Team Inc (TISI) 2007 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the Team IR 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).

It is now my pleasure to turn the floor over to your host, Mr. Phil Hawk, CEO. Sir, you may begin your conference.

Good morning and welcome to the Team web conference call to discuss recent Company performance. Again, my name is Phil Hawk. I am the Chairman and CEO of Team. Joining me again today is Mr. Ted Owen, the Company's Senior Vice President and Chief Financial Officer.

As with past calls, the purpose of today's conference call is to discuss our recently released financial results for the Company's first fiscal quarter ending August 31, 2006. 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.

Ted, let me turn it over to you.

Thank you, Phil. First, 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. 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 $65.6 million compared to $54.2 million in the first quarter last year, an increase of 21%. Income from continuing operations was $3.7 million in the current quarter versus $1.7 million in last year's first quarter. Earnings per diluted share were $0.16 in Q1 versus $0.06 last year.

Now for a little more depth around our industrial service business, first, as a reminder, our industrial services includes 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 and TCM. The TMS group includes leak repair, hot tapping, fugitive emissions monitoring, field machining, technical bolting and field valve repair services. And then the TCM group is comprised of field heat treating and NDT inspection.

TCM revenues in the quarter were $33.7 million compared to $29.7 million in last year's first quarter for an increase of 13%. TMS revenues in the quarter were $32 million compared to $24.4 million in the same quarter last year or an increase of 31%. Operating income for the industrial service business was $7.3 million in the current quarter versus $4.5 million last year. Operating income as a percent of revenue was 11% in the current quarter versus 8% last year for the business segment.

With respect to corporate costs, total corporate costs were $3.6 million in the quarter, which was up from the first quarter of last year by about $750,000, and includes $245,000 of non-cash FAS 123R expense in the current quarter.

As a reminder, and as was the case last year, our Q1 corporate costs have a disproportionately high amount of SOX and audit costs associated with the year-end audit activities, and that amounted to about $750,000 in Q1.

With respect to our balance sheet and cash flows, at August 31, our net debt, that is debt net of cash, was about $43 million, down about $500,000 from year end. Our debt to EBITDA was less than 1.7 to 1, and our available capacity under our credit facility was $31 million.

CapEx for the quarter was about $3 million and D&A was about 1.6 million. As we have indicated previously, we expect capital expenditures for the full fiscal year to be in the range of 12 to $18 million as a result of expansion into new markets, new equipment associated with specific project opportunities, and the replacement of equipment acquired in the Cooperheat acquisition.

With respect to accounts receivable, days sales outstanding at August 31 was 84 days. That is up slightly from year end due to higher than normal accruals as we work through final implementation of a new invoicing module.

Now just a brief word about stock option expense. As we pointed out in the press release, we have implemented FAS 123R in the first quarter. Under this standard, we are required to recognize non-cash comp expense for the fair value of stock options granted. We expect that the total non-cash expense for the full fiscal year will be about $1.3 million or $0.15 a share, based upon our assumptions about the number of options we expect to grant and the future value of our stock.

The impact of option expense on the first quarter was about $0.03 per share and had the effect of increasing our effective tax rate to 43% for the quarter, since the Q1 option expense was not tax benefited. Option expense will increase over the rest of the year as a result of the grant of new options in the year, which, for the most part, will occur in the second quarter.

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

Thanks, Ted. Now I would like to add several observations and comments to the financial results that Ted has reviewed with you. Let me begin with a look back at the first quarter and then make a couple of comments about our outlook and priorities for the remainder of the year.

Overall, I was pleased with our first-quarter results. Our 21% revenue growth is a big positive. It reflects a combination of continued strong market conditions and, we believe, continued market share gains for the Company. Our sources of growth remain broad-based, with both TMS and TCM divisions posting double-digit revenue gains. TMS's extraordinary 30%-plus growth rate reflects unusually strong project activity combined with very solid day-to-day onstream maintenance activity.

I was also pleased that our job profit margins improved about 1 percentage point during the quarter in both divisions. This improvement is reflected in the improved gross margins. This improvement is the result of increased pricing and productivity that more than offset significantly higher labor costs.

As we indicated in previous meetings, in many parts of the country, we are dealing with a very tight labor market for industrial construction and maintenance personnel due to the large number of major repair and expansion projects currently underway. This has caused market labor rates in these areas to rise substantially. Fortunately, our customers are very aware of this situation and have been very receptive to price adjustments to cover these increases. We are pleased that these price increases, along with the productivity improvements, have enabled us to maintain and slightly expand our margins in this tight labor environment.

While pleased with our progress during the quarter, we also recognize that we have additional improvement potential, particularly in several branches within the TCM division. Bringing our lower-performing branches back in line with our overall average performance levels remains an overall priority for this year.

SG&A expenses also grew at a double-digit rate overall, but declined as a percentage of revenue. Growth in field SG&A expense reflects growth in our employee base to support our expanding business. Growth in corporate SG&A reflects the new stock option expenses that Ted had described, along with some staff expansion. Our overall SG&A expenses are in line with our expectations.

Reflecting these results, our incremental operating leverage for the quarter, excluding the non-cash expenses, was about 19.5%, very close to our 20% long-term expectation. It is our ability to realize this operating leverage that enables Team to achieve profit growth rates that are considerably higher than our revenue growth rates.

Let me now shift to the balance sheet. Over the past year, our balance sheet has improved substantially. A year ago, we were substantially leveraged with a debt to trailing EBITDA ratio of over 3 to 1. As Ted indicated, at the end of the first quarter, the debt leverage had dropped to less than 1.7 to 1, leaving Team with substantial financial flexibility. We look forward to further progress in this area throughout the year as we use our earnings and further improvements in accounts receivable collections to continue reduction of our outstanding debt levels.

Taking into consideration the previously discussed higher projected capital spending levels this year, we currently estimate that the free cash flow available to pay down debt will approximately equal net income. Overall, it was a very good quarter and we're off to a good start for the year.

Now let me turn to the remainder of the year. As indicated in the press release, we are maintaining our previously issued earnings guidance at this time. After the impact of the 123R non-cash stock option expenses, our earnings guidance for the full fiscal year ending May 31, 2007, remains at $1.35 to $1.50 per fully diluted share. This guidance was based on 10% revenue growth for the year and projected net earnings growth on an apples-to-apples basis of approximately 35%.

Now, given Team's strong start to the year, many of you may be wondering why we are not increasing our earnings projections at this time. The answer is that it is premature to do so. Remember that the first quarter is seasonally the weakest quarter of the year for Team. Last year, Team's earnings in the first quarter represented only 5% of our total earnings for the year. It would be inappropriate to simply extrapolate progress in this reduced-activity quarter to the rest of the year.

Having said that, we remain very positive about our outlook. We are just entering the major fall turnaround period, and we expect to stay very busy throughout the quarter and the remainder of the year.

In order to fully capitalize on our opportunities, our priorities and areas of emphasis for the remainder of the year include the following -- continued focus on job execution and job margins in all branch locations; continued progress in collections performance; achievement of significant performance improvement among our handful of underperforming branches; follow-through on our new business development initiatives in both traditional and new market segments; continued growth in our technician staff levels through a combination of traditional and new recruiting sources; and finally, maintaining our organization-wide commitment to safe, responsive, effective and efficient service to our customers at every service opportunity.

To wrap up, we have had a very good start to the year and the first quarter, with strong broad-based revenue growth, encouraging progress on job profit margins, and attractive operating leverage. And our outlook for the remainder of the year continues to be strong.

With that, I would now like to open it up for questions from our listeners.

(OPERATOR INSTRUCTIONS). Arnie Ursaner, CJS Securities.

It is Arnie Ursaner. Can you hear me okay?

There is a busy signal overarching there, Arnie.

I don't know how to get rid of it. I apologize. If I hit it, I'm going to lose you. Can you give us the gross margin by segment, please?

Sorry, did not hear the question. (indiscernible). Are you there? I think we need to move to the next one. There's a disconnect there.

Mike Carney.

Good quarter. Let me just -- Ted, do you want to repeat the gross margin there?

Sure. For TMS unit is (indiscernible) for the quarter; for TCM, it is about 28%, the lower 28%. Aggregate is 33.1%, and that is up a little more than a point for each of the divisions quarter over quarter.

So TCM gained a little bit in the margin there?

Both gained about a percentage point.

And seasonally, it is obviously going to be a lot weaker for TCM. But you obviously still expect a lot of improvement there, Phil?

Sure. You are right. Seasonally it is the weakest quarter revenue-wise for both businesses, but particularly the TCM side because of its strong bias or emphasis on turnaround work. So that's not -- we don't project -- we never did project a gross margin for the year of that level. It is always much weaker in the first quarter.

But again, the encouraging part for us, and it's not really -- it is reflected in the gross margin, but it is the detail we look at, which is job margins, that the job margins, which is just the direct, the actual cost per job and looking at just on a discrete job basis, the cumulative effect for both businesses were also an improvement of 1%. And that 1 percentage point we expect to see -- we are going to build on that throughout the year.

And then also, I know that you didn't give revenue guidance this time for the full year again. But if we exclude the turnaround impact, you would expect your revenue growth to be better than 10% now, I assume?

We have not changed our guidance. But I think you got the sense and the tone that we are optimistic about our outlook. But again, I would just caution on a single quarter of data of extrapolation. So we are not raising our guidance of revenue target. But I hope we have to.

Got it. And then also, Ted, I got on a little late, but did you happen to mention cash or capital expenditures?

Yes, I did. The CapEx for the quarter was about $3 million. Total cash is actually about $4 million. I did not talk to that.

Basically in the first quarter, you should be generating cash outside of the little bit higher CapEx this year, correct?

Correct.

But there was no debt paydown?

Well, there was about a -- debt is actually slightly up from a gross debt standpoint. But cash is up, far more than offsetting that. So if you were to look at net debt -- at debt net of cash, it is down about $500,000.

Okay, because cash last quarter was just a couple million, was that correct?

That is correct.

And then one other, just to clarify -- in terms of the stock compensation expense, in the fourth quarter, Ted, there will be a restricted stock -- automatic amortization of that?

No, Mike, I think you may have got some misinformation. There is a restricted stock element that is already baked into our estimate -- the 1.3 million estimate of option expense, of FAS 123R expense, for the year already reflects that number, as does the first quarter under 123R. That expense is not really different than the regular option expense. It is estimated and amortized over the course of the year. So there will not be a pop, if you will, in the fourth quarter relative to that.

And so you are expecting, was it -- in the second half of the year, what was the pretax expense?

We expect the total for the year to be about $1.3 million based on our best estimates today, the number of options to be granted over the course of the remainder of the year, most of which will be in the second quarter. So that is why I made the point that the amount of the expense will become -- will be more in the remainder of the three quarters, if you will, than ratably for the first quarter.

It will be increasingly more in each quarter, though, right?

Yes -- well, it would be increasingly more --

Until the third quarter?

Until the third quarter.

I think it's roughly -- again, there's some rounding into this, but I think it is roughly $0.03 next quarter and $0.04 each of the third and fourth quarters. There is some rounding in there because that is $0.01 short, but something in that neighborhood.

And then also, Phil, can you speak to the new market segments that you have gone into and the progress that you have had there?

I think there's really not much to say other than we remain enthusiastic about it. We are just really in the process of launching a lot of that capital. The $3 million of expenditures are related to those segments. We remain as bullish as we can be. But it was not a material impact in the quarter.

So no material increase in business there in those segments?

Not in the first quarter, no, but it's --

We do have some projects in the second quarter that are --

That will impact it favorably.

Is that on the pipeline side?

Pipeline and line isolations both.

Arnie Ursaner.

Hopefully this will be better this time.

Much better, Arnie, thank you.

A couple of questions. Can you give us the headcount additions you made net year to date, please?

Yes, net, this is for technicians, which is I think is what I have, for technicians, is about 30 to 35.

So, are you still on plan for targeting the 200-plus you need for the year?

Yes, we think so. Again, it is a weak quarter, so particularly on the TCM group we're not going to see a lot of adds in that quarter. So we wouldn't expect to see it ratably over the year. It remains a challenge for us, but we are focused on the issue.

You mentioned that you saw very strong market conditions and you think you are gaining share of market. What do you think the market grew in the quarter?

Boy, as you know, it's just so hard for us to estimate.

You are the largest player, though.

Yes, I know. When I look at just -- you want a swag from me? I don't know -- 5 to 10%, something like that.

But the market had been growing even faster. Is it slowing a little, or--?

No, not that I can see, really. My precision is just not that great, Arnie, to be honest. What we did see -- I don't think it's going to have any effect, but I will say this, is that the margins that our customers enjoy, which have been absolutely spectacular over the last couple of years, have come in a little bit for the refining segment in the last several weeks. So to the -- in terms of just being a red-hot customer environment, I think it is moving back toward what might be some equilibrium. We see no evidence of any change in activity levels as a result, but I would note that, that the margins are little lower.

Following up on the gross margin question, obviously, on a 5% quarter, it is not indicative of what you think you can do for margin for the full year. Did you incur training or hiring costs that impacted your gross margin in the quarter?

Yes, but we always do. I wouldn't say that it was extraordinary. I'll tell you -- here is what we focus on, and it is not a publicly produced result or number. But we internally have a job profit margin that we manage and focus on pretty intensely. And that is kind of really revenue minus direct costs charged to the [jobs]. And that is really independent of kind of absorbing -- I am going to say the fixed costs or the infrastructure costs, some of which are reflected in gross margin.

That direct profit margin in both divisions went up about a percentage point versus the prior year. And that to me is indicative of us doing better. And as we get the volume, and spread higher volumes across those infrastructures, we are going to see higher gross margins the rest of the year. And that is really where I am kind of heading on this, is if we can sustain that 1% increase, we are going to see a percentage point increase or maybe even gain on it a little bit. That is what is going to drive our improved overall gross margins for the year.

A couple of very specific questions. Your TMS division had unusually good growth, and you mentioned some project activity. What percent of the growth might have been impacted by project activity?

I would say that our non-project service lines ran kind of low double digits. So the rest -- we are running -- again, with the project activity, because we averaged 31% versus last year -- again, remember, these are low project periods. I don't have the numbers in hand, but just kind of weighted average has to be up something like 40, 50% from last year.

Got it. Two more real quick questions. Obviously, the BP pipeline issue -- are you seeing increased activity in NDT because of that?

No. I mean, we are seeing -- we have a strong NDT market, but we are not personally working on that facility. There's been -- rigorously maintaining the integrity of your pipeline systems is a big issue for all operators. And it was even before the BP incident. So I don't see that as driving a fundamental change in the industry.

My final question is on -- this is obviously a key quarter for turnaround activity. Valero, who I know you have identified as an important customer, had an outage or a problem the other day, indicated they are going to take 40 days of maintenance work. Did you have planned turnaround work for them anyway? And would this be impacted by the plant issue?

I will be candid with you, Arnie. Valero has 21 plants, 22 plants -- I don't know which one you are referring to. And I'm not current to speak to what our plans would be with a particular plant.

(OPERATOR INSTRUCTIONS). Gerry Heffernan, Lord Abbett.

Thanks a lot for some good results here. I would like to follow up on a comment you made just a second ago about your customers, the refiners, that their margins have come down a bit. I find this kind of interesting because often there is a bit of a catch-22. When your customers had a number of years of low margins, it created a little bit of a difficult business environment for yourself because they are not making a whole lot of money, so they're not looking to spend a whole lot of money. And it's hard to raise prices. And then when their margin is rapidly expanded, well, you know that they're making a lot of money now, so they're not going to stop to do any other business. So I was just kind of wondering, what is the best scenario? And that is where I am kind of coming to.

With their margins having come in here somewhat on a seasonal basis perhaps somewhat and just coming back to a more normal and more ongoing rate, do you foresee -- what is your ability to foresee the turnaround scenario and would you foresee perhaps a stronger turnaround situation or a stronger maintenance period here because they have gone past this huge profitability push and things come back to normal and they are going to say, hey, margin a little bit lower -- let's take a breather. This is a good time to get work done.

I am going to answer it kind of in a global sense very simply, and then come back to some of the context for this. I don't see it having much of an effect -- it would be my kind of bottom-line answer.

Let's go back and remember a couple of things. Essentially, our services or 90 to 95% of our demand is driven by the population of piping systems out there, or the population of plants out there. We don't see any significant change, historically or in the future, about the number of piping systems or plants that we are serving or that are available to be served. You've got a little bit here and there, but it is basically flat.

So we are in a -- our premise all along has been a zero-growth market. And so with this robust environment where we had very strong profit margins for our customers, which we liked, for them, doesn't translate into, well, now that we make more, we want to spend more. They want to spend just what is necessary to maintain their plants in a competent, safe, effective way, as they always have. That is the advantage, that we don't really follow the business cycle of their success.

What we had in the last couple -- really the last year, is it was kind of sparked by, in my opinion, the hurricane damage of particularly Katrina, but Katrina and Rita along the Gulf Coast, plus really sustained higher margins over kind of the five-, 10-, 25-year margin averages for the industry, a proliferation of expansion projects, or I am going to say debottlenecking projects in existing facilities.

That is the extra surge we are getting today, is not because margins are good directly, but that we have a number of these debottlenecking projects that are underway. And there's still a little bit of cleanup and repair left from Rita.

As we go forward, I think as margins come down, I think that -- will there be the same level of debottlenecking projects forever? Well, irrespective of margins, I think that we said before we had a little wind at our back last year that is continuing now. That will not continue forever. We see projects throughout kind of above-average strength in terms of these kinds of little add-on projects throughout the remainder of this year. But it is kind of new territory for all of us, so I don't know -- will there be cancellations of projects, or will this just slow down the growth of new projects? It's a little bit hard to say.

Now, to the question of timing of turnarounds that you mentioned, it was true that when the -- particularly a couple years ago when the refinery margins spiked up really for the first time after many years of -- I don't know if normal is the right word, let's say lower margins, there were deferrals of turnarounds because, just to the point you made, is that being concerned that it was a temporary phenomenon, no refiner wanted their plant -- wanted to lose that high-margin environment or be down during that -- particularly if it was a short period of time.

But again, back to the necessary evil point, we don't do turnarounds because we like to. It's because we have to. And that is because of the thermal, hydraulic and corrosive forces at work, and frankly, also the consumption of catalysts that are a key part of -- particularly in the cokers and [HGC] units and the like. So while we had a little bit of timing kind of done on the front end, you frankly -- nature tells you when you have to do turnarounds. And while there might be some timing effect, I think we are beyond those kind of peak periods as such that I don't expect there to be big shifts of things.

Now, Arnie mentioned in the previous call a story he had heard about an upset in a plant that caused a plant to just go ahead and take it down for a full turnaround or accelerated turnaround. That is not unusual, that if you're going to be down for a sudden emergency repair and have the disruption associated with that, why not, if you're able to do it, in terms of the timing, if you can accelerate other service work and bring it in at the same time, that is on balance probably slightly more efficient. It is a reasonable approach.

But I don't expect to see -- again, because our margins are still well above historical levels, I don't see wholesale accelerations of turnarounds, trying to, if you will, kind of pit-stop on the caution light, if you use a NASCAR kind of analogy, where margins are down. A long-winded explanation, but that is kind of what I -- I think it's not going to have a big difference, I guess.

Well, I appreciate the inside and clarity of the market in which you participate.

I am just reviewing some notes here. If I go back about six months in a conference call at that point, you had indicated there was still a small number of branches that are still not profitable. Now, I know the 1Q is a seasonally slow period, and it may not be the best marker, but still, on a comparison of year over year, how many underperforming branches do you see that you still have?

I think I'll refer to the comment you made, is that the first quarter is not even a reasonable period to compare on that. I would just say this -- we're not done --

Well, that is why I asked for a comparison as opposed to an absolute.

We are not done, but we're making progress. And I really don't have numbers to say, well, it's now six out of seven -- and frankly, I don't think that's going to be that helpful to you anyway. I think what you're going to see in our results is -- and what we are going to look back over the year and say, did we on average, when we look at all those branches, have they ceased to be -- because, as you know, the eight or nine branches last year were subtracted from our results. And I think I said at that time my expectation is that in composite, those branches I don't expect to subtract from results this year. And I still have that expectation.

So you stand by that?

Yes.

Well, that is good to hear. Okay, thank you very much.

Jeev Makan, Courtside Capital.

My question has actually just been answered.

Mike Carney.

One more question, back on the turnaround activity. Turnaround for the petrochems have been at an all-time high. But if we exclude that, Phil, and look at the other marketplaces, other customer segments, what has the growth been in those areas?

You know, I don't have a --

Just a --

(multiple speakers) question, I don't have any facts or any data on that. My impression is, again, that turnaround on maintenance work generally is going to be independent of economic health because of the necessary evil nature of our business. I believe the economic health of power plants has been pretty good, pipelines has been good, and heavy industrials have been fair.

(OPERATOR INSTRUCTIONS). Thank you, and at this time there appear to be no further questions.

Then let me just wrap up. I want to just thank everyone for your participation in this call and your continuing interest in Team. And we look forward to our next conference call in early January. Have a good day.

Thank you. This does conclude today's Team Inc. conference call. You may now disconnect and have a wonderful day.