Team Inc (TISI) 2009 Q4 法說會逐字稿

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

I would now like to turn the call over to Mr. Phil Hawk. Mr. Hawk, you may begin.

Thank you, Hilda, and good morning to everyone. It's my pleasure to welcome you to the Team, Inc. Web conference call to discuss recent Company performance. Again, my name is Phil Hawk, and I'm the Chairman and Chief Executive Officer of Team. Joining me again this morning 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 year ending May 31, 2009. 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 will take questions from our listeners.

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

Thank you, Phil. First, as I usually do, 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 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, for a discussion of our financial results. Revenues for the fourth quarter were $121.2 million, compared to $143.9 million in the fourth quarter last year. That's a decrease of 16%. Net income was $5.6 million in the current quarter, versus $9.4 million in last year's fourth quarter, a decrease of 41%. Earnings per diluted share was $0.29, versus $0.47 in last year's quarter.

For the full year, revenues were $497.6 million, up 4% from last year, and net income was $22.9 million, down 3% from last year. Diluted earnings per share was $1.16, compared to $1.20 in fiscal 2008.

There are three points I want to emphasize regarding our results for the quarter and the year. First is the effect of the recession, second the impact of foreign currencies, and then third a comment on our tax rate.

First, with respect to the recession, as Phil will emphasize more fully in his remarks, fiscal 2009 really was a year of two halves, with the full brunt of the economic recession hitting our serve markets in the second half of the year.

To illustrate, in most years our second half operating results are fairly consistent with the first half of the year. Clearly that was not the case in fiscal 2009. Through the first half of the year, our revenues were up 21% over the prior year and our earnings were up over 34%. That completely reversed itself, however, in the second half, with revenues being down 11% and earnings being down 37% versus the first half. Now, that second half performance was in line, however, with our guidance in connection with our third quarter earnings call that we held in early April.

Another point, relative to foreign currency exchange rates, principally with respect to the Canadian dollar, currency exchange rates had an unfavorable effect on revenue of $4.5 million in the quarter and on operating income by about $400,000 in the quarter. For the full year, the unfavorable effect on revenue of exchange rate differences was $19 million and on operating profit was $2.2 million.

And finally, with respect to our effective tax rate, in the third and fourth quarters we benefited from a reduction -- from a reduced tax provision as a result of the recognition of R&D and HR-related tax credits totaling about $800,000. This caused our tax provision for the year to be 37% of pre-tax income. Just pointing out to you that we expect this tax rate to return to a more normal rate of about 39% in fiscal 2010.

Now, with respect to our balance sheet and cash flows, CapEx for the year was $16.4 million. That's down from $25.6 million last year. Depreciation and amortization for the year was $11.7 million, and non-cash compensation costs, or FAS 123R expense, was $4.6 million. So, our total adjusted EBITDA for the year was $57.7 million.

At the end of the year, our net debt, that is, total debt less cash, was $68.9 million. That's a reduction of $28 million in the course of the year.

In the midst of this economic -- this current economic recession, we continue to be pleased with the financial position that we're in. As of the end of the year, we had about $68 million of unused capacity under our credit facilities, which, again, as a reminder, do not mature until 2012.

And so, with that, Phil, I'll turn it back to you.

Thanks, Ted. I have a number of observations and comments to add to Ted's remarks. Team is very strong and healthy financially. Despite the worst economic environment since the Great Depression, Team posted the second best earnings results in the Company's history. EBIT margin as a percentage of revenues was about 8%, down slightly from the preceding year but still very healthy. Reflecting the attractive, low-asset intensity nature of our business, after-tax return on equity was more than 17%. And our balance sheet has never been stronger.

Of course, as Ted reported, the full-year results reflect a tale of two very different half-years. Following approximately 40 consecutive quarters of revenue growth, Team's total revenues declined in each of the past two quarters. This reversal of performance trajectory raises many questions. Let me ask and answer a number of them here.

Has the demand for Team's services fundamentally changed? If yes, what is the new demand paradigm? If no, when can we expect a return to normal? As we have discussed in previous calls, approximately 85% of the demand for our services is directly related to the maintenance of existing pressurized piping systems and related equipment. The fundamental driver is the natural deterioration of piping systems that occur during operation due to the hydraulic, thermal and corrosive forces at work. As long as these facilities are operating, they will continue to deteriorate and will continue to require maintenance services.

The remaining approximately 15% of the demand for our services is related to the development and installation of new facilities or expanded capabilities within existing facilities. This project-related demand is expected to fluctuate with the economic cycle based on industry expansion plans.

So, how is current demand tracking relative to this general understanding? Overall, demand is lower than we would have expected. What we are seeing is an approximately 10% to 15% decline in spending for maintenance services at existing facilities. While perhaps a small portion of this is due to idled plants, we believe the bulk of this decline is simply due to deferrals and minimization of near-term maintenance spending as our customers struggle to adapt to their very weak overall market environments.

For customers within several industries that we serve, demand declines and profit margin declines of 50% and more have not been uncommon. These are extraordinarily tough times for many customers.

This then leads to the next related question. Is this a temporary condition or the new normal? We believe it is the former, a temporary condition. To argue otherwise implies that one of two scenarios is happening. One, that we should expect a large-scale closure of existing facilities in North America, or two, that our customers have been overspending on plant maintenance for the past 50 years. Neither of these scenarios is likely, in my mind.

So, when should we expect to see a rebound? Obviously, it is difficult to know precisely. Any specific forecast would just be speculation on my part. However, we do know there's a limit to how long maintenance activity can be deferred and -- or minimized. In past periods, we have seen turnarounds pushed out six months to a year but not much longer. We have not yet seen any improvement in our activity levels. Through the first month or so of the new fiscal year, our activity levels have been stable but at a level below the prior year period. Simply said, we don't expect further declines from this level, but we haven't seen any improvement yet either.

Has the competitive landscape changed? Are new or different service offerings threatening Team's position? The short answer is that Team remains well positioned to not only maintain our current market position but to continue to expand our penetration. There are not any new significant competitors or new service offerings impacting our markets.

It is true that many of our customers are currently very focused on how service providers, like Team, can help the customer improve its overall costs and productivity position. We believe these difficult market conditions will provide even more focus by our customers on service consolidation with fewer larger service providers. With our large service line offering and North American-wide service network, Team remains extremely well positioned to benefit from these trends.

Which leads into the third key question -- what is Team doing to respond to this market downturn? Long term, Team is committed to a growth strategy where we continue to capitalize on both our outstanding service capabilities and the breadth of our service network. As I remind my Team colleagues, our 25% compound annual growth rate over the past decade wasn't a stroke of good luck. It reflects our sustained ability to earn an ever-greater share of the market. With less than a 20% overall market share today and the same basic market and competitive fundamentals, there is considerable future growth opportunity ahead for Team.

Of course, we can't and won't just stand by and wait for the market to improve. Without impairing our service capabilities or longer-term growth potential, we are balancing current costs and resources with current activity and revenue levels. Our initial staff and other cost-reduction initiatives were taken in early February. Since then, we have trimmed our staffing further and taken other steps to reduce compensation and other related expenses.

We are seeing the benefit of these steps in our cost structure in the just-completed fourth quarter, and expect even further benefit in the current fiscal year. We expect the total support cost in the current fiscal year 2010 will be approximately $10 million less than the year just completed.

I would now like to make a few comments about the investigation of one of our branches in Trinidad. As reported in our recent 8-K filing, we believe that Team employees in Trinidad made improper payments related to Team work for government-owned enterprises, which may be in violation of the FCPA.

Based on current information, we believe that only a single branch in Trinidad was involved and that no Team personnel outside of that branch had any involvement or awareness of the scheme. We have self-reported the potential violation to the US Department of Justice and the Securities and Exchange Commission, and we intend to fully cooperate with them.

While the Trinidad branch is only a very small part of Team, and we believe the payments themselves are also small, the actions discovered are serious and will not be tolerated. They are not consistent with our core values. Even a single inappropriate action reflects poorly on our entire company. The branch manager and others in the Trinidad branch that were determined to be directly involved in these actions have been terminated. We are currently in the process of developing and implementing a number of enhancements to our processes to improve our controls and oversight related to these matters.

Looking ahead to the current fiscal year, we expect first half activity levels to be similar to the last half of fiscal year 2009, with some modest improvement in the second half of the year. We are currently projecting that total Team revenues will be between $460 million and $490 million for the year. We are projecting earnings to be between $0.85 and $1.05 per fully diluted share.

Our near-term focus this year is on outstanding execution in every respect. All of our branches are working hard to find and earn every service opportunity available. At the same time, we are fully funding and maintaining all of our current business development initiatives. On the cost side of the equation, we are closely managing our business branch by branch, focusing on the key fundamentals of job profit margin and labor utilization.

We see no reason why we cannot have attractive earnings and earnings margins at the projected volume levels, and we expect to do just that. We are committed to staying strong financially, operationally and strategically, regardless of our market environment.

Let me wrap up with a few final comments before we open it up for questions. The severe recession is likely to continue affecting our business and opportunities for a while longer, but it is not changing the basic fundamentals of our markets and Team's competitive position. We expect to stay strong financially and maintain attractive profitability while we work through these difficult market conditions. As our markets move back toward more normal conditions, we look forward to restoring our growth, orientation and momentum.

As always, we fully understand that all opportunities that Team may enjoy, regardless of market conditions, result from our customers choosing us, not vice versa. Every one of us at Team is committed to re-earning and affirming that customer trust and confidence with every service opportunity. We have exciting opportunities ahead of us, but we still have to go earn them.

That includes -- concludes our initial remarks. Hilda, let's now open it up for questions.

Thank you, Mr. Hawk. (Operator instructions). Our first question comes from Matt Duncan from Stephens. Please go ahead.

Good morning, Phil and Ted, and congrats on a pretty solid performance this quarter in spite of market conditions you're facing.

Morning, Matt.

Good morning, Matt.

The first question I've got is with regard to pricing. It looks to us like from the gross margin you put up in this quarter, it seems to be holding up fairly well. Can you just give us some general comments around what pricing for your services has been like in these difficult market conditions?

I think your general conclusion would be our conclusion, that it's holding up fairly well. As we mentioned or alluded to, these are extremely tough times for our customers, and they're -- many of them are asking for help and kind of visiting with us and really all of their service providers, looking for ways to improve their costs and productivity. We're actively engaged in those conversations.

Again, our thrust with these customers is to fully engage and share with them and talk through all aspects of these issues and their needs and our circumstances. A couple things that we really focus on is -- because I think there's sometimes an impression in some of these customers that there have been very, very large price and margin increases over the past several years that, again, they're hoping to recapture or kind of, I guess, reflect the deflation back in their cost structure.

That, frankly, just isn't the case with us, and so a lot of the things that we share with customers is just what our historical price increases have been with them, and we share with them our margins. Obviously, we're a public company and walk through that.

So, that -- with the context of that, then we work through what are some reasonable ways we can work together that are win-win. We do fine-tune rates in -- from time to time with individual customers, but our real thrust and really where the real leverage is is kind of leveraging volume for our kind of broader presence.

And I think kind of combined with all of that, what we expect is not a material change in our job margins overall. And I -- but again, we need to, again, stay very close and responsive to our customers in response to their needs, and that's what we're trying to do.

Sure. Thanks. That's helpful, Phil. And then sort of along this same vein, in this environment, are you seeing any improvement in your penetration to master service agreements? When you look at the ability for your customers to sort of reduce price through volume, are you seeing any impact from the environment on your master service agreements?

It's hard to read it right now in the short run because of just the dramatic demand swings, so it's hard to know that in total. If I look at our alliance agreements in total for the last fiscal year, they grew slightly larger faster than the market in total -- or our revenues in total, so I would say that's a positive indicator.

But in terms of kind of whether I can point to very specific situations where work has been shifted from another service provider to us directly related, say, to these conversations in the last several months, no, I can't point to many.

Okay. And then last thing here, and I'll hop back in queue. When you look at the range of your guidance, I'm just curious if you can kind of give us some insights into sort of how you came up with the low and the high ends. And maybe another way to ask this would be does the low end of your guidance assume that you would have to see further in-market deterioration to sort of come in at the low end of that guidance?

No, I don't think so. I think if you look at our second half of the year plus the kind of cost reductions that we've taken -- I haven't done the complete numbers, but they'd probably be pretty close to the low end of that. I think the low end is related to the volume levels.

Okay. So, to see sort of the midpoint or higher guidance, you would need to see some improvement in the second half of your fiscal year. But at this point, I guess, from our perspective, it -- that should be expected given that there's been so much maintenance deferred over the last year and there likely will be over the next six months.

Yes. I think I might state it slightly differently, that the key driver for us for real -- for significant upside is volume. And we are expecting a little, as you can see in our revenue numbers in the second half, as we said earlier, and that's really the -- going to be an important driver for us.

Okay. Thank you, Phil. I appreciate it.

Our next question comes from Arnie Ursaner from CJS Securities. Please go ahead.

Hi, good morning. I know you don't comment on quarterlies, but want to at least get a little better feel for the trends that we are having as we enter into the current quarter. Normally, your June and July activity would be impacted by carryover work that you had in Q4 plus industrial activity, which is less tied to turnaround. Given the current economic environment, aren't both of those quite challenging for you entering the current quarter?

Yes. Well said. I mean, the -- as you know, our first and third quarters are always challenging because they're just lower, as you say, the less turnaround or kind of the lower volumes, typically because of seasonality. We came out of the fourth quarter with very low turnaround activity in that quarter relative to historical levels, so we didn't bring much in. And as I said, we're running kind of -- we continue to run -- we're not continuing to decline, but we're running at low levels relative to historical run rates.

Okay. And again, I know you're aggressively attacking your headcount, but one would also assume that you're keeping the more experienced people that tend to perform better. In other words, over the last few years, as you've been through a rapid growth phase, you've been adding less experienced technicians and diverted some of your experienced technicians to helping them grow. How should we think about productivity in the upcoming year from your existing technicians, and how do you envision headcount growth over the course of the year?

Well, just a few facts here is that since kind of we peaked at the end of the second quarter, our total full-time headcount's down about 300, which is, I think, about 8%. So, in a -- it's a mix of technicians but also support activities. As it relates to technicians, I would just point out that we have a lot of flexibility in our cost structure there due to the use of overtime. So we're focused very high -- we continue to be very focused on labor utilization of our, if you will, our technician or variable costs there to maintain that at an attractive level.

And we're doing that with some reductions of staff, but also there are significant reductions in the amount of overtime available to those individuals. So, as the market comes back, we get the benefit of, I guess, the capacity that overtime provides. And then we will then -- are quite confident that we can add back resources in line with any demand growth scenario that we might envision. That would be, as it has been in past years, a very happy problem and challenge to deal with.

And you do feel there are more than enough people out there when you need to rehire them?

Yes. And to your comment that -- or I guess speculation -- is exactly right, is that when we've had to make reductions, they tend to be the less senior or less experienced individuals in our technician ranks.

And one more comment about Q2, or maybe some help regarding Q2. Last year's Q2 was an absolute booming quarter for you -- record levels, extraordinarily good margins. As you enter Q2 this year, which will have some turnaround activity, do you expect the more modest intensity that you saw in Q4 to continue in Q2?

I guess that's what our guidance is based on, yes.

Okay. Thank you very much.

Yes.

See you at our conf- --

We'll go to our next participant. It's Jeff Tillery from Tudor, Pickering. Please go ahead.

Hi, good morning.

Good morning.

Morning, Jeff.

I guess as you look at kind of the upcoming turnaround season, do you see the trend -- do you see a continuation on the less intensive, kind of less hurried, maybe not working 24 hour a day turnarounds that you witnessed kind of in the latter half of 2009? Is that something you see continuing for right now?

I don't -- I haven't heard many reports on that in terms of the schedules that the plants are going to pursue. We have a number of turnarounds on the schedule for the fall, so it's not that there are just -- there are none. And we expect a lot of them to go kind of in the same historical levels. What's just hard to know at this point is whether, as they did in the second -- they did this spring, whether some of those get pushed again to the -- to next spring. But in terms of kind of the -- whether they're being done on straight time or on a 24-hour clock, I'm -- I don't have a lot of insight on that at this point.

And that's something that doesn't firm up until kind of right before it actually occurs? Is that fair?

I think so. And recall that our amount of activity and the specific turnaround also gets firmed up really on the front end of the turnaround, because a lot of our mechanical service work is going to be related to the discoverables --.

Okay, that's fair.

--when the plants are opened up.

And then my last question, just on the cost savings. For the $10 million incremental year on year, at what sort of run rate would you have been at in the fourth quarter?

There's some seasonality in some of those expenses on just kind of where things fall, so I think that's a little tough to estimate. But if I was looking at total SG&A for the year, I think -- what do we -- so I get the right number, Ted, do you have the total SG&A for the year? $116 million?

It's $116 million (inaudible - multiple speakers.)

It's $116 million SG&A. I think roughly we're looking at $106 million --

Okay.

-- would be kind of our expectation.

Okay, great. Thank you guys very much.

Our next question comes from Rich Wesolowski from Sidoti & Company. Please go ahead.

Good morning. How's it going?

Morning, Rich.

Morning, Rich.

Your sales are down 15% here in 4Q. It looks double digits at least for the first half. And you mention your headcount looks off more like 8%, and even some of that is corporate or support. I know those are round numbers, but is it accurate to say you're going to run underutilized in the first half in anticipation of better business in the second half?

Well, I guess what I look at in terms of utilization -- we're looking at labor rate utilizations of kind of our technicians, and I do not expect that to be different than historical levels. And as I mentioned in an -- to an earlier caller, I think we're going to do that. There will be less overtime available for our technicians because of the less -- the softer market.

What we're being a little more aggressive on is taking support activities down, particularly corporate support activities down, to what we think are kind of overall levels that we're going to see this year. And we have been more aggressive, frankly, in some of those activities.

Okay. You mentioned lower compensation in your prepared remarks. Have you begun to lower wages for your techs or are there any plans to do so?

No, we have not, but we have put the brakes on increases and very -- taken a very conservative posture there. We've also made some adjustments to our benefit programs to reduce costs.

Okay. Second half versus first half, your at least relative optimism for the second half, is that based more on any actual conversations with customers or more just on the faith that they can only push out the routine maintenance for so long?

I would not say so much on direct input from customers -- individual customers. I think there's a fairly strong consensus in the industry -- I'm talking about -- I'm going to say general construction and maintenance industry, not just our specific niche of that, that the turnaround schedules are going to be very strong in the spring.

Okay. And then lastly, the recession has chopped valuations for all assets in companies. Are you worried or at least alert to the potential that someone could come in and aggregate your regional competitors or some of the single service line companies and begin to replicate what Team now has?

Am I worried about it? No. I mean, is it possible that someone could buy? Yes, if you have enough money, you can buy whatever you like. I just -- I think a huge part of our advantage is execution, is having a well -- having a consistent culture, consistent service delivery across our network. That's very difficult to just do by slapping some companies together. So I think we'll compete well in that eventuality, although I have no evidence to think that's going to happen.

Perfect. Thanks.

Yes.

Our next question comes from Matt [Sacher] from KeyBanc Capital.

Good morning, gentlemen.

Morning, Matt.

Morning, Matt.

Got a few questions on behalf of Tahira, beginning with -- could you comment on any difference you're seeing in terms of activity levels among the different industries you serve and also in terms of different regions, if you're seeing any?

We've seen -- it's -- yes, there are differences, but I don't think they're very significant. I would say they're more the reflection of just timing of individual events, of -- in individual plants and customers. The most severely impacted from a economic standpoint I think have been -- we'd all kind of agree would be the petro-chems and the steel industry. But you read the -- refining, and refining's a huge segment for us, and several of the independent refiners reported losses last quarter for the first time in years and years and years. So obviously they're quite impacted as well.

The impacts that we saw in the fourth quarter, we saw all segments turning down their activities, even the ones I -- again, it's not a huge segment for us, but even ones that I thought would be the least impacted by the recession, the power industry. I saw several articles over the weekend indicating that the reduced industrial activity was reducing their demands for power and affecting their economics as well. So, I think all of -- there's -- it's just such a deep and pervasive recession, I think just about everybody is feeling the pain and trying to respond to that.

In terms of geographic changes, again, I think it's just the timing of individual facilities. We have differences, but I don't think they're really significant, and we're not seeing one part of the country doing better than another from that standpoint.

Okay, thanks. To follow up on a previous question, you'd mentioned that the expectation of some improvement in the fiscal second half was not necessarily tied to direct customer input. I was curious, when would you expect to have those discussions with customers? When do they typically start to indicate what their calendar 2010 plans are going to be? And have they indicated anything yet one way or the other?

Oh, I think we always have information regarding the preliminary plans of customers, so we are aware of a significant number of turnarounds that will be coming in the spring. We are also aware of significant in the fall. I will just point out that we -- at this time a year ago, we had a expectation of a very strong spring last spring. So, the point I'm making is that the fact that there's planning going on about turnaround activity -- we're taking kind of a wait-and-see attitude toward it, is that we're going to be ready, but we're not kind of counting on something until it happens. And I think in -- with just the severity of the economic pressures on all parties here, that's the prudent course.

Okay. Thanks a lot. That was very helpful.

Our next question comes from [Tom Claugus] from [Graham Partners]. Please go ahead.

Yes, hi, guys. Just wondering what your thoughts -- I have several questions. But what are your thoughts on capital expenditures for this year?

Our -- they'll be less. I think we're kind of in the $10 million to $15 million range would be kind of a reasonable expectation. And the reason they're less is not a change in strategy or that we don't have the resources. It's that, frankly, the bulk of our volume -- our spending historically has been for capacity expansion, and with the pullback that we've had, we just don't have the needs.

Okay. And then, one other kind of just macro-observations that bugs me a little bit is that the refineries were doing really -- refineries are a fairly large segment of your guys' business, and refineries had great years for three years in a row while we were -- while they were adding capacity, et cetera, et cetera. Now gasoline demand's down, crack spreads are terrible and back to kind of where they were before the three-year positive cycle, which is what we just went through. Is there -- I guess that's what I'm struggling with. Is there a chance for you to shift focus on growing a customer base in a different segment? I was just wondering what your thoughts were around that issue of -- is there any new segments you guys can attack to grow the business?

Well, a couple things. Let me -- you have two premises there. One is that you think the amount of opportunity for Team or anybody in the refining segment will be less than it has been historically because of the new environment that we are in and may stay in. And then secondly, are there other opportunities, other segments? I might challenge your premise a little bit, that just because the crack spreads are narrower than they have been in the last three years, that we'll see less service activity.

Again, I strongly believe that if you look at just general maintenance, that it really is not principally driven by crack spreads. To the contrary, it's driven by kind of the number of plants or the population of plants operating. And while we will see some additional closures of very small refineries, as we have for the last 25 years, I am of a belief that the major refineries, the large, significant refineries that are the bulk of our business, the probability of any of them closing or very many of them closing is very, very low. So, I think it's going to continue to be a great segment for us, and we see a lot of continued opportunity there.

Having said that, we want to have a great penetration and position in all segments, and we probably have a higher market share in refining than we do in some of the other segments, so we're making a very significant push to increase our presence and penetration in all poss- -- all kind of market segments.

Okay. And then just --.

Think the big ones would be, where I think our -- we're a little less penetrated would be power pipeline, industrial services. Some of those areas we are -- expect to continue to grow our penetration in.

Okay. And then just to qualify your comments on -- since we've seen two months of this quarter, you basically are saying that revenues are down similar -- to a similar amount as they were in this quarter?

Saying, yes, they were flat to -- they were not continuing to decline but were at a lower level.

Okay, thank you.

But they're running at the same rates.

Yes. I mean, what we have -- just to be clear, what we have are -- our best tracker of that is activity levels are hours -- billed hours, utilization levels, and those tend to be at the same levels, similar.

Okay, thank you.

Our next question comes from David Yuschak] from SMH Capital.

Good morning, guys. As far as that $10 million, help me on that. Is that primarily going to come out of SG&A expenses, then, for the year versus what you did -- ?

Yes.

Okay. And is there any -- I mean, is that -- do you think that's more of kind of a permanent reduction, then, as far as you see it? Or is that going to maybe ramp back up, say, for instance, in the second half given good -- better economic conditions?

I mean, there will -- certainly, some of it will come back as volumes come up, but it'd be certainly our hope that as we kind of improve some of our processes, that we can get some leverage off increased volume from here.

Okay. And then internationally, is the problems that have been happening worldwide having a -- having some problems for you guys trying to gain further traction maybe to grow that business internationally, particularly over in Europe?

I think the environment in Europe -- the market environment is similar to what we've experienced in North America. We are seeing, again -- obviously, we've got global industries of the petro-chemical, refining, steel kind of areas, and they're all similarly impacted in those markets. But, we're continuing to be successful over there, and I guess they're dealing with the issues in a similar way that we're dealing with them in North America, and have the same optimism about the fact that the market structures haven't changed. And we're continuing to be enthusiastic about our growth potential over there and continue to explore ways to do that.

Now, as far as that goes, will it -- to gain some good scale over there, will it require you to do anything different at all to try to increase your visibility if the slowdown would kind of drags itself out?

Well, I think what we are -- we are in essentially two countries right now, the Netherlands and Belgium, and it's our expectation that we're going to branch out from there. And I think it'll be a combination of some organic growth but also we'll be -- I think it's likely that we would purchase kind of, I guess, businesses in new markets to kind of extend our geographic presence.

So, the probability may be, because of the conditions, acquisitions may be -- might be more of a strategy here as we look into maybe the second half of the year?

I think acquisitions are going to be part of the strategy, but I wouldn't tie it to the conditions. I think if they've been -- all along, when we went to Europe was that just -- again, starting up in a new country without any presence is a difficult putt.

Now, one last question. As far as your downstream business in the year, what percentage of the revenue did downstream represent?

Downstream as -- if you take all down -- if you take all energy-related businesses -- this is refining, petro-chem, power, pipeline, and that's kind of mostly downstream, maybe a little midstream with power -- I think our estimates have been that's roughly three-quarters of our business.

Okay.

Then the other quarter or so would be, I'm going to say, heavy industrials -- steel, aluminum, pulp and paper and municipal, lot of -- a potpourri of people with big steam systems, basically.

Thanks a lot.

We have a follow-up question from Matt Duncan from Stephens. Please go ahead.

Yes, just one real quick housekeeping item. Ted, I missed your guidance on tax rate going forward. What do we need to be using in our models?

I'd use about 39%.

Okay. Thanks, guys.

We have a follow-up question from Rich Wesolowski from Sidoti. Please go ahead.

Thanks. You had estimated on previous calls that construction projects or your services relating to construction projects were about 15% of sales at the peak.

Correct.

Were you still working off much of that backlog in the second half? Where does that 15% number stand now?

I think that's probably half of what it was.

Okay.

So, that's where, again -- that's how we kind of work back to where we think the core of the maintenance demand declines are. Because the -- our declines in volume are far greater than what you could attribute to project declines.

Is the -- are the construction projects typically more time sensitive, and thus, perhaps more profitable than routine maintenance?

No, I don't -- I wouldn't say that. I don't see a big difference in them from our standpoint.

Okay. I'm just looking back to, say, fiscal 2008, when you did a revenue number that approximated the midpoint of what you're looking for now. And you did, say, $1.20 in earnings, and here you're looking for $0.85 to $1.05. After the SG&A cuts, it comes down to the gross margin line. Can you explain -- what's different in your business now? Is it the pricing utilization and mix that would result in that gap?

Yes, I think we are -- well, first of all, we have more facilities and resources than we had then, because we've added Aitec, we've added our European operation. So I think our models or guidance are based on a little bit of -- or a lower gross margin or lower branch EBIT margin than we would have enjoyed in '08.

Do we accept -- I mean, I think your broader premise of your question I agree with completely, is that in the long run, is there any reason why we shouldn't have the same profitability regardless of what the market environment opportunities are. I think the answer is yes, we should, because we should adapt to whatever that environment is. I think our guidance reflects that we cannot adapt instantly and completely to the declines that we've had in just the last six months.

That's exactly what I was looking for. Thanks.

We have a follow-up question from Matt Sacher from KeyBanc Capital.

Guys, I was hoping you could just comment on activity levels you're seeing up in the oil sands area, if you're seeing any pickup in activity on the capital projects side. If not, in the meantime, what the maintenance activity levels have been like up there.

I think it's -- in terms of capital project activity, there's virtually none going on right now up there. There are -- there's rustlings. There's rumors and some planning activity by some of the owners up there of restarting projects that were deferred or postponed last fall, but they're not started yet, so I guess the caution I would have is let's wait until they're started, and we can be excited about that. And just in terms of maintenance activity, the plants are still -- the plants that are up are operating. We have some ongoing maintenance activity. It's not particularly robust at this point, though.

Okay, thanks.

Yes.

Mr. Hawk and Mr. Owen, at this moment I'm showing no further questions.

Thank you, Hilda. Then, let me just wrap up and thank everyone for their participation and your -- in the call and your continuing interest in Team. We look forward to updating you on our progress during the first quarter of our new fiscal year around the first of October. In the meantime, everyone please have a good day, and goodbye.

Ladies and gentlemen, this concludes your conference call. We thank you for participating. You may now disconnect.