Team Inc (TISI) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Team IR 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 turn the floor over to Mr. Phil Hawk. Sir, you may begin.

Thank you, Holly. Good morning, and welcome to the Team Inc. fourth quarter and year end 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 SVP and CFO.

The purpose of today's conference call is to discuss our recently released financial results for the company's fourth quarter and full fiscal year 2004 ending May 31, 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 8-K, 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 Ted 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. Webcast listeners 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 usual, I want to remind everyone about the forward-looking information that we discuss today. It is being provided in accordance with the provisions of the Private Securities Litigation Reform Act. That 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 that we may discuss. 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 $31.8m compared to $24.9m in the fourth quarter of last year, for an increase of 28 percent. Of that amount, $2.5m is attributable to the April acquisition of Thermal Solutions. If we factor that out, revenue growth for the quarter would be approximately 18 percent organically.

Earnings before interest and taxes were $3.1m in the fourth quarter, versus $2.3m in last year’s fourth quarter. Net income for the quarter was $1.9m, or 39 percent higher than the same quarter last year.

EPS was 22 cents on the quarter versus 17 cents in last year’s fourth quarter, a 29 percent improvement.

Summarizing the year as a whole, consolidated revenues were $107.7m, 17 percent higher than last fiscal year. On an organic basis, excluding the $2.5m of revenue in April and May from Thermal, organic growth would be 14 percent year-over-year.

Earnings before interest and taxes, or EBIT, was up 26 percent for the year and net income was up 31 percent for the year. EPS was 69 cents versus 53 cents last year.

Now let’s look at the results by segment. Before I get into that, an apology with respect to the tables that accompanied our press release. Inadvertently the EBIT results by segment were dropped, so I am going to give those to you in just a second, and then as soon as the conference call is over we will repost the earnings release that includes the last few lines of the summary of operating results, the EBIT by segment will be posted to our website so that if you miss that here you will be able to pick it up there.

Let me give you the EBIT by segment first, and then I will discuss it a little further. By segment for the fourth quarter, total EBIT was $3.077m, and the components of that are industrial services, $4.1m; the Climax Group, $639,000; corporate costs were negative $1.679m to put to $3.077m as per the table in the release.

For the year-to-date, total EBIT of $9.741m, that is comprised of industrial services, $13.953m, equipment sales and rental, $1.220m; less the corporate costs of $5.432m. And again, my apologies that that data did not get into the table accompanying the press release, but it will be posted on our website as soon as this conference call is over.

So with that, let’s talk about industrial services first. As I usually do, let me remind you what that represents. 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, technical molding, fuel valve repair, and of course with the acquisition of Thermal Solutions, now field heat treating.

First let me say nearly all of our services – and Phil will discuss this more fully in a moment – nearly all of our services realized strong, double-digit growth in the quarter. Revenues for industrial services in the quarter were $28m. That is 26 percent higher than the $22.2m reported in last year’s fourth quarter. As I mentioned a moment ago, operating profits for the industrial services segment was $4.1m in the quarter, a 14 percent improvement over last year’s $3.6m.

Now that profit improvement, by the way, was not impacted by the Thermal acquisition. As we previously mentioned, Thermal is a highly seasonal business with heavy concentrations of work in the spring and fall turnaround seasons and did not contribute to our profits in the two months that it was part of our consolidation.

Now with respect to the equipment sales and rental segment, our Climax business had an outstanding quarter, with revenues for the quarter at $3.8m, up 41 percent from last year’s fourth quarter. The segment reported an operating profit of $639,000 in the fourth quarter versus a breakeven performance in last year’s fourth quarter.

For the full year, Climax had its best year in history with an operating profit of $1.2m on sales of $13.1m, up 22 percent over last year.

Now let me highlight some financial and balance sheet numbers. First, let me kind of give you the impact of thermal on the summary balance sheet information that accompanies our tables in our press release, and I will highlight just those items that are impacted by the acquisition of Thermal in a significant way.

Year-over-year, total current assets are up $11.8m, that is $41.2m at May 31, 2004 versus $29.4m at May 31, 2003. Of that $11m increase, about $4.8m was associated with the Thermal acquisition, and then the balance of all of that would just be associated with the growth in, the organic growth of our business.

Next item on the balance sheet, on the summary balance sheet, an item that was significantly impacted by the Thermal acquisition is other non-current assets, that is up $6.7m year-over-year, $17.2m at the end of ’04 versus $10.5m at the end of ’03. Five million of that increase is goodwill associated with Thermal, and $1.2m of that increase is the value that has been allocated to a non-compete agreement as part of that transaction.

Next, current liabilities increased $3.8m from $9.7m to $13.6m of that $3.8m increase, approximately $1m came from the Thermal acquisition. Finally, looking on that table, long-term debt is up $7.5m year-over-year, again due to the borrowings used to finance the Thermal acquisition.

At the end of the year, total interest-bearing debt was $18.6m and as I mentioned, on a net basis $7.5m of that attributable to the Thermal acquisition.

Capital expenditures for the quarter were $535,000 and for the year-to-date were $3.3m, which was right on target to what we had discussed in previous quarters. EBITDA was approximately $4.1m for the quarter, and for the full fiscal year was about $12.9m. Significantly, our debt to EBITDA was only 1.4 to 1, with Thermal operations only being included for two months, so we continue to have a strong balance sheet with financial flexibility. So with that, Phil, I will turn it back to you.

Thanks, Ted. Let me begin with several general comments and operations about our company’s recent performance. Then, I will address the performance and outlook of each of our business units in greater detail.

First, we are very proud of Team’s financial performance during the year. Team’s revenues continue to grow attractively, and exceeded the $100m for the first time. As Ted indicated, total year-over-year revenue growth was 17 percent overall, and about 14 percent organically, after excluding the impact of the Thermal Solutions acquisition.

This growth rate is above our long-term 10 percent organic revenue growth targets, and reaffirms the business development and market share growth strategy we have been pursuing for the last several years. Our total revenues of nearly $108m are the highest level since the refocusing of the company on industrial services in the early 1990s.

Our total net income of $5.8m is the highest in Team’s history, and is 31 percent above last year. This is the fifth consecutive year in which profit growth rate has exceeded the revenue growth rate for the company. Again, this reaffirms the inherent operating leverage of our business model.

As a result of these factors, Team’s profit margins continue to improve as well. Team’s return on sales – that is net income divided by sales – increased to 5.4 percent. Team’s EBIT as a percentage of total revenues climbed to 9.1 percent for the year.

We have discussed incremental operating leverage and incremental operating margins in prior conference calls. For the year, on an unadjusted basis, Team’s EBIT growth of about $2m, divided by Team’s revenue growth of nearly $16m is about 13 percent. When adjusted for the effect of the Thermal Solutions acquisition, and a non-cash compensation charge associated with the vesting of pro forma stock options, the incremental profit margin on organic growth was about 18 percent.

As we’ve mentioned before, our long-term target for this organic growth, incremental profit margin, is in the 20 percent range.

Second, reflected in part in the financial results, we are also pleased with the progress we are making in building the company’s strategic position and market share. Both business segments have robust and effective business development initiatives that continue to expand our business. This year we also supplemented these organic growth initiatives with the Thermal Solutions acquisition. In fiscal year ’05 and subsequent years, we expect this new service line, field heat treating, to be an exciting source of additional growth for the company.

We, along with our shareholders I am sure, are also pleased with the improvement of our stock price and valuations over the past year. The price of TMI common stock one year ago was about $8 per share. While the stock price has nearly doubled in the past year, we still don’t feel that our valuations are way ahead of the business. As a prospective on this, our trailing 12 month price earnings ratio is under 22X and our price earnings ratio based on current year earnings’ estimate is approximately 16X.

We are also pleased with the continuing increase in average daily trading volume which provides more liquidity for all investors. It is also noteworthy that we were recently named to the Fortune Small Business 100 list of America’s fastest growing small companies for the third year in a row, reflecting the sustained growth of our revenues, profits and returns to shareholders.

Now let me comment more specifically about each of our business segments, beginning with the industrial service business. Ted went through the revenue and profit results with you earlier. We are proud of these results. We have strong organic growth of about 14 percent for the year. This growth came from all service lines except NVP inspections, which experienced a decline for the year. The growth was broad-based, with four service lines having double-digit revenue growth.

Broadly, the two primary drivers of this attractive growth have been in the continued expansion of our multi-service, multi-plant customer service relationships and a continuing increase in the volume of turnaround projects we have earned. We believe our outlook will continue to be strong going forward. As we have discussed previously, despite our leadership position, our composite market share is still only in the 10 percent range. Team is still pursuing a very large number of customers in unserved markets.

Obviously, we are disappointed in the business decline in NVP inspections. This was a situation where growth in the plant services activities was not sufficient to offset the continued decline in the new pipeline construction activity. While we remain very bullish longer term about the pipeline segment, frankly it is just not happening now.

We continue to strengthen the coordination and integration of the sales and business development initiatives of both NVP inspection and the new field heat treating service line. All units now directly report to our president and COO. We have changed the names of our units to Team Inspection Services and Team Thermal Solutions respectively, to increase the linkage to the legacy Team Mechanical Services.

While we have dedicated personnel for the inspection and heat treating service line, we are training all of our managers and sales representatives in our full service line offering, looking for additional cross-selling opportunities. We are adding these service lines to our existing contracts wherever possible.

Despite the lack of growth in the past year in the inspection services line, we remain very positive about the prospects in this service line.

Thermal Solutions is an exciting additional growth opportunity for us in the coming year. While we are still in the midst of transition activities related to financial systems and business processes, we are already seeing some of these new opportunities. We have already begun providing heat treating services for several of our multi-service, multi-plan customers since closing the transaction in mid-April.

One additional comment about the Thermal Solutions business. It is heavily oriented to turn around activity, approximately two-thirds of its total business, and this turnaround work has significant seasonal demand patterns. The stronger demand patterns and demand periods are the calendar spring and fall periods, with generally weaker periods in the summer and the Christmas holidays. Consequently, Team Thermal Solutions should have the biggest positive impact in Team’s second quarter, followed by the third and fourth quarters.

Now shifting to the equipment sales and rental business segment. Climax had great performance during the quarter and full year as well. As Ted indicated, segment revenue for the quarter was $3.8m, up 41 percent. Revenue for the year was $13.1m, up 22 percent. The attractive revenue growth is a result of significant special machine sales related primarily to the military, marine and power industries.

Approximately a year ago, Climax undertook a focused effort to develop deeper relationships within a few major end use markets, and to pursue custom machining opportunities within those markets. These efforts have been productive. During the third quarter, Climax shipped a set of special machines to U.S. Navy shipyards, and a large special machine to a domestic power generation service company.

During the fourth quarter, Climax shipped a special machine valued at approximately $750,000 to a Swedish nuclear plant service company.

We remain very enthusiastic about the continued growth of special machine sales going forward. The prospect list for the coming for year is considerably larger than last year, although we can’t be certain what portion of these will ultimately become orders.

Further, we believe the improving economy plus the continued weak dollar will also be beneficial for the demand of our standard field machine tool designs as well.

Climax’s total operating profit of $1.2m is a record for the business. These results do reflect offsetting special items. On the plus side, Climax sold some idle real estate and recognized a gain of $235,000 and as previously mentioned, Climax has also taken charges totaling $245,000 related to a prior year’s sales tax matter.

The operating profit improved nicely to 9.3 percent, again reflecting the inherent operating leverage in this business segment as well. We expect fiscal year 2005 to be another record year for Climax.

Now looking forward to the current year, fiscal year 2005. Based on the continued favorable outlooks in both business segments, we project that Team’s revenues in the current fiscal year 2005 ending May 31 2005 to be in the $120m to $130m range. That is 10 to 20 percent topline growth. From an earnings perspective, we estimate that full year earnings will be between 84 cents and 90 cents per share on a diluted basis, or 20 to 30 percent earnings growth.

As was our practice last year, we will decline to provide specific quarterly earnings guidance, but rather will affirm or adjust our full year’s estimate at each quarterly conference call, or whenever appropriate.

Just to wrap up before questions, I am very proud of our company and the commitment to outstanding service and customer support by every one of our over 1,100 employees and colleagues. We understand that our customers choose us and give us the opportunity to serve them, not vice versa. We have to continue to treasure every opportunity and keep earning the trust and confidence of every customer. With that, Holly, let me turn it back to you and we’ll open it up for questions.

Thank you, sir. The floor is now open for questions. (Operator instructions) Our first question is coming from James Gentile of Sidoti.

Good morning. Good quarter, but I am going to ask a couple of nitpicky questions. Looking at your gross margins year-over-year, we are seeing the leverage on the operating income line like you’ve always proven, but it looks like your gross margin, although with a higher basis, off about 150-ish basis points in the May quarter and nearly 1 percent in the fiscal – for year-over-year. I was wondering if you could kind of comment on what’s going on there and if that is – are we going to see an under 40 percent gross margin going forward as a result of the TSI mix or will that expand?

James, the Thermal Solutions margins are a little bit softer than Team margins, and a lot of that we are still understanding from a classification of cost, cost per [capture]. So I don’t think though that we are going to see a significant difference as that rolls up into our numbers and a variance of 39 to 40 percent, that 39 to 40 percent range is what our expectations overall will be.

You commented Phil on the lack of activity again on the NDT inspection line, and there seems to be some positive language surrounding pipeline construction and activity in the marketplace, just reading the news from various sources. What exactly are you guys waiting for to happen and how are you proactively positioning NDT to kind of benefit from the potential upturn that you all have been expecting for quite some time?

Well we believe that when new pipeline construction increases, and we believe the fundamentals and requirements for that are very, very attractive, referencing your comments as well, that we are very well positioned to earn a substantial share in that market as we have historically. It is just that in our view, and our experience it is just not happening right now. But when it happens, we’ll be there.

I will say to you, we are a growth business, so we don’t like anything that is flat or declining, but let me reiterate the business continues to perform well in terms of its margins and overall profitability. We are by no means sorry that we are in the inspections business at all.

Fair enough.

What we are trying to do is leverage this and be even better, and we do not feel we have fully exploited the growth opportunities with regard to plant activities either, and we are trying to look and explore and develop and expand our approaches to grow that side of the business. So that’s where our emphasis is now, because those are the areas we can most control ourselves.

But with regard to the pipeline business, when it’s there, we’ll be there, and expect to participate in it.

So the plant activities that you mention kind of leverage your NDT inspection business. Those initiatives kind of discussed before are still in the works?

Well I think some of the newer initiatives to extend this is in terms of the name change, Team Inspection Services, again, to get a closer linkage to our team presence in the plants. So we have in the works some very comprehensive training activities across our company for all sales reps and managers, again, not to make them experts in NDT by any means, but certainly increase our awareness and basic understanding of our capabilities so we expand, if you will, the points of sales for these services across our network.

And then one last question. Have you been able, today, given the refineries that are performing at capacity, given the higher oil prices, have you been able to kind of earmark any of the incremental growth that we saw in the May quarter or any of the organic growth to volatility to the refinery capacity as a result of volatile oil prices, or are you guys not concentrating on that kind of incremental business that could potentially be there?

Well here’s what’s happening. I guess just environmentally, and I haven’t followed it the last week or so, but throughout the fourth quarter for sure was one of the best quarters probably in a decade, maybe in a lifetime. They were absolutely just spectacular price spreads for the industry, and the result of that is that they are moving ahead enough to keep those refineries online and to enjoy the benefit of those margins. So on-stream services benefit from that in the short-term because there is more of that, but conversely, turnaround activities get deferred.

We had some turnaround activity deferred in the back half of the fourth quarter, we are not particularly concerned about it because it is just deferred, not eliminated, but we are seeing refiners push back turnaround activities as long as these margins are strong, and we’ve got some indication of a couple of activities that were planned for this fall being pushed to the spring, and where it will affect us, and frankly affect us downward a little bit is they’ve had a couple – because they are so dependent on turnarounds for that particular service line – is they had a couple of smaller turnaround activities in the end of the fourth quarter pushed out, again because of the extremely strong profit margin.

So that’s going to be a little noise we have in our system. It doesn’t change our potential of output, but it can change the timing and mix of business quarter to quarter.

So as a result of this fall to spring postponement that we are seeing, I guess in the first half of your fiscal 2005 year, well then your outrageously weak February quarter may see some incremental business as a result of maybe some pent-up demand?

You are right that the second half of the third quarter is the January/February period, so I mean, they will be relatively stronger months for turnaround activity, and we are going to be heavier turnaround business, but mix-wise modestly more, because of our heat-treating presence. So it should help that.

We still have the holiday period and all of that that we are dealing with there, but it should be somewhat helpful to that. As I said, I think we are still learning in terms of the specifics that we’ve proven, but it is hard for us to forecast individual quarters, but certainly structurally what would be the biggest benefit as I mentioned in my remarks, the biggest benefit should be in the second quarter, our second quarter, which will be right in the middle of the fall turnaround season and then the back half of the third, the beginning of the fourth there will be the – February, March, April, early April period – should be the other really strong period for turnaround activity.

We had a good turnaround spring in general, it was very positive, we are pleased as I had mentioned, that was a significant driver of our growth.

So there wasn’t more net on-stream activity in the May quarter to kind of contribute to the excess growth? Because you guys beat my revenue estimate by $5m, so –

There was more, I mean there was more of everything, but I don’t mean to, certainly the two points that I made and we believe as a front – not the sole driver, because we are driving for growth everywhere, but we continue to pick up revenue in the multi-service, multi-plant customer service relationships. It is not evolving where they are all exclusive agreements, but we have arrangements that are encouraging customers to align more heavily with us and we are benefiting from those, and then secondly, turnaround activity, a share of that we believe is continuing to grow. As we hit each successful turnaround we do, it improves our reputation and the confidence of our customers and would-be customers that we have the capability to manage critical, high profile turnaround activity, and it just keeps growing.

Well there is certainly no question that you guys are performing very well, so thanks.

Thank you, James.

(Operator instructions) The next question is coming from Chris Perry of [Force Dowan] Securities.

Good morning, guys.

Hi, Chris.

My main question has been answered and I will follow up later this morning, but congratulations on a great quarter. Thank you.

Thank you.

Thank you. Our next question is coming from Zach Macatto of MCM Associates.

Good morning, Zach.

Good morning. Was there, what was the EBIT for the TSI revenue? Did you say that that was not profitable this quarter?

It was marginally, basically $100,000 to $200,000 negative EBIT for the two months that it was included.

Was there any one-time integration expenses?

Not specifically associated with that. A point I would make to you is again, it is a high seasonal business. It came off of its peak at the end of March, it had a tremendous early spring season in February and March, just from a timing standpoint of the numbers that are included in our consolidation. Again, it is the last period of the year.

Okay, so April onward is sort of half the turnaround season for that?

April through the end of, say August, will be a fairly soft period for Total Solutions, as [inaudible] the turnaround season commenced.

As we just mentioned earlier in the Q&A, I think in this particular year, it was a little softer than normal in April and May, just because a couple of things were pushed out due to this extraordinary refining margins, timing wise. But in terms of any surprises or disappointment, there are none and we are just really more enthusiastic than ever, and we are really just pushing hard on getting the integration of business processes and financial systems and getting ready to run hard.

Okay, great. Sounds good, thanks.

(Operator instructions) Gentlemen, there are no further questions.

Thank you, Holly. Let me just wrap up. To everyone who has joined us today, thank you very much for joining us and for your continuing interest in Team. We will look forward to visiting with you again in September. Otherwise, have a good day.

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