Team Inc (TISI) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2012 Team, Inc. earnings conference call. My name is Tianna and I will be the Operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Phil Hawk, Chairman and CEO. Please proceed.

Thank you and good morning. It is my pleasure to welcome you to the Team web conference call. Again, my name is Phil Hawk. 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 third fiscal quarter ending February 29, 2012. 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. Following these remarks, we will take questions from our listeners. With that, Ted, that me turn it over to you.

Thank you, Phil. First, as usual, I want to remind everyone that any forward-looking information that 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. We are very pleased to report revenues for the quarter of $136.5 million, which were up 25% from the third quarter of 2011. We are disappointed, however, with what we did with that revenue growth. Net income available to shareholders was $2 million and earnings were $0.10 per diluted share versus adjusted net income in last year's quarter of $1.7 million or $0.08 per share. Note that in last year's quarter, there was a nonrecurring tax credit which is excluded from the aforementioned comparison. Our overall gross margin declined by 1.4 percentage points in the quarter because of increased indirect costs. And, while SG&A declined as a percentage of revenues, we experienced some unusually high costs in this category that impacted our earnings by $0.07 per share. Phil will elaborate more fully on those items in his remarks.

Shifting now to year-to-date results, total revenues for the nine months of the fiscal year were nearly $435.9 million, up nearly $90 million or 26% from the prior year. Adjusted EBIT, or operating income for the year was $33.1 million, an increase of 35%. Adjusted year-to-date earnings per share was $0.95 versus $0.72 last year. We remain on track to have another record year of both revenues and earnings. Now, with respect to some cash flow related items, capital expenditures for the quarter were $5 million. Depreciation and amortization was $4.6 million. And non-cash compensation expense was $900,000. Additionally, as I reported in the last call, we spent $17 million in late December to acquire a mechanical service business on the West Coast.

Adjusted EBITDA was $8.9 million for the quarter and was $73 million on a trailing 12-month basis. At February 29, our total debt was $88 million, cash was $27 million, and therefore net debt was $61 million. Our net debt to trailing 12-month EBITDA was less than 1 to 1, even after consideration of the additional debt added to the West Coast acquisition.

And 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. We continue to be pleased with the broad-based growth of our business, both in the third quarter and year-to-date. As Ted indicated, total revenue growth in the quarter was nearly $28 million, a 25% increase. For the year-to-date, Team's total revenue growth is $89 million, a 26% growth rate. We continue to grow in virtually every segment of our business. In each of our major geographic markets -- the US, Canada and Europe -- Team revenues grow by more than 25% in the quarter. For the year-to-date, Team's revenue growth in each of these markets exceeded 20%.

Looking at performance by division, TMS revenues grew 22% in the quarter, and 24% year-to-date. TCM division revenues grew 28% in the quarter, and 27% year-to-date. Looking at revenue growth by service line, nearly all are growing. We are experiencing the highest growth rates in our inspection services and turnaround related services. I am pleased with the continuation of our strong business growth. As we will discuss in a moment, we believe we are well-positioned for continued attractive growth, both in the fourth quarter as well as in coming years.

Now, let me shift the discussion to third-quarter earnings performance. As Ted indicated, we earned $0.10 per share during the quarter, about 21% above last year's adjusted results. As we have discussed in previous third-quarter calls, this is our most difficult quarter due to the holiday season and start-up activities related to spring turnarounds. However, given the business growth in the quarter, and overall level of activity, our actual results were well below that we expected to achieve during the quarter. Based on our business model and historical operating leverage, with our business growth in the quarter we would have expected EBIT growth of approximately $4 million. And resulting earnings per share of about $0.20 per share.

I will walk through an analysis of our performance in the quarter. Overall gross margin as a percentage of revenue was about 1.4 percentage points below the corresponding prior-year quarter. This entire decline in gross margin occurred in indirect costs. Our job profit margins earned in the quarter were virtually identical to both the prior-year third-quarter levels and the immediately preceding second-quarter levels. Stable job margins are consistent with my belief that we continue to maintain pricing in line with our direct costs levels. And continue to execute well in our service activities.

Our unfavorable indirect cost performance was a result of increased spending, as well as reduced productivity in both our field activities and in some of our technical and operational support groups. Some of the increased spending and investment in training reflected startup costs ahead of significant turnaround projects that started in the quarter but are continuing into the fourth quarter. The integration of our new acquisitions increased training and transition costs during the quarter, as well. In addition, we experienced decreased productivity and additional spending related to our manufacturing, equipment centers and technical support activities. Resulting in an unfavorable variance to the prior year of about $1 million in these groups. Despite the increased costs in the quarter, we do not see any fundamental changes in our markets, cost structure or business model that alters our Outlook or performance expectations. Looking ahead, we expect our overall gross margins to return to historical levels or near historical levels, both in the coming quarter and beyond.

Now, let's shift to G&A costs. While our SG&A expenses as a percentage of revenue declined by a little more than 1 percentage point, we incurred approximately $2.5 million in one-off expenses in the quarter that significantly impacted our results. The major items were as follows. We incurred $1.2 million in increased medical costs accruals in the quarter. We accrue medical cost based on our actuarial expectation of claims. Due to an unusual number of major claims that hit in the quarter, our actual costs exceeded our accruals, thus requiring the additional expense.

We incurred about $600,000 in outside legal and professional service expenses related to both the two acquisitions completed during the quarter, as well as significant efforts on unsuccessful transaction activities. Again, while some expense in this area is not unusual, the level of activity during the quarter was quite high. And finally, we incurred about $700,000 in one-off costs related to the integration of our two new acquisitions. These included onboarding costs related to new employees, transition expenses related to the conversion to Team systems, and initial intangible asset amortization. These increased costs impacted both indirect and SG&A categories. The net impact of the costs related to all three of these one-off items is about $0.07 per share.

In summary, while we are tightening up and increasing our focus in a couple of areas, we remain confident in our basic cost and margin structure. We have some fine-tuning opportunities but remain well-positioned.

Let's now look ahead to the fourth quarter. Based on the continued strong activity levels expected during the quarter, we now estimate that total revenues for the year will be between $605 million and $615 million. After a thorough review of our third-quarter performance, and based on current and expected fourth-quarter activity levels, we reiterate our guidance that full-year adjusted earnings will be in the range of $1.55 to $1.70 per fully diluted share. Let me wrap up with a couple of final comments before we take your questions. We look forward to record results for this fiscal year and remain confident about our prospects longer-term. The basic market and business fundamentals for our Company remain attractive.

That concludes my remarks. Let's now open it up for your questions. I send it back to you, Tianna.

(Operator Instructions) Arnie Ursaner, CJS Securities.

I know you can't use the term one-time, but when you think about these various expenses, they certainly appear to be one-time. Again, it sounded like you expect to return to normal historic margins in Q4 and for next year. So which of these expenses would not be viewed as one-time in your thinking?

Let's just talk about the three of them. The easier ones are M&A, the professional fees related to our merger and acquisition activities. Those will be one-time unless we pursue other transactions. Which we will do on an opportunistic basis. But they are not related to the core or the base business that we already have in-house, if you will.

The same goes for the transition expenses related to our two acquisitions. We will continue to have amortization of intangibles associated with those acquisitions. But frankly, because of the seasonally weak periods to buy businesses in late December, you get virtually no benefit from it for the first couple of months. As we now get into the more active season we certainly expect those businesses to be positive contributors net of all those ongoing expenses.

Medical, frankly, is the trickier one. If our accrual rates and historical levels are correct, as we go forward we will not see those special charges. But we are self-insured with some stop loss insurance on top of that. To the extent that we have high expenses, though, it's possible that we could have medical charges again in another future quarter. We don't predict that, our forecast isn't based on that, but just trying to give you a little color on that.

My final question is, you are in the spring turnaround season, can you give us a sense of the intensity? We are hearing some people scrambling to get enough manpower just to handle the work that is out there. How are you positioned? And what can you say about utilization and pricing in the current environment?

We are very busy. So, we would concur that, at least for our Company, that we see it as we have a very strong or positive view about the activity levels for the whole quarter. I don't know that that would affect pricing in the immediate term. But as I said in my remarks about margins, it's always a difficult pricing environment because we have sophisticated customers that are very aggressive about pricing. But we think we are holding our own and maintaining margins and expect to continue to do so.

Thanks very much.

(Operator Instructions) Matt Duncan, Stephens Inc.

The first question I've got is honing in on the gross margin a little bit here. On the indirects, the incidentals that drove that year over year decline, is there any way to single out how much staffing up for the turnarounds, for the strong turnaround activity hurt your gross margin in that February quarter?

Not really, is the short answer, Matt. It's just very difficult. You see the anecdotal evidence and increased training activities. What you have is mobilization costs associated, particularly when we are bringing in the moving crews into an area for a particular turnaround. But to try to add all those up, or say that that training is just do a turnaround versus not this, it's difficult. So, we really haven't tried to sort that out.

Okay. And then on the guidance, the $0.07 in unusual items that you guys had in the quarter, is the guidance adjusted for those? Or is it based off the $0.10 actual for the February quarter?

It is based on the $0.10 actual.

Okay, that's helpful. On the recent acquisitions, Ted, do you know how much those added to sales and earnings, if any, in the quarter?

Total revenues associated with the acquisitions were about $2 million in the quarter.

Because of the start-up costs, it was a modest negative effect on earnings.

Do you know the split, by any chance, Ted, between TCM and TMS on those acquired revenues?

Order of magnitude, about $1.5 million TMS and $0.5 million TCM.

All right, very helpful. And then the last thing I've got is, on the inspection business, you called that out as being one of your faster growing service lines. How much of that do you attribute to Quest? I know that's been a pretty successful acquisition for you guys. Can you talk a little bit more about, now that you've owned it for 15, 16 months, how that company is performing relative to the expectations you had when you bought it?

Yes. The growth rates, the total growth rate, I think, for the inspection related activities is around 30%, 31%. I think the organic growth rate is 23% or 24%. So the difference would be Quest, the impact of the full year effect of Quest, in those numbers. We are pleased with Quest. It is off to a good start. They are just continuing to expand their in-line inspection capability. Just released their new tool for 16 inch diameter pipeline. So they are continuing to extend their service capabilities in that area. We are continuing to work well on a number of integrated service opportunities with regard to some of the target markets we are trying to build together. It's still early but we are very pleased. The business is growing and we continue to have high expectations.

And, Phil, how much revenue are you now getting on an annual basis from Quest?

Annually, Matt, it's a little north of $30 million of revenue from Quest.

So that's up about 50% from where you bought it, right?

It was probably about $20 million when we bought it. So, yes, that would be about a 50% increase.

Okay, great. Thanks, guys.

Matt Tucker, KeyBanc.

I was hoping you could give us a little sense with regard to the guidance, the implied guidance for the fourth quarter. $0.15 range seems a bit wide. Could you talk a little bit about the variables or uncertainties that could drive you towards the upper or lower end of that range?

Sure. Our experience has just proven to us, Matt, that we're not smart enough to tighten the range. And the things that impact that, one will be the timing cutoffs of individual jobs and projects that can swing revenues significantly on the margin. Again, because we have a $10 million revenue range. It's just hard to see out precisely where things are going to be, particularly as we sit here today in the month of May. We obviously have March done and we see where we are the next few weeks, but it's just hard to know with precision on overall activity level. It's going to be good but small swings, relatively small swings can have a big impact on that. Mix effect, timing of expenses, some of the things like an accrual adjustment or things like that can affect expenses, margins et cetera. So, when we just look back over the years we have a renewed conservatism just about our ability to be very precise on that. And hence the wider range.

Got it, thanks. And then, with respect to the ongoing spring turnaround season, last year in the fourth quarter you saw revenues grow 29% over the prior year. You saw the strongest quarterly revenues that I believe the Company has ever generated, even to today. So could you just compare the activity you are seeing this year versus last year? And can we expect to see you continue to grow the top line in this 20% type array? Or should we view that comp as being a little tougher than you've seen year-to-date?

I think you correctly identified it. I think the implied revenue range for the fourth quarter is $170 million to $180 million, which would be the biggest quarter ever for Team. But that is not the same growth rate, quarter to quarter, as we've had year-to-date, for exactly the reason you mentioned. That we have a much tougher comp this year for the fourth quarter than we had in the prior quarters.

Thanks. And just one more follow-up, if I could. Over the past five years, if you compared the second quarter to the fourth quarter, your two strongest quarters where you see turnaround activity, the gross margins in the fourth quarter have been lower in the second quarter. Regardless of whether the revenues were stronger. Is there something about the seasonality in the business that drives that? Or is it more coincidental? Should we expect that seasonality to recur again this year?

Matt, one of the things that might account for that is simply the cost structure in the first half of a calendar year is considerably higher than in the second half of a calendar year because of the resetting of benefits. [VICA], [ButaSud] and things like that. So that would really be the only thing that might account for that difference.

Okay, thanks, guys.

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

The unsuccessful acquisition that you talked about, was that just one deal or was that multiple deals, Phil?

We don't talk about the ones we didn't get, Adam. We continue to look at things. We have lots of reasons not to talk about that, including legal reasons, frankly, in terms of confidentiality agreements. We looked at several things but we had a significant single effort that was in there.

Okay. And then how does that make you feel about future M&A activity? What are the other opportunities out there right now?

I think there's lots of opportunities. Again, the key for us, hopefully that we'll continue to have the patience and perspective that we want to just add businesses and companies that can accelerate our growth and build on our outstanding base that we have. So that's how we look at things. We don't have to do any acquisitions. We continue to have very attractive organic growth opportunities. But having said that, if we can strengthen our position, add to our capabilities or accelerate our growth, either in new complementary service lines or new geographic areas where we maybe have under served or no service and presence, we're interested in those kinds of opportunities.

Okay. And talk about the health of your refining customers. When we look beyond the spring turnaround season, what is the demand outlook look like to you?

I'm going to just answer the question generally. We're not experts in all that. My own view is, just looking at industry stats, is that the general health of all of our major customer groups is pretty good right now. If I look at spring margins and crack spreads, by and large they are pretty good for refining. And that certainly would be consistent with the tone that we get from our customers on a plant level basis. But it's not just refining. They are very good to outstanding in the petrochemical area. They're very good in the pipeline area. Lots of new projects, new drivers of activities in that area, as well. So, again, we have a generally positive view about the environment that we're working in, and for our customers.

You do point out, I think correctly, that if you want to talk about fuel demand in the US compared to capacity, and interesting observation is that last year was the first year in 30, I believe, that the US was a net exporter of fuels. So, if you will, the capacity of our refining network somewhat exceeds the domestic demand. But, just as this industry began exporting, I think that will be the adjustment that will come. That is how supply and demand in a market gets equalized or balanced.

That's a good thing or bad thing?

I think on balance I'd rather be short than long, if I were a planner. Just because I think it would make this market less competitive if you were importing in. But, like I said, when I look at the margins out there, I don't see anything. When I see margins for our customer, I don't see anything that's alarming. And, frankly, when you look at the size of the refining infrastructure and the base -- I'm not talking about the little simple refineries maybe in the rural areas -- but if you look at the big refining centers of the US, Gulf Coast, New Orleans, West Coast, I have a high degree of confidence that that install base is going to be here for a long, long time.

Good. And lastly, I just wanted to ask a more granular question. Phil, you mentioned these indirect cost that affected gross margins, I think I heard this right, would reduce productivity in the fabrication side of the business. What drove that?

We have support groups that support our field operations in engineering and manufacturing of componentry and products that are used in our services themselves. As well as technical support groups that support all of our service lines. There's an internal P&L, if you will, for those groups, charging for services that are provided to our various field operations. That whole collection of activities was unfavorable relative to our prior-year third quarter by about $1 million. Some of it was mix and volume levels of particular service areas. But, candidly -- and I don't want to also explain away everything by a start-up here or there -- we just didn't execute as well as we could in the quarter. Both in some of our support activities but also in the field. We're not here to explain why things are lower but to make things better. And I think as a management team we feel like that's a fine-tuning opportunity that we are focused on.

Is some of that just the fact that you haven't seen demand this strong? It's been a while. I'm not quite sure how long.

I think we're at record demand levels that our Company has ever seen. And I think one can rationalize that I'm so busy adding people or focusing on this I didn't pay as much attention to maybe some of the other elements of our business model and levers. But there is no joy in that one. That's our responsibility to manage all aspects of our business and we intend to do so.

Okay, thanks for the time, guys.

(Operator Instructions) There are no more questions at this time. I would like to turn the call back to Mr. Phil Hawk for closing remarks.

Thanks, Tianna. And I want to thank all of you for your interest in Team and your participation today in the call. We look forwarding to updating you on our progress with our year-end conference call that will be in late July or early August. In the meantime, to all of you, have a very good day.

Ladies and gentlemen, thank you very much. This concludes today's presentation. Thank you for your participation. You may now disconnect and have a great day.