Team Inc (TISI) 2008 Q2 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Team IR call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session.

I will now turn your call over to Mr. Hawk. Mr. Hawk, you may begin.

Thank you, Gretchen. Good morning and Happy New Year! Welcome to the Team, Inc., web conference call to discuss recent Company performance. My name is Phil Hawk, and I am the Chairman and CEO of Team. Joining me again today is Mr. Ted Owen, the Company's Senior Vice President and Chief Financial Officer.

The purpose of today's conference call is to discuss our recently released financial results for the Company's second fiscal quarter ending November 30, 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. I will then follow Ted with a few remarks and observations about our performance and prospects, before opening it up for questions. With that, Ted, let me turn it over to you.

Thank you, Phil.

First I want to remind everyone that any forward-looking information we discuss today is being provided in accordance with the provisions of the Private Securities Litigation Reform Act 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.

Now to the financial results. Revenues for the second quarter were $122.3 million, compared to $83.2 million in the second quarter last year, or an increase of 47%. That revenue increase includes $15.9 million of revenues attributable to the Aitec acquisition that was effective on June 1. Therefore, the organic second-quarter growth rate was about 28%.

Net income was $7.8 million in the current quarter, versus $5.5 million in last year's second quarter, an increase of 43%. Earnings per diluted share was $0.40 in the current quarter, versus $0.29 in last year's second quarter. On a year-to-date basis, our net income is $11.3 million, and tha is more than 60% ahead of last year, and fully diluted earnings per share is $0.58 on a year-to-date basis, is up well over 50%.

Now let's take a look at our Industrial Service business in more depth. First, as a reminder, our Industrial Services includes an array of specialized services related to the construction and maintenance of pressurized piping and process systems, as well as specialized and special services. The Industrial Service business is organized into two divisions, TMS, which includes leak repair, hot tapping, fugitive emissions monitoring, fuel machining, technical bolting, and field valve repair services, and then TCM, which is comprised of field heat treating and inspection.

TMS revenues in the quarter were $48.9 million, compared $39.2 million in the second quarter of last year. That is an increase of 25%. TCM revenues in the second quarter were $73.4 million, compared to $44 million in last year's second quarter for an increase of $29.4 million, including the $15.9 million, as I mentioned a moment ago from the acquisition. Organically, TCM revenues increased 31% in the quarter.

Operating income for the Industrial Service business, which excludes corporate costs not directly attributable to field operations was $18.6 million in the second quarter, versus $13.5 million in last year's second quarter for an increase of 38%. Field operating income as a percent of revenue was 15.2% in the current quarter, down about a percentage point from last year's quarter. However, that decline was largely offset by a reduction in corporate costs as a percent of revenue, resulting in an overall operating income percentage of about 12%, comparable to last year's second quarter.

A point about corporate cost. While declining as a percent of revenues, corporate costs were impacted by an increase in non-cash compensation expense, that is FAS 123R in the quarter. In October, we granted 630,000 new options as part of our annual incentive options awards, consistent with our previously announced long-term plan to maintain a burn rate of about 3% of outstanding shares.

Because of the significant growth in stock price in calendar 2007 however, the Black-Scholes valuation of those new options caused an increase in our non-cash comp expense in the quarter by about $200,000, and we expect total non-cash comp expense to be about $1 million per quarter over the next several periods.

Now with respect to our balance sheet and cash flows. First, as we have discussed previously, in order to finance our acquisition of Aitec, we increased our revolving credit facility to $120 million, which includes $34 million that was drawn on June 1 to complete that acquisition. Additionally in the second quarter, we borrowed $5 million to acquire 50 acres of land, which will be used for future headquarters' manufacturing and equipment center development.

At the end of the second quarter, our debt net of $5.8 million in cash, was $88.5 million. Our debt-to-EBITDA was about 1.9:1, and our available capacity under our credit facility was $33 million. We will be using about $19 million of that availability to complete the announced acquisition of Leak Repairs Specam in Holland in the next few days.

Just some other finance numbers, CapEx for the quarter excluding the land acquisition was about $5.6 million. D&A was about $2.7 million in the quarter, and non-cash compensation expense as I mentioned previously was about $600,000. DSO, day sales outstanding, at the end of the quarter, was 83 days. And as we previously announced, we expect total CapEx for the year to be about $15 million to $20 million, excluding the impact of the land acquisition.

With that, Phil, I will turn it back to you.

Thanks, Ted. I would now like to share a few additional comments and perspectives. Obviously we are very pleased with the overall performance of our business. First we are proud of our financial performance in the most recent quarter and year-to-date. As Ted reported, overall earnings growth in the quarter and year-to-date exceeded 40% and 60% respectively. The driver of this earnings growth continues to be strong, broad-based revenue growth.

As described in the earnings release and touched on by Ted in his remarks, both divisions continue to achieve outstanding organic growth, that is broad-based both geographically and across service lines. In my view, this growth is the result of a number of factors. There is no question that overall market demand for our services remains robust. Driven by continuing refinery turnaround and expansion projects, significant pipeline projects, and generally firm demand in most other segments.

We also believe that we continue to gain market share by providing outstanding field service, and capitalizing on long-term customer procurement trends that favor larger multiservice and multilocation service providers, and we have been able to meet this increased demand by continuing to increase our service capacity. Since the beginning of the flare on June 1, 2007, Team has increased its full-time field employee ranks by 217 people, about 8%, excluding the impact of the Aitec acquisition.

Our organic growth is being supplemented by attractive performance of our new Canadian inspection activities, the former Aitec business. We are delighted with our new colleagues, and very pleased with their performance to date. We are more enthusiastic than ever about our long-term prospects related to these new capabilities.

As Ted indicated, our operating income margin for the most recent quarter was about 12%, flat with the prior-year period. On an integrated basis, an approximately 2 percentage point decline in gross margin, was offset by an approximately 2 percentage point decline in SG&A expenses as a percent of revenue.

Moving back to gross margins, the majority of the decline in gross margin percentage was mix related, due to the inclusion of Aitec, and the higher organic growth rate of the TCM division, which has historically lower gross margin levels. Within TCM division, the gross margin percent for the legacy regions were flat versus the prior year. The addition of the former Aitec business, which currently has lower gross margins than the legacy regions, reduced overall TCM division margins by about 1 percentage point. TMS margin declined about 2 percentage points from very strong prior-year levels.

Overall SG&A expenses increased more than 35% for both the quarter and year-to-date periods. However, as a result of even more rapid revenue growth, SG&A expenses as a percentage of revenue decreased a couple of percentage points. While we are benefiting from the inherent operating leverage of rapid business growth, rigorous attention to SG&A expenses will also continue to be an ongoing priority.

We remain optimistic about our future. The outlook for overall market demand continues to be strong. The competitive market fundamentals which favor larger multiservice, multilocation service providers like Team, continue to be attractive. And we are pleased with our continuing ability to add resources and expand our capacity. The key for our Company is staying focused on our business fundamentals, and remaining an outstanding service company.

Now let's shift to our new acquisition. Our planned purchase of Leak Repairs Specam is an exciting new initiative for Team. It provides us with an initial service presence in Europe for Team's current service lines. Let me share a few perspectives on this new business. Leak Repairs Specam is a high-quality company that we already know very well. For the last 20 years, LRS has been a licensee of Team's leak ceiling, hot tapping, and fugitive emissions technologies.

They use the same technical approach as Team in their service activities. The current service lines of LRS are similar to those offered by our TMS division, and include leak sealing, field machining, hot tapping, fugitive emissions monitoring, bolting, and valve repair. LRS has an experienced management team whom we know well from many years of working together. The entire organization will be joining us.

LRS has a very strong market presence, and a strong base of technical support capabilities. The company has about 90 employees, based out of four service locations in the Netherlands and Belgium. Total annual revenues for the prior-year were about $22 million.

In short, while it is already a strong company in its own right, it is also an outstanding base for growth and expansion in Europe. We believe that Europe represents a market and business opportunity for Team, that is similar to our North American opportunity. We estimate that the European and North American markets are similar in overall size, with more than $2 billion in total European demand. We believe the customer structure, demand patterns for our services, and the fragmented service supplier structure are similar, as well.

In short, we believe that an outstanding service provider, who can leverage a multiservice, multilocation network, will have excellent growth prospects. Our near-term objective is to smoothly transition the business into the Team family. For starters, we want to maintain the focus of our managers and new colleagues on providing outstanding service to our European customers. We have no plans to change the organization or service approach of the business. We will be working closely with our new managers to more fully understand our business and its opportunities.

As we have done with all of our acquisitions, over the next several months, we anticipate implementing appropriate IT and financial systems similar to those we use in North America, to make available our full suite of business analysis and management tools. Finally, over the next several months, we will be developing a longer term plan to capitalize on the most attractive growth opportunities available.

For the remainder of the year, we expect the business to be slightly accretive, but not material to Team's overall earnings. Again, to recap, we are delighted to take this initial step in Europe. The long-term potential of our European business is very exciting indeed.

Now let's turn to our outlook for the remainder of the fiscal year. As we indicated in the earnings release, due to the strong results achieved during the first half of the year, and our continuing positive outlook, we have again raised both our revenue and earnings guidance for the full year ending May 31, 2008. We are increasing our full-year revenue estimate by $25 million, to $450 million for the year. We are increasing our full-year earnings guidance by $0.05 per share, and now expect overall earnings to be between $1.10 and $1.20 per fully diluted share.

These revised estimates exclude any impact related to the planned purchase of Leak Repairs Specam. As always, we will continue to review our guidance and make adjustments as appropriate at least on a quarterly basis. You can be assured that we will be working very hard to fully capitalize on all of our opportunities, both for the remainder this year and beyond.

Similar to last quarter, I would like to end with a quick comment on a recent recognition that Team has received. Last quarter we were proud to report that "Fortune" Magazine had named us to their 2007 list of the "100 Fastest Growing Companies."

In October, last October in '07, "Forbes" Magazine named Team to its "200 Best Small Company" list. For this listing, we understand that "Forbes" considers all public companies up to $750 million in annual revenues. Team was ranked 36th in this year's list, which is based on current year and five-year performance records.

To wrap up my comments, our Company continues to have positive momentum in many key areas. We are very excited about our prospects both in North America and now Europe. However, we also realize that we cannot rest on our laurels. All of our success and future opportunity depends our continuing to provide our customers outstanding service and support every single day. Fortunately, I am privileged to work with a great team of colleagues who are fully dedicated to doing just that.

That concludes my remarks, Gretchen, can we now open it up for questions?

Thank you. We will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS) Standing by for questions. Our first question comes from Arnie Ursaner from CJS Securities. Please go ahead.

Good morning. The first question is in relation to Aitec. I think it is the kind of acquisition it had roughly $50 million of revenue. Your run rate right now based on the current quarter is materially above that. Are currencies one of the issues, or are in fact you seeing dramatically higher growth in Aitec?

I think it is a combination of the two. I am just trying to get hold of that. I think our, do you have the revenue to date for Aitec?

Yes, revenues to date are about $26 million for the year-to-date. Which is roughly that $50 million rate or slightly higher.

Right. You had $16 million in the quarter. If that is just the seasonal issue --

That is correct.

So --

Arnie, particularly in the East should mirror the seasonality that we experience in the U.S. relative to the turnaround season and the following spring.

Okay. My second question relates to the acquisition you have made of LRS. Can you give us a little better feel for the customer base they have. Are they as exposed as you are if you will to refineries? A little more on their customer base. And you mentioned it will be minimally accretive to '08, but wanted to get a feel for what sort of revenue and EBITDA margin we might expect in '09 with a full-year behind you.

Well, I think as we just asked, in answering the second question first, I believe we will have a much better feel for the kind of outlook for the business as we get involved with the managers, and really detail out some of our attractive growth opportunities. But we certainly, it is our premise that there will be attractive organic growth opportunities there going forward. In addition we may supplement here and there as we go forward with other tuck-in-type acquisitions.

The profitability of the business is approximately 10% EBIT in terms of margins. As I think I mentioned in the earnings release, this has been part of a larger, essentially an engineering and construction company, GTI group. So we are going to be carving out some of their corporate support and putting our own in place, so it may not be completely apples and apples, but we think it is an attractive business, that overall profitability is not all that dissimilar to ours, from that standpoint.

In terms of customers and markets, they have heavy focus on the energy sector, just like we do, which would be refining, petrochem, power. They also have a more significant, heavy industrial and marine business than we have in North America. Particularly related to their very extensive and considerable field machining capabilities. They are doing a lot of work in terms of the dikes, dock, harbor, and also marine vessels, as well as heavy industrials, such as steel mill machining, and that kind of activity. So they are a slightly less intense mix on the energy sector, but you know, kind of in the highest level of abstraction, it is not a greatly different.

Thank you. Have a good flight. We will see you tomorrow at our conference!

Very good.

Thank you. Our next question comes from Matt Duncan from Stephens, Inc. Matt, please go ahead.

Good morning, Phil and Ted. Congratulations on a nice quarter!

Good morning, Matt.

A couple of questions here. Did you guys have any new, significant master service agreements in the quarter by any chance?

You know, we are updating them all the time. So I don't have any, there's nothing that comes to mind that we had kind of a big one here or there. I would say our organic growth rate from our master service agreements was about 30% in the quarter, so it mirrored our overall organic growth.

Okay. So that was my next question. How much of that organic growth do you think came from master service agreements? And I guess if it is growing the same--?

I think it is roughly, I think 25% to 30% of our total business is from those type agreements right now.

Okay. So year-over-year, there is not any significant change in new agreements there?

No. I mean, we are always working on them. And we will expect it to incrementally add along the way. You know, I think the broader point I would make is we have a very broad-based business by customer, by geography, by service line, and I don't think the additions of new, we are trying to get business everywhere, including the bigger companies. But we don't expect to see them dramatically increase as a portion of our total business.

Okay. Did you have any particular service lines that outperformed the others by a meaningful amount? I know you said the growth was broad-based across the board. But did you have any particularly strong performers?

You know, you always have kind of noise there because of a particularly big project here or there, compared to the prior-year quarter. I would just say all, I believe all but one service line had growth. I know if you look at year-to-date, all 13 of our regions, legacy regions had growth, 11 of our 13 regions had double-digit growth. So that is about as broad-based as you can get. I don't have that complete detail for each service line, but I believe all service lines year-to-date had growth. If not all, certainly seven out of eight did.

Sure. Fair enough. Want to talk a little more about the SG&A leverage that you guys are seeing. It is about 200 basis points year-over-year. Some very nice leverage there. Can you walk through with us just a little bit what are the main drivers of that leverage, and then how long do you think you can carry on this sort of 200 basis points year-over-year leverage there in SG&A?

Well, I think the key driver of that is the top line.

Right.

Is they're growing very, very attractively. Both organically, of course we have the impact of Aitec in there. I guess we, as we have kind of evolved, as you know, Matt, we have kind of increased our size about tenfold over the last eight years. And we have had good operating leverage through most of that.

You know, from time to time, as we hit different thresholds, I guess we hit points where we need significant upgrading of support activities in one area or another. But we don't anticipate any major increase in kind of support costs other than kind of the normal rates that we have been running, you know, the last year or so.

Okay. Fair enough. A couple of final questions here, and I will jump back into queue. First, how is the third quarter going so far, we are about half way through? And also, I know you have been talking about a pretty strong spring turnaround season. Is there any more background you can give us to that? Maybe talk about the expectation for the spring turnaround season this year?

I think as I mentioned in my remarks, is generally our outlook and our optimism is high for both third and fourth quarter. We see a lot of activity out there. And it is just up to us to execute, we think.

Okay. Great. Thanks. Congratulations again on a nice quarter!

Thank you.

Thank you. Our next question comes from Byron Pope from Tudor Pickering. Please go ahead.

Hi, guys. Just one question for you, with regard to how you think about Europe going forward. Could you speak to the state of the availability of field technicians. I know that has been an issue for the industry in the U.S. market. Is that market as tight in Europe, and does that impact the way you think about the way your approach growth in Europe, organic versus bolt-on acquisitions?

To be real honest, our level of understanding of that level of granularity is low right now. So I can't tell you precisely what the kind of work force availability is, you know, for hiring. But I guess our premise would be that organic growth supplemented by some acquisitions will be the way we go. As we have grown domestically or not domestically, within North America, it is I guess creating demand and training and developing more personnel. And we would, it would be my hypothesis that we would, that would be attractive to do in Europe, as well.

Okay. So is it fair to think that there are other LRS-type companies in Europe, which you are already licensing equipment to that might over time fit that model?

I guess that is a possibility.

Okay.

We don't have any plan at this point to do it. But as we kind of look at opportunities, that is a possibility.

Okay. Thanks.

Sure.

Thank you. Our next question comes from Michael Cohen from C.K. Cooper. Please go ahead.

Hi, good morning.

Hi, Michael.

I wanted to ask about the acquisition in Europe. I know that we've had a lot of discussion about it. Can you give us any sense in terms of the overlap with Furmanite, and their position there? Are you going to be fighting it out a little here, and are we going to see price compression there, in that type of direction?

Well, we are direct competitor of Furmanite, where LRS, or Leak Repairs Specam, currently operates, and that is in Holland and Belgium.

Okay.

I am not an expert on Furmanite. It is my understanding they have a broader European presence than just those markets that we are not currently in.

Okay.

A point I would make, though, is Furmanite is a direct competitor of Team throughout North America, certainly throughout the U.S. So to the extent there is any, if you will, price pressure from competitive intensity, I think we have kind of experienced it, and I would certainly not anticipate anything different than what has already taken place.

Okay. Great. And just one question I think maybe, Ted, if you might address it. I think in the first quarter you spoke about a 93% to 94% utilization rate, X of the vacation timing. Was that comparable in this quarter, or how did you --?

Yes. In fact, if anything it might be a little bit higher in the second quarter. Our second quarter utilization is typically higher. We just run flat out, Michael, in both our second and the fourth quarters, during the turnaround seasons.

Okay. Great. Thank you very much. Great quarter!

Thanks.

Thank you. Our next question comes from Mike Carney from Coker & Palmer. Please go ahead.

Good morning, Mike.

Good morning, Mike.

Good morning. Sorry, I have got a cold here, but I am still alive. A couple of questions, first on the acquisition again. Is that your largest licensee in Europe?

Yes.

And then where do you have other licensees in Europe? Is it other regions other than Benelux, or is that most of it?

We have active licensees in the U.K., Spain, and in the Middle East.

Okay.

Arabia and Kuwait.

And Phil you mentioned growth in the consultant base, but I kind of missed that. Will you repeat that?

The total field personnel base excluding the acquisition, the Aitec acquisition, was up from the beginning of the year about 217 people, so that is about 8%.

So it appears that, okay. So then you had a 225 or something from Aitec I guess. So basically, you continued to add about the same pace as you did in the first quarter that you did in the second quarter organically?

Approximately very similar. Right. A little over 100 I think we added in the quarter.

Right. That doesn't include contractors though, correct?

Correct. These are full-time technicians, and we supplement those then with our projects -- our project specific, or project personnel.

Okay. What was the turnaround versus the online growth in the quarter?

They were actually, I don't have a complete split out of that. But they were actually pretty comparable. Both were quite strong.

Both above 20%?

Yes.

Yes.

Okay.

Certainly above 15, give me a little wiggle room. But they are high teens or 20s, yes. By service.

Okay. I hear you. Also let's see, Ted, you had mentioned the D&A was $2.7 million in the quarter. Is that right?

Correct.

How much of that was amortization?

Mike, I don't have that number. I can get it for you.

I mean is it, tell me, is it small, or was it, I mean, $100,000, an idea ?

Very small relative to the total.

And it's only coming from Aitec, right? That's the only --?

No, no, no. We have a non-compete capitalized cost associated with a prior acquisition that is being amortized.

Okay. So there is a little bit left over from --

A little bit left over.

From many years ago?

Yes, exactly. It is not a lot, though. It is a fairly insignificant amount relative to --

And the intangibles on the European business I assume are going to be pretty small, right? That is going to be almost minimal amortization there?

I think that will be correct, yes.

One more thing, Phil, you had mentioned 10% EBIT on the current European business. Was that including any new synergies, or is that currently what they are running at?

That is our estimate of currently what they are running, as if we owned them. So as I mentioned, we are going to transition off support activities. For example, financial systems, IT systems, HR legal support activities, that are currently provided by GTI, or their former parent company. You know, that we are estimating what those, what it will cost us to provide those to them.

But you know, candidly in terms of synergies, there aren't really any. Because they are serving a different market, we are going to collaborate, you know technically and commercially and support their activities. But the real leverage is growth, and we think that will be possible, as we go at this on a more focused and aggressive basis.

Frankly, one of the issues they had in GTI, when they were owned by GTI, is that due to the GTI's parent company is Suez, and they have a country-by-country approach to their businesses. So LRS was not permitted to seek market opportunities in contiguous areas, such as Germany, France, et cetera. So we see those as nice, nice kind of opportunities. Just by opening the kind of the available market to them.

Did Suez have other services businesses?

Well, GTI is a major engineering and construction company. That kind of say is of the ilk of a --

But in services that you compete?

No. Kellogg Brown & Root-type business, no, but they essentially don't, no.

Okay. So and you are keeping the entire management team?

Correct.

Okay. Thanks a lot. Appreciate it.

Sure.

Hope you get to feeling better, Mike.

Thank you. Our next question comes from Mike Breard from Hodges Capital. Please go ahead.

Yes. Sounds like a good quarter. Just a question on European market. Is that characterized by maybe a dozen smaller competitors, or two or three large ones, or what is the structure there?

We believe that it is similar to the U.S. in terms of lots of smaller competitors. Again, our detailed knowledge country by country is limited at this point. So you know, we can't speak to it as knowledgeably as we will going forward. But our premise is that having a, I am going to say a technical base, a large, deep, technical base to support an ever-expanding, geographic service network, much like we do in North America, will be a very attractive approach to that business in Europe.

It will give us flexibility to bring larger scale resources to bear than we think has historically been the case in some markets, much like we have done in North America. And that is kind of the approach we are looking at. And we think that there are lots of little or smaller, you know, more limited service companies currently in each of these individual countries, that will be an attractive alternative to perhaps some of those service approaches today.

Okay. And one other quick question in the second quarter, your revenue growth, how much of that might have been due to price increases for similar services?

That is a difficult issue for us to measure precisely because of the effective mix. But my estimate just based on the activity levels, the billed hours that we are generating in our system, my estimate is the price effect is about 5% to 8%.

Okay. Thank you.

Revenue growth. Yes.

Thank you. At this time, we are going to go to the line of Richard Nelson from J. Giordano Securities.

Good morning, gentlemen. A couple of quick questions. Most of my other questions have been answered. I noticed that your tax rate notched down a little bit here. Is there something we should know about, any change in the way you are handling things. Or can we look forward to that being a little bit lower going forward?

Yes. I mean, I think in the aggregate you are going to see about a 40% effective tax rate for the year in the second quarter. It is a little less than it was in the prior quarter. It is primarily a function of just higher earnings, and smoothing the effect of permanent differences, if you will.

And then the other thing that you will see with respect to our non-cash comp expense, we changed our, the kinds of awards we make, we now make nonqualified awards for tax purposes, that allow us to tax benefit new awards, whereas relative to our incentive stock options those were non-tax benefited previously.

Okay. One quick question, cash. You might have mentioned this. What is your ending cash balance for the quarter?

$5.8 million.

Okay. Thanks a lot. Very good quarter!

Thanks.

Thanks, Rick.

Okay.

Thank you. And our next question comes from Matt Duncan from Stephens, Inc. Matt, your line is open.

Hi, guys. A couple of quick follow-ups. First on LRS, just one last quick question. Do you have a trailing EBITDA number for those guys?

I think EBIT is roughly the same as EBITDA, and like I said, we are roughly $22 million. So that would be like $2.2 million.

That is correct.

That would be roughly EBIT. Or EBITDA really.

Okay. Then next on Aitec, can you talk about how they are performing relative to your expectations. I know you said they are doing very well so far. Looking at the expectations you guys had when you bought the business, how is it performing?

Outstanding. We are really pleased. They are from a financial standpoint, I think they are slightly ahead. I think revenue/volume-wise, we are probably about where we thought we would be. I think margin-wise, we are a little ahead of where we thought we would be.

I will tell you one of the things that has pleased me most, is just the enthusiasm of their entirety organization, to work closely with our group up in Canada. It has been outstanding. So just the commercial synergies that we are in the process of generating, and their leadership, and being part of that has been a very pleasant, not a surprise so much, but a very pleasant event I should say, like I say, we just see those collaborations generating great opportunities for us down the road. You know, near term as well as longer term. So we are extremely pleased with their efforts.

Right. How is it going taking their inspection service into the oil sands? Have you had any successes there?

We have got a branch there. We have got their personnel in Fort McMurray already. So, and vice-versa, by the way. Taking other services into account in geographic areas where they were strong and we had very limited presence. So --

Sure. And the last thing here on your acquisition pipeline, can you talk a little bit about what that looks like right now. You know, specifically both in North America and in Europe. I know in Europe you have now basically acquired the TMS piece, but I assume you are probably looking for the TCM piece, as well?

Well, actually, we don't have a pipeline per se. Just as a little bit of a reminder, organic growth has been the primary driver of our long-term success. It is 60% to 70% of our overall revenue growth over time. We expect that to continue to be that way.

Right.

We look at acquisitions as accelerators or enablers. And I think both the recent two, obviously, we had no presence in inspection in Canada. That was a great enabler. And both an enabler and an accelerator. Obviously we had no presence in Europe. We had to establish a critical mass. I would just say that our focus is, as it has been historically, is to let's grow organically, and let's focus and make all of our business as strong as we can that way.

Having said that, we are opportunistic. So if there is an extremely attractive accelerator/enabler out there that comes our way, we will look at it. You know, as I think Ted mentioned, our level of debt relative to our, or I should say the level of financial leverage of our business is approximately 2:1.

So we are not heavily leveraged. And, you know, we won't be inclined to pass on great opportunities. But having said that, we are really not looking to do three or four more, you know, in quick succession. We are looking to make what we have great.

Phil, what level of leverage are you comfortable with? You are at 2:1 now.

I think it is highly circumstantial.

Okay. So it is going to depend on the deal?

It is. I will just say though, and this is the way we think about it is organic growth only from here on out is extremely attractive.

Right.

A great, we are talking about high profit growth business. So we don't want to do anything that doesn't build on that. So if it is stretching to buy something that may be at a value that isn't right, or maybe a business that isn't a great fit, that just doesn't make sense irrespective of leverage. So we are going to be patient, and try to be focused so that we, and disciplined so that we, you know, only pursue things that are really attractive accelerators for us.

And then last thing. Back on your commentary on organic growth, it has been outstanding. 28% this quarter. And it has been strong for quite a while now. Kind of what is your perspective on what organic growth should feel like going forward? I know you guys have historically talked about 10%. But clearly we are outstripping that number right now. How long do you think this can continue?

I don't see, you know, I think for a long time, if we execute. But you are right, we are now, our organic growth has exceeded kind of our 10/20 model by a considerable margin. Certainly last year and this year, you know, and we are, part of it is that we are gearing up from a capacity increase standpoint. That we are systematically kind of focused on adding resources.

And we think that as we, you know, the more resources and capabilities we have, that tends to drive activity or demand almost rather than vice-versa, where we respond to demand with resource additions we think kind of the demand is a function of our resource additions. So we are going to continue to focus on that. We don't believe that the, we have a very robust market. But we think that the delta between a robust market and a normal market is only about 10% demand. So we don't think that is the primary driver of it. But candidly it is really strong now.

We can't be certain how big a component that is in our overall growth. We do know that execution is really important. And just being here isn't enough. That we have to earn it and re-earn it every year, every single day with every project. So while we are extremely optimistic about the fundamentals, we certainly don't pencil in automatically, just because the fundamentals are good, that we are going to do 25% a year.

Sure.

We hope we do. You know, if you look at our, just our rest of the year estimate, I think we are kind of the rest of the year estimates, in the 15% to 20% revenue growth range, I believe, if you look at that. Taking the effect of Aitec out of there. So we are conservatively estimating a little lighter than we have run the first half of the year. Although we are extremely optimistic about where we are, and what we are doing.

I appreciate the insight, Phil. Thanks.

Sure.

Thank you. We have no further questions at this time.

All right. Thank you, Gretchen. With that then let me wrap up.

I want to thank you all again for your participation in this call. And your continuing interest in Team. And we look forward to our next conference call, our third quarter conference call in early April. Have a good day!

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. And you may all disconnect. Thank you, Mr. Hawk.

Thank you.