Generation Essentials Group

Thank you, Richard. Good morning, and welcome to the TGC Industries Third 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 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 November 11.

Information on how to access replay was provided in this morning's earnings release. Information reported on this call speaks only as of today, Monday, October 28, 2013, 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. 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, 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 these statements. Now, we'll turn the call over to Wayne.

Thank you, Jack. Good morning, everyone.

Thank you for joining us today for our third quarter 2013 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 our markets and business going forward. As you may remember in our second quarter release and call, we discussed the decrease in demand for seismic services that began early this year.

As a result, we've quickly idled crews to align our resources with current demand and kept key personnel in place to maintain our ability to get crews back in the field as quickly as possible as demand requires. This soft demand continued through the third quarter and as a result, we began the third quarter with 3 crews operating in the U.S.

As our backlog grew during the quarter, we ended the quarter with 5 crews in the U.S. This compares to 9 crews operating in the U.S.

in the third quarter of last year. In Canada, we operated 3 crews for a short duration during the summer and then ended the quarter with no crews compared to 2 crews operating in Canada for the entire third quarter of 2012.

We incurred substantial costs associated with mobilization and demobilization of our crews in Canada, due to the short-term work there and this had a negative impact on our margins in the quarter. While the soft market has continued in the fourth quarter, activity in Canada has started to pick up and we expect a good winter season there.

Since the end of the third quarter, we have placed 2 crews back in the field in Canada for work through the end of the year. Since the end of the second quarter, we have substantially increased our backlog, which currently stands at $65 million consisting of both U.S.

and Canadian 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.

Thank you, Wayne, and good morning. Revenues for the third quarter 2013 were $21 million compared to $42 million in the third quarter of 2012.

Cost of services in the third quarter of 2013 was $18.5 million compared to $31 million in the same quarter a year ago. Cost of services as a percentage of revenue in the third quarter of 2013 was 87.6%, compared to 73.9% in the third quarter of 2012.

Gross profit was $2.6 million in the third quarter of 2013 compared to $10.9 million in the third quarter a year ago. Gross profit margin was 12.4% compared to 26.1% in the third quarter a year ago.

On a sequential basis, gross margin improved from 10% in this year's second quarter. The year-over-year gross margin decrease is largely due to cost associated with 4 U.S.

crews who remained idle during the third quarter, as well as cost to get crews in and out of the field in Canada for the short duration summer work. Our selling, general and administrative expenses were $2.4 million in the third quarter of 2013 compared to $2.1 million in the third quarter of 2012.

Depreciation and amortization expense was $6.1 million compared to $6.7 million in the 2012 third quarter and reflect the new equipment purchases we have made over the past 2 years to keep our equipment aligned with client needs. As a percentage of revenues, depreciation and amortization expense was 29% in this year's third quarter compared to 16% in the third quarter of 2012.

Interest expense was $276,000 compared to $350,000 a year ago. We recorded a net loss of $4 million or $0.18 per share compared to net income of $1.1 million or $0.05 per diluted share in last year's third quarter.

We recorded an income tax benefit of $2.2 million in the third quarter of 2013, an effective tax benefit rate of 35%. This compares to an income tax expense of $634,000, an effective tax expense rate of 36% a year ago.

EBITDA for the third quarter was approximately $230,000 compared to $8.8 million in the third 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 third quarter, we have long-term debt of $9.1 million.

Cash and cash equivalents of $21.3 million. Our current ratio was roughly 2:1.

Working capital was approximately $19.7 million. And finally, we generated approximately $822,000 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 questions, I would like to briefly summarize where we stand today.

In light of the challenging market conditions and as we mentioned in previous calls, we continue to carefully manage our cost structure and build cash in order to maintain a strong balance sheet, which we have been able to accomplish since the beginning of 2013. As Jim mentioned, we generated cash from operations of approximately $822,000 in the third quarter and ended third quarter with approximately $33 million in cash and accounts receivable.

In year-to-date, we have generated cash from operations of approximately $24 million. And as I mentioned earlier, we are keeping our key personnel in order to maintain the flexibility to get crews back in the field as quickly as client demands warrants.

Our backlog has steadily improved since the beginning of the third quarter and currently stands at $65 million up from $32 million at the end of June. We currently plan to operate 7 crews in the fourth quarter and 10 crews in the first quarter of 2014 in North America.

Preliminary indications from our clients point to a strong 2014 with higher data acquisition spending anticipated. However, this has not yet materialized into a meaningful enough increase in our backlog to provide us with additional visibility beyond the 6 months.

In closing, we remain well-positioned within the industry. We have the most advanced state-of-the-art equipment available and currently have over 135,000 channels, including wireless and multicomponent equipment.

We have a strong capital structure and ability to generate cash. This concludes my formal remarks.

And now, I'll take any questions.

My first question is on the revenue line in the quarter. Your operated between 3 and 5 crews, but revenue went significantly down.

Is it just a shift from the short-hole work that you were doing last quarter or there were some issues with its utilization also?

No, the decline in revenue was mainly due to the fact that the number of crews that we operated during that third quarter time period.

But you have 4 or 3 crews in Q2 and the revenue number was 30.4, and there was a comment that it was inflated because of the short-hole work with few -- with lower margins...

Yes, that's true. We had a -- the dynamite work during the second quarter was more significant than what we had in this quarter.

Okay. Then talking about Canada, you are now guiding 5 crews in Q1.

You're still in the timeline where you're probably signing contracts for Canada. Is there any chance, we can see 6 or 7 crews in Q1?

We're not forecasting that right now. We did have some good contracts in Canada.

We do have 2 crews in the field at this time. We may add a third crew, but we're not for sure about that.

But our projection right now is to operate 5 crews in the first quarter of next year. That could possibly improve, but we feel like probably 5 crews will probably be what we will operate.

Okay. And then my last question, and I'll re-queue.

Last -- at the end of last quarter you were working on a number of large contracts and they were in the final stages of negotiations. Is this the case right now?

Do you have large contracts that you're working that we can see added to the backlog or everything which you're working on is already in the backlog?

Pretty much we went from $32 million to $65 million, which constituted the large contracts that I've alluded to in the last quarter. That also being said, we do have some contracts out there that are pending, which mainly would be in the first quarter of next year.

Wayne, what was your CapEx for the quarter?

For the quarter, it was $670,000.

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

Or is it too early to say?

It's really too early to say. We've been on maintenance CapEx since the beginning of the fourth quarter of last year.

And we're still in the maintenance CapEx mode at this time. If demand for services picks up here, after the first year, we'll review that and determine if we are going to expand additional CapEx money.

Just a follow-up to Veny's question, I was wondering if you could touch on your outlook for dynamite work going forward as a percentage of either contracts or revenue?

Right now, I would say in the -- on the $65 million, a small percentage of that would be dynamite work.

I have a question -- if you talk about maybe the overall nature bidding activity, how activate it is, kind of the nature of any pricing pressure you might be seeing. If you could break that out between the U.S.

and Canada. That would really be helpful.

Well, we've seen bidding activity in the U.S. relatively good.

The -- going from the bid phase to the contract phase is still been quite slow so far, but we're just -- we're not that far into the fourth quarter yet, which we expect to see some contracts executed for next year. As far as Canada goes, it's been slower this year than what we experienced last year as far as the bidding.

But we've been very fortunate to get some very significant contracts in Canada and we're expecting a relatively good year in Canada this year.

Okay. And on the backlog, as usual I assume that's primarily a U.S.

and I'm wondering as well how quickly does that convert to revenues. It sounds like it's within 1 to 2 quarters I think from what you said.

Right. Normally that $65 million, that includes Canada and the U.S.

so that backlog will hopefully be realized within a 3 to 4 month period.

Okay. And then I guess, the final question before I get back in queue is, you only work in 5 U.S.

crews I mean, you obviously, have capacity for 9. And I'm just curious, how long do you hold onto this fixed cost for this 4 idle crews.

And I understand those are very experienced people, but don't you have to have some kind of expectations as to when you're getting them back to work?

Sure. Absolutely.

Most of the fixed cost is not personnel. When we speak a key personnel on these crews, we're talking about roughly 7 people per crew and these people are in turn spread out amongst the crews that we currently have operating and take other people's place.

So the personnel is not really a high dollar issue as far as holding on to the 5 crews that we have and then being able to put out the additional crews. These people are critical as far as being able to quickly put out the crews upon demand for services.

So the fixed cost we've referred to is mainly depreciation and those sort of cost.

Wayne, obviously, you have a tremendous amount of cash and given where the stock is right now and given, hopefully fairly muted CapEx demands. Why wouldn't we have some sort of shareholder friendly buyback or other shareholder-oriented returns while we're going through this period of inconsistent results?

Well I think our Board of Directors will review that at the end of each year. I think if you look at last year, we had a cash dividend.

In previous years, the last 4 to 5 years, we've had a stock dividend. So the Board of Directors reviews that normally in December of each year and makes the determination on what their best thoughts are as far as best use of cash.

How much cash do you have on the balance sheet right now?

$21.3 million.

But do with the accounts receivable and I mean, where would you expect to exit the year at?

Receivable.

Well we have 11.7 in accounts receivable right now and as far as ending the cash at the end of the year, I would...

A lot of it depends on the demand for services in Canada and how much gearing up we're doing there. Right now, we have cash demands in Canada.

We're gearing up for the season, and we'll probably have some demands after the first of the year as well. So a lot of that just depends on how much money we'll funnel to Canada to ensure that they have all the necessary equipment and resources needed to meet their season.

But I'm assuming this should be your peak of cash needs because you're going into the winter season in Canada, which is very important for you.

Yes.

And then going into March, then cash builds significantly?

Yes.

So given where you're likely to exit March, shouldn't there be -- instead of a stock dividend, shouldn't we have a buyback?

That would be up to the Board of Directors and we review that yearly and make a determination on what we think the best use of cash is.

Wayne, just to confirm the mobilization schedule for Canada, so you already have 2 crews there, third by the end of the year and then ramping up to 5 at the beginning of next year?

That's our expectations at this time.

Okay. And the third one is going to get through in late December or early December or what's your expectation?

Our expectations are that the third crew will come online here probably in November. We're not for sure whether we can continue to operate that through the end of the year.

That may have a gap in there and then we activate right after the first of the year, but very good chance we could have 3 crews at the end of the year. But our expectations right now is for sure to have 2 crews operating in the fourth quarter in Canada and then after the first of the year gear up to 5 crews.

And your backlog so far, can promise work for the 5 crews for the whole Q1?

We're not for sure. It just depends on how quick we go through the backlog.

We do have for our 5 crews in the U.S. we do have work going into the first quarter.

Well, thank you for joining us and look forward to talking to you again in the next quarter.