Team Inc (TISI) 2012 Q1 法說會逐字稿

Welcome to the Team IR call. My name is John, and I'll 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, everyone. It is my pleasure to welcome you to the Team Inc web conference call to discuss recent Company performance. Again, my name is Phil Hawk; I'm 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 first fiscal quarter, ending August 31, 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, 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. Following our remarks, we'll take questions from our listeners.

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

Thanks, 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 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.

And with that, now for the financial results. I'm pleased to report the best first quarter in the -- of operating results in Team's history. For the first quarter, net income was $6.8 million or $0.33 per share on revenues of $141 million. That's an increase of 35% over the same quarter last year. On an organic basis, which excludes the effect of the Quest acquisition, revenue growth was 28% for the quarter. Operating income was up 75% over the first quarter of last year, and net income was up about 80%. We are obviously off to a good start for the year.

Now with respect to some cash flow related items. Capital expenditures for the quarter were $5.3 million. Depreciation and amortization was about $4.1 million, and non-cash compensation expense was about $1 million. EBITDA for the quarter was $17 million, and was $69 million on a trailing 12-month basis. At August 31, our total debt was $73 million, our cash was $21 million, and so therefore, net debt was $51 million. So our net debt to trailing 12-month EBITDA at August 31 was less than 1-to-1.

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

Thanks, Ted. Let me now add a couple of additional comments to Ted's summary. We are off to a very good start in this fiscal year. The primary driver of this good start is terrific, broad-based revenue growth. Let me share several additional details on this revenue performance.

As Ted indicated, overall growth in the quarter was 35%. Team's business in all major markets contributed to this growth. Total US business grew about 18%. Our Canadian business increased almost 80%, which reflected increased oil sands activity, as well as a major repair project. And our business in the rest of the world, principally Europe, the Caribbean, and New Zealand/Australia, nearly doubled, reflecting the timing of significant new projects and the addition of Quest business in those regions. Our business in non-North American regions represented about 15% of total Team revenues in the quarter.

All of Team's service lines grew during the quarter. The on-stream services increased about 10%. The inspection and assessment services increased about 25%, and turnaround services increased more than 75%, reflecting expanded project activity in all major markets.

This revenue growth drove very attractive profit growth. As mentioned previously, Team's net income for the quarter increased nearly 80%, and operating income, or EBIT, increased approximately 75%. Operating profit margin as a percentage of revenue was 8.3%, an improvement of nearly 2 percentage points from the prior year. The margin improvement reflects improvements in both the gross margin and SG&A-expense-to-revenue ratios. The improvement in the gross margin ratio reflects stable job margins and favorable volume leverage.

Regarding SG&A, despite a significant overall increase in SG&A expenses, SG&A expenses as a percentage of revenue actually declined approximately 0.5 percentage point. The growth in SG&A expense reflects the addition of Quest, as well as increased compensation expenses related to targeted staff increases, salary adjustments, and increased incentive compensation accruals. Overall, these financial results were the best we have ever achieved in a first fiscal quarter, and I'm very proud of our team.

We also continue to be pleased with our new Quest business. Quest initiatives related both to the proprietary in-line inspection capabilities and our engineering assessment services are driving attractive business growth in the pipeline, process, and power industries.

Shifting to our outlook for the remainder of the fiscal year, we continue to have an optimistic view of our prospects. The market fundamentals and profit margins for our major customer groups remain attractive. We expect normal turnaround activity levels both this fall and next spring, and we are pleased with our market position and growth prospects from a number of initiatives. However, I caution that our optimistic views should not be interpreted as a straight line extrapolation of our first quarter growth rates.

First, as we have discussed in previous calls, the results in any particular quarter can be significantly impacted, either favorably or unfavorably, by the timing of a few projects or events. And we remain cautious about the potential negative impact of weak, general economic conditions, and an unsettled political environment. While at this point we do not see any material changes to customer activity levels or plans, we remain concerned that activity levels could soften if conditions deteriorate further. Consequently, at this time we are affirming our current full fiscal year earnings forecast of $1.45 to $1.60 per fully diluted share.

To wrap up, we are pleased with our start to this new fiscal year. It reflects the continued positive business momentum and attractive market opportunities available to us, and we feel we are very well positioned going forward.

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

Thank you. We will now begin the question and answer session. (Operator Instructions) Matt Duncan from Stephens Inc.

Good morning guys. Congrats on a great start to the year.

Good morning, Matt.

The first question I've got is with regard to your gross margin expansion. You had about 130 basis point improvement year over year there. Can you talk about what all factors drove that?

Sure, Matt. It's really all volume leverage and then the indirect costs. If you look at our job margins, which as you will recall, is really revenue minus the actual direct labor and direct expenses on our individual jobs, the sum of those aggregate job margins for our whole business for the quarter was really nearly flat with the prior year.

Okay, so Phil, are you beginning to see any willingness from your customers to take price increases as labor continues to tighten for you guys?

Well, I think how I would interpret flat is that we are -- because we are beginning to see some creep in expenses in some areas that we're able to recover those modest increases in expenses with some pricing adjustments.

Okay, that's very helpful.

Having conversations but it is not our view and expectation that we're going to expand margins through pricing. We're just trying to hold the line.

Okay, Phil. That's very helpful, thank you. And then if you look at the new services that Team has added over the last 12 months, I know there's been a number of them, such as heat exchange or repair. I'm curious how much revenue you were able to get from those services in this quarter, looking at how much new service line additions have added to your growth rate this quarter.

Matt, we don't disclose the individual service lines but just looking in the aggregate of revenues associated with the new initiatives that we have discussed and it's in our website on our new initiatives slide, it was about $4 million total in the first quarter.

Okay, and then the last thing I've got and I'll get back in the queue is you guys obviously had a very strong quarter. Phil, I appreciate the insights you gave us on what you're seeing and the outlook for your business, but thinking through the maintaining of your guidance rather than raising it after such a strong quarter, I know historically that given that the August quarter is a seasonal low point, you guys had typically left guidance unchanged. But I think with the uncertain economic backdrop, I just want to be clear that you are not seeing any deterioration of demand for your services but rather you're just choosing a cautious route early in your fiscal year given the uncertainty.

Yes, I think that is correct. Both given the uncertainty of the market but just the other point you made is a good one is that our seasonally weaker quarters are the first quarter and third quarters and to extrapolate from what is already just a weaker percentage of the total year, I think is just we're just cautious not to read too much into just a good start.

Okay, thanks guys. Congrats again on a good start to the year.

Rich Wesolowski from Sidoti & Company.

Are you confident that the job margins will ultimately retrace what was lost in 2009/2010 or is there a possibility this is the new typical rate for you and the rest of the industry?

We're planning on the latter. It would be great if -- it's not that we're opposed to having higher margins but it's a competitive world out there. We have sophisticated customers so it's not our expectation or plan that margins will increase.

Okay, so as I look at your operating margin, historically, Team has capped out around just below 10%. You put up a record in the first quarter here, at least for an August quarter and your volume seems to be going in the right direction so is there a potential that merely through volume and leverage on the indirect cost that you get above 10%, if not in 12% in some year in the future or is that a natural cap for you?

No, I don't think so at all. I agree with your analysis and observations is that, in fact, I think if you look at the last 2 quarters combined, we are at 10% right now or maybe slightly above it. It rounds to 10% but no, we don't see that as a limit at all. I think there's significantly more if you will scale or volume leverage as we continue to grow our business.

Lastly, would you mind relaying your sense of the atmosphere in western Canada, especially with oil prices falling lately. Are people starting to get worried? Are people starting to talk about projects maybe being put on hold?

I don't know that we are close enough to the inner sanctums of capital budget planning guys to know how they're thinking. We've seen no evidence of any change but candidly, it's a very, very short time period since you've had some pullbacks, so we -- obviously, our results reflect increased activity. It is nowhere near the white-hot euphoria that existed in the 2008 /2009 period. It's just, again, half step back or a full step back that we're seeing and I think for that reason, I think we would be more confident that we're going to see some sustaining of what's happening now. It's just not a sense that it's just overcooked like it was before.

Good term. Thank you.

Arnie Ursaner from CJS Securities.

You in the past have talked about people as a strategic weapon, having enough people ready to do the work when it's there. Can you comment on your headcount additions in the quarter and what you are seeing these days in terms of labor availability?

I think what I'm going to do is talk to what's, if we look at versus 1 year ago, we're up about almost 500 people. Now about 130 people of that is Quest people, so the remainder then would be other non-Quest growth. If you actually look at it versus, if you will, August 31 versus May 31, I think we're actually down a few heads because again, coming into a seasonally weak quarter, we'll have some ebb and flow from that standpoint. So I think we feel confident that as we have for the year, we can add resources when we need them and we're obviously always looking for great resources that can help us not only principally with technicians but also great business developers and people that can join our team as well. We do not perceive that we are labor constrained to support our growth.

And the cost of this labor, has that shown a noticeable change given the tightness of the market?

Not noticeable change but it's creeping.

Okay.

So we have some cost creep just from wages in our business.

Okay, my final question relates to the quarter that just ended. Normally when you have a very strong first quarter, it's carryover, turnaround work that you didn't complete in the May fiscal year or it's specific projects. Can you comment on whether either or both of those factors impacted the quarter and to the extent you can quantify them?

Sure, good question. I know about the quantification is a little trickier but you are absolutely correct, I think on both fronts, it's correct. We had a very strong June this year and I think one has to conclude and we had big project work, so I think there's no question that the Spring turnaround, so I don't know whether this is a trend or episodic to this year but we are seeing turnarounds spread longer. We did this year anyway spread longer and run well into June and as I mentioned in Canada, we had there was a major repair project which is a one-off thing that added maybe a couple 3% to the total revenue numbers that was a one-off thing.

Thank you very much. Great quarter.

Craig Bell from Enerecap Partners.

Yes, good morning. Phil, I wanted to touch on your comments on the outlook again. It sounds like what you're saying with the remaining concerns about -- that activity levels could deteriorate and it sounds like you are a little bit more cautious than you were, say, this point in the 2008/2009 time frame when it seemed like you guys got almost surprised by the sudden drop-off in activity there. Is that a fair statement that you're a little bit more cautious and then secondly, do you think, as a Company, you're more prepared if you saw a drop in demand like that, if the activity levels fell off?

Well, just in terms of perspective, it's not our view or our outlook that we are going to see a decline in activity level. What we're -- in fact, our forecast still implies continued growth on our business the rest of the year. What we're just saying being a little cautious is that, just like you, I read the papers and again, this is not industry-specific to us but general economic malaise around the world is a little bit creating a lot of uncertainty. And so the perspective we have is that we don't understand and know how that uncertainty is going to filter through and affect our customers and then ultimately our business, so that's the sense of our caution and in terms of our forecasting. We'll adapt to whatever environment that we have and candidly, I was pretty proud of the way our Company adapted the last time. We had a very significant revenue drop but we, almost within a quarter, had locked back down to where that was and adapted and I don't forecast that happening this time. I think the environment is -- the fundamentals to our business are better than they were at that time but we'll adapt to whatever comes our way.

Okay, great. Thank you.

Matt Duncan from Stephens Inc.

Phil, following up on that, I wanted to think through maybe what has changed fundamentally in the market since 2008. It seems like refiners have shifted from scheduling maintenance on a calendar every 5-year turnaround maintenance scheduling. They've gone to more risk-based maintenance planning which in theory would result in a more sticky turnaround calendar. Are you guys seeing that in the market?

Well, like I said, we haven't seen a lot of, certainly in the near term, we haven't seen a lot of changes in project plans, turnaround plans so I suppose that would be consistent with that observation that you are making. I think a little bit is that when we, again, if you go back to the 2008/2009 period, you had the end of almost a euphoric era of many years of very, very strong margins and I think underlying expectation of the industry that this was the new normal that was going to stay very, very good for a long time.

We had a lot of expansion activity, obviously, we had almost white hot activity up in the oil sands so when their demand and margin environment changed significantly and dramatically, almost collapsed in some segments, they reacted strongly but because they had been in such an aggressive forward-looking growth environment, there was a lot they could stop in the short run and they did. I think while margins have been good the last year, I don't think there's that underlying euphoria that life is just going to be fabulous forever, at least in the eyes of our customers so they're running a lot tighter. We haven't seen back to the good old days in terms of the procurement approaches and planning approaches, so because they're running tighter and managing tighter, I think the, if you will, the degrees of flexibility they have to defer or to put off is less now than it was 3 years ago.

And Phil, do you think they have caught up on maintenance that they were deferring back in 2009 or are there still maybe a backlog of some deferred maintenance activity that you might be benefiting from now? Is there any way to gauge that?

I don't know any way to gauge it but I don't perceive that there's any backlog at this point.

Okay, and then 2 more final just numbers questions. On the growth rate in the US of 18%, was that all organic or does that include Quest?

That includes Quest. If you take Quest out, it's about 13% to 14% organic.

Okay, and then the big project you referred to in Canada, I'm assuming that's repair work at the Horizon upgrader that had an explosion back in January. Can you talk at all about the revenue contribution? I guess you said it was maybe 3% or 4% added to the growth?

Yes, I think it was, what, $4 million or $5 million.

It was about $5 million in the quarter.

Lana Chan from KeyBanc Capital Markets.

Hi, this is Tahira actually on behalf of Matt. Many congratulations on a very strong quarter by the way.

Thank you, Tahira.

Thank you, Tahira.

I guess if I look at the last cycle, there seemed to be a fairly nice correlation between free cash flows for a lot of your sponsors and really some of the maintenance activity and if you really look at the free cash flows in general, they seem to be pretty strong still. And to your point that you made earlier on, even on the oil sands side, we've seen the work, the tap being turned on by being turned on fairly cautiously. So if you look at your pricing scenario and if you look at your outlook, what are the markets where you feel that things could have been turned on a little more aggressively as you compare it to some of the other markets, where you think it's being turned on cautiously and I know you said broad-based it seems like everyone is being cautious but are there any areas where you feel that there might be a bit of a worry?

In terms of worry that someone might be overextended segments that are overextended?

Well, there might -- sponsors that might have aggressively come back.

Not really and again, I don't really study our business at a micro level on a segment by segment basis in great detail on that, but I don't sense that and I would just say that we're seeing a lot of fundamental strength underlying these segments, so it will be macroeconomic pressures that I'm a little bit concerned about affecting, if you will, the underlying industry environment. If you look at the chems right now, chemical industry is really strong.

Right.

Of course, the dollar is not weaker in the last week but if you take 1 week or 2 weeks but if you -- a weak dollar plus shale gas liquids there's just a lot of fundamentals that are really good for chems. Pipeline, very, very strong with a lot of the development work in the US. That's more gathering system than big pipeline systems but that's a positive. I don't have a real good recent read on power but my general perception is it's steady and doing just fine and then refining. You wouldn't know it and it's segment specific. If you go to the Northeast, obviously, there's some concerns in the Northeast region with a lot of announced plant sales and potential closures but the crack spreads in the rest of North America are continuing to be pretty good. So I just think if those conditions remain, no one is out there stretched out. They're not betting on something could get better. Again, my caution is that those could get worse if general economic conditions dramatically change and there's all kinds of reads about whether that is going to happen or not. That's why we're cautious.

Got it, okay. And I'd probably agree with you. It seems, hopefully, it's all a sentiment. It just seems fundamentally the sector, annual business is a little better positioned for a slowdown versus the last time where it was more of a surprise.

I agree with that. Certainly, our customers are more cautious, have a more cautious posture than they had last time.

Well, congratulations on a very good quarter, gentlemen.

Thank you.

Thank you.

Arnie Ursaner from CJS Securities.

Hi, it's Arnie Ursaner. My question relates to the guidance you provided back in July. I think embedded in the guidance for revenue at that point was high single-digit organic revenue growth somewhere in the 7% to 9% range. Obviously, you were well above that in Q1 and I think you've -- would clearly seem to be indicating you expect a pretty good turnaround season. How do you think about organic growth for your Company overall for the balance of the year? Well, it's back to, can we extrapolate our organic growth over the last couple quarters is really the question you're referring to and we feel positive about where we are in our position. We're just -- and as you know, Arnie, we aspire to double digit, long-term organic revenue growth and we like our position where we are. It's just with the -- coming off, again, a seasonally weaker quarter, we're just a little bit cautious about extending the line here or trying to draw too many conclusions from our start to the year. Sure.

But we remain positive.

Okay.

Arnie, said another way, I think what we believe about the rest of the year is that exactly what we believed when we started the year, that for the rest of the year, we expect high single-digit growth. As you know, we're going to be facing a really difficult comp when we get into the fourth quarter so I think what we're simply saying is that our expectations about the last 3 quarters are unchanged relative to where we were in July.

Well, your headcount is up about 15% year over year. I guess where I was trying to go with that also is did you incur any margin hit? Are these people fully ramped up or are you still going through a training process on some of them impacting margin?

Well, I think they're fully on board and I think the way you see that is you see it in gross margin that where the ramp-ups would be or the big numbers of heads would be, would be in direct expense or in the gross margin line. And we're seeing a continued high utilization of labor and you're seeing the volume leverage in terms of our growth and our SG&A expense increases either are related to or adds, I should say, are related to Quest or they're related to, I guess, significant targeted bets that we expect to have very short-term pay-offs.

Okay.

And the other -- just to follow-up on that, Arnie, you've got to be a little bit careful on those headcount growth comparisons because that 15% that you referred to is a point-to-point first quarter this year versus first quarter last year when, really, if you think about headcount, it's more sequential, so we're actually down from the fourth quarter and so the comparisons are not as dramatic as you move through the year as you'd expect.

Okay, in Q4, 13 regions of your 17 regions have had double digit growth. What was the number this quarter?

It was actually the same. We only had [3 regions] out of 11 regions that didn't grow. 8 regions did and all of our non-US regions grew.

Okay, thanks again.

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

Hi, good morning guys. Nice quarter.

Hi, Adam.

Most of my questions have been answered. I did just wonder if you could talk a little bit about, maybe give some anecdotes about the Quest business? I know you had a pilot program where you are putting the engineers or the guys who read the data on the ground and I was just wondering how that worked out and maybe some other anecdotes about how the synergies are coming along with Quest?

I'll just talk about more general, I don't know that I have a lot of anecdotes about a single job or project but we're really pleased with Quest and yes, in addition to, I'm going to say Quest-only business development, which is in their in-line inspection activity and engineering assessment, we have 3 specific initiatives that really are the initial ones that we're rolling out that are combined Team and Quest capabilities. 1 is related at Tank Maintenance Management. 1 at Pipeline Integrity Management and 1 then for the Power Services so we're I think on both fronts we're delighted with our capabilities, delighted and excited about some of the integrated opportunities that will evolve. It's still early so we're not here to report specific sales to this customer or that one, but we're getting a lot of positive feedback and expect this to be good.

That's helpful. Thank you.

We have no further questions at this time.

Then let me just to wrap up, I want to thank all of you for your participation in this call and your continued interest in Team. We look forward to updating you on our progress with our second quarter call in early January. 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.