Generation Essentials Group

Thank you, Damien. Good morning and welcome to the TGC Industries Second Quarter 2013 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 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 www.tgcseismic.com or via a recorded instant replay until August 12.

Information on how to access the replay was provided in this morning's earnings release. Information reported on this call speaks only as of today, Monday, July 29, 2013, 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 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 its annual report on Form 10-K for the year ended December 31, 2012.

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 those statements. With that, I will turn the call over to Wayne Whitener.

Thank you, Jack, and good morning, to everyone. Thank you for joining us today for our second quarter 2013 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 markets and business going forward. As you may know, in our past press release and call, we mentioned the softening in demand we were seeing in the U.S.

seismic market, which began late in the first quarter and continued into the second quarter. After operating 15 crews in North America during the first quarter, 9 the U.S.

and 6 in Canada, we began to idle crews in the U.S. at the beginning of the second quarter.

In an effort to keep our crude count in line with demand for services, we idle crews fairly rapidly as demand softened but we kept key personnel in place to maintain our ability to get crews back in the field as quickly as possible as demands warrants. Since the beginning third quarter, conditions have improved and we are currently operating 3 crews in the U.S.

and intend to fill 2 additional crews in early August, which will bring our crude count to 5 crews in the U.S. We expect to operate a minimum of 5 crews in the U.S.

for the remainder of the year and believe business conditions will improve over the balance of 2013 and into 2014. The significant drop in our U.S.

crude count during the second quarter resulted in a substantial amount of cost associated with idling of these crews, which negatively impacted our results. In addition, we experienced a significant increase in shot-hole work during the quarter, which produce higher revenues but has a lower margin.

Canada continues to be a solid market for us. Of course, our Canadian crews were shut down by mid-April with the spring breakup, but we added additional crews for summer work in June and have 3 Canadian crews currently working and operating.

Based on preliminary feedback from our clients, we expect a strong winter season in Canada. We ended the first quarter with a backlog of $32 million, consisting of both U.S.

and Canadian work. Additionally, we have a number of large contracts that are in the final stages of negotiation.

I'll now turn the call over to Jim Brata, who will give you some detailed review of our financials, then I will come back with some final remarks.

Thank you, Wayne, and good morning. Revenues for the second quarter of 2013 were $31 million compared to $30 million in the second quarter of 2012.

Cost of services in the second quarter of 2013 was $28 million compared to $25 million in the same quarter a year ago. The increase is primarily due to a significant increase in shot-hole work during the quarter, which carries a lower margin, as well as cost associated with the idling of many of our U.S.

crews during the second quarter. Cost of services as a percentage of revenue in the second quarter of 2013 was 89.8% compared to 82.3% in the second quarter of 2012.

Gross profit was $3.2 million in the second quarter of 2013 compared to $5.4 million in the second quarter a year ago. Gross profit margin was 10.2% compared to 17.7% in the second quarter a year ago, primarily due to the lower margin shot-hole work and idle crew costs mentioned earlier.

Our selling, general and administrative expenses were $2.5 million in the second quarter of 2013 compared to $2.1 million in the second quarter of 2012. As a percentage of revenues, SG&A was 7.8% in this year's second quarter compared to 6.7% in the second quarter a year ago.

Depreciation and amortization expense was $6.4 million compared to $6.2 million in the 2012 second quarter. As a percentage of revenues, depreciation and amortization expense was 20% in the second quarters of both 2013 and 2012.

Interest expense was $308,000 compared to $280,000 a year ago. We reported a net loss of $4 million or $0.18 per share, compared to a net loss of $2 million or $0.09 per share in last year's second quarter.

We recorded an income tax benefit of $1.9 million in the second quarter, an effective tax benefit rate of 32%. This compares to an income tax benefit of $1.2 million, an effective tax benefit rate of 37% a year ago.

EBITDA for the second quarter was $747,000, which is an EBITDA margin of 2.4%, compared to $3.3 million, an EBITDA margin of 10.9% in the second quarter a year ago. An EBITDA reconciliation table was provided in our earnings release issued this morning.

And finally, I will highlight some balance sheet items. As of the end of the second quarter, we have long term debt of $11.5 million; cash and cash equivalents of $25 million; our current ratio was roughly 1.9:1; working capital was approximately $21.2 million; and finally, we generated approximately $18 million in cash from operations in the quarter.

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

Thank you, Jim. Before we go to call-in questions, I would like to briefly summarize where we stand to date.

As I mentioned in our previous call, due to the softened U.S. market conditions, we continually -- continue to carefully manage our cost structure and build cash in order to maintain a strong balance sheet, which we were able to accomplish during the second quarter.

In fact, as Jim mentioned, we generated approximately $18 million in cash during the second quarter. And as I mentioned earlier, we're keeping our key personnel in order to maintain the flexibility to get crews back in the field as quickly as client demand warrants.

In closing, I would like to reiterate our geographic diversification, low cost structures, strong capital structure and our ability to generate cash. We require combined with our new wireless technology position as well to take advantage of the opportunities ahead of us.

This concludes my formal remarks. Now, I'll take questions.

My first question is about your comments in the press release that you expect to run 5 crews in the States and 5 crews in Canada in Q3. Are the contracts for these additional crews already signed and in the backlog?

Or you expect to run 5 in each country because of the new contracts that are in final stages of negotiations?

I don't think I said I was going to run 5 crews in Canada. We do expect to have a good Canadian season.

We'll be ramping up for Canada starting in September. As I mentioned, we're operating 3 crews in Canada right now, but we'll be ramping up for additional crews starting in September for Canadian operation.

We're presently in the U.S. operating 3 crews, as I mentioned.

We'll be filling 2 additional crews here at the end of this month, first part of August. That is -- the crews in the U.S.

have already -- have contracts in place, plus we have additional contracts that are in the final negotiations, which is in legal right now, that we expect to get signed either today or tomorrow, next few days there. So we do expect to run at least a minimum of 5 crews going in the third quarter and fourth quarter.

Okay. I'm sorry, I misunderstood.

And then in terms of Canada, you expect strong winter thanks to indications from clients. Do you think it's going to be stronger than last year or it's shaping to be like last year based on the preliminary indications?

Well, we have some contracts we're working on right now, which we've been verbally awarded in Canada, which is early for us. They're very good contracts.

They're in legal as well. We do expect to run at least the same amount of crews as we ran last year, 6 to 7 crews, during the height of the season.

And as I mentioned, we'll start putting -- start building on the crews for the season starting in September.

All right. One last question and I'll re-queue.

In terms of bringing crews back to work, so do we have to expect again some cost associated with it, and heavy cost structure in Q3 because you're bringing crews back to work?

Well, there is some cost associated with it because what you have is you've got to get these crews back in the field and then there's an amount of lay-out days involved in that, so there is some cost associated with getting those crews back in the field. But as I mentioned, all the key personnel were kept during this timeframe, so it's just a matter of adding the flavors [ph] and that sort of thing.

We also took advantage of going through and repairing any equipment that needed possible attention. So we had those cost also in this last quarter as far as repairing vibrators and any additional equipment that we had.

We took advantage of this time to get everything back up to 100% condition.

What was your CapEx in the quarter?

Jim, what was that?

It was about $200,000.

Okay. And then looking into '14, do you have any capital expenditure expectations for that year?

Or do you think it's going to be relatively low like it has been for this year?

As it stands right now, we're not forecasting a large CapEx for 2014. Of course, that depends on demand for services.

That pretty much drives our CapEx. We do expect business to accelerate in 2014.

So if demands are there, we may add some additional wireless channels to our operation depending on demand for services.

Okay. And then in your news release, you say you have a number of large contracts that are in the final stages of negotiation.

When you say number, how many is that?

We've got 2 in Canada and 3 here in the U.S.

I was wondering if you could talk a little bit more about what you think is happening in the U.S. market with the softness.

Obviously, you're running at, I mean, crew count numbers that are probably about half of what you were doing last year. I mean, is it just kind of an industry-wide slowness?

Are you seeing any pricing pressure in the bidding activity? Just any color would be helpful.

Sure. I think if you go back to the beginning of the fourth quarter of the 2012, we started seeing some slowdown in demand for services at that point.

At the beginning of the fourth quarter of last year, we had a backlog of $103 million and then we ended the year with $81 million and then we ended the first quarter with $40 million. So it's been almost a 9 months scenario that we've seen as far as a softening demand for our services.

We believe this is due to companies that are in drilling phase, as well as people reevaluating the shale plays and what the economics are on those. From our indication from our clients, it looks like a lot of bids that we put out in the first quarter, as we mentioned, bids were pretty brisk in the first quarter, we're starting to see those turn into contracts.

So we think things are upbeat about that. So our thoughts are, right now, is that things will increase going into the third, fourth quarter, and hopefully, we're expecting a good year in 2014.

Okay. A question on the backlog.

$32 million, that's primarily U.S.? Or could you give...

Yes, that's pretty much all of the U.S, yes.

Yes, and I understand because in Canada, you don't have the permitting delays, so time from contract signing to actual work, I guess, goes a lot quicker. I mean, could you give us any more details on that?

Just say between Canada and U.S., you sign a contract, like how quickly do you start working the crews?

Well, of course, it depends on how long -- how far along they are on the E&P company getting their land position in place. But normally, it's -- from the time that we get the contract signed, it's normally anywhere from 3 to 6 months on a normal job.

Now, a lot of these jobs have been -- since the beginning of the year, they've been working on the land position. So that could -- once the job is awarded, could escalate to where we could go to work on that job anywhere from 2 weeks to 30 days.

And, of course, in Canada, as you mentioned, people kind of wait to the last minute, but we do have a couple of large contracts that we've been awarded in Canada and that we're in the final stages of the legal -- legalizing the contracts.

And talking a little bit about the, say, your U.S. crews.

I know when we talked in the past, I think the mix in Canada was, I'm going to say 20% permanent, 80% contract, I think that was about right. Is it a similar mix in the U.S.?

And, I guess, what I'm [indiscernible]?

Now, what are you talking about as far as percentage is here in the U.S.? I wasn't following you on that.

Okay. What I'm getting at is in the U.S.

crews, like how many are permanent employees and how many are contract employees? And what I'm getting at is how much flexibility do you have to reducing your employment cost, basically if these crews aren't working?

Well, of course, you have about 7 people on each individual crews that are key personnel that are on salary. The remainder of the crews are laborers that are on by the hour.

Right now, we're running no contract personnel, it's all company personnel, either by the hour or by salary. We do have the capabilities of hiring contract laborers that are readily available to us through a couple of different firms here in the U.S.

Depending on demand for services, sometimes we use these contractors, either for short-term or for longer term jobs, depending on our demand for services.

And I guess, final question before I jump back in queue is, you mentioned this increase in shot-hole work in the quarter. I was just curious as to why you think that is happening?

Well, we had quite a few jobs that we were finishing up in the Northeast in the Marcellus. And everything in that area up there -- not everything, but a big majority of it, is dynamite top works.

So it just happened to follow we had 3 crews that were in the Marcellus, up there working that was doing dynamite work, which caused the percentage of our dynamite revenue to go up.

Wayne, one more question on the bidding activity. It was been strong in Q1 and now, you are probably signing the contracts that were in the queue back then.

How is bidding activity right now?

The bidding activity is pretty much the same as it's been probably in the first quarter going into the second quarter. It's -- bids are steady.

Like I say, we have quite a few bids in the first quarter and -- which didn't go to contract which we're seeing them go to contract now. So bidding seems to be still very good.

We're getting a lot of feedback from our clients that are saying that they expect to be very active in 2014, and we're starting to see bids come in for 2014 now.

We thank you for joining us and looking forward to talking to you in the next quarter conference call. Thank you.