Team Inc (TISI) 2010 Q2 法說會逐字稿

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, John, and good morning to everyone and welcome to the Team web conference call to discuss recent Company performance. As John indicated, my name is Phil Hawk and I'm the Chairman and CEO of Team. Joining me again today is Mr. Ted Owen, the Company's Senior Vice President and Chief Financial Officer.

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

Thank you, Phil. First, as usual, I want to remind everyone that any forward-looking information we discuss today is being provided in accordance with the provisions of the Private Securities Litigation Reform Act of 1995. We have made reasonable efforts to ensure that the information, assumptions and beliefs upon which this forward-looking information is based are current, reasonable and complete. However, a variety of factors could cause actual results to differ materially from those anticipated in any forward-looking information. A description of those factors is set forth in the last paragraph of our press release and in the Company's SEC filings. Accordingly, there can be no assurance that the forward-looking information discussed today will occur or that our objectives will be achieved. And 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.

So with that now to the financial results. Revenues for the second quarter were $123.3 million compared to $148.8 million in the second quarter last year, a decrease of 17%. Similar to our first quarter, the sources of second quarter revenue declines when compared to the same period of a year ago are broad based, reflecting the continued constrain maintenance and project activity in all our end markets. Our revenue declines in Canada were even more severe than in the US and other areas due to the presence of a major oil sands project in the prior fiscal year which has since been completed. Reflecting primarily the impact of the Canadian facility project, TMS division revenues declined much more significantly than those of the TCM division. Net income was $5.8 million in the current quarter versus $10.2 million in last year's second quarter. Earnings per diluted share were $0.30 versus $0.51 in last year's second quarter.

Results for the quarter were negatively impacted by $1.2 million of nonroutine cost associated with an independent investigation of potential FCPA violations in our TMS Trinidad branch that we have previously disclosed in prior filings. Excluding these costs, net income would have been $0.34 for the quarter or $6.6 million. On a year-to-date basis, revenues were $224.2 million, earnings were $7 million or $0.36 per diluted share. Again excluding the impact of $2.3 million of nonroutine cost on a year-to-date basis, year-to-date earnings would have been $8.4 million or $0.43 per share. Now with respect to cash flow and balance sheet matters, capital expense was 2 point -- $2 million for the quarter and $3.9 million on a year-to-date basis, which is down from $9 million in the first half of last year. Depreciation and amortization was $3 million for the quarter and $6 million year-to-date. Non-cash compensation expense was $1.4 million in the quarter and $2.6 million on a year-to-date basis.

Total adjusted EBITDA was $16 million for the quarter, $24 million on a year-to-date basis and trailing 12 months EBITDA was about $46 million. Please note that when we talk about adjusted EBITDA, that reflects the add back of both non-cash compensation expense and nonroutine charges associated with the investigation. We continue to be very pleased with our financial position during this difficult economic environment. Our net debt, that is total debt less cash, was $62.1 million at the end of the second quarter. That is a reduction of $6.9 million since our May 31st year-end. In the 12 months since the recession began for us at the end of the second quarter of last year, we've reduced our total debt or net debt by more than $30 million. So with that, Phil, I'll turn it back to you.

Thanks, Ted. Now I'd like to add several observations and comments to Ted's remarks. As he indicated we continue to work through a difficult market environment. Our earnings for the quarter are significantly below the record results achieved in last year's second fiscal quarter. At the same time, however, I'm generally pleased with how we've managed our business in this very weak economic climate. Our focus has been on managing our cost, maintaining our profitability, expanding our financial flexibility, and staying well positioned for continued long term business growth. While market conditions in the quarter remained difficult, there were a few encouraging signs. Our revenues for the quarter were up sequentially more than 20% over the first quarter and up slightly over our fourth quarter fiscal year 2009 revenues, which was the last quarter encompassing the most recent prior turnaround period.

Further, while there's still many negative pressures at work in this market, we are cautiously optimistic that we will see some growth in activity level and revenues in the second half of the fiscal year. The primary driver of this revenue growth is expected to be expanded turnaround activity. Following nearly a year of fewer generally reduced scope major turnarounds in the industry, the current spring schedule is shaping up to be substantially larger than either the fall or spring 2009 turnaround seasons. At the same time we remain cautious in our outlook because most of the customer segments we serve continue to suffer from low demand and low profit margins when compared to historical levels. It is definitely not business as usual for anyone. We interpret the anticipated increase in maintenance activity to reflect the inability of our customers to defer major maintenance expenditures indefinitely. Now let's shift to our operating profits and profit margins.

For ease of comparison with prior periods, all of my remaining comments will refer to current financial results that exclude the investigation expenses. For the second quarter operating profits were $11.5 million and operating profit as a percentage of revenue was about 9%. Total operating profits were down 37% from the prior year period. And operating profit margin declined 3 percentage points versus that same prior year quarter. This decline reflects the impact of reduced pricing and lower job margins, as well as the negative leverage effect of reduced volume partially offset by our cost reductions. Total SG&A expenses have declined $3.8 million or 12% from the prior year quarter. I'm equally pleased with our cost performance above the gross margin line. Because labor is our largest expense category, technician labor utilization is a key driver of our overall productivity.

Despite the significantly reduced activity levels versus the prior year periods, Team's labor utilization levels are actually up more than 1 percentage point in both divisions. For those of you who have been listening to Team's conference calls for several years, you will be familiar with this next discussion topic, operating leverage. At Team, we define operating leverage as the change in operating profit divided by the change in revenues. Because a portion of our cost do not vary directly with revenues or activity levels, incremental operating profit margins or operating leverage will be significantly higher than our base operating margin, both to the positive with growing revenues and to the negative with declining revenues. Compared to the prior year quarter, revenues in operating profits declined $25.5 million and $6.9 million respectively. The negative operating leverage was 27%. However, we expect to realize similar positive operating leverage as the market recovers and our revenues improve.

We can see that impact by comparing second quarter results with the immediately preceding first quarter. Compared to the seasonally weaker first quarter, revenues and operating profits increased $22.4 million and $7.7 million respectively. The positive operating leverage compared to the sequential prior quarter was 34%. We are focused on achieving similar positive operating leverage in the second half of the year. Given the existing infrastructure and capacity within our Company, we believe that the positive operating leverage around the 30% level is a reasonable expectation. As our earnings release indicated, we are affirming our previously issued full year earnings guidance of $0.85 to $1.05 per fully diluted share for the fiscal year 2010 ending this May 31st. This estimate excludes expenses related to the FCPA investigation. Let me provide a little more perspective on our earnings guidance.

Team's first half revenues on an annualized basis with no additional growth in the second half would equate to full year revenues of about $450 million. On the same no growth basis with similar operating profit margins to those achieved in the first half of the year, our full year earnings per share it would be about $0.85. As previously discussed today, we continue to expect Team's revenues for the second half to be a little higher than the first half. With 10% revenue growth in the second half, total revenues would be about $470 million representing incremental revenue growth of about $20 million. With the expected operating leverage discussed earlier, this level of revenue growth could result in earnings near the high end of the range. Let's now look to Team's longer prospect. Given the very difficult market environment over the past year, a number of fundamental issues naturally come to mind. We continue to review and explore these issues thoroughly and rigorously.

Let me share some of our current thinking. There are a number of issues related to our markets. As the market changed fundamentally, is Team still well positioned to capitalize on opportunities. Our conclusion is that the fundamentals that have provided the basis for our extraordinary growth over the past decade are as robust as ever. Demand for our maintenance services is very likely to return to historical levels. We believe this to be true because one, is unlikely that plants have been systematically over maintained in the past. Therefore, we believe that plants will continue to need a similar level of maintenance services as in the past. A customer can defer but not eliminate its service need. Two, it's unlikely that a substantial percentage of current operating plants will be closed. The announced closures of two US refineries by Sun and Velaro in the past quarter certainly demonstrate that some plants -- plant closures can and will occur.

However, as a percentage of total industry capacity, we continue to believe that any reductions or closures will be small. It is also unlikely, or it is also likely, excuse me, that future plant expansions for at least the next few years will be more limited. We will not have this extra tailwind for the foreseeable future. Procurement consolidation. With fewer larger more professional service providers, we'll remain a more powerful trend in the current economic environment. Plants have fewer and fewer in-house resources with which to supervise service companies. Service scale economies through procurement consolidation is a high leverage cost reduction opportunity for our customers. The larger service companies, like Team, can provide better support over a range of service needs and for all facilities in a Company's network. In short, Team continues to enjoy a structural advantage over many much smaller competitors.

Another key issue relates to Team's individual prospects. Specifically, can and will Team return to the high business growth rates the Company has achieved historically. Despite its strong growth over the past decade, Team has very significant growth potential ahead in both North America and the rest of the world. In North America Team's total market share today is still less than 20%. Total market share with major alliance customers is only slightly higher. We have an equally exciting opportunity in Europe. We have a solid foundation in the Netherlands and Belgium that can grow and expand in a number of dimensions. The market structure and overall size in Europe is similar to North America. Today our European business is only 5% of total Team revenues. It has the potential to be substantially larger in the years ahead. Of course, having available market share to capture does not mean that Team will necessarily capture it. As has always been the case, we will have to earn it.

And our success in that regard requires continued outstanding execution. The primary elements of outstanding execution are a customer service mind-set where every colleague understands that customers choose us not vice-versa and that we need to re-earn that next service opportunity every day. An outstanding organization that values the contributions of all of its colleagues and provides the appropriate resources and training to support world-class service performance. An ability to focus on each and every job both operationally and financially. This isn't trivial with over 130,000 jobs annually. And a Company culture that promotes safety, ownership, pride, respect and integrity in everything that we do. The deep recession has caused us to react to significant near-term declines and disruptions in our business in order to stay strong operationally and financially. But we have not changed our long-term strategy or our aspirations for the business. Team's best growth opportunities are still ahead of us.

Before wrapping up let me add just a - add a couple of comments on the FCPA investigation. While the investigation has cost us more and has taken more time than we initially expected, I continue to believe that this unfortunate episode should have no significant impact on our business outlook. While the improper activity was limited in scope, it is nevertheless counter to our standards and culture. It reflects negatively on our entire Company. We have already strengthened our compliance processes and oversight in several significant ways and we will continue to enhance our compliance programs. 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 various government agencies.

Let me end with a few final prospectives and 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 basics of our business, 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 my remarks. Now let's open it up for questions. John, can I turn it back to you?

(Operator Instructions) Our first question comes from Matt Duncan from Stephens. Please go ahead.

Good morning Phil and Ted.

Good morning.

The first question I've got for you really kind of goes back to the pricing environment. I know last quarter you had thought it was about 100 basis points negative impact on your gross margin. You look at the gross margin this quarter and it was down a little bit less year-over-year than it was last quarter. Is that the pricing is improving a little bit or is that really more related to mix.

I think it's the latter, Matt. I think it is related to mix. It varies kind of margins, if you look at gross margins or, and we look at more even detailed kind of direct profit margins vary a lot even by division and that reflects kind of volume effects, mix effects and a lot of the latter. I think on balance I would still swag, it is hard to estimate, but I would still swag about that 100 basis points impact.

Okay. And Phil, do you have any sense that with the expected uptick in the spring ties to turnaround activity that pricing may get a bit easier for you guys or do you think is it going to stay tough?

I think it's going to stay tough, in kind of the same vein we are and the driver of that is that the economic performance of our customers is poor. And so they are continuing to focus hard on anything they can do to kind of address that issue for themselves.

Okay. And then as you look at your various service lines, are there any that stand out, that are doing better than others that may not be down as much? And what is driving that if there are?

Yes, I think if you look at and I am going to use year-to-date numbers, I think we are, I am rounding off here, what are we down just a little less than 20% overall. Our on stream services are going to be down about half that amount. Our turnaround services about twice that amount. The turnaround services being the heart treating, fuel machining bolting, fuel valve repair activities. The on under pressure on stream services being leak repair, fugitive emissions, monitoring, hot tapping. Inspection services have held up pretty well, not quite as good. It is kind of a little bit of a bland. Better than our overall average, but again reflecting a mix of on stream as well as some turnaround activity. Our alliance customers, our big customers, their rate of decline is approximates the same as our total change in volume or decline, so they are kind of basically kind of representative of the whole as well.

Okay. Thank you, that's very helpful. If I look at this Trinidad investigation, I remember last quarter we thought it was going to cost $2 million. Now it's $3 million. I am just curious what is causing this to drag on and get more expensive?

My cute answer is lawyers. It's an independent investigation and we are really beholden to the independent investigators in terms of how they approach it. I really don't have a lot to say other than as I noted, it is a little bit more than we thought.

Okay. And then looking forward now to the spring, I know we've been talking about this for a long time and fairly in-depth, it sounds like your expectations for the spring are still pretty much where they've been for the last six months that things are going to be better. It's tied to the fact that these plants simply cannot push out this maintenance too far. They start having safety problems. Are you starting to sign on work for the spring at this point? And have you seen any changes to the calendar? Is it still pretty much the same as it would have been when we last spoke on this conference call three months ago.

Yes, it is pretty much the same, although as we get closer and things aren't moving or changing appreciably, that is a good sign. We are having discussions with many customers about their plans and activities, planned kind of events this spring. We see a lot of industry data that supports that, that it will be a more active spring. The caution is that the economic environment for our customers in our area remains weak, and so I guess until it happens, we have a cautious optimism I guess.

Sure and my recollection that these projects typically start up beginning in mid February. Do you really have a sense when you might know how you think the spring really is going to shape up? Is it that mid February start up point or is it really more after you get into these projects and find out really how much work sticks.

First of all I think we are expecting to see some activity start as early as mid January. So there are some projects starting earlier than that mid February range, although it will then cover the entire period really into May and we'll see perhaps in some years perhaps a little beyond that. So we are going to see some activity, some turnaround activity coming fairly soon, we believe. But you are also correct that the scope of our work is largely -- is significantly impacted by discoverables when the project kind of gets under way. So for us to have a real clarity on even the revenue, projected revenue for a particular turnaround, it's tough to estimate that with any precision really until it's almost over.

Okay. And Phil, am I correct in saying that a mid January turnaround start date is a bit earlier than normal?

It was certainly earlier than last year, but I think we've -- I think over the last couple of years we've seen some of those beginning in that time frame. I don't think it's particularly extraordinary.

Okay. And then last thing here and I'll hop back in queue. As you look at your various customer groups, it sounds like the vast majority are still struggling. Are you seeing any signs in any of your major customer groups of improvement. Are there anything -- is there anything you are seeing that points to potential improvement in the underlying fundamentals of your business anytime in the next 12 months?

That's a very tough question to answer. I think it's -- I'd make a general observation just about business recoveries that you kind of -- it's easy to see after it's started. It's hard to see before it's started.

Sure.

And I think maybe that is a little bit where we are. I don't see -- I can't point to specific positive things that are happening that will -- that are driving this forward, but if the general economy is improving and there is some indications I hear about that, if capital goods sales like autos improve, that is going to help the petro chem industry, that is going to help the power industry, that is going to help the steel industry. A weaker dollar, which we have certainly relative to a year ago, that will help exports of some of those same products or certainly the relative competitiveness vis s vis exports. So those are possible positives factors. I'll just tell you from our standpoint our business position is we are not investing or staffing ahead of actual activity because I think it could stay soft. It could also stay soft for sometime.

All right. Appreciate the insight. Thank you.

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

Hi, good morning. First I would like to offer a comment. I think you should ask your analyst to ask one question then a follow-up. So in that spirit I would like to ask one question with a follow-up. You mentioned the startup of seasonality and the turnaround season, but you didn't comment about the intensity of the work you expect to have. Last year you were being pretty much asked to bill eight hour days and not get a lot of over time. Are you seeing more request for 12 -- continuing work 12 hour shifts 7 days a week.

I don't have a complete roll up, Arnie, of that but, yes, I think that is the case. That we are seeing more, I'm going to say, more typical or more -- a higher mix of just I would say the normal seven day a week 24-hour a day turnaround schedule.

And when that occurs typically doesn't that enhance your margin since you are leveraging your SG&A a lot better?

I guess in the sense, yes, for that particular time period, yes. That would be true.

Okay. Embedded in your revenue guidance or outlook for the rest of the year, what percent of expected revenue would be coming from project activity and are you seeing a change there?

Well, I think as I mentioned in my general comments, the -- when you say project you are talking about new construction -- new capability as opposed to turnarounds?

Well, you have had a lot of work in the past in places like the oil sands and other project related activity.

Fair point. If we looked a year ago I would have estimated about 15% of our revenues were tied to activities that I would say were new capability or new capacity projects and you mentioned the oil sands project was a good example. That was a green field facility that was being constructed. I would say today that the percentage of our revenues associated with that is, and this is a little bit of a swag, but is about half of what it has been historically. There are new pipeline projects. There are expansion projects still underway in the refining petro chem area and there will still be fewer -- some of those, it is just at a much lower level.

It had been more like 15%. So you are saying now it is high single digits at this stage?

Yes, 5, 5 to 7, 5 to 8, something like that. It's a -- I have to say I haven't actually gone back and added them up, but it's not going to be none, because there's just the need for replacement of kind of pipelines here and there and there's always some kind of debottlingnecking projects going on here and there.

Okay, final question or comment. Typically strong companies gain share of market from weak competitors in downturns. Do you believe you are gaining share market, Phil?

I believe the potential. I concur with your basic premise. I can not say with just the level of disruption in the market that I can see it. That would be our hope and expectation that that will occur. Again I'll make a comment similar to the one I made to Matt. I think sometimes you see that better after the fact than while it's happening.

Thank you very much.

Sure, Arnie.

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

Good morning, how's it going

Good morning, Rich.

I would like to just drill a little deeper on that last question. You alluded to the fact earlier in the presentation that consolidating service providers becomes more appealing for customers when times are tight. Are there any anecdotal examples you could give of where maybe you have won business that would have alluded you in a good economy?

I don't think I have enough evidence that it is happening in any way that is material to really comment on. Can I say that we have kind of earned business at a particular facility, sure. But to say that I know the motives behind it and can say that it's systematic to the consolidation trend, no, I can't say that. I can point to over the last several years just the expansion of our kind of, I'm going to say, alliance agreements or multi-plant, multi-service agreements have expanded extensively and that still continues to be a focus of ours, but I can't say that- in the last 12 months that I have seen a huge change in behavior on that front.

Okay. Going through the kind of (inaudible) of pricing agreements and the operating leverage that you cited earlier, it seems you have landed on an annualized gross margin range in low 30s, 30%, 32% or whatever that equivalent is in your job margins that you look at internally. Given that you just exited a number of the price negotiations with your clients is that the range that we can expect until the economy picks up in ernest and you have the opportunity to revisit some of those agreements?

I think so. Okay. It's going to be affected by mix and volume and all that, but I think that is a reasonable expectation.

So more of the leverage would come from the -- either the industrial SG&A or the SG&A for corporate?

Yes. I was going to say it's going to come from volume, because we'll be able to kind of handle more volume -- we expect to be volume increases on the -- we are talking about overall margins will improve because of the operating leverage of the principally the fix cost below the line, although also there will be some leverage in our indirects. Okay. Gross marginally.

How far have you trimmed the field headcount since the peak?

Our total headcount reduction I think is in the 350 range.

It is probably closer to, since the end of the second quarter a year ago, it's about 400 reduction, Rich. Our total headcounts at the end of the second quarter right now are about 3200, a little more than 3200.

Okay, great. Thank you. Yes.

Our next question comes from Holden Lewis from BB&T. Please go ahead.

Great, good morning. Thank you.

Good morning.

A couple of things building on, I guess, some earlier questions. The first is when you comment about sort of the turnaround season and all that I assume that you are sort of leaning heavily toward the refinery side of the business, which is about half of what you do, and you fully said that everything remains weak. But when you look at the other 50% of the business, whether it be chemical, petrochemical, metals, mining whatever it is, do you have any similar type of visibility about that half of the business as you do on the refinery side? Are the dynamics of that visibility different? If so, are you also confident that that non-refinery business is going to be up 10% in the second half over the first half? That sort of guidance.

Because the individual plants and facilities are smaller in the other segments, the flow of anecdotes and kind of what I see personally is less than I see on the refining side. Anecdotally we hear about turnaround activity coming in those other areas, but I would say that our basic premise is the refining petrochemical complex, that is where the big change that is clearly visible to us. I don't have a good -- if we look at some of those markets, I don't have a good sense one way or another on power and say steel industries of whether there's bigger turnarounds or not, honestly, in the spring (multiple speakers).

Just to point to that, that when we talk about 50% of our business is refining, remember that there is another 15% that is the petrochemical complex and so the tracking data or kind of the visibility relative to that piece, so it's really more like 65% of our business that we have perhaps better tracking ability than pipeline and power.

We are seeing, on our books for the spring our expectation, our turnaround activity I am familiar with several in the power industry. So we are seeing some activity there. It was surprising to me, frankly, how much the power industry was hurt by the lower economic activity. As I've been tracking industry staff, the profitability of that industry was hurt quite a bit over the last year by a reduced manufacturing output.

And the one area you didn't address was on the project work, oil being back around $80. Are you increasingly encouraged that you are going to start to see some of that new capacity work coming back on stream as you get into the second half of this fiscal year or into fiscal '11?

I think as it relates to upstream activities and I am kind of referring to the Canadian oil sands, tar sands, yes, we have some encouraging. I think it's an encouraging trend and actually we are seeing some preliminary activities by the companies up there to restart projects in the oil sands. Now whether that will happen the second half of this year or early next year or later remains to be seen, but it's encouraging activity that we are seeing. As it relates to the refining complex in the US or North America, I'm not particularly optimistic because crack spreads continue to be very, very low, and I think we need a more robust environment for those things to be considered.

And then the second question was with regards to -- you shaved out the $10 million in expenses on an annualized basis, what would it take for you to be sort of kicked back into growth mode where you begin to look to add those costs back and grow again. Do you need to see the macro indicators getting better, because you have already -- you are pretty confident that revenues will be up year-over-year in the second half of 2010, but it sounds like that is not enough to rekindle your spend. So under what scenario would you envision beginning to add those resources back into the model at a decent clip?

Well, let's talk about the resources. The $10 million is kind of the SG&A kind of reduction. Our view is we didn't completely revert back to where we where. We've maintained -- what we think we've done is really tighten and fine-tuned kind of our current capabilities. So our belief is that really with some substantial growth that we will not see expansions of SG&A expense. That we are anticipating holding the line. Now a few things like we've kind of really tightened the line on any kind of wage adjustments and any kind of benefits programs that we would probably as our business improves try to get more back towards steady state in some of those areas, but in terms of adding significant resources in anticipation of a stronger market, that's not our expectation. Now let's talk about tech. Technicians are kind of our direct resources. Again our focus is going to be on high labor utilization and utilization of our technicians. As I pointed out in my comments, our utilization levels are very high, but they are very high with, frankly, with low worked hours relative to what they've been historically for our technicians.

So we are now working, I don't have a precise number, but just a somewhat illustrative number where technicians today are working on average 40 to 45 hours. A year ago they were working 50 to 55 hours. So we have a lot of capacity just built into our current workforce in order to kind of capture, capitalize on increased business opportunities. I think we've also shown that we can ramp-up fairly quickly in the face or in response to additional kind of project opportunities. So I am not too concerned about our ability to kind of serve new growth opportunities and we certainly commercially are focused on, in a number of dimensions, on kind of continuing to grow our business, but what we are not going to do is add resources ahead of that. We don't foresee the need to add resources ahead of that. That is not what we need to trigger growth. What we need is a little bit stronger market and then to kind of get back into that positive momentum.

Okay, great. Thank you.

Yes.

Our next question comes from Max Barrett from Tudor, Pickering, please go ahead.

Hi, good morning, guys.

Good morning.

Phil, you had commented on the last call that you didn't need the help of market fundamentals to see sort of 10% improvement in the second half of 2010 and that this would sort of get us halfway back to normal. Based on sort of the deferred maintenance and necessary evil thesis, could we also see the first half of 2011 higher without the improvement in crack spreads and refinery utilization, et cetera?

That would be consistent with that thesis. Okay. Like I said, the cautiousness of our cautious optimism is just the poor economics for our customers, but I think the argument is the same.

Okay. And secondly first I was wondering how LRS fared in the quarter. You mentioned that this is sort of an area where you think you can grow and also could you talk a little bit more broadly about the health of the European market and Team's growth prospects over the next 12 months.

LRS did fine. I think it suffered kind of proportionally to the North American operation just on a growth stand point for the same reasons, but its margins are good and its profitable and it's kind of on par with our expectations and where we would have expected it to be. We are -- we think there's phenomenal growth prospects particularly because of low base in a huge market and we are exploring lots of opportunities and frankly we are now kind of two years into our relationship with LRS and we had a little bit of a year to get all our systems in place and we all dealt with the downturn this past year, but we have got a number of kind of step out opportunities that we are pursuing. I would really rather not dwell on individual ideas that haven't happened yet, but we'll share with them as we go. But our expectation is that we should see much more rapid growth percentage wise in Europe than we will in North America again because of such a small base that we are starting from.

Great. Thank you very much.

Yes.

Our next question comes from Tahira [Epsom] from KeyBanc. Please go ahead.

Good morning, gentlemen, and first of all congratulations on a good performance given the market circumstances. Hello?

Yes.

Sorry. I didn't know if I had you on line. I have a couple of questions to ask. Number one, if I look at your compounded annual growth rate on earnings on a five year and ten-year basis, ten year your earnings have grown as much as 30% on a compounded annual growth rate basis. Over the last five years, they have grown at 17% on a compounded annual growth rate basis. Phil, when you talk about really getting back to historical growth levels, are we looking at something around the 17% mark or 29% mark?

Thank you. Of course as you know the way math works, Tahira, is if you add a horrible year to four years, five years, it has more effect than if you add it to ten and I think that reflects your numbers. Here is our model of growth is we don't expect much in the market. We expect market share growth to drive it and our historical aspiration has been 10% up line revenue growth and if we can achieve that organically, we believe that translates into roughly 20% income growth.

Got it.

That would be our model and expectation going forward. Simply that is where I would expect -- that's our, continues to be our aspiration. As you point out we have done -- we had some acquisitions that will affect our top-line growth a little more than that historically and of course if you get a ten year look, we are a little bit higher than that overall. But I think that is my personally aspiration is to achieve those results long-term.

Thanks. That was very helpful. And then if you look at your G&A as you have discussed and I think it has been fairly well trashed out, but if you look at your growth rate as outside of 2010 and look at your top-line growth rate really going back to, let's say, 10% on a normalized level, how do you see G&A ramping up? Have you pushed it down to the point where the ramp-up would have to be a little more accelerated if business comes back just because you made your structure very lean or should we assume that G&A growth is really going to replicate historical levels on an organic basis?

I hope we do better, Tahira. I'm just going to give you a little historical perspective on where we were a year ago. One year ago, we would have -- I think if you look at ten year growth rates, one year ago our compound growth rate was approximately revenue now or activity level was approximately 30% a year, our organic growth rate for the last ten years at that point was 15% to 20% a year, and this is going from $50 million to $500 million. And so we kind of -- we were kind of transforming our Company from a support standpoint as we got bigger and bigger and frankly probably got a little ahead of ourselves as we put in some of the capabilities that we needed to manage that business in all areas of accounting, finance, HR, IT, all those systems just to run a full size business. And I think what we've done in this downturn is really not dismantle that but tighten that up and recognize that we were more concerned about covering the business and covering -- supporting our business than being as optimal as we could be from a cost standpoint because of the rapid growth that we were trying to manage.

I think we have now tightened up to where we think we have a pretty good support and pretty efficient support activity, and frankly I think we can add a substantial amount of business without significantly increasing that support activity. So as I mentioned to one, maybe one of the other callers, things that relate to just depressing, I am going to say, non-normal kind of personnel management like depressed kind of wage adjustments and benefit support, I would like to put that back and I would like to restore that to more kind of normal long-term levels. In terms of adding significant resources or seeing the need to add significant resources to support our business, I certainly don't see that from a corporate standpoint and I think even commercially the add backs will be -- will not be proportionate to our revenue growth but will be, I hope to be much lower.

Okay, fair enough. If I look at your peak earnings before the economy sort of went all topsy turvy and that was in 2008, you produced earnings of $1.20 and that was only on a partial contribution from LRS, would it be fair to say as we look out to fiscal year 2011 and I know you are not presenting any guidance at this early point but as we look beyond 2010, would it be fair to say that you could well exceed that just because your G&A is going to be well under control and even if you look at fiscal year '10 and if it turns out that it's closer to your expectations, cautiously optimistic expectations of close to the upper end of the guidance your earnings really haven't declined that materially over the last couple of years even though the market has been fairly challenged. So with a more lean structure would it be easy for you to surpass as it stands today, assuming global economy continues to recover and EPS outlook organic which exceeds your 2008 levels.

I'm going to -- I am not going to let you pin me down on a forecast for '11, but I would say it this way is that the operating -- we would expect significant operating leverage on revenue growth and to achieve what you are asking about, what does it take to get beyond a $1.20, it is not very much. It's revenue growth in the 10% range over running rate at the end of the fourth quarter would, or second half, that's where to using your scenario, if we are running at a 470 rate for the year or maybe a $500 million rate roughly for the second half of the year, a little growth on that would certainly exceed, should exceed historical earnings levels.

Fair enough. That was very helpful. Congratulations on the quarter again and thank you very much.

Thank you.

Our next question comes from David Yuschak from Madison Williams. Please go ahead.

Good morning, guys, great quarter. As far as you're looking into the second half of this year and your optimism, do you think that you can probably do more with your alliances in this period, in the next six months versus becoming more aggressive on the bidding for business away from your alliances?

I would expect our -- because the major turnaround work will be alliance customers, I would expect that business to grow a little more rapidly just because of the source of the -- where the activity is, I think. But just generally speaking I would say that where -- a plant is a plant, right, and our service locations are calling on all those plants and we really don't make a big distinguishing, I guess, discernment between who the owner is or which ones we would go try to serve or call on. So, I expect us to continue to expand in a number of dimensions.

As far as the -- with a good potential robust opportunity here in the spring, is it your thinking that you may have to become more aggressive on the bidding side of it just because everybody does have capacity to add new business? Is that pricing environment going to be more difficult maybe than what you have seen in the past based off of just where we are at in way of utilization rates?

No, I think it is going -- it is difficult now because of just the, as I mentioned earlier, the poor economics for customers, but I think a lot of this work, don't want to say all of it, but nearly a substantial portion of it will be performed under the basic agreements that are in place. So I don't see the amount of work that we are going to do this spring based on our success in bidding for activities. We have arrangements in place, some of which that have been modified in the past year, but it's in place and that's what we are going to work under.

Okay. Then one last question. As far as because of the weak economic conditions, does that suggesting that maybe there is more acquisition opportunities and would they be more focused in Europe for you guys than here in the US? Just thinking that with the weak economy you may want to step up to the plate more than you would as the recovery develops.

Well, I think, as we've said before, I think we always look at acquisitions as a possible supplement to our organic growth and to the extent that you are in a disruptive environment that might make some opportunities more available, although that's a theoretical observation, but we remain kind of interested in opportunities that can accelerate our growth beyond our organic activities. That is really going to be the key, though, is that we are looking for opportunities that --not buying growth that we would naturally earn anyway, but I guess buying capability or exploring capability that could allow us to expand in areas or expand more rapidly than we would otherwise do. So we remain receptive to that. The difficulty is, as you know, with any acquisition it takes two consenting parties. They are difficult to do, so we don't really forecast those, but we continue to be, opportunistically be alert to things that might fit us.

I appreciate, thanks.

Yes.

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

My follow up was answered. Thanks.

(Operator Instructions) Our next question comes from Holden Lewis from BB&T. Please go ahead.

Great, thank you, again. Can you give some -- it looks like your debt overall went up sequentially in Q2. I understand there is some seasonal factors behind that, but from the current debt position, what is your expectation over the balance of the year? Would you expect to reduce debt by a meaningful amount? Can you just give a sense of what is expected on that line?

Holden, I would not really expect to see a debt come down a lot over the course of the year, because we are, again, in the second half of the year, we expect overall revenues to grow because of -- for reasons that we've described. Certainly in the second quarter revenues grew 20%, our biggest kind of capital requirement is working capital associated with periods of growth. So in the third quarter you'll see debt come down again but then in the fourth quarter it will, it should go back up again. So you are not going to see the, kind of the extraordinary reductions of -- that we saw over the course of the first half of the year in the second half of the year, but we should continue to see as a result of kind of -- we will have a kind of constrained capital spending in the second half and certainly we will continue to tightly manage receivables and so the effect of earnings should result in more reduction in debt, but not on the dramatic levels that we have seen in the first half of the year.

Okay. And then just sort of a, a higher view question I've asked before, just didn't know if there was any greater insights or anecdotes on it, but again when you think about the various sort of federal initiatives that are in place, whether it would be towards clean energy, which might work against oil sands, or whether you think about cap and trade, which I think the refiners are not all that pleased with what might come out of that, do you have any greater insights into what some of these external federal driven items might have on you over the next several years?

We really don't, Holden. I guess the test I'd make is there anything I'm rooting for or rooting against that what I thought would be good for us or not, and the answer is really there isn't anything. I just don't have a perspective of what would be helpful or not, frankly, to our business.

I think that's it. Thank you.

Yes.

At this time we have no questions.

Okay. I'll just wrap up then, John. I want to just thank everyone for your participation in this call and your continuing interest in Team. We look forward to our next conference call at the end of next quarter. I think it will be sometime in the late March, early April time frame. In the meantime, everyone have a good day.

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