Team Inc (TISI) 2010 Q4 法說會逐字稿

Welcome to the Team IR call. My name is Sandra and I will be your operator for today's 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, CEO. Mr. Hawk, you may begin.

Thank you, Sandra, and good morning, everyone. It is my pleasure to welcome you to the Team Inc. Web conference call to discuss recent Company performance.

As indicated, my name is Phil Hawk. I am the Chairman and CEO of Team. Joining me again today is Mr. Ted Owen, Executive Vice President and Chief Financial Officer.

The purpose of today's conference call is to discuss our recently released financial results for the Company's fourth fiscal quarter and full fiscal year ending May 31, 2010. 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, 8K, 10Q, and 10K filings to the SEC, as well as 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. As Sandra indicated, following our remarks we will take questions from our listeners.

Ted, let me turn it over 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. 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.

With that, now to the financial results. First, we say that the results for the fourth quarter and the year-to-date period are impacted by three separate nonroutine charges, including two that we have previously disclosed. The previously disclosed matters pertain to the FCPA investigation and to the devaluation of Venezuelan currency. The third item relates to severance costs associated with additional cost reduction initiatives that we completed in the fourth quarter.

I'll talk more about each of these nonroutine matters in just a moment, but my following comments about operating results will be on an adjusted basis. That is, excluding the impact of those charges and credits.

Revenues for the fourth quarter were $125 million which is up 4% compared to last year's fourth quarter. Adjusted net income was $6.1 million in the current quarter versus $5.6 million in last year's fourth quarter. And adjusted earnings per diluted share were $0.31 versus $0.29 in the fourth quarter last year.

Now, let me just describe those nonroutine charges that affected our results for the quarter and for the year. First, as I said, during the fourth quarter we implemented cost reduction initiatives, which will result in an additional reduction of about $6 million of indirect and SG&A costs in fiscal year 2011. There would not have been, by the way, much impact in the current fourth quarter, relative to those initiatives which were taken near the end of the quarter. Also, the impact will be about half and half between indirect and SG&A costs next year.

These initiatives included the elimination of nearly 80 indirect and SG&A positions from our organization. Severance associated with these actions of about $700,000 is included in SG&A expense in the quarter.

The second matter is the FCPA matter. As we previously reported, our Audit Committee completed its independent investigation, and the results of that investigation have been communicated to the SEC and to the Department of Justice. Their investigation concluded that improper payments of limited size were made to employees of foreign government-owned enterprises in Trinidad, but determined that the improper payments were not made by or authorized by employees outside of that one TMS Trinidad branch. The total professional fees associated with the investigation were approximately $3.2 million.

And finally, the third matter is the Venezuelan currency devaluation. Effective as of the beginning of our third quarter of fiscal 2010, we began to account for Venezuela as a highly inflationary economy. Accordingly, currency fluctuations between the bolivar and US dollar are now recorded in the Company's statement of operations.

In January of 2010, the Venezuelan government announced a significant devaluation of its currency and, on a year-to-date basis, we have taken a charge of $1.7 million relative to the devaluation, which is reflected as an element of other expense below the operating income line. By the way, our total remaining investment in Venezuela is about $1.5 million.

Now let me shift to a discussion of our balance sheet and cash flows. Capital expenditures were $2.2 million for the quarter and $7.7 million for the year. That is down from $16.4 million last year. Depreciation and amortization expense was $3.1 million for the quarter and $12.5 million year-to-date, and non-cash compensation cost was $1.1 million for the quarter and $5 million for the year.

Total adjusted EBITDA was $15.1 million in the quarter and $46 million for the year. Please note that adjusted EBITDA reflects the add-back of both non-cash compensation expense and the nonroutine charges affecting operating income.

We continue to be very pleased with our financial position during this difficult economic environment. Our net debt at May 31 -- that is, total debt, less cash -- was $36 million. That is a reduction of $33 million in just one year. Our debt to EBITDA was 1.3 to 1 and our borrowing capacity under our credit facilities was $78 million.

Finally, in our earnings release last evening, we announced that the Board of Directors has authorized the repurchase of approximately 5% of Team's outstanding common stock. This decision reflects our confidence and our optimism in Team's future prospects. We expect this to be a very good investment for our shareholders.

It also reflects our strong balance sheet and strong projected cash flows. Based on our current projections of operating cash flow in the current year, we do not expect our debt levels at the end of next year to increase as a result of this repurchase program.

With that, Phil, I will turn it back to you.

Thanks, Ted. Now, I would like to provide some additional perspectives on our recent performance and outlook. In my comments, I will refer to adjusted financial results, excluding nonroutine charges as discussed by Ted.

Now, let's begin by addressing Team's performance last year. As we have discussed for the past several quarters, Team is faced with weak conditions in our markets, which directly relate to the economic recession that began in the late fall of 2008. Reflecting this market weakness, our total revenues for the year declined about 9%.

Our full-year operating profit reflected both the decline in volumes and about a 1 to 2 percentage point decline in job margins. These declines were partially offset by cost reductions in both indirect and SG&A categories. Total operating profit was $29 million and approximately 30% decline from the prior year.

As a point of perspective, in each one of my 12 years as Team's Chairman, with the sole exception of this past year, our Company has grown its business, often rapidly. Our compound annual growth rate in revenues for this 12-year period is above 20%. Excluding the impact of acquisitions, our organic annual growth rate for the past 12 years has been about 15%.

Our ability to deliver outstanding service to our customers effectively, efficiently, responsively, and safely is the foundation for our success that the Company has achieved over the years. Each of the approximately 130,000 service jobs we perform annually is the opportunity to earn that next job with one of our 6,000 customers.

We have the additional advantage in North America of the broadest service network and service line offering in our industry. We are a very attractive option for customers looking to simplify and reduce the number of service companies they work with, either in total or on a specific project. Our historical growth and growth in market share reflect the power of these advantages.

So what has happened over the past year and a half? Has the market changed? Are Team's historical advantages still relevant?

The short answer is yes, the market is changing in some respects. And absolutely, yes, our historical advantages are still very relevant. Let me elaborate.

The economic pressures facing our customers have been the impetus for many of them to make changes in their procurement processes. In many customer companies, the procurement and finance functions are increasing their influence in the buying process at the expense of the maintenance and operations functions.

There is no question today that many customers are more focused on pricing, rates, and cost. This shift in procurement process requires that we learn and adapt to these new processes and, in some instances, you rate formats. And we are and we will.

But these changes don't fundamentally change our market opportunities and outlook. Historically, our success has not been based on windfall profits or profit margins. Since we believe our efficiency and cost position is now and will continue to be competitive with any other service provider, there is no reason why we should not continue to earn fair and attractive profits with any customer pricing rate structure and format.

That leads to the next question. When can we expect to see improved growth and profits from Team? I believe that our return to growth has already started. During the first half of this past fiscal year, Team revenues were down about 17% when compared to the same prior year period.

For the third quarter, Team revenues were flat and, now in the fourth quarter, Team achieved modest 4% revenue growth. While we still have a long way to go, we are growing again. Our operating results for the fourth quarter reflected continued solid execution and focus on efficiency across our Company. Adjusted operating profit was $10.7 million, and adjusted operating profit margin was 8.5%.

The operating leverage on our revenue growth versus the prior year fourth quarter is also encouraging. In this comparison, Team earned incremental operating profit of $1 million on about $4.3 million in incremental revenue growth, resulting in an operating average of about 23%. There is a similar positive operating leverage story when comparing the fourth-quarter results with the previous sequential quarter, our third quarter.

Let's now look forward to the current 2011 fiscal year. While we do not expect market conditions to improve dramatically, we do expect our performance to improve significantly in the coming year.

This improvement will be driven by three major factors. First, we do expect some continued gradual improvement in overall market demand, as some deferred maintenance over the past several quarters becomes no longer deferrable.

Second, we expect to benefit from the reductions to our cost structure. In May, as Ted mentioned previously, we took actions to reduce our base cost by another $6 million annually.

Finally, we have stepped up our business development efforts and have refocused on expanding our business. In this regard, we have made targeted investments designed to strengthen our sales and business development capabilities and focus our organization on business development initiatives.

Put simply, we are not waiting for markets to improve or for procurement processes to change. We are aggressively going after new business. We expect to be a successful growth business with our current business environment.

With respect to business development and business growth, Team continues to expand and extend its service capabilities. As examples within the past year, Team's TMS division has introduced two new product lines -- insert valves and pipeline wise -- and expanded its laser measurement and heat exchanger servicing capabilities. Similarly, Team's TCM division has expanded its advanced inspection capabilities in several technologies, including GUL, phased array, EMAT and AUT -- and has also expanded its wireless heat treating and induction heating services.

For the fiscal year 2011, the Company expects total revenue to be between $470 million and $500 million. We currently estimate the net income for this year will be between $1 and $1.15 per fully diluted share.

Now I would like to shift topics and take a moment to briefly discuss the recent promotions of two Team senior managers. As I mentioned in the introduction, Ted Owen has been promoted to Executive Vice President and Chief Financial Officer. And Pete Wallace has been promoted to Executive Vice President and Chief Operating Officer.

While you all know Ted, you don't know Pete. Pete Wallace joined Team 22 years ago and has held numerous leadership roles throughout our field service network. Immediately prior to his promotion, Pete was Senior Vice President for Business Development and Commercial Support activities.

The primary objective of Pete's new role is to provide additional leadership and focus on opportunities that span across our field service networks and support groups. The new positions also further Team's longer term organizational development objectives. Please join me in congratulating Ted and Pete on their recent promotions.

Let me wrap up my remarks with just a couple of final comments before we take your questions. Despite difficult market conditions and a disappointing year performance wise, I remain very confident in Team's prospects for both next year and many years beyond.

In the near term, we have positioned our business to be successful in our current business environment. Longer term, we continue to have outstanding growth opportunities in virtually all service lines and in all geographic regions, both within North America and beyond.

To realize these growth opportunities, we need to stay focused on the basics of our business, providing great service with every service opportunity, continuing to capitalize on our services network advantages, managing the profitability of our business job by job, balancing our resources with current activity levels, and conducting our business all of the time in all activities in a manner that fosters pride from all Team colleagues and respect from our customers. In my view, that is how great organizations are built and sustained.

That concludes my remarks. Let's now open it up for questions.

(Operator Instructions). Matt Duncan from Stephens.

Morning, guys. This is [Jack Atkins] on the call for Matt. My first question is just on the general market outlook. You know, refining utilization rates are [backed] about 90% and refinery margins seem to have stabilized in the last few months. Has that begun to translate into an uptick in the [manner] for you guys at this point? And do you get the sense that your business could be at a turning point here?

I agree those are encouraging factors and I think you saw that, also, in the profit reports for the second quarter by most refining segments or independent refiners. I would say, though, that that near-term profit performance has not yet translated into a more robust outlook by refiners. I think most are taking a very cautious view and continue to be very focused on cost management minimization.

Of course, sustained improved conditions for them would be a great circumstance. And we hope for that.

Sure. Okay. Shifting gears here now to the Gulf oil spill. Could you guys give us your thoughts on how that --? On how the oil spill will impact your business? You know, do you get a sense that some of the deferred maintenance that has been pushed back over the last 18 months could be shaking loose? Because I would guess that you are not going to see any major oil companies or refiners want to be the next major accident.

I can't say that I see any really direct correlation between the downstream or upstream issues related to the spill in the Gulf and downstream activities. I agree that -- with your general assertion -- that no refinery wants to have an unsafe plan or have incidences, but I think that was true before the Gulf spill.

Okay. One last thing and I will jump back in queue. Could you guys give us a little bit more color on the buyback, both the rationale from your perspective for it? And then also the potential to re-up the buyback once, once you've run through this first $15 million authorization?

I think the basic logic is, we think that our -- we're positive about our prospects. We have a very strong balance sheet and cash flow, and we think that the future value of our Company will be substantially higher than the current value. So we think it's a great investment. Regarding kind of a ability to go further than $15 million, I think that will be up to the Board and I think that obviously will be something that will be reviewed as we go forward.

Max Barrett from Tudor Pickering.

Thanks. Good morning. First off, could you give us a sense of your visibility into the fall turnaround season? Have customers already begun discussions giving or give an indication of the [scope of work] needed to be done in the fall. Or is it too soon at this point?

No. I think we are already talking with lots of customers about their plans for the fall and that would be routinely the case. I think the best way for me to kind of answer the question about kind of outlook is that, unlike last year where our forecast was predicated on back year acceleration of growth, our forecast this year really is balanced throughout the year.

So we expect -- with seasonal adjustments, we expect our results for the year to be balanced throughout. So kind of translating that is that we expect there to be a positive turnaround season in the fall.

Okay. And then secondly, on the [Valero] call, management talked about replacing coke drums at Port Arthur in order to reduce go-forward maintenance costs. And my question is twofold. One, are you seeing uptick in replacement of older equipment? And two, what is that -- to what extent does newer, more efficient refining equipment impact the revenue opportunity for Team?

I think as it relates to a --. First of all, any time there is a kind of a major replacement equipment or kind of -- that would be kind of a major turnaround or more significant in-depth turnaround, those are good things for us. We saw a lot of that frankly in the pre-recession as more higher upgrading equipment was being installed in facilities.

I would say generally there's less of that now, not more. Not saying that there is no kind of replacement anywhere, as you referenced the Valero plans there with regard to that. I'm sorry, I missed your second half of that question. Would you repeat it?

Mr. Hawk, his line is closed.

Okay. Did you get the --? I'm sorry, get back in, Max. I dropped your second half of your question. Go ahead.

Arnie Ursaner from CJS Securities.

Good morning. I have a couple of mechanical questions for Ted regarding your guidance if I could ask them?. In your guidance, are you assuming the share buyback which would add about $0.04 or $0.05?

We are not. You know, the precise timing of the buyback is a little uncertain. It's governed by some pretty strict rules, as you know. And so we did not contemplate that.

You are correct. Were that to have occurred at the beginning of the year it would be about a $0.05 impact.

Okay. And I guess I'm going to throw this one out to Phil, if I can. You mentioned in your prepared remarks, the market is changing. You also mentioned you are targeting a lot more business development. You also mentioned you are going after a lot of new business, highlighted a lot of new capabilities.

I guess what I'm trying to think about is that, if you're going after new business from clients, I'm guessing given the price dynamic, that one of the ways you could get it would be more aggressive pricing. You've had weaker competitors attack you on price. When you're trying to win this new business, is it price that is driving it? Is it new capabilities?

Maybe another way to ask this is, if I think of your revenue guidance for the upcoming year, how much of that might be driven by new product or service capabilities that you've added versus organic growth in the industry versus your winning business from others, perhaps on a price basis?

Lot of complexity to that question. Let me take a crack at this. I think the -- if there's a theme that we have internally and kind of reasserted is, again, our [D&A] as a company over the last decade has been the growth. And 40 consecutive quarters, 12, as I kind of mentioned earlier, with the advent of the recession, candidly, we took our foot off the pedal a little bit and played defense. And just trying to resize our organization, but I think frankly took less input, less emphasis on growth because of the soft market conditions.

And I think that the change in attitude internally is that it is time to get back to business as usual. And let's not make any excuses internally about the fact that we have weak market or competitive conditions. That is just business. And let's go get and earn our full, fair share.

So we have really stepped up some of our -- you know, we [talked] about the selective investments, we stepped up our training and focus, and some of our tools around our business development activities and the training of our account reps, etc. As it relates to pricing, I think the -- our view is we are not going to stand by and allow aggressive pricing to penetrate our existing accounts. I don't think now or ever that price alone has ever been the primary driver of selection. It wouldn't be the stability of relationships that exist in our industry. Not just for Team, but for other major service companies if it was just a price story.

But we're -- you know, growth is very important to us and it is a fundamental aspect of our long-term strategy, and we intend to grow. And I think that is just -- I think it's more our attitude and mindset.

The new capabilities we are adding, I think it's -- to me, I think that's indicative that we are not, I guess, losing sight of what has been a continuing kind of practice of our business, which if we are continuing to evolve and extend our capabilities as technologies mature, new ones evolve. And that is really I think what is reflected there.

I wouldn't, just as we have in the past, I don't assign kind of meaningful growth to a single idea. But rather, I think it just broadens our capability, makes us more attractive to more players. We, you know, we will be extending our service lines or customer base and we expect, we are focused on adding new customers. But I think in terms of a material change in our mix, I don't see that.

So, if I can ask just a clarifying question. You used to have a chart in your slideshows that would show the market opportunity and your market position. If you were to add things like the insert valves and laser measurement and the other types of new services you are adding, how would you describe that changing the market opportunity that you're targeting?

I would kind of -- for example, the insert valve is really a form of hot tapping service. It is kind of a unique service in that it allows us to replace valves with a single hot tap.

The current line of products that we are introducing are for lower pressure, lower temperature applications. So they will be in the waterworks market more than -- and kind of drainage market or kind of train lines rather than the high-pressure, high temperature lines. So we put several of them in in municipalities and also power plants on the kind of backside of the plants.

Our intention will be to extend that to all types of applications over time. So that's a slight extension of our markets and opportunity from that standpoint.

Laser measurement was really -- it sounds kind of peculiar, but it really is a service that's kind of hand-in-hand with our field machining activity. Because it would be an application to measure the requirements for machining kind of services. So I think that's really kind of part and parcel of that. So I don't see the, perhaps the sense of the insert valve extends from an industry standpoint and some of the municipal markets. I think the laser measuring is just a newer, better way to do things that we are doing already. So it's really not a market growth or expanded market opportunity.

Adam Thalhimer from BB&T Capital Markets.

Thanks a lot. Good morning. Wanted to see if you could talk a little bit about the opportunity as you see it in the oil sands today?

I think we are pretty bullish about it, actually. It was a significant part of our business up through, really, the middle of 2008. Kind of concurrent with the economic recession was a very significant drop in oil prices, which really hurt the economics of that play, if you will. Because of the heavy capital investment and operating costs associated with refining of the bitumen, it requires a significant oil price to support that.

And we are back in that area again. At least that is the report we get from the operators and producers up there. We see increased activity, although not -- it is not wide open yet, but we --. There's probably four or five major expansion projects that are in progress of planning stages right now that we expect many, if not all, of those to get rolling sometime within the next year or so.

But, I think, six months ago, I would've said that we were projecting a lot of those to happen this fall. And I think not much of those are happening yet. So I think it is a little slower than we had thought maybe six months ago. But longer term, it's an incredible hydrocarbon resource. And I, for one, don't think we are going to be off hydrocarbons for many, many years, decades, what have you.

Just a follow-up to that. We are still in the -- we still have a significant presence in the oil sands. We are doing a lot of maintenance, a lot of turnaround activity. Phil was just referring to new construction activity.

Yes. Good point, Ted.

Thanks for that. And as a follow-up, when you look at your large customers, is there any variance among spending outlook there? I mean, is everybody in the same boat where they are -- they are doing normal maintenance again, but they are not planning large discretionary projects? Or do you -- can you point to one or two customers and say, wait a second, that's -- those guys are a little bit more -- those guys seem to be a little bit more aggressive about large spending projects?

It is really hard to draw specific conclusions about individual customers because of the timing of projects. Because it is kind of inherently lumpy, really, for everybody. Here's what I can say overall. Again, we mentioned that our total revenue decline for the year was 9%.

If you take the revenue decline of the multi-plant, multi-service alliance agreement, these are our major customers, which are roughly a third, approximately a third of Team's revenues. The decline in those accounts was actually slightly less, but in the 8% to 9% range. So approximately the same.

So what we've seen in aggregate that the decline in spending of those accounts has mirrored the market overall.

If I go account by account, or plant by plant, some are up, some are down. But I think again those just reflect the timing and the lumpiness of individual projects, turnaround activities, etc.

Matt Duncan from Stephens.

Thanks. This is Jack again. Just have a couple of quick follow-ups here. First, just on the competitive pricing environment. I know you have said in the past it's been about a 100 basis point headwind for you and I know in the prepared comments you said 100 to 200 basis points. I am just wondering if pricing has stabilized at all or is it getting any better or any worse?

I think it is just the competitive market and we expect it to stay that way. So I don't -- are we expecting price increases in the coming year? No.

But do you expect it to maintain what you've got or do you think that there is going to be further weakness on the price front, going forward?

I don't quite know how to estimate that. I don't -- we don't have this sense of that we have another wave of a step down, but I --. To think customers are caring less about it or less focused on it, that certainly isn't the case. So --.

Okay. And the last thing I've got here is just looking at your second performance, I was wondering if you could give us some commentary around the TMS and the TCM segments? I know TMS had a nice performance this quarter, but TCM was down in the low single digits for the fourth quarter. Any kind of commentary on what drove the weakness there?

I think it's timing of projects. If you really bore back into it, TMS -- and that is where I kind of I hesitate about declaring victory, or spending too much time in the details of just a specific quarter. I think what you had from a comparative standpoint, if we look at TMS, for example, it benefited from the fact that it had an extremely weak Gulf Coast kind of activity in '09 that was more normal in '10. So it had that kind of comparison -- positive comparison there.

Conversely, for TCM, it had a remarkably strong West Coast performance in the fourth quarter of '09 that wasn't present this year. So it's just the timing of things.

If I look more broadly at growth rates, what are we seeing? I don't see major changes among divisions per se. I would say that turnaround activity was weaker than onstream activity as a general rule. And that is how -- what we saw. I would say that the US was stronger, relative growth wise -- or less negative, I should say -- relative to Canada. Again, reflecting principally the decline of the Canadian oil sands activity that was very active in '09.

So that's as a general, what I would say. I don't -- I've wouldn't read a lot into individual quarter differences that you referenced.

Okay. Thanks for the color, Phil.

[Davis Petik] from Invesco.

Quick question I wanted to follow up with you on your cost reductions. You announced the $6 million -- it was $6 million, is that correct?

Correct.

And would that -- where would that mostly be coming from? Is it corporate cost, line item from your (inaudible) disclosure?

No, actually, the $6 million is going to be about equally -- it will be reflected in about half of SG&A and half in indirect costs. But we've -- the big driver of that was the elimination of 80 support positions.

Some of those are SG&A positions. But many of them were also ops supervisor or operational support roles in our branch activities. And so I think it's kind of about 50/50 there.

But most of it is field SG&A that the SG&A component would be field SG&A for the most part. Not a lot of corporate costs in that number.

Got it. And then you mentioned you are also stepping up some business development activities. How much do you think that will offset some of the $6 million of cost cuts?

Really, when I say -- it's really investments. What we conducted through a series of regional training -- we had regional training activities, really with all of our account managers over in the springtime. We've introduced a new customer account relationship program or software that kind of gives us better tracking and better (technical difficulties). And we just increased our emphasis (technical difficulties) conversation about the importance of business development challenging also new account development and setting new account targets.

So that is the investment we have made. It is not a significant dollar amount and it is not adding heads. It's adding attention, focus, and attitude.

And in the past, I think you have talked about -- I'm trying to remember what the incremental operating margins you talked about with sales -- is it 20%?

Yes. 20% has been the typical.

And does that mean with the $6 million of cost cuts that that might be a little higher in fiscal '11?

Yes. It absolutely means that. I would kind of think about that as additive.

Okay. Great. Thank you very much.

[Matt Tucker] from KeyBanc Capital.

Good morning, gentlemen. I dropped from the call for a moment, so I think I lost my place, a lot of my questions have been asked, but so I apologize if I repeat any. But some of those new service lines that you had mentioned sound relatively a little more maybe technologically advanced.

I was wondering if they carry higher margins than, say, your average, what you see on average and if so, do you expect that we could see that reflected in the numbers in FY '11?

You are correct, particularly if you get into the advanced inspection areas is that the direct job margins of those services would typically have higher rates or margins than maybe some of our more conventional inspection services. But they also come with more operational technical support with them. So in terms of having kind of an impact and really moving the needle in terms of our average margins, we are not projecting that they will.

But I think we are very excited about inspection services. It is a very, very large market. There are a lot of interesting technologies that continue to evolve and we are going to be a player and that is really the focus of that.

Okay. Thanks. And then turning back to the improved second-quarter operating conditions for some of your customers. What do you think or how long do you think it would take for them to start increasing their discretionary or capital project type spending?

This is completely speculative on my part. I think it gets back to what their view, long-term view of their environment is. More than it does the profitability of a single quarter or a couple of quarters.

So I guess it's too early to say?

Yes. I don't have a -- I don't have -- all I guess our view would be is we are not waiting around to hope it changes. You know, it's -- our view is we need to be successful and grow in the environment we have.

Great. And then one last question. If we look at your SG&A in the fourth quarter excluding the non (technical difficulty) items, let's say around $28 million. When we are thinking about next year, the seasonally stronger quarters, is that a level that you can maintain even though your guidance is suggesting revenues will be a little higher? Or should we think about it as more maintaining, say, SG&A as a percent of revenues?

I think we are going to actually see a slight decline reflecting if we have a $6 million cost cut from the position elimination, some of our initiatives and let's say, roughly half of that is in SG&A. To say there's no cost creep -- it wouldn't be fair, but I would kind of think just as a starting point you would maybe have a couple million dollars of reduction for the -- over the course of a year.

Again to tie it into an individual quarter, I don't know that I have good clarity on that.

(Operator Instructions). Arnie Ursaner from CJS Securities.

Can you give us your year end headcount and your expectation for the upcoming year, please?

Our current year, current headcount is about 3,100. And that is down from a peak of about 3,700 in November of 2008. So we are down about 600 net. I don't really have a go-forward forecast. That reflects all of the other adjustments that we've made. I think we will adjust to our volumes if we have -- as our volumes go up, we'll be hiring more technicians.

Okay. And you are finding it easier to get them at this stage?

It's not an issue.

And project activity, can you update your view for '11 for project activity?

I think if you mean project in terms of turnaround activity, which I think is what you mean, our view is it's slightly better than '10.

Actually I was thinking more projects, things like the Tar Sands and other things.

Well, there's really no -- we have no kind of clarity about the timing of when Tar Sands activity will go forward, although they are back in the planning mode. So it's not -- it's kind of not -- you know, not dead from that standpoint. One of the callers mentioned an upgraded a -- I think the Valero refinery he referenced. Those continue to go on from here and there and I think we will continue to see some projects.

Again, my view is the market is likely to be a little better, but not a lot better than what we have right now.

That was a perfect follow-up to Davis's question. If you look at your fiscal year '09 results, you basically were pretty close to $500 million and did 116 -- $1.16 of earnings in fiscal '09. You've highlighted multiple times that we've had a dramatic reduction in your cost structure since then. And yet if I follow your guidance, it's essentially the same level. What is the offset?

I think the offset is pricing margin, and there will be a little bit of cost creep just in terms of the -- kind of a base cost. Wages mostly. Though not much of that lately.

Thanks.

(Operator Instructions). Bob Nicholson. Pine Cobble Capital.

Hello. Just a quick follow-up to the last question.

I guess I'm a little bit confused. If I take the midpoint of your revenue guidance range for next year and I blow it through at the 20% incremental margin, which you guys have consistently commented on, and then I factor in the $6 million of cost cuts, which you just implemented, that gets you to a very different earnings number than what you've guided to. My quick math here was sort of $0.35 to $0.40 of incremental EPS, excluding any share buyback.

And I guess I'm a little bit confused what I'm missing in that calculation.

Well, I guess my math is a little different than yours, Bob, here. But I guess if we take a base of $0.80 and you take cost reduction of $6 million, that would be about $0.16. If you take low-end growth at 20% and 40% tax rate that is about $0.10. And we, just for conservatism and just a little cost creep in wages or other advance, added a swag factor of a couple million of other as an unfavorable. That gets you a net increase of $0.20, which gets you to the low end of the range.

And then you add the $30 million in the range of revenue. At 20%, I think that's about a $0.16 ad so that kind of puts it at the high end of the range. So I think from our kind of view, our -- there's a lot more moving parts as you know and our precision (multiple speakers).

Okay., Yes, I was taking the midpoint of the revenue range. But it sounds like, again, it sounds like within the revenue guidance and the cost, it sounds like you've layered in some conservatism in terms of the margin and -- or any incremental cost creep as the business begins to grow again.

Yes.

Okay. Terrific. Thanks, guys.

Gentlemen, there are no further questions at this time.

Great, Sandra. Then let me just to wrap up, I want to thank everyone again for your participation in this call and your continuing interest. We look forward to updating you on our progress during the first quarter of our new fiscal year around the 1st of October.

In the meantime, have a good day.

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