Team Inc (TISI) 2011 Q3 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. (Operator Instructions). 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, Sandra, and good morning. It is my pleasure again to welcome to the Team Web conference call. Again, my name is Phil Hawk. I am the Chairman and CEO of Team. Joining me again this morning is Mr. Ted Owen, the Company's 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 third fiscal quarter ending February 28, 2011. 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 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. With that, Ted, let me turn it over to you.

Thank you, Phil. As usual, first, 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 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, the financial results that both Phil and I will discuss today exclude the impact of a $2.2 million nonrecurring tax benefit that we recognized in the quarter, which increased GAAP earnings by $0.11 per share. Excluding that benefit, third-quarter adjusted net income was $1.7 million or $0.08 per diluted share.

Now let me describe the cumulative adjustment to our tax accounts. As disclosed in our press release, during the quarter we identified and corrected accounting errors related to tax provisions for fiscal years 2007 through 2010 and for the first two quarters of this fiscal year. During those periods, reported earnings were understated by immaterial amounts because effective tax rates were overstated as a result of previously undetected errors in our tax provision calculations pertaining to the tax effect of share-based compensation. No restatement of previously issued financial statements was required because the effect on those financial statements was not material.

How did this happen? Because our processes regarding the determination of significant inputs into the tax provision process was not rigorous enough, which allowed faulty assumptions to be made and repeated over time. We are now strengthening our monitoring controls in this area to address the deficiency in our processes.

The cumulative effect of the errors in the tax provision calculation was a tax benefit consisting of $1.8 million associated with the prior year's and $400,000 associated with the first two quarters of the current fiscal year. Excluding the effect of the $1.8 million, a portion of the cumulative adjustments that relate to prior years, the Company's effective tax rate for fiscal 2011 is expected to be 38% versus the 40% tax rate that we previously reported.

Now, with that, the rest of our discussion, as I said, will focus on adjusted earnings that exclude the effect of the tax benefit provided in the quarter.

Revenues for the second quarter were $108.8 million, which includes $6.6 million of revenues contributed by a recent acquisition, Quest Integrity Group. Adjusted net income available to common shareholders was $1.7 million in the current quarter versus $1.2 million in last year's third quarter. As we pointed out in our press release, some other financial highlights for the quarter were adjusted EBIT increased 24% and 37% for the third quarter and year-to-date respectively. Adjusted earnings per share increased 33% and 47% for the third quarter and year-to-date respectively. Net debt -- that is total debt less cash at the end of the quarter -- was $46.7 million, a reduction of $16.7 million during the quarter.

Now just for a few more cash flow related items. Capital expenditures for the quarter were $3 million, depreciation and amortization was $4.3 million, and non-cash compensation was $1.2 million. Adjusted EBITDA for the quarter, excluding nonrecurring items, was $8.6 million, and adjusted EBITDA for the trailing 12 months was $53 million. At February 28, our total debt was $69.3 million, cash was $22.6 million, and as I mentioned, our net debt was, therefore, $46.7 million.

Even with a use of approximately $41 million of cash in the Quest Integrity acquisition during our second quarter, our net debt at the end of Q3 is only $11 million higher than it was at the end of last fiscal year. We are very proud of that. And our net debt to adjusted EBITDA on a trailing 12-month basis was less than 1 to 1.

At the end of the quarter, the availability under our credit agreements was in excess of $75 million, and so with that, Phil, I will turn it back to you.

Thanks, Ted. Now I would like to provide some additional perspectives on our business, recent performance and our outlook.

Let's begin with a high-level look at the entire fiscal year. Overall we remain on track with previously communicated expectations. We are maintaining our full-year fiscal year 2011 adjusted earnings forecast of $1.10 to $1.25 per fully diluted share. This current estimate corresponds to earnings growth for the full year of 40% to 50%. We are pleased with the progress we are making.

Now let's shift to a more detailed review of our third-quarter results. As context and background, let me remind everyone that our businesses -- our business, excuse me, experienced seasonal fluctuations in both revenues and net income. And our third fiscal quarter, which runs from December 1 to February 28, is typically our weakest quarter.

There are a number of reasons for this. From a revenue standpoint, the third quarter encompasses both the Christmas and New Year's holidays, which are typically very low activity periods. It is also generally a period of lower turnaround activity. There is also one additional cost that Team incurs primarily in this quarter. Many payroll-related taxes are at their highest levels during the first few months of the calendar year. For example, the total amount of federal and state unemployment tax expenses in the most recent quarter were about $1.5 million or $0.04 per share higher than in Team's first fiscal quarter this year with roughly the similar activity levels.

Let's now shift to actual performance in the quarter. I was pleased with Team's metrics in a number of key areas. Team's overall job margins remained unchanged versus both the prior year quarter, as well as the most recent trailing quarter. That is Team's second fiscal quarter ending in November 2010.

Team's field labor utilization levels continue to be strong and slightly favorable to last year. Our SG&A costs for the legacy units continue to be favorable to prior year levels, and our new Quest Integrity Group had a very positive start in its first full quarter as part of Team. In what is a seasonally weak quarter for them as well, Quest posted total revenues of $6.6 million.

On the other hand, we are disappointed with Team's lack of organic revenue growth. Excluding the impact of Quest, Team's legacy revenues were $102 million, down about $2 million from the prior year quarter. Because we have such a large number of projects, customers and service locations, there is not one single event or factor to point to that accounts for the lower revenues and activity levels.

Organic growth in the US was a positive 3% for the quarter versus a 11% growth for the first half of the fiscal year. Canadian revenue actually declined 18% overall in the quarter, reflecting significantly less project work versus the prior year. For the first half of the current fiscal year, overall Canadian revenues were flat versus the prior year.

Non-North American revenues in the quarter were actually up about 10%. There were several factors that contributed to these results. The first was weather.

During the quarter, there were several major snowstorms that had a significant impact on our operations in both the central and northeastern regions of the US.

In addition, the Gulf Coast regions also lost several days of work due to ice. Frankly, we do not believe that the presence of bad weather reduces the total ultimate demand for our services. We presume that virtually all of the work that is delayed or deferred will need to be completed at some point.

Second was the slower than expected startup of project work in January and February. There were two major projects that were each pushed back about 30 days for different reasons during the quarter.

One final observation is that the natural lumpiness of our business related to the timing of projects will have a bigger impact both positively or negatively in the seasonally weaker quarters.

Following a thorough review of our current activity levels and planned major projects, we continue to expect strong activity levels and earnings performance in our fourth quarter. Our March activity levels were strong and consistent with this full-year forecast.

Looking ahead and consistent with our practice in previous years, we plan to provide our initial specific guidance for the next fiscal year at our year-end earnings conference call this summer.

Today I would like to provide some general color and tone to our outlook for the coming year. The bottom line is that we expect to achieve continued attractive organic revenue and earnings growth in the year ahead. We believe our market and business fundamentals are already good and are continuing to improve from recession levels.

For our major customer segments, customer profitability is much improved from prior year levels. For example, refining customers continued to enjoy attractive crack spreads. Many petrochemical customers are benefiting from improved export opportunities due to the weak dollar. However, at the same time, our customers are maintaining a cautious, cost-sensitive attitude in the management of their businesses.

Our natural advantages resulting from our service line and geographic service network breadth continued to be relevant in our highly fragmented competitor environment. Our customers continue their migration toward fewer, larger, more professional service providers. Our continuing focus is to make sure the advantages of our comprehensive service capability are even more compelling to our customers wherever possible.

We have a number of exciting growth opportunities in the coming year, which were not available or mature in the current year. These include the expected restart of new capacity development in the Fort McMurray Canadian oil sands region. Expanded Team capabilities and offerings in a number of areas, including insert valves, pipeline wide, advanced inspection services, expanded wireless heat treating capabilities, and expanded heat exchanger repair capabilities, and a full year of Quest Integrity Group as part of the Team family with the continuing growth of its capabilities. We expect to see this growth both within the Quest Integrity Group revenues, as well as within Team's legacy businesses, as we capitalize on joint opportunities and the linkages between our various units.

Let me wrap up with a couple of final comments before we take your questions. We remain pleased with our expected performance for this year and confident about our prospects longer-term. Our basic market and business fundamentals for our Company remain attractive. Of course, being well positioned does not guarantee positive future results. We fully understand we will have to earn it by providing our customers with outstanding service and support everyday, and we expect to do just that.

That concludes my remarks. Sandra, let me turn it now back to you for any questions from our listeners.

(Operator Instructions). Matt Duncan, Stephens.

The first question I've got is with regard to the project start delays and adverse weather you referred to in the quarter. Is there any way to quantify the impact of those two items on your top line this quarter?

I'm going to resist trying to do that. We have done a little bit of estimating internally. The problem is comparing to prior year. Because weather happens every winter, right?

Sure.

To say that -- I can point to kind of branches and closures. We lost a week here or there. But to say that that is comparable to prior year, it is difficult. So I'm going to resist that. And the same with project starts. These are projects that are happening again that we just -- we are in two different ones that are significant events for us. Both got pushed about 30 days for issues completely unrelated to Team.

And those projects, Phil, are ongoing presently?

Yes.

Okay. Now that we are obviously squarely in the middle of the spring turnaround season, can you talk a bit about the industry dynamics that you are seeing for this turnaround season? Are projects, by and large, going forward? Are they doing their typical starting at Y and end up being 1.5 times that size? Are you seeing sort of a normal healthy spring turnaround?

Yes is the answer. We are very busy, and we expect to stay that way for the quarter. I mean we are very positive about our activities, and as I said, we are a month into it, and it was a very good month activity wise, very strong.

Okay. The last thing, and I will hop back in queue here, Quest is still relatively a new part of Team, but can you give us some commentary about how it is performing to date relative to your expectations?

We are delighted. I would just caution that it is early. But this was their first full quarter. It is a seasonally weak quarter for them as it is for us for the legacy businesses for the same reasons, and they had a solid quarter. As I said, $6.6 million revenue is good performance for them.

Rich Wesolowski, Sidoti & Co.

Is there any change to the annual revenue outlook versus the range given in January?

I think we have tightened it down a little bit. I believe it is $485 million to $500 million --

To $500 million, right. We reduced it by $10 million.

Okay. So taken in isolation, is the May quarter shaping up any better or worse than you had planned when you reset the guidance in January, or was all the change in the February quarter?

Do you mean in terms of revenue?

Right.

I think the bigger impact was on the third quarter.

Okay. Can you comment on your potential for further operating leverage and specifically the room for revenue growth that would not require any additional indirect costs?

I think the guidance that we have given is that we expected kind of operating leverage organic leverage in the 30% range until we get back to running rates that we have run historically, which would be a little over $500 million. And that is what we really are projecting here in the fourth quarter.

Okay. And then looking out a little further, is it reasonable to assume you would at least post the, say, mid-teens incremental operating margin as you move past the $500 million --

Yes, our goal is 20% operating leverage long-term, and I appreciate your point that we have not always achieved that over the years. But I think it's going to be a little -- it is going to be favorable for that certainly for the rest of this year and perhaps as we get into next year.

And then lastly, just a quarter-end headcount. Thank you.

Quarter-end headcount is about 3200 people, full-time employees.

Arnie Ursaner, CJS Securities.

I can appreciate you may not be able to quantify the weather, but I assume you could quantify the losing 30 days or slowing down 30 days on two projects where you probably had people lined up ready to work. And I assume it also relates to the Canadian revenue being down 18%. Can you expand a little bit on both of those, please?

Let's talk about each of those items. The easy one is the Canadian project. Frankly, last year there was a very significant project, a heat treating project in Canada, kind of special circumstances that caused it that is not present today, and that is virtually the entire difference in Canada in terms of revenue variance. So it is really not related. It was not something that we planned to have this quarter; it just is kind of on a comp basis.

We look at the turnarounds, the revenue is not lost. It just did not happen at the time frame that we had anticipated, and for the bulk of it, a significant bulk of it is not happening or did not happen in the third quarter.

In terms of direct labor or lost labor wages, there was very little of that. But what you have in our business is we have a fairly high -- when you count all of the readiness costs of our Company with all our locations and expenses, if you have low revenue overall, you would have less absorption of that cost or you have less revenue over which to spread those, that entire infrastructure cost. So it squeezes margins. But it was not that we lost revenue. It is just the lack of that revenue in this quarter allowed us -- gave us less revenues over which to spread our costs.

I guess where I'm going with that is, have you thought about or quantified the margin impact you think it had?

Well, I think you can -- it kind of goes both ways. If the incremental revenue up is, as we are saying, 30% in this environment, the incremental revenue down is probably even a little bit more than that because of the benefit costs on individuals. So I suspect it is a 30% to 40% impact delta EBIT on revenues in the quarter.

But we are going to get that back, though, in the next quarter. And that is a little bit of the message of why we are not changing our overall outlook, is we don't really think the world is worse. We think it is lumpy, and the amount that we realized in a quarter is less than certainly the analysts expected and a little less than we were anticipating. But our overall view continues to be pretty much unchanged and positive.

My second question relates to Quest Integrity. According to your filings and comments, it did $22 million in revenue in 2010. You mentioned it created or had $6.6 million of revenue in this quarter, which is seasonally weak. If I look at that, it is a 26.4 annual rate, and you have not even gotten the benefits yet of cross-selling, subcontracting to ownership of some of the other initiatives you have underway. Any additional comments you would care to make about Quest?

Well, it is early is what I would say, but as we told you when we bought the Company, we are excited about it and so are the management team and all that came with us, and we have high expectations. I don't want to declare victory on a single quarter, but it is a good start. But I don't think any of us are satisfied that just we are done. It is just a start. It is an exciting future for that company and for Team.

(Operator Instructions). Matt Tucker, KeyBanc Capital Markets.

It looks like in terms of the organic revenue that the weakness really came on the TCM side and which also includes Quest, which you indicated you are happy with the performance. Can you talk a little bit about why it was the TCM legacy business that seemed to be impacted more? And then looking forward, do you see a different outlook for Quest versus the legacy TCM business?

Thanks for your question. Your basic facts are correct in terms of what we posted in the press releases is that the lack of growth appears to be resident in the TCM business, not in the TMS business. But I would just tell you that that is a little misleading and not the way I look at it and certainly not the prospects that we see, and here is why.

If you look at the TCM business, it has a higher proportion of Canadian activity than the TMS business, just by kind of some historical reasons, and that is the weaker of our businesses. So there is a lot of impact to that. We talked about the big project last year, which was a TCM project. So, again, negatively affects those results.

TMS has had a very good year in total as you can look at the results. But even within the quarter, I would just say that the total TMS number reflects a very strong activity in the Gulf Coast region, but they had some of the same weather and kind of project issues in other areas. So I don't see them, even though the data is different, the underlying reasons for that really don't speak to the potential of those businesses.

I think the businesses have the same -- they have a lot -- structurally the same characteristics, nearly the same margins, the same outlook. And so our expectations for all those -- or the businesses and service lines in both divisions really are comparable. So we are pleased and excited about both of them, although I understand the basis of your question from the data that we put out.

Thanks. That clarification is very helpful. And can you talk a little bit about where you are in terms of the integration of Quest and how far along you are in deploying Quest capabilities at your existing locations? And that if you can also comment on employee retention with the Quest business?

Okay. Well, first of all, in terms of integrating, we are not going -- it is not our plan to integrate Quest into the business. It's going to continue to operate as a stand-alone entity for a lot of reasons just related to the technical nature of the business and the differences in that business versus our other businesses. We do expect to coordinate our marketing presence and activities with one another across the markets, and we are just getting started on that.

We have got a couple of exciting anecdotes and plans. We've got a couple of committees looking at high potential areas involving both the Quest leadership, as well as other TCM managers. So we continue to be quite positive about it, but I cannot point to in the bag successes that are really leverageable yet. But our optimism and enthusiasm about the potential is greater -- as great as ever. So we remain very, very positive about that.

In terms of personnel retention, to my knowledge I am certain about it at the senior levels, but to my knowledge we have 100% retention within the Quest Integrity Group since we bought them.

Great. Thanks and then just one more. Can you just comment on the outlook for the Canadian business going forward?

It is actually good. Kind of ironically there is clear movement of activity in Western Canada related to the tar sands activity. That is starting -- actually we are seeing some kind of remnants of it this spring, but we expect it to continue to ramp for the next year or so. A lot of exciting things happening.

(Operator Instructions). Adam Thalhimer, BB&T Capital Markets.

You touched on the oil sands. What specifically are you seeing up there? Because I think at one point you talked about half a dozen projects. What would be the update to those projects?

I don't have specific current status of every one of those, but certainly directionally our belief is that many of those are moving forward and some sooner rather than later. You just have to look at oil prices, and I think an outlook, kind of a more bullish outlook on oil prices. At these ranges, the economics of the bitumen my understanding is are really quite attractive. So I would expect we are going to see a lot of ramp-up.

What happened in the boom, the last boom in the 2007-2008 period, again, we had high oil prices that made the economics very attractive in anticipation of high oil prices. But there was such a rush to develop that the costs really got out of line for the developers just competing for resources.

So what I expect is a little more I'm going to say cautiousness or deliberateness in terms of the development approach just to avoid the complete overheating of the market with regard to any of the service companies and input components to this development activity. But it is going to be positive I think for several years to come.

How big of a deal is the proposed Keystone pipeline? Are some of these projects dependent upon the Keystone expansion?

I'm not sure I know. I mean I don't think so. Certainly the Keystone project would be a big deal. It is a major, major pipeline that is, as you know, under review right now. But whether that bitumen is shipped to the United States in that pipeline or somewhere else, I don't think it will have a lot of impact. It would be my sense on activity in the oil sands.

Okay. Do you have a figure for organic growth for the entire business in March?

You know, we track a lot of activity metrics. The thing that I hesitate to do is segment and break our business down into such small components that I think it can be misleading or it just encourages unhelpful extrapolation of small data points.

So I think what if you look at our total revenues that we are guiding to for the fourth quarter, it is $135 million to $150 million if you kind of delta out the full-year forecast versus $125 million last year in a comparable period. So that's going to be in the $12 million to $25 million is what we are projecting our revenue growth to be for the quarter.

Okay. Where are we in the timeline of discretionary projects coming back? Do you think that happens this turnaround season, spring turnaround season?

I think we are seeing improvement all along. The economics of our customers are very good, and as they stay good, that makes those projects more interesting to them. Because they are are looking to de-bottleneck or on the margin increase production activity. So I think we are -- we have an environment that is going to be favorable. As I said, last spring, last fall we saw a pretty normal turnaround activity, and we expect the same this spring.

It is funny because the crack spreads are obviously very favorable, but the utilization rates have not really ticked up that much. Is there no historical correlation there?

You know, I'm not an expert in refining, so I don't really know. I don't track utilization rates very much because I don't -- one thought was that utilization rates drive the demand for our services, and I had not been able to discern that. So I don't really focus too much on that myself.

And then last just a couple of housekeeping issues. What was the quarter-end share count, the diluted share count?

20,400,000.

20.4 million, and I think I heard you say the cash at quarter-end was $22.6 million?

Right. Correct.

(Operator Instructions). Arnie Ursaner, CJS Securities.

In your mind, what are the factors that would get you to the higher low end of your guidance, and how much of the work in Q4 is in hand in your opinion?

I think it's all about revenue. I mean very simply I think every other aspect of our business we feel like is operating very well. And what gets us to the high end of the range is how hot and long the turn around season runs. If it runs all way to the end of May at the end of the quarter, we go to the high end of the range. If it kind of wraps up earlier, we are kind of on the other end.

Okay. And the weather and other issues you have had in the quarter, when I think about utilization, do you even have the capacity of staff to make up the weather and other shortfalls you had in Q3? Do you have enough capacity to make it up in Q4?

Good question. We supplement our permanent staff with contract people, and we're up to 350 contract personnel are supplementing our full-time staff currently. So we are moving to the high-end of our utilization rates and near-term capacity and are, frankly, taking steps to start -- which is a very positive thing -- to start broadening our permanent staff again as we see the demand expanding.

And when you use these third-party people, does that impact your margins in a noticeable way?

No.

Okay. And you really have not touched much on it, but it has been kind of a two-year issue on pricing. You were getting clobbered in the downturn. People people were really pressing you very hard. You are now talking about a dramatically better environment and a pretty strong outlook where you need to hire people. Is your pricing beginning to reflect the change in the underlying demand?

Not yet, but what I think I did mention is that our job margins, which is really a reflection of pricing to a large extent, job margins were flat, not only versus the trailing quarter but also versus a year ago. This is independent of overhead utilization, so individual kind of direct job margins, which I think is a positive. Because it is not that there is no cost sensitivity, there is, and there is going to continue to be, but that it is not leading to degradation or deterioration of our underlying profit drivers job margins.

My belief is that, if we get into an environment or a more inflationary environment where wages begin to creep up, that we will be in a position to pass that along.

When you look to the fall turnaround season, what is the pricing outlook for that business?

I don't have any -- I guess my expectation from a pricing and margin standpoint is that it is going to be similar to what it is today. We are not expecting recovery in job margins or an improvement in job margins, and frankly, we don't plan for that. We planned that any improvement in net margins will be to leverage our productivity improvements.

Matt Tucker, KeyBanc Capital Markets.

Forgive me if I missed this, but could you just give us a sense for what type of projects were those two that were delayed, and would you consider those more discretionary type projects?

No, they are big turnarounds.

Got it. Thank you.

Rich Wesolowski, Sidoti & Co.

The 350 contract staff, that number is not included in the 3200, correct?

Correct.

Okay. Of the five organic initiatives that you ran through, insert valves and heat exchanger maintenance, etc., do any of those individually have the potential to move the needle for the companywide sales over the next two to three years, or is it perhaps only in aggregate that they can raise the top line?

I think the potential revenues associated with any of those individual items, excluding Quest here for a moment, is probably in the $50 million revenue range. That is not a prediction that we would get $50 million next year, but that is kind of the order of magnitude. So it's a nice addition, a nice incremental addition is how I would say it.

Right. And then lastly, what is the best tax rate to use for 2012 and beyond?

38%.

Mr. Hawk, at this time, there no further questions. I will turn it back to you for closing remarks.

Thank you, Sandra, and I want to thank all of you for your participation in this call and your continuing interest in Team. We look forward to updating you on our progress with our year-end conference call in late July or early August. 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.