Jack Lascar – Partner, IR Counsel, Dennard Rupp Gray & Lascar, LLC
Robert Peebler – President and CEO
Brian Hanson – EVP and CFO
Daniel Burke – Johnson & Rice Company
ION Geophysical Corporation (IO) Q1 2011 Earnings Call May 5, 2011 10:00 AM ET
Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the ION Geophysical First Quarter Earnings Conference Call. During today’s presentation all parties will be in a listen-only mode. This conference is being recorded today Thursday, May 5, 2011.
I would now like to turn the conference over to Jack Lascar. Please go ahead, sir.
Thank you. Good morning and welcome to ION Geophysical Corporation first quarter earnings conference call. We appreciate you joining us today. Your hosts today are Bob Peebler, Chief Executive Officer and Brian Hanson, Executive Vice President and Chief Financial Officer. Before I turn the call over to management, I have a few items to cover.
If you would like to be on our e-mail distribution list to receive future news releases or experience a technical problem and didn’t receive yours yesterday, please call us at 713-529-6600 and let us know. If you would like to listen to the replay of today’s call, it is available via webcast by going to the Investor Relations section of the Company’s website at www.iongeo.com, or via a recorded instant replay until May 19. The information was provided in yesterday’s earnings release.
I should also point out that we will be using some power-point slides to accompany today’s call. They’re accessible via a link on the home page of ION’s web site at www.iongeo.com. Information reported on this call speaks only as of today, May 5, 2011, 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. 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’s unable to predict or control, but may cause the company’s actual results or performance, to differ materially 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 and its quarterly report on 10-Q. Furthermore, as we start this call please refer to the statement regarding forward-looking statements incorporated in our press release issued yesterday 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 Bob Peebler.
Thanks, Jack, and good morning. We’re pleased with our first quarter results which usually are seasonally the weakest of each year. As we always remind people, our business is normally skewed to the back half of the year and 2011 will likely be a very similar pattern as 2010. The reasons for this are the shape of all company exploration spending which almost always accelerates as the year progresses, the timing of known large scale system sales and the shape of the new venture program activity this year.
That being said, we did get to off to a strong start for 2011 in both our marine and multi-client businesses, which more than offset the slower than usual start for data processing business and the impact of the turmoil in the middle east on a Geophone sales activity. What was most impressive was the strength of our multi-client business especially considering that we had little new venture activity in the first quarter compared to our full year 2011 capital program of over $120 million. I think this is a good indicator of the wind at our back that I spoke to at our last earnings call as we are seeing exploration budgets increasing as oil prices are hovering well above what is in the most company or company price tags.
We have a significant number of multi-client new venture projects that are under development with many of these projects scheduled to the second half of the year. We did have one project to Libya that was scheduled for the second quarter which was canceled, while we have significant opportunities to replace it later in the year. Our Marcellus shale land multi-client project has been delayed due to weather with permitting and shot-hole drilling is still in progress, and with shooting now expected to begin by the end of this month. We’re also expecting other shale projects that we have commissioned to start later this year.
We anticipated a slow start in 2011 in our data processing business due to the condo blowout and resulting impact on our pipeline of business for Houston Center. As a reminder, we saw a 20% reduction in our backlog specific to the Gulf of Mexico in the third quarter of last year compared to year end 2009, and it was late 2010 before we started seeing recovery. The good news is we are now seeing our sales pipeline accelerating, so we expect a good year for data processing with pre-Macondo momentum being restored in the back half of the year.
One very bright spot for ION’s data processing business during the first quarter was a recent opening of a joint venture processing center in Rio de Janeiro. The center will be equipped with state of art GXT processing technology and is ideally suited to meet the needs of the rapidly growing position in energy industry as it delivers a broad range of advanced seismic processing services for land, marine, ocean bottom cable and transition zone data with initial emphasis on 3D marine. The first marketing target will be complex pre-salt in the offshore. This business with local content including Brazilian Geoscientist is well positioned for rapid growth in its exciting exploration frontier.
The only true disappointment in the first quarter was our Centric Geothermal business where we had two multimillion dollar orders put on indefinite hold due to the turmoil in Libya. We also had another large Iraq field that closed but the actual shipping was delayed due to some timing issues with our contracted customers. Our central group is also in the middle of the manufacturing transition into China, where we expect to benefit from significantly reduced costs putting us in a more competitive position with a strong brand and improved future pricing.
Our marine group continues to grow and penetrate new markets, thanks to our positioning technology including DigiBIRD, DigiSTREAMER and Orca, increasing activity from our marine contracted customers. We’re still expecting to book the revenue for the 12 Streamer sale to BGP in the second half of the year. Likely in the fourth quarter which further contributes to our backend loaded view of our business this year. Most of our contracted customers are reporting increase in bid activity, although they still are not seeing price returning to the pre-crisis days. This is likely the outcome of new capacity that is coming into the market with expectations in market will improve as exploration spending increases and activity in the Gulf of Mexico picks back up.
INOVA’s business continues to slowly improve year-over-year, but the rate of improvement has likely been impacted by the Libyan issues and a negative impact on BGP which had several crews operating on Libya that are now shut down. We don’t yet know the extent of the impact on the INOVA business if any, but it’s a variable that was not anticipated. INOVA is on schedule with the BGP directed R&D programs and we’ll be making some technology announcements at the European Trade Show this spring that will be field tested with BGP later in the year.
In summary, we don’t see any significant change in our business outlook from our last quarter call and look forward to a good year.
With that, I will turn it over to Brian for his comments.
Thank you, Bob. Good morning everyone. I would like to begin by sharing a few of the financial highlights of the first quarter. We deliver breakeven results for the first quarter as the strong performances by our solutions and software segments as well as our marine business, offset weak performances by our sensor Geophone business and our share of INOVA Geophysical. As a point of reference, ION has only finished the first quarter in the black, three of the last 13 years given the nature of our customer’s budgeting processes and the resulting impact on our business being so backend loaded. So, we are really pleased with these results kicking off 2011.
First quarter results include non-cash pre-tax charges of approximately $4.2 million related to the impact of foreign currency exchange rates on inter-company receivables held by our software segment and stock-based compensation expense impacted by increases in ION stock price during the first quarter which reduced first quarter earnings per share by approximately $0.03.
Excluding the revenues of our Legacy Land business, revenues increased 25% to $91 million compared to $72 million for the first quarter of 2010. Our solutions multi-client business delivered record first quarter revenues of $38 million up 56% over the same period of the prior year driven by our customer’s strong interest in accessing data from our multi-client programs in Northeast Greenland, East Africa and Brazil. Solutions backlog grew for the second consecutive quarter with 30% growth over the prior quarter.
Our full year expected investment in our multi-client data libraries has increased by approximately $20 million to a range of $110 million to $130 million. As another point of reference, we only deployed $12 million in the first quarter and expect 70% of the 12 years investment to occur during the second half of the year. This investment combined with the probable recognition of revenue for the 12 streamer system sold to BGP, and the increase in momentum in our data processing business significantly back-end loads the year.
EBITDA of $30 million almost doubled compared to $16 in the first quarter of 2010. Cash from operation were $52 million increased 102% of the same period of prior year, with free cash flow generation of $37 million.
With that overview let’s take a look at the trailing 12 months revenues followed by an in depth look at each of our segments. Excluding the impact of our Legacy Land business, revenues for the trailing 12 months of 2010 were $110 million or 33% higher than the same period of 2010. Solutions Segment revenues increased 58% with higher sales of data processing services, new venture projects and data libraries each contributing to the overall performance of this segment.
Software segment revenues increased 8% or 12% on a pound Sterling basis. While systems segment revenues remain consistent with the prior period. Our solutions multi-client business set a record for the first quarter with revenues of $38 million.
Our data processing business started the year with the slow first quarter as revenues decreased by 15% compared to one year ago, primarily due the lagging impact of the slowdown in the Gulf of Mexico.
Our solutions backlog grew for the second consecutive quarter with 33% growth over prior year quarter. Current backlog of $105 million exceeds the typical range of $70 million to $90 million, which is a positive indication of the strength of our sales pipeline and should result in a positive impact towards solutions revenues during the second half of the year.
During the fourth quarter, we saw spike in aggregate bidding activity and significant recovery in our sales pipeline related to the Gulf of Mexico. While the level of bidding activity softened some in the first quarter, the value of bids one has increased resulting in backlog growth and has expected a larger international component in the geographic composition of our backlog.
In addition due to the increase levels of exploration spending on the slowdown in the Gulf of Mexico last year, we are seeing emerging multi-client opportunities and strategic international locations around the globe.
Software segment revenues increased 6% to 5 million pounds in sales compared to the first quarter of 2010. On the U.S. dollar basis revenues increased 9% due to the favorable impact of foreign exchange rates. The software segment continues to grow primarily due to steady demand for our ORCA software platform. By the end of the first quarter, we had converted 44 of the estimated 119 vessels in the seismically, which represent approximately 30% of total vessels. Of the two permanent conversions added during the first quarter, one conversion involved a vessel upgrading from a rental system to a permanent system.
System segment revenues were 50% to $24 million for the first quarter of 2011, compared to $16 million for the same period of the prior year. This increase was primarily due to higher sales of towed streamer positioning products as new vessels entering the market were outfitted with our latest marine technology. Our sensor geophone was negatively impacted by recent events in North Africa and the Middle East, some contracted sales were cancelled or delayed. There continues to be in softness in our geophone string product sales and ocean bottom cable product revenues. However, the softness was offset by continued interest in our towed streamer products.
As we mentioned in our fourth quarter call, we have shipped the 12 streamer system BGP, and for which we expect to recognize revenue during the second half of the year. We are also seeing an increase in OBC bidding activity around the world indicating the potential for OBC sales later in the year.
The asset side of our balance sheet illustrates our asset life strategy with the bulk of our investment in working capital and Oil Company funded multi-client projects resulting in Data Library with a net book value of $101 million. To put this in perspective and truly appreciate the value of this Data Library, we have invested over $325 million in the last four years building a strong portfolio, which is clearly beginning the pay dividends and sales activity today.
Total cash on hand was approximately $138 million exceeding our total outstanding debt balance by over $30 million. As of the end of the quarter, we had $238 million of liquidity comprised of $138 million of cash and $100 million of undrawn on our revolving credit facility.
Operating cash flows, including cash flows from working capital doubled to $52 million for the first quarter of 2011 compared to the same period of the prior year. During the first quarter, we invested $12 million in our prefunded multi-client data libraries and almost $4 million in PP&E. Free cash flow increased 89% to $37 million compared to $19 million of free cash flow for the same period in prior year.
We do expect to start using some of this cash as we move into period of heavy investment of multi-client work and bridge the timing of project execution expenses and the collection of underwriting.
In addition, we are assessing the viability of increasing the amount of risk, we are prepared to take on strategic projects that are in areas where we have a proven track record of success.
Historically, we operated at a level of 100% of the portfolio of new venture projects being underwritten before commencing work, which has put us in a competitive disadvantage and forced pricing concessions.
Most companies in the industry performing multi-client work commenced projects at levels less than 50% of underwriting and anticipate further underwriting coming in as the project advances.
Given the growth of exploration activity, our access cash balance, the typical practice of discounting pricing for early underwriting and the proven track record we have in several basins around the world, we are assessing decreasing our underwriting standards to commence work to the 50% to 75% range on our portfolio of strategic and differentiated projects.
We expect this will accelerate our growth and potentially drive margin expansion. INOVA estimates first quarter revenues to be in the range of $30 million $33 million with an operating loss of approximately $7 million to $9 million and a net loss of approximately $8 million to $10 million. Similar last quarter, we would expect to book 49% of this estimated net loss in our second quarter results. These numbers are estimates, which we believe offer some visibility into the impact we expect the joint venture to have on our financial results, however, these are not final audited numbers.
Total revenues for the first quarter of 2011 approximately doubled compared to the same period of last year reflecting an improve land seismic market. The increase in INOVA first quarter reflects strong, but low margin vibrator truck sales and over sold 27 vibrator trucks during the first quarter and expects to see additional sales of this product in the second quarter based on a healthy book of customer orders.
In addition BGP continues to purchase land seismic equipment from INOVA with a $11 million of purchases in the first quarter. The recent political unrest in North Africa and the Middle East is negatively impacting the land seismic market directly impacting INOVA.
However, the long term impact to these events could become positive if replacement equipment is needed in this region. In other regions of the world such as Europe opportunities for land seismic equipment sales are increasing. Meanwhile Canada experienced the late winter resulting in delayed start for seismic acquisition cable rentals.
On land seismic business particularly INOVA’s business in North America and Russia is showing signs of recovery. However, we do not expect to see significant improvements until 2012.
And one announcement, we’re holding an Investor Day at the Marcellus Shale multi-client survey being shot with firefly June 14th, space is limited. So, if you have interest in attending, please call DRGNL at 713-529-6600.
In Summary, we’re pleased with the results of the first quarter. In addition with the increased investment in our multi-client business, revenue recognition of the BGP 12 streamer system, the increased momentum in our data processing business and the potential for OBC sales activity the year is looking significantly skewed in the second half similar to 2010.
With that we’ll open up the call for questions.
Thank you. (Operator Instructions) Our first question comes from the line of Daniel Burke with Johnson & Rice Company. Please go ahead.
Daniel Burke – Johnson & Rice Company
Good morning guys.
Good morning Daniel.
Daniel Burke – Johnson & Rice Company
I was wondering on the multi-client additions for this year those on shore or off shore?
Yeah Daniel, actually it’s a combination of both where, we’re having significant success in marine environment, so we’re expanding projects both the optic and other regions of the world. And in addition, we are having success on shore primarily on the short lays on, we have the initial one that we announced on Marcellus, we have activity that’s on, we’re going to shoot on the heels of that as well, but we will announce that later.
Daniel Burke – Johnson & Rice Company
Okay. And then on the thesis of increasing multi-client investment without full pre-funding, I guess, really question there. What kind of margin off side do you think might be possible or that you sacrificed by using the more 100% pre-funded model? And then, I guess my other question would be with the size of this year’s multi-client budget, if you would have stepped out to a lower level of pre-funding, I mean how large is program could you fund in a given year looking out to 2012 or 2013. How large budget can ION support?
Yeah, first I want to make sure we clarify that the guidance range or guidelines that we’ve given on our multi-client investment this year, do not include this concept of decreasing or underwriting standard. So I think to your question it would be incremental to the business to the extent we do that in 2011 and probably 2012. Relative to margin expansion, I’m not sure we are in a position to actually give you that estimate yet. I believe we’ll be in much better position to give you that as well as what potential – what potential revenues could that represent by the end of the second quarter. We need to actually go through the process of assessing what that opportunity would be and having dialogue with our customers and actually running the traps on it. So although we believe, periodically there should be margin expansion because naturally the lower pricing occurs of the early stage on underwriting and pricing tends to escalate. As you go through underwriting and ultimately peeks out when it goes into the Data Library. We need to do some work on the pieces, and we’ll come back to you in the second quarter call.
Daniel Burke – Johnson & Rice Company
Okay. Great. And then, if I could squeeze one last on in, it looks like the some of the disruptions that I know, we experienced in Q1 sequentially on your PNL, there would be little step down there in Q2 you got back with multi-client and I guess, the streamer sale we had thought might be a first half event of that, and the second half of that. Is it reasonable to assume Q2 on the aggregate, probably looks like the Q1 result before you get that big back half rap in the earnings profile? Is that the right way to think about it?
Yeah, obviously we are not in a position to give guidance in anyway, so it makes it difficult for us to comment specific by quarter, but I think if you do take a look at 2010 I believe it is our opinion that this year will, the shape of 2011 will very significantly follow the shape of 2010. So that is about as much as I can say on that.
Daniel Burke – Johnson & Rice Company
I understand guys. Thanks for the comments Brian.
(Operator Instructions). And I’m showing no further questions. Please continue.
Okay. Well, thank you for taking the time to attend this conference call. And I look forward to talking to you during our second quarter call. Thank you.
And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.
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