Team Inc (TISI) 2007 Q4 法說會逐字稿

Good morning. At this time I would like to welcome everyone to the Team IR conference call.

(OPERATOR INSTRUCTIONS)

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

Thank you, [Mikale], and good morning, 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 and I'm the chairman and CEO of Team. Joining me again today is Mr. Ted Owen, the Company's senior vice president and chief financial officer. The purpose of today's conference call is to discuss our recently released financial results for the Company's fourth fiscal quarter and full fiscal year ending May 31, 2007. 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 as well as our annual report.

As has been our practice, Ted will begin with a review of the financial results and I will follow Ted with a few remarks and observations about our performance and prospects. As Mikale indicated, following our remarks we will take questions from our listeners.

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

Thank you, Phil.

First, as usual, a word from our lawyers. 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 any 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.

And so with that, now to the financial results. Revenues for the fourth quarter were $96.1 million compared to $76 million in the fourth quarter of last year. That's an increase of 26%. Net income was $6 million in the current quarter versus $4 million in last year's fourth quarter. Earnings per diluted share was $0.63 in the quarter versus $0.43 in the fourth quarter last year.

For the full year, our revenues exceeded $300 million for the first time in our history, increasing to $318 million versus $260 million last year, an increase of nearly $59 million, or 23%. Net income was $15.5 million compared to $10.6 million last year, a 46% increase, and earnings per diluted share was $1.64 versus $1.16 last year.

For a little more depth around our industrial service business, as a reminder, industrial services includes 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 then the second division is TCM, which is comprised of our field heat treating and inspection businesses or service lines.

TCM revenues in the fourth quarter were $54.8 million compared to $41.2 million last year, for an increase of 33%. TMS revenues in the quarter were $41.3 million versus $24.8 million in the fourth quarter last year, for an increase of 19%. Operating income for the industrial service business, which excludes corporate costs not directly attributable to field operations, was $15.7 million in the fourth quarter versus $11.2 million in last year's fourth quarter. Operating income as a percent of revenue for field operations was 16% in the current quarter compared to 15% in last year's fourth quarter.

Now, looking at the full year results for our field operations, TCM revenues increased 19% to $171 million for the full year and TMS revenues improved 26% to $147.3 million for the full year. Overall, our gross margin percentage was slightly improved for the year to 34.6% compared to 34.3% last year. Significantly, though, our TCM gross margins improved 2 points for the year and 4 points for the fourth quarter.

On the other hand, TMS margins declined 2 points for the year, 5 points during the quarter due primarily to the very rough comparables -- or very tough comparables in last year's fourth quarter due to Katrina/Rita related projects. Operating income for the industrial service business for the year, again excluding corporate costs, was $44.8 million, or 14% of revenue, up $12.3 million, or 38% over last year.

Now looking at corporate costs, for the full year corporate costs were $14.4 million, up $3.5 million over last year, principally related to two items. First, $1.5 million of FAS123R stock option expense that you will all recall was not included in last year's numbers. And secondly, as a result of about $1 million of costs associated with an independent investigation that was completed in the third quarter and that we discussed fully in our second and third quarter conference calls.

Now, with respect to our balance sheet and cash flows, first, as previously announced, in order to finance our acquisition of Aitec, which Phil will talk to more fully, on May 31st we increased our revolving credit facility to $120 million, which includes $34 million that was drawn down on June 1st, the day after our year-end, to compete the Aitec acquisition. Our financial covenants with respect to the new credit facility are virtually unchanged in comparison to the previously existing facility.

At the end of the year our debt net of cash was about $49.3 million, up $6 million from last year-end, reflecting the significant working capital growth associated with fourth quarter revenues. Our debt to EBITDA at May 31st was about 1.4 to 1 and our available capacity under our credit facility after giving effect to the Aitec acquisition would be about $34 million. By the way, while we financed the Aitec acquisition with senior debt, it's important to note that even after considering the new debt, our debt to EBITDA would only be about 2 to 1. Additionally, I should note that the modification of our credit facility extended its maturity to 2012.

Now, just some other financial numbers. Capital expenditures in the quarter were $5.5 million and $16.5 million on a year-to-date basis, depreciation and amortization was $2.3 million in the quarter and $7.8 million for the year-to-date. Our days sales outstanding at the end of the year was 79 days. That's down about three days from the same quarter of last year. And by the way, for fiscal 2008 we would expect capital expenditures to be in the range of $15 million to $20 million, which would include new capital to support our Canadian acquisition.

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

Thanks, Ted.

I'd like to add several observations and comments to Ted's remarks. Again this year Team achieved record performance. We had the highest sales, highest profits and, as a result, the highest Company valuation in our history. All of us at Team are proud of this continuing progress. We believe it reflects the commitment of our more than 3,500 Team colleagues to bring our best to every service opportunity with every customer.

And this commitment to service leadership and all that it entails is the foundation of our success. Customers choose us, not vice versa. When we work together as a team and bring Team's best to each service opportunity, we reaffirm our customers' trust and confidence in us and, in the process, earn expanded service relationships. I am very proud of our entire team and I want to take this opportunity to recognize their critical role in our success.

Now let's briefly review several noteworthy highlights from last year. First, we again achieved double digit organic revenue growth. Our business model is based on a premise that we can organically grow our revenues at a double digit growth rate. While total industry demand for our services is not expected to grow significantly over the long term, we believe Team's outstanding service capabilities combined with the breadth of our service offerings and geographic coverage has and will continue to enable our Company to meet these revenue growth goals through increased market share.

Our revenue growth in the past fiscal year again affirms and validates our organic business growth strategy. Total revenue growth, all organic, was 23% overall. I continue to be pleased with the breadth of our growth. Our success is not driven by nor is it dependent on the performance in only one or just a few projects or branches or service lines. As Ted mentioned, both Team divisions achieved at least 19% revenue growth during the year and nearly all service lines achieved more than 10% revenue growth.

And we grew our business with both the industry's largest customers and smaller customers. Team's total revenue growth for the year was approximately $59 million. Of that growth -- or half of that growth, or $29 million, represented growth in our large multi-service, multi-location alliance agreements, principally with the major energy companies. Importantly, though, half of our growth also came from our other smaller customers, the result of the aggressive grassroots development efforts across our now 83-branch network and we've hardly saturated the market.

Even after this significant growth over several years, our composite market share in this highly fragmented market remains well under 20%. There is still over 80% of the North American market that we do not serve, plenty of future opportunity.

A couple questions related to our revenue growth may come to mind. First, is Team still benefiting from above average new plant project work related to expansions and deep bottlenecking projects? Without question, there is still very active ongoing plant expansion work in a number of geographic areas. In particular, our refining customers continue to enjoy very strong profit margins that in turn encourage those additional capital projects to incrementally expand their output.

As we have discussed in the past, this type of nonrecurring capital project work is a small portion of our total revenues, estimated to be about 10% or less. Nevertheless, this is incremental demand and represents a continuing wind at our back at the present time. While we certainly do not count on this incremental surge in demand forever, we have not seen any evidence of a slowdown to this point. We expect similar conditions for fiscal year 2008.

A second commonly asked question is how much of the revenue growth is related to pricing as opposed to an increase in real activity? This is a more difficult question for us to answer due to the impact of job mix in our results. Overall, our hours billed directly to customer jobs -- or work hours billed directly to customer jobs increased 16% during the year. Given our overall revenue growth of 23%, this would imply that the average price increase for the year was approximately 7% to 8%.

Because the excess demand -- because of the excess demand mentioned a moment ago has led to tighter labor conditions and significantly higher labor rates in many parts of the country, we have focused on negotiating price adjustments to reflect our higher costs and to at least maintain our current profit margins.

Second, during the year we have been able to continue the aggressive growth in our staff. As we have discussed in prior conference calls, a key driver of our revenue growth is and will continue to be our ability to add sufficient new technicians to our team to meet our requirements. I'm pleased to report that in the past fiscal year, Team has increased full-time employees by a net 350 individuals, or about 12%.

This growth represents a combination of experienced hires from within the industry and new employees from a number of sources, such as trade schools and the military. Recruiting and staff development is now an everyday responsibility in most of our branches.

Third, we continue to improve our profit margins. The bottom line is that our overall operating profit margins have increased about 1.5 points in the past year. The drivers of margin improvement are a continued focus and emphasis on, first, realizing our total profit -- our target profit margins, both at the job level and branch level, and second, capitalizing on profit margin expansion opportunities via the operating leverage associated with growth.

Overall job and gross margins improved slightly during the year, but our overall progress was more positive than the numbers reflect. During the second half of last year we began to see significant improvement in our TCM division margins as some nagging, poor performing branch issues were successfully addressed. We expect to see that progress carry through to the current year.

Offsetting this progress was a decline in job and gross margins in the TMS division. As Ted indicated, a significant contributor to this decline was the lack of Katrina/Rita hurricane projects that positively affected the profit margins in fiscal year 2006. Overall, TMS division continues to perform well. Of course, we continue to maintain a keen focus on margin management across our business.

Overall operating leverage, as measured by a change in operating profit divided by a change in revenue, was 15% last year. However, after adjusting for $1.4 million in non-cash stock option expenses that were not included in last year's results and the approximately $1.1 million spent related to the previously discussed independent investigation, the adjusted operating leverage was 19%, or near our 20% long term target. In short, we believe our results this year affirm the inherent operating leverage of our business, a key premise of our attractive profit growth model.

And we are maintaining our uncompromising commitment to safety. As an integral part of Team's service leadership, safety first in everything we do is and has been Team's first value. All of our colleagues understand our obligation to ourselves, our colleagues, our customers and our families to ensure that we conduct all of our activities in the safest possible way and in the process go home everyday in exactly the same way that we arrived. We are pleased that our safety statistics continue to improve and are among the best in our industry. But we will not be satisfied until we experience zero injuries, zero incidents and zero unsafe behaviors.

Now let me take just a moment to comment on our recent acquisition of the Aitec inspection company that, as Ted indicated, was completed on June 1st. As mentioned in the previous press releases, Aitec is the second largest inspection company in Canada, with a network of 13 branches. Significantly, prior to the acquisition, Team had no NDT inspection capabilities within Canada. The addition of the Aitec branches fills this gap and significantly improves the breadth and depth of our presence in the important Canadian market. We are very excited about the growth potential for both the former Aitec branches, but also for our other Team service lines in Canada as a result of our combined presence.

The transition of the Aitec business to Team is well underway. We've had meetings with all of our new branches and are more enthusiastic than ever about their fit with Team. We are in the process of installing both the Team IP network and our financial system at each new location. Our target is to have these activities completed by the end of the calendar year. We will be transitioning to the Team industrial services brand name in that timeframe as well.

However, because we are not changing the branch network or the branch leadership and personnel, we do not expect major disruptions. Our current focus is to continue to provide great service to all of our new customers. While we are still finalizing a detailed financial plan for the acquired business, we expect Aitec to be accretive to our performance in the current year.

Switching to a new topic, we are also pleased to announce the stock split. Our primary reason for the split, which is being done in the form of a 100% stock dividend, is to increase the number of shares outstanding. For a company our size, we think the larger number of shares outstanding, nearly 20 million on a diluted basis, will be helpful to all investors. The 2 for 1 approach was selected for simplicity. There are no partial shares for investors to deal with and the math of pre-split and post-split results is simple, just divide or multiply by 2.

Another important factor for the board in considering a stock split was the future outlook for the business. The decision to split the stock reflects management's and the board's high confidence in our continued growth and progress going forward. The record date for the split is August 15th and the payment date is August 29th.

And now let me add a comment on our fiscal 2008 earnings outlook. Following our record performance in fiscal year 2007 just ended, we are forecasting additional earnings growth of approximately 25% to 30% in the current fiscal year. As indicated in the earnings release, based on a projected -- a projected 10% organic revenue growth plus the impact of the Aitec acquisition, we expect that fiscal year 2008 earnings will be between $2 and $2.20 per share -- per fully diluted share on a pre-stock split basis. The corresponding total revenue for Team is projected to be slightly in excess of $400 million.

While organic growth and improved execution remain the primary strategic focus of the Company, we continue to be receptive to business acquisitions that can attractively accelerate our performance growth, similar to Aitec. There is no assumption of any business acquisition within our earnings guidance for fiscal year 2008. As with past earnings guidance, we decline to provide individual quarterly estimates. Frankly, we don't believe that we can accurately forecast the timing of specific projects, which can affect the results of any given quarter, with any precision. At least quarterly, and more frequently when appropriate, we will affirm and/or update our annual guidance.

In wrapping up, let me reiterate that we are all proud of our results this year, yet we're even more excited about our future. Our growth and progress in the past year hasn't reduced the pool of opportunity available to Team one iota. Rather, it has improved our position and capabilities to capitalize on additional opportunities this year. I hope that you sense my -- you share my sense of excitement and enthusiasm for Team's prospects.

We also realize that saying it and doing it can end up being two entirely different things. To capitalize on our opportunities and deliver the results we expect, we need to stay focused on the basics of our business. Our key priorities are to sweat the details in margin management. At our current size, a percentage, a single percentage point of operating profit margin is about $0.25 per share. With over 100,000 jobs and over 5,000 customers, we have a fertile field to look for improvement opportunities.

Continue to be the employer of choice in our industry, but also expand our recruiting horizons to bring new sources of talent into Team. We have many positive initiatives underway in this area.

And as a final comment, we must never forget what it takes to be a great service company. Service leadership requires that we treasure every single service opportunity and stay with it until it's completely right and the customer is fully satisfied. We must recognize that we have to re-earn our customers' confidence every day. And we must continue to value every employee and recognize the critical role each and every individual plays in our success.

That concludes our initial remarks. Let's now open it up for questions. Can I turn it back to you, Mikale?

Thank you.

(OPERATOR INSTRUCTIONS).

Our first question comes from Arnold Ursaner from CJS Securities.

Hi. Good morning.

Good morning, Arnie.

Hi, Arnie. How you doing?

I'm great. A couple of quick questions, if I can, first. Ted, what is the rate on the facility that you have right now, LIBOR plus -- ?

It's the -- it is LIBOR plus a margin and the margin is kind of a matrix margin, depending upon what our debt to EBITDA. On a composite basis, Arnie, it's a little over 7%.

Great.

It's actually -- the margin is actually more favorable than our previous credit facility by about 25 basis points.

So your rate is 7%, not the spread?

No, no, no. The all-in -- the all-in rate at present --

Perfect. Second question I have is I know you don't give quarterly guidance and I fully appreciate the challenge of your business and I know Q1 is seasonally your least important quarter, but you had had a pretty wide range of Q4 estimates and dramatically exceeded it on the revenue side but were within the range, if you will, on the earnings per share side. I guess the question I have is did you either incur some unusual expenses in Q4 or are you borrowing any activity from Q1 in the current quarter? I guess I'm trying to figure out how much business got done literally at the end of the quarter and how much may have moved into the next quarter.

Fair question. Actually, the -- in terms of -- as we kind of look at our overall business, we look at, again, operating leverage in our target margins and we were pretty pleased with those in the fourth quarter. So I appreciate that we had a little bit higher revenue maybe than some of our earlier guidance, slightly higher, but we were also sitting on the very high end of our performance range. So we were kind of basically in line with expectations.

No, we did not pull any revenue ahead from first quarter. In fact, to the contrary, we're having a pretty strong first quarter to start activity-wise. I think what's happening in our industry a little bit is some of the seasonality is softening a little, just in response to very high demand levels. So plants are spreading out a little their activity level. So we saw kind of a turnaround season that might kind of be wrapping up completely by kind of the end of May, frankly continuing through June and even into -- a little bit into July.

I think, Arnie, one thing that is -- that we mentioned the -- our overall margin was about a point less in the fourth quarter compared to last year, kind of a flip from the two divisions. TMS just had -- was awfully strong in the fourth quarter last year as a result of the -- kind of the significant Gulf Coast projects. On the other hand, TCM had just tremendous improvement in their margins in the current year. But the net effect of that was about 1 point less margin in the fourth quarter this year versus last year.

You previously discussed annual goals for each segment for margin, TMS 38 to 39, TCM 32 in the past. What is your view looking into this year for each of the segments?

I think the -- I think the 37, 39, 38, 39 still is a good number for TMS. I would expect our TCM -- I don't think --- that may have been a near term goal. I think we still expect that to continue to creep up with time as we get the full effect of some of our improvement areas. But it'll be -- it'll be several points below that. I think just kind of off the top here I would aspire to a couple of points higher than that over the long run.

Okay, my final question, and then I'll jump back in queue, is mechanical. You're guiding to 10% organic revenue growth plus the impact of Aitec. If I take 10% organic growth, that gets me to $350 million. Your guidance is for $400 million and in your prepared remarks you speak about exciting growth for Aitec in the upcoming year. So if it implies $50 million of Aitec revenue, what were the previous year revenues for Aitec? What sort of growth are we looking at that you would describe as exciting?

I think our -- and again, we still are kind of finalizing audited numbers for Aitec and all of that, but our kind of basic premise on Aitec is that we ought to be able to get 10% organic growth this year from them and from that business and roughly 20% operating margin. That would be our kind of planning premise.

Okay. Thank you very much.

Sure.

Thank you. Our next question is coming from [Byron Pope] of [Pickering Energy Partners].

Good morning, guys. I appreciate the detail in terms of kind of breaking out the revenues that came from expanded business from major alliance customers as opposed to smaller customers. What I was curious about is has there been an acceleration in that trend, which is to say are you seeing more of the plant owners with multiple facilities moving toward the model that -- where they outsource more of their services to someone like a Team? So I guess a different way to ask the question is would that percentage of the revenue growth in prior years be comparable to what it was in fiscal '07 from the major alliance customers?

Good question. First of all, just as a point of clarification for everyone, the services we provide have always been outsourced so that the issue is not a company that used to do our service in house and is now shifting those to us. So, just as a point of clarification. But it is true that the major companies have been migrating from, I'm going to say [buy the drink] service purchase, kind of plant by plant, service line to service line, to a more integrated approach, multi-plan, multi-service alliance agreements. Those started in earnest probably five six years ago with our first one.

If you looked at our growth rate, and I don't have it at my fingertips, but my recollection from last year was again about half of our growth was related to alliance agreements. So I think the -- in terms of kind of the mix of alliance growth percentage-wise and kind of the smaller customer growth continues to be pretty balanced, about 50/50.

Okay.

Would point out, though, that as we look at our projected market share by major customer, we're not even [denting] it yet. We're still -- we're still in the 20s range with those customer so we have lots of further penetration opportunities with the big guys.

Okay. and then as we layer on kind of Aitec's results, I mean I wouldn't assume that there was a tremendous amount of seasonality associated with kind of the nondestructive testing up there, at least for Western Canada, or is that a -- is that a fair way to characterize kind of the -- any seasonality issues with regard to Aitec's revenue this year?

I wouldn't -- I would not -- we're still learning the business with more precision than we know from just our due diligence, but I would not presume that there's no seasonality because there it's just like the rest of Team's businesses. So we will have -- we will have seasonality related to turnarounds. And then for the day-to-day activities, of course, they would be continuing like our other on-stream services.

Okay. And then --

Following up to that, Byron, just relative to kind of last year's flow of their business, it's not unlike ours, frankly, in kind of a heavy concentration in second and fourth quarter, lesser so in the first and third quarters.

Okay. And then just last question with regard to number of field technicians. Always like to kind of track that. I think you shared with us, I'm trying to look at my notes here for -- I think it was up -- net hires up 12% year-over-year. I was wondering were most of those adds kind of field technicians, kind of the guys out at the facilities doing the work -- ?

Yes, but just because they're the -- I don't have the figure at my fingertip, but 80% of our employees are technicians, or 80%-plus. So just by virtue of those numbers, it is, yes.

Okay. And then you mentioned Team has roughly 3,500 employees total. So is that kind of pro forma for Aitec? I'm just trying to think in terms of revenue per employee, if you will.

Yes.

So that includes -- ?

Those are the -- two things. We're in the midst of installing a more comprehensive personnel management system which would give us kind of better, tighter numbers. Secondly, we're in the midst of kind of integrating Aitec into it. So that's another limitation right now. But so that's roughly correct, but with the limitations that we don't have complete precision at our fingertips at this moment.

One other comment I'd like to add, though, is that we also, in addition to our full-time, permanent full-time employees, which is the numbers we're talking about here, we supplement that with project teams. These are contract people that we hire kind of by project to join on particularly big turnaround activities. We have several hundred people in that category that are available to us to add to augment our full-time team when appropriate.

Okay. Thanks, guys.

Sure, Byron.

Thank you. Our next question is coming from Mike Carney from [Coker & Palmer].

Good morning, Mike.

Hi, Mike.

Mr. Carney, your line is live.

Must have lost him. Sounds like we better go to the next one.

Our next question is coming from [Richard Nelson] from [Jay Giordano Securities].

Good morning. Most of my questions have been answered, but I did have one. You sort of touched on it with the supplemental project crews that you've got, but I was curious if you are indeed finding it increasingly difficult to find talented and skilled people, if that's becoming a problem yet. And also, are you finding some pushback in terms of price increases from all your customers? If you could just elaborate a little I'd appreciate that.

Anytime when you're adding 10%, 12%, 15% to your staff every year, that's a challenge. So we -- what we've evolved toward is -- frankly, our model several years ago was let's go get the work and kind of earn the relationships and then we'll backfill with technicians or resources to do that work. Our model now is we continuously hire and that if we attract and hire great people, the work will come. And that's worked very, very successfully for us.

And as I said, I think the key word is it's become an everyday responsibility to recruit, so we're aggressively developing an ever broader array of sources of folks. We are training at unprecedented levels in terms of quantity of training we're providing, again to accelerate the development of our staff and particularly our technicians at all levels of experience.

And I did mention that because of the -- it's not just our little niche, but broad industrial services markets, generally the demand for services in many geographic areas there's been a significant pressure and increase in the wages that we pay our folks and we've aggressively sought to recover that cost increase through improved pricing arrangements with our customers.

And to date, we've -- I'm not saying that 100% of our requests have been accepted, but our customers are experiencing exactly the same environment in their plants with their folks and there's a high understanding of the environment we're in and general receptivity for reasonable price increases.

So we haven't -- we haven't gotten strong pushback and you see it in our margins that they're at least staying even and, frankly, creeping up slightly.

All right. Well, thanks a lot and congratulations. You're doing a great job.

Thanks, Rick.

Thanks.

Thank you. Our next question is from Mike Carney from Coker & Palmer.

Good morning.

Good morning, Mike.

Hi, Mike.

Can you hear me now?

Yes, we can.

Lost you there for a minute.

They hate me at the conference call place. But anyway, the -- I don't believe you have been asked this yet. But on the TCM side, you mentioned, Phil, the underperforming branches picking up. That was some of the gross margin. Was that the primary reason or was there gross margin expansion at the branches that were also -- that had already been healthier than the underperforming ones?

I think we saw improvement in a lot of places but I think the big kicker for us was, remember the top half of our branches on the TCM side have always performed pretty well and they still continue to, is that we were giving it back with that handful of very -- of poor performing branches and we saw real traction on virtually all of those in the second half of the year and that was a big driver of our improvement.

And are those branches spread out across North America or is there a specific region that has more?

They're spread out.

Okay. And in terms of TMS, in general what was the growth in online versus offline?

I think it was slightly higher on the offline because of the very heavy [turnaround] schedules, but it was double digit, as I mentioned, on both.

Okay. And so the 37% gross margin, I think you've already mentioned that you expect that to be higher over time and obviously if we go back before there was any -- this dramatic infrastructure increase, they were running 40%. So is that what you would still look for long term?

That's a little [hot]. I think if you look last year it was 40%, is my recollection was for the year, in the aggregate and --

-- 43% in the fourth quarter.

And we have a -- we have a -- as we do anywhere, right, we always have improvement opportunities. So would we like to see it up a little higher than 37%? Yes, we would and we're working on that. But I wouldn't -- I would declare it pretty good already in that we're just working to tweak that up a little bit as we go forward. We're the sum of 100,000 jobs so it's -- if we have a few that are maybe not as good as we could make them, that will -- that's how you get the 37%.

So we're continuing to focus on all of our business and trying to make it better, but I don't want to leave you the impression that we were kind of severely disappointed with the year, with TMS, because we weren't.

Well, between the quarter, year-over-year, again, you said it was Katrina that was hampering the margin, Katrina and Rita.

Comparability, that's right.

Right. So from the 43% to the 37%, is that -- is what you're saying is basically you were able to get a little bit better billing rates above the wage rates last year because of the -- ?

I'm saying because of the Katrina/Rita situation, we had several projects that had very high margins associated with them because of the emergency nature of the work. And it was an extraordinary circumstance that was extremely attractive and profitable for the Company, but it was just a one-off event. By a one-off event, I should say.

And you had -- you answered -- you've become so good at answering basically all the questions before we ask them, but you talked about the price increases that you've kind of analyzed. Do you have something similar for the pay increases?

No. I don't -- again, we will, as we get our more comprehensive personnel system in, but I do not have a stat in terms of what our average rate increase was this year.

So anecdotally you think it's around the 7%, 8%?

Yes, because -- and my evidence is that our margins are -- our utilization levels continue to be good and high, so the difference in margins -- since the margins are roughly the same with the job level, that means that our costs are going up at the same rate as our revenues.

And have indirect expenses as a percent ticked up? Have you seen anything like that?

No, I don't think so. Actually, the indirect expenses -- you're talking about SG&A would be -- as a percentage of revenue it declined a --

No, actually on the -- still in the cost of services.

I think they've been roughly comparable. Obviously that related to benefits and all that would comparable because that's somewhat variable with the volume of -- or number of technicians. We will see a creeping up of depreciation due to our higher capital spending, but we really didn't see a lot of that this year. That was, I think, about $8 million was our depreciation in the recently completed fiscal year.

And, Ted, you mentioned -- did you mention the fourth quarter non-cash expense? Was that $400,000 non-cash compensation expense?

I don't have that number in front of me, Mike, but it would be comparable to the prior quarters. I think for the year-to-date it was about $1.5 million.

Okay. And then you mentioned $1.5 million for the internal investigation costs. That was including the write-off of receivables or was that -- ?

Excluding. It was a little -- it was just a fraction less than $1 million excluding the write-off of the receivables when it was all said and done.

Okay.

-- amount of cost that impacted -- that was recorded as corporate expense, if you will. The $400,000 write-off of receivables was just kind of flow-through field SG&A in the allowance for bad debt.

So in the third quarter there was $600,000 of costs. Was there an extra of SG&A costs?

There was. There was some additional cost in the fourth quarter that frankly we had not anticipated at the end of the third quarter so that was reflected in Q4, about $300,000 in that, I think.

Okay. And so do you -- was there any difference in terms of SOX costs or compliance costs between the quarters?

Not really. As you know, our costs are a little higher in Q4 and Q1 because --

Related to the prior year.

Yes. But related to the prior year it would not be much different. It would be -- our internal costs of SOX compliance have tailed down significantly as compared to when we got started. Our third party audit costs have been reduced slightly but not nearly as significantly. We just -- we're now in year three and we've kind of embedded SOX into our routine business processes and it doesn't affect our comparability year-over-year very much.

And in terms of the technicians, looks like there was maybe an extra 100 that you added in this last quarter. Is there anything, Phil, that has changed in terms of the kind of aggressive training, human capital plans or just kind of continuing on with the -- what you had started a year ago in terms of that?

I think it's more a continuation of the trend. I think we're -- I think the big difference is we're getting a little better at it and we're getting more systematic about it. I mean the key thrust to me is that we're now looking at recruiting as job one, not something that we do in reaction to getting additional work. It's an everyday activity. We're mining all of our sources. In terms of any of our great technicians we have, it's kind of getting referrals, it's being in all the trade schools, it's being in all the military job fairs. It's just kind of getting the word out and systematically following up so great folks learn about Team.

Would you say that it's -- the majority is coming from competitors or from new to the industry?

It's a blend of both.

Okay. And last question, Phil, there's been a lot of -- at least the majors have talked about less turnaround activity because they've been getting a whole lot of pressure from it going forward. Do you have any thoughts on that?

No, I really don't know kind of all the things that are going on. I just -- just general observation I'd make is I don't think anybody likes to do turnarounds or take their units offline, so I don't think they're doing it for fun. And it's just one of those necessary evils of their industry. So we don't see -- we don't have as a planning premise any fundamental change in the way turnarounds or outages are handled over time, although they're inherently lumpy, you know, they come from time to time.

Thank you.

Thank you. Our next question is a follow-up from Arnold Ursaner.

Hi. A couple of real quick ones. Ted, your tax rate guidance for the upcoming year?

It'll be about 40%.

Okay. And in the last couple -- well, I'll ask a thematic question for Phil, if I can. We obviously had a steam pipe issue in New York last week. [BP] had a very visible plant issue which had a significant impact on them. Are you seeing customers begin to react to this type of thing and get more aggressive or is it just premature to see a change in the overall industry dynamic? And I guess the reason I'm broadly asking the question is you continue to guide to 10% organic growth and you haven't been anywhere near that number in quite a few years, 23% last year and it doesn't sound like the tone of business is deteriorating. So I'm trying to get a better feel for maybe the macro drivers in your business and perhaps why you're so conservative talking about 10% growth.

Well, let me -- we'll come back to our forecast in a minute. But just in terms of industry trends, we're aware of -- you noted two high profile kind of plant failures or system failures that do impact -- favorably, frankly, impact us and our industry. I think the -- if you read the [Baker Report] about the BP Texas City incident, it not only challenges BP but it challenges the entire industry to be more rigorous and aggressive in process safety management.

And I think what that has to mean for our industry is that there's going to be more aggressive preventative maintenance activities by all of these facilities and that's going to be good for us. I can't say that we have seen specific evidence of that or we got this project because of that report or that incident or what have you, but it just stands to reason to me that that is going to be a positive for us because everyone's going to be that much more sensitive to avoiding failure, operational failure type situations.

Regarding our forecast, I certainly hope you're right, Arnie, and that we kind of grow our revenues significantly higher than the 10% kind of benchmark that we've kind of initially set out for the year. I don't believe there's going to be an industry out -- there's not going to be a demand issue in meeting that. The point I'd make is that 10% revenue growth is good. It's a significant increase in resources, it requires a lot of management to make all of that happen. We've been fortunate to do better than that in the past couple of years, as you point out, and we are certainly striving to do better than that if we can. But having said all that, we think it's a good place to start. It's in line with kind of our minimum expectations and that's -- so that's where we start with our guidance.

It's a good thing to beat expectations, so I don't -- I'm not trying to fight you too hard on tat. A couple of more specific questions. In your capital expenditure, the biggest driver of that has been rigs, if you will, for mobile heat treating. Can you give us an update on how many are in the field and what sort of profitability you're seeing from the ones that are in the field and how much of that will impact your CapEx in the upcoming year?

Your are correct. Just as a clarification, we spent about $16 million last year. I think that the big buckets of spending, the rigs were a big significant part, I think it was $3 million or $4 million, were on the 20 new rigs that have all been -- they're our own design, they're all -- they're fantastic. They're all in the field working. And I don't have specific margin on them, but my belief is that they're very attractive, they're very, very well received by the industry and our customers and we are looking at some additional rigs this year as well. I think 10 more rigs are in our capital plan for this year.

The other big areas of capital spending last year were very significant spending on field machining and bolting equipment as we expanded our capability and added a couple of new service centers to our support network. Big on hot tapping, particularly as it related to the pipeline industry. And then very significant and continuing investment in inspection services as we -- again, that's our -- now virtually a $100 million business as we continue to expand, particularly at the higher end, services and some significant equipment related to that.

One last item that's more related to hot tapping dimension was the waterworks business. I think we had talked about before that we had some investment in that. And also we mentioned line isolation tools that is another kind of category. It's kind of a subset of field machining and bolting to us, but it's a new, exciting capability that we're adding.

All of these investments that we made in the past fiscal year, to me, are -- represent growth opportunities, revenue growth opportunities this year because we did not have the full year effect of that significant capital investment. And we are delighted with what we own and how we're going to use it.

As we look forward to the coming year, again, we gave guidance of, I think, $15 million to $20 million, including Aitec investments. We don't know precisely what Aitec needs, but it's been a -- it's a company that has not been supported aggressively with capital in the past so we expect a fair amount of additional capital there. Plus just follow through on our basic initiatives we have today and, again, as we add $60 million, $70 million, $80 million of revenue growth, however that turns out, that's a substantial amount of additional business and we will have just capacity requirements to support that.

You mentioned most of your new initiatives. One you didn't mention, you've been moving -- you've obviously been a leader in hot tapping at the plant level --

Right.

-- moving into the pipeline area last go around and I think it was a real startup operation for you where there was kind of one market leader. Can you freshen up where we stand there and how trends have been in terms of markets?

Well, the -- in terms of our progress there, we're pleased with our progress. We've got a very good working relationship with many major customers in that market. You are correct, it is a segment that we had not been in historically and there has been a larger competitor -- or a competitor has been a much larger player in that segment. We continue to work. Frankly, [it was] anything was brand new; first couple of jobs in the service line we were probably doing it for practice from a margin standpoint. We're learning what we need to do it successfully and profitably. We're getting better all the time. We're continuing to improve our processes. We remain very, very optimistic about our business and our outlook in that area. So I guess just generally that's how I'd like to respond to that.

Thank you very much.

Sure.

Thank you. There appear to be no further questions at this time.

Okay, thank you, Mikale. Then let me just wrap up with a couple of final comments here. I want to thank you again for your participation in this call and your continuing interest in Team. Let me summarize a couple of our key discussion points this morning.

First, we are very pleased with our performance and progress. Fiscal year 2007 was a record year for Team and while we continue to have improvement opportunities discussed earlier, we nevertheless are proud of the progress we are making.

And finally, we expect another record year in 2008. Our business outlook is strong and we are confident that we have the programs in place to capitalize on these opportunities. We remain pleased with the positive momentum of our business.

We look forward to updating you on our progress during this first quarter of our new fiscal year around the 1st of October. Until then, everyone, have a good day.

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