Team Inc (TISI) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Team Inc. third quarter web conference call.

At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions following the presentation.

It is now my pleasure to turn the floor over to Phil Hawk. Sir, the floor is yours.

Thank you, Jackie.

Good morning, and welcome to the Team Inc. conference call to discuss recent company performance. My name is Phil Hawk and the 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 third quarter of fiscal year 2004 ending on February 29th, 2004. 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.

Ted will begin with a review of the financial results. I will follow 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. Those wishing to ask questions should call 1-888-896-0862 and ask to join the Team IR conference call.

With that, Ted, let me turn it over to you.

Thank you, Phil.

First, as I always do, I want to remind everyone that any forward-looking information we discuss today is being provided in accordance with 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 I would please carefully 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 $25.1 million, compared to $21.8 million in the third quarter last year, an increase of 15%. Earnings before interest and taxes were $1.7 million, in the third quarter, versus $1 million in last year's third quarter. Net income for the quarter was $980,000, or 82% higher than last year. Earnings per share was 12 cents in the 2004 quarter, versus 6 cents in last year's quarter. That's 100% improvement.

Now, I'm looking at the results by segment. As I usually do, let me remind you again of what our Industrial Services represent. That segment 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, technical bolting and most recently, field valve repair. Revenues from Industrial Services in the quarter were $20.9 million, or 9% higher than the $19.1 million recorded in last year's third quarter. Operating profits for that segment during the seasonally weak third quarter were $2.2 million, a 4% improvement over last year's $2 million.

As we mentioned in our press release, segment operating profit was negatively impacted by the continued weakness in our NDT inspection business related to pipeline projects. Other service lines, however, realized strong double digit growth in the quarter and Phil will discuss more about that in just a moment.

With respect to the Equipment Sales and Rental segment, that's our Climax business. Climax had an outstanding quarter resulting from the shipment of two previously announced major orders in December. Revenues for the quarter were $4.2 million, up 59% from last year's third quarter. That segment reported an operating profit of $875,000 in the third quarter, versus a profit of $204,000 in last year's third quarter an improvement of over 300%.

The results for Climax for the third quarter have brought year-to-date profits to $581,000, which is very close to last year's results for the same period. Remembering that in the year-to-date results, for the current year, Climax is impacted by a provision that we made in the second quarter of $175,000 for the sales tax matter that we've previously discussed. There is no change in that loss provision in the third quarter.

Now let's highlight some financial and balance sheet numbers. We had previously reported to you in our first and second quarter conference calls that we had not seen the cash flow from operations in the first half of the year that we have been accustomed to due to a buildup of project-related accounts receivable and unusually high capital expenditures spending. As we indicated, though, that was a timing issue and we're now pleased to report that, indeed, we have seen the more usual cash flow patterns in the third quarter.

At the end of the quarter, total interest bearing debt which includes current maturities was $11 million, down $2 million since the end of the second quarter, and down slightly since the end of the last fiscal year. For the quarter, capital expenditures were $650,000, and on a year-to-date basis, capital expenditures of $2.8 million. EBIT, during the quarter, was $1.7 million, and EBITDA was approximately $2.5 million. For the trailing 12 month period, EBITDA is $11.8 million and trailing earnings per share is 64 cents per share.

During the quarter we did not repurchase any shares through our stock buyback program because we did not want to compete with investors during the recent market price increases. We will, however, continue to buy shares in the future, as circumstances dictate that pursuant to our existing authorization.

Thanks, Phil.

Thanks, Ted.

I would like to make a few overall comments and then speak to the performance of each of our business segments. Overall, we're obviously pleased with our performance to date, for both the quarter and the year-to-date. There are two cornerstones of our business strategy that are important to, kind of, let me review.

One is achieving double digit revenue growth. And second is capitalizing on the inherent operating leverage of our business in a way that will enable profits to continue to grow faster than revenue. For both the quarter and the year-to-date, our overall performance is on track in both of these dimensions.

For the quarter, as Ted indicated, revenue was up about 15%. And our incremental operating margin, that is the growth in EBIT, or operating profit divided by the growth in revenue, the incremental operating margin for the quarter was 21%. Year-to-date, revenue was -- grew approximately 13%. And the incremental operating margin, again the same definition, was approximately up 14%.

While this year-to-date number was slightly below our long-term goal this was due in large part to the previously discussed one-off charges that related to the Climax sales tax matter that Ted had mentioned earlier. Due to the -- excuse me.

Due to our strong performance year-to-date, and the continued positive outlook for our fourth quarter, we have updated our previously issued earnings guidance for this fiscal year ending May 31, 2004. We now expect to modestly exceed our previously discussed $100 million revenue projection for the year. We have also narrowed our earnings guidance to the high end of our previous range. We now expect full earnings for the year to be between 65 and 68 cents per fully diluted share. Fiscal year 2004 is on track to be a record year for Team and we are equally pleased with our prospects going forward.

Let me now discuss the performance and the outlook of our two business segments. Starting with our Industrial Services segment. In aggregate our quarterly performance for this segment was certainly positive, but slightly below our aggressive growth targets. As Ted indicated, for the quarter our revenue was $20.9 million, up 9%. Our operating margin was 10%, essentially flat with prior year. These aggregate results reflect the combination of very strong performance in our mechanical service lines; that is, including leak repair, hot tapping, fugitive emissions monitoring, field valve repair, field machining and bolting, that offset a revenue decline in our NDT inspection services.

As Ted indicated that revenue declined in the inspection service segment was driven by reduced pipeline inspection work. Our aggregate year-to-date performance is in line with our expectations. Our revenue was year-to-date $66.5 million, up 13%, our operating margin was 15%, and our incremental margin was 19%. We continue to benefit from our development initiatives in a number of areas. Notably, increasing volumes from our multi plant, multi service arrangements and continued rapid growth of our new field valve repair service line.

Relative to the field valve repair service line, this January, we earned our VR stamp from the National Board of Boiler and Pressure Vessel Inspectors. This certification enables Team to work on pressure relief valves, which creates a major new opportunity for Team, particularly in the power industry. The inspectors at the National Board indicated that Team earned its full certification in less time than any other company with whom they had worked. We are very proud of this and believe it reflects the consistent, high-quality procedures and practices we have in place across our company.

Now shifting the discussion to our NDT Inspection business. In short, we are disappointed but not discouraged about our current situation. Our job level margins remain very sound. The only performance issue related to the service line is depressed activity levels. We are encouraged about our prospects in a number of areas. Frankly, even with the depressed customer demand within a key segment, such as the pipeline industry, there's still plenty of other work being performed in our industry. We just have to adapt and go earn it ,and that's exactly what we intend to do.

I want to make one final comment about the breathed of our Industrial Service business and the value of that breath in enabling us to consistently grow and expand our overall business.

As we saw this quarter, with the pipeline customers, and as we have seen with different customer segments in prior periods, there can be significant fluctuations in the demand level at specific customers, or specific industries, or specific service lines over a short time interval. However, with our broad base, we can take advantage of up market conditions in other areas and segments to counter the temporary effects of down markets. Our year-to-date results are good evidence of this point. We think our continuing growth and expansion will only add to this value and improve the consistency -- our overall performance consistency.

Now let me shift to the Equipment Sales and Rental business segment. Climax was Team's star performer this quarter, as it reported its best quarterly results in history. As Ted indicated, sales were $4.2 million, up almost 60%, with operating profits almost $900,000, more than tripling. Our operating margin for the business was 21%, and the incremental operating margin, again, reflecting the operating leverage was over 40%. These outstanding results reflect, in part, the shipment of the two major orders placed earlier this year, that we had discussed them in prior conference calls. We are very encouraged about our business development efforts in this segment. In particular, there are a number of very interesting large projects in the development process. As a result, we expect another good quarter in the current period, and are quite positive about Climax's future as well.

As larger projects become a more significant part of our business within this segment, we will expect to see continued overall business improvement in results and improvement -- and an improvement in our results, but also we'll see greater quarter-to-quarter fluctuation and volatility, tied to the delivery cycles of these major projects.

Just stepping back, and to wrap up our introductory comments, we get to reiterate, we are very pleased with our results both four the quarter and year-to-date. We continue to focus on the basics that have made us successful historically. And those include being an outstanding service company, at every opportunity and treasuring every customer relationship. And we do that by being safe, being responsive, being efficient, and cost effective, and doing it right the first time. Second basic is conducting our business in a manner that makes every employee proud. Putting safety first, with integrity, with respect for all of our colleagues as well as our customers and with pride in our company and ourselves. And finally, it's continuing to capitalize on a market opportunity that enables us to maintain double digit business growth.

With those comments, Jackie, let me turn it back to you and open it up for questions.

Thank you. The floor is now open for questions.

If you do have a question, you may press 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. We do ask if you are using a speaker phone to please pick up your hand set to provide optimum sound quality. Once again to ask your question you may press one followed by four on your touch-tone telephone at this time.

Your first question is coming from James Gentile of Sidoti & Company. Please state your question.

Good morning. How are you?

Good morning, James.

Hi, James.

I have a -- you know, for a couple of quarters you saw the stabilization -- you saw -- you saw less decline in the NDT inspection business and now we're seeing declines again in this quarter. What is specifically happening in that market and what needs to change specifically for, you know, y'all to experience, you know, maybe an up trend?

Well, what specifically caused our decline this time, this quarter is the decline in pipeline inspection activity. That's a result to basically soft, new pipeline construction activity and our participation in that. What we believe the fundamentals in that segment are outstanding because there's a great need for -- particularly in the natural gas industry -- for pipeline expansion and pipeline replacement and there's nothing we see that changes those fundamentals. It's purely a timing issue; although, frankly, I don't think that we necessarily believe there's going to be bounce back robustly one quarter from now. I think as we look to the latter half of calendar year 2004, we're more optimistic about that. What we need to do and what we intend to do is get more business elsewhere. We don't believe we're losing share in the pipeline segment, it's just -- it's just weak right now so we need to go where the business is. And we expect to do that.

Is there any other competing services that other folks are offering in the market place that differ from what you offer in NDT inspection, maybe, you know --.

You mean that we are disadvantaged?

Yes.

No.

Okay.

And you mentioned that the sales tax issue is pretty much -- you know the reserve stands from the second quarter. So that's good. And is the Climax business -- I'm just going to throw out a number, could it be a $13 million business for you all in fiscal '04?

That's --

Which would probably equate to about a $3.5 million in revenue for the fourth quarter of this year?

I don't -- I don't have a forecast in front of me for the fourth quarter. It's not -- it's not wildly off of that for sure.

It won't be far off of that.

We're gonna be in the fourth quarter somewhere between where we were volume-wise in the first half and where we were in the third quarter.

So we could potentially see another $4 million in revenue in the Equipment Sales and Rental business in May?

I would say that's the same as the fourth quarter, James.

The third quarter.

I think it's a little lighter than that.

We don't have the backlog that we had going into the their quarter.

Okay. That's about it. Thanks.

Sure.

Thanks, James.

Once again, if you do have a question, you may press one, followed by four on your touch-tone telephone at this time.

Your next question is coming from George Karutz of Karutz Capital. Please state your question.

How are you guys doing?

Good morning, George.

I wanted to talk to you on NDT. 'Cause I've talked to a couple of people, that have talked to people in the industry. How did you all get in that business? Did you make a purchase of a company?

Yeah, we acquired a company, XRI Inspection based in Lafayette, Louisiana, in April of '99.

Okay. Okay and through my sources -- I've had two people in the industry tell me that y'all don't have that good of a reputation with that -- you know that Team doesn't have that good of reputation and I asked specifically, what do you mean Team? They've got a - Well, this company that you bought came with a reputation that's not that good.

And, you know, I don't know -- I -- you know, I know you all are doing all you can, and maybe you don't feel like you did, but a couple of the people in the industry have said that. Maybe that's plaguing you somewhat too. And I don't know. I'm just -- I'm just asking.

You know, that's a -- that's a little bit of chasing ghosts there, George.

Yeah.

Unnamed guy from who knows where, when and how. Have every company had kind of trips along the way, certainly? I -- it is very important for us to be well regarded as a service company.

We believe we are doing things to -- to the extent that there are individuals who don't feel that way, we'll try to change their mind with our performance going forward. But, no, we don't believe -- there's certainly -- there's within no change in our reputation negatively that would drive our recent decline here in revenue. A point I would make is, that the revenue of XRI has more than doubled since we bought the company four and a half years ago.

Mm-hmm.

So even with this -- even with these kind of soft quarters that we're wrestling with, we have not -- you know we have substantially expanded the business. So the notion of some chronic, underlying lack of capability, lack of performance is driving this, I don't think is -- is on point.

Right. And I didn't -- I wasn't trying to imply that it was because I know you know what's going on better than anybody. I just wanted to hear you say it.

And, you know, sometimes you wonder, well, can something plague you because of where it came from. And I know the things you start and that you are involved with, there is not going to be that.

I will tell you just as a broader point on service companies in general, and it's something we believe very strongly here, is that the one misstep counters a thousand good steps.

Right.

So that it's very important for us to be outstanding every single time, and we -- and if we have any dissatisfied customer for any issue, for whatever reason, we're going to very aggressively address it, because of just what could have been resulting here. We have some other anecdotes where you have a situation where I've heard of a problem, a decade ago --

Yeah.

-- no one knows what the problem was and no one knows even the specifics and yet that - if you go, that rumor is there that somehow there was a problem.

Right.

And it reflects negatively on the service company. So we work hard to avoid any circumstance or situation like that.

Could you also comment on any acquisition activity and what you are seeing and the pricing of it and it's always been priced too high? Is there -- are there deals out there that look decent now and along with that, can you comment on how your competitors are doing at the present time?

Yes. The -- let's talk to the whole M & A strategy.

We talked before that the core of our business growth strategy is organic growth, because we have just an outstanding opportunity to continue growing at a double digit rate, doing nothing else but kind of minding our p's and q's and staying on point and being a good service company. As we have said in the past and it is true today is that, we are very receptive to acquisitions that would help us accelerate that growth, that are within the industrial service segment, that leverage and take -- and capitalize in a very complimentary way, our existing strengths and focus. And we are continuing to pursue those kinds of opportunities.

It's not in our interest in that we have a lot of other -- and for a number of reasons, for us to speculate of every possibility that might be on the horizon, or where we might have, you know, had discussions in the past. What we, kind of, are committed to doing is reporting as soon as we have a -- an opportunity that kind of will happen is reporting that to you. And at this point, we have none of those to report. We're not really -- you know, I don't have a real comment about kind of the market as a whole because, again, what we focus on are opportunities that are very, very good fit with where we are and what we're trying to do, more than kind of looking at businesses that are, "for sale" out there. So I don't have a comment on whether the prices generally for businesses are -- are for sale or not.

You asked a second question. Oh, how our competitors are doing. We don't know. I guess the -- we have one other major competitor that reports, you know, publicly and we can all kind of look at their results and kind of draw our own conclusions, but our focus is primarily on our business, and how we're serving our customers.

Are you taking market share?

We are definitely taking market share. All of our growth is market share growth.

Okay.

Precisely who that market share is coming from, you know, can't be known with certainty .

Right. Well, great job. Nice talking to you.

Thanks, George.

Thank you. If there are any further questions, you may press one, followed by four at this time. I'm showing no further questions at this time.

Great. We just turn it back to me then, Jackie?

Yes, sir.

All right, well, I've got it. Just to all of you who are on the call today, I appreciate your interest in Team, and the opportunity to visit with you. And your -- as I said your interest in our company. We look forward to speaking with you again at the end of our fiscal year, sometime after the end of the May quarter. So have a good day, everyone and thank you very much.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.