Team Inc (TISI) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Team Inc. 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 turn the floor over to your host, Phil Hawk. Sir, the floor is yours.

Good morning, and welcome to the Team Inc. web conference call. My name is Phil Hawk, and I'm the Chairman and CEO of Team. Joining me again today is Mr. Ted Owen, the Company's Senior Vice President and Chief Financial Officer. The purpose of today's conference call is to discuss our recently released financial results for the Company's second-quarter and year-to-date results for fiscal year 2005, ending November 30, 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 our remarks, we will 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 introduction, Ted, let me turn it over to you.

Thank you, Phil. First, as usual, I want to remind everyone that any forward-looking information 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 that we might make. So please be sure to 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 $51.8 million, compared to 25.8 million in the second quarter of last year, an increase of over 100 percent, due primarily to the acquisitions of Thermal Solutions and Cooperheat-MQS. Earnings before interest and taxes was 3.1 million in the 2004 quarter versus 2.6 million in last year's second quarter. Net income was $1.4 million, compared to 1 million 6 in last year's quarter. Earnings per diluted share were 16 cents versus 19 cents last year.

Looking at the results by segment, first, our Industrial Service group includes an array of specialized services related to the construction and maintenance of pressurized piping and process systems, as well as specialized NDT laboratory inspection services. As a result of the recent acquisitions, we have reorganized the Industrial Service business into two groups -- Team Mechanical Services or TMS, which includes the legacy leak repair, hot tapping, fugitive emissions monitoring, field machining, technical bolting and field valve repair services; and the second group, Team Cooperheat-MQS or TCM, which is comprised of field heat treating and NDT inspection. That group includes the former operations of Thermal Solutions, Cooperheat-MQS, as well as Team's legacy inspection business, x-ray inspection.

In the table to our press release, we have provided enhanced disclosure about the revenues and margins of these two groups for the quarter and year to date. Revenues from Industrial Services in the quarter totaled $48.4 million, compared to $23.2 million last year. Now, that 48.4 million consists of 21.9 million from the Team Mechanical Service Group and 26.5 million from the Team Cooperheat-MQS Group. The Mechanical Service revenues grew by 10 percent over the same quarter of a year ago, which is consistent with our growth objectives. Naturally, nearly all of the TCM growth of 23.1 million in the current quarter is associated with the Thermal and Cooperheat businesses, which were not present in last year's numbers.

The issue for us is to get the same financial performance from the Team Cooperheat-MQS business as we have achieved from our Mechanical Service offerings. As you can see from the table, the gross margin percentages from the TMS business is 40.2 percent for the quarter, while the gross margin for the TCM -- again, that's Team Cooperheat-MQS -- is only 28.7 percent. Phil will discuss this disparity more fully in the remarks that he makes.

Now, just shifting to the Equipment Sales and Rentals segment, the Climax business continued to be a bright spot for us in the quarter. Revenues were $3.5 million, up 37 percent from last year's second quarter. That segment earned $219,000 in the quarter, a more than $400,000 improvement from last year.

Turning to corporate costs, total corporate SG&A costs increased by more than $600,000 in the quarter, compared to last year's quarter, of which 400,000 is directly associated with the additional corporate support in HR, IT and accounting associated with the Cooperheat-MQS acquisition. Interest costs also increased significantly in the quarter versus last year, due to the additional debt associated with the Cooperheat acquisition and with working capital growth in the second quarter.

Now let me talk specifically to debt and cash flow. Obviously, there has been significant changes since year end in our balance sheet associated with the Cooperheat acquisition, so let me just remind you of the impact of that. The total acquisition price of the Cooperheat assets was about $35 million. Again, that acquisition occurred right at the end of Q1, in August of '04. The total assets associated with the Cooperheat acquisition that are included in our balance sheet are approximately $45 million, including 21 million in current assets, 11 million in property, plant and equipment, and 13 million in other assets, principally being goodwill.

As you will recall, financing for the acquisition was provided through a new $75 million credit facility through a six-bank syndicate led by Banc of America. That facility consists of a $25 million term loan and a $50 million revolving credit facility. Borrowings under the facility are generally at LIBOR plus a margin based on a formula of debt to EBITDA. The initial margin, by the way -- the margin over LIBOR is 225 basis points.

Since the end of the first quarter, our debt has actually increased by about $5 million, as a result of substantial growth in working capital in the second quarter, principally accounts receivable. This has resulted in negative cash flow from operations in the first half of the year of approximately $3.6 million. We fully expect this to turn around in the second half of the year, and to have a significant reduction in debt during this fiscal year. Now, at November 30, just balances -- total debt outstanding at November 30 was $61.2 million total funded debt plus $5 million of outstanding letters of credit. And we have approximately $8.7 million of availability under our facility.

With respect to capital expenditures in the quarter, we spent approximately $700,000 on CapEx, bringing the year-to-date total to about $2 million.

With that, Phil, I'll turn it back to you.

Thanks, Ted. Let me began with a few general comments and observations. The Company took many positive steps during the recent quarter, but we are still a work in progress as it relates to the integration of our new businesses. There are several areas of noteworthy progress.

First, as Ted indicated, our historical business lines achieved revenue growth in line with our long-term objectives, rebounding from a weak first quarter. In that respect, Team Mechanical Services grew approximately 10 percent and Climax grew more than 30 percent. The corresponding profit performance for these units was also in line with expectations.

And we have made considerable progress in our integration activities, following the announcement of the new organization in October of 2004, or about three months ago. In December, we held our first combined branch managers meeting, bringing together the top 100 managers of our Industrial Services business. This is a major step in building relationships and fostering communication across our entire service network.

We have launched a series of regional integrated services training seminars to train all our field sales, operations management and branch management personnel on the full scope of Team's expanded service capabilities. In addition to the technical training, the seminars improve the communication and coordination among our service units within a region.

Effective January 1, we implemented a common payroll and benefits structure for all Industrial Services personnel.

We have also combined the corporate support activities of the former Cooperheat-MQS business with the corresponding Team units located in Alvin. We expect to exit the former Cooperheat-MQS headquarters facility within the month.

We also expect to implement a common financial system for all of the Team Cooperheat-MQS units on February 1.

Commercially, we have added or are in the process of adding the inspection and heat treating services of Team Cooperheat-MQS to seven major existing multiservice, multiplant contracts.

While we have accomplishments in many areas, we're still work in progress regarding our financial performance. Overall margins and profit contribution from our new Team Cooperheat-MQS business were well below our ultimate expectations. The inevitable distractions and disruptions that accompany the establishment of a new organization have contributed to our performance challenges. For example, we now have a new combined dealer organization with shifts in the responsibilities for many personnel, which we are getting used to. We have new common policies and procedures -- again, which require learning and implementation efforts. And we have to date had limited financial tools with which to manage job-level and branch-wide performance. We, again, expect this situation to improve dramatically with the implementation of our common financial system next month.

Our challenge for the remainder of this year is to complete the integration initiatives and restore the primary focus on field services execution in each of our service locations. While disappointed with our recent overall results in Team Cooperheat-MQS, we remain positive about our potential and outlook. For example, several TCM branches are already performing at or above our target levels. We are confident that our goals and expectations are realistic. Second, most of the major integration activities will be completed or implemented by next month. We will become more comfortable with our new organization and have the full set of tools to support the business. And finally, we believe we will have a very favorable market environment throughout the second half of this year, with robust turnaround activity.

Now, let me make a few comments about our individual business segments -- again, beginning with the Industrial Services segment. As most of you know, and just reminding you from some of Ted's comments, Team offers its Industrial Services through the two units. Team Mechanical Services provides leak repair, hot tapping, fugitive emissions monitoring, field machining, bolting and field valve repair services. Team Cooperheat-MQS provides the full array of inspection and field heat treating services. Due to the differing circumstances in each unit, I will comment on them separately.

As previously mentioned, Team Mechanical Services' performance for the quarter was pretty much in line with long-term expectations. As Ted indicated, revenue growth in total was 10 percent. The growth was stronger in non-turnaround services -- that is, leak repair, hot tapping and fugitive emissions monitoring -- due primarily to two very large turnaround projects in the prior year's second quarter. From a geographic perspective, the West Coast and Canada were particularly strong growth areas during the quarter. Profit performance for Team Mechanical Services was also roughly comparable to last year, in terms of margins, and in line with expectations.

We also continue to have a broad range of business development initiatives under way that support the continued growth in all service lines and in all geographic regions. A partial list of these initiatives include the continued expansion of multiplant, multiservice relationships; the establishment of a business development group to expand Team's participation in power plant outage work; an expanded focus on pipeline and offshore opportunities; and an expanded presence in Canada and South America.

Shifting to the Team Cooperheat-MQS unit, I previously discussed the range of integration initiatives that have been launched. From a financial perspective, Team Cooperheat-MQS revenues for the quarter were 26.5 million. It is interesting to note that these total revenues are about 20 percent larger than the Team Mechanical Services revenues, the point being this is a very significant part of our business right now. From a margin and total profitability perspective, we currently have only limited financial data. The total gross margin of about 28 percent is well below our ultimate expectations. We have already taken steps to address performance issues in a couple of problem branches, and we are working hard to implement our financial system, which should improve branch-level visibility at the job level as well as -- job-level profitability as well as overall labor utilization.

In the former XRI branches, where the financial system is already fully implemented, we are currently earning gross margins above 35 percent. While a portion of the SG&A expenses represent shared support services for both the Team Cooperheat-MQS and Team Mechanical Services units, we do expect the average branch-level operating profit of Team Cooperheat-MQS units to be in the 15 percent range, similar to the legacy Team Mechanical Services. The current SG&A levels reflect integration costs, as well as some excess capacity. We will be fine-tuning those resource levels, consistent with our growth expectations in the various areas.

Now, let me shift to the Equipment Sales and Rentals segments, which is Climax Portable Machine Tool Company. As Ted indicated, the unit had another good quarter. Revenue for the quarter and year-to-date revenues were up more than 30 percent. This growth came from a combination of standard equipment and custom machinery sales. We experienced sales growth in all major geographic areas, including North America, Asia and Europe. We are obviously pleased with this continued growth, and believe it reflects the continued productivity of the Company's strategy, which has been to focus on expanding its presence in the shipbuilding and power industries.

From a profit perspective, the unit earned $219,000 and $375,000 for the quarter and year to date, respectively. We are certainly pleased with the turnaround from the prior-year losses in this regard. And our outlook for the remainder of the year is attractive. We have several significant projects already on the books that should be the basis for continued revenue growth.

Let me wrap up with a couple of comments on our outlook. We are optimistic about our business, and expect continued improvement throughout the remainder of the fiscal year. We expect continued revenue growth in both business segments and across the many service lines within our Industrial Services segment. We expect improved margins in Team Cooperheat-MQS.

I want to point out the leverage of improvement in this area is very significant. For example, as noted in the earnings release, had Team Cooperheat-MQS improved its overall margins by 10 percentage points, overall company earnings for the quarter would have more than doubled from the reported 16 cents per share to approximately 34 cents per share. Said another way, each 1 percentage point improvement in margin will yield about a 2 cents per share improvement in overall quarterly company profitability. While we are confident that we will improve our Team Cooperheat-MQS margins, until we get our tools in place and gain a little more experience with the business, it is difficult to predict how fast we will improve. Once we develop a better understanding of these margins and improvement trends, we plan to re-establish earnings guidance for our investors.

Looking ahead to fiscal year '06, we remain comfortable with our previous guidance of $1.25 to $1.40 per diluted share. Some of you may be asking, how can we be confident projecting next year's earnings when we are not comfortable projecting next quarter's earnings? It is true that it is difficult to have complete clarity about fiscal year '06. However, we are comfortable with our estimates of several key assumptions underlying that performance outlook. At the risk of oversimplifying the process, the two key assumptions underlying this outlook are that, one, Team will continue to grow organically at a 10 percent rate; and two, that Team Cooperheat-MQS will improve its gross margin percent to approximately 32 percent, while the remainder of Team's units and service lines maintain current gross margin levels. This organic rate assumption is consistent with but slightly lower than our historical experience. The Team Cooperheat-MQS profit margins assumption does not reflect Team's ultimate expectations for that business, but rather an interim point of improvement along the improvement path.

Before opening up for questions, just a few final comments. We are pleased with our strategic position. The expanded combination of eight specialty service lines, the industry's largest service network, the industry's largest market share in this highly fragmented market, and continuing and growing customer preferences to combine service requirements with fewer service providers positions Team very attractively. Nothing we have seen or experienced since undertaking the acquisitions has diminished our assessment of this opportunity. Now, the key for Team is execution. We need to work through the remaining integration issues and restore our focus on providing outstanding customer service in every opportunity, safely, effectively and efficiently. Speaking for our approximately 2,000 employees, we are up to the challenge.

Now, let's open it up for questions. Matt, can I turn it back to you?

(OPERATOR INSTRUCTIONS). Chris Terry, First Dallas Securities.

Ted, thanks for breaking down the Cooperheat financials the way you did. That really helps a lot. The 18 cent earnings -- now, did I hear that right? That would have been on top of the 16 cents?

That's correct. What it is, Chris, is a sensitivity analysis just showing what the impact of margin improvement can be, as we continue our integration activities and begin to restore those margins to our target levels. Really, each percentage point is 2 cents a share per quarter or, if you will, 8 cents per share per year, so a little bit of improvement means a lot.

And then also debt levels -- realistically, what do you think -- what's a good target by the year end?

I think we'll be back down to the 55 million level.

And most of that, I'm assuming, is going to come from cash flow?

Yes, all of it will come from cash flow.

What did you guys do in operating cash flow in the second half last year? Do you guys have that figure off the top?

Chris, I don't have that. I can get it to you later (multiple speakers) off the top.

Gentleman, there appear to be no more questions at this time.

Chris Terry, I think, indicated he might have had a couple others. I'll just give him a second to get back in, if he does. And if not, that's okay, too. All right. It looks like we're all set. I just want to thank all of you for your participation in this conference call and your continuing interest in Team. We look forward to being with you again at next quarter's conference call. In the meantime, have a good day.

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