ION Geophysical Corporation
Q2 2010 Earnings Call Transcript

Published: 5 Aug 2010

[Operator:]

Welcome to the ION Geophysical Second Quarter Earnings Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. This conference is being recorded today, Thursday, 5 August 2010. I would now like to turn the conference over to Jack Lascar of DRG&E. Please go ahead sir.

[Jack Lascar:]

Thank you, Luc, and good morning and welcome to the ION Geophysical Corporation’s second quarter earnings conference call. We appreciate your joining us today. Your hosts are Bob Peebler, Chief Executive Officer, and Brian Hanson, Executive Vice President and Chief Financial Officer. Before I turn the call over to management, I have a few items to cover. If you would like to be on an e-mail distribution list to receive future news releases or experienced a technical problem and didn’t receive yours yesterday, please call us at 713-529-6600 and let us know. 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.iongeo.com or via a recorded instant replay until August 19. The information was provided in yesterday’s earnings release. I should also point out that we will be using some PowerPoint slides accompanying today’s call. They are accessible via link on the home page of ION’s website at www.iongeo.com. Information reported on this call speaks only as of today, August 5, 2010 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. 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 results or performance to differ materially from any future results or performance, expressed or implied by those statements. These risks and uncertainties include the risks 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, 2009 and in its quarterly reports on Form 10-Q. Furthermore, as we start this call please refer to the statement 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 to Bob Peebler.

[Bob Peebler:]

Thanks, Jack. And good morning. Let me start by addressing what is on many of our investor’s minds and that is the impact of the Gulf of Mexico oil spill and ION business. In the near term, the only that impact was the short term tests to a multi clients business which we have to make was $9 millions to the quarter. The $9 million includes $4 million of actual Gulf of Mexico data sales and the balance with BT related to other parts of the world. We’ve been assured that this was a clienting [ph] issue related to management distraction which slowdown their approval process. You will likely seen this expected second quarter sales be completed later in the year. Our Gulf of Mexico data library is very mature and does not represented the significant portion of our future business as majority of our new venture projects are in places like the Arctic, Brazil and the West Coast of Africa. The only other area have some concerned with the Arctic projects but we have not had any indications or reduced interest by all governance since our efforts involves very restate exploration in the library to use for fundamental based and understanding normally years ahead with any drilling operations. Also we don’t believe our marine equipment business will be impacted since our customers vessels moved from place to place around the world. The only other exposures would be through our data processing business and we still have solid backlog that should underpinned another record year for this group. It’s too early to tell what the long term impact might be on our EP [ph] business but we are starting to mitigate any potential long term risks to expanding our business into other international markets such as Mexico. In summary, we believed at this time, that the impact to our business is minimal this year and somewhat uncertain over the long term. Now, more specifically to our business this quarter, first of all, I am pleased that we just reported the profitable quarter even though it was only a penny for sale. In addition, we had efficient strength in our data processing, marine equipment in concepts and software business to help offset while we are confident was in and only in a multi-client business. As previously mentioned, we lost approximately $9 million of sales in the quarter due to the short term impact to the BP spill. In addition, we had no new venture projects running during the quarter as we are currently focused on the Arctic where the shooting seasons starts in July and runs through a default. We expect a much stronger second half for a multi client business starting in the third quarter based on these current underwritten projects to the Arctic. Our proprietary data processing business remains strong with sufficient backlog to this year given its confidence so we could look forward to another record performance. We are also having a solid year for marine equipment business with sufficient new technology sales, a processing products partially offset to decline in equipment sales related to new vessels. One very dry spot for our marine group was we announced in last night at a resent contract awarded by BGP to provide revenue streamer for the new 12 streamer vessel that would be commissioned in 2011. This is a breakthrough for ION and this will be the first material revenue streamer sale which is a new market for ION and also reflect the commitment for BGP in supporting ION, in significant shareholder and joint venture partner. As, Brian will explain later, we will be reporting our 49% share in the joint venture at INOVA Geophysical on a quarterly lives. So even though, we would not reflect the second quarter result of INOVA and ION results, September third quarter. I can report that our land equipment business did experienced some growth quarter over quarter. Basically we are seeing some recovery in North America as a shale plays continued to expand and dating activity is picking up for a contract for customers worldwide including BGP. However the Land Seismic business is far from a full recovery as contract is still have access capacity due to the market collapse in 2009. The current opinion that, we will see slow improvement during 2010 going into 2011. We now do not expect INOVA to become profitable before 2011. The good news is the fact the new management team of INOVA comprised of both ION and BGP personal is now formed. And they have made significant progress in getting the new company functioning with the focus on R&D to support future BGP sales and with client for reducing manufacturing costs. I’m very optimistic about the future potential for INOVA and believed we are on track achieving our goal of a fully functional joint venture by year end. With that I will turn the call over to Brian.

[R. Brian Hanson:]

Thank you, Bob. Good morning, everyone. With the formation of INOVA Geophysical, we reorganized our business into three primary segments

[James West:]

Hey, good morning Bob. Good morning, Brian.

[Bob Peebler:]

Good morning

[Brian Hanson:]

Good morning, James.

[James West:]

Bob one market that was particularly strong last cycle and then particularly weak I think during the downturn was Russia and I was curious if you could give us an update on what you are seeing in that market today as it, I know the drilling activity has recovered but what about seismic?

[Bob Peebler:]

Yeah first a couple of comments about Russia. I think one Russia was I think the positive compared to couple of years ago, as they is a continuing consolidation going there is two major players and even some of the smaller guys are consolidating so I think that’s a favorable trend and one of difficulties in Russia has always been financing. And just we have the balance sheet. So we are happy to see some consolidation going over which I think is good medium short medium and long-term trend. We are getting reports from people that the [indiscernible] contracting business is certainly stronger this year then last year. So we're seeing we're starting to see that activity pick up. My expectation is it will probably moderately better than last year which doesn’t say a whole lot compared to last year, just for the fact that you got to soak up the contracts are getting back to work, soak up the capacity but I think the general trend is good. It’s my view that Russia will and I want to say Russia as a whole Soviet Union that whole part of the world should slowly they surely increase oil and gas that to be the 2011 cycle where we can see real straight coming back.

[James West:]

Okay. That’s helpful. With respect to INOVA obviously, the rise trip of BGP is very strong and we saw the sale on the marine side this quarter. What about penetration in to other Chinese contractors presumably the management team of INOVA has been marketing equipment to others presides to BGP relationship. Is there been any penetration, how do you feel about that penetration going forward?

[Bob Peebler:]

You know, guys has spent a very large amount of their initial time in China one is that we do see that is a big market not only for BGP but also the other CMPC oilfield. still have some of their own contract increase. So, China has totally only CMPC have a totally consolidated all of their activities under BGP. So one of them challenges, one of the activities that our team has been doing is actually going from oilfield to oilfield so have reacquainting target about INOVA, obviously there is a lot of strong interest of CMPC down in to those oilfield for them to buy from INOVA. So I think that right now we are in the market for preparation face. The biggest – and you’ve got other companies such as [indiscernible] and then there is some smaller companies now just on the budget cycle point of view we’re sort of already this year going to sort of lots of loaded and frankly there isn’t a whole of capital expenditure going on because they had start cruise so I think its again – that our guys are sort of preparing for the next cycle which will for the budget cycle really was started late this year and early next year and going to ’11 that’s again one of the reasons that we have really said that we don’t expect the land equipment business get a lot strong for this year just to slow improvement and ’11 was we should start see in the – thanks to pick up returning to the more the normal pace.

[James West:]

Okay and then just one final question for Brian I guess first thanks for the additional color on the segment, it’s very helpful. You mentioned solutions backlog I think a 118 million I am curious I know we’ve got the Arctic new ventures starting now or underway now how will that 118 million flow out over the next two, three quarters should we expected all to be done by year end or is it take longer?

[Bob Peebler:]

You know the nature of backlog James is that it for as we work through the backlog we tend to replace this but this develop not just new ventures but also data processing business under contract on a normalize basis that backlog is typically out run in the 70 and 90 million range, so I would expect that over the next two quarters will probably the back down to that normalize range.

[James West:]

Okay. Thanks guys. Operator

[Daniel Burke:]

Sorry.

[Bob Peebler:]

Good morning Daniel.

[Daniel Burke:]

Brian question for you, I appreciate the ability to give us in your commentary that we expected sort of Q2 INOVA outcome and just as point out clarity then putting back to your guidance you would expected that the mid point of that net loss of 11 to 12 – excuse me 11 to 13 million, we would expect to see equity loss about 6 million from you guys in Q3. Is that – I drawn the right conclusion?

[Bob Peebler:]

Yes. That’s correct.

[Daniel Burke:]

Okay. And so if we would get back kind of to not a surprise to see INOVA in that position, but the guidance towards profitability for the whole year, clearly that’s a larger equity loss to overcome than when you had in second quarter when you really don’t have INOVA represented. So – I know you guys can tick through where you cover, potential – which segments you’re really going to see a sequential step up here from Q2 to Q3 in terms of results?

[R. Brian Hanson:]

Sure. I can…

[Bob Peebler:]

Go ahead, Brian.

[R. Brian Hanson:]

Do you want to cover that one?

[Bob Peebler:]

Okay.

[R. Brian Hanson:]

For me, if you take a look at the business and sort of breakdown the various aspects of the business. The data processing business continues to be strong. We’d expect that to continue. The software business is strong and we expect continued performance there. Probably the single largest uptick will be on the solution side of the house, because we have a significant amount activity around the new venture programs in the third quarter.

[Daniel Burke:]

Okay. That’s useful. It helps me understand, I think about Q3. The sale that to BGP certainly good news. Two questions, one, can you help me understand why that the revenue would be booked next year? Are there any – you want just to the terms of that contract we should be aware of and then are there any additional marine vessels in the new build BGP order book we should beyond the look out for?

[R. Brian Hanson:]

Yeah, I’ll comment that the reason one is that we’ll be shipping right after the end of the quarter and then we have to go to an acceptance configuration. And so just prune for us until we have that acceptance, we’re going to recognize revenue. We'll be staging it’s a big system and we'll mainly just be shipping the equipment so we have to stay to put it together do integration testing on the vessel and that really will happen probably sometime in the first quarter of 2011.

[Daniel Burke:]

Okay. And then are any other recharging of vessels in the on the BGP side that they are still looking for streamer outfitting?

[R. Brian Hanson:]

I would say this is probably I can’t speak for BGP but sort of knowing their current work I think this is the main focus for 2011 will be to get that that’s a very large vessel. They do have some smaller vessels that I am not familiar with but they may need on if they [inaudible] more or less expansion kind of things.

[Daniel Burke:]

I understand Bob and then and Brian one last one maybe going back to just income statement here, a lot of cost obviously absorbed into INOVA, the run rates we saw this quarter for R&D and marketing and sales pretty representative or what we should expect second half of the year with obviously the recognition of marketing and sales at least did skip up a little bit on revenue?

[R. Brian Hanson:]

Well I am sure [inaudible] as much we are coming up the guidance or a direction that could be indicated as guidance but I think that our – I don’t see any material change in our current run rates.

[Daniel Burke:]

Okay that’s helpful. Thank you guys for the answers. Operator

[Unidentified Analyst:]

Hello thank you and good morning. I have a question, well first of all let me say that I find your new business break down very helpful in understanding [indiscernible] business so thank you for that. But can you talk about the total streamers system under the system segment. What does that represent is that all of your marine, streamer and associated sales?

[R. Brian Hanson:]

Yeah, true, that’s going to represent primarily our products that we sell in to the towed streamer segment. So positioning products, the streamers themselves, so…

[Unidentified Analyst:]

Okay.

[R. Brian Hanson:]

Pretty much product sales that apply to towed streamer applications.

[Unidentified Analyst:]

Okay. And that had a nice sequential uptake about level with last years number I guess. Who are you selling? I think that’s going to be your first large stages streamer sales, is that correct with to BGP?

[R. Brian Hanson:]

Yeah, that is our first multi streamer sale. So we’ve sold single streamers to customers in the past and this is the first time we are doing a towed streamer application to BGP. But, the typical cash [indiscernible] on the marine side is the same and its still the [inaudible] in the food rose and pretty much as you know the that area of our business is fairly consolidated in that say, it’s a handful of operators up there, shooting marine seismic and they are all purchasing from us.

[Unidentified Analyst:]

Okay. And I understand the confidentiality of sales numbers. But do you have guidance and what the revenue of this BGP would be and what the operating margins would beyond that?

[R. Brian Hanson:]

Yeah, I unfortunately just can't speak the specifics of our transaction.

[Unidentified Analyst:]

Okay. Well, may I just ask another question then on the land business can you talk about what’s happening with [inaudible] both in INOVA and on some of the projects you are working?

[R. Brian Hanson:]

Yes, I’ll take that on butterfly, one of the, as we have talked in the past one of the changes we made last year was to take the FireFly but we had put into rental model is really I believe we need to get more market exposure and as we are quite well we have system now in the Mexico that’s gone from basically job-to-job we’ve got one going for patchy down and Latin America we’ve got more sale of share we had been success there and in fact we have fairly large project that large project starting this fall again the more sale us now. We are very confident that overtime as you can imagine our rental rates are fairly significant overtime once the contractors get to know with the system here bulk of business we should see some product line sales drew that but in the mean time its good revenues stream force system just to speak to the system itself we are now – we are routinely running now very high density jobs 10,000 channels and greater we are getting great what’s call stress recovery which is a good indication of the quality of the system we get stress recovery of 98 and greater percent which means if you put all 10,000 or more stations out were actually recovering stresses more or less 10,000 stations, 98 plus percent time which is an excellent technical count accomplishments. So I am – we are still bullish on cable system we are confident, we had a leadership position with these very large scale systems and experience and it just matter found to keep work in way – were down focus on getting the cost and system down and working on things user interfaces, more liability and vis-à-vis all the normal things you do in the cycle.

[Unidentified Analyst:]

Okay. Thank you very much. I’ll queue back up for another question. Operator

[Terese Fabian:]

Thank you. Question on the aftermath of the Gulf of Mexico oil spill. Are there any industry review groups looking at the way marine sites they can conducted? Are you participating in any of these exchanges coming this way?

[R. Brian Hanson:]

There are groups, the biggest one is a – there is a group that’s a form of – formalized group of all the seismic contractors. And that one is very much involved. Currently the only limits they have been placed on the industry are related to where there might be actual oil spill which is becoming less and less of an issue, so there is instructions that you had to basically negotiate around those spills. Now there is always the constant – there has always been a constant pressure on the contractors related to namles and obviously the spill has brought all that to the front once again. But so far there hasn’t been any real major restrictions beyond just avoiding the spill. It’s one that the industry has sustained gains because there are people that would love to stop everyday, everywhere. So obviously we have to be involved including lobby and at different times through the industry.

[Terese Fabian:]

Are you seeing any impact on other areas world wide from this Bill, in terms of your work?

[R. Brian Hanson:]

Not in our work. We are very aware of those possibilities but we really have not seen, there was a lot of discussion but we haven’t really seen any real impact. Now what we do see is the possibility of things moving around. You may have seismic crude’s moving out of the Gulf and going to other parts of the world. So that is yet to be seen how that’s going to play out.

[Terese Fabian:]

Okay and do you have a percentage of your sales now that are international for the first half of the year?

[R. Brian Hanson:]

We typically close 50%.

[Terese Fabian:]

Okay. Thank you. Operator

[R. Brian Hanson:]

Okay well thanks for taking your time, thank you for attending the conference and we look forward to talking to you during our third quarter call. Operator