Team Inc (TISI) 2008 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to the photo year-end Team year-end IR call. (Operator Instructions). Please note that this conference is being recorded. I will now turn the call over to Mr. Phil Hawk. Mr. Hawk, you may begin.

Thank you and good morning. It is my pleasure to welcome you to the Team Inc. web conference call to discuss recent company performance. My name is Phil Hawk. I'm the Chairman and CEO of Team. Joining me again today is Mr. Ted Owen, the Company's Senior Vice President and Chief Financial Officer.

The purpose of today's conference call is to discuss our recently released financial results for the Company's fourth fiscal quarter and full fiscal year ending May 31, 2008. As with past calls, our primary objective is to provide our shareholders and potential shareholders with an enhanced understanding of our company's performance and prospects. This discussion is intended to supplement our quarterly earnings releases, 8-K, 10-Q and 10-K filings to the SEC, as well as our annual report.

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. Following our remarks we'll take questions from our listeners. With that, Ted, let me turn it over to you.

Thank you. First, as usual, the message from our lawyers and that is I want to remind everyone that any forward-looking information we discuss today is being provided in accordance with the provisions of the Private Securities Litigation Reform Act of 1995. We've 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 could 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 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 fourth quarter were $143.9 million compared to $96.1 million in the fourth quarter last year, an increase of 50%. The revenue increase includes $17.1 million of revenues attributable to the Aitec acquisition that was effective June 1 of 2007 and $7 million of revenue attributable to the LRS acquisition that was completed in January of 2008. The organic fourth quarter growth rate was 25%.

Net income was $9.4 million in the current quarter versus $6.1 million in last year's fourth quarter, an increase of 54%. Earnings per diluted share was $0.47 versus $0.31 in last year's quarter. For the full year, revenues were $478.5 million, again, up 50% from last year. And net income was 23.6 million, also about 50% ahead of last year. Diluted earnings per share was $1.20, up 46% from last year. We are also delighted to note that our organic growth in revenues was $95 million in the year.

Now, for a little more depth around our industrial service business. As a reminder, our industrial services include 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 -- that includes our leak repair, hot tapping, fugitive emissions monitoring, field machining, technical bolting, and valve repair services, and TCM, which is comprised of field heat treating and inspection services.

TMS revenues in the quarter were 61.6 million versus 41.3 million in the fourth quarter last year. And TCM revenues were $82.2 million in the quarter versus $54.8 million in last year's quarter. Both divisions achieved revenue growth of about 50% in the quarter. And again, excluding the impact of acquisitions, organic revenue growth for the quarter was about 25%.

For the full year, TMS revenues were 203.9 million, a 38% increase and TCM revenues were 274.5 million, an increase of 61%. Excluding the acquisition impact, organic revenue growth for the full year was about 30%.

Shifting to operating income, operating income for the industrial service business, excluding corporate costs not directly attributable, was 23 million in the fourth quarter versus 15.7 in last year's quarter, an increase of 47%. Corporate costs were 5.7 million in the quarter. So overall, our operating income percentage was 12% in the quarter comparable to last year's fourth quarter. For the full year, operating income was $45.9 million or 9.6% of revenues, again, comparable to last year.

Now, with respect to our balance sheet and some cash flow information, capital expenditures for the year was $25.6 million, including $6.5 million of costs associated with our future headquarters, manufacturing and equipment distribution facility. Depreciation and amortization for the year was $11.3 million and non-cash compensation cost was 3.3 million. So, our total EBITDA was $60.5 million.

At the end of the year, our net debt was $96.4 million and our total debt was about 103 million. With that, Phil, I will turn back to you.

Thanks Ted. I would like to add several observations and comments to Ted's remarks. Again, this year, Team achieved record performance in sales, net income, and earnings per share. During the physical year, Team improved performance in each of these metrics by approximately 50%. I'm proud of our company's performance this year and in a moment I will offer several additional perspectives on this performance.

But I also want to take a moment to look back over the past several years. I believe an even more noteworthy aspect of Team's performance has been our sustained high growth rate and high level of performance over many years. For example, since fiscal year 2004, Team's compound average annual growth rate for both revenue and net income has been greater than 40%. All of us at Team take great pride in this sustained high level of performance over many years. To our way of thinking, consistent performance and growth are the hallmarks of a great company.

The primary drivers of this success are my nearly 4000 Team colleagues. Team's mission as a company is to assist our customers in safely, effectively, and efficiently maintaining their pressurized piping systems. We provide critical specialty services that are instrumental in plant productivity, up time, and the management of overall system integrity.

Our customers may need our services at any time, seven days a week, 24 hours a day. While some of the turnaround and project work is planned and scheduled, a significant portion of our work remains unplanned repair work requiring immediate mobilization of service crews and key support resources. Last year, a portion of our Team colleagues were working during virtually every hour of the year, completing over 120,000 individual service opportunities.

Our success depends upon our customers having complete confidence both in our service capabilities and also our service team. Our continuing revenue growth and growth in market share reflect this confidence in Team and a growing preference for Team's services. I salute these wonderful Team colleagues for their commitment to service excellence and service leadership. Their performance is directly responsible for Team's overall performance. It is my great privilege to work with this dedicated and talented group.

Now, let me focus on 2008 and share some of our noteworthy areas of progress from my perspective. First, we are all very proud of the significant, broad-based growth in our business. I will focus on the full year results, although nearly all of my comments would also be appropriate for the fourth quarter as well.

Overall revenue growth was about 50%. As Ted mentioned, our two new acquisitions during the year, the Canadian inspection services business, formally Aitec, and the European mechanical services business, Leak Repairs Specam, were significant additions representing about 66 million in incremental revenue.

But these acquisitions were hardly the only source of growth. The remainder of Team's units grew a total of $95 million during the year, representing a 30% overall organic growth rate. Both the TCM and TMS divisions grew about 30% organically. Within these divisions, all 13 regions grew their businesses in last year with 11 of these 13 regions growing at double-digit rates.

Virtually all of our service lines grew at double-digit rates as well last year and our major alliance agreements continued to support our strong growth. Last year, our revenues from approximately 20 multiplant, multiservice alliance agreements grew over 40%.

Despite our strong total and organic growth, both in 2008 and over the past several years, Team remains well positioned for continued strong growth. Several observations support this conclusion. Despite our significant historical growth, our overall market share is still less than 20% in North America and much less in Europe. There is plenty of market opportunity available without adding any new service lines or geographic regions.

Second, demand for our services will remain strong. It is true that we continue to benefit from strong project and capacity expansion activities, particularly related to refining and pipeline customer segments. And we expect the strong project work to continue throughout 2009 and beyond.

However an equally important point is that these cyclical major projects still only represent 10% to 15% of our total market demand, with the remainder related to the ongoing maintenance of existing facilities. The very large population of facilities represent a very stable long-term demand for Team's services. In short, we believe we are well insulated from a volatile business cycle.

Another factor supporting Team's positive future growth prospects is the continuing growth of our service resources and capabilities. During the year just completed, excluding personnel joining Team as part of our newly acquired businesses, total field personnel increased by more than 600 employees, over 20%.

We also continue to maintain the most extensive technical training programs in our industry at the branch, region, and national levels. We conducted over 100 training classes in our Alvin headquarters last year involving over 750 technicians. We purchased over about $20 million of new equipment to support our expanding business requirements, following a similar level of capital expenditures last year. And we also launched a companywide management and leadership training program with over 300 Team managers participating.

Shifting to this year's acquisitions, our newly acquired businesses are off to a good start as part of Team and represent exciting additional growth opportunities. We have already made significant progress in integrating our new businesses into our Team family. As part of these efforts we plan to have all of these Team businesses on a common IT network, common financial system, and with extensive technical and commercial support and collaboration among all units.

Historically and during 2008, the job margins and gross margins earned by these new businesses were several percentage points below those earned in other Team units. We expect these margins to improve going forward as these units benefit from the more detailed project performance measurement available with our financial system as well as from internal benchmarking. Nevertheless, the overall EBIT margins for these branches for the year were still in the 10% range, a positive contribution to overall results.

In the coming year, for our European business, we expect to complete the implementation of our financial and personnel systems and begin developing a more comprehensive growth plan. We have a number of exciting ideas that we're pursuing. For Canadian inspection services, we expect to capitalize on business opportunities throughout Canada as we continue to build and expand our inspection capabilities and resources.

Now, let me offer a couple of comments on Team's margins and overall profitability. As Ted reported, our full year EBIT margins, after accounting for all corporate costs, was about 10%, similar to last year. While Team's overall gross margin for the year declined about two percentage points, this decline was offset by a corresponding decline in SG&A expenses as a percentage of revenues.

Overall, I'm pleased with our profit performance but I also expect to see some improvement in overall margins in 2009 and beyond. As previously mentioned, our newly acquired businesses had lower gross margins and EBIT margins than other Team units. A little more than one-half of the gross margin decline can be attributed to the additions of these business units. For the reasons previously discussed, we expect to see these margins move higher going forward.

We also experienced some decline in gross margins in other TMS units. These decreases were partially offset by increases in gross margins in other TCM units. The TMS declines reflect both an increased mix of more labor-intensive services in several branches as well as some cost creep in personnel and other costs that were not fully offset by price increases. We view this as a temporary situation. We see no reason why we cannot maintain our margins at or near historical levels.

Margin management is a very high leverage aspect of our business and will always be an area of strong management focus. While we have the challenge of managing all aspects of our business in a rapid organic growth environment, with a significant influx of new resources and all the complexity it brings, we also have a sound business model and excellent job management tools.

Now, shifting to fiscal year 2009. As mentioned in the earnings release we are projecting revenue next year to be in the range of $530 million to $540 million, about a 10% to 15% increase. We are projecting earnings of $1.45 to $1.60 per fully diluted share, about a 20% to 30% increase. No potential future acquisitions are included in these estimates.

As with past earnings guidance, we don't provide quarterly estimates. However, at least quarterly and more frequently when appropriate, we will affirm and/or update our annual guidance.

Given our very strong organic growth for the last several years I suspect that some of you may be asking why our revenue growth forecast is below those historical growth rates. Are there market issues that we're concerned about? Is our momentum slowing? Neither is the case. Our business continues to be very strong.

However, I remind everyone that 10% to 15% sustained organic revenue growth in a service business such as ours is really good. I will be pleased if we achieve these projected results. If we are fortunate enough to exceed those growth levels as we progress throughout the year, we will be delighted to adjust our estimates at that time to reflect them.

In wrapping up, let me reiterate that we are all proud of our results this year. Yet, we remain even more excited about our future. Our significant growth and progress in the past year hasn't reduced the future opportunities available to Team at all. Rather, it has only improved our position and capabilities to capitalize on these opportunities. And to capitalize on them and deliver the results we expect, we need to stay focused on the basics of our business.

Our key priorities are to sweat the details and margin management. At our current size, a single percentage point of operating profit margin is about $0.15 per share. We have a fertile field of improvement opportunities. To be the employer of choice in our industry and continue to attract outstanding individuals to our team from both within and outside of the industry.

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

That concludes our initial remarks. Now let's open up for questions. Dawn, I will turn back to you.

(Operator Instructions). Arnie Ursaner, CJS Securities.

First of all, great quarter. First question I have is focusing on the gross margin issue. I guess the question is, are you considering -- you mentioned you do have some higher labor costs creeping up but, why would it be any difficulty -- or I guess the real question I'm trying to get to at the end of the day is, are your customers pushing back very hard on the price increases you need to get the gross margin?

No is the short answer. We serve a lot of large customers and these are sophisticated companies. So, to say that our customers don't care what they pay for things would be an untrue statement, of course, but the cost increases we're experiencing are particularly in labor, fuel, and expenses, commodity prices for the materials that we use as part of our services are being experienced by all competitors as well as our customers themselves. So, it is a very kind of logical discussion to have that our pricing has to reflect those increases.

I think in our view, some of our challenge is that the rate of increases in some of those areas and some geographic areas has been quite high and that we've been a little slow in responding. And so, it's kind of ramping up our efforts and intensity to focus on kind of getting basically our pricing in line with our costs.

These are not huge issues where we our way out of whack, but it's obviously, when one point is $0.15 a share, it's a big deal. So, we are highly focused on it and we see no reason why, as I mentioned in my comments, no reason why our historical margins -- again, mix adjusted, apples and apples, will not be what our future margin should be. So that's really our expectation and focus.

You added headcount quite aggressively over the last three years but it even had a major pickup in Q4. I think you had almost 300 additional headcount in Q4.

That's correct.

Can you give us your view of what you hope the headcount growth will be in the upcoming year? And are you still seeing more than enough work to keep these people pretty busy?

Yes. It was a very strong year. Just again, we were -- you were correct. We were about -- a little over 300 people net increase through the first three quarters and were up again another 300 in the fourth quarter. Overall, for the full year, about 400 of those 600 folks were at our US branches and a couple hundred were in the non-US branches, principally Canada but also in the Caribbean.

And if you look at the fourth quarter, by the way, the 300 increase about 140 those or about half were in, again, the US branches and a little more than half were in the, again, non-US branches. Again, principally Canada and principally reflecting, although not exclusively Canada, reflecting the kind of the ramp up and start of some major projects in those markets.

You know, as I look forward next year, what I'm pleased with is, I think we have internalized and institutionalized a consistent manpower growth model. All of our branches are -- it's an everyday, every month expectation that we will be adding great folks to our organization. So we have that -- we have the ongoing processes and procedures locally in all of our branches continually -- like in recruiting or attracting folks to our organization.

So, what do I expect next year? I think something in the 10% to 15% kind of resource range would be fantastic. So, with our total field personnel, a little north of 3000 or 3500, if we add another 400 plus or minus, I think that would be a great performance. If we have opportunities in some areas, our groups exceed that as they have this year, that would be great too.

Remind us if you would typically, the margin impact as these employees are being trained and starting up, typically when do they reach a point where they are fully productive?

You know, I don't view that we have a -- if you will, lost time. It depends obviously on whether it's a completely inexperienced individual or somebody someone who's got some industrial experience or ideally, maybe experience in our industry. You might have a week or two of training, safety training and some basics in order to be able to kind of fill or help a role. But basically we think these individuals on fairly short order can be productive individuals as part of our team. Again, in reduced roles or helper roles as part of our service teams.

Where I think the challenge is, is when we bring in very large numbers of people to individual branches, that's just a lot of additional management responsibility to again manage and kind of cope with or deal with increased resources and personnel. So, that's where maybe some distraction, related to that rapid growth can have some effect on our efficiency and utilization of resources. I don't think it's really -- I'm going to say investment in the front end of getting someone ready to be a contributor.

Final question if I may. Q1 -- how is the carryover work from Q4? Can you give us your view of Q2 turnaround work? Sort of what we're looking at demand-wise in the current quarter and in Q2 for turnaround work.

You know, obviously we're just a month into the first quarter and as I reported, we are continuing to be busy and think we're not dissimilar seasonally than last year would be kind of my overall guidance from that standpoint. Our expectations for Q2 are very strong. We see a lot of activity out there.

Look forward to seeing you at our August conference. Thank you.

Matt Duncan, Stephens Inc.

Congrats on a great quarter. A couple of questions. Going back to this margin thing, just to make sure we've got kind of a full understanding of what's going on kind of on the cost creep side, with the significant number of personnel additions that you had this quarter, 300 techs in a single quarter is quite a bit more than what you've been doing. Is that part really of what we may be seeing with the weight on those TMS margins?

It's the first portion of that. I will tell you one of our non-US projects that we ramped up that had significant increase of resources was, I'm going to say, a heavy labor intensity project where we didn't have a lot of other equipment and materials as part of the project. It was just the nature of the work. Labor-only work will have inherently a little bit lower gross margin or job margins than work that has a mix of labor plus equipment rentals, materials, etc. So, we do -- that's a portion of the equation.

But, I would also point out that when we have those big projects and things of that nature, they also are not very taxing on SG&A. So, when you get down to total EBIT impact of those kinds of projects, they are fantastic. So, we certainly welcome those.

But, that's not the whole story. We did back a little bit in some areas just in terms of on an apples and apples basis for gross margin or job margins in a couple of areas. And that's really what I was referring to the latter, which is the fact that our wage increases and some of our other costs weren't fully reflected in the price increases that we have achieved to date. And that's maybe a point or so and that's really what we think we can recover and are focused on doing just that.

And if I look at your gross margin then, and going back to fiscal 2007, it was 34.6%. What is the expectation that you can get back to that level? And if so, how quickly would you expect to see your business be back to that level?

No. I wouldn't expect that because of the mix effect of, again, our inspection and heat treating services are much bigger portion of our business as a result of the former Aitec acquisition, our Canadian inspection services. So just the mix of, I'm going to say, more labor-intensive services is higher than it was in 2007.

Okay but again (multiple speakers) the operating leverage at the SG&A line significant with that business, correct?

What's that?

The operating leverage that you would see from those two businesses, while their gross margins are lower, their operating margins are not, correct?

That is correct. In fact, we really have comparable EBIT margins for our two divisions today. When you talk about the legacy businesses or excluding the new acquisitions, so why they have different gross margins and they are different by a couple of points I believe, something in that order of magnitude, a couple or three points. Our EBIT margins or branch level margins are the same. We believe the operating leverage is the same.

And, candidly, I look at gross margin once a quarter to get ready for this call. But, what we focus on our job margins and then also EBIT margins or branch margins.

So, if I'm hearing you correctly, kind of the margin expansion is really an initiative for fiscal 2009 is -- just kind of trying to get a sense of what type of margin expansion you would be happy with. Is 100 basis points kind of bogey? Is that what you are looking for?

I think so. I think that would like to -- I mean that's a little bit of a swag. You could probably -- again, I didn't manage in this way but I think you look at our guidance, it's probably about a point of EBIT margin embedded in those estimates that we're giving you.

The point I would make, though, is that rather than -- it's not that we're broken but, the point I would make is that just margin management is incredibly in an -- and a very high leverage activity for us in that we're never done. That we'll never just sit back and say we're set, we can work on something else now.

It's with 120,000 plus jobs and growing every year, the way you make it is the sum of those 120,000 jobs. So, it's every manager, everyday, managing the profitability of every job. It's the sum of that effort that generates the margins that we earn.

Sure. Moving on them to the two acquisitions you guys have made, it looks like those are performing very well. Can you maybe talk about (technical difficulty) Aitec? You have that for the full fiscal year. Maybe if you kind of look back at the year, how did Aitec perform in its first year as a part of Team versus the expectations you guys had when you bought it? And can you tell us how accretive -- what the impact of that business was on earnings for the year?

As I mentioned in my remarks, the EBIT margins of the business was really about in line with what are expectations were. It was about 10%. What delights me, though, is the quality of the organization that has joined us. We have great colleagues from this new business.

And the same, by the way, although we have less time with them in the acquisition, the same is true for our European colleagues. These are just great folks. They are absolutely consistent with our culture and values and the things that we are already doing together and collaborating in terms of cross selling opportunities and future growth opportunities are fantastic.

So, while our financial results I think were about what we expected, I think my anticipation of what we're going to do together as a combined entity is higher than it was. I'm again just delighted with our new team and colleagues and appreciate the real positive contributions they've been making.

What were Aitec sales for the full year?

54 million. And the EBIT contribution was very consistent with what we had kind of announced going into the transaction. We did about 11%. I think that our plan was for 10%.

And moving on to LRS, let's talk about Europe for just a moment here. You guys now have owned that business about six months. What have you learned about that European market over the last six months? And sort of maybe walk us through your growth plans for Europe going forward.

Well, we'll walk you through them when we have them on the second question. But let's just talk about what we learned or what we expected when we -- when LRS joined us is that we expected our new colleagues to fit right in because again, remember they had been a licensee of Team for more than 25 years.

So their operating procedures, practices, service culture, their success and their markets very similar to the, I'm going to say, North American Team. So we expected no issues at all in terms of bringing them in from an organization standpoint and they are fitting in with our approaches and that has been the case. Just a terrific group. We're really excited and proud of our new colleagues.

We have done some initial exploration of the market for growth out there because that was really, as you know, the real thrust here is that we have a very strong base of business. But it's a small base in the Netherlands and Belgium. We believed and still believe that we could leverage that base with more, with our full suite of industrial services in those regions as well as in a broader European presence.

Our initial kind of discussions with customers over there, again, with the LRS management just talking about some of our ideas about a broader presence in Europe and multiplant, multiservice agreement service agreements was met with great enthusiasm. No one is doing that in Europe today and that's going to be a great opportunity for us.

So now as I mentioned our plan is to really understand where the lowest hanging fruit is and go from there. So we're looking at which incremental geographic expansions make sense from our base and also how we might bring additional services into the Netherlands and Belgium, again where we have strong relationships and very strong service capability.

Last thing and then I will jump back in queue, just a couple of quick things. On the National Alliance agreements, you said those were up 40% for the year, is that correct?

That's correct.

So, if I look at your total growth, your organic growth of 30%, what does that translate to? How much of that 30% was from these National Alliance agreements? I guess maybe a better way to ask it would be what portion of your total revenues are those now? And then we can calculate it.

I think it's roughly about 25% of our total -- (multiple speakers) about 30% -- (multiple speakers)

About 35% in total.

About 35%?

Yes.

And then last thing here, kind of looking at your age service lines, what -- which of those service lines are growing the fastest right now? And then I will jump back in queue. Thanks guys.

I guess I would just say that all of them grew last year and seven of the eight grew double-digit rates, and the one that didn't grew at a huge rate the year before. I think our -- we have had more [wrap] -- so everything is growing and we're really proud of that. I think our turnaround service project work is growing at a slightly higher rate than, I'm going to say, our onstream services. So, those would be the field machining, bolting, field valve repair, heat treating services.

Byron Pope, Tudor, Pickering, Holt and Company.

As you guys think about your guidance for fiscal 2009 in terms of revenue growth, what are the key items? What are the key signposts that we can look for? And I know there's the kind of inherent seasonality of the business, but again from a high level what are the key issues or signposts that we should be looking for in terms of gauging whether or not you guys are tracking toward the low or high end of the range? Again, just trying to bracket what the key assumptions are.

Well, there's not a lot of science here you know, on our guidance going forward as we have -- as I kind of said in remarks, what we kind of generally set as our target each year is to grow our top line of our business at a double-digit rate and then expect that would leverage create -- from the inherent operating leverage, expect to drive a 20% plus earnings growth. And that's kind of how we start each year.

As I mentioned, I think our market continues to be very strong. I think our challenges are basically to, in an orderly way, while maintaining outstanding service and capability, keep growing our resources. That's what will drive our top line. So if you look at our trends in terms of revenue growth and kind of historically look at our trends in resource additions, those are things that will ultimately in our view drive our future revenue growth.

Okay, so there's no inherent assumption about the pace with which your major alliance work grows relative to the other work?

In fact, one of the comments I would just make on that is that yes, they have -- it was growing faster than overall last year. It grew about the same pace as organic growth the year before. If I look at the -- what I -- or what we do a little bit of calculation of market share by customer, although it's rough in general, the highest marketshare I think we have of any alliance customer is in the 30% range. So, this notion that we're out of -- we're going to top out I just don't see it.

And again, overall market share in North America is no higher than 20%. So again, despite all our growth as I tell our teams, the good news is, you don't have 80% of it. So, go get it. We've got plenty of opportunity market wise. We just have to again prove that we deserve it and can earn it with great resources.

Very helpful. And then, Ted, just one quick question, in terms of the 2009, what are you thinking in terms of CapEx at this point?

Still about the same $20 million level for equipment.

Rich Wesolowski, Sidoti & Company.

Why do you think refinery capital budgets have remained so strong while their profits have gone away? Maybe what gives you confidence that the market is going to last?

Well, a couple of things. One is, I'm struggling with a little bit with the premise that profits have gone away. But, let's -- because (multiple speakers)

At least temporarily.

I look at the frac spreads. But very honestly when you look at projects that are underway, projects are undertaken basically based on an, I don't know, 30 year time horizon and premise about what margins will be. These are not projects for next week. Many of these projects won't even come online for another year or so.

So, the fact that a short-term crack spread, if they are compressed, and again I think there is some data that wouldn't support that, but I will accept that kind of -- that's clearly with the generally industry [theme], but if cracks spreads are depressed a little bit in the short run it really shouldn't make any difference to a refiner. I guess in theory, it could affect their cash flows a little bit.

But again, these refining companies -- these are very big, well capitalized companies. They are not kind of switching on and off 30 year projects based on one month, one quarter, maybe even one year or a couple of year kind of margin experiences. It's going to be based on their long-term presumption about margins.

Secondly, can you talk about the execution performance of your branches in FY 2008 versus a year ago? I know there's always those on the wrong side of the bell curve, but how many branches do you have that are persistently or even chronically underperforming?

Very few. You know, when you have 100 branches and by the way what we have kind of very stable overall demand growth, strong demand growth as we've talked about, the variability of that increases as you get -- as you decrease -- as you go to more and more levels of granularity. So, there will be more variability regionally than there is nationally, and then when you get to individual branches there can be very large swings in volume in a given year because of the timing of particular projects within that geographic area.

So, when you have a fairly significant fixed cost, if you will, embedded in a branch and you have high variability and volatility you can have -- in any one year you will have branches struggling financially. You know as they're trying to adapt to kind of a different resource level to their activity level. So, we always have a handful of branches each year that are -- kind of had less profit than the year before or profit levels that frankly on a sustained basis would be unacceptable to us.

But in terms of chronic branches, and this was an issue we had when we bought Cooperheat-Mqs four years ago, we had 8 to 10 branches that were -- had kind of lost their business momentum due to the bankruptcy and that we -- they were chronically underperforming. All of those issues or nearly all of those are nonissues today. Many of those are very, very successful branches.

So what we deal with is just the law of 100. With 100 we always have a handful. It's a different group every year and we kind of focus on how we support it, how we leverage our network to enable those branches to perform up to their potential.

Right, but that sounds like bumps in local market demand rather than execution mishaps or what have you.

Right.

Given that they are performing well, do you think there is any opportunity for you to raise margins at the project level aside from pricing? Is there anything else you could do or is the margin increase implicit in your guidance based on, one, Aitec and two, pricing?

I think it's the latter because I think it's not completely true, but it's nearly completely true, nearly all of our work is kind of -- on a time and materials basis. So, we don't really have a chance as you think about margins, just doing more work or doing it quicker, faster all that doesn't do a lot to margins.

Obviously, if we have upsets or we make mistakes that are our responsibility, we would incur incremental -- excess cost. We wouldn't expect customers to pay for our mistakes. But, there's not a lot of that going on. So, I think margin improvement is pricing for the most part.

Thanks for the great detail.

Arnie Ursaner, CJS.

First a real quick question. Ted, when you gave the CapEx number for 2009, the 20 million, that's equipment; that does not include expenditures for the new headquarters, is that correct?

That is correct.

Okay. And that will be an incremental 5 million?

Well, over the course of fiscal 2009, we will complete the headquarters building. The total project cost for that is estimated to be at about 30 million in the aggregate. That will come online in fiscal 2010.

Got it. Different question if I can. I knew you guys are doing some work on the Motiva refinery. But can you broadly comment about sort of opportunities you see for new refinery work that is likely to be on the boards in the next few years? I always thought of you as being more reactive after the plants are up and running. But are you also seeing some pretty good opportunities to get involved earlier in work on refineries and other projects?

You know, we don't generally talk to specific plants and the reason we don't is that, although as you point that we're working with Motiva project in Port Arthur, it just in our view puts undue emphasis on a single job and we are about kind of surfing lots of jobs in lots of areas.

So, but to your broader question, are we serving kind of -- are we involved or are there other opportunities with plant expansions, absolutely. And there are lots of them out there. You mentioned the Motiva project. There, the plant expansions I can think of that are going on. There's the Garyville, Louisiana. These are all publicly available information. Marathon Garyville. There's a Marathon Detroit project. There's the British Petroleum whiting project related to bringing in Canadian tar sands, oil upgraders, bitumen.

Those are the ones that come to mind. I think Conoco at Wood River is looking at a project. So there are a lot of projects out there. But the point I would again make is, for all -- as exciting as those are and we love them. We chase them all. It's only 10% to 15%.

So, what I like about our business is, we have got this huge base of kind of installed facilities that if they are running they're going to need our services and we're out to earn a bigger share of that as well.

What sort of work are you doing on these new construction projects if you will?

Inspection, field heat treating, bolting, field machining.

And is that part of your National Alliance that you're seeing this growth or are these independent of that?

They would generally be independent of that because they are related to a lot of them -- the new construction would be work we do for contractors.

Holden Lewis, BB&T.

On the margins, as I'm doing some of the math here, it seems to suggest to get the midpoint of your revenues, the midpoint of your EPS, it really assumes about -- I think you alluded it's about 100 basis points of improvement on the margin. Now, presuming that you increase the margin and you certainly can tell me if any of these pieces are wrong, but assuming you increase the margins on the acquired businesses by 200 basis points, that's about 30 basis points to the aggregate.

If you grow the corporate at about half the rate of revenues it's probably about another 20 basis points to the aggregate. And so I guess I'm curious about the additional 50 basis points that comes, not from the corporate leverage, not from the acquisition improvement. Given that we just came off a year where you didn't have a lot of margin improvement, I was just sort of curious about that other 50 basis points.

And I guess another way to look at it is, it looks like the incremental margin you're assuming is about close to 20% for the year again to get to those midpoints. And again you are coming off a year where you're at 10%, the year prior you're about 15% which didn't include the acquisition. Just seems aggressive and I just wanted to make sure I understood the pieces that get United States noncorporate leverage and the non M&A contribution.

You've got a -- you probably have a dissection of margins that's a little more precise frankly than we've done in our own shop. But just in terms of the inherent operating leverage of approaching 20%, I agree with you. We didn't hit it this year. As you said obviously we didn't because our margins -- EBIT margin didn't change with our revenue growth.

As I reflect on the prior year, though, if I take out some kind of special charges and related investigation and take out some of the non-cash things, I think we actually are at about 19% from last year. And back to this little bit of catch-up, if we just catch -- it's not that everybody's margin went down. It's that on average the composite went down a point or to. So if as we kind of look at recapturing that, it's not kind of learning a new skill we've never had, it's just catching up a little bit with that.

So, I am pretty comfortable with that. I don't see -- I'm not particularly viewing our earnings guidance as a stretch. But, what we are confident in, that's where our budgets are, candidly.

Okay and when you look at the pieces, are you also comfortable that maybe sort of the revenue guidance based on what you're seeing right now looks a little conservative, so, to the extent that maybe we repeat the last year or what have you on the margins, you are pretty comfortable to make it up on the sales side.

You know, we aspire to that every year. I guess as I said my comments, I think we just better be -- all of us ought to be thoughtful and careful about just automatically assuming we're going to grow organically 20% plus. These are huge numbers.

Okay. And can you comment on sort of the corporate growth? Is assuming half your rate of revenue growth the right number? What do you guys aspire to limit the corporate growth to?

Well, I guess we want to be as efficient as we can be. A significant part of the corporate growth this year was non-cash compensation expense related to stock options. That will continue to creep up. We are shifting from stock options to restricted stock, which will kind of dampen further growth of that number because, again, with our stock appreciation, without getting into all the fine points of it, the way stock option expenses are calculated, they become too expensive for us to use.

Just comments also, I guess Dolly hitting Texas sort of in that stretch, any impact from hurricane or weather that you're seeing, anticipating, how should we view that?

It's a nonissue. Dolly is just a storm really. It's nothing. But the thing I would just say about if we have a major hurricane, there is pluses and minuses to all of those. And I'll point back to Katrina which was obviously just a gigantic upset to our system.

There it had some near-term effect as we just lost facilities to work in. But, of course then we have to rebuild all those facilities so it had a longer-term beneficial effort. So, I don't think major storms are going to affect us for the year or beyond. They could affect if you had a major storm with major disruption in a significant producing or I'm going to say refining, industrial complex area. It could have an effect for a particular quarter. But Dolly is nothing. So there should be no consideration to that.

Okay, and then just lastly, can you just comment on your non refinery businesses, the petrochemical and other sort of high-pressure applications and how they are performing?

I think the -- again we continue to grow, increase our penetration in those segments as well. I will say that our general customers are pretty healthy right now, not only refining but power, pipeline, and particularly healthy steel has been very, very good recently. I think pulp and paper may -- kind of has been depressed for many years. I think it continues to be.

Frankly, we're getting some reports on chemical companies that they are -- some of the strongest margins they ever had and it's driven by exports. So, we see the weak dollar is creating some opportunities for some of our customers.

[Brian Crawford, Premiere Capital].

Quick question, just a couple of housekeeping items. Could you talk about a little bit about what was your cash flow from operations in the quarter and how are receivables trending for you guys?

Receivables are actually improving in comparison to last year. Our DSO at the end of year was about 78 days. Hang on just a second. I think I probably have that cash flow number that you ask for. Actually, for the year, cash flows from operating activities was about $30 million. Slightly negative in the quarter because of the rapid ramp up of accounts receivable associated with the seasonally strong revenue growth.

One final quick question. Utilization of your technical staff -- is that something you guys track and talk about in these calls? I would assume given strong revenue performance, that's been running from -- historically it's been running really high. Could you talk a little bit about where it's at and what do you think is sustainable?

I think we are kind of at full utilization in aggregate or generally there. And -- but we expect it to stay there. Again, you were right. The very largest, the most single, largest expense we have is people. And, how we utilize those people or particularly technicians in terms of kind of making them productive or putting them on billable projects is really a key to our kind of economics at our branches and then kind of rolling up from there.

So, our financial system generates a utilization rate by individual by week. And that is the tool that our local managers are using to make sure that they are getting -- basically productively using their labor. If we look at our overall utilization rates, kind of billed hours to total available to be billed hours, those rates range in the low 90% level to I guess up to kind of the mid-90% levels depending on the nature of the services, predictability of demand, etc. And, that's kind of where we have been and continue to be. So, that's what we focus on.

Our challenge is, and we've seen it in a couple of times in some of our weaker seasons, you bring resources on for our very strong periods. But because of seasonality, then, we get into summer or the Christmas holidays where we are where we have as a percentage of billed hours more unproductive hours. So we have some utilization effect seasonally in those time periods. And so we manage that or certainly get with our management to manage that locally very tightly.

And so, you haven't seen any issues with turnover or anything like that? Those are pretty high utilization numbers.

No, we're actually trying to increase our -- improve our retention rate. That's one of the reasons for our leadership and management training programs is to improve our abilities to work with all our colleagues to make Team a greater -- a better place to be.

Holden Lewis, BB&T.

How exactly did we fall behind on the pricing side? I ask primarily because the dynamics really haven't changed. You had the need throughout the year to raise pricing. You have been adding a ton of people. Demand has been good. It doesn't seem like anything has changed as the year goes on in terms of dynamics. And in the past you have been keeping up it seems, and then in the fourth quarter it seems like we fell behind a little bit, if I'm sort of reading your comments right.

Why -- what was different about Q4 that caused us to fall behind? Was that kind of maybe not paying as much attention there as you should have or was there some new dynamic that we're unaware of? It just seems like it was a bit different from the comments in the past.

I think it's not a fourth quarter issue. When you -- again, we're the sum of a large number of projects, so mix has significant effect or can have significant effect in terms of kind of averages when you look at that. If we look at the fourth quarter, I think the additions of some significant labor-intensive projects are affecting kind of apples and apples mixes in terms of comparisons. So I don't look at -- I don't really think there's much information in an individual quarter's information or data.

Where -- I will tell you here's how it's happening, is that we -- we mentioned Beaumont or the Port Arthur projects or they could be anywhere along the Gulf Coast. We have some significant projects going on. We have big contractors move into an area, and basically, needing general industrial service labor to staff their projects. So they come in basically trying to acquire resources. Not necessarily our individuals directly but just general and industrial service personnel. So they drive the labor rates up in those areas when they move in.

And our approach and our attitude is that we're going to be competitive and we're going to have attractive rates for our folks. So, that means that if we have to, on the fly, make adjustments in and adjust our rates, we're going to do it.

Now what we then have to do, because it would be true for everybody, all of our competitors, we have to then turn around and get price adjustments to reflect -- basically to cover those rate increases. And, I think in certain parts of our business, certain geographic areas that's been more aggressive in the last year or so than it was historically. So, that's the new dynamic. But the basic fundamentals are the same.

And since everybody else -- it's not like anybody can bring their -- can import their labor from China or some other low-wage kind of base area. It's all inherently local. We all have the same pressures at work. We just have to work to pass it through.

Sure. So it's competition for labor which is fine. But again, that competition for labor seems like it existed throughout the year. I think this is the first quarter where we really had a conversation about it negatively impacting your price in a given quarter.

Well, again, all my conversations were about on full year. So, something we've been focused on all year long. (multiple speakers) mentioned it previously.

At this time, we have no further questions. Do you have any closing remarks?

Yes, I will take the floor here. Just to wrap up, I want to thank all of you for participating in this call and your continuing interest in Team.

Just to wrap up, a couple of key discussion points today, we're pleased with our overall performance and progress. Fiscal year 2008 was another record year for Team. And while we continue to have improvement opportunities, we're nevertheless very proud of the progress we're making.

We're optimistic about 2009. Our business outlook is strong and we're confident that we have the programs in place to capitalize on these opportunities. We remain pleased with the positive business momentum. We look forward to updating you on our progress during this first quarter of our new fiscal year around the first of October. So, with that, again thank you for your attention and everyone have a good day.

Thank you, ladies and gentlemen. This concludes today's call. Thank you for participating. You may now disconnect.