Team Inc (TISI) 2006 Q4 法說會逐字稿

Good morning. My name is [Jurleen] and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Team, Inc. fiscal year 2006 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). Thank you.

It is now my pleasure to turn the floor over to your host, Phil Hawk, Chairman and Chief Executive Officer. Sir, you may begin your conference.

Thank you and good afternoon, everyone. It's my pleasure to welcome you to the Team, Inc. Web conference call to discuss recent Company performance. Again, my name is Phil Hawk. I'm the Chairman and Chief Executive Officer 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 fourth fiscal quarter and full fiscal year ending May 31, 2006. 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, 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. As indicated, following our remarks, we will take questions from our listeners.

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

Thank you, Phil.

First, I want to remind everyone, as usual, 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, 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 $76 million, compared to 63.2 million in the fourth quarter last year, an increase of 20%. Income from continuing operations was $4 million in the current quarter versus $1.7 million in last year's fourth quarter. Earnings per diluted share from continuing operations was $0.42 in the current quarter versus $0.19 last year.

For the full year, revenues were $260 million, a 35% increase over last year, and income from continuing operations was $10.6 million, an increase of 148%. Earnings per share on a diluted basis from continuing ops was $1.16 per share versus $0.48 last year.

As a result of the Climax sale, which was completed at the end of the second quarter, all of our operations are now in a single business segment; that is industrial services. As a reminder, these services include an array of specialized services related to the construction and maintenance of pressurized piping and process systems, as well as specialized NDT inspection services. The Industrial Service segment is organized into two groups -- TMS, which includes leak repair, hot tapping, fugitive emissions monitoring, field machining, technical bolting, and fuel valve repair services; and then the second group is TCM, which is comprised of field heat treating and NDT inspection.

With respect to TMS, revenues in the quarter were 34.8 million compared to 27.2 million last year for an increase of 28%. With respect to TCM, revenues in the quarter were $41.2 million versus 36 million for the same quarter last year, an increase of 15%. All of our growth in the current quarter is from organic growth. For the full year, TMS revenues were up 24% and TCM revenues were up 44%, which would be 25% without the acquisition affect in the first quarter of last year.

Operating income for Industrial Services was 11.2 million in the current year quarter versus 7.5 million in last year's quarter. The operating margin as a percentage of revenue was 15% in the current quarter versus 12% in last year's quarter.

Now, looking at corporate cost, total corporate costs in the quarter were $3.5 million, which was about the same as last year's fourth quarter but up substantially from the third-quarter amount of 2.4 million. Corporate costs in the fourth quarter included a $225,000 non-cash compensation expense associated with a vesting of performance-based restricted stock that was awarded to the Company's Chief Operating Officer in 2005. Additional increases over the third quarter were in legal costs of about $200,000, incentive compensation costs of $250,000, and audit costs of about $650,000, all when compared to the third quarter.

With respect to audit costs, Sarbanes-Oxley and our both internal and the cost of our extra audit -- we expect our second-year cost to total about $1.4 million, of which, as I said, 650,000 was incurred in the fourth quarter and $750,000 will be incurred in the first quarter of fiscal '07. That total of 1.4 million compares to about $2 million incurred in our first year of Sarbanes-Oxley compliance and for fiscal 2005, which was incurred 1.1 million in Q4 of '05 and 900,000 in the first quarter of this current fiscal year.

Now, with respect to our balance sheet and cash flows, at May 31, our total debt was $45.7 million, down about $10 million from the end of the third quarter as a result of an improvement in our Accounts Receivable issues that we've discussed in past conference calls.

In the fourth quarter, our Days Sales Outstanding declined by about ten days as compared to the end of the third quarter. Capital expenditures for the year-to-date was about $7 million, and depreciation and amortization was about 6.4 million. EBITDA from continuing operations was $9.5 million for the quarter and nearly $28 million for the year. At May 31, our debt-to-EBITDA ratio was about 1.7 to 1.

Now, just a brief word about forward-looking stock options expense -- as we pointed out in the press release, we will be implementing FAS 123R in the first quarter of the current fiscal year, fiscal 2007. Under standard, we are required to recognize non-cash comp expense for the fair value of stock options granted. Generally on a historic basis, we've not recognized options expense for the routine grants of options. While the accounting for FAS 123R is very complex and has multiple pieces, we expect total non-cash expense for fiscal 2007 to be about 1.5 to $2 million, based upon our assumptions about the number of options we expect to grant and the future value of our stock. Phil will address this more in his comments.

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

Thanks, Ted.

I'd like to add several observations and comments to the financial results that Ted has reviewed with you. Overall, I am very pleased with our continued growth and progress. Fiscal year 2006 was a record performance year for Team and I am proud of this performance. Both the Company's revenues and net income were the highest in company history by a substantial margin. Our performance improvement was consistent with our long-term strategy and business model. We achieved organic growth in both divisions, all service lines, and nearly all geographic regions. We continue to benefit from our multiservice, multilocation capabilities that enable us to bring a more comprehensive service offering to our customers.

Our profit growth rate exceeded our revenue growth rate, reflecting the inherent operating leverage of our business. That is not to say that we've exhausted all of our opportunities to improve our leverage, and I will speak to these opportunities in a moment. We've begun to show progress in bringing our Accounts Receivable levels back toward target levels. As a result of this progress and our strong operating results, we reduced debt by approximately $10 million in the fourth quarter.

A second key point I want to make is this. Despite this record performance in fiscal year 2006, we have extraordinary opportunities to keep building and improving this performance in 2007 and beyond. The opportunities for continued revenue growth remain robust and strong. Due to the structural advantages of our size, our depth of resources and our multiservice, multi-location capabilities, Team continues to expand its penetration and market share in this highly fragmented market. Team also continues to benefit from attractive overall growth and market demand, driven in part by the remaining storm-repair activity and significant plant-expansion activities that we believe are in response to very strong customer operating margins and a strong outlook in those industries.

Also, we have further improvement opportunity with our profit margins. Despite our progress over the past year, we are not fully satisfied with our margins, particularly in the TCM division. We expect further progress on this front in the current year. As a result, we expect that Team's earnings in 2007 will exceed last year's record earnings by more than 30%.

Now, I'd like to add a few specific comments on our observations in a number of areas. First, let me begin with the operating performance in our two divisions. TMS division had an outstanding year. Total revenues were $117 million, up about 24%. All regions and all service lines expanded their business this year. The prospects for the coming year are equally exciting.

In addition to continued grass-roots penetration of historical business areas, TEAM has launched exciting initiatives to expand our business in two new areas, line isolation services and pipeline hot tapping services. While our current-year forecast is 10% revenue growth, in line with our long-term organic growth targets, these new initiatives certainly create some exciting upside, perhaps for 2007 but also the years beyond.

I'm also very pleased with the operational execution of TMS division and their ability to restore gross margins to the 40% level for the year. Recall that they had slipped a little in the prior year. While coping with significantly expanded service volumes, the division maintained its focus on execution and improved overall gross margins by approximately 3 percentage points. I look for the division to sustain this margin level going forward.

Shifting to the TCM division, which provides our inspection and heat treating services, total revenues were 143 million, up more than 40%. As Ted indicated, a portion of this growth is the full-year effect of the Cooperheat-MQS business acquisition, which reacquired in August 2004 and therefore was not part of the Team for the full fiscal year, 2005. After adjusting for this impact, we estimate organic growth for the year on an apples-and-apples basis was approximately 25% -- again, still outstanding.

Again, we have a number of exciting initiatives underway to support future growth. As one example, we currently have 20 new, large heat-treating rigs on order, both to upgrade the aging fleet we inherited from the acquisition of Cooperheat-MQS but also to substantially expand our capacity.

An area of focus and significant improvement potential in the current fiscal year is overall profit margins within TCM. Our profit margins at the branch level did improve slightly last year, up a little more than a percentage point. But all of the improvement was driven by volume leverage with essentially no improvement in gross margins. Overall, gross margins were about 30% for the year, versus an ultimate goal of 34 to 35%. The biggest source of this shortfall is in a handful of underperforming branches. I'm not going to discuss our business on a branch-by-branch basis, but we are certainly managing it that way, and I'm confident that we will make significant progress on this opportunity this year.

Kind of shifting to cash flow, while we're not offering a specific cash flow forecast for this current year, we suggest there are three factors to keep in mind. First and foremost is projected net income. As always, this remains the key driver of cash flow. Second is anticipated further improvement in our Accounts Receivable management efforts. In rough terms, a reduction in days outstanding of a single day results in about a $1 million improvement in incremental cash for the Company. We believe the improvement opportunity for Team from its current position is about 15 to 20 days, or 15 to $20 million. I wouldn't expect to get all the way there in the next 12 months, but we expect significant progress in that time frame.

Finally, as an offset, we are expecting our capital expenditures this year to being substantially higher than last year, in the range of 12 to $17 million, up 5 to $10 million from last year. A portion of this capital is to catch up to support the large growth in our business base in the last year or so, enabling us to replace the costly use of rental equipment with owned equipment in our baseline operations. And a portion is released to several expansion initiatives mentioned earlier. Again, it's our philosophy to expend significant capital only after we have very high confidence that the new equipment can be productively put to work immediately. The actual level of capital expenditures will be determined by our progress in developing the specific business opportunities related to the equipment. My net expectation is that our cash flow available to pay down debt will be about equal to net income.

The earnings release issued this morning as well as Ted's comments a few moments ago addressed our projected non-cash expenses in fiscal year 2007 related to stock options. The current estimate is about 1.5 to $2 million. As Ted indicated, it's a complex calculation driven by a number of assumptions. I want to add just a couple of general comments on this subject. First, there is no doubt that stock options are and have always been a real expense for the business. In a growing stock-price environment, stock options have the effect of diluting the ownership of other shareholders. In fact, the calculation of earnings on a fully diluted basis reflect the impact of this dilution at today's stock price.

We think the right way to think about the impact of stock option dilution going forward is burn rate. Burn rate is the number of new stock options awarded to Team managers in a single year, divided by the total number of shares outstanding. In our view, burn rate is the driver of future dilution for shareholders. Going forward, it is our plan to manage our option grants to roughly a 3% average annual burn rate. The focus of our discussions of historical business performance, as well as business forecast, will continue to be on the same basis that we have used previously, before the effect of these non-cash stock option expenses.

Shifting to fiscal year 2007, I'd like to make just a couple of additional comments. As we indicated in our press release and I mentioned in my introductory comments, we expect 2007 to be another record year for Team with earnings growth of 30 to 40% over fiscal year 2006. The primary drivers of this earnings growth are the projected, continued organic revenue growth in both divisions, combined with expected progress and margin improvement in TCM division. The earnings projection is based on an expectation of 10% organic revenue growth and an improvement in the Industrial Service segment profit margin from about 12.5% to 14%. We are confident that we can reach both of these targets.

While organic growth and improved execution remain the primary strategic focus of the Company, we are also receptive to business acquisitions that can attractively accelerate our performance growth. As we explore possible opportunities from time to time, we will stay patient and disciplined. We are guided by the following two principles -- we will only pursue opportunities that are clearly additive and nondilutive to current organic growth initiatives. Because of our attractive organic growth opportunities, we don't depend on acquisitions to be or stay successful. And we're going to stay in the space we know. We will only consider opportunities in current segments or those closely related or complementary to current business segments. I should point out there is no assumption of any business acquisition within our earnings guidance for fiscal year 2007.

Let me wrap up with some of our key challenges for Team. I hope you share my sense of excitement and enthusiasm for our prospects. However, as I have said before, saying it and doing it can end up being entirely two different things. To capitalize on our opportunities and to deliver the results we expect, we are focusing on several specific issues -- first, make every branch of positive contributor to Team's overall results. Most of our 70 branches are already there, but a few aren't. At locations where we are not yet at satisfactory levels, our focus is on getting the right team in place, re-establishing and expanding our commercial presence in the area, and balancing our resources in line with business opportunities.

Sweat the details and margin management -- at our current size, a single percentage point of operating profit margin is about $0.15 per share. With over 80,000 jobs and over 3,500 customers, we have a fertile field to look for improvement opportunities in this regard.

Continue to be the employer of choice in our industry but also expand our recruiting horizons to bring new sources of talent into Team. A key requirement to support our continued growth is the continued growth in our employee base, particularly technicians. With expanded overall industry demand, simply recruiting technicians already active in the industry will not be a sufficient solution. We have programs underway to expand our reach both with military veterans and appropriate tech and trade schools across the country.

As a final comment, we must never forget what it takes to be a great service company -- treasuring every service opportunity and staying with until it's completely right and the customer is fully satisfied -- valuing every employee and recognizing the critical role each and every individual plays in our success and recognizing that we have to re-earn our customers' confidence in us every day.

With those comments, let's now open it up for questions. Jurleen, Can I turn it over to you?

(OPERATOR INSTRUCTIONS). Arnie Ursaner, CJS Securities.

I guess my first question would be, obviously, the one thing relative to our number that was a little surprising is on the TCM division, I know you have had a goal of improving margins for awhile. I guess, as specifically as you can try to be, what is holding it back now and what actions or steps are you taking to get this more in the lower 30 -- to get that 2 to 300 basis point improvement you're looking for?

Well, I guess, in layman's terms, what is holding us back is spillage -- is it's the good projects. The strong branches are doing just fine; they're where we want them. It's that we kind of have kind of poor jobs on a number of instances, poor job execution I should say, and we continue to be plagued with a couple of branches that haven't yet kind of got the momentum where we want it. I won't say that we have a solution -- a 100% solution in every single branch instance but I will tell you I am extremely pleased with the progress we're making in most situations. We have new leadership in place. We are seeing that -- the precursors of financial progress that we expect to report this year.

Okay, my second question relates to your organic revenue growth assumption. You grew 39% in Q2, greater than 20% each of the last two quarters. I think you've been pretty enthusiastic about the demand side of the equation.

Right.

Is the thing that's causing you to only think about 10% growth -- to me there are one or two possibilities. Either you can't find enough people to do the work, or the cross-selling opportunities that were one of the factors driving growth are diminishing. Could you comment on both of those, please?

I think, more than anything else, it's conservatism. I think our organic growth assumptions in our guidance each of the last several years has been about 10% -- kind of where we started the year. Then we kind of move from there. I think 10% is good and as the outcome of that is good.

You are correct that we do have to resource in terms of continuing to hire technicians and bring them into to meet the even 10% growth goals. That's not a new issue but it's a continuing issue that we have to manage through. I think there's a -- I certainly am not negative about or want to foreshadow that I have less optimism/enthusiasm about this year than I have in the past. As you point out, I am very enthusiastic about some of the opportunities we are creating. It's just been our posture to, again, forecast to our long-term target, at least in the beginning of year and then we will adjust from there as we go forward.

You know, traditionally, you've entered new lines either because you couldn't buy your way into it or it was an opportunity that in essence you are creating. Could you expand a little bit more on line isolation and pipeline topping? Give us a feel for the size of those markets and -- (multiple speakers)?

Okay, these are both I'm going to say add-on or complementary and in one respect is kind of part of a market that we are in -- that we have been in; we just haven't served those customer groups explicitly.

Line isolation is the process by which you are basically isolating pipe ends and for the purpose of pressure testing the pipe ends, the flanges when they are welded onto pipes and new construction or replacement construction. That's something -- it's a service line we've not historically provided but it's complementary to our field machining and turnaround service activities. It's just -- it has a little bit of tooling associated with it but it's a natural add-on and frankly, a lot of our customers are asking us to offer it as a complement to some of our turnaround activity and services.

Pipeline hot tapping services we provide. We're the largest -- probably the largest provider of hot tapping services in the plant environment. A major use of the technology is in pipelines. We have done a little of that work but that historically hasn't been our focus. We have a service line manager really focused on -- business development manager focused on that segment today. We just see it as a real good growth opportunity for us, so we're moving forward with that.

In terms of market potential, each of those segments kind of roughly is at least a $50 million market. We expect to, as we go forward with this, to have a material portion of that market in our bucket.

Thanks very much.

James Gentile, BB&T Capital Markets.

Just a couple of questions, if you could? The international -- any sort of new international efforts developed in the quarter?

I wouldn't say there were new international efforts in the quarter. The international business -- it's principally a North American business, which is Canada and the Caribbean, Trinidad, Venezuela, Puerto Rico I think are the big ones -- and Aruba thank you -- continue to grow robustly. We had attractive double-digit growth, both North and South of the border, throughout the year, and we continued to be excited about our continued development opportunities there.

Then, the competitive environment -- I was wondering if you can characterize what's happening with regard to some of the larger projects that could be coming up for bid shortly and some kind of aggression with regard to competition in terms of growth (indiscernible) of service lines elsewhere.

Well, I think we've always believed, as we've continue to believe, that we are in a competitive environment. It's a highly fragmented industry. Mom and pops or smaller companies still maintain or make up the bulk of the market as I think we've said or if you look at our Web site, you can see our company presentation. We estimate our total market share is approximately 15%. We do have, I think, a little bit of an unusual circumstance, both in fiscal year '06, is continuing in '07 and we think probably at least another year or so -- is we have actual demand growth as a result of very robust conditions.

So with robust growth, that means the industry has to expand its capacity. I think we are probably tighter as an industry than we've been in some time. So that kind of works into the whole competitive environment, that all of our competitors are, like us, are -- (technical difficulty) -- resources to meet the expanded demand levels of our industry. But in terms of is it less competitive or are customers not as selective as they used to be, I don't believe that's the case. I think it's pretty much the same as before.

Is there any sort of change in the pricing strategy that you are experiencing as a result of the higher demand that is out there?

Well, there's no question that we are getting -- seeking and getting price improvement across the board really with nearly all of our customers. A lot of that, because of the increased demand environment, it's not specifically just in our segment but really across the board because of the very heavy levels of construction, maintenance, rebuilding activities in all of these business segments. We've had a very aggressive competition for technical resources.

We have to respond to that by aggressively increasing kind of technician wage levels kind of in response to those competitive levels. That, in turn, becomes the basis for going back to our customers, explaining the environment we're in, which by the way they understand fully because they are in that same environment. That's the basis for a fairly significant adjustment in pricing really in, I would say, nearly all customer situations.

Okay, thanks.

Mike Carney, Aperion.

I've got a number of questions, so I will try to shoot through a few of them. First, Ted, can you explain a little bit more on the option expense going forward? You described in the press release ISOs versus non-qualified options.

Yes. Historically, most of our options have been incentive stock options, which is a special kind option under the Internal Revenue Code.

With respect to those -- and those are called qualified options, in short. Qualified options, to the extent that a holder exercises the option and he holds it and doesn't sell it, there are capital gains benefits to that individual.

Under 123R, if you have ISO options, you have to assume that the holder will act rationally from a tax perspective and not allow it to become disqualified. Because of that, when we book expense associated with ISO awards, we will be not able to recognize a tax benefit for that. Most of our existing options that are outstanding at May 31 as we are converting to 123R are indeed ISO options. So with respect to that tranche of the expense, we will be booking a non-cash expense without a corresponding tax benefit. Now -- so that's -- and that's a significant portion of the non-cash expense that we would expect going forward.

The second piece of that, Mike, will be the expense -- or non-cash expense associated with new options that we may issue. We are planning to change, to modify our option plans when we go to our shareholders and send a proxy out in just a few weeks with an expectation of giving ourselves an option to grant non-qualified options. If we grant non-qualified options, we in fact then are able to take a tax benefit as we book the expense. So it's a little bit driven by the tax code and the kind of options that we happen to have outstanding at the present time, so there will be a piece of our option expense going forward that will not have a tax benefit and a piece that will have a tax benefit as we move toward granting more non-qualified options rather than qualified options.

Well, it just seems like that's counterintuitive because ISOs are the ones that would get the tax benefit from the Company if they get a tax benefit from an individual, and the non-qualified don't. So that's why I'm not --

Well, it's a little counterintuitive to me, too. The reason is because the fact of the matter is that most of our option holders, as they exercise options, in fact do not hold them; they exercise and sell and we do get a tax benefit. In fact, that doesn't change relative to booking non-cash expense going forward if a holder of an ISOs settles the option, the Company gets the tax benefit at that time. The difference is we won't be able to anticipate a benefit if it's an ISO because -- (multiple speakers).

Okay, I got it.

You see what I'm saying?

I got it. Good. Okay. Then also, Ted, on the increase in corporate level expenses, did you say -- I think you said versus the third quarter was 225,000 from RSUs to the COO, 200,000 in legal expenses, 250,000 in incentive, and 250,000 in audit. Was that correct?

650 in audit.

650.

Right.

Then there will be an additional 750 in the first quarter of '07?

That's correct. That compares to 900,000 in the first quarter of '06 for the same line.

So when I back the corporate expenses out essentially, it still looks like there was a substantial -- or there was a substantial increase in operating expenses relative to what seems to be -- certainly this is the highest revenue -- or historically the highest revenue point you've been at, and also the highest gross margins. It just seems like you would've gotten more leverage on the operating expenses at the branch level.

Yes, and here's the significant element from that field level, in terms of SG&A cost, again, versus looking at third quarter, which is easiest to look at sequentially -- is additional incentive comp costs at a field level of about $600,000 in comparison to Q4. That's because two things -- one, the significant increase in revenues and a significant factor in our incentive comp awards are associated with revenue growth, as well as just overall performance in the fourth quarter drives a higher incentive compensation cost to the field.

Okay. And then -- (technical difficulty)

We lost you, Mike.

(OPERATOR INSTRUCTIONS). Mike Carney, Aperion.

Okay, I missed that. Phil, when you talk about under-performing branches, is that just in the TCM division or is there work to do in TMS also?

There's actually two branches that I would characterize as underperforming last year in TMS and a handful in TCM, so principally TCM but not exclusively.

Okay. The changes you said to Arnold's question I think is principally new leadership and trying to get better execution, because you certainly have enough demand to keep those branches open. Is that correct?

That's correct. It's just -- I've talked at some length in prior calls about just the challenge when a branch is kind of stalled and doesn't have positive momentum going forward, you have to simultaneously kind of restore that demand. I should say the customer confidence in the local service capability, as well as bring resources, technicians and technical resources.

Now, our advantage, because of our big network, is to loan resources or provide support to that branch from contiguous areas.

But essentially there's no branches that you feel are to be closed because there's not enough demand?

Correct. I won't say that we won't ever close a branch, but I don't think -- that is not what we need to do to fix our issues.

Okay. Then also finally on the guidance of 10% revenue, I understand that's kind of the long-term average, so you bring that as your guidance. But can you talk about the visibility that you have and then necessarily, what indicators do you look at for making strategic initiatives each year?

Well, I think a couple of things. Just in terms of -- clarify your comment. You said our long-term average has been -- and it really hasn't been -- our long-term average has been more like 14, 15. We've kind of always stated kind of our long-term goal is a double-digit revenue level, so that's kind of where we started. By the way, that's where we started last year with our guidance. I would point out that through the year, we sold Climax and made a few other adjustments that kind of in effect were increases in our guidance as we went along. That was kind of a back-handed way to do it but we ultimately increased our guidance as a result of selling Climax or increasing the guidance for the -- I should say the Industrial Service business.

In terms of kind of indicators for us, again, general things we look at is it's going to be overall industry demand, as I pointed out, for things that we look for there. It's not going to be general maintenance; it's going to be special projects, expansion projects, or ideally even new facilities. We're not seeing new facilities but we're certainly seeing a high level of expansion and debottlenecking of facilities -- customer facilities in major industry segments with a lot of good reason. I mean, just the margins are tremendous right now in refining area; they are very good in power and several of the other segments as well, but those are the two biggest segments for us. So we have customers who are very healthy. They are looking to optimize and expand their business.

Secondly, we are counting on or expecting additional market share growth as the result of I guess the procurement consolidation to fewer, larger, more professional companies. Again, we see no slowdown occurring in that activity.

Now, it is true that we have relationships with nearly all of the majors, so it's not like there are virgin customers out there with whom we have no relationship that we're going to establish one; there's not a lot of that. But in terms of the penetration of those customers, there's still a tremendous opportunity, so we are excited about that.

So I'm not trying to be cute here but I think just the view is we have a very robust environment, as I said, that we are kind of coming out of the blocks for the beginning of the year. I think that a 10% target rate is not a bad place to start and again we're pretty proud of a 30 to 40% growth rate.

What we have to do to grow faster than that and we have in the past we have to continually bring, in orderly way, bring more resources on board. We are striving to do that. I'm not projecting that we can't this year, but as we have historically, just projecting as a starting point what we think is a pretty good long-term aspiration, which is, again, double-digit revenue growth for our business.

Well, if you had 17, 20% growth just recently, basically there's no reason to think that you're going to all of a sudden decline to 10% year-over-year growth, you know, this next quarter or next month or --.

We don't have any reason to slow our growth down; you're exactly right. I would point out we're bringing a lot of resources on board so that will be -- that can be a governor to our absolute growth, is how fast can we bring trained -- recruit, retrain and retain particularly technician resources. Our total technician force today is a little over 2000, 2200 technicians, something of that order of magnitude. So when we talk about 10 to 15% growth, we're talking net adds of 2 to 300 technicians, gross adds of probably twice that, in terms of 4 to 500 technicians. So, that's a challenge for us but certainly one where it's not a new challenge. It's one that we are aggressively addressing.

The 30 or 40% earnings, is that earnings growth you're saying before stock option expensive? Is that where you are getting that number?

Correct, on an apples-and-apples basis, that's right.

Okay, and last question -- Phil, in talking about the pipeline -- new pipeline business -- how much pipeline segment business do you have currently?

You mean prior to this initiative?

Correct.

Negligible, in terms of this particular segment of the hot tapping.

Well, I'm saying in terms of pipeline customers?

Oh, we serve pipeline customers on a number of -- provide a number of services to them, but these are -- the segment that we're entering is the large-diameter kind of field pipeline hot tapping and line stopping business.

But the same customers as these previous -- (multiple speakers)?

Some of them are different segments of that. The requirement of this business is a different kind of -- our same hot tapping machines are applicable but there are some different valving that's used in the field work, kind of basically because of the location of the hot taps. It's a little bit lighter from a weight standpoint, lighter equipment that moves a little bit better. So that's the capital expenditure that would be involved with us entering this business.

Okay, thank you all.

Arnie Ursaner, CJS Securities.

A pretty straightforward question in response to the question you just got about revenue growth, which I continue to think of being pretty conservative. You are more than two months into the current quarter. There's obviously been a negative of having to wait to get this earnings release because it's year end, but you are also two months into the quarter. If I understand your business, you normally have excellent visibility as far as 90 days or even more out. As you look -- and I know you don't want to get pinned down on any quarter, but are you seeing enough of a slowdown now to indicate the 20% growth is going to slow anywhere near 10% in the current quarter now that you are more than two-thirds of the way through it?

Well, first of all, here's a reminder I'll give everyone -- is that the first quarter is seasonally the weakest quarter, so to draw many conclusions from first-quarter results is a perilous job -- duty there. I would discourage that. But no, we're not slowing down. Business is strong.

Okay. Going back to I think Ted's comments, I think I may have misunderstood you the first time, so I just want clarify it and perhaps see if we can put some spin on this. I think, in your prepared remarks, you indicated the incentive comp and I guess that was in corporate was an incremental 200,000. But then you had another incremental 600,000 at the field level?

Yes, that's correct.

Okay, so what we are really talking about here is a total -- unless I'm mistaking you -- a true-up if you will of expenses for the year that ended of almost $800,000. So I have two questions related to that. If in fact that is the right math, that alone would have taken your earnings per share in the quarter up to $0.56, unless I'm not doing my math right.

The second question --.

No, that's -- I mean the problem with the math on that is the 800,000 is the correct number but it's a fourth-quarter number. It is caused because the incentive comp is an annual computation; it is not a quarterly computation. Because of the significant revenue growth in the fourth quarter, as well as the significant profitability and performance, particularly on the TMS side, it caused fourth-quarter aggregate incentive comp expense to be $800,000 more than -- in the third quarter, which is comprised of 600,000 in field-based and the remainder at corporate.

Don't you normally accrue, though, all through the year for the fourth quarter true-up -- I mean, for the fourth-quarter number, and then literally true it up at the end?

No, we accrue to the level earned through each of the quarters.

Right. So staying on that, it seems as if this number is much more tied to revenue than profitability. Have you taken any actions to change this on a go-forward basis to perhaps line up the incentives more in line with what your shareholders would like to see?

You know, actually it's a combination of both, Arnie, and one of the things that we do look at very carefully with our board is our total incentive plans. We think incentives are terrific because they do align our managers with the success of our company, which we think should line up exactly with our shareholders. We look at carefully our total incentive cost as a percentage of EBIT, and those actually for this year were little less than 70%, kind of all in. That's something that we and the Board looks at carefully, in terms of managing that.

(multiple speakers).

But to Ted's point, we -- rather that we don't just straight-line accrue it per budget because of the seasonality of our business, so what we try to do is accrue the portion that was kind of earned in that quarter, so our stronger quarter -- second and particularly fourth quarter -- are quarters that have heavier accrual rates related to that. But in terms of kind of a change, we've had no change in incentive philosophy where we are paying more or a higher percentage. To the contrary, we paid a significantly lower percentage of incentive comp this year than we did last year as a percentage of EBIT.

I want to come back again on cross-selling because I know it's been a driver. You were I think pleasantly surprised, when you completed the merger, at some of the cross-selling opportunities. Are you seeing this slow down or in fact are we still pretty much in harvest mode on these opportunities?

I think we're still rolling. We've benefited from several of them for sure, but it is still developing and evolving, positively. You know, the truth is the customers wanted -- I mean, there's a lot of very positive reasons why customers should want to and do want to deal with fewer service companies more comprehensively. We are an outstanding alternative to do that, and cross selling -- a lot of that is just getting customers more familiar with the breadth of our capabilities. And so we just see ever-increasing concentration or I would say penetration is the right word -- penetration of a lot of these larger accounts. The relationships that exist from the other side or the other division, if you will, or the sister division, is a very powerful draw of that. It's not the only draw but it's a powerful one, and we are continuing to see more of that.

We have -- this week, for example, all of our branch manners in all 70 locations are together here in Houston. We are having a kind of a three-day management meeting. One of the key objectives of these types of meetings is to increase the familiarity, communication ties between all of our branches so that we help each other commercially in terms of selling new work but also help each other from a resource standpoint in terms of bringing resources to bear when we have big, big jobs that require resources from across our network. So, no, it's not slowing down and I would not expect it to for really some time.

Can you remind us again of what your fourth-quarter net adds were in headcount of professionals? And again, since we are well into the current quarter, can you give us a feel for the trend in the current quarter?

Arnie, I don't have any headcount data with me today, so can we -- we can get it to you.

Thank you.

Byron Pope, Pickering Energy.

Good morning, guys. You mentioned, in the press release, some of the year-over-year growth associated with hurricane-related repair services. Could you help us quantify the order of magnitude of that hurricane-related repair work? Absent a similar type of hurricane season this year, when would you expect to see some of that hurricane-related backlog abate somewhat?

I think we're -- I don't -- it's difficult to separate hurricane from kind of projects, okay, or kind of fundamental demand. This is a rough swag but (indiscernible) look at TMS division, it's up I believe it's 25%, 24% for the year. I would kind of roughly say something like of the order of magnitude of 10 to 15% of that 25, so about half of that is probably I'm going to say growth in demand and half of it is marketshare growth. The reason I say that is because we have historically grown when we haven't -- when we know we haven't had market demand -- is about marketshare. The penetration has grown at about 10 to 15% and I think that's unchanged. I think the hurricane work will be done here in the next quarter or so; there is very little left. I mean, the big efforts were in the spring, as far as we saw.

What is less clear when it will end is are the expansion efforts related to I'm going to say extraordinarily robust environment, and we continue to see kind of very large numbers of projects and big projects related -- we call them turnarounds. They can be done seasonally, the same time the others works done, but rather than just restoring what's already there, there is substantial expansion activity underway within a unit to kind of either debottleneck it, make it larger, make it more efficient. Just as a frame of reference, Byron, you know this better than I but I would say 3-2-1 kind of historical 3-2-1 crack (indiscernible) 25 year average, $3 or $4 a barrel, something like that. I believe we're running in the neighborhood of $20 to $25 a barrel today.

So when you think about customers whose profit margins are 5 times historical levels with at least in some view, some prospect of some maintenance that's being sustained for some time, it gets the creative juices going about well, how do I get more incremental barrels out of my plants? We are benefiting from some of the initiatives that are coming out of that thinking.

Thanks, guys.

Chris Jackson, Brown Brothers.

I have a couple of longer-term questions directed really at one of your comments about adding technicians and sort of payroll growth. That is should we assume that the rate of revenue growth pretty much translates into an equivalent percentage increase in the number of technicians on the payroll? Is that a reflection of the current tightness in resources or a long-term characteristic of the type of work that you do? In other words, is there little or no wiggle room on productivity or man-hour numbers?

Then sort of a follow-on, any comment on sort of the current environment of wage and total comp increases, what you're having to pay?

I think, historically, we've not seen -- this is prior to this current year -- that we've not seen a lot of price flexibility, so revenue growth equals technician growth I think is true. I don't think that was true the second half of '06 and '07; we don't have good metrics on that. Say the -- what would I say? I would say that the average wage increase on average across our network, while our historical targets have been probably 4%, although have been a little bit higher than that actual, we are several percentage points higher than that on average. It's going to vary a lot by region. The Gulf Coast right now is extremely hot due to a lot of these projects related to -- again, it started with Katrina/Rita rebuilds but those areas are -- there's a lot of competitive pressure on wages, and we're going to respond to that and be with that.

I think, in terms of kind of revenue (indiscernible) so we're going to see some nominal, if you will, inflation effect in pricing of -- I don't know -- something of the order of magnitude of what, 4 or 5%, maybe, beyond just kind of real resource adds.

Now, our goal is to -- I think we are pretty satisfied with the TMS gross margins. Not to say we aren't going to continue to try to make them higher, right, by managing the individual jobs effectively, but where we see the greatest opportunity is in TCM. That's some combination of pricing, productivity improvement, higher utilization of personnel, just better management of the business. So I don't -- I guess that's trying to answer both questions at once there a little bit, I guess.

Okay, so you do have some wiggle room in the long run you think but -- (multiple speakers) --?

Yes, I mean we are a very high-value, relatively low-cost component service to our customers. If we do an outstanding job and really differentiate ourselves, they are going to want to use us and we should -- and they should want us to be a healthy provider, so that's kind of as a basic context.

Having said that, nobody wants to pay more for services than they have to, you know? Like any good company, they are going to challenge us to be as effective -- efficient and effective as we can be, and they are going to test alternative sources and use that to challenge us in terms of our pricing.

Thank you very much.

At this time, there are no further questions. I will turn the floor over to Phil Hawk for closing remarks.

Thank you, Jurleen, and thank you to all of you for your participation in this call and particularly your continuing interest in Team.

Let me wrap up by summarizing our key discussion points today. First, we are pleased with our performance and progress. Fiscal year 2006 was a record year for Team, and while we have -- continue to have improvement opportunities, as discussed earlier, we are nevertheless very proud of the progress we're making.

Finally, we expect another record year in 2007. Our business outlook is strong and we're confident that we have the programs in place to capitalize on these opportunities. We remain fully pleased with the positive momentum of the business.

We look forward to updating you on the progress at our first-quarter conference call around the first of October. Until then, have a good day.

This concludes today's Team, Inc. conference call. You may now disconnect.