Generation Essentials Group

Thank you, Shannon. Good morning and welcome to the TGC Industries’ third 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 Web site at tgcseismic.com or via a recorded instant replay until November 10.

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, October 27, 2014, and therefore you’re advised that time-sensitive information may no longer be accurate as of the time of any replay listening.

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 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 I’ll turn over the call to Wayne Whitener.

Thank you, Karen, and good morning everyone. Thank you for joining us today for our third quarter 2014 earnings call.

I’ll make some initial comments, and Jim Brata will provide you with financial details. Then, I’ll conclude with some remarks about our market and business going forward.

Before I start with my third quarter comments, I’d like to say a few words about the recent announcement of our strategic business combination with Dawson. We are extremely pleased to have announced this strategic business combination with Dawson Geophysical and are looking forward to joining forces with them.

The combination of our shared technical operational and international experience will provide increased opportunities to better serve our client base and result in a stronger company. This strategic business combination should allow the new company to enjoy increased utilization rates and lower costs.

We continue to anticipate a first quarter 2015 closing of this transaction. Now I’ll move on to our results.

Our third quarter results were negatively impacted by a land seismic environment that has remained challenging since the beginning of last year, especially in the U.S. Also our Canadian operations did not substantially contribute to third quarter due to the normal seasonality nature of the seismic work in Canada.

We operated five crews in the U.S during the entire third quarter of 2014. We added one crew in Canada at the beginning in June for summer work, but that crew operated intermittently during the third quarter.

Last year, we began the third quarter with three crews operated in the U.S as our backlog grew during the quarter ending the quarter with five crews in the U.S. In Canada last year, we operated three crews for a short duration summer time during the third quarter and end of the quarter with no crews.

Canadian activity has been improving, and we’re currently operating two crews in Canada and expect to add two additional crews there before the end of November. Our current backlog is $32 million, and we have some substantial amount of contracts awaiting signature.

We expect these to be finalized in the next few weeks. I’ll now turn the call over to Jim Brata who will review the financial results, and then I’ll return with some final remarks about the outlook for the rest of the year.

Thank you, Wayne and good morning. Revenues from the third quarter of 2014 were $26.1 million compared to $21.1 million in the third quarter of 2013.

As Wayne mentioned, we operated five crews in the U.S. during this year’s third quarter.

In the third quarter of last year, we began the quarter with three U.S. crews and ended with five.

In Canada, we had a one crew in early June for summer work, which operated intermittently during this year’s third quarter. This compares to three Canadian crews at the beginning of last year’s third quarter for summer work and none at the end of that quarter.

Cost of services in the third quarter of 2014 was $25.1 million, compared to $18.5 million in the third quarter of 2013. Cost of services as a percentage of revenues in the 2014 third quarter was 96.1% compared to 87.6% in last year’s third quarter.

Gross profit was $1 million in the third quarter of 2014 compared to $2.6 million in the third quarter of last year. Gross profit margin was 3.9% compared to 12.4% in the third quarter a year-ago.

Selling, general, and administrative expenses were $2.3 million in the third quarter of 2014 compared to $2.4 million in the third quarter of 2013. As a percentage of revenues, SG&A expenses for the third quarter of 2014 and 2013 were 8.8% and 11.3% respectively.

Depreciation and amortization expense in the 2014 third quarter was $4.7 million compared to $6.1 million a year-ago. As a percentage of revenues, depreciation and amortization expense was 18% in this year’s third quarter compared to 28.7% in the third quarter of 2013.

Interest expense was $149,000 in the third quarter of 2014 compared to $276,000 a year-ago. Net loss in the third quarter of both 2014 and 2013 was approximately $4 million or $0.18 loss per share.

We recorded an income tax benefit of $2.1 million in the third quarter and effective tax benefit rate of 34.5%, and this compares to an income tax benefit of $2.2 million and effective tax benefit rate of [$35.2 million] (ph) a year-ago. EBITDA in the third quarter of 2014 was a negative $1.3 million compared to $230,000 in the third quarter of 2013.

An EBITDA reconciliation table was provided in our earnings release issued this morning. Now, I’ll briefly touch on the first nine months results.

Revenues for the first nine months were $93.1 million compared to $115.8 million in the first nine months of 2013. Gross profit in the first nine months of 2014 was $16.5 million compared to $25.8 million a year ago.

As a percentage of revenues, gross margin was 17.7% in the first nine months of 2014 compared to 22.3% in the first nine months of 2013. Cost of services as a percentage of revenues was 82.3% in the first nine months of 2014 compared to 77.7% for the same period of 2013.

SG&A expenses were $7.1 million in the first nine months of 2014 compared to $7.2 million in the same period of 2013. As a percentage of revenues, SG&A was 7.6% in this year’s first nine months compared to 6.2% in the first nine months of 2013.

Depreciation and amortization expense for the first nine months of 2014 was $14.6 million compared to $19.1 million in the same period of last year. As a percentage of revenues, depreciation and amortization expense was 15.7% and 16.5% for the first nine months of 2014 and 2013 respectively.

We reported a net loss of $3.8 million or $0.17 loss per share for the first nine months of 2014 compared to a net loss of $1.6 million or $0.07 loss per share in the first nine months of 2013. EBITDA for the first nine months of 2014 was $9.4 million or 10.1% of revenues compared to $18.6 million or 16% of revenues in the same period of 2013.

And now I will highlight some balance sheet items. As of the end of the third quarter of 2014, we had long-term debt of $6.7 million, cash and cash equivalents of $25.1 million, our current ratio was 1.7:1, working capital was approximately $17.2 million, and finally we generated approximately $19.7 million in cash from operations.

And with that, I will 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.

We clearly are going through another one of those cycles where oil and gas companies have become a lot more cautious about exploration and seismic activities and are now more focused on reducing costs, improving returns, and generating free cash flow by concentrating on attractive development activities in cost effective basins. This has resulted in limited capital being directed towards exploration and seismic work.

Here is where we stand today as we approach the end of October. Inquiries and bidding activities are essentially steady.

We’re currently operating five crews in the U.S. and added additional crew in Canada in early October for a total of two Canadian crews operating currently.

We expect to add two more crews in Canada before the end of November. We expect to operate between seven and nine crews in North America during the entire fourth quarter.

We will have a better sense of future activity for the upcoming Canadian winter season later this year. Our current backlog is approximately $32 million and we have some significant amount of contracts awaiting signatures which should be finalized in the next few weeks.

Regarding the strategic business combination with Dawson, we have submitted the necessary notification forms as required under the Hart-Scott-Rodino Act and we plan to file the S-4 in the early part of November. In closing, a lot of the current market conditions -- we continue to maintain the financial flexibility and low cost structure needed to navigate these challenging market conditions which we have done since the beginning of last year.

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

Good morning.

Good morning, Veny.

My first question is on the number of crews, if you can clarify. You said we expect around seven to nine crews in North America, but you have three in Canada and you think you’re going to add two more.

Does this mean that the number of crews in the U.S. will be going to four?

No. Right now, we’ve five crews right in the U.S.

We expect to operate those five crews between now and the end of the year. We have two crews operating presently in Canada, and we anticipate adding two more crews in Canada in the next couple of weeks.

Okay. So that’s how it’s going to nine, five plus two plus, okay.

Thank you. My next question is on the gross profit margins, which have suffered this quarter.

You saw pricing -- the targeted pricing pressures and pricing decline increase, the reason behind it because if you compare it to Q3, 2013, the gross profit margin has gone significant low?

Yes. We’re seeing some very competitive market conditions out there with the number of competitors in the market place.

It has squeezed some gross margins down, but we’re optimistic that we may see an improvement possibly that next year within the (inaudible) what happens with oil prices and demand for services.

Okay. And then, during (indiscernible) in the preservation that you mentioned, that you expect to sign new contracts in the next couple of weeks and active backlog, and I know that they have been pushed to the right in the next couple of quarters.

What's -- how is it different today than it was two quarters ago? Do you -- are you geared up to next year, which you’re going to sign them in the next two weeks?

Well, it’s been pretty steady as I mentioned earlier. Contracts getting signed seem to be somewhat slower.

I think it’s the E&P companies are valuating their available funds for exploration and production, and it seems that we have to go to little bit higher levels in order to get these contracts signed, but we’re optimistic that a lot of the contracts that we have sitting on peoples desk will get executed and back to us in the next couple of weeks.

Thank you. I appreciate it.

Thank you, Veny.

Good morning, Wayne.

Good morning, Evan.

I know it’s early in your talks with Dawson, but has there been any consideration on whether the combined company would look to pay a dividend?

That has basically been discussed, but that would be decided by the new Board of Directors once the new company is formed, and we’ll review what options are going to be discussed as far as the structure of the new entity.

Okay. Fair enough.

I’ll hop back in the queue. Thank you, guys.

Yes.

Wayne, in Canada we are getting calls to the winter season. What kind of indications, do you see a good season or strong season, an okay season?

Well, we look we’re better out of the shoot for the fourth quarter here. Last year, we had some severe weather that impacted the fourth quarter of last year in Canada.

As we talked about, we’ve got two crews presently operating in Canada and we expect to have two more crews that’s earlier than the year than what we saw last year. So we’re anticipating that fourth quarter could be better than what we saw last year as far as the Canadian operation.

It’s a little too early to say exactly what the first quarter is going to look like, but we’re optimistic that we can operate five to six crews in the first quarter of next year.

We do have a lot of repeat customers in Canada. We consider ourselves a premier operator in Canada in the seismic market.

So we’re getting of course a lot of repeat business up there. And also we’re trying to get some new clients that we didn’t have last year.

So, like I say, we’re optimistic. As you know in Canada, the contracts don’t get executed till normally later in the year due to the fact that -- because not really the amount of lead time on our [ph] [endeavor] since most of the preliminary work is done by outside contractors, and basically we’re brought into the acquisition portion later in the process.

Thank you.

We’d like to thank every one for joining us for this third quarter conference call. And we look forward to talking to you next quarter, and thank you for your interest.