Team Inc (TISI) 2007 Q2 法說會逐字稿

Good morning. My name is Stacy and I will be your conference operator today. At this time, I would like to welcome everyone to the Team quarterly web 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, CEO. Sir, you may begin your conference.

Thank you, Stacy, and good morning and welcome to the Team Inc. web conference call. As Stacy indicated, my name is Phil Hawk. I'm the Chairman and CEO of Team. Joining me again today is Ted Owen, the Company's Senior Vice President and Chief Financial Officer.

The purpose of today's conference call is to discuss financial results for the Company's second quarter ending November 30, 2006. As with past calls, our primary objective is to provide shareholders and potential shareholders with an enhanced understanding of our Company's performance and prospects. This discussion is intended to supplement the quarterly earnings releases and our filings with the SEC.

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.

But before I turn it over to Ted, I do want to take a moment to note that we have a new home for our common stock. Effective December 28th, Team's common stock was listed on the NASDAQ global select market. Our new trading symbol is TISI. We are pleased to be listed on this exchange.

Ted, now 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 once again, please be sure to read the last paragraph of our press release for a complete description of those factors.

Now to the financial results. We had a great quarter. Revenues for the quarter were $83.2 million compared to $67 million in the second quarter of last year. That's an overall increase of 24%. Income from continuing operations was $5.5 million in the current quarter versus $3.8 million in last year's second quarter. Earnings per diluted share from continuing operations was $0.58 in the current quarter versus $0.41 in last year's quarter.

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 divisions. TMS, that's our legacy businesses, which includes leak repair, hot tapping, fugitive emissions monitoring, field machining, technical bolting and field valve repair services. And then the second division is TCM, which is comprised of field heat treating and NDT inspection.

Now, first TCM revenues. TCM revenues in the quarter were $44 million compared to $38.3 million in last year's quarter, an increase of 15%. TMS revenues were $39.2 million in the quarter versus $28.7 million in the same quarter last year for an increase of 36%.

Gross margins also improved over last year with a total gross margin of 37% in the current quarter versus 35% in last year's quarter. TMS margins improved 2 points to 40% in the quarter and TCM margins were up slightly to 33%.

Operating income for the industrial services business was $13.4 million in the current quarter versus $9.4 million last year. Operating income as a percent of revenue for field operations was 16% in the current quarter compared to 14% in last year's quarter.

Now, reflected in the industrial service operating income for the current quarter is a total of $1.4 million of bad debt expense compared to only $170,000 in last year's quarter, and that's a, that's a line item that's set forth in our earnings release. The increase in bad debt expense for both the three month and the fiscal year to date periods is primarily attributable to a $600,000 billing dispute with a customer and a $400,000 pretax charge related to an internal investigation, which is described in our earnings release and which Phil will touch on briefly in his remarks.

Corporate costs. Total corporate costs for the quarter were $3.2 million, which was up from the second quarter last year by about $800,000 and includes a $350,000 of non-cash FAS 123(R) expense in the current quarter. And again, that, we implemented 123(R) in the current fiscal year so there would be no comparable expense in the prior year.

Now with respect to the balance sheet and cash flow. At November 30th, our debt net of cash was about $47.5 million, up about $4 million from year end. Our debt to EBITDA was 1.7 to 1 and our available capacity under our credit facility was about $19 million. Capital expenditures in the quarter was about $4.7 million and $7.2 million year-to-date. DD&A was about $1.8 million in the quarter and $3.5 million year-to-date. As we've previously indicated, we expect total CapEx for this fiscal year to be in the range of $12 to $18 million as a result of expansion in new markets, new equipment associated with specific project opportunities, and replacement of equipment acquired in the Cooper Heat acquisition.

With respect to accounts receivable, our DSO at November 30th was about 81 days. That's down slightly from the end of the first quarter.

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

Thanks, Ted. Now I'd like to add several observations and comments to the financial results that Ted has reviewed with you. The general theme of my remarks is this. We have a lot to be proud of. This was the most profitable quarter in the Company's history achieved by virtue of outstanding activity levels and improved margins and we are well positioned for continued business growth and expansion.

Let me discuss our results in more detail. Our earnings and profit margins in the second quarter were the highest in Team history. The $0.58 per share earnings represents a more than 40% profit growth. And net income as a percentage of revenue increased to about 7%, a full point increase above last year's strong results. The key driver of this outstanding performance has been very strong revenue growth. For the quarter, overall revenues were up about 24%. This growth came from many sources, both the TMS and TCM divisions, all service lines and nearly all regions. Overall, 9 out of our 13 regions experienced growth over 20% versus the prior year quarter.

TMS divisions overall growth of 36% led the way with particularly strong growth along the Gulf Coast. TCM division also posted a 15% overall increase with noteworthy growth in Canada, Gulf Coast and West Coast regions.

These sales results reflect our continued market share growth as we capitalize on the continuing procurement consolidation trends by our major customers and as we benefit from new initiatives in a number of areas. However, there's also no question that the overall market demand remains strong, above historical levels, due to extensive turnaround and new project work across the country, particularly along the Gulf Coast.

Looking ahead, we can expect continued growth and new market penetration from a number of ongoing new business initiatives. Among others, we have initiatives targeting the pipeline, offshore, pulp and paper, power and municipal markets with additional service capabilities in hot tapping, line isolation, and well testing and expanded specialty technology inspection services. We expect to benefit from these initiatives in the latter half of this year as well as in future years.

In addition to creating the demand for additional Team services from our customers, achieving this level of growth also required Team to attract and hire the additional technicians necessary to deliver the additional volume of services. As I have mentioned in previous calls, attracting additional talent is challenging for Team due to our expanding base of business and due to very strong labor markets in several regions. Despite these challenges, I'm pleased to note that the number of technicians working for Team has increased by about 175 or roughly 10% in the first six months of this year. These additional employees, plus the hard work and dedication of all our employees, enabled Team to increase its total billed hours by about 15% over the prior year period.

We also have a number of initiatives underway to help sustain our attractive technician growth rates, including military recruiting and a new technician apprenticeship program.

I am also proud to report that our business is expanding safely. For the calendar year just ended, Team achieved its best safety performance ever. We remain an industry leader in this critically important dimension. As part of our continuing improvement program, we added six dedicated field safety coordinators to our organization this fall. Their role is to work closely with our branches and technicians in safety training and other safety support initiatives.

Complementing our revenue growth, we have also improved our job margins. This improvement is the result of new contract pricing and productivity improvements that are exceeding increases in our labor and other costs. Reflecting these improved job margins, overall gross margins increased to 37%. TMS led the way with gross margin of 40%, but TCM also improved its gross margin to 33%. Contract price improvement remains a continuing area of emphasis for all of our branches.

One significant SG&A expense increase in the quarter was bad debt expense, which as Ted mentioned is up $1.2 million over the prior year quarter. While we expect some increase in our bad debt expense levels with the increase of our business, the charges this quarter were unusual and hopefully infrequent. Nevertheless, we have done a good job of realizing the operating leverage for our business in both the quarter and year-to-date. As a reminder, operating leverage is the change in operating profit divided by the change in revenues for the period. In the second quarter, Team's operating leverage was about 20%, in line with our expectations.

Now let me take a moment to discuss the commencement of an internal investigation. As was announced in the earnings release, Team's audit committee is currently leading a thorough, independent investigation of improper accounting entries in one of our branches. Since the investigation is ongoing, I cannot predict what all the findings will be. However, let me share what I do know at this point. The alleged improper accounting took place at a single branch. The wrongdoing identified to date includes some small, improper expense reimbursements to an ex-employee and false revenue entries made in October of 2005. Appropriate charges related to these matters are fully reflected in our second quarter financial results. Let me say that we are disappointed to be faced with this issue and are taking it very seriously. When the investigation is complete, we will provide further communications on the matter.

Now, looking forward, we are poised to have our best year in history during fiscal year 2007. We see continued strong project demand in the second half of the year and expect continued strong performance. As a result of this outlook, we are increasing our revenue estimate for the full year to slightly above $300 million and increasing our earnings range by $0.15 to $1.50 to $1.65 per fully diluted share.

To wrap up, we are very pleased with and proud of our results for this quarter and year-to-date. The most noteworthy drivers of this exceptional performance include Team's continued strong broad based revenue growth, encouraging progress on job profit margins, and attractive operating leverage. As in all worthy endeavors, this is a team effort. These results reflect outstanding contributions of all 2,700 plus Team colleagues and their continuing commitment to provide our customers with safe, responsive, effective, and efficient service with every service opportunity. I am very proud of this team.

With those remarks now, let's open it up for questions. Stacy, can you take it back?

[OPERATOR INSTRUCTIONS] Your first question comes from Arnie Ursaner from CJS Securities.

Good morning, Arnie.

Phil, how are you? Couple of questions regarding revenue growth. Can you give us a feel for whether you believe you're gaining share of market in terms of total volume and also your view of pricing in the current environment?

Yes, we do agree -- believe we're gaining share. It's hard to get really precise of how much share because there's no question our market is also very, very strong overall. In terms of pricing, it's very tough for us to measure that precisely because of the effective mix. But if I swaggered, I would say something in the probably 8 to 10% in terms of price -- price kind of average price appreciation year-over-year.

Okay. Very specific questioning. In the last quarter, you had mentioned that the TMS growth benefited by the project activity and without that your growth would have been in the low double digits. Obviously TMS growth was again just tremendous?

Correct.

Can you give us a feel for, perhaps, how much you may have benefited by project activity this quarter and is there some change underway in project activity that may make it more sustainable?

I think it's similar to the first quarter is that project activity was a key contributor. Again, recall we have growth everywhere, all regions, all service lines so, nearly all regions, 9 out of 13 double digits, or 20% growth as I mentioned in the call. We think there's strong project activity out there as far as we can see right now. As we've talked in prior calls, is that sustainable forever? Probably not. When is it going to slow down? We don't know.

Okay. My final question would be in terms of your revenue guidance and I fully appreciate you try to be conservative, but you're implying a pretty good slowdown in the back half of the year. Is there some actual business item that is leading you to think that the business will slow down or should we just assume it's again the lack of complete visibility about the turnaround activity in Q4 that would keep you conservative?

I think we just generally like to be conservative, Arnie. We see a strong outlook. I would note that we're comparing with ever stronger comps as we go forward, but we have a positive outlook.

Okay. I'll jump back in queue. I do have a few more questions but I'll jump back in queue. Thank you.

Thanks, Arnie.

[OPERATOR INSTRUCTIONS] Your next question comes from James Gentile from BB&T Capital Markets.

Good morning, James.

Good morning, James.

Hey, how's it going. Just looking at your debt movements. At the end of Q1 and the August period, there were about $41 million in long-term debt. And you mentioned, we're approaching $48 million. In addition, I think your last public submission that was debt capacity in excess of $20 or $30 million if my memory serves me right. Is this just you guys borrowing to meet some working capital demands as we had a very strong quarter on the top line or are there any other issues at play with the use of the revolving debt?

We had just a very, very strong quarter and remember sequentially the second quarter is much stronger than the first. That entails a growth in working capital. Our CapEx, as you know, is also higher than in prior years.

That's true.

-- that was reasonably close to DD&A. So it's those two things. We would expect debt to come down in the third quarter as seasonal adjustments are made to revenue.

Fair enough. And then your D&A forecast for 2007 about $7 million, call it?

Yes.

Yes.

Okay. With regard to your TCM division, this is part of the Cooper Heat acquisition from now moving into year 2. Moving, looking at it from a regional perspective, you mentioned strong growth in Gulf Coast and the western United States. Are there any particular product lines within the acquired business lines that are showing particular strength?

No. We have a relatively short history, James, so it's a tough question for us. But no, I think we're pleased with our growth, both in the inspection and heat treating sides of that division. And a point I would make, a little bit of this is the tyranny of looking at growth rates in a short time period as -- I mentioned the regions where there's very strong growth this quarter compared to last year. A couple of those other regions had incredibly strong growth last year in this quarter. So the -- we're generally pleased with our continuing progress on all our businesses and look forward to their continued development.

Is there any way -- one more question. You've driven accountability and better systems through the organization and that's obviously one of the drivers of your job margins improving and your billing hours improving and everything else. Is there any way to kind of break out, perhaps, the technician sharing or customer sharing impact that, that is impacting the growth at TCM?

You mean in terms of the ability to share regions -- ?

Cross selling between customers, using technicians for other, as they become more increasingly trained, for other uses, et cetera.

I think the -- I think we've -- the impact to date has been more on the former in terms of the cross selling with the expanded relationships across both divisions. The -- I guess the utilization of technicians across divisions is still fairly modest.

Okay.

We have lots of anecdotes of introductions both ways, where the strong relationships developed by one of the divisions enabled the introduction of the other. But in terms of any comprehensive kind of tally of that, I don't think we really have one.

What's the story on the M&A tip just in general? Any other properties out there that are piqueing your interest?

We continue to, yes, we continue to be receptive to that possibility. Again, our guidelines and kind of framework would be the same. Anything that we kind of pursue will be in our space, will be industrial service, it will be complementary to what we're doing, and it will -- and an acquisition would be interesting if it accelerated our growth beyond what we could do internally.

Great. Thanks very much guys.

Your next question comes from Arnie Ursaner.

Hi. Question I have is in the last quarter, you indicated you were going to be dramatically increasing capital spending for some larger heat treating machines?

Yes.

Can you update us on the status of those and perhaps give us a feel for what segment they'll be used in and how, kind of returns you might get on those?

One, it was 10 big mobile rigs.

Was it 10 or 20?

20, excuse me. 20 large self-contained mobile rigs. We started taking delivery of those rigs in November of this year, and we've got homes for them. I think they're in about four or five different branches is where they're going. But we have actually one major customer that we were able to introduce and support as a result of these investments. So we expect, as we do with all of our capital investment, we expect very attractive returns on these incremental investments.

I know you gave a number, but I missed it. I just want to double check. The additions to headcount, and I assume that's a net number.

Yes, net technician adds and again, our systems will be a lot better six months from now. We're in the process of implementing, kind of new, kind of personnel systems, but our estimate is that our net increase in technicians is 175 from the first of the fiscal year, from June 1st.

Right. And what's your goal or target for the full year?

We don't really have a target, but we're trying to hire as many, our belief is that that becomes a constraint to our growth so we're hiring and bringing on as many great people as we can.

Okay, and I know you've taken more aggressive steps in recruiting, like in the military and some other places. Can you update us on how you're going about adding these people and some of the successes you've had and how some of your clients may have reacted to strategies you've had to increase, to provide more people for them?

Well, I think the -- I think the, still the strongest driver of our growth is going to be local recruitment and development by our branches. We're trying to assist that by a more systematic, I guess, marketing or kind of an exposure to attractive sources of personnel for us and the military is one of them. We have kind of 30 managers designated as kind of a recruiting coordinators across the country. And they are kind of visiting military bases or visiting trade schools and the like, kind of introducing Team and the Team opportunities for individuals coming, coming from those locations whether it be a military, mustering out of the military or finishing education at a trade school.

Another thing that we're doing and I mentioned the technician apprenticeship program is that, and this is something that a couple of our major customers are quite interested in is the recognition that in some of the more skilled services or skilled trades that we offer that there is a limit to the number of personnel in our industry, and an aging of that population of personnel. And one of the things we're trying to do is take the lead, kind of with the support of our customers, to, if you will, grow the population that can provide these services to the industry and there's been a very strong positive response to that, kind of recognizing that only the leading companies can be at the forefront of that and they're very responsive to those possibilities.

On the billing dispute you're having with, I'm sorry, with the internal investigation you're having with dealing with the problem. In your guidance, have you built in the likely costs of the investigation and have any, were any built into the last quarter, and have you built them into your views for the upcoming quarters?

There were, the last question, no. There were no costs in the previous quarter other than the charge for the improper entries. We don't know what the cost will be. It's very possible that the cost of the investigation could exceed the charges that we've taken in the previous quarter. We have a -- kind of a range of what we think is possible or likely to be and we do have that embedded in our earnings guidance.

Terrific. Thank you.

Yes.

[OPERATOR INSTRUCTIONS] There appears to be no more further questions at this time. I will turn the floor over to Phil Hawk for any closing remarks.

Thank you Stacy, and thank you to all of you for your participation in this call and your continuing interest in Team. We look forward to our next conference call in early April. In the meantime, have a good day.

This concludes today's Team quarterly web conference call. You may now disconnect your lines.