Team Inc (TISI) 2011 Q1 法說會逐字稿

Welcome to the Team IR call. My name is John 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. Mr. Hawk, you may begin.

Thank you, John, and good morning. It's 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'm the Chairman and Chief Executive Officer of Team. Joining me again today as Mr. Ted Owen, the Company's Executive Vice President and Chief Financial Officer.

The purpose of today's conference call was to discuss our recently released financial results for the Company's first fiscal quarter ending August 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, 8-K, 10-Q, and 10-K filings to the SEC, as well as our annual report.

Ted will begin with a review of the financial results. I will follow Ted with a few brief remarks and observations about our performance and prospects. Following our remarks, we will take questions from our listeners.

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

Thank you, Phil. First, 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 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.

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 for the financial results. Revenues for the first quarter were $104.5 million, which is up 4% compared to last year's first quarter. Net income was $3.8 million in the current quarter, versus $1.8 million adjusted for nonrecurring charges in last year's first quarter.

The nonrecurring charges in last year's first quarter, as you will recall, were associated with an FCPA investigation, so that all of our discussion relative to prior amounts will adjust for that as we had done last year for comparative purposes.

Earnings per diluted share were $0.20 in the current quarter versus an adjusted $0.09 in last year's first quarter.

Other highlights in the quarter were as follows -- gross margin as a percent of revenue improved to 30.2% compared to 29.2% in last year's first quarter. SG&A expenses were down $800,000 in the quarter or 3% from the prior-year quarter. Operating income as a percent of revenues was 6.5% versus an adjusted 3.7% in the prior quarter.

During the quarter, we repurchased 90,000 -- approximately 90,000 -- shares of our stock for a total of $1.3 million. Capital expenditures in the quarter were $2.3 million. Depreciation and amortization expense was $3.1 million. And non-cash compensation expense was $1.1 million. Total adjusted EBITDA was $11 million for the quarter, and $49 million for the trailing 12 months.

Please note that adjusted EBITDA reflects the add-back of both non-cash comp expense and the non-routine charges affecting operating income.

During the quarter, we repaid $10 million of our outstanding debt. And at the end of the quarter, our net debt to EBITDA was considerably less than 1 to 1.

Our net debt at the end of the quarter was approximately $22 million, which is a reduction of $14 million during the quarter, and includes a $10 million of debt paid back plus an increase in cash of $4 million.

And then, finally, at the end of the quarter, our unused borrowing capacity under our existing credit facilities was approximately $100 million.

So with that, Phil, I will turn it back to you.

Thanks, Ted. Now I would like to add some additional perspectives on our recent performance. We were off to a good start in our new fiscal year. I'm pleased with several aspects of our performance in the recently completed quarter.

First of all, we continue to grow our business in a challenging market environment. As Ted indicated, for the quarter, our overall growth was approximately 4% versus the prior-year period. This revenue growth was approximately the same rate of growth that we achieved in the most recent fourth quarter. Let me share a few more details and perspectives on this growth.

Overall, it is still a challenging market environment. Our customers continue to face business pressures, which are impacting their procurement approaches and operational plans. But there are some bright spots in a number of areas.

Our US business revenues grew about 10% for the quarter, faster than either our Canadian or other international markets, reflecting a slightly stronger demand environment in several US regions. We experienced growth in both our onstream and turnaround services. Also, business from our alliance agreements grew slightly faster than the overall growth rate.

In summary, our revenue performance is off to an encouraging start for the year. However, we are also not yet fully satisfied with our performance. Despite our market challenges, we continue to expect that our business should achieve double-digit growth rates over the longer term.

I am also pleased with our cost management and business execution in the quarter. The 1 percentage point improvement in gross margin that Ted mentioned was achieved despite flat project or job margins. This margin improvement was driven by improved indirect cost performance; improved labor utilization and management of other indirect costs were the key drivers of the improvement.

We achieved similar positive performance in our SG&A costs. Total SG&A expenses declined by nearly $1 million in the quarter. These reductions are directly related to the initiatives taken last year.

The resulting impact of modest growth, combined with good cost management and execution, was solid improvement in our operating profit and operating leverage.

For the quarter, operating profit margins increased several points to 6.5%. Incremental operating leverage compared to prior-year results was greater than 80%.

I'm also pleased with the continued improvement in our balance sheet that Ted discussed. Our financial strength and flexibility has never been better. We also expect to continue generating cash from business operations throughout the remainder of the year.

As stated in our earnings release, we are affirming our previously issued earnings guidance for the full fiscal year that ends May 31, 2011. For this period and for the year, we expect to earn between $1 and $1.15 per fully diluted share. As discussed earlier, we are off to a good start in this first quarter, and our outlook is positive.

Let me wrap up my remarks with a couple of final comments before we take your questions. I remain confident in Team's prospects. We have an attractive business position from which we can be successful in both the near term and longer term. We have been a high-growth company historically. Following a step-back during the recession, Team has started to grow again. I see continued attractive growth opportunities for Team in virtually all of our service lines, and in all geographic regions, both within North America and beyond.

The key to being successful in our business is our continued focus on the basics -- providing great service with every service opportunity; continuing to capitalize on our service network advantages; managing the profitability of our business job by job; balancing our resources with current activity levels; continuing aggressive business development initiatives and focus; and conducting our business all of the time in all activities in a manner that fosters pride from our all Team colleagues and respect from our customers. Companies that focus on and execute these fundamentals in an outstanding manner will be very successful businesses for years and decades to come. We are committed to doing just that.

That concludes my remarks. Now let's open it up for questions. John, can I pass it back to you?

(Operator Instructions). Matt Duncan, Stephens.

Good morning, guys, and nice progress here in the quarter.

Thank you.

The first question I've got, and I'll just ask two, the first is on pricing. You mentioned I guess the gross margin was up 100 basis points year over year. It sounds like that's primarily -- you are doing a good job managing the cost side of things. What are you seeing in terms of price? Is it at least stabilized at this point?

I think there's continue -- I think that would be a good projection; just in net, it's that we expect our kind of job margins to be roughly stable from here forward. There's continuing pressure and kind of discussions with customers, but I don't think it's as broad-based or as intense as it was a year ago.

Okay. And then the other thing is, in terms of the outlook for your business, I guess what we've been hearing is both the size and number of turnaround projects here in the fall turnaround season appears to be on the rise, which I guess would point to improvement especially in that refiner end market. Are you guys seeing some of the same things? And what's your outlook for your business in terms of how it's improved or maybe not I guess over the last few months?

I think we would concur with that general comment that there -- certainly at least in some regions of the country, we are seeing larger -- more and larger turnarounds in the fall than we saw a year ago. I think it's just because we are really just in the heart of the season right now -- to have a kind of comprehensive view, I think it's a little premature. But we are cautiously optimistic that there is some -- I think the way I would kind of say it is, some of that pent-up demand is kind of being addressed I think in some of the turnaround activities right now.

So, Phil, it would be safe to say then the outlook for your business is probably better today than it would have been three months ago, with the size of those projects beginning to go up and that pent-up demand starting to shake out a little bit.

I think a little bit better. It's certainly better than it was a year ago.

Okay.

I think we kind of reflected -- we expected a little improvement I think if you -- from where we were standing three months ago.

Sure. All right, guys. Thanks.

Rich Wesolowski, Sidoti.

Thanks. Good morning. Do you guys care to give roughly what your current job margins are? What they would expect to be on the next job you book?

The tricky part about that, Rich -- where we really haven't kind of gotten into all the detail on that is that what that is is an internal measure of just the direct costs that we capture. It doesn't include all of the benefits and things that actually track with some of that labor, so I don't think that's a particularly helpful public number.

Okay. Have you lowered wages for techs in any geography to any material degree?

No.

Okay. It seems the ongoing theme of vendor consolidation that you were feeding off of for a long time was more prevalent when business was good than when business was not good. You mentioned that the alliance customers grew at a slightly faster rate than the overall Company. From your vantage point, is there evidence that customers are, again, engaged in the classic Team sales pitch?

I think it's always been attractive. I think when there was -- I guess the most severe pressure on them from a cost management standpoint there, I'm going to say their time frame or perspective was shorter. And, I think as you get shorter, then you start looking for kind of individual rates on this job rather than kind of a -- maybe a broader look at overall efficiency.

But I think as the kind of industry recovers a little bit, one of the big advantages of our size and strength is our ability to consistently provide resources and support for any size project, anywhere. And that's not automatic, and I think that's a big distinction between us and certainly some of the smaller regional players. I think that will, again, become -- the advantages of that will become clearer to bigger customers as the market improves.

Okay. And then the last question, you put up a big earnings number, at least relative to our market, and sales weren't too far off. And how long can you grow without having to add some cost back or -- what is the category that you see if you end up growing 5%, then 10%? What cost category would first have to snap back for you?

Well, I think the -- what we have done and I'm pleased with it is I think we are managing our resources that we do have. If we look at our variable and technician resources, we're managing them a little better than we have historically. And I think we are seeing kind of better utilization levels and better leverage there. It will go up with volume -- those resources. But, our expectation is just continue to manage them well.

I think when we start getting back to volume levels that are beyond where we have been -- recall we are still growing -- we're growing, but we are still not back to the levels we were kind of at peak levels. Once we start kind of reaching those levels and beyond, we will be adding additional equipment and kind of fixed tooling and other aspects to our work that will increase our depreciation, increase some of our other operating expenses. So I would expect, until we get there, we're going to have, as we've talked before, a little higher operating leverage. I think we talked about that in previous calls, you know and the -- while our overall target long-term leverage may be in the 20% range, we are probably in the 30% range in the short run until we get back to our -- operating activity levels near our -- the peaks that we achieved in previous years.

Okay. Appreciate it. Best of luck.

Arnie Ursaner, CJS Securities.

Good morning. This is actually Torin Eastburn filling in for Arnie. Good morning. You had mentioned on your last call you are undertaking some internal investments and business development initiatives. Could you just detail what you are doing there and how it's progressing?

Well I think we talked about several -- a number of them -- in both divisions. My recollection from our call is we talked about both the insert valve and pipeline Y products -- or projects in our Team Mechanical Services division. These are kind of innovative approaches, both related to line techniques for inserting valves or accessing pipelines for [pigs] that we think are innovative in the market. Both are advancing very nicely. We've expanded our capabilities in an insert valve in a couple of sizes during the quarter. We've got a couple -- our first several orders in the pipeline-wise, and we are pleased with that.

I think we also mentioned that we were entering or expanding our -- initially entering and expanding some of our field heat exchanger services, and those continue to progress nicely. We're focused just in the Gulf Coast area on those services at this point.

On the inspection and heat treating side, I think we talked about our commitment to expand our higher-end or advanced inspection services. And, again, we saw very nice activity and progress in those areas, particularly in the areas of GUL, guided ultra-long wave length inspection services, which was a particularly active service area for us in the quarter.

Okay. And my other question, what is your tech headcount now? And what's your short-term outlook for it?

Let's see if I have that here. I've got it. The total field headcount is about 2800 right now.

Okay.

And our expectation would be that we will -- and our belief is we will just grow that with volume.

Okay. Thank you.

Matt Tucker, KeyBanc Capital Markets.

Good morning, guys and congrats on a strong first quarter. My first question is, could you talk a little bit why you think the US was stronger versus other regions? And then within the US, why certain regions might have been stronger than others?

I think when you get to addressing activity levels in a specific quarter, it not only relates to what happened in this quarter, but what happened in the prior year first quarter. And the timing of projects can affect that greatly. So I wouldn't -- I don't have a point of view that the US is going to be just (technical difficulty) stronger overall than other parts of the world or our world, where we serve -- our served markets, but that what it reflects is that we had a weak, relative to this quarter, a weaker project slate in the first quarter a year ago.

And this was particularly, I think, the Gulf Coast area and the West Coast were the areas of big difference in the first quarter.

Conversely, if you look at Europe, which was actually down from a year ago, it's not that Europe is just generally weak in our view. It's that we had the benefit of a couple of very significant projects in last year's first quarter.

Okay; that's helpful. If you look up in Canada and the oil sands, you had mentioned last quarter that it looks like activity could be picking up, and we have seen some of the sponsors up there dusting some projects off. Has the ramp-up there been meeting your expectations so far? And could you talk a little bit about what you are expecting up there?

I think the answer is, is that we continue to believe that new projects will be restarting, but they haven't yet. You know, I think the only one I'm aware of that has kind of restarted is the Suncor Firebag project, but and I think -- of Cold Lake. Okay, there are a couple of them up there.

But the big -- there's a half a dozen projects out there. Most of them are still in the planning stages. So it's a spring at the earliest, maybe even next fall before that happens.

There are turnaround activities related to existing facilities going on that we are participating in. But, in terms of kind of the big expansion activity, I think it's still coming. Not a big change in our viewpoint, but it's -- I wouldn't say it's accelerating either.

Okay, thanks. And then just one more question and I will hop back in the queue. When you look at the fall turnaround season, are you seeing customers plan any more upgrades or capital project type of work? Or is it really more kind of deferred maintenance coming back?

I'm not sure I have a really insightful perspective on that, Matt. The -- I don't think we are seeing lots of expansions happening right now in the market, but to say that there's no upgrades or fine-tuning of plants, I wouldn't say that either. I think that's just typical that there be a little bit of that here and there.

Okay, thanks.

Max Barrett, Tudor, Pickering, Holt.

Thanks. Good morning, guys. I guess just excluding refining and petrochem, could you update us on the remaining third of your client base, kind of how those areas performed in the quarter and expectations for the remainder of the year?

I don't have -- I'll be honest with you, Max, I don't have a -- and haven't bothered to look, by segment for just -- for the quarter to look at kind of how it's split out. So I don't have any data at my fingertips. In just kind of the reports from the field, I wouldn't say that there was a kind of a major report from our field locations or branches about major differences in the different segments. So I think it all is -- as I said in the beginning, I think our customers are still under pressure, but maybe there's a slight easing occurring -- just with some of the pent-up demand.

Okay. And then just curious, do you see the recent incidents with both the Enbridge pipeline and California gas utilities' potential catalyst for additional business?

I guess generally, yes, just in the sense of I think that kind of -- it's just one more heightening of the attention and focus on mechanical integrity of pressurized systems.

Okay. And then I guess last question from me -- you talked about the stock repurchase in the quarter. If you could, just remind us how you think about using cash to buy in stock versus funding acquisitions in the near term?

I guess the -- as we talked at the last conference call, we don't really see it as an either or because I think we're in a significant cash generating position. And frankly, we think that we will -- even with our purchase plans or kind of what's been authorized by our Board, we wouldn't expect to increase our debt levels as a result of that. Our posture on just purchasing stock is that we just are going to be kind of periodic purchasers of a stock, which is not an aggressive plan, but just view it as an attractive supplement to our activities. So as you can see, we're not in an aggressive way trying to get in front of investors, but we are just kind of out there purchasing from time to time.

Great, thank you.

(Operator Instructions). Matt Duncan, Stephens.

Just want to ask on the guidance, you beat the consensus estimate fairly nicely here on earnings this quarter. And I know it's a seasonal low point in your business and you chose to leave the guidance sort of unchanged. Is that really just a function of this being a seasonally slower quarter? You'd rather get through at least the fall season before you update your guidance there?

I think so. And, as you -- you kind of answered the question; it's seasonally a weaker quarter to -- I think it's kind of not prudent to just rush to extrapolate on a quarter, right? And but we are positive about our business and we are anxious to go earn it again.

Okay. And then if you look at the size of your tech force today, you said it's about 2800 people. How utilized is that tech force currently? And sort of what annual revenue base do you think you can generate out of the current size of the Company?

Well, we are very proud of our levels of utilization. I don't have them at my fingertips, but I know they are the highest levels of utilization that we've ever achieved. So we are very pleased with the work we are doing to utilize our force.

I think the second question, though, is how much revenue can we achieve from that is misplaced because our ability to both supplement our full-time force with -- we call them 253 or kind of our project kind of personnel -- our project resources -- is quite extensive. Plus we are -- as we've proven before, we can ramp our permanent force very quickly as well. So we don't view kind of our levels of our resources to be a constraint whatsoever in terms of our revenue opportunities.

Okay. But in terms of techs to add for growth, you are seeing available good quality people out there to add as you need them?

Yes.

Okay. And the last question I've got is sort of focus of the acquisition strategy. The balance sheet has obviously improved nicely. I know you are kind of mixing how you want to use cash, but as you look at acquisitions, is there a particular geography that you are focusing on? Any particular types of services? What are your thoughts on the types of acquisitions you're looking at?

I think it's really a consistent -- we continue to have a consistent view on that. Again, we believe, just as a foundation for our business, that we have very attractive organic growth opportunities, and that's the heart and the core of our Company and our strategy. And that's what we forecast, so that's what our guidance is all based on. So, that's unchanged.

Having said that, we're opportunistic to identify approaches that will accelerate that growth. And it accelerated either geographically or in service lines and capabilities that we don't have internally. And I think we continue to be very receptive to those types of opportunities.

If you kind of guess geographically where those would be, Europe would be again because we have a foothold there, that would be probably a more likely geographic area than kind of further in the US or North America just given the current extent of our capabilities. I'm not saying there's not a niche here or there, but that would, kind of just as a broad category.

I think in terms of service lines though, there are also opportunities to expand, and we continue to look at those again around the edges in the -- but we're going to stay in industrial services; that's our focus, but there are certainly kind of enhancements and extensions of our capabilities that are possibilities at some point.

I would point out that -- and we talked about M&A or growth, but it's not a big thing, but as just kind of our continued evolution, we opened our first branch in the UK during the quarter. Toward the end of the quarter, we kind of purchased the -- some small number of assets from a former licensee and now have our own direct service branch in the UK and look forward to some exciting growth in that market.

Okay. Thanks, Phil.

We have no further questions at this time.

Great, John. Well then let me just wrap up. I want to thank all of you for your participation in this call this morning and your continued interest in Team. We look forward to updating you on our progress again with our second-quarter call that will be scheduled in early January. 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.