Team Inc (TISI) 2008 Q1 法說會逐字稿

Good morning. My name is Nelson and I will be your conference operator today. 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, CEO, Phil Hawk. Sir, you may begin your conference.

Thank you, Nelson. And good morning and welcome to the Team web conference call to discuss recent Company performance. As Nelson indicated, my name is Phil Hawk and I'm the Chairman and CEO of Team. Joining me is Mr. Ted Owen -- 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 first fiscal quarter ending August 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, our 8-K, 10-Q and 10-K filings to the SEC and our annual report.

Ted will begin with a review of the financial results, and I will follow Ted with a few remarks and observations about our performance and prospects. With that, Ted, let me turn it over to you.

Thank you, Phil. First, as usual, a message from our lawyers. And that is -- 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. And so with that out of the way, now to our financial results.

Revenues for the first quarter were $103.5 million. That compares to $65.7 million in the first quarter last year, for an increase of 57%. The revenue increase includes $10.1 million of revenues attributable to the Aitec acquisition that was effective June 1st, so that the organic first quarter growth rate was 42%. Net income was $3.5 million in the current quarter versus $1.5 million in last year's first quarter, for an increase of over 130%. Earnings per diluted share was $0.18 in the current quarter, versus $0.08 in last year's quarter.

Now for a little more depth -- as we always give around our Industrial Service business. 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 inspection services. The Industrial Service segment is organized into two divisions; TMS, which includes leak repair, hot tapping, and fugitive emissions monitoring, as well as field machining, technical bolting, and field valve repair services. And then the second division is TCM, which is comprised of field heat treating and inspection.

With respect to TMS, revenues in the quarter were $43.7 million, compared to $32 million in the first quarter of last year, for an increase of 36%. With respect to TCM, revenues in the quarter were $59.8 million, compared to $33.7 million last year, an increase of $26 million, which includes the $10 million from the Aitec acquisition. Organically, TCM revenues increased by 47% in the first quarter.

Operating income for the Industrial Service business, which excludes corporate costs that are not directly attributable to field operations, was $11.5 million in the first quarter, versus $7.3 million in last year's first quarter. Operating income as a percent of revenue for the field operations was 11% in the current quarter, which is about the same as last year's quarter. For the first quarter, our corporate costs were $3.7 million, up slightly -- about $100,000, over last year.

Now, with respect to our balance sheet and cash flows; first, as previously announced, in order to finance the acquisition of the Aitec business, we increased our revolving credit facility on May 3st to $120 million, which includes $34 million that we drew down on June 1st to complete the Aitec acquisition. So at the end of the first quarter, our debt, net of cash, was about $79 million. Our debt to EBITDA at the end of the first quarter, was about 1.8 to 1. And our available capacity under our credit facility was $42 million.

Now, some other financial numbers -- capital expenditures in the quarter was about $3.5 million. Depreciation and amortization was about $2.2 million. And non-cash compensation expense was about $400,000. At the end of the quarter, our days sales outstanding was 82 days, that is down slightly from the first quarter of a year ago.

And then just as a reminder, for fiscal 2008, we expect total CapEx to be about $15 million to $20 million for the year, which would include new capital to support our Canadian acquisition. That CapEx amount does not include, however, the capital associated with the new headquarters, manufacturing and equipment distribution center that we announced in yesterday's press release.

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

Thanks, Ted. Now, I would like to add several observations and comments to the financial results that Ted has reviewed with you. Let me begin with a look back at the first quarter and then make a couple of comments about our outlook and priorities for the remainder of the year. Of course, I'm delighted with our start to fiscal year 2008. As Ted mentioned, net income increased about 130%, driven primarily by a very strong revenue growth, and was up 57% versus the prior year quarter. As he indicated, the Aitec acquisition contributed about $10 million in incremental revenues for the quarter. Excluding this effect, our organic revenue growth was approximately $28 million or 42% -- still outstanding.

I'm proud to report that the organic revenue growth this quarter, as well as over the past several years, continues to be very broad-based. Practically every facet of our business increased from the prior year. Both divisions had organic revenue growth exceeding 35%. Every one of our 13 legacy geographic regions increased revenues versus last year and nearly all service lines increased revenues in the quarter. We believe that our growth continues to be positively impacted by the pervasive customer procurement consolidation trends, where our customers are continuing to shift toward fewer, larger, more professional service providers for their industrial service needs. Our array of eight service lines and more than 80 service locations gives us unmatched market coverage, making us a very attractive option for service procurement consolidation.

However, if that was the only driver of our growth this quarter, why then was our organic growth -- previously I mentioned it was 42% for the quarter -- nearly double our historical growth rate, when these same procurement consolidation trends have been present for several years? The fact is that we've had -- we had other significant tailwinds in this first quarter as well. First, due to high levels of maintenance and the bottlenecking construction activity by our customers, particularly refiners, the spring turn-around season continued well into the summer this year. As a result, Team benefited from much stronger demand during the quarter than in past years. It is too early tell, but this may reflect some flattening of the main seasonality in our industry, as customers become more cognitive of skilled labor limitations in all of the labor industrial and maintenance trades. Of course, any permanent flattening of the demand seasonality would be a very good thing for Team.

Second, we also continue to benefit from continuing strong organic growth in Canada. During the quarter, we -- it is noteworthy, we completed a major project related to the Canadian [tar sands] activities up in Fort McMurray.

Another positive factor driving our revenue growth is our continuing ability to attract, train, and retain field technicians. During the quarter, our net field service personnel, excluding the impact of Aitec, increased by 115 technicians, a little more than 4% since the beginning of the quarter.

Strong revenue growth drove the attractive bottom line results. Net income more than doubled and our operating profit margin as a percentage of sales increased by nearly two percentage points to about 7.5%. This operating profit margin improvement was achieved despite an almost 2% -- or two percentage point decline in gross margin for the quarter. The primary drivers of this decline were the mix impact of TCM's higher growth rate, the impact of the Aitec acquisition, and lower labor utilization levels within the TMS division, due in part to aggressive recruiting and training initiatives. We have and will continue to maintain a strong focus on our execution to ensure that we keep our job margins and gross margins at attractive levels.

Shifting to a related subject, we are delighted with our progress in integrating Aitec into Team. First, as we've gotten to know our new Aitec colleagues better, we are more excited than ever, regarding their fit with Team. They are now participating in all of our planning, review, and business development processes. We are well under way to having our I.T. and financial systems available in all former Aitec branches by January. Commercially, we are already beginning the cross-selling and introductions process with our Canadian customers, which we are confident will lead to significant new business opportunities. And the business is on track financially with our initial revenue and profit projections. We continue to believe that the business will meet or exceed a 10% operating profit margin for the year. Longer term, we are confident that our former Aitec branches will be similar to other Team branches in performance and all other respects.

As we indicated in the earnings release, due to the strong results achieved during the quarter and our continuing positive outlook, we have raised both our revenue and earnings guidance for the full year ending May 31st, 2008. We are now projecting full-year revenues to be approximately $425 million for the year, and full-year earnings to be between $1.05 and $1.15 per fully diluted share.

While both the revenue and earnings estimates represent significant increases versus prior year results, I also appreciate that the implied revenue and earnings growth rates in this revised guidance for the remainder of the year are lower than what we have experienced in this first quarter. While we are very positive about our prospects for the rest of the year, extrapolation of a single quarter's results, particularly one that benefited from some special circumstances, would be inappropriate. You can be assured that we will be working very hard to capitalize on all of our opportunities, both in the remainder of this year and beyond. As always, we will continue to review our guidance and make adjustments as appropriate, at least on a quarterly basis.

In our press release, we also announced our planned purchase of a new site for an expanded manufacturing, distribution, training and headquarters support facility. The new 50-acre location is about 15 miles southeast of downtown Houston and about 10 miles from our current Alvin facility. Since consolidating our support activity at the Alvin location about 10 years ago, Team has grown approximately tenfold. Our new location enables us to build a facility to meet our current needs, as well as have the flexibility to expand with future requirements as appropriate. In addition to substantially expanded manufacturing and equipment distribution capacity, it will house a large world-class training facility. We would expect to move into the new location sometime in early 2009.

Let me end with a quick comment on our recent recognition Team received. We are proud to note that a couple of weeks ago, Fortune magazine named us to the 2007 list of the 100 Fastest Growing Companies. The Fortune list was developed based on three-year average growth rates in revenue, earnings, and total return to shareholders.

In total, we have a lot of positive momentum in many key areas and we are very excited about our prospects. We also realize that we cannot rest on our laurels. All of our success and future opportunity depends on continuing to provide our customers outstanding service and support every single day. Fortunately, I am privileged to have a -- more than 3,700 colleagues who are fully dedicated to doing just that. To wrap up, we are off to a very good start for the year and we look forward to continuing progress as we progress in the remainder of the year.

Nelson, that concludes our initial comments. Why don't we open it up for questions?

Thank you. (OPERATOR INSTRUCTIONS)

Our first question is coming from Arnie Ursaner, CJS Securities.

Good morning, Arnie.

Good morning. Congratulations on the quarter. First question I have is a capital spending question. You had previously disclosed $15 million or $20 million or so for expected capital and that was prior to this purchase of land.

Right.

Can you perhaps -- I'm assuming either you had an idea you would buy this -- or perhaps could you update us on what the capital spending for that project might be?

Sure. The land purchase is about (inaudible) dollars and our -- we are still in the finalization process of the facility itself. But our estimate would be that it would be approximately a $20 million project, all in -- land, everything.

That would be in addition to the previously disclosed CapEx? Or is that embedded in that?

No.

No, it's in addition to. By the way, Arnie, the financing for that facility has not been determined yet. We will probably either do a mortgage on it or do a sale lease back kind of financing on that.

Second question I have is, obviously you went out of your way to highlight a major project in Canadian tar sands that you completed. You can quantify perhaps how much that may have impacted the quarter? Did it have any impact in the current quarter?

You mean in the current second quarter?

Correct.

No. I think -- we have ongoing work up there in Canada, but our incremental revenue growth in the quarter was about $8 million in Canada. That is from all sources. I believe the particular tar sand project was about $4 million.

The only point I would just note was just -- (inaudible) attractive continuing growth in Canada, and it was highlighted by a pretty significant project, a $4 million project for us.

And just to clarify, I think you had $10 million of revenue from Aitec, which is all Canadian. When you mentioned you had an incremental $8 million of revenue, I assume that excludes Aitec?

Correct.

And just to follow up on Aitec, it had $50 million in revenue last year. I think we and some others were hoping it would grow at least 10% this year. Is the primary reason it was only $10 million seasonality -- ?

Yes.

Yes. We're delighted with its start. It is on track relative to our internal budgeting process, Arnie. It does have a seasonality to that business, like Team's business, and that $10 million is on track toward the $55 million that we have embedded, as we previously disclosed.

What sort of year-over-year growth rate was the $10 million or so?

I don't have the number.

I don't know, to be honest.

Okay. I will jump back in queue. Thank you very much.

Thank you. Our next question is coming from Holden Lewis of BB&T.

Good morning, Holden.

Good morning, thank you. Can you speak to the gross margin a little bit? I think you referenced the hiring that you had done as being one reason why that was -- why the gross margin came down. I mean, is that just a function of you hired the people, didn't get them fully utilized and therefore it is more of an investment -- and suggest that maybe the Q1 margin is the low watermark as you get those people utilized? Or how should I be looking at that?

That is a reasonable interpretation. Let's just talk about all of the components of our aggregate gross margin decline. Probably, the most significant is just the more rapid growth of TCM versus TMS. And that structurally -- that is a structural difference. Because of the labor intensity of the TCM side, it has historically and will always have lower gross margins than TMS. It also has lower SG&A as a result of its structure. So that was a component of that.

Within TCM -- TCM, if you look at our -- the press release, it shows a flat margin for TCM, but we actually -- that was actually an increase in legacy TCM offset by the initial Aitec results. So the only gross margin decline and a component of our business was TMS, and I think your characterization was correct. Our utilization levels were about 2.5 points lower in the quarter than they were in the prior year first quarter. We're a man power management business. So when it is lower, our performance is less. And it is toughest in the summer months, because even though we were busy, it is spotty, and we don't have the consistent demand -- and the real strong demand that we have in our seasonally stronger quarters. And so that contributed to the decline in that portion of our business.

Did you say your overall utilization was 200 basis points lower?

No. It was 2.5% lower in TMS.

In TMS. Okay. And that was primarily because of the new personnel adds?

It is not the adds so much, Holden, it is -- the summer months, they have a significant element of training associated with it. There is some -- still some seasonality in that business that results in lower overall utilization, more training initiatives, more vacation kind of time. So the typical summer aspects of labor utilization still happened even though we have an overall increase in revenues.

But we are comparing to the same season, of course, as we go to last year, but our results were -- as I said, we were just about 2.5 points lower in that utilization in the group. We are aggressively -- we're not distressed about it. But I will tell you, we -- it is a key driver of economics, so you can be sure we're highly focused on our entire organization.

Well, and I guess when I look at -- I mean last year, I think your gross margin was 39% in Q1. And this year, it was 35%. And I would have thought with the strength that you're seeing and perhaps maybe the unseasonable sort of demand you're seeing in this quarter, that your core utilization should have been higher than a year ago. Isn't that right?

Except our personnel -- it is a little bit trickier than that, because we are talking about in TMS -- really either division -- you are talking about 40 service locations and it is just kind of -- it is where the concentration of that revenue is. And not all -- we can't move everybody all the time and in all locations so that we have, particularly in slower periods, you have you pockets of under-utilization. And that is kind of my view of what occurred in the quarter.

Okay. So the combination of that and the new adds is what pushed it down to 2.5?

Yes.

Okay.

And still -- it is still pretty good, by the way. We weren't -- it is not like we had half our folks -- we are talking about again, around 90% utilization of available hours, so these are big numbers. But it is just wasn't as big as we would like or we had in the prior year quarter.

Okay. And was adding 115 people, was that a particularly large quarterly add? Or was that kind of typical in what you would expect to see going forward?

Well, I think we would like to add great folks and retain them, at any rate that we can do in a sensible way. I think last year -- I believe we talked about adding a net 300 or 350 for the year. So we're a little bit ahead of that rate. And frankly, because of the seasonally weaker quarter, it would not be the quarter we would be typically adding a lot of folks. So I view that as a positive. And what we have focused on as a Company is making hiring and kind of development of our personnel an every day job. So rather than, let's sell it -- and with the kind of secondary focus on kind of resource development, I think we appreciate that how well we develop our resources will be the key to our revenue growth.

All right. Okay. Thanks. I will jump back in queue.

Sure.

Thank you. Our next question is coming from Mike Carney of Coker and Palmer.

Good morning, Mike.

Good morning. A couple of questions. First, on the contractors -- back to that. The 115, Phil, you mentioned that was a 4% growth from the end of -- or from basically May?

Yes.

Is that -- that must include contractors? Is that right?

No. These are full-time employees.

So that would assume that there is like 2,800, 2,900 techs at the end of '07?

Roughly. Yes, something like that. Pretty close.

Okay.

It's not versus the prior year quarter, because we've been adding all year. This is since the beginning of the quarter, we added 115 -- during the quarter, is what I'm saying.

During the first fiscal quarter or the second?

The first.

This first quarter.

From June 1st

That compares to our -- since May 31st, if were you to look back over the course of a year, from the first quarter of last year --

We have added probably 500 -- or 450 to 500 people.

All right. Okay. So how many techs were there at the end of August?

At the end? I guess I have a head count coming out of about 3,700 and that includes, not only techs, but all of our personnel.

And the 115 did not include Aitec or it did include Aitec?

Did not. Aitec is a little under 300, I believe.

And 3,700 does include Aitec -- about 300 total personnel at Aitec.

Okay. And were most of the tech increases coming from TMS?

No, it was about two-thirds in TCM, one-third TMS.

So going back to the gross margin decline and the lower utilization that you talked about, that was -- in the TMS side, that was more -- was that more of a function of the increased techs or just branch by branch -- just lower utilization branch by branch?

It is lower utilization. Cause and effect? I personally think that the aggressive training -- because we -- and recruiting because we are bringing in people into the branches where we frankly didn't need them in the quarter. But they're great folks that we think are going to make great contributions that we live with the lesser utilization rate in a quarter, in order to get great folks on board. But it is the greatest challenge for us, in these softer months -- seasonally weaker months, because it is just not as strong of a demand to kind of apply those resources to.

Right. And is it typical that online work would have a little bit lower gross margins or job margins to begin with than offline work?

No. I think -- we can't see a big difference.

I'm sorry. Actually, I was thinking the opposite. The online work would have greater job margin?

No, I think it is comparable. If you have a job, you have a tremendous amount of pass-through costs, say in terms of logistical issues, kind of manning people to kind of out of the way location, and those are -- and we absorb them and pass them through the customer. Those pass-through items don't have the same margin as kind of, I would say, our value-added works. That can average down margins a little bit in that circumstance. But in terms of kind of as we look at a job, we don't -- the way I look at it is, am I rooting -- when someone tells me they have a new job, am I rooting it to be one type of job, because it will be better for Team? And the answer is no, I'm really indifferent -- that all of our service lines have the same profit opportunity for us, in my mind.

Okay. And Ted, how much was the intangible extent in the quarter?

It was about $100,000 -- or I'm sorry, the intangible expense relative to the Aitec acquisition? Is that what you're asking, Mike?

Yes. And I would think that is all that you would have now, because isn't the other acquisition gone?

No, we still have intangible, embedded in the D&A number that I shared with you of $2.2 million for the quarter, that reflects amortization of intangibles, not just from the Aitec acquisition. But we had some allocation of purchase price or excess purchase price in one of the previous acquisitions, as well.

What was it for the Aitec?

It was about $100,000 for the quarter. It is still an estimate, because we are -- we have not completed all of the valuations of -- as required under the FASB.

Okay.

That will be done by the end of the second quarter.

And you said $400,000 was the stock compensation amortization?

Correct.

Okay. Thanks a lot. Great quarter.

Sure.

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

Good morning, guys.

Good morning, Byron.

Phil, I wanted to circle back to something that you mentioned in your prepared comments, which I think has pretty important implications for kind of the long term growth outlook -- this notion of potentially flattening of demand seasonality. I mean you mentioned that -- you didn't want to say definitively that's what is occurring here. But do you need to get through one or two more refinery turn-around seasons before you are willing to say that you really do expect to potentially see less demand seasonality going forward? How do you think about what we should be looking for, in terms of being able to -- ?

I personally think -- as you are well aware, Byron, the power industry and the -- really power, refining, and pulp and paper, even though it is less clear to me what the reason is, that historically have always done their turnarounds in the calendar springs and falls. And for the power and refining, there is good reasons for that, in terms of trying to kind of hit peak gasoline, peak heating oil seasons and for power, peak heating and air conditioning season. The reality is, though, as long as we have very strong demand, the access to skilled trades is limited.

Right.

And when have you -- where I think historically customers didn't even think of the turnaround schedules of their competitors, they just scheduled them to their convenience, they're finding -- and it is not just for Team services, it is for all of the array of trade scope they need for their debottlenecking and kind of maintenance and turnaround services -- they're realizing that there are shortages. So what we -- I think we observed this year is that, while it would be typical that by early May, you're kind of done with the big turnaround activities, and we saw turnaround activity really, at some level, continue most of the summer. But certainly very strongly through the end of May, and well into June. And that is different. Now, was that a one-off deal? Or is that the customers saying hey, let's be smarter about this? Let's spread this out. Let's use the skills and capacity that the industry has more wisely than maybe we have in the past.

Okay.

And my only observation is that if is so, that is good for us, because that just makes it that much easier to manage the swings in our demand. It dampens it.

Thanks, guys.

Sure.

Thank you. Our next question is coming from Richard Nelson of J. Giordano Securities.

Good morning, Rick. Good morning and congratulations.

Very nice quarter. I have a couple of technical questions. To begin, your interest expense -- obviously, you've drawn down on your credit line. By my calculation, it looks as if you're borrowing at about 250 over LIBOR. Is that kind of a fair number to use going forward?

Not incrementally. The incremental rate over LIBOR is -- right now 1.75. There is obviously, there is some amortization of financing costs that are embedded in the number that might attribute or kind of yield the results that you're looking at. But on an incremental borrowing base right now, it is 1.75.

Okay. And I noticed that your tax rate for the first quarter is somewhat high, as it was in the first quarter of last year. Is this a level that will be more constant going forward, now that you've got some Canadian operations at work? Or will we see a slightly lower level going forward?

No, I think over time it will -- during the course of the year, you will see it come back to around the -- kind of between 40% and 41%. It is a little higher than that as you correctly point out in the first quarter. Part of the issue of that is the stock option expense historically has been largely not tax benefited because it originated from incentive stock options. We modified our stock option plans going forward to -- so that we will be granting non-qualified options that will allow us to accrue tax benefits as we accrue expenses. So the impact of that will tend to pull it right down.

Okay. Very good. Well, my other questions have been asked, so -- and answered. So again, very good. Thank you.

Thanks, Rick.

Thanks, Rick.

Thank you. Our next question is a follow-up coming from Arnie Ursaner of CJS securities.

Hi. I to want to specifically follow-up on the last question. Since you highlighted that some turnover activity spilled into kind of -- the end of May, into June; are you seeing a slowdown from that in the August to October period? Meaning, we're in it right now. Normally, this is your busy season for turnaround work. Did in fact we borrow some of the business from the current quarter in the last quarter? Or alternatively, how are your bookings looking for turnaround work?

Well, I would say, we didn't borrow from the second quarter with the first quarter. It still looks good and we're ramping up. I will tell you where I think the industry is going to be challenged is the spring. The spring is going to be phenomenally large in terms of the amount of activity that is going to happen. But again, the fall is going to be good. So we're busy.

You're a conservative guy -- phenomenally large? That is not normally the way you think about things.

When our field managers are worried about -- they're really worried about resources. I love that, you know.

So let's focus on that for a minute. You needed to add roughly 300 people -- 300 technicians this year to accomplish 10% growth in your business. You did add 115. Given what you just described, I think two things are happening that -- I wouldn't mind your comments on them. I think your view used to be, let's make sure the demand is there and build to the demand and not get ahead of ourselves, particularly in seasonally weak periods. And it sounds like you're shifting a little bit philosophically saying that there is more than enough demand, if we can get the people. Let's keep pedal to the metal on getting people. Is that in fact a change? And what can you tell us about your hiring plans in the current quarter and perhaps the next quarter?

I think you accurately characterized it, Arnie. I would say there are (inaudible) things that --- I would say one is there is plenty -- structurally, we're in a fabulous position, I think, because of customer preferences to deal with fewer, larger, more professional service companies. So if we add resources and we continue to be an outstanding service company, I think there is just no limit to how fast we can grow or how much revenue is out there for us. So from that standpoint, but it is not just resources. It is also bringing them on in a way where we continue to deliver outstanding service to our customers. That if we do that, that we absolutely will be driven -- our revenue growth, and potential will be driven by our supply, more than it will be by any kind of market forces or demand. Because the demand out there is very, very significant from our view.

So what's the manifestation of that philosophy? It's that we want our branch managers and kind of field managers, and this is coming to pass, we want them to review recruiting and personnel development as a very significant, everyday job, not in response to a specific customer opportunity. But if we continue to -- but just as you said, if we build our resources and our capabilities, branch by branch, that we are very confident and our experience has supported this -- that we will see strong demand follow that or be driven by that increased supply. So that is our focus on it now.

How big can we get? I don't know. We're -- with an ever-bigger base that we're working with. But I think the key is let's do it sensibly. And it is not about getting bodies, it is getting talent that can really make a contribution that fits with us culturally, that are committed to a service mentality and approach, that can operate safely. So we don't just want bodies, but we want great folks who want to be long-term contributors and parts of Team. And like I said, I am pleased with the first quarter. I think if we can add 100 a quarter, that would be very good. And obviously, if we keep doing that and keep earning the business, it will be good for our results, too.

But in essence, when you provided your full-year guidance, you were not assuming you would be able to add 300 to 400 new technicians in the course of the year. Is that fair to say?

Yes. That's fair to say.

So if you can, that would be an element, hopefully, of positive surprise, at least on the revenue side -- and as long as we don't lower margin impact.

A quick comment on that. It is tempting, particularly off a great quarter, and we had great organic growth, to extrapolate. It is tempting for me to do that, too. We just have to remember, it is a seasonally weak quarter. And so what we would like to do -- we're very, very positive about our future. But what we would like to see is that -- we would like to see some of those positive results kind of continue into our real strong and busy seasons. And if they do, yes, we can revisit our outlooks and all of that. But I would just say that the outlook that we have isn't bad. I think it is 40% earnings growth. So it is not exactly a down year. But that is our cautiousness -- is just trying to extrapolate too much from a single quarter.

Phil, I think I've followed you guys seven or eight years, and even though you had good quarters previously in Q1, you have never raised guidance after Q1, usually taking the view it is too early in the year, it's not a critical quarter, too many things can happen. What caused -- what is different this go-around?

I think it was just -- we were so significantly above even our own internal estimates for the quarter, we thought we ought to reflect that progress in our estimate.

Okay. Final question is, on AIT -- on Aitec, when you first took it over, obviously it was new -- you had at least once before, when you made a sizable acquisition, got a little ahead of yourself. And I think because of that, you clearly went in conservatively. Now that you've had it a few months, you had talked about a 10% margin in Aitec.

Right.

Two questions about it. One, are you more confident in their growth? And is that 10% margin goal you've previously talked about for this year perhaps on the conservative side, as well?

I think it is way too early to tell for the year where we're going to be, because we're just getting started. I will tell you what is just thrilling to me is, this is a great group of folks. They are outstanding, they provide outstanding service to their customers -- or have historically. They have great capabilities, in terms of just kind of fit with us. Kind of from a philosophical standpoint, it is outstanding. And therefore, my long-term view about the role these individuals and these groups are going to play in the Team, I couldn't be more excited. They are just -- if you will, just like us and they are going to be an extremely positive view. I think in the long run and longer run, as we get fully working together, their performance is going to be every bit as good -- as I mentioned in my remark -- every bit as good as any other aspect of Team's business. These guys are -- folks are going to be real key -- continue to be real key contributors.

Was the first quarter 10% operating profit? No it wasn't. Did we expect it? No. I mean, we've got a lot of transition things to catch up and kind of getting new systems in place. It will take us a little while to fine tune everything. But when you start with great folks who provide great service to their customers, the other stuff is workable. We're going to work through it.

Just talking to the (inaudible) as a trajectory of that business. As we said, the first quarter revenues were about $10 million, we disclosed that our expectation for the first year is something on the order of magnitude of $50 million, $55 million, at a 10% EBIT. So that $10 million first quarter is seasonally weak. And so the contribution, while positive, was not at 10%. So our 10% expectation is for the full year. It performed as well as we had expected it to during the first quarter. And we're delighted with kind of where we are with that.

Without trying to be a hog, my final question -- you've got a lot of new business initiatives that you have been developing, some you have talked about in water and other new operations. Can you freshen us -- freshen how we're doing on those, please?

I would just point out that we had virtually double-digit revenue growth in every service line. So it is going well. We've got a lot of initiatives. The thing I am proud of is that we are not -- our success doesn't depend on any one of them kind of taking off. It is that we're making progress on a number of fronts -- lots of geographic areas, lots of service lines, lots of new initiatives. And we're the sum of all of those things.

Thank you very much.

Our next question is a follow-up from Holden Lewis of BB&T.

Thanks. Can you comment just on where you're seeing labor costs? Has that gotten worse, better? Are you still getting pricing to sort of match that? And are you getting pricing above or falling short of that? Can you give us some insights in those trends?

I don't -- in terms of the last 90 days, I don't have a good feel one way or the other. I guess a little bit -- we're in the process of installing better -- a new enhanced personnel system would give us a lot more internal insight on that. It has a little bit of a feel -- there is still a lot of competition out there for resources. It kind of varies a little bit by region. I think we're still continuing to see cost creep or wage creep in our business. It feels a little less intense than last year. But that is kind of -- just a little bit of visceral sense on my part.

If you look at our direct profit margin, which is kind of what we're focused on, they're staying comparable with prior years. So we're kind of hanging in there -- staying in there. Staying with it. That's how we -- because mix is so hard to kind of manage, that's how we really focus on our project margins hanging steady. And even -- frankly, even in the TMS division, we talked about a little bit of a dip down in the quarter from the prior year, our job margins actually were about comparable -- or only a couple of tenths off from rounding error from our standpoint. It really wasn't -- there was none of that effect in our quarterly gross margin number.

And then the leverage -- the SG&A leverage was really solid. And it looks like about half of that was from leveraging the corporate side, which -- it's pretty clear where that would come from, but it looks like you got a fair amount of leverage out in the field as well. Can you just comment -- what pieces of your SG&A structure out in the field are leverageable led to that? Or is that something unusual in that trend?

I think it is a little more than we normally get. But I just kind of point to 42% organic revenue growth, which is kind of through existing branches. So that is very, very strong growth. And that is going to, obviously, benefit SG&A. In the very short run, as you look at our SG&A expenses, they continue to go up. We continue to add sales reps and all of the associated personnel expenses related to business development activities. But when you're growing at, you know, the numbers we're growing at, it just will not be proportional to that.

Okay.

So that's where we're seeing a lot of that leverage. It is just the volume leverage.

Okay. Great. Thanks.

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

Great. I will just wrap up then, Nelson. I want to thank all of you for participating -- your participation in this call and your continuing interest in Team. And until we visit again -- which I think our next conference call will be in January -- I wish you all a good day.

Thank you. This does conclude today's Team IR conference call. You may disconnect your lines at this time. And have a wonderful day.