TGC Industries, Inc. Q2 2008 Earnings Call Transcript

Jul.28.08 | About: TGC Industries, (TGE)

TGC Industries, Inc. (NASDAQ:TGE)

Q2 2008 Earnings Call

July 28, 2008 9:30 am ET

Executives

Wayne A. Whitener - President, Chief Executive Officer and Director

Kenneth W. Uselton - Chief Financial Officer, Treasurer, Secretary

James Kevin Brata - Vice President and Chief Financial Officer Designate

Jack Lascar - Investor Relations - Partner of Dennard Rupp Gray & Easterly LLC

Analysts

Karen David-Greene - Oppenheimer & Co.

Terese Fabian - Sidoti

Neal Dingmann - Dahlman Rose & Co.

[Vinny Alexandra - Pritchard Capital Partners]

[Dan McCullom - River Capital]

[Sherman Pryor - North Point]

Operator

Welcome to the TGC Industries second quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Jack Lascar.

Jack Lascar

Your host will be Wayne Whitener, President and Chief Executive Officer, along with Chief Financial Officer Ken Uselton and James Brata, Vice President and Chief Financial Officer Designate.

Before I turn the call over to management I have a few items to cover. If you would like to be added to the company’s email distribution list, please call DRG&E’s office at 713-529-6600 and relay that information to us or you can send me an email with that information a jlascar@drg-e.com. 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 www.tgcseismic.com or via a recorded instant replay until August 11. That information was provided in this morning’s earnings release.

Information reported on this call speaks only as of today, July 28, 2008 and therefore you are 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. All statements regarding the company’s future including without limitation the company’s expected future financial position, results of operation, cash flows, funds from operations, financing plan, gross margins, business strategy, budget, projection of costs and expenses, capital expenditures, competitor position, product offerings, access to capital and growth opportunities 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 its annual report on Form 10K for the year ended December 31, 2007. 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 this morning are covered by these statements.

I will turn the call now over to Wayne Whitener.

Wayne A. Whitener

I would like to welcome Jim Brata, our new Vice President who is expected to become our new Chief Financial Officer after Ken Uselton retires at the end of September. As far as the agenda is concerned, I will provide you with some highlights and Ken Uselton will provide you with some of the financial details. Then I will come back with some final comments.

First I’d like to discuss a few highlights of the quarter. As I had mentioned during the first quarter conference call, we have been bidding and winning some larger projects. On two of these larger projects our clients experienced delays in their permitting process so we idled two of our crews for most of the second quarter which reduced our revenues, increased our costs, and negatively affected second quarter earnings. However these two crews have been back at work since the middle of July. The good news is that during the last three months bidding activity has been very strong. We have been very successful and have been awarded several large contracts in the Midcontinent Gulf Coast region and currently have a new record backlog of approximately $78 million. This is up 70% from the backlog of $46 million we had in late April and with our current backlog we expect to have all our crews fully utilized for the second half of the year and well into the first quarter of next year.

Driven by continued strong customer demand and our record backlog, we have ordered another 4,000 channels in early July that we expect delivery on this week. With the additional 4,000 channels we’ll have a channel capacity of approximately 47,000 channels. So we are well positioned for the larger projects we are bidding and winning. The additional 4,000 channels will increase our crew productivity and better enable us to meet the growing needs of our clients.

As far as our financial highlights, we ended the quarter with a strong balance sheet with cash exceeding long-term debt. We continue to generate cash and year-to-date we generated cash flow from operations of about $13.2 million.

Now I’ll turn the call over to Ken Uselton, our Chief Financial Officer, who will give you some details on the financial results. Then I will return with some final remarks.

Kenneth W. Uselton

Revenues for the 2008 second quarter decreased 14% to $18.6 million from $21.7 million in the second quarter a year ago. As Wayne said, two crews were idle for most of the second quarter which negatively impacted revenues. Cost of services in the second quarter were $12.6 million compared to $14.8 million in the second quarter a year ago, a decrease of 15%. Cost of services as a percentage of revenue was 67% in the 08 second quarter versus 68% in the 07 second quarter. Our gross margins for the second quarter of 08 were 33% compared to 32% a year ago.

SG&A expenses were $986,000 in the 08 second quarter compared to $927,000 a year ago and were 5% of revenues in this year’s second quarter compared to 4% of revenues in last year’s second quarter. A depreciation expense was $3.4 million compared to $3.5 million in the same period a year ago.

Second quarter 08 income from operations was $1.7 million compared to $2.5 million in the second quarter a year ago. Income from operations as a percentage of revenues was 9% compared to 11% in the same quarter a year ago.

Interest expense on the second quarter was $209,000 versus $191,000 a year ago. Our income before income taxes in the second quarter was $1.5 million compared to $2.3 million in the second quarter a year ago. As a percentage of revenues income before income taxes was 8% in the 08 second quarter compared to 10% a year ago. The effective tax rate was approximately 41% in the second quarter of 08 and the second quarter of 07.

Our net income for the second quarter was $868,000 or $0.05 per diluted share compared to net income of $1.3 million or $0.08 per diluted share in the second quarter a year ago. Per share amounts in all periods have been adjusted to reflect the 5% stock dividend declared on March 20, 2008 to shareholders of record as of April 14, 2008 and paid April 28, 2008. EBITDA for the 08 second quarter was $5.1 million compared to $6 million in the 07 second quarter, an EBITDA margin of 27% in both periods.

And now for a brief review of our six-month results. Revenues for the first half of 08 were $41.1 million compared to $40.3 million in the same period last year. Cost of services for the six months this year were $27.4 million compared to $25.6 million for the same period last year. As a percent of revenues our cost of services were 67% compared to 64% in the same period a year ago. As a result, gross margins for the first six months of 08 were 33% compared to 36% a year ago. Our net income for the first six months was $2.9 million or $0.16 per diluted share compared to $3.4 million or $0.20 per diluted share for the six months a year ago. EBITDA for the first half of this year was $11.7 million an EBITDA margin of 29% compared to $12.9 million an EBITDA margin of 32% for the comparable period last year.

Now turning to the balance sheet, at the end of the second quarter we had long-term debt of approximately $7 million, cash and cash equivalents of approximately $12.2 million, a current ratio of 2.1, and working capital of approximately $12.2 million.

I’ll now turn the call back over to Wayne.

Wayne A. Whitener

Before we move to some questions I would like to make a few additional comments. We continue to see strong domestic capital expenditures from the oil and gas industry. E&P expenditures in 2008 are projected to rise 15% in the United States to $98 billion. This is much higher than previously anticipated. Clearly the budget’s additions are being driven by higher commodity price expectations. Growth in the E&P expenditures is anticipated to continue into 2009 with gains of at least 10% expected by the majority of the companies surveyed. This is a major reason we remain bullish about the strength of the land seismic data acquisition business.

Operationally we are very well positioned. We currently have $78 million in backlog, our order book is very strong, and we expect our eight crews to be fully utilized for the remainder of 2008 and well into the first quarter of 2009.

Furthermore, the increased seismic activity we have experienced since the middle of April remains unabated as we continue to see numerous opportunities for additional contracts including many large contracts indicating our improved competitive position within the industry. As a result we will continue to assess our equipment needs on an ongoing basis to ensure that our customers’ needs are being met. Based on what we’re hearing and seeing from our customers, we remain optimistic about the remainder of 2008 and for the year 2009.

This concludes my formal remarks. And we’ll now take any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Karen David-Green - Oppenheimer & Co.

Karen David-Green - Oppenheimer & Co.

You certainly had a very large build in backlog. Very impressive. In terms of looking at the pricing dynamics and the contract terms of the contracts that you just signed. Can you kind of compare and contrast that to maybe where it was a year ago?

Wayne A. Whitener

I will say that the newer contracts that we are signing in success on are much larger than what we’ve seen in the past. Of course that makes better margins for us since we have less windshield time and less moving around once we’re able to move on to these jobs. On the negative side it takes longer to get these larger jobs prepared. But we feel like going forward that we should see some definite margin improvement with the larger jobs that we’re successful in getting onto.

Karen David-Green - Oppenheimer & Co.

Given the outlook that you have for the remainder of the year and into 09, at what point do you kind of re-evaluate and re-assess your crew count and maybe consider adding an additional crew?

Wayne A. Whitener

The way we pretty much review that of course is we make sure that our existing crews are fully booked and that the work in front of them is at a level that they’re prepared and able to work at as full capacity as possible with the eight crews. Beyond that point we continue to look for other opportunities from possibly some of our very good clients. Also we look at some new areas that possibly we’re looking at moving into. So if our eight crews are fully booked and the work is prepared in front of them, we definitely will look at opportunities to add additional crews possibly in new areas for some of our very good existing clients.

Karen David-Green - Oppenheimer & Co.

What are the delivery times right now on the ARAM equipment?

Wayne A. Whitener

Approximately three months.

Operator

Our next question comes from Terese Fabian - Sidoti.

Terese Fabian - Sidoti

I have a question on the composition of your backlog. Is it still basically turnkey and so do you have some better weather provisions in there?

Wayne A. Whitener

Basically the majority of our backlog at this time is turnkey and we have been able to improve on some of our weather protection on these contracts.

Terese Fabian - Sidoti

I know you said that you’re going to be evaluating your equipment needs as you go along. In the work that you’re doing is it basically all 3-D and is any of it coming from the new shale place that we’re hearing talk about?

Wayne A. Whitener

All the work at present or 90% of the work that we’re doing right now is all 3-D. We are working in some shale areas, the Fayetteville Shale and some of the shale plays in Louisiana. We do anticipate possibly working in the Appalachian regions and some other regions in the Rocky Mountains but at present the bulk of our work is pretty much Midcontinent Gulf Coast right at this time.

Terese Fabian - Sidoti

And just to follow up on the equipment needs. Do you expect you’re going to be leasing equipment as you go along or do you have enough now to cover the crew needs as you see it?

Wayne A. Whitener

I would say that this year we’ve purchased over 7,000 additional channels, we’ve purchased eight new vibrator units, and we anticipate that to be significant for our present crews that we have operating. If we anticipate putting in another crew, it will require of course additional equipment.

Operator

Our next question comes from Neal Dingmann - Dahlman Rose & Co.

Neal Dingmann - Dahlman Rose & Co.

Wayne, two questions here real quick. As far as on your orders obviously it looks as Karen mentioned a backlog and your orders are running up quite nicely. What’s sort of the makeup as far as the type of customers are you seeing? Is it your typical customers - for you I think it’s generally been a bit smaller customers - or are you seeing a newer larger customer come in? And then I’m wondering to go along with that, color as far as the regionally makeup. It looks like these days the last quarter or so you’ve had less activity in Kansas and you’ve moved more back to the Texas market. Could you give us color both on customer makeup and regional makeup?

Wayne A. Whitener

Sure Neal. The customer makeup is roughly last year 45% of our business was repeat business. We’re probably seeing that same percentage here going into 08. We are seeing some strengthening in some of the spec companies utilizing us for some of their larger spec jobs, so that’s somewhat new for us as far as being successful in working for some of the spec companies on some of their very large jobs. We’re also seeing some additional opportunities in the Rocky Mountain areas. And right now as far as where our crews are working, we are still very active in Kansas and we’re operating four to five crews in Texas at any given time and also Louisiana and Mississippi. So we’re pretty well diverse at this time and we expect to be possibly active in some new areas going forward.

Neal Dingmann - Dahlman Rose & Co.

When you talk about the new areas, some of the new shale plays, are you seeing incremental interest there or are you talking a lot of those folks in the Haynesville, Marcellus, Mancos, all those areas?

Wayne A. Whitener

We are definitely looking at those areas and we definitely have some clients that are interested in those areas and we are in the mix as far as presenting proposals to those clients in those areas.

Neal Dingmann - Dahlman Rose & Co.

You mentioned the eight [fibersize] units. As far as your crews, is everybody on [fibersize] or do you still have one or two doing some dynamite work?

Wayne A. Whitener

We’re still doing some dynamite work. As you know we own our own shot hole drilling operation. That operation’s been going very well for us. We expect probably between now and the end of the year that the shot hole drilling will not be a very significant number for us between now and the end of this year.

Operator

Our next question comes from [Vinny Alexandra - Pritchard Capital Partners].

[Vinny Alexandra - Pritchard Capital Partners]

I have a question about the wells permitting process. Does it take longer now to get the well permit and do you see these around the country or was the well permitting delay that you saw particular to these two jobs?

Wayne A. Whitener

I think that the permitting process is of course taking longer. A lot of that is of course out of our control. That is being done by our clients. We come in on a lot of jobs after the permit phase and the phases involving the land, and then we come in at that point and take over the operation. With the larger jobs that we’re seeing, it’s taking our clients longer to get their land position in place in order for us to get to the position that we’re able to take over the job and acquire the 3-D seismic. So to answer your question, due to the (a) size of the jobs, (b) also we’re seeing some type of pushback on land owners because of the value of the crops, when we’re talking about value of corn or wheat or any of the crops that are out there, it’s taking somewhat longer to acquire the land position in order for us to start our 3-D acquisitions.

Operator

Our next question comes from [Dan McCullom - River Capital].

[Dan McCullom - River Capital]

A question about your recent growth in backlog. Would you say that you’re taking market share or your growing with the market?

Wayne A. Whitener

I would say that would be both. We’re seeing some new clients as I mentioned, some of the seismic spec companies, we’re seeing some increase in backlog along those lines as well as we’re seeing increased activity within the space itself.

Operator

Our next question comes from Terese Fabian - Sidoti.

Terese Fabian - Sidoti

I have a follow up on the tax rate. Do you have a view on what the tax rate will be for the year and for the next quarter?

Wayne A. Whitener

Ken, you may want to address that.

Kenneth W. Uselton

Probably not at this point in time. I would say if anything it may be a little higher than it currently is but we haven’t gotten that far.

Terese Fabian - Sidoti

But it won’t probably be lower?

Kenneth W. Uselton

No ma’am.

Terese Fabian - Sidoti

On the depreciation number, do you think it’s going to stay sort of level?

Wayne A. Whitener

It should stay fairly level. We’ll have some equipment drop that becomes fully depreciated in addition to what we’ve added here recently. I would say you may see a little spike in the third quarter for what we just recently added.

Terese Fabian - Sidoti

We’re entering the active hurricane season I think about mid-August and nobody knows what’s going to happen, but how will it affect your work if in fact there is a more active landfall of hurricanes?

Wayne A. Whitener

Of course we have no equipment on the open waters so no real exposure on that end. We do have two crews working in the South Texas area. Those crews were slightly affected by the Hurricane Dolly this past week. Basically there were four days affected on one crew and three days affected on another crew, but both of those crews had weather protection so it was not very significant.

Operator

Our next question comes from Karen David-Green - Oppenheimer & Co.

Karen David-Green - Oppenheimer & Co.

Wayne, could you just walk us through the cost to add another crew? I know you’ve added a lot of channels, you’ve added additional trucks, my understanding is you have around 12 shot hole drilling units, but if you were to add an incremental ARAM system, what would that cost you?

Wayne A. Whitener

That would pretty much of course depend on how we rigged that crew out. I believe if we rigged out a new crew, it would probably be around a 6,000 channel crew so we would probably be looking at an investment of roughly around $8 million to $8.5 million. Somewhere in that range.

Karen David-Green - Oppenheimer & Co.

I know that it was recently announced that ARAM is going to be acquired by ION but how does that impact you in terms of your relationship with them and your availability to order equipment?

Wayne A. Whitener

Right now availability is very good. They’re continuing on with their program on building their new equipment, their new ARAM area system as well as their ARAM 3C system. We expect that the ion purchase would probably have a very positive outlook with ARAM as they’ll be able to take some of their technology and put with some of the ARAM technology to fast-track some of the newer technology that ARAM has been looking at. So we’re kind of excited about the ion purchase. As you know the deal has not been consummated yet so we’ll have to see how that plays out. I think they’re anticipating having that consummated by roughly September 1.

Karen David-Green - Oppenheimer & Co.

Ken, could you give us the short-term debt number at the end of the quarter?

Kenneth W. Uselton

It’s approximately $4.8 million Karen.

Operator

Our next question comes from [Sherman Pryor - North Point].

[Sherman Pryor - North Point]

I actually have two short questions. First, you talked about by year end shot hole will not be significant. Talk about the impact on the costs of those folks that you acquired with that business. And secondly, can you comment on what percentage of the current backlog if it turns into revenue in 2008?

Wayne A. Whitener

To discuss the shot hole, with this last quarter the percentage of shot hole was 26% of revenue. We’re operating 12 shot hole drilling rigs and we do have one large shot hole drilling job coming up within the second half of the year which will pretty much keep all of our drilling rigs on one job for the remainder of the year. But the majority of the eight crews will be doing [fibersize] operations. So we expect the dynamite work going forward to be probably somewhat less than the 29% that we’ve experienced.

[Sherman Pryor - North Point]

And with respect to the backlog? Can you discuss that?

Kenneth W. Uselton

I’m going to say probably, this is just a guess on my part, I’m going to say probably 18% to 20% possibly.

Operator

There are no further questions at this time. I’d like to turn it over to management with any closing remarks you may have.

Wayne A. Whitener

I have no closing remarks. I appreciate everybody’s time and we look forward to the next quarter conference. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!