ION Geophysical Corporation
Q1 2015 Earnings Call Transcript

Published: 7 May 2015

[Operator:]

Greetings, and welcome to the ION Geophysical First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Karen Abercrombie, Vice President of Communications. Thank you, Ms. Abercrombie. You may begin.

[Karen Abercrombie:]

Thank you, Doug. Good morning, and welcome to ION Geophysical Corporation's first quarter 2015 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'll be using slides to accompany today's call. They're accessible via a link on the Investor Relations page of our website, iongeo.com. There, you'll also find a replay of today's call. Moving on to Slide 3. Information reported on this call speaks only as of today, May 7, 2015, and therefore, you're advised that time-sensitive information may no longer be as accurate at the time of any replay. Before we begin, let me remind you that certain statements made during the 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 were 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 these 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 in our quarterly reports on Form 10-Q. Furthermore, as we start this call, please refer to the disclosure regarding forward-looking statements incorporated into our press release issued yesterday, and please note that the contents of our conference call this morning are covered by those statements. I'll now turn the call over to Brian Hanson, who will begin on Slide 4.

[R. Brian Hanson:]

Thanks, Karen. And good morning, everyone. As we expected, our first quarter results were impacted by a virtual halt in exploration spending. Generally the first quarter is our softest but this quarter was exceptionally weak, as many of our E&P company customers are only now finalizing their budgets for the year. Yesterday, we reported our first quarter 2015 net loss of $55 million or $0.34 per share, which included $4 million in restructuring items. As we have said on previous calls, we anticipated a downturn coming in the third quarter of 2013, and began preparing by managing our business conservatively with a focus on generating cash. We ended 2014 with $174 million in cash, but we also expected, going into 2015, we would be a net consumer of cash during the first half of the year. In the first quarter, we consumed about $29 million in cash, a good portion of which was timing of collections that slipped into the second quarter. We ended the quarter with cash and cash equivalents of $144 million. With our available liquidity, we are confident we could sustain a prolonged period of reduced activity at these levels. We are, however, seeing activity levels begin to pick up as budgets are being locked in. I expect the second quarter will be slow as well while our customers figure out how to prioritize the allocation of their budgets, but we should see an increase in activity in Q3. In addition, to a sharp focus on cash generation and now cash preservation, over the last 7 quarters, we have implemented several key cost control measures. We have strategically restructured our business, scrutinizing nonperforming and lower performing parts of our business. During the first quarter of 2015, we centralized our global data processing capabilities to core data processing centers of excellence in the U.S. and the U.K., and we consolidated our marine equipment operations into 2 locations in the U.S. and the UAE. Including actions taken in December, these restructurings have resulted in a 20% reduction in our global workforce. In addition, in the second quarter, we initiated a 10% salary reduction program among the majority of our U.S. and U.K. employees. These cost control measures will result in savings of approximately $25 million this year and an annualized savings of about $33 million. While there still remains a significant amount of uncertainty in the multi-client side of our Solutions segment, we are starting to see an increase in customer activity. In addition, we are starting to see growth in the sales pipeline for reprocessing existing seismic data as we have seen in down cycles in the past. But it remains too early to predict to what extent the business will bounce back. There is still significant uncertainty and I expect it will be for a while. Our Systems and Software businesses continue to be impacted by the reduction in vessel capacity within the towed streamer seismic contractor market. We have done a thorough review of our customer base, identified our areas of exposure and believe we have experienced most of the expected decline with the exception of perhaps a couple more vessels being stacked later this year. With our Ocean Bottom Services segment. OceanGeo has been idle since late Q4. We have been verbally awarded and are working through the bid process towards a formal contract for a longer-term project in Brazil, expected to begin in the fourth quarter of this year. In addition, we are well into negotiating a contract to work in Africa that was scheduled to start late Q2. But the reality is, even though negotiations such as these are ongoing, E&P companies are taking a hard look at budgets and how to allocate them, so nothing is guaranteed. Several seismic companies have been awarded projects, only to have budgets reevaluated and projects canceled. Despite the extended market downturn and uncertainty, we see significant long-term potential for OceanGeo and technologies to improve ocean bottom survey productivity. We expect demand for ocean bottom production surveys to increase. So we have implemented significant cost reductions and plan to carry our crew for a number of months as we assess the health of the ocean bottom market. Steve is going to walk through the financials, then I'll wrap up before taking questions.

[Steven A. Bate:]

Thanks, Brian. Good morning, everyone. Our first quarter results were extremely soft with revenues declining by over 70% year-over-year. Revenues declined significantly in 3 of our 4 segments, while our Software segment showed a relatively modest decline of 12%. Our first quarter Solutions segment revenues were down year-over-year by almost 80%. Not surprising, given the pause in spending with many of our E&P customers only now finalizing their 2015 budget. We expect to see an increase in exploration spending in the back half of the year that's still expected to be softer than in prior years. Our Systems segment experienced decreases in new marine system sales as well as a reduction in repair and replacement revenues. These declines were primarily attributable to a decrease in vessel capacity from 2014 to 2015. As Brian mentioned, our Ocean Bottom Services segment contributed no revenues this quarter, as the crew has been idle since completing a survey in the fourth quarter. As a result of the decline in revenues, our overall gross and operating margins for the quarter were negative at 39% and 115%, respectively. Our adjusted EBITDA was a negative $38 million and our adjusted earnings per share was a loss of $0.31. Our cash balances stood at $144 million at March 31, and we have had no outstanding borrowings under our revolving credit facility since the second quarter of last year. Our net debt, defined as total debt less our cash balances, was $45 million at March 31. As a result of the pause in spending during the quarter we consumed cash of $29 million. Our investment in our multi-client data library was less than $10 million during the quarter, down from $22 million a year ago. We continue to maintain our spending discipline, starting new programs only after receiving an adequate level of industry underwriting. During the quarter, we spent approximately $12 million in CapEx, which was primarily related to the build of new ocean bottom cables for OceanGeo. Going into this year, we expected that we would use some of our cash during the first half of 2015. Given the combination of our available liquidity, and the anticipated increases in exploration spending during the second half of the year, we will continue to invest in key strategic opportunities to position the company to take advantage of market opportunities when activity resumes to a more normal level. With that, I'll turn it back to Brian.

[R. Brian Hanson:]

Thanks, Steve. It's no surprise to anyone on this call, there's a big storm out there and we are weathering it along with the rest of the industry. With most of our E&P customers now in the final throes of finalizing their budgets for 2015, we expect to see an increase in exploration spending over the back half of the year, albeit at lower-than-historic levels. We began to take steps over a year ago to proactively weatherproof our business. We have been focused on cash generation and are now focused on cash preservation. We have strategically restructured parts of our business to optimize performance and to dry up nonessential costs. We are focused on maintaining our Ocean Bottom business, which skews more to production than exploration and expect demand for ocean bottom production surveys to resume. And we will continue to invest in key strategic opportunities to ensure we are well-positioned to take full advantage of opportunities when seismic activity resumes. With that, I'll turn the call back to the operator for Q&A.

[Operator:]

[Operator Instructions] Our first question comes from the line of Joe Maxa from Dougherty & Company.

[Joseph A. Maxa:]

Talking about preserving cash. I'm just wondering what you would expect to see by year-end? Do you have a range your trying to shoot for or stick to? I know there's a lot of variables out there but if that's the #1 priority, where do you think you can manage your cash to?

[R. Brian Hanson:]

That's a great question, Joe, but I honestly couldn't give you that answer. The real question is just how prolonged this storm is and how quickly spending resumes. So if I gave you brackets there would be a big gap in between them.

[Joseph A. Maxa:]

I see. With the idling of the Geo or OceanGeo crew and -- in vessels or what not, would you expect that -- those costs to decrease? Is there a way you can limit those idling costs?

[R. Brian Hanson:]

Yes, absolutely. In fact, we've gone back and we've reduced headcount, reduced salaries, renegotiated vessel contracts, have significantly lower standby rates while the vessels are idle, eliminated all nonessential spending. So we've dramatically reduced costs of the crew.

[Joseph A. Maxa:]

Got it. Okay. And it sounds like you're expecting Q2 to be similar, maybe on the top line, as Q1. What kind of -- you gave us a lot of bullet points but where would you expect the difference to be or how much savings do you think you'll get out of Q2 versus Q1?

[R. Brian Hanson:]

I -- again, Joe, the biggest variable in my mind is top line revenue. And at this point in time, I'd expect Q2 to be better than Q1, but I can't tell you how much. Because, what we're seeing with our customers is they're struggling relative to the allocation of budgets, not locking them in but now -- what their priorities are and where are they going to spend their dollars. So I don't know if we're going to see that spigot turn on greater in Q2 or it will be pushed out more into Q3. So there's just too much range on the top line number for me to give you a feel for the second quarter.

[Joseph A. Maxa:]

From what you're seeing out there and the likelihood of a pickup in the back half, are you -- do you see a potential where you could get back up to that $100 million range on top line, let's say, at Q4, or look to early next year or is that just still way too early to make a call?

[R. Brian Hanson:]

Joe, I'm far -- I've been sitting in this chair too long to even make that guess.

[Operator:]

Our next question comes from the line of Rudy Hokanson from Barrington Research.

[Rudolf A. Hokanson:]

A couple of questions. You mentioned that the issue on the cash flow had more to do with the timing of payments. What kind of visibility do you have on that right now?

[R. Brian Hanson:]

Well, really it's visibility because we obviously, understand the components of the consumption of cash, and I'd say, that about 2/3 of the consumption of cash was because of poor performance in the quarter and about 1/3 was attributed to just slippage. And we're seeing the same games being played that we saw back in 2008, 2009 when things got tightened. Everybody hoards their cash and makes their payments on April 1 versus March 31 so that they can make it appear that they got a better cash-ending balance for their quarter results. And we saw the same thing occur at the end of the first quarter where some of that slippage just slid over the line and it flew into April.

[Rudolf A. Hokanson:]

Okay. So about 1/3 of the use of cash was just related to receivables and you've seen that come in already?

[R. Brian Hanson:]

Yes, that's correct.

[Rudolf A. Hokanson:]

Okay. And then the second thing. And I realize this is difficult to tell, it might -- could change depending on the customer. But aside from those issues, any feel for the timing on when E&P companies are going to be coming to you or when they give you a lead time on their projects? I mean, as you're starting to see increased activity, is this for business that's 1-month out or 2 months out or 3 months? I'm just thinking -- and again, I realize this isn't necessarily directly related to ION, but there was a headline a few weeks ago that Shell deciding to go back into the Arctic and doing work there or Exxon deciding to do something. And I was just wondering if you're noticing any kind of -- anything that could give you a profile on the industry right now or is it everything sort of up-for-grabs and some of the national oil companies might be coming in at one time, the independents at another time? Anything in terms of any kind of rhythm or pattern to your visibility?

[R. Brian Hanson:]

Yes, I'd say it's just as simple as this, Rudy, it's -- it was absolute paralysis in the first quarter as nobody could figure out what their budgets were. The second quarter would be represented by budgets getting locked in and then because of the reduced size of the budgets, there's a lot of activity around trying to prioritize where to allocate the funds and what they want to pursue. So what we're seeing today, I can't predict timing but I can tell you that activity levels have picked up in the form of seeing a growth in our sales pipeline on the data reprocessing side, telephone calls and conversations on the multi-client side of the business. But I think they're all just sort of trying to figure it out. So I think there's going to be kind of a mad rush to spend budgets Q3, Q4, and that's about as close as I can get.

[Rudolf A. Hokanson:]

Okay. Do you -- are your clients telling you what some of the land E&P in North America are talking about now? That they're resetting their budgets off of maybe $55 for the land E&P in North America it might be $55 WTI or something like that or relative to Brent, if they're now saying, "Okay, we're living in a new world and while it might be volatile, we're not counting on it going up, but we're setting our budget at certain base for oil?"

[R. Brian Hanson:]

Yes. Although my experience has been that most of our customers are pretty quiet about where they take that price of oil and their assumption of their budgets. But I can tell you this, there -- generally speaking, there's a lot of discussion around how budgets are going to be down 30% to 35%. I personally believe budgets will be down closer to 50% for 2 reasons, one is, I think activity levels will be down a good 1/3, but when you look at all the cost reduction that's going on in the industry, lower day rates for vessels, et cetera, that in turn just translates into a reduction in spend as well. So I think we're going to see spend this year in our area of the business down, probably closer to 50%.

[Rudolf A. Hokanson:]

Okay. And along those lines, are you -- is the issue with your customers, are they pushing on you regarding price reductions or is it more a matter of just their overall budgets and they're suppliers of big, more commodity type services that they're pushing the pricing on?

[R. Brian Hanson:]

There's definitely quite a wave of cost reduction going on in the industry, and yes, customers are asking for price concessions. Our business is somewhat insulated from that, given the nature of it. So there's a small component of our business that sees that, mainly where we sell equipment or software to marine contractors. But in general, most of our business is insulated from that kind of price pressure.

[Operator:]

[Operator Instructions] Our next question comes from the line of Daven Shastri from Och-Ziff Capital.

[Daven Shastri:]

My question's in terms of -- and the thoughts that I'm having are around your future capital spend, which I know you've commented on a little bit, and your goal to preserve liquidity. I guess, when you think about the future, how does your capital spending plan change based on some of the litigation overhang that you guys have? Do you guys have kind of a Plan A and Plan B in place?

[R. Brian Hanson:]

Well, certainly we certainly have the capital management strategy in place. And if I had to step back and think about how I think the business is going to perform and cash burn, first -- the first quarter is always the most dramatic quarter for us historically, and this quarter, as we said, was more than we've ever seen. So I'd expect our cash consumption in the first quarter to be the greatest of any quarter, and then, I think you'll see slow improvement in the second quarter and then we'll slowly get back to cash breakeven. We've implemented so many cost-reduction programs that we'd expect that -- the full impact of those will really be felt by the third quarter, and you'll just have a natural resumption in businesses as budgets get spent. So the third and fourth quarter you'll see a lot of healing around the cash flow in the business. As far as cash and available liquidity, we feel we're sitting in a very good spot and expect that we'll be -- this litigation overhang will probably resolved itself fairly quickly. I'd expect this year or very early '16.

[Daven Shastri:]

Got it. And I guess, the Part B of that question is, how does your -- obviously you're going to be very judicious with the dollars you spent on the multi-client side. But when you actually -- if this litigation were to come through and you guys -- and I understand you have pretty big cash cows now, but are you going to be cutting in that part of your business just to preserve cash? So if we see that $120-odd million come through, is that the place we're going to see where you're just not developing your library in that respect?

[R. Brian Hanson:]

No, not at all. We have always maintained a very disciplined approach to doing our multi-client work. We do projects when they're adequately underwritten. We don't take a lot of risk on our projects and so it's not really a huge consumer of cash in our business. We've always operated in a very conservative way and we're not changing that.

[Operator:]

There are no further questions in the queue. I'd like to hand the call back over to Mr. Hanson for closing comments.

[R. Brian Hanson:]

Well, thanks for taking the time to attend the call, and we look forward to talking to you in the second quarter.

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.