Team Inc (TISI) 2007 Q3 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) 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 and good morning and welcome to the Team Inc. Web conference call. As Tiara mentioned, 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 third quarter ending February 28, 2007. 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 few of the financial results, with a review of the financial results, and I will follow with a few remarks and observations about our performance and prospects. With that introduction, Ted, let me turn it over to you.

Thank you, Phil. Before I get into the financial information, let me give you the briefing relative to forward-looking information. 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 of 1995. We have made reasonable efforts to ensure that the information, assumptions, and beliefs upon which this forward-looking information is based are current, reasonable, and complete. However, a variety of factors could cause actual results to differ materially from those anticipated in any forward-looking information. A description of those factors is set forth in the last paragraph of our press release and in the Company's SEC filings.

Accordingly, there can be no assurance that the forward-looking information discussed today will occur or that our objectives will be achieved. We assume no obligation to publicly update or revise any forward-looking statements made today or any other forward-looking statements made by the Company, whether as a result of new information, future events, or otherwise. Now with that, to the financial results.

Revenues for the quarter were $73.3 million compared to $62.6 million in the third quarter last year, an increase of 17%. Income from continuing operations was $2.4 million in the current quarter versus $2.3 million in last year's third quarter. Earnings per diluted share from continuing operations was $0.26 versus $0.25 in last year's quarter.

For a little more depth around our industrial service business, as a reminder, industrial services include an array of specialized services related to the construction and maintenance of pressurized piping and process systems as well as specialized inspection services.

The industrial service segment is organized into two divisions. TMS, which includes leak repair, hot tapping, fugitive emissions monitoring, field machining, technical bolting, and field valve repair services; and TCM, which is comprised of field heat treating and inspection.

First, TCM. TCM revenues in the quarter were $38.6 million compared to $33.9 million in last year's quarter. That is an increase of 14%. TMS revenues in the quarter were $34.7 million versus $28.7 million in the same quarter last year, or an increase of 21%.

Overall gross margins declined slightly from last year's quarter, with total gross margin of 33% in the current quarter versus 34% in last year's quarter. TCM margins actually increased and were up by 1 percentage point to 30% in the current quarter versus 29% last year, while TMS margins actually declined 3 points, to 36%, compared to 39% last year.

The TMS margin decline reflects startup cost incurred in connection with new service initiatives and higher indirect field expenses associated with lower-than-expected utilization levels around the year-end holiday season.

Operating income for the industrial service business, which excludes corporate costs that are not directly attributable to field operations, was $8.4 million in the current year quarter versus $7.3 million last year. Operating income as a percent of revenue for the field was 11% in the current quarter compared to 12% in last year's quarter.

Total corporate costs were $3.3 million in the current quarter, which was up from the third quarter of last year by about $900,000, principally related to two items. First, $350,000 of noncash stock option expense in the current quarter; you'll recall that we began expensing stock options in this fiscal year so that charge was not reflected in last year's numbers. Then secondly, there is $600,000 of cost associated with the completion of an independent investigation involving false accounting entries and improper expense reimbursements in one of our branch locations. The investigation, which was fully discussed in our second-quarter press release and 10-Q filing, found no evidence that the irregularities extended beyond a single branch location; and there was no material effect on any of our previously-issued financial statements. This matter is expected to have no significant impact beyond the current quarter.

Now moving on to a discussion of balance sheet and cash flow items, at the end of the third quarter our debt net of cash was $42.6 million; that is down slightly from year-end. Our debt to EBITDA was about 1.5 to 1; and our available capacity under our credit facility was about $23 million.

Capital expenditures were $3.8 million in the quarter, and $11 million year-to-date. Depreciation and amortization was about $2.1 million in the quarter and $5.5 million year-to-date. For the full year, we expect CapEx to be about $15 million as a result of expansion into new markets, new equipment associated with specific project opportunities, and replacement of existing equipment.

Days Sales Outstanding or DSO at the end of the quarter was about 86 days, which is down about six days from the same quarter at the end of last -- same quarter a year ago. So with that, Phil, I will turn it to you.

Thanks, Ted. Now I would like to add several comments to the results that Ted has just reviewed with you. First, I am very pleased with several continuing positive trends about our business. Our revenue continues to grow at an impressive rate, 17% for the quarter and 21% year-to-date. And this growth is broad-based. For the year-to-date, 12 out of 13 regions have posted revenue gains. For the same year-to-date period, both our turnaround and onstream service lines, kind of collectively together, have both posted double-digit revenue growth rates.

There are several key drivers of this growth. First, Team continues to provide outstanding service to our customers. We can never forget that consistently delivering outstanding service is a fundamental prerequisite for any business success in our industry.

Second, we continue to benefit from customer procurement consolidation trends within all market segments. Our North American-wide presence and broad service offering are very attractive to more and more customers, who increasingly prefer to work with fewer, larger, more professional service companies. Currently, we have about 20 multisite, multiservice alliance agreements in place.

Third, we continue to benefit from an above-average level of new construction and plant expansion projects, particularly in the refining sector. There are some reports that this wind at our back, as we have described in past calls, could continue for several more years.

Finally, we continue to be successful in expanding our technician base. Our full-time technician count has increased by approximately 250 or 14% since the beginning of the year. In addition, our part-time project technician ranks have also increased an additional 150 technicians in the same time period. As a result of this success, I am proud to report that for the first time in our history, total Company employment now exceeds 3,000.

To continue our progress in this critical area, our branches and regions are now establishing monthly and quarterly recruiting targets. We understand that building our technician ranks and capabilities is necessary for future growth. We are hiring to drive business growth rather than hiring in response to that growth.

Also, I am very pleased with the continuing improvement in overall job profit margins for both the TMS and TCM Divisions. As I have mentioned before, our financial system and business process enables us to track the profitability of each job of work order the Company performs. This process gives us great visibility on our job margins along any dimension of our business, by branch or by service line, for example.

With our escalating labor cost due to the very competitive labor environment in many regions, we have been focusing on negotiating price increases that will at least offset these labor cost increases. I am pleased to report that for both the quarter and year-to-date, our job margins in both divisions are ahead of last year. About 1 percentage point for the year-to-date and a couple of percentage points for the quarter.

Of course, this leads to the key question, if revenues are up 17% and job margins are improved, why then are operating profits for the quarter only up 5%? As Ted indicated, our growth in the quarter was dampened by a number of significant additional expenses. Notably, the cost of the independent investigation and excess labor expenses around the holiday period. Which leads to the corollary question, will these extra expenses experienced in the third quarter continue to occur and impact Team's future profit margins in the current fourth quarter and beyond?

I am confident they will not. The investigation is completed, and our utilization rates for the month of February, at the end of the third quarter, and continuing into March were back to expected levels. Finally, we remain quite optimistic about overall business activity levels and job margins going forward.

In addition to the business momentum of our current activities, the impact of several of our new growth initiatives are just beginning to kick in. These include expanded pipeline service initiatives, particularly hot tapping, where we have several significant jobs coming up. Our new line isolation services, where we have placed three full sets of tooling into the field in the last quarter, all of which are currently working. Expanded mobile heat treating, where we have added 10 new rigs to our fleet just in the last quarter.

By the way, we are extremely pleased with our new rig design. It has a number of safety and performance features unmatched in the earlier generation equipment.

Other growth initiatives include expanded advanced inspection service capabilities and a new presence in the municipal waterworks market.

As a result of this confidence, we are reaffirming our full-year earnings guidance, which we had increased at the end of last quarter. For Team's fiscal-year 2007 ending on May 31 this year, we expect fully diluted per share earnings to be in the $1.50 to $1.65 range.

This earnings guidance implies the following for Team's performance in the current year. Revenues will increase 15 to 20%. Net income will increase 30 to 40%, even after taking into account the impact of stock option expenses and all unplanned charges this year.

The bottom line is that we are pleased with our overall performance and believe we are well positioned for continued attractive business and economic growth.

As another note, Ted and I had the privilege earlier this month to represent Team in ringing the closing bell on NASDAQ. As you know, we joined the NASDAQ Global Select Market in late December. Our shift to the NASDAQ and the recognition associated with the closing bell ceremony was a source of pride to all of us at Team. It commemorated significant growth and development of our Company over the past several years, as well as our expectations of continued growth going forward. For those interested, there are links on our website to both photos of the event as well as an interview with business reporter John Metaxas.

To wrap up, we continue to be very pleased with the overall business performance and position. Our revenue growth and overall business activity continue to be robust. Our focus on maintaining and, where possible, improving job margins is yielding results. We remain confident that overall profit growth for this year and beyond will be consistent with our business model and expected business operating leverage.

As a final comment before opening it up for questions, I want to thank my more than 3,000 Team colleagues for their key contributions to our business. Their commitment and devotion enables us to perform our services with the highest possible level of safety; to continually affirm and re-earn our customers' confidence in our service capabilities; and to conduct our business in a manner in which we all can be proud. It is my pleasure to be associated with this great team. With that, let's now open it up for questions. Can I give it back to you, Tiara?

(OPERATOR INSTRUCTIONS) Arnie Ursaner from CJS Securities.

So the first question I have is, you did actually gives sort of revenue guidance, if you will, and you hadn't in your press release; but you're still giving us a relatively broad range. If I take your 15 to 20% revenue growth that you're highlighting in your prepared remarks and look at the one remaining quarter that we have, for the fourth quarter it would imply a rate of growth that ranges between 5 and 22%. Given that we're halfway through the quarter, that seems like a pretty broad range.

Could you perhaps comment a little on why that broad a range, and some of the factors that could impact it, please?

Well, I think if we look for our full-year number, I think our guidance at the end of the last quarter was a little over $300 million; and I think that is still kind of where we are. I would interpret that as 305 to $310 million kind of range, just broadly.

But frankly, with just I guess the way individual projects flow and land, I mean, candidly we are not smart enough to get it really precisely, Arnie. So we kind of keep a broader range because just where a particular project can fall can have a significant effect.

Then as we get to per-share numbers, with only 9 million shares outstanding, again the same issue is just a project falling in one quarter or another can bump it several cents a share.

Sure. I think we are all trying to grapple with the 300 basis -- the 300 or 3 percentage points or 300 basis point decline in TMS margins. Could you perhaps try to back out some of the factors? You mentioned two specific ones, project start-up timing-related work, and also the new service initiative. Could you perhaps expand on both of those and give us your best view of how you think they impacted the margin in the quarter?

First of all, you also have in effect mix effects, where a particularly attractive project can fall in one quarter and not be in a comparable quarter. So we always have a little of that, although not highlighting that; but that is just always a factor in there.

The two big things that hit the quarter that affected particularly at TMS, as you mentioned, the 3 points is -- I am going to say slow out of the box project start-ups coming out of the holiday season. We have been very, very strong; and frankly, we finished the quarter very strong; but really for the last couple of weeks of December and the first couple weeks of January, particularly outside the U.S., things were soft. It wasn't that there is no business, it was just a slow start-up from the holiday.

So we didn't do as -- they were softer and we didn't do as good a job, I think, in retrospect as we are going to focus on going forward and managing all of our labor during that time. So our labor utilization levels in that period were less than we anticipated and less than they have been in some other time periods.

We also are in a -- we have got a number of new initiatives going as you are well aware. Some of those had kind of growing pains associated with them in terms of either start-up costs or below kind of margin -- I guess below kind of running rate margin levels on the first couple of jobs in those project areas.

But we don't, really -- I will say, I am quite optimistic that those are kind of normal, natural effects of growth and am not too concerned about them as being chronic problems.

Would you expect, first of all, could you tell us what the new initiative is? Could you tell us sitting here today your view of whether it is likely to reach a normalized TMS margin when it is up more up and running?

Certainly, the latter question, yes, it will. In terms of the particular margin kind of impact in the third quarter related to our pipeline hot tapping activities. But I won't tell you that there won't be other start-up costs with some of our other kind of new initiatives as we go forward. But that happened to be that particular one there.

I will jump back in queue. Thank you.

James Gentile from BB&T Capital Markets.

Hey, guys. Good morning. You did list a couple of new programs, mobile heat treating, this pipeline hot tapping, and the entrance into municipal water; and I think I might be missing one other one. But could you articulate as you usually do with some other new product lines the market opportunity in terms of revenue? And perhaps your targeted share of these kinds of tangent services?

Well, let's start with pipeline hot tapping. You know, I think it is probably a $100 million-plus market or 50 to $100 million at least. We have virtually zero share in that. That has been a market kind of dominated by a couple of our competitors who have really focused on that. I think our aspiration and expectation -- it is not kind of built into next year's budget -- but we do, we kind of chase these things for 10 to $15 million of business or more. So that would be our expectation a couple years down the road.

Let's see, talk about the other. Mobile heat treating rigs, we have always been in this business. Frankly, it is an area where we had not -- our predecessor company Cooperheat that we bought out of bankruptcy had really, because of their financial difficulties, had not maintained their fleet of mobile rigs kind of up to our standards. So we had less capacity and, frankly, less high-quality capacity than we desired.

So we have made a commitment to really reassert our leadership in this area. We have got 20 new rigs in the fleet this year coming, and another 10 million -- 10 rigs next year kind of in our budgeting.

I think our total heat treating business is in the 50 to $60 million range. This is a several million dollar -- I don't have the numbers in front of me -- but a several million dollar increase in capacity for us. The thing I am excited about, candidly, is that the new design of our rigs have several features that not only our prior generation equipment doesn't have, but no one in the industry has. Safety features, convenience features, weight, which we think will make our equipment to be very, very desirable from a commercial standpoint.

Municipal waterworks is just again a stepout from kind of in-plant hot tapping. It is a hot tapping service. It is not high-temperature in the municipal area, but larger diameter piping systems. We have got the equipment in place, and we are pursuing that as well.

Great, thank you very much.

(OPERATOR INSTRUCTIONS) Mike Carney from Aperion.

Good morning. First of all, on the quarter, just in TMS, can you give us the difference in the off-line and on-line growth?

I don't have that handy. I'm sorry. Both were double digit, right? But I don't have the specifics.

Okay, but can you remember? The off-line was -- has been a lot higher, on-line has been lower growth. So is that the same trend that occurred? Or was it the turnaround work that was down around the holidays? Or was it the on-line work?

Well, the work that would be down around the holidays was the off-line, the project work, the turnaround work. It wasn't that -- it was just projects stayed down, just stayed down for a couple more weeks than we would have expected.

Mike, we just had a couple plants that we had expected kind of to come up and start some projects that were deferred until mid-January instead of early January.

So the project services for you were deferred? When you say project, not the turnaround, but the services for you were deferred?

Deferred till later in the quarter.

We are pleased with our overall revenue. So it would be a little disingenuous if we said, well, gee, it is our -- because we didn't have enough revenue growth. It was that we didn't manage the timing of our revenue as well as we expected to and expect to going forward. So we had lack of utilization and personnel that we didn't manage well during that time period.

So then as you move into February and in March, you said things have remained strong then?

Very strong, yes.

On the tech hiring, it looks like I am implying about 75 net new techs in the quarter; is that right?

Yes, something of that order of magnitude, continuing kind of roughly the trend we have been running. I'm getting -- I'll tell you, that is something I am very pleased with, because as you know, we have -- the key to long-term growth is being able to build a great organization, and sustain our attraction and development of our resources to support that growth.

I think we are getting better at it. We are getting more consistent. We are approaching recruiting and training and development as a business, a business within our business. Like I said, I'm really pleased to be at 3,000 employees, and we have got a lot of managers really focused on that and viewing that as a job every day, just like doing great service for our customers is.

I expect that we're going to have good continued success in that area. That is important though, to our ultimate success.

Just roughly where are those techs coming from? Competitors, the new hiring initiatives in the trade schools and the military, etc.?

Yes. I guess the not very helpful answer is yes. I don't have a -- as we kind of get some history here, we will get you some better profiles of that; but I don't have today a profile of where the net adds came from.

Ted, what is -- you mentioned the exact -- what is the exact stock option expense?

It's $350,000 in the quarter.

Okay, thanks a lot.

(OPERATOR INSTRUCTIONS) Byron Pope from Pickering Energy Partners.

Good morning, guys. I just have one question, also related to the technician side. In thinking about, trying to think about the productivity of these incremental adds, are you generally bringing on folks -- I'm trying to think about the learning curve. So I mean, how do you think about for kind of some of these hires that may be new to the business, the time that it takes to get them up to the point where you have them at a targeted productivity level in terms of revenue generation?

I think there's a couple -- there's no question, when we bring someone in who is inexperienced in our industry, there is at least a couple of week -- a couple week to maybe a four-week period of just training on our basic safety processes that must precede any work, so that we don't put any individual or, by virtue of their actions, anybody else in harm's way or in an unsafe situation.

But beyond that, for technical training, beyond again part of that earlier indoctrination period, we expect to get pretty full utilization right out of the box. The way we do this -- because we are working generally in crews, small crews of two or three or maybe slightly more for some projects. So what we can -- are able to do with that crew structure is split crews and put, if you will, assistants or new hires in as helper, in a helper roles to our more experienced technicians.

The whole structure allows us to do that. So we -- again, once we get through that little bit of a brief orientation period, we expect kind of normal utilization levels and kind of normal margins associated with those personnel.

I will tell you, though, one of our -- really we think all of our employees are critical to our success, but we certainly understand how valuable those senior technicians are and the key role they play in not only training our new people but ensuring the very high-quality work to our customers. So we are obviously also training and supporting those folks to the greatest extent possible.

Thanks. Then just one additional question on the CapEx side, roughly $15 million this year, fiscal '07. With your growth initiatives, how much of that has kind of been growth capital versus maintenance capital? Is it too early to think about what you all might be spending in terms of a range for fiscal '08 at this point?

No, it isn't. Actually to the growth versus maintenance, the vast majority of it is growth related. There is really not a lot of maintenance capital in our business, because I guess in some inspection technologies you have some -- with some of the digital type equipment has a reasonably short life. But nearly all of the mechanical stuff is iron. So we maintain it; it doesn't wear out.

Our biggest, if you will, depreciation of capital relates to vehicles. We have 1,300 vehicle fleet. But we handle all that via operating leases, so that is kind outside of our capital budget and has been always in that vein.

Looking forward, so we have $15 million this year; our kind of baseline budget for next year we are working up is going to be in the same range. So expect probably another $15 million, something like that.

Great, thanks guys.

Arnie Ursaner from CJS Securities.

Hi, two follow-ups if I can. I know you obviously took the $600,000 expense related to the problem you had in this particular branch, which you fully disclosed and everything else. But did you also see any impact on your operating trends with that branch? In terms of was that a possible factor that impacted your margin in TMS as well?

Absolutely. Where the whole notion, the whole idea of an investigation is disruptive, distracting and expensive. And not just to that branch, but to all management focused on supporting that activity. So it was a -- it is not something we want to repeat. I will assure you that we are gleaning all lessons learned from that whole episode to kind of, I guess, maximize our opportunity to avoid any more endeavors like that. But it was -- you bet, it is very distracting.

Got it. Two more questions. You in the past have broadly described sort of margin goals by the various segments. With some of the moving parts in place here, could you remind us or refresh your views of segment margin goals?

Okay, in terms of just operating profit, if we take the -- again back to the operating profit, the four corporate costs, our goal, our branch goal, as we have talked to in a lot of our presentations, is a 20% operating profit margin. I think we are year-to-date around 14%.

We believe that ought to be -- and that reflects kind of the mix of a lot of branches already at our ultimate target levels, plus some below that level that we are still working to continue to improve. We expect both divisions can achieve that goal. So our expectations for the operating profits kind of for our divisions are roughly the same.

If you look at now moving up the line to gross margin, because of the different mix of equipment and materials, our kind of gross margin expectations for TMS are a little higher than TCM. Then offsetting that would be different SG&A expenses associated, for some of the same reasons, with the different mix of businesses.

But our gross margin targets for TMS are in the, I think, the 37 to 40% range; and for TCM kind of full year from 32 to 35% range. So that is kind of roughly -- it is roughly a 3 point difference.

So that really goes to the point I was trying to get to. On TMS, while you had a disruption, if you will, this quarter, and I think you have been very clear people shouldn't necessarily look at your business on a quarterly basis. There is really no change in your intermediate or longer-term views on that segment at all at this point?

Correct. That is -- we're having a great year, by the way. I think we're having a great year overall, but particularly if you look at the margins at TMS, they are very, very good. They were not -- they just were not particular good this quarter.

Okay. Two more questions. Obviously, March, you should start to see a pretty good pickup in your business seasonally. Did you in fact see that? Could you comment a little bit about trends you saw (multiple speakers)?

I did a comment in my remarks that really coming out of January, February is very strong and March continues -- and March was strong. And we continued to see -- we see a robust market and a positive outlook.

Normally your visibility based on sort of -- obviously you can't predict unusual events -- but based on turnaround and other activity, in terms of your goals for Q4, what percent do you think you basically have in hand in terms of orders at this point?

I think we have everybody. We kind of are -- obviously, we have -- one month is completely done. We are -- you kind of staff probably two to four weeks out. What you never know, though, Arnie, is whether projects will expand or contract. So we kind of know what we are chasing and what we are working on; but because of the nature of some of the project work, you don't really know how big it is until you have done it, because of the discoverables are highly variable in those kinds of projects.

But not to duck the question, it is going to be a good quarter. I mean, we're going to be busy.

Final question, just remind us again of the leverage in your business model. Where you have operating leverage and -- again this quarter didn't show it, but just perhaps remind us of, as you think about your business, where the leverage (multiple speakers)?

Our target is for delta EBIT, or change in the growth in the earnings -- you know, EBIT -- divided by delta revenue to be 20%. That is our target.

If you take this year, if you take the year-to-date, take out the effect of stock option expenses, because those are apples and oranges for this particular year; and take out the $1 million associated with the false invoices from a prior year and the investigation; I believe our number year-to-date EBIT versus dollar revenue is 19%.

So we are pretty close to our target kind of year-to-date, but that is our basic business model that we think as long as we are --. It would not be true with an acquisition; but I'm saying for organic growth, we would expect that incremental business development to yield a 20% EBIT margin for us.

I think that is very helpful. Thank you very much.

Thank you. Mike Carney from Aperion.

Okay, so I guess, Ted, it sounds like the DSO are now coming down.

Yes.

And you pretty confident with that? That is a good trend now?

We are very confident with that.

Okay.

Now if you look at it, the way to look at it is in comparison to the same period a year ago, and that is down about (multiple speakers) days. If you look at it sequentially, you will see it is up a little bit. But that is because (multiple speakers) coming off of a kind of a lower revenue base in the third quarter.

We have implemented significant new processes that we have talked about over time. We have a new accounts receivable management tool for tracking delinquent accounts that we are rolling out into the entire organization. We have incentive measures, metrics in our incentive comp program, that are tied to collection efforts. So we are very confident that we have turned the corner and will see continued improvement in that regard.

What was the total debt that you had given?

$42.6 million; that is net of cash.

Net of cash?

Right.

So now, obviously, you have got some higher CapEx spending this year and probably going forward. But I mean what is the -- is it basically CapEx and then pay down debt, in that order?

That's correct.

Okay. Thanks.

Thank you. There are no further questions at this time.

Thank you, Tiara. Again, as always, we appreciate your interest in Team and your willingness to visit with us. I guess until we meet again, I think our next conference call will probably be in early August to discuss full-year results. I wish you all a good day.

Thank you. This concludes today's Team IR conference call. You may now disconnect your lines at this time and have a wonderful day.