Team Inc (TISI) 2010 Q1 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 will now turn the call over to Mr. Phil Hawk. Mr. Hawk you may begin.

Thank you, Hilda, and good morning and welcome to the Team web conference call to discuss recent Company performance. As indicated, my name is Phil Hawk, I'm the Chairman and Chief Executive Officer 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 first fiscal quarter ending August 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, our 8-K, 10-Q, and 10K filings to the SEC, and our annual report.

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

Thank you, Phil. First, I want to remind everyone as usual 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 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 the financial results for the quarter. Revenues in the quarter were $100.9 million, compared to $123.3 million in the first quarter last year, a decline in revenues of 18%. Net income was $1.1 million in the current quarter versus $5 million in last year's first quarter. Earnings per diluted share was $0.06 versus $0.25 in last year's quarter. Results for the quarter were negatively impacted by $1.1 million of non-routine costs associated with an independent investigation of FCPA violations in our TMS Trinidad branch. This matter was previously disclosed in our 10-K and 8-K filing at the end of the year. Excluding those costs, net income would have been $0.09 per share or $1.8 million.

Now with respect to our balance sheet and cash flows, capital expenditures for the quarter was $1.9 million, down significantly from $4.3 million in last year's first quarter. Depreciation and amortization for the quarter was $3 million. Non-cash compensation cost was $1.2 million, so our adjusted EBITDA, which includes an add back for non-cash comp was $6.8 million in the quarter. On a trailing 12 month basis, adjusted EBITDA is $50.6 million.

We continue to be very pleased with our cash flows during this economic downturn. Our cash flow from operations in the quarter was $18 million, and at the end of the quarter, our net debt, that is total debt less cash, was $53.1 million, a reduction of $15.8 million since our May 31 year-end. In fact, in the nine months since the recession began for us, at the end of our second quarter of last fiscal year, we have reduced our total net debt by more than $40 million or 44%.

With that, Phil I'll turn it back to you.

Thanks, Ted. Now, I would like to add several observations and comments to Ted's remarks. Let's begin with first quarter performance. As Ted indicated, Team continues to work through a difficult market environment, which has lead to significantly lower earnings in the quarter versus the prior year period.

The primary driver of this lower performance is significantly reduced demand for our services, and the resulting lower revenues. For the quarter, total revenues were down about 18% compared to the very strong results in the prior year quarter. This percentage revenue decline versus the comparable quarter is similar to what we experienced in the preceding fourth quarter of fiscal year 2009 which ended in May. While the market is still significantly below pre-recession levels, it seems to have stabilized at this level. We do not see any evidence that market demand is continuing to deteriorate.

The sources of Team's revenue decline were broad based. On a division basis, TMS division, reflecting our mechanical service offerings declined 25% while the TCM division revenues, reflecting section and heat treating services, declined 12% in the quarter. A very significant component of the demand decline in the TMS division was the completion of a major Canadian oil sands construction project, that was active in last year's first quarter, but was not present or replaced with a similar project in the current year quarter.

Nearly all service lines experienced lower revenues in the quarter. Generally, the services performed while the plants are operating, including leak repair, fugitive emission monitoring, hot tapping and some inspection services fared a little better than services related to plant turnarounds and new construction including heat treating, field machining, bolting, field valve repair as well as some inspection services. As a rough estimate, I believe the demand for on stream services is down in the 5 to 15% range while the demand for the turnaround services is down in the 20 to 30% range compared to the prior year quarter.

However, I would also point out that there was significant spring turnaround work that continued into last year's first quarter. There for, this 20 to 30% variance also reflects the unusually strong turnaround service demand in this traditionally softer First Quarter that occurred in the prior year. Revenues from our major alliance customers were approximately 10% less than in the prior year quarter. There was a wide range of revenue variances among individual customers within this group, reflecting the timing of specific significant projects; however, we do believe that generally, the larger major energy companies have not cut their near term maintenance programs quite as severely as the independent refiners and other smaller customers in other segments.

To be clear, every Team customer has been impacted by the recession, and has responded with cost cutting initiatives; however, the approach taken by each customer varies. Perhaps, correlated to some extent based on the size of the customer. Team's European business revenues were flat with the prior year, despite similarly depressed market conditions in Europe. Our leak repair SpeedCam team has done an excellent job expanding the breadth of their customer base and service capabilities. As you may recall, Team purchased LRS about one and a half years ago. We're delighted with the performance and progress. We're confident that we have a very strong platform from which to continue to expand our European business. LRS currently represents about 6% of Team's total business.

As we look forward to the second quarter, we see continued difficult market conditions for our customers. Frankly, market fundamentals for our customers have not improved much since the beginning of the recession; however it certainly isn't all doom and gloom either. We are expecting the second quarter revenues to be up about 20% versus the first quarter as a result of expected plant turnaround activities during the period. This is similar to the sequential quarterly growth that we have seen in past years. Unfortunately, this year's projected growth is off a smaller starting base.

This near term outlook raises the questions, will we see a rebound in the market demand to historical levels, and if so, when? My answer is the same as it has been in the last couple of conference calls. Yes, we are still confident that market demand for our maintenance services will return to historical levels. There are no technologies or business approaches that we are aware of that can replace the necessity of maintaining these facilities. Over the longer term, there's simply no alternative to our services for these maintenance requirements.

As we have said previously, we do expect significantly reduced new capability or new capacity projects for the foreseeable future; however, these new construction projects represent less than 15% of total service demand. Regarding the when question, we continue to think that it will be fairly soon, but we can't be sure. At this point in time, the major plant turnaround schedule for the Spring is quite extensive. This is a positive indication. It is also consistent with our historical experience, where we've observed that deferred turnaround work generally tended to be undertaken within a year of the original postponement.

All of my comments to this point have focused on the impact that the current market conditions have had on our business; however, all of us at Team, as well as those of you who have been following our Company for some time, certainly understand that our very attractive organic growth over the past decade has not been primarily driven by market growth. Team's growth has been driven by market share growth, as we have capitalized on the inherent advantages of our multi service North American wide service network, our outstanding service performance, and aggressive business development initiatives to continually expand our capabilities and market presence.

While extraordinary shifts in the overall market demand have overshadowed our organic growth initiatives in the near term, we remain committed to an aggressive business development focus that will continue to expand our business and market share. We have not been historically and we will not be now or in the future satisfied with just maintaining our business in line with the overall market. We expect to remain a high growth company.

In the near term, our posture is to be cautiously optimistic. We are closely monitoring the market situation and will be ready to handle expanded business opportunities when available. At the same time, we will manage our business and resources to our current revenue levels. We intend to stay strong strategically, operationally and financially regardless of the market conditions we face.

Now let me return to first quarter results and make some additional comments on our performance below the revenue line. As indicated in the income statement issued in yesterday's release, gross margin for the business declined about 2.5 points versus the prior year quarter. Approximately one percentage point of the decline reflects reduced job margins with the remaining 1.5 percentage point decline reflecting the volume affect related to fix and direct costs. Turning to job margins, we believe that the one point decline reflects increased price and margin pressure on our business as a result of the poor economic conditions facing our customers.

Let me make a couple of other comments on price pressure and price sensitivity in our markets. First, we expect customers to maintain a heightened sensitivity to all costs for the foreseeable future. At the same time, the key service provider selection criteria remained pretty much unchanged. Confidence in the quality of service provided, safety, technical competence, and timely service capability remained the basis for choosing a service provider. Customers are asking Team and other service providers for ways to help them improve their overall productivity and to lower costs, and we are working with them to do that. Ideally, we encourage approaches that are win-win, such as volume discounts, and more integrated service approaches.

In addition, we will also work to fine tune our contract arrangements to be responsive to specific circumstances when warranted. We have not experienced and do not expect to experience any significant loss of customers. Conversely, if these market pressures lead to accelerated maintenance services consolidation within customer facilities and networks, it will ultimately be beneficial to Team, given the structural advantages of our size and service network breadth. Shifting back to first quarter results, I am very pleased with Team's management of its costs in the quarter. During the quarter, despite significant declines in activity, our overall technician labor utilization was at or very near historical levels.

Consistent with our cost reduction plans, we also achieve significant reductions in our SG&A expense. Overall, SG&A expense declined 9%. When the investigation expense is excluded, total SG&A expenses declined $3.8 million or 12%. Corporate expenses contributed to this decline as well. Corporate cash expenses decreased 11% in the quarter. Overall, these cost levels are consistent with our expectations and our financial plan.

Now let me shift to the investigation related to the FCPA matter that has been previously disclosed. As we discussed during the last conference call, we discovered potential violations of the Foreign Corrupt Practices Act related to actions by former employees of our TMS Trinidad branch. We self-reported these potential violations to both the Department of Justice and the SEC. The Audit Committee of Team's Board of Directors is leading an independent investigation into this matter.

As was reported in our press release and addressed by Ted, we incurred $1.1 million in outside professional costs related to this investigation in the first quarter. On an after-tax basis, this represented a $0.03 reduction in net earnings per share, a very significant impact in this seasonally weak quarter. To date, the independent investigation has found no evidence that inappropriate actions that took place in the TMS Trinidad branch were in any substantive way more extensive than we had previously disclosed. We continue to believe that the total of the improper payments made to employees of government owned enterprises was less than $50,000 over a five year period. To date, the investigation has found no evidence of FCPA or similar violations in any of our other foreign branch locations, nor has any evidence been found that managers outside of the Trinidad TMS branch directed or had knowledge of any violations of the FCPA. Assuming no additional violations are discovered, we estimate that our total outside professional costs for the investigation will be approximately $2 million.

While the illegal activity was limited in scope to a single small branch of Team's foreign operations, it is nevertheless illegal and counter to our ethical standards and our culture. It reflects negatively on our entire Company. While we have had compliance processes in place, we are strengthening and augmenting our compliance programs going forward, especially as it relates to our FCPA obligations to do our best to insure that this never happens again. We will learn from the mistakes that were made, and take appropriate measures. In the long run, I believe this unfortunate episode should have no significant impact on our business and outlook. We have always been and continue to be fully committed to operating our business with complete integrity and honesty in all respects with all parties including customers, TEAM colleagues, suppliers, and the various government agencies.

As reported in the earnings release, we are affirming our current earnings guidance of $0.85 to $1.05 per fully diluted share, excluding expenses related to the investigation. Our current guidance is based on anticipated stronger second half revenues from improved demand for plant maintenance services. As I discussed earlier today, we are not projecting a complete market recovery, but rather a 10% strengthening due to both higher volume of turnaround activities and anticipated catch up in previously deferred maintenance. Overall, we expect total revenues to be in the $470 million range. We also expect to benefit from the cost reduction initiatives that we have undertaken over the past several months.

Some of you who follow us closely may be wondering if it would be appropriate to reduce our earnings guidance in light of softer quarter results. I remind everyone the first quarter is typically a weak quarter seasonally, representing a small percentage of total annual earnings. When excluding the costs of the investigation, overall first quarter results were in line with our internal plan. As I mentioned earlier, we will not be adding costs or resources ahead of improvements in the market environment. We intend to stay strong strategically, operationally, and financially, regardless of the market conditions.

Let me end with a few final perspectives and wrap-up comments. We are blessed with an outstanding group of colleagues who continue to earn and affirm our customers' trust and confidence with consistent outstanding service. As always, we intend to maintain a diligent focus on the basis of our business. These include providing great service with every service opportunity, continuing to capitalize on our service network advantages, managing the profitability of our business, job by job, and balancing our resources with current activity levels.

That concludes our initial remarks. Let's now open it up for questions. Hilda, can I turn it back to you?

Thank you. We will now begin the question and answer session. (Operator Instructions). Our first question comes from Matt Duncan from Stephens, Incorporated.

Good morning guys.

Good morning Matt.

So the first question I've got is going back to these job margins for a second, and I'm curious, it looks like your alliance customers, the revenues there are down less than your total sales are down, so they're becoming a bigger piece of the mix, and those guys are typically going to get higher volume discounts, so do you have any way of quantifying that 1% decline in job margins? Could that just be customer mix shift?

You are correct that mix shift, both among customers, among service lines, all those things affect margin. I guess our conclusion is that kind of beyond that though, that what we have seen and kind of believe there's about a one percentage point decline that's basically independent of the mix effects.

That's helpful.

It's difficult to measure but we have made concessions in a number of situations and that's what we think is reflected of those lower margins.

And then when you look, Phil, at the Fall turnaround season, how is that looking so far? Have you seen any of the delays or deferrals happening in the Spring? Are any of those projects happening in the Fall or are they more geared towards next Spring?

I think the general consensus is that, well first of all, there are turnarounds happening as we pointed out where we're projecting a 20% sequential quarterly volume improvement which is directly related to turnaround activity. I think our sense is that the Spring will be a stronger turnaround quarter than the Fall, although we have activities under way right now.

Okay. And then if you look at an increase in demand of 10% in the second half of your fiscal year, earlier I guess last year, you did kind of reduce your tech force by a couple hundred people if I remember correctly, with a 10% increase in demand, do you need to add some of those people back to meet that demand, or is your utilization rate low enough now that the people that you have currently can fulfill that demand?

I think there will be some add backs with staff, but we're confident we can do it. Let me make a couple points about how we flex our staff, because that's a good point that you make. Our actual build, our direct labor utilization as I mentioned in my comments have remained fairly constant, at attractive levels even with the lower activity levels. That is possible by again reduction of staff, we're about the 330 kind of full time people down from where we were a year ago, in terms of total staff and it's also fletching by less overtime that our technicians have less kind of work hours as a result of kind of the less demand available to us, so on the way back up, the first and most easiest kind of capacity expansion for us is overtime hours where we just expand the hours and work opportunities for our current force. We'll supplement that with additions to our force, and also with the project related or contract personnel that we use, particularly for big turnaround work that has historically and continues to supplement our full time staff.

And last thing here and I'll jump back in queue. When you look at the competitive landscape, we've had nine to 12 months now of the demand being down for your services, are you seeing of your small mom and pop competitors fall by the wayside, or for the most part are they holding on at this point?

To my knowledge, I'm not aware of anyone who has closed their doors and it's really hard to know from our perspective whether they're struggling. I would suspect the lower volume environment is difficult for everybody.

Do you think you're taking share in this downturn, Phil, using those master alliance agreements and being able to give your customers some price breaks through those? Do you think you're gaining share right now?

Theoretically we should have advantages and they should be accelerated in this environment. I will be honest, it's so extraordinary that just the change in customer behavior as they respond to their incredibly difficult market conditions, it's very hard to tell in this short period of time whether we're gaining share or not. Our focus is, obviously we're getting some opportunities to visit with customers as they kind of explore all their options, but I certainly don't have a conclusion that we're kind of sweeping up lots and lots of share in the short run.

Thanks. I'll hop back in queue.

Yes.

Our next question comes from Arnie Ursaner from CJS Securities.

Good morning, Phil, good morning, Ted.

Good morning.

My first question relates to the quarter that you just reported. Can you give us the break down of project revenue in this quarter versus the year ago? Obviously you had a very important Canadian contract, but can you quantify the delta if you will, in project work this quarter versus last year?

Oh, Arnie it's always difficult to get that split. Obviously we can identify individual big customers and I really haven't done that so I don't have a swag estimate, but that was a very significant project.

The Canadian project last year, Arnie, was about $10 million.

Okay.

That one project, and I think that it's certainly less project work but I don't, it's also not none either by the way. There are continuing buildouts of major projects that have been under way, both pipeline projects and a couple of major refinery upgrades that continue to go forward.

And your revenue decline in the quarter, can you break it down between a volume decline and price decline?

Well I think if given my other comments I think virtually all of it is volume. That price decline would be that 1%.

And on the cost of the investigation, I certainly know versus my expectation and frankly I think versus your own expectation, the $2 million expense is dramatically higher than we had expected, and my guess again is probably more than you thought. What has caused it to become, to escalate, and can you give us a feel for the remaining $1 million that you do expect, when we should expect that to hit?

The second question is easier than the first. We expect the bulk of the rest of the remaining expenditures to hit in the second quarter. We had a lot of small matters, there's no kind of materiality threshold with regard to FCPA violations and we had a violation of the law and our Audit Committee of the Board of Directors is undertaking a very thorough in depth investigation. They've hired, retained outside counsel and forensic accountants to assist in that effort and they're doing a very thorough job, and I would just say I guess that this process is bigger, and you're correct that it was bigger, and more extensive than I envisioned, but as I understand kind of their obligations and approach that it's kind of what the circumstances, it's not the size of our issue but just what these types of issues require, and as I said in my comments, I think what we're going to do is learn from this and get as much perspective on how we can make sure that it never happens again. But like I said, we fully support their efforts, and like I said, their investigation has not uncovered any kind of expansion of kind of wrongdoing or inappropriate activity but it's important that we independently verify that, and that's what's happening.

In the turnaround work you're expecting for the upcoming season, are you being asked by your clients to again similar pattern to what you've had, not work as intensive and not build them as much overtime? Are you seeing that?

It's a combination. I think there are examples of that. It just again depends a little bit on customer requirements and practices but yes, we do have, I'm aware of a couple straight time turnarounds which again prior to last year would have been extremely unusual.

And I thought Matt was going in a different direction when he asked about competition. You have a Company that is about to complete a road show and price a public offering that competes directly with you in NDT, and one of the highlights of their road show is they probably use the word proprietary 50 times in their presentation. Would you care to comment on any competitor that you think you are at any disadvantage where they may have some proprietary technologies, and the other question related to their offering is to the extent they raise a fair amount of cash, would you expect them to impact industry consolidation?

Let me just talk about Team or kind of Team relative to competitors. I guess I don't sense that we have any in our basic service capabilities, we think we have the access to kind of all of the technologies that are relevant and appropriate that our customers are demanding. We in fact pride ourselves on the kind of the breadth of the technologies that we have available to us and our ability to deliver them in a consistent high quality way. I think there are companies that compete in segments and in areas that we don't compete in, and so they have capabilities in those areas or advantages in those areas and that's very possibly the case. In terms of kind of consolidation in the industry, I think there have been little companies, this is not a new phenomenon, but there have been companies being purchased by others, kind of over the years and it continues to happened to so I don't think the fact that we have another public Company facilitates that one way or another, but like I said, I'm speaking from my perspective, not necessarily what their view might be.

But in NDT, your view is you're fully competitive in terms of monitoring technology and some of the other issues that seem to be raised by the offering of this Company?

When you look at the and it's not just in NDT, but you look at really all of our service capabilities, we're providing services in line with kind of industry standards and requirements and that's certainly the case and inspection that we're providing services with regard to code and kind of industry certification levels, so we're all providing the same services in those respects to the extent that we try to differentiate ourselves it's the consistency of our quality, the consistency of the training that we provide our technician force and kind of the, if you will, just the certainty or the confidence they can get from that consistency of performance. I just think that it's not, it would be very small portions where I'm going to say just a competence to do something that no one else can do is relevant. In really any of our service lines. I'm not saying there's none but it's very very small.

Thank you very much.

Yes.

Our next question comes from Rich Wesolowski from Sidoti & Company.

Thanks, good morning.

Good morning Rich.

By this time in any year, would you have typically sewn up a good portion of your turnaround business for the next Spring or would the majority of orders still be ahead of you?

I think the majority of activity is ahead of us and just a little bit of comment about how kind of all this works is that even when we are aware of a turnaround and a facility that we historically do the work in, we will not know the magnitude of the turnaround until much closer to the time and frankly, even when we man to start the turnaround the variability once we start can vary a lot because of discoverables, so our work is not where it's kind of a fixed quantity that's built and baked in but we have our general indications of where the events or the activities are going to take place, with kind of rough estimates of personnel required, based on kind of historical repairs of similar type turnarounds at those facilities.

Okay. Thanks for the numbers on what drove the gross margin down. I think that distinction between the operating leverage and the pricing is very important. On pricing, how far along with your discussions with your various bigger clients, does that 1% hit to the job margin have the potential to turn into 2 or 3% within the next year?

Sure. The answer is it could, but I will tell you we're working the other way too. We're always continuing to kind of improve our delivery mechanisms, just kind of the labor mix and also frankly, for concessions that we've made with customers they are not kind of permanent concessions. In many instances we're making concessions for six months kind of where we look at some of this activity so our kind of Management focus and plan is to kind of hold the line or maintain our margins but as I said we're in a difficult environment and we are kind of having to deal with this cost price pressures on the current environment.

So if Team call it whatever it is, 18 months from now is working in a better economy, you will have a chance to relook at some of these discussions and there's no reason to suspect that your job margins could not be what they once were when the economy was stronger?

Absolutely I believe that and here is another perspective. These are sophisticated customers that we serve. I mean many of them are, and they have been for many many years so the notion that we had kind of unfair or unsustainable margins at one point in time and now they caught us or caught up with that just to me doesn't make sense.

What we have in the short run is all competitors have similar kind of starting points. We don't have foreign import kind of advantage that like you might have in a manufactured good, so I expect our costs should be comparable with competition and our margins should be fair, and I think what we're dealing with is an extraordinary environment where what we want to do is be responsive to customers so that we sustain our relationships during their very very difficult time, but we expect that to normalize out to where we've always been.

Finally, we talk a lot about refining but can you talk about any of the other end markets whether any are performing any better or much worse than others or maybe which in turn first?

I'm not aware of many that are strong right now to be very honest about it. The evidence that we get obviously crack spreads right now for refineries at the database I saw are as low as anything in the last seven years and probably for this time period, and perhaps ever in the last seven years so we're continuing to see very weak refining margins. What I'm hearing about the chems is that it's kind of a mixed bag is most chems are continuing to be very weak again because of the weak demand for their product. Those that are the olefin category that I heard the other day, kind of related to natural gas as a feedstock in the US are tending to do a little bit better because of the advantage of the big gas crude oil to natural gas spreads, but power, demand for power is weaker, so while they would typically be a little stronger market, I think that's kind of impacting some of those companies. Steel, heavy industrials continue to be weak. There's some again, the auto manufacturing is up a little or expected to be up a little bit in the Fall and that's helping a plant here or there, but as I said, just as you look at the fundamentals, none of it has translated into kind of what we're hearing as increased orders for us that if I just look at the fundamentals of any of our customer groups right this minute, I don't see much improvement over the bottom frankly.

Great. Thank you.

Yes.

Our next question comes from Max Barrett from Tudor, Pickering, Holt.

Phil, I wanted to get a little bit more comfortable about the guidance for the back half of the year and the 10% demand recovery. So you've got deferred work coming back into that picture but are you also assuming that the scope of that work will be increasing as well?

Well, we're assuming that our activity levels will kind of pop-up 10% in the second half versus the first half, and that implies a bigger turnaround schedule and some, I think as I mentioned in my comments, the really two drivers of that is just bigger turnaround schedule and some catch up on deferred maintenance. Again, we think that that level of activity would not even be back to what we believe steady state is. Long term steady state, but it's certainly an improvement in that direction. The challenge is that I have the rationale of why that should happen, as I mentioned to you, but as I mentioned maybe in one of the other callers, is we don't have firm orders, so it's not like we have it in the bag and it's already booked. We have to really kind of wait for that time to come and again, we'll be ready to react to expanded environment, demand environment when we get it.

I just wanted to talk a little bit about overall gross margins going into Q2 and for the back half of the year. Is it still safe to say that Q2 gross margins look like Q4 of 2009?

Look like Q2 of 2009?

Q4 of 2009.

I think that's a reason expectation because of the volumes will be similar.

And Q3, Q4, margins still holding above 30?

I haven't really studied individual margin forecasts so we don't provide guidance on that level, I think because that's a reasonable just generally that's a reasonable expectation because we're going to get the volume leverage on that.

Does that answer your question?

I don't know if we lost him or not there, Hilda.

Let me move to the next party in line. We have Max Tucker from KeyBanc Capital.

Good morning gentlemen. I've got a few questions here. You guys mentioned that fundamentals for customers really have not improved. Does your 10% demand improvement expectation for the fiscal second half assume that conditions remain the same as they are currently, or if you see some improvement in the customers' fundamentals could that provide upside to that estimate?

It assumes, it does not assume a recovery of the market fundamentals. Again, our point of view is that we're in kind of a general sense a necessary evil, that where the maintenance is required if you're operating these facilities and plants, and we're not really projecting new plants coming back on stream or any of that in our estimates for the second half of the year. We would love for the market environment to improve for our customers, even if it doesn't lead to more direct maintenance services, obviously healthier customers is good in a lot of ways.

Certainly. I guess how would you expect then the second half to compare to historical levels, say second half of 2008? Do you expect it to return to those kind of pre-recession levels, or is it going to be kind of a more moderate recovery?

No. I think we're about half way back is what I think it is. We're projecting about 10% improvement over where we were, and I think we're kind of riding at about 20% below our currently running at about 20% below kind of our historical or where we were prior to pre-recession. So it's kind of half way back I would say.

Okay, thanks. And then if customer conditions don't really improve here for a while, have you seen, I know there have been some plant closures announced already. Do you expect that to accelerate in that view, or is that something you're worried about? Have you heard anything from your customers about potential closures?

There have been individual plants here and there closed and obviously, if the conditions stay bad or get worse, I think we can anticipate a few more of that. I guess our basic premise is again, we have a very very large industrial manufacturing refining complex that we're serving and our basic premise is that again, not for new construction or capacity, but for that existing infrastructure that by and large, that North American industrial infrastructure is going to stay in place and stay operating. The consequences of a different alternative for our economy, for the North America, are quite quite significant, and just think that's an unlikely scenario for large scale kind of reductions of that infrastructure. Obviously, if that would happen, that would reduce fundamental demand for our services but our belief is that what we have by and large, and there will be some on the margins some closures here or there, but by and large, that the facilities that exist today and are operating today will continue to operate, and they will continue to need maintenance and that's our premise, and basis for kind of our firm belief that kind of the demand levels for our services over the longer term are going to stay fairly stable.

Thanks, gentlemen.

You're welcome.

Our next question comes from David Yuschak from SMH Capital.

Good morning, guys. What was your quarter ending cash balances on cash equivalents? Do you have that at hand?

It was about $13 million.

Okay, and then as far as your ideas about you've been paying down debt pretty aggressively here in recent. What's your thoughts as you look to the balance of the year? Is that still a focus of yours, given current business conditions, that the debt reduction with any free cash is going to be the number one use of it?

I think that it's the result of, not of the objective of our operations.

Yes, that's right.

First of all as I said we're going to operate our business to stay profitable regardless of market conditions and we're going to support our business as needed to stay as strong as we can and take advantage of the opportunities we have. Because of the kind of lower demand environment, a lot of the cash flow that we're generating as a result of kind of lower receivables, than we've had in the past so that's a big chunk of that. Also, because we're not dramatically expanding our capacity in this environment, we have significantly lower capital spending, because there's just not a need for that in this environment, so I think in a kind of reduced or depressed or reduced demand environment, I think it's very likely that we'll continue to generate a lot of cash and we'll use that to, with the revolver, so the cash will just kind of reduce our outstanding debt, increase our available borrowing capacity, kind of simultaneously.

Should we use that, would we use that debt to buyback equity? Probably not. I think our view has been that kind of not financial leverage but operating leverage has been the focus of our business and I think that's kind of our continuing focus. There's really no contemplation of that. Could we use our debt capacity to acquire other companies or pursue other opportunities? I guess the answer to that is that we're always responsive and looking at opportunities to do that, so that's kind of independent on how much cash flow we generate to pay down debt, but we've remained opportunistic and alert to opportunities that can expand our capabilities, and consistent with our long term strategy, that can accelerate our growth and development of our presence in our target segments.

As far as your CapEx spending this year, what are you currently planning on, what things could change one way or the other or is it pretty much set in stone for what you think you'll spend the rest of the year?

The CapEx spending plan is roughly $10 million to $15 million is what is kind of our rough range. We're going to have a little bit of CapEx related to some replacement of equipment in a couple of areas. It's not that nothing is growing, as we expand in areas here or there, we need additional pieces of equipment and we'll provide for that, but what we haven't, what we don't have in this environment is kind of the need for, I'm going to say capacity expansion that we had in our high organic growth periods, because we've kind of pulled back a little bit in demand, obviously we can expand demand or expand our activity levels with existing inventory of equipment to some degree.

So that range of 10 to 15 pretty much covers about anything between lower demand versus better demand as far as you're concerned? It's just a matter of where you fall on the demand curve for the rest of the year?

I think I will say when we were growing kind of every year, 20 to 25% I think we were probably anticipating demand and investing ahead of demand in both equipment and probably resources, too. We're going to be a little more cautious on that in this environment now.

And then one last question. As far as in your IR presentation, I think you list the refinery being around 48% or thereabouts of revenue. As you look back over the last two to three years, what percentage of refining as a percent of your total revenue has been its highest, and what has it been tracking in the last couple quarters?

I don't have a really good measure of that, Dave.

It's pretty consistent though, David, over that period of time.

So when things are going good, and kind of going good across all your industry verticals, power and all the rest so refining never really got totally outsized relative to the total to the point where it could track, so when a recovery comes, we can get a better outsize recovery and refining, it's kind of what I'm driving at, if you follow me.

No, I think there's good opportunities of kind of demand growth in all of the segments. I think they are all, I think a significant portion of the project work, probably a little higher percentage of the project work in the last three to five years have been refining related than in the other areas.

So if you exclude any new potential new business, the basic core business will probably stay in line. It's just a matter of the new business isn't there right now?

Yes. I think we're trying to kind of develop, we're kind of being very aggressive in all market segments and this continues to expand our presence not just in refining but in all of our segments so we're looking for more growth across-the-board.

And as far as acquisitions concerned, would it be looking more for some specialties in some of those other industry verticals, or more just like you've done in the past? I guess the would be if you got very specific industry needs.

I think the criteria we would kind of use is and we've talked before, we think that just acquiring companies for the sake of acquiring them is not a particularly high leverage activity. We want to acquire companies that can be the basis for accelerated growth, and that's all of our acquisitions have kind of fit that mold, if you look at the two most recent ones, the inspection services in Canada filled a gap, and allowed us to cross sell across our network. Obviously our initial investment in Europe kind of provides a platform for exciting growth over there, and so those are the things that we would be looking for, so just buying for the sake of buying, where we can't see kind of attractive growth from that, historically hasn't been something that looked very good to us.

That's all I've got. Thanks guys.

Our next question comes from Matt Duncan from Stephens, Inc.

Hi guys. Phil, I really kind of want to get a little bit more about the timing of when you'll see the uptick for the Spring and my understanding is that these turnaround projects typically you would get signed on for a Spring project. Late this year, early next year, but that you aren't going to know for sure how much work you've got until you're on site. Do you think that sort of normal timing will hold this go around?

Yes, I do. I'd love to say by November we'll have a big old order book but you know how it works. It's going to be after the first of the year, and we're going to see it in probably January, even more likely February, when things are ramping up and we're close in and we're seeing kind of requirements from both our owners and the generals on the, general contractors on these projects.

But the main thing I guess right now is that you are still seeing a big book of projects on the schedule for next Spring, haven't seen any change to that, and as of right now, I think you guys and I would just tell you from other people we talked to, everybody is still of the belief that next Spring will hold together because quite frankly it almost has to because of the delays from last Spring. Is that still the right way to think about this?

That is our point of view. Like you said the challenge is they would be a lot nicer to have firm orders or be in a world where we could say that it is absolutely so, because we have these POs to prove it, but that's not the way our business works. But it's certainly our belief is consistent with what you just described there.

Okay. And then the last thing here is you gave us some parameters around sort of which of your service lines or kind of where demand is anyway for the varying service lines. Which line has been the least impacted by this, and which have been the most? I assume the most would be machining and bolting, things that tend to be a little bit more project geared.

The on stream services are the ones that are least affected and those are fugitive emissions monitoring, field valve repair, hot tapping services, and some classes of inspection services, particularly where we have kind of permanent resident inspectors on site.

Sure and also I guess leak repair?

Correct. Yes.

Okay. And then how much are those down versus the declines in bolting and filled machine?

Well what I mentioned in the comments, the range for the on stream services kind of the roughly 5% to 15%.

So that is the range for what you're actually seeing?

Yes. That's based on our own experience, yes.

Okay, thanks.

Yes.

Our next question comes from Holden Lewis from BB & T.

Good morning, thank you.

Good morning.

Stepping back to the SG&A a little bit, I guess I was surprised that the SG&A wasn't down a little bit more primarily because if you look historically, obviously revenues were down so SG&A is naturally going to be down some, just along with the revenue decline sequentially from Q4, and I guess historically, it's not been unusual for every dollar that revenue comes off sequentially, you see $0.15 or $0.20 of decline in SG&A and that's I think kind of historically normal and this quarter you were really more at 12%, which is a little bit less than historically normal, even though you've really been working to sort of reduce headcount, and I guess I just would have expected a little bit more than historically normal in terms of sequential downtick in SG&A given the aggressive headcount management that you've been doing and I really didn't see it play through. Do you have any sort of perspective on that?

Well let me give you, you have some kind of assertions about historical normalness that I need to kind of go back and look at. I guess that your first premise was that lower revenue would lead to lower, automatically lead to lower SG&A, and I don't have a perspective that that's the case, because there's nothing in SG&A that's really SG&A expenses that's immediately related, directly related to revenues, so that the reductions are principally resource or headcount reductions and kind of spending cuts, entertainment, travel, reduced outside services, and the like, that as I said we've made a very significant focus on and kind of had projected that for the year, we would expect total SG&A to be $10 million less than 2009 and I think we're kind of basically on those kind of on that track. So I guess from my view, I'm going to need to go back and look at what's maybe kind of study our results or see what you're seeing on this normal decline, but that hadn't been the case where we're normally seeing, there is just some variability on accruals from here, kind of just normal chop in kind of bookings of those kinds of things, but in terms of driven by revenue, that would not be my starting perspective.

Okay.

Just to make sure Holden that you're pulling out the costs associated with the investigation are embedded in SG&A.

Yes, I have. We need to explore that further off line. On the gross margin side, the 150 basis points that's underabsorption just give us a review. Being a services business to a large extent, what exactly are the big pieces that are being under absorbed there?

It would be depreciation for the equipment, it would be all of the vehicle expenses that are in indirect expenses, and all of the kind of burden related to those, burden for our employees, although that will be, that would be variable to the number of employees we have, but when we reduce hours for employees proportionately, that would stay relatively fixed. The burden related to medical benefits and other kind of personnel benefits, and I'm going to say it would also be branch supervisor it labor, operation supervisors which again, the fact that we're reducing the number of techs generally is not the first step is not to kind of take apart our supervisor it infrastructure so that's kind of relatively fixed.

Okay, great. Thank you. And then sort of on your guidance, again that 10% increase in the second half and again this is just kind of crunching numbers historically, it's not been unusual just from a seasonal standpoint for your second half revenues to exceed your first half revenues and averaging out the 10 to 12% time frame. That looks like it's seasonally normal which would suggest that you don't need much of an uptick or any sort of heroic things on the demand side to achieve that. Is that right or am I looking at that wrong?

Here is where it's a little tricky with historical data. Again, we had a decade of I think 15% or 15 to 20% organic growth, virtually every year in that range so because of that growth, when you look at the second half of the year, you're reflecting kind of organic growth throughout that time period, so there is going to be a little bit of higher kind of growth, second half to first half, and by the way, you'd see it going forward again to the first half I think. I think kind of the numbers I have recollection of, and we can kind of follow-up more on off line is that I believe the second half typically has been maybe 52%, maybe a couple points higher, 52% of the year, if I look at average and try to normalize a little bit, so it wouldn't be my view that it's 10% or even close to that but it could be a couple of points.

But our view of that is generally, we're not sure there's any kind of statistical significance to that 48, 52 difference quite frankly.

Okay. And then just how much are the alliance customers of your total revenues now?

About a third.

I don't have it precisely but that's a good estimate.

Okay, and then just the last thing, sort of a big picture theme thing. If cap and trade were to go through, there's a lot of discussion about refineries being under a lot of pressure for that sort of thing, making it tougher to operate here, maybe finding alternative strategies. How would you envision any sort of cap and trade bill going through as it currently stands affecting either your customer base or your ability to bring additional services? I mean what would be the net effect of what's out there on your business for it to go through?

I think the short answer is we don't know. Obviously anything that changes the relative competitiveness of a facility or broadly the whole infrastructure could have significant impacts on -- the big issue for us is that forced more plants to close or not? I don't have any understanding of how cap and trade would change how plants operate. I think it kind of just penalizes the certain classes of plants more than others based on whatever the allowances that are provided to them, etc.

I didn't know if you had any services sort of en hand or maybe that you would be eyeballing as a potential acquisition that might take advantage of, you know, the need to sort of limit or capture or what have you, issues related to that.

You mean carbon sequestration or ways we can take carbon out? No, we don't have any. We really don't have anything of that order of magnitude. I would say again we have a very broad customer base and kind of the green energy, if you look at wind power and solar and all that, solar and less so than wind, but we have a lot of applications of our services for wind power, not that it's going to make a big deal of it, because it's just not going to be a big segment, but we're definitely going after it.

I think that if you do anything at all you should put it on your Annual Report. Everyone else does.

No matter how small it might be, right?

And then the thing you didn't address was cash flow, dividends, any interest in sort of going forward with one of those as your balance sheet cleans up and your cash flow generation continues to pump out?

I think we haven't discussed it as part of a near term item on our agenda. I think your general view is once we have no internal use for cash, that's productive, that's a very good thing to do.

Thanks guys.

Yes.

Our next question comes from Andrew Cash, from Point Clear Value.

You mentioned that you had organic growth over the last few years in the order of 10% to 20% and I'm just wondering, you know, now that the world is sort of reset at a lower level, do you have any idea of what you think you might experience in terms of organic growth over the next three to five years?

Honestly, Andrew, we think that our historical organic growth rate of kind of 10% plus is really a very realistic expectation for the long term.

Okay, so it's a combination of market share gains, new product offerings?

It's market share gains, and here is why is that again, against kind of a premise that demand is flat, we have a highly fragmented industry, we're one of the big guys, and yet with all of our growth historically, we're still just in North America, we're estimating that we're less than 20% share, and there's more than 100 competitors that we can identify. What's driving the market share growth is kind of good outstanding performance. We've got to start with that service performance but what's really driving it is customer preference to deal with fewer, larger, more professional service providers.

Ouf customers or the industry of customers is just consolidating their procurement with the larger multi-service, multi-location guys, and we're taking advantage of that, and so we have gone from in the last 10 years from $50 million to $500 million, yet we're still less than 20 share, so when we start saying well what can we grow in the future, a 10 share, a 10% organic growth rate is basically adding less than two points a share a year, so when I look out really even the next decade, I don't see much constraint from overpenetration of the market available to us. Now having said that and again we have the track record to prove we can do it but we still have to execute. Nothing is in the bag. You go earn it. But we're quite bullish about our longer term prospects.

It's a very compelling story and obviously your track record is very admirable now. As far as your CapEx is concerned you mentioned somewhere along the lines of $10 to $15 million. Is that the sort of level you'd expect to spend even if the world sort of remains flat, and you're picking up share, you're introducing new services? Do you think 10 to 15 is the right area?

Honestly it's kind of an estimate of what it will be. Just the way that we handle that is we kind of look at each individual investment opportunity and say, is that worth doing and frankly, in today's environment, virtually all of them are directly related to a specific customer opportunity that has payback right away.

Just final comment here is that just looking historically and I haven't really crunched a lot of serious numbers, just taking a closer look at your Company, for a Company that's grown at the rate you've grown, and given the service business, your free cash flow generation, is not a little bit higher than it was and maybe that's tied up to accounts receivable, but if you think you've gotten over the hump in that your free cash flow generation relative to sales would actually start ramping up.

Well, I think as Ted mentioned, we've paid down half our debt in the last nine months, and so we certainly had a very significant kind of portion of kind of that if you will that cash flow, when you're growing, I think our total growth rate is averaged a little under 30% for a decade and there's a lot of working capital kind of tied up with that, that growth, so historically that has been a big consumer and we're also organically growing on acquiring companies so there will be CapEx to kind of expand that capacity. We personally think that's a much higher leverage way to grow than acquisitions. Okay, thank you very much.

Our next question comes from Arnie Ursaner from CJS Securities.

Hi. Did you actually give us your tech headcount? I don't think you did. I think you gave us your total staff.

That's correct. I don't know that I, do you have a tech number? I'm not sure I have it handy but we can get it to you.

But more importantly so what's your strategy? You had been adding fairly consistently in the up cycle. I know you brought it back down. How should we think about your tech headcount for the rest of this year?

Well our field headcount right now at the end of the first quarter was just under 3000 or virtually at 3000. Honestly, we're going to, it's not a number that I even kind of estimate or think about. What I look at is utilization of labor, is making sure that we're not kind of deteriorating in our productivity as a labor that we do have, and we're paying and I think we've proved and believe particularly in this environment our ability to expand our labor and resources. We've proven we can do that in a tough environment, this is an easier environment to do that, that we can bring on labor whenever we need to meet our demand, so I'm more focused on productivity of the labor that we have on staff than I am worried about us not having enough.

So is it fair to assume we should not expect a lot of the inefficiencies of cost of training lots of new people as we go through--

No, I don't think so. What we have at our staff is the most experienced, obviously when you're downsizing, you're high grading. We have our most experienced group we have in what we'll see is we will be splitting, the way we'll grow is how we've grown in the past, we'll split crews and we'll be able to grow I think pretty quickly.

And my final question, most of the people have focused their questions on the Q4, the spring turnaround business, but could you just comment a little bit about how much of the Q2 turnaround work you haven't had or maybe even more broadly, you've guided or hinted that you expect sequential revenue growth of 10%, Q2 over Q1. How much of that is in hand at the moment?

It's really 20% is what our guidance was, in my comments.

I'm sorry, that's correct.

Well, again, the difficult part of that question is that exactly what the scope of all of the work we're doing will ultimately remains to be seen but we have a number of turnarounds going right now so we are staffed up and it's kind of consistent with that 20% estimate. We won't know for sure until we kind of conclude all of the turnarounds as we get toward the holiday season, but it's happening. So it's not, it's something yet to happen. It's happening now.

Very good. Thank you.

Yes.

At this moment I'm showing no further questions.

Okay, Hilda, let me wrap up here. To all of you we would thank you for your participation in this call and your continuing interest in Team, and we look forward to our next conference call with you. In the meantime, have a good day.

Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.