Team Inc (TISI) 2012 Q2 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, CEO. Mr. Hawk, you may begin.

Thank you, John. And good morning and happy new year to 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 and I am the Chairman and CEO of Team. Joining me again today 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 second fiscal quarter ending November 30, 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, our 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. Following these remarks, we will 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.

Now for the financial results. I am pleased to report very strong second-quarter results. Net income available to shareholders was $10.3 million and earnings were $0.50 per diluted share. The reported GAAP earnings for the second quarter include a non-routine charge in SG&A of $800,000 for a settlement of a decades-old personal injury matter. Excluding that item, for the second quarter, adjusted net income was $10.8 million or $0.53 per share on revenues of $158 million, an increase of 19% over the same quarter last year. On an organic basis, excluding the effect of the Quest acquisition, revenue growth was 13% for the quarter. Adjusted operating income was up 24% over the second quarter of last year. And adjusted net income was up 28%.

Shifting to year-to-date results, I'm also pleased to report that total revenues for the first half of the fiscal year were nearly $300 million, up $61 million or 26% over the prior year. Adjusted EBIT or adjusted operating income for the year-to-date was $29.6 million, an increase of 40%. And adjusted operating profit as a percentage of revenue was 9.9%, up nearly a full percentage point over the same prior-year period.

Now, with respect to some cash flow related items. Capital expenditures for the quarter were $5 million. Depreciation and amortization was about $4 million. And non-cash compensation expense was $1 million. We also spent $2.3 million in the quarter for the acquisition of a small business that expands our presence in the pipeline integrity management sector. And on December 30, just last week after the quarter end, we spent $17 million to acquire the West Coast mechanical service business of a former TMS competitor. This acquisition substantially enhances our TMS presence on the West Coast, and nicely fills a geographic void that existed in TMS in the Pacific Northwest.

Moving on, adjusted EBITDA was $24 million for the quarter, and $74 million on a trailing 12-month basis. At November 30, our total debt was $74 million. Cash was $19 million and thus our net debt was $55 million. Our net debt to trailing 12-month EBITDA was less than 1 to 1, even after considering the additional debt added in December for the West Coast acquisition.

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

Thanks, Ted. Let me add a couple of additional comments to Ted's summary. Overall, I am pleased with our financial performance for both our second quarter and our fiscal year to date. These results reflect our steady and sustained progress in the continued growth and development of our Company. As Ted indicated, overall revenue growth was about 19%, and organic revenue growth was about 13% in the quarter. The revenue growth was broad-based from a geographic perspective. Overall US growth was about 14%.

However, the mix of business within the US did change from the prior-year. Turnaround related service lines -- heat treating, field machining and bolting -- were down slightly from the prior-year due to fewer and smaller refining turnarounds being scheduled this quarter compared to stronger turnaround activities in the prior-year second quarter. These small declines in activity were offset by attractive growth in the onstream and project related services including inspection, leak repair, and hot tapping services.

Team experienced much higher growth rates in its other geographic regions. Team's total Canadian business was up about 25% for the quarter due to strong double-digit growth rates in virtually all service lines. For the quarter, approximately 20% of Team's total revenues were in Canada. Team's business in the rest of the world increased approximately 50% to about $17 million. About half of this revenue increase came from organic growth in Europe due to good turnaround levels and an expanding market share in our served markets there.

Quest's market presence in New Zealand and Australia substantially increased Team's revenues in Asian markets compared to the prior-year period. And Team's top-line revenue growth in the quarter drove attractive bottom-line profit growth. Overall adjusted operating profit grew 24%. The adjusted operating profit margin as a percentage of revenue grew about 40 basis points to 11.3% in the quarter. Overall gross margin was about 32%, about 1 percentage point below the prior-year period. We believe this difference is primarily due to mix effects and the corresponding natural lumpiness in margin data. Particularly compared to the very strong margins reported in the prior-year period. The 32.9% gross margin in the prior-year quarter was the highest quarterly gross margin Team has reported in the past three years. This year's 31.9% gross margin exceeds all other Team quarterly gross margins in any other quarter in that same three-year period.

Consistent with this view, both job margins and overall labor utilization rates, a key driver of indirect expense levels, are remaining fairly steady with no negative trends. Overall SG&A expenses increased about 12%, reflecting the addition of Quest, as well as expanded resources in several field and corporate support areas. SG&A expenses as a percentage of revenue declined about 1.4 percentage points to 21.3% for the quarter. We are pleased with the improved SG&A cost ratio. However, continued focus on SG&A cost remains a priority for our managers. Adjusted net income for the quarter was $10.8 million or $0.53 per fully diluted share, an increase of $0.10 per share compared to the prior-year period. Overall, it was a very good quarter.

My assessment of year-to-date performance is virtually the same. I am pleased with the level and breadth of our business growth and with the corresponding attractive profit growth. We remain positive about our business prospects for the remainder of the year. We recognize that there are several general economic headwinds that could impact our customers and their plans. But we also see new and additional opportunities that may be available. Within the US, we expect spring turnaround activity to be very strong. We see continued growth in Canada, both in the oil sands region as well as in other markets. Despite uncertainty in the Eurozone, we remain fairly positive about our European business prospects.

As Ted mentioned, we are also utilizing small acquisitions to expand our capabilities and presence in a couple of areas. During the second quarter, we completed a small acquisition to expand Team's pipeline project management skills and capabilities. While that business is small, we expect that these project management capabilities and current pipeline Company relationships will help facilitate a larger service presence with this customer group utilizing several other additional Team and Quest service lines, as well. And in December, we expanded our TMS Division presence in the Pacific Northwest with the acquisition of a successful small business in that region. This increases our capabilities in the Seattle, Portland, and San Francisco areas.

Reflecting our results in the first half of the year and our continued positive outlook, we have increased our full-year fiscal year 2012 revenue and earnings estimates. We now expect total revenues for the year to be between $585 million and $610 million. We now expect adjusted earnings to be between $1.55 and $1.70 per fully diluted share. As a reminder, Team's third quarter, which spans December through February, has been our seasonally weakest quarter in the last few years. We will continue to review and update our earnings guidance on a quarterly basis or when conditions warrant.

To wrap up, we are pleased with our continued growth and progress this year. We are on track for another record performance year in fiscal year 2012. And we believe we are very well-positioned for continued attractive broad-based growth for years to come. We have exciting development and growth opportunities in virtually every service line and geographic region where we operate.

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

(Operator Instructions) Matt Duncan from Stephens Inc.

Congrats on a good quarter. The first question I've got for you is, I wonder if we could get maybe a bit more detail on the two acquisitions you guys just made. Any help you can give us on combined annual revenues and earnings accretion from these two deals?

The combined revenues of the companies are about $12 million annually. And it will be accretive, but just marginally so. I don't know if you have a number.

It would be a couple of cents a year with the amortization of intangibles.

Okay. So the new guidance is probably including about $6 million in sales and maybe $0.01 in earnings from the two deals for the balance of FY12?

That's a good estimate, yes.

And then the last thing I've got, and I will hop back in queue, is Phil, you made a comment on the strength of the spring turnaround season. Can you add some color, maybe, to what your expectations are? I know the spring of '11 was a bit longer than normal on the back end. It carried through most of June. It sounds like maybe this turnaround season is actually starting a little early. Can you just talk about what you guys are seeing on the spring '12 turnaround period?

I think you're right on it, Matt. I think that's the big difference from last year, is it is starting earlier. I think our first significant turnaround activity starts about mid-January, in a week or two. Which would be several weeks earlier than normal. And just generally there's a lot of big projects happening.

Phil, does that mute some of the normal softness you would see in a February quarter? Or is it just too early to tell?

I think it's too early to tell but it will sure help. We are looking forward to it.

Okay, thanks.

Matt Tucker from KeyBanc Capital Markets.

First question is about the guidance. It's still $0.15 wide, even though we are halfway through the year. Is there any reason you didn't feel comfortable narrowing that a little bit? And could you talk a little bit about the factors that could result in achieving the higher or lower end of guidance?

I think it's basically driven by activity levels, Matt. We have been humbled many times before, where we think we are smarter than we are about being able to precisely forecast timing of events and activity levels, and the precise margin of an individual project. I think our lesson learned from past is that we are not that good in our forecasting. So I think the wider range just reflects, frankly, the inherent lumpiness in our business. We try to give as much guidance and some underlying perspectives of what's driving our results. But the notion that we can lock it in tight, we haven't been successful doing that historically. So we are a little bit humbled by the challenge.

Thanks. And you alluded to this a little bit. But on average, refiners enjoyed very strong profitability levels in 2011. Crack spreads have come down a little bit prematurely over the past few months. How do you think your customers are viewing that as they think about their maintenance spending going forward? And is that a bit of a concern, if not maybe for the spring turnaround season but longer term?

This is a personal view. I don't think the customers spend their maintenance based on what they're crack spreads are. I think that is a necessary evil of spending. What they might plan their maintenance spending on is whether or not they're going to keep plants open for the long term. And so if cracks go to an area or level of margins that they no longer see it as a viable business, that will affect their activities. I see no indication of that, other than in pockets in the Northeast of the US, with the simple or low complexity refineries up there where we've had some announcements in the Philadelphia and New Jersey area. Other than that, I see no indications that there is a lack of interest in or support for long-term refining business. Given that, I think refining maintenance expenditures are going to be basically consistent with needs or what Mother Nature and just the natural operating requirements demand. I don't see them growing, I just see them to be steady and near historical levels.

Thanks, and just one more and I'll hop back in the queue. It looks like Quest really had easily the strongest quarter in terms of revenue contribution since you acquired that business. Can you talk a little bit about what drove that strength in the quarter? And what you expect in terms of a run rate from Quest going forward?

Quest's 12-month trailing '12 run rate or revenue rate is $32 million through the second quarter. If you recall, I think it was roughly $22 million when we bought it, so that's a nice bump already. They are getting growth really across their service areas. I think the bigger growth is in their in-line inspection tool percentage-wise; in both percentage and absolute dollars. But we continue to expect growth across their portfolio of services.

Thanks a lot and congrats on a nice quarter.

Arnie Ursaner from CJS Securities.

Just talking about your business a little bit more, can you give us a heads-up on what you're seeing on pricing trends, employment trends or ability to find people in a more robust environment? And how we should think about both of those going forward?

Pricing, I think, is stable. You are correct that our space is getting a little more active, not only for us but for others. There has been a rebound from the recession, if you will, of a couple years back. So there is a little more competition for labor, which is creating a little bit of wage/cost increase for us, and we are having discussions to pass that through. But I think I would just say that what we view as an environment is that we are expecting to maintain margins, not increase margins. So we still have price sensitivity on the part of customers and expect that to continue. In terms of ability to recruit and add resources, I think it's slightly more difficult than it was a year or two ago. But we have been here before and we don't anticipate difficulties in meeting our needs.

But you've in the past had very aggressive plans to expand people recruiting in the military and other places. In the current environment, is it stable enough that you don't have to use what I'm going to call less efficient resources to grow your business?

I'm not quite sure how to respond to that. We are always looking for great people. We have an aggressive attitude and mindset toward attracting good resources. And I would just point out, I think we added 400. I've got a number here. Our total personnel right now, full-time personnel, is about 3,600 world-wide. That compares with about 3,200 last year. So we have added a little over 400 people in the last 12 months. I wouldn't say that we are going to every job fair, looking at all the unusual places, but we have a pretty aggressive, I'd say, traditional search process and recruiting process going, both for full-time but also for project-related resources.

Just thinking about the second half of the year; usually your second half in total is stronger than your first half. You indicated you're seeing an earlier start to the turnaround season. You've made two acquisitions. If I look at the math of your first half revenue, you're not implying very much growth in the second half versus the first. Again, is that just the typical let's try to be conservative, or is this mix shift that impacted Q2 affecting your view of the back half of the year?

No, I think you are correct. Your analysis is correct that it's roughly half and half. Or maybe, if you look at several years, slightly higher in the second half. I would point out we had an extraordinarily strong first quarter, because of the overhang of the turnaround season last spring into our first quarter. I think because of that, we have a little bit of conservatism that we wouldn't just normally project the same. Because it's so strong on that first quarter that we wouldn't have the same projections or ratios that perhaps we'd have in other years. But we are positive about the year. We are not trying to downplay our expectations which are that it will be good.

Thanks, Ted.

Rich Wesolowski from Sidoti & Company.

If I'm not mistaken this is the first quarter in some time when your US growth was driven by onstream activity and project work rather than from turnarounds. Do you infer anything from that change with regard to the sustainability of today's activity rates over the next few years?

No. I might clarify it slightly. I think we've had growth in onstream services virtually every quarter. I think the difference this time is we did not have growth in the turnaround services in the US. We did actually, in aggregate, because of other markets. So it's not that the US; the onstream hadn't grown before. It's just that it was the driver of the growth in this particular quarter.

And now to your question, does that portend trends. No, not at all. I think we, again, believe we have share growth opportunities in both onstream and turnaround services. What we had, and I think this was confirmed by us in talking with just some of the general turnaround contractors that aren't competitors of ours, but just do turnaround activity in the US, that they also saw this second quarter, the fall turnaround season was weaker for them for their business than it was in the prior year. So, to me, it's just the timing and lumpiness of turnaround schedules in the US. It was particularly Gulf Coast, Mid-Continent for us, is where the big differences were.

Thanks for that. And separately, would you contrast your business in Western Canada today with what was going on in 2007-2008 when it was roughly the same size? Is there anything that would give you confidence that the results would be steadier if we saw a drop in oil prices?

I think we have bigger maintenance programs today than we did then. We were very heavy on new construction and the new upgraders, and now we have a better mix of both new construction projects and ongoing maintenance.

I'm sure the new construction up there is higher than the typical company-wide 10% or thereabouts. Is that correct?

Correct, absolutely.

Okay. And lastly, the numbers that I see show even less refinery expansion in Europe than we have now in the US. And of course their economies aren't strong. What gives you any optimism regarding your European business?

What we are seeing on the ground. When you look at our activity levels, I think Europe quarter to quarter was up 40% overall.

Do you think that's customers spending more money or Team expanding?

I think it could be a little bit of just that turnaround activities aren't affected by the general economy. So the fact that the Eurozone is going down, or general consumer spending is going down, or whatever those headlines mean, isn't directly affecting our type of customer. But yes, we do -- we are proud of our business over there and we do think we are increasing our presence and penetration in the markets that we are serving.

Appreciate it and best of luck in 2012.

Martin Malloy from Johnson Rice.

Congratulations on the quarter. Could you talk a little bit about your pipeline integrity business, and if you're seeing some growth potential there that's being driven by regulatory changes?

We will come back to the question. If you take Team, our origins are really in plants. But we have services that are very applicable to pipelines. It's not that we have done no pipeline work, but we have not been a major player in the pipeline maintenance service. The Quest acquisition obviously gave us more with the in-line pipeline inspection tools; gave us more access and breadth of capabilities in that area. But what we are seeing and saw was that what our customers, our pipeline customers, are looking for is more integrated maintenance capabilities. And that's what this acquisition was about, was to basically acquire a small company that provided project management capabilities for pipeline customers. And we think that gives us the introduction to these customers at an appropriate level where we can now bundle and bring our services, plus other related services that the pipeline companies need, to bear in a more integrated package. So we are quite pleased and excited about our capabilities, expanded capabilities, in this sector.

There is no question that the pipelines in North America -- and, really, around the world but certainly in North America -- is an aging infrastructure asset. And there been several high-profile failures that bring to light the importance of mechanical integrity management of these assets. And we think we are very well-positioned to assist pipeline customers in the management of those assets. That's both inspection or identifying service and maintenance requirements, but also then providing some of those requirements once they are identified. So we think the project management capabilities with our inspection capabilities, and then with our subsequent, both prove-up capabilities on the inspection side, but then maintenance capabilities. Hot tapping in particular would be one that would be very relevant to the pipeline industry. We are excited about our growth potential.

Is this an area where we could see you possibly make some more acquisitions in the coming year or two?

I think the philosophy we have towards acquisitions is that we are looking to buy things that expand our capabilities, or allow us to grow faster than we could otherwise grow organically. So yes, I think as we identify, or if there are other special needs or areas of presence that could accelerate our growth, that would be something that we would be receptive to. I don't have a belief that we have to acquire other companies in order to be successful. But if we could accelerate -- much like the acquisitions that we made over the last several months here -- to us, they all fit that same test. They give us expanded capabilities in a relevant area that accelerates our growth and presence.

Thank you.

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

For the larger acquisition, the $17 million acquisition, what EBITDA multiple did you pay?

It was a multiple rate at about 6 times EBITDA.

I keep reading about, with low natural gas prices, that you're seeing more chemical and fertilizer plant construction in the US. Remind us what percentage of your business is petrochem. And is that growing for you guys?

It's about 15%. And honestly, we don't track business by customer segment really carefully. I read like you do. I am very positive about the expansion that's, I think, in my view, driven by the lower feedstock costs that look like they're here today and on the horizon for the long-term, related to shale gas and shale liquids. And we see those projects coming, as well. But in terms of tracking, is that a direct increase in our volumes, I don't have much insight on that.

And then just lastly, you and others in the space that I talk to certainly indicate the next six months, there's a very good outlook. Can you help us understand maybe looking out 12 months, what would be the reason to remain excited about your primary end market, refinery spending?

I think the thing that I would say is that it's not excited about we are going to have expansion of growth. It's steady. When we look at our growth, it's we are taking advantage of natural consolidation that's taking place in our industry. So our long-term revenue growth is a function of both the expansion of our service capabilities and market share growth. It's not really market growth. And so I think the premise to your question was that there is market growth that we should get excited about. And I don't think that's really driving our business. It is true, I think we expect just the lumpiness in timing. While it was a little bit weaker in the second quarter -- or our second quarter, the fall -- than it was the prior fall, I think the turnaround activities are going to be a little stronger in the spring than it was in the fall. But that's just a little bit of lumpiness of timing. I don't think it really reflects a notion that the market is fundamentally changed, or the demand levels are fundamentally higher.

Thanks, Phil.

Matt Tucker, KeyBanc Capital Markets.

Just a couple follow-up questions. During the downturn, I remember you commented that it was difficult to tell whether you guys were gaining market share, and now you sound pretty confident that you have been. Can you give us a little detail in terms of where you're gaining market share; from whom? Is it in certain services lines? And is that just being driven by the consolidation overall trend that you mentioned in your industry? Or is there any new trend or strategy that you think is driving that?

I think our aggregate growth rates speak to, we believe, are higher than demand growth rate. So that's why I have confidence that we are gaining share somewhere. Here's again the difficulty for us, Matt. I think last year we did in the order of magnitude of 130,000 individual jobs. Who did we compete with in every one of those? I really don't know. It's just so difficult to say. On one of those we can say we got that piece of business from competitor XYZ. But we don't know where they are getting all their business. So to have a view that we are taking it from this particular company; we really don't have much insight on that. I do think just structurally, larger companies -- multi-service, multi-location companies -- are advantaged, and they are going to be doing better. Like Team. They are going to be doing better than the smaller companies.

And then just to touch on the spring turnaround season again. Last year was strong and it had a nice tail to it. This year you're starting a little early and also think it's strong. Do you think that the turnaround season this spring overall is going to be stronger than last year?

I don't know. Our field managers are positive about their opportunities. I agree with you, last year was also strong. I just think it depends on so many different factors. We will know when we look back at it. But as you said, we are guiding to a strong quarter; a strong second half of the year. And it reflects our optimism.

Great. Thanks.

Rich Wesolowski from Sidoti & Company.

Would you remind us if the seasonality of Quest's business mirrors your own?

Yes. By and large, it does.

So, same way, the November and May quarters should be bigger?

Yes.

And lastly, you mentioned the in-line inspection area is outgrowing the engineering assessment. But is the engineering assessment growing at a reasonable clip, as well?

Yes.

As you look out at your vision of Quest three or five years from now, I know you think it's going to be a lot bigger company than it is today, but has in-line become consistently a much bigger portion of what they are doing?

Probably. Because it's just such a huge opportunity for them in that area. And it's so leveraging, as again, they are expanding their capabilities in terms of sizes. There are so many exciting applications, and just the revenue growth from that expanded capability, I just think is greater than building and engineering assessment capability.

Okay, thanks again.

We have no further questions at this time.

Thank you, John. Let me just wrap up then. I want to thank everyone for your participation in this call, and your continuing interest in Team. We look forward to updating you on our progress with our third-quarter call sometime in early April. 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.