Team Inc (TISI) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Team first-quarter earnings conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions following today's presentation. At this time, it is my pleasure to turn the floor over to your host, Phil Hawk. Sir, you may begin.

Thank you, Maria. Good morning and welcome to the Team web conference call to discuss recent company performance. My name is Phil Hawk, and 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 first quarter of fiscal year 2004, ending on August 31, 2003. 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 and 10-K filings to the SEC, and our annual report. As in the past, Ted will begin with a review of the financial results. I will follow Ted then with a few remarks and observations about our performance and prospects. Following these remarks from Ted and me, we will take questions from our listeners. With that, Ted, let me turn it over to you.

Thanks, Phil. First, 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 carefully the last paragraph of our press release for a complete description of those factors.

Now to the financial results. Revenues for the quarter were $24.9 million compared to $22 million in the first quarter of last year. That is an increase of 13 percent. Earnings before interest and taxes were $2.4 million in the 2003 quarter, versus $2 million in last year's first quarter. Net income for the quarter was $1.4 million or 18 percent higher than last year. Earnings per share was 17 cents on a diluted basis versus 14 cents in last year's quarter.

Now looking 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 in process systems. These services include leak repair, hot-tapping, fugitive emissions monitoring, NDT inspection, field machining, technical bolting, and most recently field valve repair. Revenues from Industrial Services in the quarter were $22.3 million, which was 17 percent higher than the $19 million reported in last year's first quarter. Operating profits for that segment were $3.7 million, a 30 percent improvement over last year's $2.8 million. Of course, Phil will get into the particulars on that more in just a moment.

Now with respect to the Equipment Sales and Rental segment, our Climax business struggled during the quarter with lower sales and a weaker sales mix. Revenues for the quarter were $2.6 million, down 13 percent from last year's first quarter. This segment lost 96,000 in the quarter, which is a decline of $350,000 from last year's first quarter.

Now let's look at some highlights from the financial and balance sheet numbers. At August 31, 2003, total interest-bearing debt which includes current maturities was $12.7 million as compared to $11.1 million at 5/31 of '03. That is an increase (technical difficulty) of $1.6 million in debt in the quarter. Now this increase is entirely due to timing of two things. First, accounts receivable grew by $2 million in the quarter, largely as a result of an individually significant major turnaround project that was completed in August, and secondly, we expended $1.3 million in the quarter for capital expenditures associated primarily with the valve repair business that we have just entered and for an upgrade of our emissions monitoring hardware. We expect capital expenditures for all of fiscal 2004 to be on the high end of our usual spending pattern of $2 to $2.5 million a year.

Now some more information about cash flows. For the quarter, earnings before interest and taxes was 2.4 million and EBITDA was approximately 2.9 million. On a trailing 12-month basis, EBITDA was $10.6 million and earnings per share was 56 cents per share. In the quarter, we also continued our stock buyback program, acquiring 50,000 shares for a total consideration of $395,000. So on a cumulative basis, we have now repurchased 1,245,000 shares at an average price of $4.62 per share. So with that, Phil, I will turn it back to you.

Thanks, Ted. What I would like to do is provide just a couple of overall comments, and then a few comments on each of our individual business segments. Overall, we are off to a good start for our physical year. We are on chart for this year, physical year '04, to be another record year for our company. In July, we indicated that we expected total Team revenue to meet or exceed $100 million for the current fiscal year, and that we expected net earnings per share to be between 60 cents and 68 cents per share. This guidance continues to be our expectation for the full year.

Performance in the quarter reflected nice growth rates on both the top-line and bottom-line; 13 percent revenue growth and 20 percent EBIT growth. But the quarter was not without challenges. While overall growth was very good, this net performance reflected very strong performance in several areas, offsetting revenue declines in a couple of areas. I will discuss both groups in a few moments.

Beyond maintaining ongoing revenue growth, our other major focus is on cost management. Balancing our cost growth with our revenue growth so that we can continue to capitalize on the inherent operating leverage of the business and continue to grow profits at a faster rate than revenues. As we have mentioned in past meetings, our target is to achieve incremental operating profit margins of 20 percent or more on our incremental revenue growth. In the most recent quarter, we did achieve this performance level in our Industrial Services Business Segment, realizing the incremental EBIT margin of over 25 percent.

However, with the inclusion of the Equipment Sales and Rental segment, Team's composite incremental EBIT margin is just over 12 percent, below our overall target. As we will discuss in a moment, we expect significant improvement in the second-half performance of our Climax business. Nevertheless, this area, cost management and balancing cost growth with our revenue growth, will be an area of continuing focus throughout the year.

Now, let me address some performance aspects of each of our business segments, beginning with our Industrial Services segment. There we feel overall performance has been excellent for the segment. As Ted indicated, revenue grew 17 percent to a total of 22.3 million. This growth came from all geographic regions and nearly all service lines. The most significant contributors to this quarterly growth with greater than 10 percent year-over-year for the quarterly basis growth rates include onstream leak repair, hot-tapping, field machining, and our newest service line, field vale repair services. The attractive growth in field machining and valve repair services reflected significant turnaround activity for Team during the quarter.

From a quarterly performance standpoint, the one disappointing service line was our non-destructive testing or NDT inspection services. For this service line, total revenue declined about 15 percent from prior year, due entirely to a reduced number of major projects, particularly related to new pipeline construction. Importantly, operating profit performance tracked the excellent revenue performance. For the quarter, operating profit for the segment was $3.7 million, up 30 percent from the prior year quarter. The operating profit margin for the segment was 16.4 percent, up from 14.8 prior year, an increase of 1.5 points. The driver of this improvement in operating margins is the realization of the operating leverage that I discussed earlier.

Regarding our outlook for the segment, we continue to have a very positive view about our revenue growth prospects for the remainder of the year. We have aggressive business development activities and initiatives underway in nearly every area of our business. And we are seeing positive results from these initiatives. We continue to have discussions with many of the larger customers regarding major multiplant, multiservice agreements. And it is very possible that one or more of these discussions could mature into a significant new agreement this year. But as we have said many times before, it is very difficult to know whether and when this might happen.

Fortunately, our growth does not depend solely or even primarily on a single event or contract. Our grass-roots development efforts will continue to drive our growth as we expand our penetration of the newer service lines with existing customers, as well as we expand our overall customer base.

Now, a few comments about the Equipment Sales and Rental Business or Climax, our Climax Portable Machine Tool Company. Obviously, we were not pleased with the net performance of Climax in the quarter, where we experienced a sales decline of approximately 12 percent to 2.6 million which resulted in a small operating loss of about $95,000. Sales during the quarter were weaker than the prior year in both the U.S. and our international markets.

However, while sales or shipments were weak during the quarter, orders booked were quite strong. For the quarter, total orders received equaled almost $4 million, 3.9 million in total. While we do see some continued sales weakness for the next couple of months, we expect a much stronger second half of the year, certainly bearing in mind these major orders. We remain confident in this business. Our strategy is sound and our primary focus now is on aggressively managing the day-to-day execution of the business.

To wrap up, let me summarize with just a couple of final points. One, we continue to follow through on the business strategy Team launched several years ago. We continue to grow our business by capitalizing on Team's outstanding service capabilities, Team's very broad service line offering and geographic presence, combined with continuing customer trends to consolidate service requirements with fewer service companies. Second, we are pleased with the business growth we achieved during the first quarter and look forward to continued growth throughout this fiscal year and beyond.

With those introductory comments, I would now like to turn it back to Maria and open it up for questions.

The floor is now open for questions. (OPERATOR INSTRUCTIONS) Greg Evans (ph) of Evergreen Capital.

A couple of quick questions. One is, can you -- we're a little new to your company. Is there any seasonality in your business?

There is a little bit. If you look at our historical financial results, the weakest quarter is our third fiscal quarter, which would be December, January, February. Essentially, the cause of that is the Christmas holiday season where most of our customers go on kind of a reduced operating mode and minimize some of their service activities. If you look at the other four quarters, historically, the second quarter and the fourth quarter have probably been the two strongest, with the first quarter being third in that category.

Okay.

That is a little bit of the historical levels. What is happening to us, though, I think with the increasing turnaround activity that is kind of becoming an increasing part of our business, I think that tends to strengthen the first quarter a little bit, but again historically that is the way we have been.

Terrific. In terms of the company's balance sheet, I know there's about $12.7 million of debt. How much cash does the company have?

We sweep cash every day, so that is a net debt (indiscernible).

Okay.

I think that makes our debt to EBITDA about 1.1 at that level of debt. As Ted mentioned, it was a little bit of an anomaly this year or this quarter to have our debt increase. That I don't think has happened recently, and we would expect that to come back down.

If you look at the company's cash flow generating abilities, what can you envision kind of for this year and next year in terms of the company's to throw off cash? Obviously, you've given us some guidance on an EPS basis, on a top-line basis. Where do you think that flows through in terms of cash flow?

You mean cash flow with which to pay down debt?

Either free cash flow or cash flow from operations or EBITDA, whatever you're comfortable speaking to.

I think the easiest way to do it, and I don't have it handy, would be be to take your net income -- well, I think we have averaged 3 to 4 million a year. It's basically net income plus D&A less $2.5 million in CAPEX and a little bit of working capital growth related to our continued revenue growth.

Historically, our CAPEX and D&A have been pretty much the same. CAPEX will be a little higher than it has been historically, perhaps on the high end of the range I mentioned. So that should give you some guidance.

Any reason to believe there should be some meaningful changes in working capital over the next year?

No. Essentially, our working capital, the vast majority of it is receivables, and if you add receivables and inventory together, it runs about 90 days.

Great. My final question is, simply, what are you as the management team thinking in terms of the company's position as a public company? It is a tiny company, not really covered by any analysts. It doesn't seem to be a whole lot of interest in terms of people who are on this call, yet it is obviously an interesting business that you have here which is growing, and I just wonder what you were thinking in terms of why the company remains public?

Well, of course, we have exciting business plans for the company, and I think we have doubled the business, the size of the business in the last four to five years. And with all of that progress we have made, as we have mentioned in prior calls, our market share in our strategic segment, the industrial service business, is still only about 10 percent share in a highly fragmented market. So we think we have some tremendous revenue growth and even more significant profit growth potential ahead of us as a business.

You are correct in one thing. One notion of our business is because we generate cash, we don't need to be continually accessing public markets for capital with which to fund our growth. But our view is that we will -- we have increased the liquidity significantly of our company over the last several years. We will continue to do so as we grow and continue to increase our -- improve our performance. If at some point in the future, the public markets no longer give fair valuation to the value of the company, then I suspect a go private option is an alternative. But that is not something that we are contemplating in the short run. We think if we keep getting bigger and better that we will increase the liquidity which should increase the realization of value for all shareholders.

My final question is, I know you guys have been buying back some stock. I guess at what point do you think that the return on capital is -- at what stock price is the return on capital better deployed doing other things, whether it is CAPEX improvements or any other projects you may have, as opposed to buying back stock?

Well, we have not precluded any business initiative as a result of our stock buyback programs. What we have been doing is buying back stock in lieu of reducing debt still further, I guess would be the other near-term alternative for those funds. We got involved in our aggressive stock buyback program when our -- about two years ago when our stock was I think a little under $3 a share of roughly $3 a share, and we were two years into this growth program that we're continuing as we discussed today. At those levels, it was so obviously -- in our view, there was an obvious imbalance of sellers and buyers, and we were trying to eliminate that imbalance. And really, frankly, add to your point about going private or reducing float, have a point of view that if we are not realizing value in the public markets, then we will just continue to aggressively buy stock.

Our stock has done, obviously, much better than that over the last several years, now up in $8 range. And our philosophy is this, is we -- but $8 on the way to -- we have a vision and a strategy for this business to be $1 a share in earnings, not necessarily next fiscal year but probably the year following that. We think that is a $15 to $20 stock. Now, the market will tell us what it is at that time. So any stock that we buy at 3, at 4, at 8, at 10, at 12, is all outstanding returns in our view to our shareholders.

But the conundrum we are in a little bit is we don't want to be aggressively competing with shareholders for that stock. So our posture has been to be a regular buyer of stock, and we buy just about every quarter, but we don't aggressively try to bid stock away from other potential buyers. So we kind of, I guess, participate in the market without trying to dominate the market or preclude anyone from getting stock who has an interest in establishing an ownership position.

Okay. Thank you.

If that makes any sense.

Yes. Thank you.

Giles Van Prague (ph) of Atlantic Investment Management.

Good morning. Phil, nice to hear the comments that you're seeing strength in the Industrial Services piece of the business with what I believe you said strength sort of across the board in terms of your product offerings and the end markets. Could you be a little bit more specific about where you are seeing signs of strength in the end markets, which customers, by end market that is including, in which it might exclude at this point?

I would say -- you're correct. We saw growth everywhere with the exception, again, of the -- the only declining service line was the inspection business, which I think we can attribute directly to major new pipeline projects, just the derth of those projects. What I would say about the other segments we serve for the benefit of all listeners, we basically serve plants that have, I guess, large quantities and populations of piping systems. So these would be the refinery, petrochem, power industries, and then heavy process industries; aluminum, steel, automotive and the like.

Quite candidly, in terms of customer health, in terms of margins that we're seeing in customer markets, it is still a pretty bleak picture out there. I think in the last maybe 60 days, refining margins have been pretty strong as a rebound from kind of a very poor year. But chemical margins are still very poor; power industry is still struggling with a lot of issues related to deregulation and kind of the sort-out of all of that activity. We still don't seem much improvement in the pulp and paper industry.

Aluminum -- primary metals are probably a touch up, but we think what is happening is this continuation of these trends toward consolidation, and that what we are benefiting from is just higher market share of the same -- basically, a flat market as we aggressively pursue the development of our services and our presence with a very attractive starting point, because of our very large base, geographic base and a broad service line.

Do you, in terms of consolidating your market share here, do you continue to take business primarily from the smaller players, or are you getting a share from the other two big players in the industry?

It's hard to tell. When we look at some of the big multiplant, multiservice contracts, I think we could certainly presume that some of that came from other larger players, but that has not been the case in this quarter. This was all kind of organic rates, growth rates, and we obviously also benefited from some big turnaround activity, but I think we think it is from a mix of competitors, large and small.

The turnaround activity, was that specific to a certain end market, or do you see that sort of across the board?

Well, I think the biggest turnaround projects are related to refining.

Right, and you are actually seeing, because I know that a lot of those have been pushed out and pushed out. You're actually seeing some of those take place now?

Yes, we had a very significant turnaround for us in the last quarter, and we have at least one or two this quarter. One is underway right now, and we anticipate some in the third quarter as well.

With the margins going up a little bit in refining, does that tend to push those turnarounds out further, in the sense that the refineries have been hurting for so long, and now that they're actually making a little bit of money, they might defer some of the maintenance?

I don't know how to -- it is hard to -- sitting on the outside, it is hard to judge all that. Certainly, I have heard that argument; we wait when the margins are good. I've heard the argument, you have to have good margins because you need cash flow from your network to fund turnarounds. So I have had heard both arguments kind of both ways, and I guess we just wait till they go and we go with them.

Lastly, in light of the weakness in the end markets of your customers out there, do you think that there has been a deferral in the types of maintenance that you provide, maybe building up some kind of bottleneck out there? Or is it that when you have one of these issues, they need to call you or a competitor in because they just can't operate with a significant link (ph)?

I think as we have said, on the margin there can be some deferral of activities when there is very severe cash crunch. But for the most part -- and that is the power of our business -- is that if you are running, you need our onstream services. So I don't think there is a big kind of pent-up demand out there. We would sure love to see our customers have a healthier profit environment for them, and I think that would on margin be helpful to us. All of our forecasts for the year, by the way, are not predicated on a rebound or any sort of loosening of the purse strings if you will by our major customer groups. I think our planning premise is this is just the way it is, and we're going to deal with the environment we are in.

Great. Thank you, Phil.

(OPERATOR INSTRUCTIONS) George Krutz (ph) of Krutz Investments.

You know, you mentioned the third quarter being the weakest quarter, yet we should see some substantial Climax business in that quarter. Could that change the mix this year and the third quarter not be such a week quarter because of that?

Oh, I hope -- we are optimistic it will be improved, that we will continue to improve over our prior year, but it will be -- I can't see a scenario where it's not the weakest earnings quarter of the year, just because of you lose two weeks -- you lose two weeks of work, really.

Did anybody touch on acquisitions? I missed a little bit of the call.

No, we haven't discussed that. Our philosophy remains unchanged. We are very interested in accretive acquisitions. That was kind of built in the current business lines we are in, services we're focusing on that would be highly accretive to earnings and that would leverage our system. We do not have anything to announce in terms of progress on that front, but we remain very receptive to that.

What does the landscape look like? Are things loosening up? Are there some opportunities or is it a tight market where you cannot find people at the right price?

George, I think it comes down to -- they're all hard to pull off, and either it is or it isn't till we have one, and we don't have one. So I don't know how to put odds on it.

Well, you mentioned your game plan and your model, and going forward you thought it was exciting with the business that you have, and that you thought a couple of years out you could earn a dollar. That was your goal, let's put it that way.

That is basically a trajectory view of what we have been doing.

We're talking about '06, right, when we talk about two years out?

Right, correct.

When you look at that trajectory, is that organic; that's without any major acquisitions?

That is organic.

Thank you. Great quarter, you all are always doing a good job.

A follow-up from Greg Evans of Evergreen Capital.

Hi, thanks. I just want to follow up, given that the company throws off a lot of cash and I guess you have somewhat mixed reservations about doing the share repurchase because, as you said, it kind of competes with your shareholders; I was wondering if you had given any thought to initiating a dividend?

No, but historically, we thought it was an easy call with the tax law, where it is getting more interesting now, for sure. I think as we -- our premise has been that the real leverage of our business is the operating leverage, not the financial leverage. So we have been comfortable paying down debt, even though we would argue that the business could stand more financial leverage than we have on it. But as to the question of acquisitions earlier and some possible strategic opportunities in the future, rather then kind of initiate a dividend or basically maintain our financial leverage, we have been comfortable letting that financial leverage kind of be bought down over time.

I think this is something we will continue to look at, and we are kind of going to be watching what other companies do with regard to that and what valuations get attributed to dividends. But we certainly have the wherewithal dividend, if that is something that kind of makes sense.

Thanks.

Gentlemen, I am showing no further questions at this time.

All right. Then I will just -- thank you, Maria. Let me just, to wrap up very quickly, I really appreciate -- Ted and I both appreciate your interest in Team. As we said earlier in the call, we're off to a good start for the year and look forward to visiting with you again in mid-December at our second-quarter conference call. So thanks again, and have a good day.

Thank you.