

And now I will highlight some balance sheet items. As of the end of the second quarter of 2014, we had long-term debt of $3.6 million, cash and cash equivalents of $30.5 million, our current ratio was 1.6:1, working capital was approximately $22.3 million and finally we have generated approximately $21.3 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 go to questions I would like to briefly summarize where we stand today. Oil and gas companies since the beginning of 2013 have been emphasizing the activities other than exploration and seismic and are now focused on drilling activities into domestic shale plays. This has resulted in a limited capital being directed towards exploration and seismic work. Our everyday environment for seismic services appear to be improving. We are currently seeking indication -- we are currently seeing an indication of the pickup in and poor demand for seismic service particularly for projects acquiring wireless equipment. In fact, we are considering purchasing an additional wireless system to complement our existing fleet.

Inquires and bidding activities are improving, and we currently have a number bids outstanding. We are currently operating five crews in the U.S. and one crew in Canada and we expect to operate those six crews during the entire third quarter.

In light of the current market conditions we continued to carefully manage our cost structure, build cash in order to maintain a strong balance sheet which we have done over the past year.

In closing, we remain well positioned within the industry we have some of the most advanced state-of-the-art equipment. We have strong capitalization structure and ability to generate cash, and we are prepared to capitalize on improvements in the marketplace.

That concludes my formal remarks and I’ll take any questions at this time.

Question-and-Answer Session

Operator

Thank you, sir. We’ll now begin the question-and-answer session. (Operator Instructions) We’ll take our first from Veny Aleksandrov with FIG Partners.

Veny Aleksandrov - FIG Partners

Good morning.

James K. Brata

Good morning, Veny.

Veny Aleksandrov - FIG Partners

My first question is about Canada, the crew that just started to work. How long do you envision this crew operating? You said Q3? Is it going to go beyond Q3?

Wayne A. Whitener

Yeah, we’re operating one crew doing summer work in Canada. Right now, we expect to start adding additional crews starting some time in October. But we expect this one crew for sure to go -- to be there in the third and fourth quarter and then start adding crews more so in the fourth quarter.

Veny Aleksandrov - FIG Partners

And how is -- I know that it’s too early, but you have some indications already probably about Canada. How is the winter season working?

Wayne A. Whitener

Well, it’s still a little bit early. [Stampedes] over people or revaluating what you’re going to done this season. So things look relatively about the same or probably a little bit better than what we saw last year.

Veny Aleksandrov - FIG Partners

Okay. And then going back to the U.S. you sound at least to me more optimistic that you sounded in the last year in terms of demand? And you are talking about wireless crews being in demand and probably buying some other system? Can you give us a little bit more details about that? And do you need more equipment you (inaudible) go on from Canada and why is wireless equipments needed?

Wayne A. Whitener

Sure. Demand is still relatively soft here in the lower 48. As I mentioned, I think a lot of the money is being diverted into drilling phases by these E&P companies. Right now, out of the five crews who are presently operating there in the U.S. and also in Canada are wireless crews. Due to the softness of the market there’s more demand for wireless than there is for cable crews.

So, we’re looking at additional opportunities maybe to add some wireless to our fleet. So, we’re reviewing that at this time. But we are seeing small increase in demand per services and we’re little bit more optimistic more towards the end of the year.

Veny Aleksandrov - FIG Partners

And do you need to sign additional contracts to add to your fleet or you need that right now -- the background that you have from the projects out there, or you need for additional wireless equipment?

Wayne A. Whitener

We would like to get the additional wireless equipment to add to our present fleet at this time.

Veny Aleksandrov - FIG Partners

Okay. And one more question and I will circle back. The $38 million in backlog, does this provide you visibility into the end of the year for all the crews that you have or you have sign contracts to fill in some gaps until the end of the year?

Wayne A. Whitener

Yes. We’ll be adding some contracts. That $38 million will not take us to the end of the year.

Veny Aleksandrov - FIG Partners

Okay.

Wayne A. Whitener

But we’ve got some contracts that are basically sitting on some people desk that will signed here in the next seven to ten days and we expect that to take us into through the end of the year.

Veny Aleksandrov - FIG Partners

Okay. Well, let me circle back and let somebody ask the last questions. I will queue back now. Thank you.

Operator

(Operator Instructions) We’ll next go to Evan Richert with Sidoti & Company.

Evan Richert - Sidoti & Company

Good morning, guys. Talking about adding equipment, I don’t know, if you could just kind of touch on that again and some of the rationale. Are you sensing that there is some pricing coming down on that just given the over supply or just a little more on the rationale given -- the backlog seems to be have come down also in the first quarter, and I know your optimistic long-term, but just little bit of the rationale for adding more equipment at this point?

James K. Brata

Sure. The rationale is that, there is more and more channels that are being added to these 3Ds that we’re involved in, so also in Canada we ran some equipment for the season as well, which somewhat impacts our margins out there. So also we’re seeing some pricing opportunities in the wireless equipment. So, we’re evaluating all that and kind of make the determination about adding some wireless to the company to take advantage of improved margins, would that happen to rent some equipment and also take advantage of some of the pricing in the wireless equipment right now.

Evan Richert - Sidoti & Company

Okay, great. And you also talked about wanting to keep building cash given the outlook. How much would you be willing to spend on new equipment right now? Is there any way you can ballpark that?

Wayne A. Whitener

Well, we’re still evaluating exactly what that number. Its not going to be anywhere near what we’ve done in the past.

Evan Richert - Sidoti & Company

Sure.

Wayne A. Whitener

From 2010, 2011, and 2012 over those three-year period we spend about $100 million on the newer wireless equipment. So it would be very limited amount of funds being diverted to adding wireless equipment. But that being said, we have some very favorable opportunities as far as some low interest, simple interest phones and those types of opportunities, so, we feel like if it makes sense to spend some money on some wireless equipment.

Evan Richert - Sidoti & Company

Okay, great. And then as far as the bid you’re getting, is there a lot of pricing competition right now? I’m trying to get a sense whether you’re turning away customers since the bids they are not coming at the right price here, if the activity is just to [go] soft?

James K. Brata

The activity is still soft. We’re really not terminating clients away, but competition still relative and competitive out there. There are still some opportunities for us at some decent rates, but it’s definitely -- the margins are down from where we’d like to see in.

Evan Richert - Sidoti & Company

Okay. And then just one comment on the prepared remarks, I think you said you had $21.3 million cash flow from operations? If I heard that right, is that for the six months or for the quarter?

James K. Brata

That’s for the six months.

Evan Richert - Sidoti & Company

Six months. Okay. Do you have CapEx number; I don’t know if it’s just running at the same run rate you’ve been at?

James K. Brata

So far this year, we’ve spend $1.1 million in CapEx.

Evan Richert - Sidoti & Company

$1.1 million. Okay, great. I’ll hop back in the queue. Thanks guys.

Operator

Okay. (Operator Instructions). And we’ll go back to Veny Aleksandrov with FIG Partners.

Veny Aleksandrov – FIG Partners

Again, back on the wireless equipment, is it going to be single or second [indiscernible] revenue is more than they offer in Canada?

Wayne A. Whitener

Well, we have both. We have single channel and we have Three-Channel Multi-Component equipments as well. So we’re going to review exactly what the make up of the equipments going to be. We’re more reviewing at that time. It possibly could be 3-C equipment or single-channel. We think right now, it will probably be some additional 3-C equipment

Veny Aleksandrov – FIG Partners

Okay. Thank you. Appreciate it.

Operator

And gentlemen, at this time there are no further questions. Please continue.

Wayne A. Whitener

We thank you for joining us for the second quarter conference call and hope to hear from you next quarter. Thank you for your interest.

Operator

Ladies and gentlemen, this does conclude the TGC Industries Second Quarter Earnings Call. You may now disconnect. Thank you.

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