Team Inc (TISI) 2005 Q1 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Team IR conference call. (OPERATOR INSTRUCTIONS) At this time it is my pleasure to turn the floor over to your host, Phil Hawk. Please go ahead, sir.

Good morning and welcome to the Team Inc. earnings call. As Autumn indicated, my name is Phil Hawk, and I'm the Chairman and CEO of Team. Joining me again today is Mr. Tom 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, and the outlook for our full fiscal year 2005, ending August 31, 2005. Excuse me, ending May 31, 2005. 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. For those listening via webcast and wishing to ask questions, you should call 1-888-896-0862 and asked to join the Team IR conference call.

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

Thanks, Phil.

First, as usual, let me remind you about the message contained in our press release about forward-looking information. And that is that any forward looking information we discuss today is being provided today in accordance with the provisions of the Private Securities Litigation Reform Act. Such information is subject certain assumptions and beliefs that's based on information that's 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, as always, please read carefully the last paragraph of our press release for a complete description of those factors.

Now to the financial results for the quarter.

As we had pre-announced a week or so ago, the earnings for the quarter were disappointing to us. We will go into considerable detail about that. But for the quarter, revenues were $33.2 million. That compares to $24.9 million the first quarter of last year.

Of that total $8.2 million increase over last year, 7.3 million is attributable to the two acquisitions recently completed, the Thermal Solutions acquisition and in April and the Cooperheat-MQS business that was acquired on August 11. Naturally, the Cooperheat business was included in our consolidated results for only 20 days of the quarter.

Earnings before interest and taxes for the quarter was $688,000 versus 2.4 million in last year's first quarter. Net income was 269,000 compared to $1.4 million last year. Earnings per share was 3 cents versus 17 cents in last year's quarter. And again, Phil will be describing in considerable detail the character of those earnings and the reasons for that. But first let's just kind of look at segment by segment.

In the Industrial Services segment first, as a reminder that includes an array of specialized services related to the construction and maintenance of pressurized piping and process systems. These services include leak repair, hot taping, fugitive emissions monitoring, field machining, technical bolting, field valve repair, NDT inspections, and now through the recent acquisitions field heat treating.

Revenues from Industrial Services in the quarter were $29.8 million compared to $22.3 million last year. Again, of that $7.5 million total increase for Industrial Services, 7.2 million was from acquisitions, as I mentioned a moment ago. And actually only $200,000 of growth was associated with -- was from organic growth in the quarter. As Phil will describe more fully, that flat revenue growth represents a significant reduction in revenues associated with refinery turnaround activity in the quarter.

Operating profits for the Industrial Services segment was 1.9 million compared to last year's 3.6 million. Again, Phil will discuss in some detail the character of that change.

With respect to the Equipment Sales and Rental segment -- that's the Climax business -- Climax business continued to be a bright spot for the quarter, as it has been over the last couple of quarters. Revenues were 3.4 million, up 29 percent from last year's first quarter. And that segment earned $156,000 in the quarter, a more than $250,000 improvement from last year.

Relative to corporate costs, let me call your attention to the fact that the last tranche of Phil's performance-based stock options that were awarded in 1998 that covered 67,000 shares became vested in the quarter as a result of our stock prices meeting targeted amounts. Again, those targets having been set in 1998. This resulted in a non-cash charge to earnings of approximately $200,000 in the quarter.

Now let's focus on some financial and balance sheet numbers.

From a balance sheet perspective, obviously there have been significant changes since year-end; those changes associated with the Cooperheat acquisition. So to give you an appreciation of the impact of that, let me just walk you through some of the footings associated with the acquisition of Cooperheat.

As we have previously indicated, the purchase price was about $35 million. The total assets associated with the Cooperheat acquisition that were acquired in our balance sheet, if you will, were approximately $43 million. And that includes 17 million in current assets, 12 million in property, plant and equipment, and $14 million in other assets. That is principally goodwill. Those numbers will be modified as we go through the process of appraisal of assets over the next month or so, so there could be some slight changes between property, plant and equipment numbers and goodwill numbers.

On the right hand side of the balance sheet, if you will, we assumed net current liabilities of approximately $7 million, and incurred debt of about $36 million to close the transaction. So that's the aggregate of the $43 million that is reflected in our total footings, and gives you a reflection of the change in our balance sheet.

By the way, we will be filing an 8-K by October 25th which will more fully set forth the financial information pertaining to the Cooperheat assets acquired.

As we had also previously disclosed, the financing of the Cooperheat transaction was provided through a new $75 million credit facility, through a six bank syndicate led by Bank of America. That facility consists of a $25 million term loan that will be amortized over five years and a $50 million revolving credit facility that includes a $10 million sub-limit for letters of credit.

Borrowings under the new facility are generally at LIBOR plus a margin that's based on debt-to-EBITDA. The initial margin over LIBOR is 225 basis points. As we pay down that debt and our debt-to-EBITDA is reduced over time, that margin over LIBOR will also be reduced.

Just to give you the outstanding balances at August 31st that are reflected on our end-of-quarter balance sheet is total debt of $56.7 million. That includes 25 million under the term facility; $31.5 million under the revolving facility. That's on the books. Plus there's $4.2 million of outstanding standby letters of credit, so that we have approximately about $14 million of availability under the facility at August 31st.

With respect to capital expenditures in the quarter, we expended $1.4 million on CapEx. And that includes about $500,000 associated with the two recent acquisitions.

So with that, Phil, I will turn it back to you.

Thanks Ted.

I'd like to begin with several general comments and observations about overall Company plans, activities and performance. Then I will address the performance of each of our business units in greater detail.

First, the past six months have been some of the busiest and strategically most significant times in Team's history. In April of this year we purchased Thermal Solutions. In August, we completed the purchase of the assets of Cooperheat-MQS. The addition of these two businesses has approximately doubled Team's overall revenue to nearly a $200 million per year running rate.

The larger, broader business base is not just economically important. It also offers many strategic benefits as well. Team is now the market leader in four service lines -- on-stream leak repair, fugitive emissions monitoring, and now NDE inspection and field heat treating -- along with a substantial presence in four additional service lines. We now have a full presence in all of our service lines throughout the US, Canada and the Caribbean. We have a broader service offering, more service locations, and significantly more service technicians than any competitor.

Our strategic vision is this -- through these acquisitions, Team has been able to expand our service line capability significantly in two complementary service lines. The acquisitions themselves give us a significant immediate boost to our overall size and market presence. But just as importantly, it also provides the foundation for continued organic growth across all of our service lines.

As we have mentioned many times in prior conference calls, nearly all of our customers continue to shift more of their industrial service work to fewer, larger, more professional service providers. Our expanded capabilities make Team that much more attractive as a service provider of choice. Team's broader array of service lines also expands the served market and total market potential, now estimated to be about $1.7 billion.

I want to emphasize that the acquisitions do not take Team into a new direction, but rather enable an acceleration of our growth and progress along the same path that we have been following for the past several years; the same specialty industrial services focus for the same customer segments, with the same long-term organic growth opportunities as a result of the fragmented competitive environment and consolidating customer procurement trends.

Our associated economic vision is similarly exciting and attractive. Following the completion of integration activities necessary to bring together our inspection and heat treating businesses, we expect our revenues and earnings per share to be approximately double the fiscal year '04 levels.

Achieving this level of performance does not require heroic business turnarounds, but rather is based on sustaining historical performance levels in all businesses and capturing the approximately $4 million in synergies already identified. In fact, we think these margins assumptions will prove conservative, at least in the longer term.

Based on our own experience with Team's inspection business and the prior experience of our two acquired companies, we expect the operating margins of inspection and field heat treating service lines to be comparable to those Team earns in its traditional service lines. Achieving those margin levels will result in additional performance growth and improvement.

The challenge now is to bring our new businesses together, complete our integration activities, and realized the strategic and economic benefits outlined earlier. We are making good progress with this effort. Effective October 1st, the three inspection and heat treating businesses of Team will be combined into a new single organization which we have named Team Cooperheat-MQS. Shelby Morris, an experienced and accomplished senior manager, has been named Group Vice President and will lead this group. Senior managers from all three businesses, the former Cooperheat-MQS, Thermal Solutions, and XRI Inspection play key leadership roles in the new company. Our primary objective with the business combination is to present a single market presence with the full capabilities of all three predecessor companies.

We will be consolidating overlapping office locations where they exist, but the primary focus is not on cost reduction. We know the most powerful business lever available to our Company is business growth. Our focus is on enhancing our industry-leading service capabilities.

We are also in the process of transitioning to a common communication network and financial system. At Team we believe our current system that provides job level profitability measures has been a critical business tool and a key enabler of our success. We hope to have that capability for this new business within the next three to four months. Following the completion of the systems transition, we plan to relocate and integrate the remaining Cooperheat corporate functions to Alvin (ph).

While there is natural anxiety associated with any significant change such as this, our employees are excited about our new Company and its opportunities. We're all eager to move forward with our new Company. While the new Team Cooperheat-MQS is still a work in progress, we remain extremely excited about our prospects.

With that longer-term vision in mind, let me come back now and comment on the most recent quarter in each of our business segments, beginning with Industrial Services.

As Ted indicated, total Industrial Service revenues were up 7.5 million or about 34 percent from the prior year quarter. However, 7.3 million of that growth was a result of the acquisitions. Organic growth was only about $200,000 or 1 percent. However, this composite organic growth figure is misleading due to the very depressed market turnaround activity during the quarter.

Team's traditional services composed of leak repair, hot tapping and fugitive emissions monitoring, which are not dependent on the level of turnaround demand activity, actually grew about 1.9 million or 13 percent versus the prior year quarter. This is a strong organic growth, consistent with our long-term plan. However, Team's newer turnaround services, comprised of field machining, bolting, and field valve repair, declined approximately 1.7 million or nearly 50 percent versus the prior year quarter. This decline is not lost work, but rather deferred work.

As indicated in the press release, the very high refining profit margins caused all refiners to push out turnaround work into later quarters. We expect an increasing level of turnaround activity for the remainder of the year, catching up on most of the first quarter deferrals during this fiscal year. We are confident that we have not suffered a decline in our market position within our mechanical service lines, but rather have weathered a very low turnaround environment that is already beginning to improve.

Now shifting to operating profit, the Industrial Services segment earned $1.9 million for the quarter. This is approximately half of last year's results. Reduced turnaround activities in the Caribbean versus the prior year represented about 1.2 million of this decline. Second, the two acquired businesses had operating losses of about 600,000 in the quarter, again reflecting the very low level of turnaround activity.

The profit growth and declines in all other areas approximately offset one another. The domestic mechanical services units increased their profits by about $500,000. Commercial and operations support units declined by about the same amount, primarily due to reduced turnaround-related equipment rentals.

The key question is this -- what will Team's segment operating profits be when turnaround activities return to more normal levels? The answer is that we think they will be very good. We see no reason why Team's mechanical service margins will not be back in the 14 to 15 percent range in the next quarter and beyond.

Because of our lack of experience with the new businesses, it's more difficult to forecast the Team Cooperheat-MQS business. We are confident that the business will be profitable in the current quarter and be a meaningful profit contributor for the remainder of the fiscal year. As I said earlier, once we complete our integration activities and have our financial system installed, we see no reason why the margins in these service lines will be any different than our margins earned in the mechanical services.

Now let me turn to Climax. Climax had a good start to the fiscal year. Revenues for the quarter were $3.4 million, up about 30 percent from a weak prior year first quarter. This growth came primarily from increased equipment sales in both the US and Europe.

From an earnings standpoint, Climax reported an operating profit of $156,000 versus a prior year loss of approximately $100,000. The outlook for the remainder of this fiscal year continues to be attractive. Climax has booked a number of special machine orders for both the power and military marine segments that should lead to attractive sales and profit growth for the year.

In looking at the remainder of fiscal year '05, despite a slow start during the first quarter we are maintaining our earnings guidance for the full year at 84 to 90 cents per share. We believe there will be substantial catch-up in the turnaround activity through the remainder of the year. And we also believe our new acquired businesses, now part of Team Cooperheat-MQS, will make meaningful contributions to Team's overall performance. Looking beyond fiscal year '05, we remain comfortable with our previous $1.25 to $1.40 earnings per share guidance for fiscal year '06.

To wrap up, this is a difficult and confusing quarter to analyze. Due to the acquisitions, prior year numbers are not comparable. Due to the very low level of market turnaround activity, there are large activity declines in those related service lines.

Nevertheless, our fundamentals remain very strong. Demand for our services is not optional and is not declining, only the timing of demand is being shifted. Our competitive position continues to improve. We see no reason why we will not continue to grow our business organically at the 10 percent plus growth rate.

The operating leverage inherent in our business also enables us to grow profits at a much faster rate than sales. Our performance over the past five years has confirmed these fundamentals. We are confident that our performance over the next several quarters and the full year will again reflect these very attractive fundamentals. We remain very positive about our outlook.

With those comments, let's now open it up for questions from our listeners. Autumn, can I turn it back over to you?

(OPERATOR INSTRUCTIONS) James Gentile, Sidoti.

Just wondering if you can tell us exactly what you're expecting in terms of turnaround revenues over the next three quarters or so in terms of postponement. I got all phased out when I was listening to all your positive language and I missed the number.

There wasn't a number James.

Okay.

What we see and what is very, very encouraging -- one, we're seeing increased the activity already there. There are several turnarounds that have been launched here in the early fall, calendar fall. We see a very busy schedule, particularly after the first of the year in terms of number of planned outages that we're well positioned to participate in. In terms of specific numbers, we have not attempted to forecast precisely what those would be in terms of a revenue number.

And some of this, I assume you want to call it backlog coming from the Caribbean area, where you experienced weakness this quarter?

Yes, particularly after the first of the year. We referenced we did have a very strong turnaround quarter in the prior year first quarter in the Caribbean, and that was part of the issue as well.

Just looking at your traditional services organic growth, 13 percent is pretty strong coming from hot tapping and leak repair. We haven't seen those numbers out of those service lines in quite some time because a lot of the organic growth, in my opinion, has come out of the field machining, bolting and valve repair part of it. So what did you guys -- what happened in the traditional service lines in the quarter that facilitated this organic growth?

A couple of things. First of all, our four-year average growth for those traditional services has been about 9 percent. So you are correct; it's a little above average.

Two things. One, we were beneficiaries of some new contracts in the fugitive emissions monitoring area. Secondly, when plants are not turning around, they're are more heavily users of on-stream leak repair services in particular. So we're beneficiaries of that.

Our projection would be, and our guidance and expectation would be, that the high-single-digit long-term growth rate is still what we would expect over time.

I just can't help but ask this question. Prior to your Cooperheat acquisition, with TSI just kind of getting comfortable with TSI, you still gave us guidance for fiscal 2005 of 84 to 90 cents. Turning the clock forward at the end of 1Q F05, you have 2 cents of earnings, but yet you still are showing us this very strong earnings guidance for this year in terms of growth year-on-year. I guess presumably would it have been -- had the turnaround activity not affected you guys in Q1, would we have seen over $1.00 in earnings as Cooperheat began to contribute?

Here is my caution about our estimate, is that we have not changed our estimate because we think we will catch up. There are two items. We said we expect to catch up on some of the depressed revenues due to turnaround. Secondly, we have a substantial new earning power and earning capability as a result of the acquired business of Cooperheat, which is about $80 million on an annualized basis. So we continued to be very positive about our catch-up capability.

We have only owned Cooperheat for 20 days, so our precision at which we can forecast exactly what their earning capability will be and which months and quarters, is a little bit blurred at this point. We're very -- as we look longer-term in terms of the fundamentals, they're very, very exciting. But I caution you against precision in terms of the current year. As we get each quarter down the road, I think we will be able to fine-tune that.

But again, there's a lot of upsides that we see. And that's why we normally would say, if it such a week quarter you are going to be coming down on your estimates. But we just see so many positives out there that we don't think that's recklessly conservative to do so, because I think we've got as good a chance as any to make up all of that.

Fantastic. Thanks Phil.

(OPERATOR INSTRUCTIONS) Jerry Heffernan (ph), Lord Abbett.

I don't usually like to ask about recent one-off events, but the hurricane season this year has been -- at least seems to have been a little bit more active than usual. And certainly you're speaking of your Caribbean business, which was quite strong last year. To what extent can you assess what these increased weather activity may do for your business going ahead? And I'm not really asking how much to take out of this quarter because it is what it is and I'm not looking for that. But to the extent that can this create additional work for you -- a lot of wind blowing, a lot of things getting shaken around, my little industrial background says that causes things to leak or bend.

I'm not aware of any damage to any refineries as a result of the hurricanes. Because of Ivan, the one I am aware of, is that many big refineries along the Eastern Gulf Coast went into kind of reduced operation mode -- and kind of not shut down but kind of reduced operation mode to kind protect themselves, that generally is helpful to us because it cycles -- pressure goes down and then come back up, that creates a little more maintenance work, although it's hard to forecast that or see that in the day-to-day activities. But that's really about it.

I would say we have had -- it's not, again, a material item and it sounds funny to say where it is, but we had significant damage from Ivan not on the Gulf Coast, but at our Pittsburgh office, that because of the heavy rains of Ivan there was flash flooding that caused a local dam to break that put eight feet of water into our Pittsburgh branch. We lost three vehicles and probably three or four computers, and have a lot of mud in that place. So you would not expect that to be a place that would be vulnerable to a hurricane effect, but in fact it was this time.

Okay. In regards to the integration, you're going to refer to this new entity Team Cooperheat-MQS?

That's correct.

That's a lot of letters to put on a letterhead there.

What about the people? Talk to us about the Cooperheat operation. How many people were quality people that were still around? Certainly TSI was the result of some quality people leaving Cooperheat and doing it again themselves their way. Just review that if you would please.

The new Team Cooperheat-MQS is really the sum, if you will, of the combination of all three of our inspection and heat treating businesses. Just to remind everybody, that's the Cooperheat-MQS business just recently acquired; it is also Thermal Solutions; and it is also XRI Inspection, which was acquired in the spring of 1999 by Team.

Our view is -- and by the way, with the Cooperheat-MQS acquisition, we acquired all of the business, and all of the managers joined us with the exception of six senior managers that would be the corporate officers. But all of, in our view, the key regional managers that were really driving the business and really most responsible for kind of our field service operations joined us as part of the transition. All of those managers, plus several other managers including not only from Cooperheat-MQS, but also XRI and Thermal, have key leadership roles in our new combined business or the Team Cooperheat-MQS. And we expect and our plan is to have all of the employees of all three organizations to join us and be part of our effort.

Will some people opt out as we kind of go through the transition? That's a possibility. That's not our desire or our approach. You mentioned that obviously the Thermal managers left Cooperheat in another era about five years ago to kind of start their own business. That is true. The reasons they left were not really -- are no longer present in terms of we have a different management philosophy, we have a different financial capability and a different focus. Are we having to kind of --

Who is a we?

We as Team versus the old Cooperheat-MQS organization.

So politely saying that perhaps the people at TSI whom they had a problem with were six of the high-level people from Cooperheat who are no longer with us?

Or at least the philosophy that they supported with the business.

Now, to say that we don't have -- because Thermal Solutions and Cooperheat have been aggressive competitors of one another in the marketplace, to say that we immediately start with no personnel issues to kind of work through would be incorrect as well. But we're working through those. Our view is that we're creating by far the industry leader in these service lines. And we're going to conduct ourselves -- regardless of how work was done in the past in the business, we're going to conduct ourselves in a way that we're all going to be proud of and be proud to be part of. And I think that will be very attractive to the management and all of the employees of all three of those companies.

So yes, we're working through a few of the issues. But at this point we're very, very optimistic. Our employees are very positive and anxious to move forward. So it's a big task, but we're getting after it.

Okay, thank you.

(OPERATOR INSTRUCTIONS) James Gentile, Sidoti.

Just one more question. I was wondering if, Ted, you have put together kind of a forecast separated by the next few quarters regarding the incremental expenses being spent on the integration of the two properties.

We're expecting something in the neighborhood of $1 million related to integration costs, James.

In total?

In total. And I think that's going to occur or the next three quarters.

Great, thanks.

(OPERATOR INSTRUCTIONS) We appear to have no further questions. I will turn the floor back over to Mr. Hawk.

Thanks Autumn. And to all our listeners, thanks for joining us today for this call and for your continuing interest in Team. We look forward to visiting with you again in December. Have a good day.

Thank you. This does conclude today's teleconference. Please disconnect your lines and have a great day.