Team Inc (TISI) 2004 Q2 法說會逐字稿

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

Thank you, Stephanie. Good morning and welcome to the Team, Inc. 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 second quarter of fiscal year 2004, ending on November 30, 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 with the SEC and our annual report. Ted will begin with a review of the financial results and I will follow with - follow Ted with a few remarks and observations about our performance and prospects. Following these remarks from Ted and me, we'll take questions from our listeners. Ted, let me turn it over to you.

Thanks, Phil. As usual, I want to begin by reminding 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 quarter were $25.8 million compared to $23.2 million in the second quarter last year. That's an increase of about 12%. Earnings before interest and taxes were $2.6 million in the 2003 quarter versus $2.4 million in last year's second quarter. Net income for the quarter was $1.6 million or 14% higher than last year. Earnings per share on a fully diluted basis was 19 cents versus 16 cents in last year's quarter.

Looking at the results by segment - first, industrial services. And again, as a reminder, industrial services includes an array of specialized services related to the construction and maintenance of pressurized piping and process systems. These services include leak repair, hot tapping, fugitive emissions monitoring, NDT inspection, field machining and technical bolting and, most recently, field valve repair. In the quarter, revenues were $23.3 million for the industrial services segment, which was 12% higher than the $20.7 million reported in last year's second quarter. Operating profits for the segment were $4 million and that's a 16% improvement over last year's 3.5 million. And of course, Phil will go into a much more detailed discussion of the character of those results in just a moment.

Now, with respect to equipment sales and rental - that's our Climax business. The Climax business continued to struggle during the quarter with lower margins, due to a weaker sales mix and higher SG&A cost, due to ongoing administrative expenses associated with the sales tax matter that I'll discuss further in a moment. Revenues for the quarter for Climax were $2.5 million. That's up 3% from last year's second quarter.

This business segment reported a loss of $199,000 in the quarter versus a profit of $138,000 in last year's second quarter. The significant portion of that loss is due to an additional provision of $175,000 with a sales tax matter that we had discussed previously in our fourth quarter conference call and had disclosed in the fiscal 2003 10-K in our first quarter of '04, 10-Q. But let me review again this sales tax issue.

As you know, Climax is domiciled in the state of Oregon, which is a state that imposes no tax on sales originating there. We've determined, however, that Climax does have an obligation to collect and remit sales taxes in certain other jurisdictions, which it had not previously done. We're in the process of entering into agreements with several states and had recorded a charge of $150,000 in the fourth quarter of fiscal 2003, which represented our best estimate at that time of the probable loss that Climax would incur with respect to the matter. We cautioned then that the ultimate outcome is subject to a great deal of variables and could not be determined with a certainty.

With another six months of experience behind us, it has become clear that our success in rebuilding customers or previously unbilled sales taxes will not be as high as we had previously anticipated. Consequently, we have increased the loss provision by $175,000 in this second quarter. We continue to expect that this issue will be fully resolved over the course of the next year and that 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 highlight some financial and balance sheet numbers. While we are extremely pleased with the operating results for the first half of fiscal 2004, those earnings have not directly translated into the cash flow, as is our usual history. We are confident that this is a timing issue only and that by the end of the fiscal year, our usual cash flows will be evident. At November 30, total interest bearing debt was $13 million, and that includes current maturities, as compared to 11.1 million at the end of our last fiscal year on May 31. That's an increase of $1.9 million in debt.

Since the end of the first quarter, debt is actually increased by another $300,000. Now, this increase was due to timing of three things. First -accounts receivable, second - capital expenditures and third - inventory. Let me discuss, first, accounts receivable. Accounts receivable grew by $1.4 million in the quarter and $3.8 billion for the first six months of the year as compared to May 31, primarily as a result of individually significant major turnaround projects that we completed in August and October of this year.

These projects are with major customers and involve a significant number of suppliers besides Team. The process of approving and paying all the supplier and contractor invoices by those customers is a very involved process and simply takes longer than our customary service work. And that's why accounts receivable has increased in the first half of the year.

Now, let's talk about capital expenditures. In the quarter, we expended approximately $900,000 for cap ex. On a year-to-date basis, we've expended about $2.1 million. Our expenditures have been associated primarily with the valve repair business and for an upgrade of our emissions monitoring hardware as well as additional hardware to support a significant new monitoring contract. With - we would expect in the second half of the year to - that our cap ex spending levels would revert to our more normal patterns.

Now, with respect to inventories - inventory grew by $400,000 since May 31 and that's - that is due to significant Climax orders that will ship in December and January. And Phil will address those Climax second half orders more fully in his remarks. So with all that said, by the end of the fiscal year, we would expect that all of these timing matters to resolve themselves so that you would see our cash flows would be evident in the business.

Now, with respect - just a little more information about cash flow related matters. For the quarter, EBIT was 2.6 million and EBITDA was approximately 3.3 million. For the trailing 12 months, EBITDA is $11 million and trailing earnings per share is 58 cents per share. In the quarter, we did not repurchase any shares through our stock buyback program because we didn't want to compete with investors during the recent market price increases and because of the working capital and equipment investments that we made during the quarter. We will continue to buy shares in the future as circumstances dictate. With that, Phil, I'll turn it back to you.

Thanks, Ted. Let me begin with just a couple of overall comments and then move into the individual business segments. Overall, we remain on track. Fiscal year 2004 should be another record year for Team. We also remain comfortable with our previously issued full year earnings guidance of 60-68 cents per share. I am pleased with several aspects of our overall performance. First, for both the quarter and year to date, Team achieved double-digit growth in both revenues and earnings, despite weak market conditions and other difficulties in the equipment sales and rental segment. I will discuss the performance and outlook for each of these segments in just a moment.

Second, we are pleased to see a corresponding increase in the value of Team's common stock. In the last quarter, our stock has appreciated approximately 20%. In the last year, our stock has appreciated more than 25%. Yet despite this stock price appreciation, Team's current trailing price earnings multiple is about 17, still a substantial discount to major market indices. We feel there is still plenty of improvement potential ahead.

Third, our outlook is bright. We are excited about our prospects for the rest of the year and beyond. I'll cover some of these opportunities in just a moment. But we have some improvement opportunities as well. We are focusing on bringing our accounts receivables back in line with historical levels. This improvement, plus a more normal capital spending profile in the second half should significantly improve our cash flow. And, as I will discuss in a moment, we also can improve our performance within a few of our business segments and sub-segments. However, overall, we are pleased with our performance and progress.

Now let me shift to each of our business segments, beginning with the industrial services business segment. The industrial services business led the way for Team with another strong quarter. Kind of recapping some of Ted's earlier comments, revenue growth was 12% for the quarter and 15% year to date for this fiscal year. Operating profit growth was 16% for the quarter and 22% year to date. Operating profit margins for both the quarter and year to date were 17%. The operating profit margin for incremental sales growth in both the quarter and year to date was in the 20-25% range, consistent with our long-term goal. We continue to realize the operating level available through business growth.

We are very pleased with these overall results, particularly in light of continued weakness among several major business segments. For example, many sub-segments of the petrol chemical industry continue to suffer from weak demand and very poor margins. And the domestic pipeline industry continues to be very cautious with - regarding new pipeline projects, although the longer-term outlook in this regard is excellent.

Our business growth, which we believe is the result of market share growth, continues to be broadly based. The most significant drivers of growth year to date have been new field valve repair - have been the new field valve repair service line and the presence of several major turnaround projects during the first half of this year. Year to date, all service lines except one achieved positive growth despite the weak market conditions. The one exception, our NDT inspection service line, continues to wrestle with reduced demand for pipeline and other major projects.

Looking forward, we remain excited and optimistic about our growth prospects. We have a range of interesting initiatives underway. We have continued focus on multi-service, multi-plan agreements. We expect continued penetration of the field valve repair service and other newer service lines within our existing customers. We expect continued growth related to our expanded geographic presence in Aruba, Trinidad, Western Canada and, recently, the Pacific Northwest. And finally, we expect continued grassroots business development at all of our 40 plus field service locations.

We also understand that continued business growth depends upon our ability to provide outstanding service to all our customers at every service opportunity. We continue to pursue opportunities to improve our importance in this area as well. Throughout this year, we have been pursuing a comprehensive program to strengthen our safety awareness and focus across our company. Frankly, our safety statistics have always been very good and we always have provided a range of excellent technical safety training programs to our employees.

Our goal with our new initiatives is to more fully involve every employee in the development of our company's safety culture and to enhance understanding and participation across our company in the processes that can help us eliminate unsafe working conditions and unsafe behaviors. All employees have participated in discussions of Team's values and the development of local unit action plans to support our direction. By year-end, all technicians and other personnel using company vehicles will have completed a space management driving training program used extensively by Fed Ex, UPS and other large fleet operators.

Beginning in the new year, we will begin employee-led, behavior-based observations and training. Our goal is no longer just good safety statistics. We want to improve to the point where we have no statistics at all. In other words, we want to eliminate all incidents. While our focus of these initiates is safety, we are already seeing improvements in all aspects of our performance as we improve our overall communication and expand leadership roles across our company. In a different vein, Team's business was recently recertified for the ISO 9000 quality requirements.

The point I want to make with these examples is this. We are not resting on our laurels. We are trying to improve every aspect of our business and we understand that improvement is not the result of a project, but rather occurs because of a continuing process and focus. Simply put, we expect Team to be the best service company in our industry.

Now let me shift to the equipment sales and rental business. As Ted indicated, Climax which again is the company representing this business segment, has struggled through the first half of the year. As Ted indicated, Climax reported nearly a $200,000 operating loss for the quarter and a nearly $300,000 operating loss year to date. There are two primary drivers of this poor performance. First, overall business shipments for the first half of this year have been relatively weak, down about 5% year to date. And these shipments have had a poor product mix, with a greater proportion of resale versus own manufactured items in the shipment mix.

Second, as Ted indicated, during the first half of this year, Climax has increased its reserve related to the sales tax matter by $175,000 as well as incurring more than $100,000 in related consulting expenses. As Ted explained earlier, this is a one-off issue, but it is, nevertheless, a real expense in this time period.

Despite this gloomy start to the year, there is reason for optimism. While shipments were weak in the first half, orders were not. Year-to-date orders were $6.7 million compared to 5.1 million in shipments. As a result, we expect a very strong shipments and earnings in the third quarter where we will benefit from the very positive operating leverage of this significant business volume.

Our focus and priorities for this business going forward are to maintain our aggressive marketing and sales efforts in all geographic markets, targeting both major projects and smaller standard product sales. And to continue focus on cost productivity and margin management. With regard to the latter, we have taken several steps to further streamline our manufacturing processes and reduce outsourcing. Despite our difficulties year to date, this business will be a positive contributor to Team's performance this year.

And now, just to wrap up, let me just make a couple final comments. Team continues to pursue the same business strategy it adopted five years ago. The foundation for this strategy is our outstanding service capability and commitment to service excellence. The growth opportunities result from our ability to leverage two key attributes. First, our very large commercial and logistical footprint developed over our more than 30 years in the business combined with our customers' increasing preference to consolidate their service requirements with fewer, larger, more professional service companies. We are pleased with our overall performance year to date and look forward to our continued progress.

Now, with that, Stephanie, let me turn it back to you for questions.

Thank you. The floor is now open for questions. If you do have a question, please press the numbers one followed by four on your touch-tone telephone at this time. If at any point, your question has been answered, you may remove yourself from the queue by pressing the pound key. Questions will be taken in the order that they are received. And we do ask that while posing your question, you please pick up your handset to ensure proper sound quality. Once again, if you do have a question at this time, please press the numbers one followed by four on your touch-tone telephone. Please hold the line while we poll for questions.

Once again, if you do have a question at this time, please press the numbers one followed by four on your touch-tone telephone. The first question is coming from of . Please pose your question.

Good gentlemen.

Good morning, .

Good morning, .

Two things numerical. In regards to the earning guidance that you have put forth, I presume with the way the rest of this reported is worded that that is including any further current and any further charges regarding to the sales tax matter?

Yes.

OK. Very good. And then, in regards to Climax, I was doing my best to write notes and keep up with everything you said there. However, I was wondering if you would review the - what I have termed here as the backlog scenario. You gave some information for billings versus shipments for the quarter. If you could just go over that once again.

Sure. The - essentially our orders for - and the majority of, kind of, I'm going to say standard orders or typical product orders would be - the backlog would be three to four weeks would be kind of the normal situation. But with major projects, the lag time to kind of design, build and sale can be up to three to six months. And that is what happened this year. Again, the statistics are this - is our sales for the first half of this year were 5.1 million. Our orders were 6.7 million.

So, if you will, that differential basically relates to significant projects that were booked, but not delivered. And, in fact, they're extensively all manufactured now, as Ted mentioned, with regard to kind of inventory builds. And these major projects are now planned to ship in December and January. So hence, with just our normal regular business combined with these significant big orders that are going to be overlaying that, we project a, you know, very significant sales volumes in the third quarter. And with that will be - and the operating leverage that goes with that volume will be a significant profitability that will offset - more than offset the losses we've occurred year to date.

OK. In regards to these large orders, can you give me an - is this one customer with a couple of orders or are these ...

Three different customers. hefferton: So it's just coincidental that you had three customers ordering product that were all ...

Yes. It's coincidental. One - I think two of the products are related to the power industry and two of the orders - and then probably - but the largest order is related to a military - it's actually to a marine shipyard related to military activity.

OK. They came on in the first quarter - first fiscal quarter. Is that correct - those orders?

If not all of them, most of them did - toward the end of the first quarter. Right.

What has the ordering the - any billings situation been like since then? I said first quarter because it seemed to me my memory was that you already had indications the last time that we - that you reported of these larger orders. You were pretty sure they weren't coming through in this quarter, which did turn out to be the case. But is - I guess what I'm trying to get to - is there any indication that these orders are an indication that, you know, that business is on the upswing and you have other people talking to you about orders this size?

We have - we have a lot of anecdotal evidence, which we - you know, which is encouraging for the second half of the year. But if you look at our actual order and shipment levels in the second quarter, they're not appreciably greater than the first quarter.

OK. So phones are ringing, but nothing is turned into black and white orders.

You know, a third of our business is outside the U.S. The weak dollar ...

Yes.

... will also be a significant advantage to us once things start loosening up. It's just they - I don't mention other people's views here on this call, but our view is that the economic environment we're operating in is very, very difficult for our customers and we don't - while we're - we have seen some glimpses of optimism, it continues to be, up to this point, pretty tough.

Do you ordinarily see any order pickup with the beginning of a new calendar year going back to your statement on ...

With Climax, we do, as a matter of fact. The - and I don't - I think it's probably due to capital budgets ...

OK.

... that we see a little bit of a pickup, but our outlook, our projections are not based on any abnormally large kind of pickup or any of that kind of thing.

Right. I was just thinking in regards to you comment on the dollar valuation that certainly the whole world has the same calendar, for the most part. And if the international business goes on a, you know, a resetting of their - of their budget of the fiscal year and you have a pricing competitive advantage now, that could bode well for you.

It's a good upside for sure.

OK. Thank you.

The next question is coming from of . Please pose your question.

Hi. Good morning. I just want to clarify the remaining - so essentially, your backlog in Climax is 1.6 million?

Roughly.

OK. Great. And I just have a couple of other questions not related. We saw better volumes kind of year over year on your top line in industrial services business. However, your gross margin was a little bit lower. Could you just speak to the reasons why that's the case?

I think there are a couple things. First, Climax, because of product mix in - and kind of volumes, contributed to that. It's not - it's not solely Climax. I guess just a general positioning comment. Gross margin is very important to us. It's something that we focus on and will continue to focus very aggressively on in terms of maintaining our margins. However, when you look at our mix of business, it is going to fluctuate a little bit. Very large projects like these turnaround projects typically have lower gross margins.

Sure.

And some of our smaller or more routine type business. So that, certainly, I think, was a contributing factor in that. But it is - it is an important issue and one that we continue to manage closely.

Could you - of the 23 million plus in industrial revenue you reported in the quarter, how much of that was tied to large turnaround products? And could you give us maybe an idea of the margin differential between the smaller projects and the larger projects?

It's really quite difficult. I - we have kind of chosen not to kind of provide detail on, you know, of all those components, you know, in terms of our revenue breakdown. In terms of margins, what's difficult is a - there's a fixed component to these - to gross margins that we don't track on a job-by-job basis. We have a, kind of higher, as you're aware, , a kind of higher level of direct profit margin that we do track. Because some of these costs, such as employee benefits and all that really don't track to an individual hour. We don't actually track them all the way back to the jobs.

But, you know, I think the - you can have it at the direct profit margin, which is some comparability. You can have ranges of up to five to 10 percentage point differences between - I'm going to call them standard or regular job margins on some of these big projects. It's just, of course, they don't consume SG&A so that the incremental, you know, contribution to them - of these projects are very, very good.

It - that showed on the SG&A margin as well on the flip side, so I just was curious there. The ...

We expect more big projects coming forward. Whether we'll ...

You anticipated my question.

Whether we get the same number in every quarter. You know, it's just - it's going to be a little bit lumpy. But, on the other hand, we, you know, some of our other business was pretty weak because of what we think of - very poor business environment. So we're, you know, optimistic about rebounds there as well. So, you know, we're looking for growth everywhere.

The turnaround - the large turnaround projects that contributed in the quarter, you know, there was some positive language after your first quarter call saying that, you know, we're very excited about, you know, two large projects in particular. Those have, essentially, kind of been completed. Are we going against, you know, a more difficult sequential comparison, given the turnaround seasons and whatever else? Or was it particularly strong for you in the first half versus, you know, year over year?

No, I think - I think the turnaround profile looks pretty good. Again, not in December so much, but if we look at January and beyond, we think there's a lot of turnaround activity out there and we expect to participate in it.

All right. And the $175,000 charge that - it's basically, obviously, a two-cent effect on earnings in the quarter. Where is that accounted for on the P&L?

Well, it's an expense.

Right. So it's on - it's in SG&A. But you also allowed 150,000 for it in the first quarter.

Correct.

Correct.

OK. So the two-cent effect is basically netted in the first half?

No, the other 150,000 ...

Oh, so this is additional.

Yes.

Yes. OK. So this could potentially continue on for some time?

No. The $150,000 - the initial charge was in the fourth quarter of last year.

Right.

There was no adjustment made in the first quarter this year. We believe that we have fully reserve for this matter. We cannot be certain because of the range of variables that are associated with it. I will say that in a worse worst case scenario, it will not be material to the business. But we can't say that - we can't say with certainty that we have precisely reserved the exact amount. It's unknowable.

Great. Thanks.

Yes.

Once again, if you do have a question at this time, please press the numbers one followed by four on your touch-tone telephone. Gentlemen, there appear to be no further questions at this time.

Great. Thank you, Stephanie. Again, I just want to thank everyone for joining in this morning and appreciate your continued interest in Team and we'll look forward to speaking with you again in - at the end of the third quarter. In the meantime, I hope everyone has a wonderful holiday season. Good day.

Thank you for your participation. That does conclude this morning's teleconference. You may disconnect your lines at this time and have a great day. Thank you.