ION Geophysical Corporation
Q1 2016 Earnings Call Transcript

Published: 7 May 2016

[Operator:]

Greetings and welcome to the ION First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Karen Abercrombie, ION Vice President of Communications. Please go ahead.

[Karen Abercrombie:]

Thank you, Shea. Good morning and welcome to ION's first-quarter 2016 earnings conference call. We appreciate your joining us today. As indicated on slide 2, our hosts today are Brian Hanson, President and Chief Executive Officer, and Steve Bate, Executive Vice President and Chief Financial Officer. Before I turn the call over to them, I have a few items to cover. We will be using slides to accompany today's call. They are accessible via a link on the investor relations page of our website, IONGEO.com. There you will also find a replay of today's call. Information reported on this call speaks only as of today, May 5, 2016, and therefore you are advised that time-sensitive information may no longer be accurate at the time of any replay. Before we begin, let me remind you that certain statements made during this call may constitute forward-looking statements which are based on our current expectations and include known and unknown risks, uncertainties and other factors, many of which we are unable to predict or control, that may cause our 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 ION from time to time in our filings with the SEC, including in our annual report on Form 10-K and our quarterly report on Form 10-Q. Furthermore, as we start this call, please refer to the disclosure 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 Brian Hanson, who will begin on slide 4.

[Brian Hanson:]

Thanks Karen, and good morning, everyone. As we expected, our first quarter was another challenging one. Yesterday we reported a net loss of $35 million or $3.35 per share on revenues of $23 million. That compares to an adjusted net loss of $52 million or $4.70 per share on revenues of $41 million in the first quarter of 2015. While disappointing, our results were not surprising. We expected our first quarter to be our weakest. We have all weathered a tough revenue quarter. With significant shifts in commodity pricing toward the end of last year, many oil and gas companies are only now finalizing their budgets for the year and are assessing the impact of the recent increase in oil prices. Despite the low revenues, our 2015 cost reduction initiatives allowed us to consume only $8 million in cash during the quarter compared to $29 million in the first quarter of last year. This quarter, we generated $2.5 million in cash from operations versus using $6.7 million from operations in the first quarter of 2015. In April, we implemented additional cost reduction initiatives, further reducing our workforce by over 12%. While decisions like this are extremely difficult, we believe these steps were needed to streamline our organization and to right-size our Company while at the same time maintaining our core capabilities and progressing our strategic initiatives. These reductions will produce approximately $15 million in annualized savings, an estimated $9 million in 2016 on top of the $80 million in savings from our initiatives last year. On a positive note, as we announced Tuesday, we are about to begin mobilizing our ocean-bottom vessels and crew to conduct an OBS survey offshore Nigeria. A binding letter of commitment for the project has been issued by an international oil company, and we expect the contract to be finalized within the next few weeks. We expect to begin acquiring data in late June or early July and to complete full demobilization by late in the third quarter. Our technology is well-suited for additional opportunities in Nigeria and West Africa, and we continue to pursue active tenders and leads for projects in the area. We remain optimistic about our ability to keep the crew deployed upon completion of this project. All parts of our business continue to be hampered by the industry downturn. The data processing revenues were light in the quarter, but we have closed a significant data processing master contract of a large national oil company and expect our data processing revenues to increase through the remainder of the year as we receive sales orders under it. Also, similar to last year, we expect our new venture and data library revenues to be stronger in the second half of the year. Our first-quarter systems and software segment revenues were indicative of the low-capacity utilization among our installed base of equipment and of vessels utilizing our command and control software. As we announced on March 10, we acquired Global Dynamics Incorporated, an Ontario-based company that designs and develops Marine towing systems and equipment, including their proprietary SailWing technology. SailWing configurations can be employed to optimize towed source arrays and augment towed streamer deployment systems, yielding significantly less drag, faster towing, improved fuel efficiency and safer operations through their flexible and smaller footprint. As a result, seismic contractors using our SailWings technology should be able to acquire surveys faster and at lower cost. We will leverage SailWing technology to develop and sell commercial products for both source control and streamer deployment optimization to contractors in the towed streamer segment, and we will commercialize SailWings for our own exclusive use in the OBS space. And finally, in late April, we completed our bond exchange offer, retiring $26 million in principal value of our $175 million high-yield bonds using $15 million of our cash. We issued $121 million of new notes extending the maturity date through December 15, 2021, with the interest rate increasing by 1% to 9.125%. We are very pleased with the success of the exchange offer and the support we received from our bondholders. Almost 84% of our bondholders participated in the exchange. The exchange provides us with flexibility and additional liquidity to execute our strategic and operating plans in 2016 and in the years to come. This is a positive step toward aligning the business to the current market environment and positioning the business for the future. As part of the exchange offer, we issued just over 1.2 million shares of common stock to exchanging bondholders. We utilized about 500,000 treasury shares toward the total shares issued. These treasury shares included the 450,000 shares we recently repurchased that were netted against the 1.2 million shares issued – results in a net effect of dilution of only 6.8% of our currently outstanding shares. With that, I will turn the call over to Steve to walk us through the financials. Then I will come back to wrap us up.

[Steve Bate:]

Thanks, Brian. Good morning, everyone. Our first- and second-quarter revenues are typically our lowest, as customers are generally slow to set and improve their annual budgets. This was especially true in Q1, as our customers continue to be impacted by the volatility in commodity prices. Our first-quarter revenues were down 44% year over year. All of our segments experienced a significant decline in revenues, with solutions down 31%, software down 51% and systems down 58%. We did not report any revenues in our ocean-bottom services segment, as our vessels remained idle during the quarter. Regarding our ocean-bottom services segment, under our new project award in Nigeria, we will be mobilizing our vessels to the survey site during the second quarter. Acquisition is scheduled to begin in late June or early July, and we expect the bulk of the project revenues to be recognized in the third quarter. Despite the significant drop in our revenues, our 2015 cost reduction initiatives enabled us to reduce our operating loss for the first quarter to $30 million compared to an adjusted operating loss of $45 million a year ago. We were able to reduce our net loss to $35 million compared to an adjusted net loss of $52 million one year ago. Our EBITDA in the first quarter of 2016 was a negative $17 million compared to a negative $38 million in the first quarter of 2015. Despite extremely low revenues, we used only $8 million of cash in the first quarter of 2016 compared to $29 million in the first quarter of 2015 and had positive cash flow from operations for the second consecutive quarter. A little over half of the cash used in Q1 was associated with financing activities. On March 31, our total liquidity was $103 million, consisting of $77 million in cash and $26 million available on our revolving credit facility. We had no borrowings under our $40 million credit facility but experienced a decrease in the amount available under the facility due to the decline in eligible receivables included in the borrowing base calculation. We would expect that as our revenues increase in the back half of the year, we would see an increase in availability to the facilities' maximum capacity. As part of the debt exchange, we used $15 million of cash to retire approximately $26 million of high-yield bonds in the second quarter. Post the exchange, approximately $149 million of high-yield bonds remain outstanding, with $121 million maturing in December 2021 and $28 million maturing under the original terms in May 2018. We expect our interest expense on our bonds to decrease by almost $1 million annually as the 1% increase in the interest rate on the new bonds is more than offset by the bonds retired. With that, I will turn it back to Brian.

[Brian Hanson:]

Thanks, Steve. This continues to be a tough operating environment. But unlike the first quarter of 2015, when we were navigating through a great deal of uncertainty, the picture has become clearer. We are managing the cash, and our first-quarter results were in line with our expectations. Although we have had a slow start to the year, we are pleased to be putting our OBS crew back to work and after completed our financial restructurings. We managed to bring our costs down to be in line with our lower revenue streams. We expect our second half to be stronger than the first with the addition of ocean-bottom revenues, improved data processing revenues and the typical effect of year-end driving data library sales. As is typical, our first quarter is among our weakest, and we are already seeing significant improvement in the second quarter as budgets are being set. With the quarter behind us, we believe that we have bottomed and expect our business to significantly improve sequentially for the rest of the year. We also believe our current liquidity, coupled with our operational and financial restructurings, will enable us to continue to weather this deep economic storm. With that, we will turn it back to the operator for Q&A.

[Operator:]

Thank you. We will now be conducting a question-and-answer session [Operator Instructions] Our first question comes from Blake Gendron [ph] from Evercore ISI.

[Unidentified Analyst:]

Hey, Brian. It's Steve. How are you guys doing?

[Brian Hanson:]

Good morning, Blake.

[Unidentified Analyst:]

I'm stepping in for James West. He's in Houston doing OTC, but I just have a few questions for you guys. First of all, I wanted to congratulate you guys on the exchange offer and also just highlight the SailWing technology that you guys have acquired as a result of global – having tangentially just come from the oil field myself, I can definitely appreciate the acquisition – the synergies that you guys are going to grab there. But my question relates to the OBS revenue. And if you can just offer a little more color onto the extent of the revenue bump that you are going to get from OBS here in the second half.

[Brian Hanson:]

Yes, I think the – it's a little difficult to answer the question, Blake, just because it's one customer, one job and everybody else that competes with us is listening to this call. But I would directionally say to you that if you looked at when our OBS crew was working in 2014, approximately nine months of that year, and backed into, say, this was probably about four months with the work you can directionally get and appreciation for the amount of revenue that it represents.

[Unidentified Analyst:]

Got it. Okay. So basically just taking, I guess, a proportion of revenue from OBS in that quarter is a pretty good guesstimate for us at this point.

[Brian Hanson:]

It's a pretty good estimate.

[Unidentified Analyst:]

Okay, good deal. That's all I have. Appreciate the time.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Phyllis Camara from Pax World Funds.

[Phyllis Camara:]

Hi how are you and congratulations also on getting the exchange done. Quick question on the master contract that you said you closed. I'm assuming this is the same contract that you had talked about rimbling for extending last quarter. Was there any amount of work done under that contract rent the first quarter?

[Steve Bate:]

Phyllis, this is Steve. Yes, it is the same contract, and we did have a little bit of work in the first quarter and are still waiting on some additional orders under that contract – some work orders.

[Phyllis Camara:]

Okay. So you expect second quarter to actually ramp up more than the first quarter was?

[Steve Bate:]

Yes, I would expect that.

[Phyllis Camara:]

Okay. Okay, good. As far as the acquisition on the global dynamic, will that be – that technology be included in the Nigeria contract at all?

[Brian Hanson:]

Hi, Phyllis. Brian here. No, the basis for that technology is we need to do some further development on it. We are very close on certain applications on the ocean-bottom side. And we need to do a little bit more development on the source side, and then the next project after that will be on streamer side. But it won't be on this particular job in Nigeria.

[Phyllis Camara:]

Okay. Will you have to spend, I assume, some amount of capital to complete that?

[Brian Hanson:]

Very minimal. Very minimal.

[Phyllis Camara:]

Okay, okay. And then have you started talking to customers about having or what you hope that the – that this new technology can provide for you? Are you starting to see some interest in that from customers? Or are they just saying we don't even really want to talk to you about it until we decided to fits that to work.

[Brian Hanson:]

No, actually, we have – we typically preview our R&D roadmap with our customers in solicited feedback into all of our programs to make sure we are developing what they want. We have previewed this with a number of customers and the feedback is very positive.

[Phyllis Camara:]

Okay, okay. Are you starting to see – everybody is breathing somewhat of a sigh of relief with oil prices and I guess the wrong news today out, made everybody feel a little bit better as well. Are people starting to talk about loosening up CapEx a little bit more than what they were at the beginning of the year? Are they still saying they're going to wait and see how things go throughout the rest of the year?

[Brian Hanson:]

Yes, I don't think we see any indications of loosening up CapEx. I think what we are seeing is – what you can expect to see in 2016 is that it will be probably a greater degree of comfort to spend the budgets that they've committed. The budgets will be significantly reduced off 2015. We are looking at 25% or greater. But I think what you'll see is there will be a certain amount of comfort levels to spend those budgets versus if the commodity price drop again, they may be reticent to actually spend against the budgets. But I don't think you'll see an expansion of spend beyond those budgets in 2016. I think we need to get through the natural budgeting cycle late 2016 to see if it drives improvement in spending in 2017. And early indications are that spending should improve in 2017. Just question is how much.

[Phyllis Camara:]

Okay, okay. And then the last question for me – and I will let somebody else ask if they want to. On your cost savings, what are we expecting to see – I guess what is kind of the run rate that we could expect to see in either – or is there one especially in SG&A? I mean and then also what about in R&D and marketing sales are you going to be able to cut any more from those two areas for are you at the limit do you think?

[Steve Bate:]

Phyllis, I will answer that in a couple of ways. I think we always will evaluate our business and figure out how to scale up and down and manage our cost structure based on the revenue stream. I think the way I will answer your question is the cuts that we took in 2015 are pretty much fully in effect right now and were in effect in Q1. And the $9 million Brian mentioned in his remarks will come online over the next three quarters. And by the end of Q4, we will be at that $15 million run rate of savings on our cost structure. And those cuts were pretty much throughout the P&L structure.

[Phyllis Camara:]

Okay, okay. Thank you. Thanks, Steve.

[Operator:]

Thank you. Our next question comes from Ken Funston from FMCO.

[Ken Funston:]

Just a couple quick questions following up on the last one. What was the – so it was 12% of workforce. What was the number of workers there?

[Brian Hanson:]

Ken, it's Brian. The number was approximately 80 people.

[Ken Funston:]

Okay. Can you give an average salary – average…

[Brian Hanson:]

No, I can't. I think the most relevant number to give you is the $15 million annualized expense.

[Ken Funston:]

Savings [ph] okay. And that was the day after the Doha conference broke up. Was there any relationship there in your thinking?

[Brian Hanson:]

No.

[Ken Funston:]

Okay. That's it for me for the moment.

[Brian Hanson:]

You didn't really have any optimism that conference would deliver results, did you?

[Ken Funston:]

No, but I wondered about the – your thinking the day after, if you had the employees all watching it. But I was hard-pressed to think of you giving any other answer than you just gave.

[Brian Hanson:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Joe Phillips from Clearview Trading.

[Joe Phillips:]

Good morning, I wonder if you please repeat the comparable period for ocean-bottom revenues that would correspond to what you expect in Nigeria. I believe you gave a time period to look at, and I didn't catch it.

[Brian Hanson:]

2014.

[Joe Phillips:]

Very good. Thank you very much. That's what I didn't hear.

[Operator:]

[Operator Instructions] We appear to have no further questions. I will turn the call back over to Mr. Hanson for closing comments.

[Brian Hanson:]

Thank you for taking the time to attend the conference call, and we look forward to talking to you on our second-quarter call.

[Operator:]

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.