Team Inc (TISI) 2003 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to your Team, Inc. quarterly conference call. At this time, all lines have been placed on a listen-only mode and the floor will be open for questions following today's presentation. It is now my pleasure to introduce your host, Mr. Phil Hawk.

Thank you, Rahim. Good morning and welcome to the quarterly Web conference call to discuss recent company performance. Again, my name is Phil Hawk. I'm the Chairman and CEO of Team. Joining me again today is Mr. Ted Owen, the company's Senior Vice President and Chief Financial Officer. The purpose of today's conference call is to discuss our recently released financial results for the company's fourth quarter and fiscal year ending May 31, 2003. We will address both quarterly and year-to-date performance. As with past calls, our primary objective is to provide our shareholders and potential shareholders with an enhanced understanding of our company's performance and prospects. This discussion is intended to supplement our quarterly earnings releases, our 10-Q, 8-K and 10-K filings to the SEC and our annual report.

Ted will begin with a review of the financial results for the most recent quarter and the full fiscal year. I will follow Ted with a few remarks and observations about our performance and prospects. As indicated earlier, following these remarks from Ted and me, we will take questions from our listeners. Those wishing to ask questions should call 1-888-896-0862 and ask to join the Team IR conference. With that, let me turn it over to you, Ted.

As usual, I want to remind everyone that any forward-looking information that we discuss today is being provided in accordance with the provisions of the Private Securities Litigation Reform Act. Such information is subject to certain assumptions and beliefs based on current information known to us and is subject to factors that could result in actual results differing materially from those anticipated in any forward-looking statements. So please read the last paragraph of our press release for a complete description of those factors.

Now to the financial results. Revenues for the fourth quarter were $24.9 million, which compared to 24.6 million in the fourth quarter last year. Earnings before interest and taxes were $2.3 million, which was virtually flat with last year's quarter. Net income for the quarter was $1.4 million versus $1.3 million last year. Earnings per share was 17 cents in the current quarter versus 16 cents in the fourth quarter of last year. For the year, revenues grew 8 percent to $91.9 million. Earnings before interest and taxes was $7.7 million, compared to $7.2 million last year and net income for the year was $4.4 million, or 53 cents a share, compared to $3.9 million, or 48 cents last year. That is an increase of nearly 13 percent.

Now let's look at the results by segment. First, as a reminder, our industrial services includes an array of specialized services related to the construction and maintenance of pressurized piping and process systems. Traditional services include leak repair, hot tapping and fugitive emissions monitoring. Our newer services include NDT inspection, field machining and technical bolting and more recently, field valve repair. By the way, with the exception of field valve repair, our newer services are now about four years old. And so after this fiscal year as we have previously discussed, we will discontinue making the distinction between traditional and newer services.

Now revenues from industrial services in the quarter were 22.2 million, which was 4 percent higher than the 21.3 million reported in last year's fourth quarter. Remember that this comparison is off a very strong fourth quarter in fiscal year 2002. Operating profits for the industrial services segment were 3.6 million in the quarter, which is about flat with last year's quarter. Growth in our traditional services lines grew at 11 percent during the quarter while newer service lines declined in comparison to last year's fourth quarter by 8 percent, primarily as a result of timing of turnaround projects when compared to the very strong fourth quarter of last year. For the fiscal year, industrial services revenues grew nearly 9 percent, compared to 2002 to a total of $81 million and segment operating profits increased by 5 percent to $12 million.

Now let's talk about the equipment sales and rental segment, which is Climax portable machine tools. Revenues for that segment in the quarter were $2.7 million, which is 18 percent less than last year's fourth quarter. But remember that last year's fourth quarter included a $700,000 military sale. Operating profit for Climax in the quarter was only $4000 after absorbing a $150,000 charge related to a sales tax matter which I will discuss more fully in just a moment. For the year, Climax revenues were up 2 percent and its operating profit was up 10 percent over the previous year.

Now just a word about the sales tax matter. As you know, Climax is domiciled in the state of Oregon, which is a state that opposes no tax on sales originating there. We have determined, however, that Climax does have an obligation to collect and rebid sales taxes in certain other jurisdictions, which was not previously done. We're in the process of entering into agreements with several states and have recorded a charge of $150,000 in the fourth quarter, which represents our estimate of the probable loss that Climax will incur with respect to this matter. The ultimate outcome is subject to a great deal of variables and cannot be determined with a certainty. We expect this issue will be fully resolved over the course of the next year and the ultimate outcome, even if different than the amount provided, will not have a significant impact on the future operating results of the company.

Now let's talk about cash flow and debt. At May 31, 2003, interest-bearing debt was $11.1 million. That is down $2.4 million from the end of 2002. During the year, we also repurchased 310,000 shares of our stock, including 159,000 repurchased in the fourth quarter. So that for the year, the total consideration paid was $2.1 million, an averaged stock price of about $6.70. By the way, our remaining authority for stock repurchases is approximately $1.4 million. Finally at the end of the year, our debt to EBITDA ratio was approximately 1-to-1. And so with that Phil, I will turn back to you.

I will begin with a couple of overall comments and then discuss each of our business units and their performance and prospects. As I mentioned in the earnings release yesterday, fiscal year 2003 was a record year for Team in many respects. The highest revenue at nearly $92 million, the highest net income at $4.4 million, the highest earnings per share at 53 cents a share and the highest profit margins at 4.8 percent. Reflecting this progress not only last year but for the last several years, we are proud to note that our company was recently named to Fortune Magazine's Fortune Small Businesses 100, America's fastest-growing companies under 200 million in revenue. This is the second consecutive year for Team to be so recognized. And as Ted mentioned, we also made significant progress in strengthening our balance sheet. As he mentioned during the year, we purchased about 300,000 shares of stock, and at the same time, reduced our total debt by 2.4 million, all the while, improving our debt covenants or debt to EBITDA ratio now down to nearly 1-to-1. This gives us significant financial flexibility going forward. As we have emphasized and discussed in prior conference calls, our business is very straightforward. Net income translates almost directly to cash flow. And because the capital requirements to fund our growth are fairly modest, most of the cash flow from the business goes to debt reduction and stock repurchases. That is demonstrated again this year with the continued improvement in our balance sheet.

While we made good progress in many areas, we were not totally satisfied with our profit performance this year. Frankly, due to the inherent operating leverage of our business, we expected and planned for profit growth that was significantly greater than the 13 percent growth we achieved. As we mentioned in the third quarter conference call, our costs got a little ahead of our business growth in a few areas. As we discussed at that time, we took steps to bring our resources back in line with current business levels and increased our focus on managing our job-level profit margins consistently across all branches and regions. We made progress with these initiatives during the fourth quarter and expect continued progress into fiscal year 2004. Despite limited overall revenue growth in the fourth quarter compared to last year's extremely strong quarter, we saw progress at both the gross margin and operating profit margin levels.

First, looking at gross margin. Fourth quarter gross margin improved to 40.5 percent. This is an improvement of 1.7 percentage points from the 38.8 percent gross margin we earned or achieved in the third quarter. You should note, though, that we are still 1.6 percentage points below the gross margin of last year's fourth quarter, which was 42.1 percent. This gap of 1.6 percentage points, so that was roughly half the size of the gap that existed during the third quarter results. So in a sense, we have not completely restored our margins, but we have cut the gap in half during the fourth quarter. Similarly at the operating profit or EBIT line, fourth quarter profit margin for Team this year was 9.4 percent, versus 9.6 percent in last year's fourth quarter. This 2/10ths of 1 percent percentage point shortfall compares to a 9/10ths of 1 percent shortfall in the third quarter comparison; again, closing the gap. I should note, though, that small differences in profit margin make a big difference. As I mentioned before, a 1 percentage point difference in operating profit margin translates roughly into 6 cents per share in earnings. Of course, we are not satisfied with profit margins below last year's level, but we do see good progress and results from our efforts to date and expect continued progress going forward.

Let me now discuss the performance and outlook of each of our business segments, beginning with industrial services. As Ted indicated, for the year, total segment revenues increased 9 percent. This overall increase resulted from greater than 10 percent increases in five major service lines, combined with a decrease in the NDT inspections revenue service. Onstream leak repair, hot tapping, fugitive emissions and monitoring, field machining and technical bolting all experienced revenue growth in excess of 10 percent. This growth came from many sources, including the major multiservice, multi (indiscernible) contracts, several new customers for traditional services and the continued penetration into turnaround activities for both current and new customers. At the same time, NDT inspection service revenues declined 3 percent overall. This net 3 percent decline was due to a significant decline in pipeline segment and pulp and paper project revenues that were nearly offset by continuing growth in plant facility revenues.

We continue to see a difficult economic environment for most major customer segments. While pipeline company financial pressures may have received more media coverage related to the Enron bankruptcy and electricity deregulation difficulties, we see difficult margin environments for our customers in most segments. As examples, chemical plants continue to struggle with higher natural gas prices. A major independent power producer filed for bankruptcy just this week. Overall, we do not think that any of the major industry segments we serve had positive revenue growth during the last calendar year. This includes refining, petrochemicals, power, pipelines, pulp and paper, steel and aluminum. Fortunately, much of the demand for our services is related to the ongoing maintenance in operating plants. These maintenance requirements continue to occur, regardless of the plant's or customer's overall profitability. We see some deferred work related to new construction and the timing of turnarounds, but the majority of demand is unaffected. Nevertheless, this is a difficult environment to aggressively expand the business. In light of this environment, we're fairly satisfied with our 9 percent growth rate this year.

For the quarter, segment revenues were up 4 percent. The lower growth rate for the quarter compared to the 9 percent full year growth rate primarily reflects the very strong prior year activity level. As a frame of reference due in part to a major turnaround project in last year's fourth quarter, the prior your quarterly revenues were up 22 percent from the year prior to that, which was, again, fourth quarter fiscal year '02. Economic conditions for the most recent fourth quarter remain similar to what we've seen in the last three quarters -- generally soft.

Shifting to profitability, my discussion of segment operating profit nears our earlier discussion of overall company operating profit growth. Our overall 5 percent growth in operating profit in the segment was less than we planned for, given the 9 percent revenue growth and inherent operating leverage. We did show progress in the fourth quarter, closing the margin gap versus the prior year, as compared to the third quarter. And for the year overall, our operating profit margins were 15 percent in the segment.

As we manage the continued improvement in profit margins and overall profit growth in the coming year, we are focusing on a couple of keys. First is to continue to maintain excellent job level profit margins across the company. As I mentioned earlier, we've made good progress in this respect in the fourth quarter. Second is to continue to maintain high technician utilization levels. This frankly has been an area that is a high leverage aspect to the profitability of our business, but it is an area where we have done fairly well in that regard all year long. Finally, we are going to monitor progress with regard to the business development initiatives underway. We believe we already have the development resources in place to achieve our fourth quarter -- or fiscal year 2004 business growth goals. Our challenge now is to monitor our progress with our various growth bets and adjust accordingly. For example, we have a substantial dedicated resources in our NDT inspection business. We need to get back in the growth mode to fully utilize this infrastructure.

In the other service lines, over the past year, we have added half a dozen or so additional business development resources, targeting specific growth opportunities and underserved geographic or service line niches. We will continue to support these initiatives that are productive and refocus or eliminate resources where we are not getting a payoff.

Now shifting to our other business segment, equipment sales and rental, which as Ted mentioned, encompasses the activities of Climax portable machine tool company. First, Climax is operating in an even more difficult market environment than our service business. The poor economic growth conditions have depressed capital equipment demand throughout the world. Unlike maintenance services, capital equipment purchases, such as the purchase of portable machine tools, are a deferrable purchase in many respects, which is frequently postponed in uncertain economic times. Nevertheless, Climax held its own this year. Sales were up 2 percent for the year as Asian equipment sales and increased rental revenues offset declines in U.S. equipment sales. Due to the restructuring undertaken last year, Climax's profits this year improved about 10 percent. As was pointed out in the earnings release and by Ted, both fiscal year 2002 and 2003 had other expense charges related to Climax of about $150,000. Ted previously described the sales tax matter associated with this year. Excluding that charge, the operating profit margin for the segment was about 7 percent.

Now looking forward to 2004. We have spoken several times today about weak market environments, but let me remind all of you that Team's strategy is driven by market share growth. We do not need a growing market in which to grow. So despite the expected continued market difficulties, we are striving for a 10 percent revenue growth this year. This level of growth will enable Team's total sales to exceed $100 million for the first time. In the service business, this growth is likely to come from several sources -- continued grass roots penetration of current and prospective local customers, new multiservice, multiplank (ph) contracts, rapid growth of our new fuel valve service repair business, rapid growth in the Caribbean and Canadian markets due to our new presence in Canada and extended presence and expanded presence in the Caribbean. With regard to inspection services, we expect to rebound in pipeline inspection revenues and continued plant inspection service growth in both Texas and Eastern Louisiana.

In the equipment sales and rental segment, we should benefit from the weak dollar as regards sales in Europe and the former Soviet Union, or Eastern Bloc countries. We expect continued rentals growth and growth from other initiatives that we have underway.

Our earnings guidance for this year is 60-68 cents per share. As we have done in the past, if at some future date we no longer feel that this is appropriate guidance, either too low or two high, we will issue a revised range. We are not comfortable providing specific quarterly guidance. The timing of specific projects and events make any level of precision at the quarterly level difficult. We do expect the seasonality of the business to remain similar to prior years.

To recap, our business strategy remains unchanged for the past several years, and that is to grow our revenues at a 10 percent plus rate by leveraging our large service network, increasing the penetration of our newer service lines to existing customers and capitalizing on growing customer preference to work with fewer service providers, and to grow our profits more rapidly by realizing the inherent operating leverage of the business. And then utilizing the cash flows flowing from those profits to continue to pay down debt and buy back stock. We look forward to continued revenue and market share growth in the coming year and beyond as we capitalize on this strong position and follow through on our growth initiatives. We expect improved profit growth rates as we again realize the benefits of operating leverage in our business growth. This concludes our introductory remarks. Rahim, if I could turn to back to you so that we can open it up for questions.

(Caller Instructions). Eric Nickerman (ph), Third Century.

Good morning, guys. Thank you for the nice, thorough report. I just had to notice that you are talking about the company trying to growth through market share growth. And I noticed you have not said anything about an acquisition strategy. I know of course you acquired Climax awhile back, so clearly, there is one. Could you just talk about how acquisitions figure into the long-term strategy?

Sure, we would be happy to, Eric. Just for the benefit of all, back in the fiscal year 1998, we purchased Climax. I think actually we closed in '99, in August of 1998 and we also purchased XRI, which is our entry into the inspection business in April of 1999. We have not made any purchases since then. Our basic philosophy and strategy is that there is a significant organic growth available to us through the market share growth in the strategy we talked about today. Having said that, we are very receptive to acquisitions in our existing business areas that could help us accelerate that growth in an accretive way.

As we have talked in some previous conference calls, just buying mom and pop companies in some of our industries is not a particularly attractive prospect for us because of the relatively low asset intensity of the business. In a sense, what you are purchasing is just a customer relationship, and it is very hard to determine the defensibility or dependability of that relationship purchased in that regard. The types of acquisition that would be more interesting to us would be larger companies where we could benefit from the scale economies or the shared distribution network, combined share distribution network that would be more efficient than either one company or just ourselves alone.

And additionally, we would be interested in acquisitions that could extend our capabilities either geographically or in certain technical or operational ways that, again, would be a more efficient way to develop that capability than the organic growth. The difficulty with acquisitions is they require two consenting adults, or companies agreeing on value. So we continue to be -- so, therefore, we do not plan for them and we do not have them kind of budgeted in our forecast. But by the same token, if we can identify opportunities that are consistent with those criteria I just described where we can agree on a mutual value, we would be very receptive to that and would look forward to that as a supplement to our organic growth strategy.

Good. Thank you very much. That's all I had.

Sure.

(indiscernible).

Guys, congratulations on a great quarter. On your 2004 guidance of 10 percent revenue growth, what is the split between service (indiscernible) section?

Of course, inspection would be included in the service's number. I thank you may mean services versus the equipment and sales and rental?

No, I am specifically interested in the NDT part.

We have not provided a revenue guidance by service line.

But on topically (ph), compared to last year, the NDT declined 3 percent.

We expect NDT services to grow handsomely this year, as we do the other service lines.

Alright, thanks.

Michael Snyder, Robert W. Baird.

Good morning, guys. I realize the outlook is to continue to gain market share, especially in the refining market. Could you give us a sense of what you expect in your forecast of turnarounds, etc., is for the second half? Is it sequentially down from here, or are the year-over-year comparisons accelerating? Just some color on the core market itself, not the market share gains.

This is a little bit of a rough swag. I think the market, our market environment through our fiscal year had been slowing down throughout fiscal year 2003. And that was just the opposite of 2002, where I think from a general market standpoint, we saw the market get stronger through the year. So I think if you ask me, again, a lot of our demand is not driven by market trends. But if you ask me, I think that we're going to see accelerating or strengthening market as we go through the year. (MULTIPLE SPEAKERS) Ended a little bit stronger than we're starting, although there is demand all of the time.

When you say through the year, you mean through the fiscal year, correct?

As I mentioned, there are a lot of positives -- let's take some of our segments. Pipeline. the fundamentals of the pipeline business are terrific and the need for new pipelines and for new construction are I think pretty self-evident and clear. And I see evidence of the industry working through some of the capital problems that they have, and that will, we hope, lead to kind of freeing up or bringing a lot of these projects back on the books that have been deferred or delayed. I think the one segment I think we're seeing some strength in the primary metals and pulp and paper, some strengthening. I continue to be a little worried about our chemical industry. At least, that is tied to natural gas. I do not see anything that says to me that natural gas prices are going to drop precipitously. And, therefore, they're going to continue to have I think margin pressures from suppliers from offshore.

Do you get the sense that your major customers are underspending their budgets and to some extent, there is the opportunity to play catch-up in the second half of the calendar year?

I don't know what their budgets are. I do get the sense that they certainly are feeling very frugal these days.

Okay. Just a final question. In terms you do continue to gain market share, and congratulations on that, what has been, or have there been any responses from your major competitors as a result of anything you have perceived?

Not that we can see. Remember how we're gaining share. We're gaining share by, first and foremost, being an outstanding service company that provides safe, responsive and efficient service to our customers. And that is hard to do and you have to do it every day and earn it all of the time. And that, plus the fact that we have this very large network that is very -- we're supportive of what our growing customer preferences are to deal with fewer service providers across multiple plants. That is why we're gaining share. So the response of a competitor, of any competitor, needs to be to the extent that we are providing more outstanding service than they are, is they've got to up their game and go earn it, job by job. This is not by a market philosophy or strategy that we're going to lower prices or we're going to go buy business from this company or a customer or that. So I feel pretty confident that we're going to keep focusing on our business. And I don't think that we are particularly, I guess, exposed to a -- I'm going to call it a superficial or from the top type response from any particular competitor.

Okay, thank you guys.

James Gentile (ph), Sidoti & Co.

Good morning. I guess I assume that the gross margin contraction year-over-year was primarily caused by the lack of that military contract in the equipment sales and rental business?

That was a significant contributor, no question about that.

You talked about the margin differential sequentially, almost 200 basis points. Was that -- how are you guys handling that, in terms of your job margin, management and materials, usage, etc.?

Actually, we've been pretty pleased with -- particularly in the fourth quarter, we have been pleased with our job margin profitability. Our SG&A growth for the year was a little higher than we desired for the business that we had, and that is where we think the improvement is going to kind of as we go forward. A little bit in indirects and a lot in SG&A as we get our margins back in line and really ahead of prior years. Because of operating leverage, we should be continuing to see improving operating margins as we go forward.

So what particularly within SG&A are you finding more of a problem?

It's not that we find a problem, we put a lot of resources in place last year to support growth. And, frankly, we got growth, but we did not get as much growth as we expected and we toned down some of those resources already. But we're, as I mentioned in our keys going forward, we believe we have all of the resources in place to support next year's growth. So we're not looking to add any net -- I'm going to say SG&A resources to our company, at least at the kind of growth forecast that we're offering. And, therefore, our business is going to grow into our current cost structure. Or as I mentioned, we're not getting leverage on some of those resources (indiscernible), we will change them.

Fair enough. You received a visitor last week by the name of Claudette. Is that affecting anything going on?

Fortunately, it was not a big deal. It shut down operations in our Corpus Christi office for a day. We had relatively little rain. I'm aware of no damage to any customers of note.

Damage is good for you, no?

Not really.

You have not broken out your particular growth projections for the NDT inspection business, but it seems like you're kind of excited about it. Is that just because you're coming off of the lower base this year, or are there other drivers that are?

Two things. One is, we're obviously coming off of a low base and we need to get back to where we were. But also, significantly like some of the other newer services, we have a relatively low market share. So the field we're playing in is much less less mature than, say, from leak repair, hot tapping, fugitive monitoring. Just to follow-up on that. Some of the business development resources that we've talked about are specific specifically focused on inspection activities.

Your sales and marketing or business development initiatives, are they at all pretending to the Climax side of the business?

No, in terms of additional resources. It is just Climax is a relatively small part of our business. We're going to have some exciting, I think some exciting initiatives and tactics that we think will lead to growth in that business as well, but I think the focus should appropriately be on industrial services.

Good quarter, guys, and I hope all is well.

(Caller Instructions). James Gentile.

I have one more question. There were about four turnarounds that you expected -- one in May, two in May, rather; one in June and another coming up potentially in September. I was wondering how the ones in Beaumont and in Houston, I think, that were scheduled in May, how they are going? And then you had the Aruba one in June that started up in June? How has that progressed? And then what we are expecting going forward into September potentially?

Let's talk about history. You mentioned two. I'm kind of vague on one of those two kind of right of the market here. But the turnarounds in the fourth quarter; they were not as significant or as large as the prior year, as I mentioned, but we did have some turnaround activity that -- you mentioned the Beaumont project, which is complete, and that plant is up and running. Due to some things unrelated to Team and some plant activities, the Aruba turnaround was actually delayed I think 30 days, but it is now running and underway.

So essentially, what may have happened then is we would have gotten a stronger comparison this quarter, had Aruba been on-time?

I think Aruba was still scheduled for the fourth quarter, it was just June past July (ph). And we will push it back 30 days. Now, whether it pushes it beyond the end of the quarter, I'm not sure.

Fair enough. I apologize -- IO forgot that your quarter ended in May.

And we do have some very attractive projects on the books, both in the fall and in the spring.

Are these at all relating to your underlying or your overlying strategy as a multiservice, multilocation initiative?

I think all of them do. The turnaround activity, it is the fact that we the work for the plants themselves, obviously, it links directly with our onstream services. But what we're also getting because of our familiarity of these plants, we're also working for many of the general maintenance contractors in these turnaround activities. And a lot of our services support some of their activities as well. So we're getting an increasing number of customers we're serving with these newer services.

Great, sorry for the barrage of questions.

(Caller Instructions). There are no questions in the queue. I would like to turn the floor over to Mr. Hawk for any closing remarks.

Thank you, Rahim. Just again, I want to thank all of you for your interest in Team and joining us this morning and we look forward to our first-quarter conference call sometime in the middle of September. So probably, a couple of months from now, and I hope to report on our continuing progress of our business. So, again, thank you very much and have a good day.

(CONFERENCE CALL CONCLUDED)