Team Inc (TISI) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your Team Hawk teleconference. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn your call over to your host, Mr. Phil Hawk, CEO of Team Inc. Mr. Hawk, you may begin.

My name is Phil Hawk and I'm the Chairman and CEO of Team. Joining me again today is Ted Owen, the Company's Senior Vice President and Chief Financial Officer.

The purpose of today's conference call is to discuss financial results for the Company's third quarter ending February 28, 2008. As with past calls, our primary objective is to provide shareholders and potential shareholders with an enhanced understanding of our Company's performance and prospects. This discussion is intended to supplement the quarterly earnings releases and our filings with the SEC.

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

Thank you, Phil. First I want to remind everyone that any forward-looking information we discuss today is being provided in accordance with the provisions of the Private Securities Litigation Reform Act of 1995. We have made reasonable efforts to ensure that the information, assumptions and beliefs upon which this forward-looking information is based are current, reasonable and complete. However, a variety of factors could cause actual results to differ materially from those anticipated in any forward-looking information. A description of those factors is set forth in the last paragraph of our press release and in the Company's SEC filings.

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

Now with that out of the way, let's turn to the financial results. Revenues in the third quarter were $108.8 million compared to $73.3 million in the third quarter last year, or an increase of 48%. The revenue increase includes $10.8 million of revenues attributable to the Aitec acquisition that was effective June 1st, and $3.3 million of revenue attributable to the LRS acquisition completed in January. The organic third-quarter growth rate was 29%.

Net income was $2.9 million in the quarter versus $2.4 million in last year's third quarter, an increase of 20%. Earnings per diluted share were $0.15 versus $0.13 in last year's quarter. Year-to-date net income of $14.3 million is more than 50% ahead of last year and diluted earnings per share of $0.73 is up 46%.

For a little more depth around our industrial service business, as a reminder, our industrial service business includes an array of specialized services related to the maintenance and installation 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 TCM, which is comprised of field heat treating and inspection.

TMS revenues in the quarter were $49.7 million versus $34.7 million in the third quarter last year, or an increase of 43%. Excluding the impact of LRS, organic TMS revenue growth was 34%. TCM revenues in the quarter were $59.1 million compared to $38.6 million in last year's quarter. That's an increase of 53%. Organically, excluding the Aitec acquisition, TCM revenues increased 25% in the quarter.

Operating income for the industrial service business, which excludes corporate costs not directly attributable to field operations, was $11.1 million in the third quarter versus $8.4 million in last year's quarter for an increase of 33%. Field operating income as a percent of revenue was 10% in the current quarter which was down about 1 percentage point from last year's quarter. Overall operating income percentage was 6%, down about 1 percentage point from last year's third quarter. The operating profit margin for the year-to-date was about 9% which is similar to last year.

While these margins combined with our attractive revenue growth result in significant absolute profit growth, those of you who have been following our company know that we expect our margins to increase with our growth as we capitalize on operating leverage in our business. So what's driving the flat margin performance?

From an overall company perspective for both the quarter and year-to-date results the general picture is straightforward, our overall gross margin has declined about 2 percentage points and has been offset by lower SG&A cost as a percent of sales. There are two key drivers to the gross margin decline.

First is the impact of the acquired businesses, principally the former Aitec inspection businesses. As mentioned in previous calls, the historic profit margins of this business have been lower than Team levels for the same services. On a composite basis about half of the total decline in gross margin as a percent of sales is related to the addition of Aitec.

Now effective January 1, we have implemented our full suite of financial and personnel management tools within the former Aitec units, which we believe will result in margin improvement in these branches just like other new branches that we have added over time and implemented our systems. That will take some time, however, as managers become familiar with the new management tools.

The second primary driver of the gross margin decline in the quarter has been the impact of weak seasonal demand combined with a considerably larger business space, particularly in the TCM Division. While organic growth in TCM was 25% over the same quarter last year, it was nearly 20% less than the seasonally stronger second quarter. The challenge in the third quarter is that we simply have less volume to absorb the base cost of our business. This is not new or unique to this year, although the base of our business is considerably larger. Similar to last year we struggled through late December and January with marginal results and then finished strong in February as business activity levels ramped back up into the fourth quarter.

Now with respect to our balance sheet and cash flows -- first, as we previously announced, in order to finance our acquisition of Aitec on May 31st of last year we increased our revolving credit facility to $120 million which includes $34 million that was drawn on June 1st to complete the Aitec acquisition. Additionally, in the second quarter we borrowed $5 million to acquire approximately 50 acres of land which will be used for future headquarters, manufacturing and equipment center development.

And then finally, in January we borrowed about $19 million under our revolver to complete the acquisition of Leak Repairs Specam in the Netherlands. With these three transactions in mind, at the end of the third quarter our debt, net of $12 million in cash, was $88 million which, in spite of the additional borrowing in the third quarter for LRS, was about the same as at the end of the second quarter. Our debt to EBITDA at the end of the third quarter was about 1.9 to 1 and our available capacity under our credit facility was $27 million.

Now just some other financial numbers -- capital expenditures in the quarter was about $3.5 million, D&A was about $3.1 million and non-cash compensation expense was $1.2 million. For fiscal 2008 we expect operating capital expenditures to be $15 million to $20 million which excludes the amounts expended for the land acquisition. With that, Phil, I'll turn it back to you.

Thinks, Ted. Now I'd like to add several comments to the financial results that Ted has reviewed with you. Let me begin with a comment about earnings estimates.

As most of you know, we decline to make estimates of company performance on a quarterly basis. Instead we provide annual earnings guidance that we reaffirm or update periodically as appropriate. However, I also understand that our analysts who follow us do make quarterly estimates of our performance and that the recently reported results for this quarter are below the consensus estimate.

Just as we have discouraged analysts and investors from increasing expectations based on above Street estimate performance in past quarters, it would be misguided to reduce expectations for Team based on performance in this quarter that is below Street estimates.

As we indicated in the earnings release, we are reaffirming our full year earnings guidance of $1.10 to $1.20 per share for our fiscal year ending May 31, 2008. Due to the seasonality of our business our fourth quarter has historically been our strongest quarter in terms of both revenue and earnings. I'm confident that it will again be the case this year.

In fact, early in our fourth quarter we are running at the highest activity levels in company history. Based on this level of build hours I think the upper half of our earnings range estimate is probable. In the remainder of my remarks I will touch on quarter and year-to-date performance in greater detail to provide a better understanding of both where we have been, but also where we are going. Let me begin with revenue.

I continue to be very pleased with our overall revenue growth and marketshare growth. For the year-to-date our total revenue growth is up more than 50%. Of course a portion of that revenue growth reflects the impact of our two acquisitions this year -- Aitec Inspection Services in the Canadian market and Leak Repairs Specam in Europe. Together these two acquisitions represent about $40 million in year-to-date incremental revenue. Excluding the effect of these two acquisitions, Team's year-to-date organic growth totals more than $72 million or 33%.

The picture is much these same when looking just the third-quarter results. Overall revenue growth was 48%; excluding the acquisitions, Team's organic revenue growth for the quarter was 29%. So where is this impressive growth coming from?

We continue to experience very broad-based organic revenue growth. Illustrating this point, all 13 legacy geographic regions of Team have revenue growth this year. 10 of the 13 regions have achieved double-digit revenue growth. All eight service lines have increased by double-digit growth rates this year. On a quarterly basis the sources of growth remain broad-based; however the details are a little lumpier due to the timing of specific turnarounds and special projects.

So how is Team achieving this growth? I think there are a number of significant contributing factors. We continue to benefit from strong market demand driven by the significant capital projects, particularly in the refining and pipeline sectors, that are supplementing baseline maintenance demand. While it is difficult to measure this with precision, we continue to believe that total industry demand is approximately 10% higher as a result of these large capital projects.

This raises a related question -- when is this extra demand or wind at our back likely to end? Based on what we see already underway we expect a significant mix of capital projects for at least the next few years. In the near term we see very significant activity along the Gulf Coast and in Western Canada. In the midterm we also see new projects and related opportunities in the mid-continent and Rocky Mountain regions.

We are also asking the question what impact will the current credit crunch and likely U.S. recession have on a world demand. Frankly we haven't seen much impact on our industry to date and don't expect the situation to change very much going forward. While we can't predict markets with certainty, there are a number of reasons why we believe that any impact will be minimal -- the non-deferrable maintenance nature of the primary demand for our services, the overall health of our major customer segments, and the inability to efficiently cancel capital projects that are already underway are just a few of those reasons.

Another favorable industry trend is the continuing procurement consolidation, particularly by larger multi-plant customers who increasingly prefer to work with fewer, larger more professional service providers more extensively. In our highly fragmented competitive environment where we face approximately 200 different competitors, our extensive North American network with over 80 service locations and our eight service lines give us unmatched service breadth. Approximately 25% of our total revenues are attributable to our alliance agreements with major multi-plant customers.

Both of these first two points speak to the favorable industry conditions or trends, but favorable trends don't automatically translate into growth or success. We fully understand that it is up to us to capitalize on them. Job one in that regard is continuing to provide outstanding service to our customers. All of us at Team understand that customers choose us and not vice versa. Every one of our more than 100,000 jobs each year is an opportunity to affirm and re earn our customers' confidence. I'm proud of our service mindset and commitment to service excellence; it truly is a team effort.

As we had mentioned before, continued revenue growth also requires continued growth in service resources technicians. I'm pleased to report that our total number of full-time field personnel, excluding the effect of acquisitions, has increased by more than 300 people or 15% since the beginning of the fiscal year. A number of initiatives and programs support this significant growth -- expanded recruiting initiatives both locally and companywide; expanded training programs in all service lines. We believe we have one of the largest overall training programs in the industry.

We conduct monthly training in all of our branches. In addition, we host more extensive skills training programs in all of our service lines at our central training facility in Alvin, Texas. This year we expect to bring approximately 750 technicians to Alvin for one- to two-week training programs.

This year we have also launched a companywide management training program aimed at improving the leadership, planning, communication and personnel development skills of all of our managers and supervisors across the Company. We have received very positive feedback from the more than 300 managers who are currently participating in the program.

Finally, our growth reflects our continuing aggressive business development efforts. Great service from our technicians anchors all of our business development efforts. Building upon this service reputation we are also looking for new customers; we are always looking for new customers and service opportunities.

Each of our branches has active ongoing development efforts with both current and prospective customers. Frequently they are also supported by our service line and market segment business development managers. Through these ongoing initiatives we continue to build our business with all customer groups from small local facilities to our major alliance accounts. We are pleased with this broad mix of business.

Now let's shift to operating profit and profit margins. In his remarks Ted provided a substantial amount of detail on our profit margins and sources of change within the key components of gross margin and SG&A expenses. While the impact of the Aitec acquisition is new to this year's results, my overall perspective on our current situation is much as it was last year at this time. We struggle with the low demand from our seasonally weak third quarter, on the flip side, we expect to benefit from the very high demand in our seasonally strong fourth quarter.

Reflecting this perspective our expectations of our business from a margin perspective remain unchanged, both for this year and beyond. I continue to expect overall profit margin for this fiscal year to be approximately 10%. We expect the profit margin as a percentage of sales to continue to improve in future years due to both future growth and margin improvement in the acquired businesses.

Let me end with a couple of comments and observations about our acquisitions this year. We are delighted with both businesses and we are making excellent progress bringing them into the Team network. As mentioned earlier, the Canadian inspection businesses are now fully operational on Team's IT and financial systems. Leak Repairs Specam, our European business acquired in January, is already operational on Team's IT network and expects to be converted to our financial system around the beginning of the fiscal year.

Even more important, we are delighted with our new colleagues. They are energetic and talented individuals who also reflect Team's core values in the conduct of their businesses. We are off to a great start.

To wrap-up, we continue to be pleased with our overall business performance and outlook. Our revenue growth and overall business activity continues to be robust. We look forward to a strong fourth quarter and another year of record performance for our company.

As a final comment before opening up for questions I also want to recognize and think all of my colleagues at Team for their key contributions to our business. Their commitment and devotion enables us to perform our services with the highest possible level of safety, to continually affirm and re-earn our customers' confidence in our service capabilities, and to conduct our business in a manner in which we all can be proud. It is my pleasure to be associated with this great team.

Gretchen, with -- that concludes our initial remarks. Let's now open it up for questions.

(OPERATOR INSTRUCTIONS). Arnie Ursaner, CJS Securities.

So the starting question -- obviously a lot of the tone of this call is whether Q3's results are really indicative of any change in your business, so to start with that you mentioned that you saw a pretty good ramp from a slow start in January into February. Now that March is completed can you give us a little better feel for the ramp you saw in the quarter and what you've seen so far quarter to date in March both in terms of activity, but, equally if not more important, in terms of bookings or turnaround work you expect to do?

Good question, Arnie. As I kind of alluded in some of my comments, we're one month into the fourth quarter and our activity levels were excellent in March. They continue to ramp up as we projected they would, and our outlook for fourth quarter is very strong.

You're not basing your enthusiastic view about Q4 on work you hope to get, but literally work that's essentially in hand for the most part in terms of turnaround work?

That's correct. I would, for all our listeners, just remind you that when we're doing turnarounds the actual size of the work for any individual or specific project is really not known until we actually get into the work. So with discoverables it may expand, frequently does, or occasionally it contracts. So to say we have a precise forecast and we know to the last detail exactly what our revenues will be is not true and not correct, but the overall activity levels are very strong, the number of projects we're working in, the breadth of those projects is strong and we're optimistic.

Math, you added roughly 100 or so technicians in the quarter, is that correct?

That's correct.

And just to think about margins, when you bring in 100 people like that are there lingering inefficiencies as you try to train these people, or is it a relatively quick process?

Well, again, we're not bringing them in and expecting them to be expert lead technicians on day one. We do have a -- it's probably a couple of weeks safety training and orientation program for people who are new to our industry before they can reach helper status. As I look at our billed hours to total paid hours or labor utilization levels, they are comparable this year to what they were last year. So we're not seeing erosion of that due to influx in our growth -- either influx of technicians or our growth in those technicians.

Two more quick questions if I may. In looking at your views about the balance of the year, we only have one quarter left. So if I take your 110 to 120 guidance it implies a range of growth anywhere from 19% to 51% which is obviously a very sizable range. You also indicated you expect a 10% operating margin for the year, if I heard you correct. If you have a 10% operating margin for the year you are implying a very sizable jump year-over-year in operating margin. Is that correct? And perhaps you can narrow down this range a little bit.

Well, let's kind of back up here a little bit -- just in terms of if we take the midpoint of the range I believe that we're $0.73 year-to-date, to the midpoint of the range your $1.15 I believe implies a $0.42 earnings for the quarter. That's a little bit better than the second quarter as kind of our midrange and, as you know, in our business we have a lot of moving parts with lots of projects, lots of branches that we can't measure or forecast with precision. And we still have to execute and do a great job.

But given the profile of our market, our trend in terms of continuing share growth, the trend in terms of resource growth being a little bit better than second quarter is not a heroic stretch for us. I believe, at least as we look at our own internal estimates, I think the 10% earnings guidance for the year for EBIT margin requires something in the order of magnitude of about 12 or 13% for the quarter which is I think in line with last year. I think you saw our earnings guidance or revenue guidance. I think we're approximately $130 million is our rough estimate for revenue for the quarter.

Thank you very much.

Matt Duncan, Stephens.

This is [Jack Adkins] on the call for Matt today. I was wondering if you could talk a little bit about -- just a little bit more about the fourth quarter, kind of what you're seeing right now as far as the utilization rates for your technicians?

I don't have that at hand. The utilization rates are kind of measured a couple of ways, but one really good way to look at that is total billed hours to total paid hours. It's always good in our seasonally strong quarters and it is very good right now. I don't have it for this week or for the month to date, but they run considerably higher. Our utilization kind of to straight time hours doesn't vary as much quarter to quarter, but all the overtime that we generate with the big project work of course leverages our whole network much more fully.

Okay, great. Fair enough. And then just to dig into margins for a minute here. Obviously the TCM gross margins hurt you in the quarter. I was just wondering if you could provide maybe a little more color on the gross margins in the TCM segment, how much of that decline year-over-year was due to the Aitec acquisition versus seasonality?

Well, actually I was going to answer it that way. There are two time periods to look at. Ted talked to the quarter in which about half the gross margin -- this is the total effect of gross margin and total on Team, the two points, half the effect was related to the Aitec acquisition, half related to lower margins in the TCM Division in the quarter relative to it's corresponding third quarter last year.

If you look at year-to-date on that same basis, actually the legacy TCM Divisions are flat. So the quarterly difficulty we had is not a chronic issue of kind of just lower overall margins, but in our view truly related to the happenstance of weak season and dealing with that and with an ever larger base.

Okay. And thinking about the ramping up of the Aitec margins, getting them in line with regular normalized TCM margins, what kind of time frame on that and how much leverage do you expect to get going forward now that you have them integrated on your software?

Let's talk about where we started. We started the year with the expectation that the Aitec businesses would -- in this excludes corporate overhead and all that -- would be at about a 10% EBIT margin, while our expectation is even higher, but I think our running rate for all our businesses last year was in the 14% range. So I think that's kind of a good place to where we started. So that's the gap we have to close is that 4 point or so gap.

What we've seen from our other businesses is that it takes probably up to a year to get full closure of that list, so we're not forecasting kind of major improvements in the next subsequent quarter. But what happens is when you get -- again, this is a good opportunity to just talk a little bit about the fundamentals of our business and our model -- again, we have -- with our financial system we have visibility on the utilization of our labor week by week at all locations, we have the visibility and the profitability of our job, of every single job and then of course any aggregation of that.

That's a wonderful perspective with which to manage your business. You can see where the causes of any margin disappointments are and I think while it's descriptive not prescriptive, it certainly indicates where the leverage points are and that continues to be a key focus of our business. We are highly decentralized. We spend a lot of time and effort on all of our locations just kind of maintaining a really clear focus on our fundamentals in making sure that we're not seeing any deterioration in those.

Okay, fair enough. And one last question here. Looking beyond the fourth quarter and into '09 what do you see as far as the Company's outlook for growth, whether it's through market share gains or just overall demand? What are you seeing right now as far as '09?

I think the expectations are more of the same. Our compound growth rate for the last eight years is 25% a year in revenue growth. It's been a little bit higher the last few years as we've benefited from some of the -- little stronger overall market. For all the success and growth that we've had historically we project our -- or estimate our marketshare today at something around 15%. So all these trends that we spoke to about the consolidation of procurement, the extremely strong structural position that we have in the market, if we execute, if we continue to be a great service company and obviously that's our focus and commitment, we should continue to see very attractive growth for as far as we can see.

Okay, great. One last thing and I'll jump back in queue, but now that you have the LRS acquisition integrated could you speak to the opportunities that are present there as far as the Company's growth in Europe?

It's really -- we are very excited about the potential. It's too early to talk to specific plans because we're still developing perspectives on that. But I think the overall perspective for why we did it is that if you look at Europe in total it's a market that from a refining capacity total GDP, total production capability is very similar to North America, therefore we estimate the market potential is $2 billion to $3 billion a year and we continue to believe in all our early experiences with our new European friends and colleagues reinforced this notion that the procurement consolidation and integration that we're seeing in North America we will see in Europe and we hope to be part of that, making that happen.

I would discourage anyone from thinking this is going to be half of Team's business anytime soon or anything of that nature, but we're going to see some very attractive growth over time because it's just a great market opportunity and we have a very good base from which to build.

Okay, great. Thanks, guys.

Jack, just also, just as a point of clarification, I think you said that we had the LRS business fully integrated. That's not exactly true. We've got our IT systems in place, we're making good progress, our financial systems will actually be in place in LRS around the first of June.

Great. Thanks, Ted.

Holden Lewis, BB&T Capital Markets.

A couple of things. First, on the revenues, I think, depending on how much acquired revenue flows into the fourth quarter, should be more than we saw in Q2 or Q3 I think from the acquired businesses. It looks like you're kind of suggesting with your guidance revenue growth in the neighborhood of that 10% range. I just would like to get -- given the visibility and the promising things that you have sort of talked about, trying to get a feel for why you're sort of going with the boilerplate number here?

And then secondly, I guess -- you commented on strength broadly in the regions and by service line. Could you also comment by your end markets? You know, talking -- I guess you touched on refinery pipe, but also chem, petro chem, pulp paper -- the other markets that you're in, just give an update on where we're at there?

Sure. And just in terms of the revenue guidance I will confess that we don't spend a whole lot of time forecasting. So I will agree with you that I don't believe that we're going to see 10% organic growth. If that's the implication it's not my expectation to see 10% organic growth in the fourth quarter. I will say we are comparing with a very, very strong quarter last year, but it certainly feels a little better than that.

Back to the segment -- health of segments, I don't have at my fingertips good data in terms of our services by end market, but I can give you just some comments of we're picking up just on the market outlook themselves. I think generally it's amazingly positive. Let's just kind of go through them. Refining, you've seen some preannouncements from some customers about earnings declines from last year. So what we have in the refining market is lower crack spreads than they enjoyed, some really very historically high crack spreads a year ago, but still very solid to be candid about it.

Our pipeline customers are strong, [chems] are very strong. It's interesting, the weak dollar has precipitated some expanded export activity among them chems which is kind of helping their business out. I don't think that has a huge effect, direct effect on us because, as you know, Holden, it's kind of operating plants that generate demand, not their margins. But again, we are rooting for our customers so we want them to be as healthy as they can be. Steel looks pretty good, pulp and paper a little bit weaker, power is good and growing. So there's a little bit of an overview.

Okay, thank you. You talked about some of the earnings coming in at lower crack spreads and, again, I stipulate that they're generally in decent conditions, but they're lower year-over-year. Any concern that maybe as earnings have come down from the refiners perhaps they have been more aggressive on the maintenance and perhaps less aggressive on more project activity that may be sort of pulling some of the maintenance forward and maybe out there somewhere is sort of a drop off in demand just as they pull more of those maintenance projects forward into a more compressed period? Or does that not really feel like an issue?

I understand the basis for your question; I just can say that we haven't seen it. What we did see several years ago when the margins spread out we saw some specific deferrals where projects that were on the docket for a particular quarter were pushed. And so that was a clear reaction to that that we saw. I'm aware of no instance where a customer has brought forward activity because of low margins or really for any reason where the motivation was kind of take advantage of kind of a weak market.

Right, okay. Well, I guess it's sort of the composition of the demand whether it maybe shifts from one -- whether it be capital into maintenance or what have. But you're really not seeing anything -- but you said capital was pretty strong too, right?

I talked a little bit about that. With a capital project, again a couple of kind of perspectives. One is a capital project -- probably you're betting on an environment for the next 20 to 30 years as the customer. Whether the margin is a little bit higher or lower this week or this quarter wouldn't have a lot to do with it. Although to the extent that it affects your future outlook it might affect whether you do some other future projects.

Once you're underway though, once you've kind of broken ground or you have the activity underway, stopping it is really inefficient. So we just would not project anything that's already launched to stop.

Okay. At this point you're not seeing any of those deferrals you referenced from last time around either, that's not playing out either?

Correct.

Okay. And then just lastly if I could, on the technicians, you've been adding about 100 technicians per quarter really I guess for the last three. It was at a slower rate I think prior to that.

300 for last year I believe.

In the last 12 months?

If we go to the last fiscal year I believe total number was about 300 so consistent with your point that we were a little lower rate last year.

And I guess this may be a little less than sort of how those move through the system. But assuming that you stay at that 100 person per quarter, and I guess perhaps you can update us on whether that's the goal going forward or whether it slows down or speeds up. At what point do you expect that if the incremental investment is the same quarter to quarter, at what point would you start to think that the contribution would begin to Eclipse the incremental cost and therefore the technicians would no longer be a drag on the margins to any meaningful degree?

So the premise is that the added technicians are depressing our margins, is that the premise of your question?

Right, so since you have stepped up the investment and since it takes some time to get them productive, going forward you'll make the same investment every quarter, but at some point the contribution of prior adds will begin to more than overwhelm that steady quarterly investment. And I'm just sort of curious where you think that might occur?

I understand the premise of that. What would be true -- if that were completely true, I don't think it is, when we look at our utilization of that labor we are not seeing lower utilization rates as a result of our addition of personnel. So that would be what you would expect to see because of training programs and all that, but even absorbing all those training programs our utilization rates, if you will, the proportion of total hours that we're billing to customers is not decreasing or has not decreased. So I think that's an observation to make.

But I would say there is a corollary that probably is true, is that when we're adding very large numbers of folks and growing organically, again I would submit our organic growth rates of 30% for this year are really terrific and something I'm very proud of is that level of growth does kind of bring with it in terms of the branch level a lot of management and leadership responsibility to bring those techs on, get them trained, get them out there and all of the assorted activities of just managing and handling a much bigger base of business in these locations.

So do we see some of that kind of tweaking at our tightness of our margin management? I think that's not only possible, it's probable on that. It's not lack of intention, but kind of prioritization or just having that load of activity. So one of the things that we continue to work on and we'll focus on and certainly would be I think as we go forward, we expect to spend a lot of time making sure that our basic job margins, labor utilization and management of our business relative to our model are as good as they can be at all of our locations.

Yes, but you haven't seen any slippage in terms of like billable hours per employee or anything like that despite all the adds at this point?

No, that's correct.

Okay. And do those billable hours come in less profitably with the new people?

It's very hard to correct it down to that level of detail. This is wherein is the mix issue. We can look at job margins by customer, by branch, by region, by service line. We can't really look at it by kind of employee, if you will, on that kind of a basis. So it is kind of a tricky thing.

I think one of the other things that's just hard for us is the effect of mix, because all customers have slightly different profit margins, all service lines kind of have some variability within them. And the labor intensity of different service lines is different.

So when I start looking at kind of aggregate metrics, those mix effects are significant and kind of distort maybe very small trends that we might be looking for.

If the billable hours data is good, then you're not seeing any evidence that maybe your hiring is getting ahead of the demand at this point?

No, not at all. What we focus on is job margins, which reflect the cost of our labor, whatever we have and as we add them. And then we look at, as we talk through gross margin and basically our indirect costs and SG&A and make sure that those expenses are -- our goal is to manage those in line with our activity level.

So the feeling is that you can still add as many people as you can find. Is it getting easier to find people given the construction bust or anything like that?

It is highly region specific. Certainly in some regions that have -- with the housing-related construction have some probably more available personnel. I would say you get on the Gulf Coast today, that is the case, and probably some other areas as well where there is very high demand for industrial service type personnel.

Great. Thank you, guys.

Arnie Ursaner.

A couple of follow-up questions. One of the ways, hopefully, you could enhance margins over time is if you would be able to shift some of your industrial customers in periods like Q4, where you have massive turnaround work. As you look into the backlog of work you have, are you trying to in fact move some customers into perhaps Q1, which is seasonally slower for you in the refinery area?

We are the tail of the dog on this. These big projects that are big for us, we are probably 2% of the project. So the notion that a customer is going to move it for our convenience isn't going to happen. What we did see, though, last year in the first quarter, it will be interesting to see how it plays out this year, is we had a stronger first quarter this year than we have ever had in the past. And the reason was is that the -- not just the natural growth, but if you recall significantly greater growth. And the reason was that the project work really continued all the way through June, which was a month or so longer than historically has been the case.

We surmised at that time or speculated that it might be some load balancing that our customers are doing, and we'll kind of look forward to seeing how that plays out this year. The broad issue that you raise is one that our customers are concerned about, because if they're -- it's not just in our little niche of the world, but for the big maintenance contractors that are the bulk of the cost and manpower for these turnaround projects, they are squeezed as well by some of the capital projects and things like that.

So to the extent they can spread that industry demand for that resource out a little bit, it helps them and helps their provided suppliers as well. So that very well may be the case. We saw it this summer or last year through June, and we're looking forward to seeing how it plays out this year.

One of the things you haven't commented on at all on this call, Phil, is your new initiatives. One of the things that has made you an industry leader is sometimes you identify targets and, in essence, create the market and the opportunity. I know you have got several that are underway. Can you update us on how some of those are doing?

Well, I think you can just -- if you see the breadth of our growth, double-digit growth in all of our service lines, they are going well. Some of the things -- I don't have a lot of specifics to add or new information to provide, but let's just recap some of them. We have the line isolation plugs; that business is kind of a derivation of our field machining activity. It's worked out very well. It is a nice growth area there.

In terms of industry segments, the pipeline industry we have grown very significantly this year. We're making good progress in the waterworks industry. We have got other kind of hot tapping kind of related initiatives, expanding our capability to sub sea and some of those areas in the Gulf of Mexico area.

In terms of the heat treating, we continue to expand our fleet of mobile rigs. We think we have the industry-leading design in terms of the mobile rig area. We have got projects and initiatives underway to expand our wireless capability and also in induction heating.

We have a similar array of kind of initiatives in inspection related to some of the high-end inspection activity. So we've got a lot going on. That's kind of been our theme before, is that the success of any one of those isn't that important to Team, although we hope they are all successful. It is the breadth of our initiatives, and we think just being a great service company with our structural advantages should drive at least the opportunity for attractive continued growth.

You mentioned -- I know you're obviously made some important acquisitions internationally, and you have service agreements with several key customers. By having the international capability, have you seen any direct expansion from some of your service agreements and cross-selling opportunities already from that?

No, not yet. It is just premature, Arnie. I think we will. We have had some of our initial conversations with some of our European customers who are also North American customers, but again, literally our U.S. team and kind of leaders that are working with our European business over there have been over there maybe a total of three or four weeks. So it is just early.

Shifting gears to Aitec for a second, I know you mentioned effective January 1st you had finally implemented the systems you needed to better manage their business and the management tools. Can you remind us of what happened when you acquired Cooperheat and sort of the process of bringing in your systems to Cooperheat? How long it took for the managers to sign off on this and how it impacted your margin once you had them in place?

Sure. Well, we are getting better at it is the bottom line, is that, again, we closed Aitec in June, and seven months -- June 1st, seven months later, we have all our systems in place. And it is not -- just a little nuance here -- it is not management systems for Ted and I. It is management systems and information for our managers on the field, on the ground at our various locations. It's so they have the information to continue to manage and to improve the management of their business because of the information.

Cooperheat-MQS, we acquired them I think it was in August, and I think it was at least a year before we got the system, and probably another six months after that before we got it debugged enough to really -- to be an operational tool. So it was a year and a half in development, and frankly, it was another six months to a year as we kind of really got full utilization of that.

And I think we are going to have some of that little bit of migration. We don't instantly get it, right, when you have these new tools. But what is happening is we have more success and also our success with integrating companies, it's much easier to bring new folks in and just the enthusiasm to utilize these tools and the expectation that they are really going to be a positive event for them is much better.

And so we have gotten the morale, the attitude, the leadership of our Aitec managers, and enthusiasm for these new tools is high. So they're all over it and very candidly, with just a few months data, we're seeing some things. They are seeing some things that they are challenging some of the ways they conducted parts of their business where they can improve some efficiency and focus on margin.

So it is just what we want. We want those groups. When you know where you are, you can get better, and that is our basic premise and that is really what the tools have provided.

My final question if I can, I've known you a while, Phil, and I'm trying to sort through various comments you have made on this call. So one of them I think you made is that industry demand is probably 10% more than you thought -- than it has been running. You mentioned the mix of capital projects over the next few years looks as robust as you have seen for quite a while.

You have highlighted the fact that you have had 25% revenue growth over eight years, and yet you historically have talked about 10% revenue growth. When I weight all these various factors, it seems to me a pretty big gap between the performance you have had of 25% and the historic long-term goal you've spoken about of 10%.

Would it be fair to say at least ever the next two, three years you see a much better environment than your 10% long-term historic deal?

Well, I think our opportunity is as much as we can earn, and let me kind of speak to that. Just a couple -- let me clarify a couple of your facts for all our listeners and then I'll come back to your specific question about outlook. We have grown 25% a year historically. If you take out the effective acquisitions, our organic growth I believe has been -- over a very extended period has been probably 15%, a little north of 15%.

Our organic growth last year was 23%. Our organic growth year-to-date this year is 30%, so we have been better in the last few years. The capital projects that I spoke to and that little wind at our back is not new to this year. It is new really kind of a post-Katrina period. So we have seen this incremental demand over what we believe is to be a very stable but not high-growth demand from our basic maintenance activities; is that we still believe that the basic driver of demand for our business is population of plants.

We are a necessary evil. Plants don't look to spend money on maintenance if they don't have to. So our overall market outlook is really flat market or fairly flat market, but again, in the near-term here the last couple of years and we think for at least a couple more, we've got a little boost on top of that due to these projects.

Now what's really driving our opportunity though is the fact that our customers want to deal with us -- or want to deal with companies like us, larger, multi-plant, multi-service, more professional service providers. That is driving marketshare growth; we're earning more of the business, but even with all our success we've only earned about 15% of it in total. So with 85% that we don't have, we think there's a very long runway of growth opportunity if we earn it.

Now to earn it we've got to continue to be a great service company; we also need to continue to add resources. We're getting better at it. I'm proud of how we've added -- I was proud of 300 new technicians net last year and we're on track, as we talked earlier, of about 400 new net technicians in North America this year. That's not nothing, that's a lot of effort across our network. And what we're doing is getting more systematic and it's becoming -- part of our routine is just to systematically grow.

So I think if we continue to grow resources and kind of manage that effectively, we continue to earn the confidence of our customers, our growth rate will be what we earn. It's not that it's our goal to be 10% long-term, that has been our model. Our observation has always been that 10% is pretty good in a no growth business, and that if we only got 10% our earnings growth rate ought to be in the 20% range. And as we look at multi-year -- long-term multi-year growth -- earnings growth of more than 20% a year with no benefit of acquisitions going forward, we think that's a pretty good model and a pretty good base.

But as you know, our historical earnings growth rate has been much higher than that and we aspire to maintain that if we can. So it's not a -- we're not trying to limit ourselves with our 1020 model, I would just state that 10% growth and bringing all of the resources in to do that wouldn't be horrible and the outcome or the consequence of that would be 20% plus earnings growth, which again, I'd put up against most industries and most companies over the long run even though we hope to do better.

Great answer, thank you very much.

Mike Carney, Coker & Palmer.

Good morning. What's the DSO in the quarter, Ted?

It's 87 days, it would be 85 days without the inclusion of our Euros. It's about the same as at the third quarter last year.

All right. And do you have revenue from Canada?

For the quarter, for all of Canada or for the Aitec business?

All of Canada.

Mike, I do not have that.

It's approximately 20%.

I'll just wait for that. What about the currency effect in the quarter on revenue?

It's about $750,000.

And I think you said this, the total number of techs at the end of the quarter?

I didn't. I did the delta increase, I don't have it right in front of me. It was about 300 for the year. We can get that for you.

And then I'm just -- I'm a little bit confused on the TCM margin now that you've talked about everything else. And I think that you were talking about the overall company. But in just the legacy TCM branch you had a number of years where those were weaker and then last year or so you've gotten those improved. And so the gross margin, the lower gross margin in this quarter, is that a function of -- was that a utilization issue or is that just a pricing issue? I mean, obviously I understand extremely high growth, that's tougher to manage. But what's the issue there and so basically can it be fixed in the short-term or is it something that needs to be improved over the long-term?

I guess to answer that question I would tell you that you're right, the TCM business has been steadily improving and it has been improving this year. There was more leverage in SG&A, but if you take out the affect of Aitec for example in the TCM business, the gross margins for the legacy TCM year-to-date is comparable, it's flat, but we've got leverage on the effect of the SG&A.

So the real issue is really it's a quarter -- it's an issue in the quarter, not an issue for the year. And I think it's back to, again, it's more seasonal, as you know, because it's more dependent on project work than our TMS Division and off a bigger base. Our utilization levels for personnel were really roughly the same. It was just a slightly weaker quarter than it was a year ago.

It's just a short time period, so there's nothing that you really need to look into that you're concerned about like what had happened in the past?

Correct, that is right. It's a reinforcement, we've got to execute well all the time everywhere. But if in terms of being disappointed that we dropped the ball in this area or have a major remediation underway, no, there's nothing like that going on.

And then I think you mentioned this, but in Aitec, even though the gross margins are lower you're still -- are you getting the 10% operating margin that you expected?

Yes. In aggregate for the year I think -- we will be for the year. We didn't do that for the quarter because it's a very weak quarter for them, they have high seasonality.

And then in improving the operating margin -- or I'm sorry, the gross margin at Aitec, do you expect that to come in line with the overall TCM margins or is it -- I mean, obviously Canada is probably a lower margin environment because of the labor markets. But basically are you trying to make some gains or are you trying to get the gross margins to the 30% level?

Well, our expectation would be similar to similar type services, so it would be more like TCM because its labor intensity is similar to the TCM services, the inspection activity.

Right. But there -- so they're at 29, 30%.

I don't start (multiple speakers) with the promise that Canada should have lower margins than the U.S., that's not been our experience in other businesses.

Okay. Thanks.

Holden Lewis.

And obviously you'll want to stay out of the realm of projections for next year. But just in principal this year you've obviously had somewhat more modest incremental margin contribution than you've had in prior years and obviously that's -- and I guess I'm sort of curious. What do we do in 2009? Can we expect to see the incremental margin, incremental operating margin in '09 better than what we're seeing in '08 in light of the fact that you're still going to be adding technicians, in light of the fact that you'll probably be adding some cost for the headquarters? Just if you can speak a little bit to the fact that incremental margins are a bit lower than history and how quickly you might expect to see those tick back up to historical levels?

A fair question. First of all, if you look at, again as we normally do, real simple delta EBIT divided by delta revenue, if you do it on that basis. And our incremental margins, to your point, Holden, have been significantly lower than they've been historically. One key driver of that of course is the acquisitions, is that we're not buying businesses that have incremental margins equal to the operating leverage of organic growth.

So we need to separate that out of there and then look at the incremental leverage of organic growth, but that too is lower than it has been historically. Again, our goal is a 20% operating leverage. We were very close to that last year. It's varied a little bit year-to-year, but we are lower than that this year.

Our expectation is we're going to be back in that -- I'm not going to hear the forecast 20% next year, but it ought to be better. Here are a couple of benefits we're going to get. One is to the extent of we will still have growth, but I think as our base gets bigger and more mature I think we have opportunities to fine-tune there, but we're also going to see improvements from these acquired businesses that kind of feed into that operating leverage equation. So yes, we still believe strongly in the operating leverage of our business model. Without giving you a specific number, we expect profit growth to significantly exceed the revenue growth.

And a big piece of that is just the acquired businesses will improve?

Well, that is a component of it, but I think there is just also inherent operating leverage and continue to be inherent operating leverage in our business. And frankly, what we didn't capture this year, I'd say to the extent that that's added to our base that's improvement opportunity, isn't it? So as we fine-tune our resources around our activities.

Just a point of clarification also on that relative to the headquarters facility, that facility actually comes on stream in fiscal 2010.

Okay. All right, great. Thanks, guys.

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

Thank you, Gretchen. And I want just to wrap up, thank all of you for your participation in this call and your continuing interest in Team. We look forward to our next conference call to discuss full year results that should be in early August. In the meantime, have a good day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating, you may all disconnect. Speakers, please hold.