Team Inc (TISI) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Team, Inc., fourth-quarter earnings conference call. My name is Sue and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would like to turn this call over to Mr. Phil Hawk. Please proceed, sir.

Thank you, Sue, and good morning, everyone. Again it's my pleasure to welcome you to the Team 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 this morning is Mr. Ted Owen, the Company's Executive Vice President and Chief Financial Officer.

Again, the purpose of today's conference call is to discuss our recently released financial results for the Company's fourth fiscal quarter and full fiscal year ending May 31, 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, 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. And then following these remarks, we will take questions from our listeners.

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

Thank you, 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've 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, and 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 with that, on to the financial results. First, let me report the results for the fourth quarter. Revenues for the quarter were $188 million, up 16% from last year's quarter. Adjusted net income available to shareholders was $14.8 million, up 37%, and adjusted earnings were $0.71 per diluted share, up 34% from the $0.53 per share reported in last year's quarter.

Excluded from adjusted earnings, and as we discussed in the press release, we incurred a $1.7 million nonrecurring non-cash charge in the quarter to write off previously capitalized development costs related to a planned new headquarters, manufacturing, equipment, and training facility that was to have been constructed on a 50-acre tract of land that we own in Houston. Those of you who have followed us for a while will recall that we suspended development activity on the site in 2008 as a result of the recession.

We have now decided not to pursue the development of the land. Instead, our existing corporate headquarters in Alvin, Texas, will be repurposed as a technical center for training, engineering, manufacturing, and operations support. And we will relocate our corporate office to a leased commercial office space in Sugar Land, Texas, which is another suburb of Houston.

We expect to complete the corporate relocation by the end of this year, 2012, and to have completed the construction and remodeling activities in Alvin by the end of 2013. We now expect to spend about $5 million for the repurposing of existing space at our Alvin location as well as for the corporate office lease in Sugar Land, as opposed to the $25 million that was originally planned for the facilities on the 50-acre site.

We have placed the 50-acre site for sale now, and expect the proceeds from that sale to more than fund our revised capital plans for the Alvin and Sugar Land facilities.

Shifting now to the full-year results, total revenues for the year were $624 million, up $116 million or 23% from the prior year. Adjusted EBIT, or operating income, for the year was $57.3 million, an increase of 33%. Adjusted net income available to shareholders was $34.5 million, up 37% over last year, and adjusted earnings per share was $1.67 versus $1.26 last year, an increase of 33%. Another record year for Team in both revenues and earnings.

Now with respect to cash flow-related items, capital expenditures for the year were $24 million, which includes $5.7 million expended for operations facilities. Depreciation and amortization was $17.5 million, and non-cash compensation expense was $4.4 million. Additionally, as we had previously reported, in the second quarter we spent $19.4 million for two small acquisitions.

Adjusted EBITDA for the year was $79 million, up 26% from last year. And at May 31 our total debt was $86 million; cash was $23 million; and thus our net debt was $63 million. Our net debt-to-EBITDA at May 31 and was 0.8-to-1 even after considering the additional debt added for the aforementioned acquisitions and the natural growth in working capital that occurs during the fourth-quarter turnaround season.

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

Thanks, Ted. Now I would like to provide some additional perspectives on our recent performance and outlook. As I have done in past year-end earnings conference calls, I will briefly touch on fourth-quarter performance, and then direct the bulk of my comments to our performance and progress throughout the entire year.

This reflects our belief and philosophy that our longer-term performance trends are more meaningful indicators of our overall progress than our results, strong or weak, in a particular quarter. I will then wrap up with a few comments about our expectations for the current fiscal year 2013.

Wow. As Ted indicated, Team finished our fiscal year with a flourish. We achieved record financial performance in a number of areas. Our revenues, operating profit, and adjusted net income were all the best quarterly results in Team's history.

Our growth this quarter is particularly noteworthy because we are comparing against a very strong record performance in the prior-year fourth-quarter period. Ted indicated Team's fourth-quarter revenues totaled $188 million; quarterly revenue growth was about $26 million or 16%.

From a service line perspective we achieved double-digit growth in all of our major service line segments -- inspection services and assessment, turnaround services, and online services. From a geographic perspective, the growth was concentrated in the United States, reflecting the presence of major projects in Canada and our Rest of World regions in the prior-year fourth-quarter period.

Operating profit for the quarter increased $5.5 million, or 30%. Operating profit as a percentage of revenues was 12.9%, up 1.3 percentage points from the prior-year quarter.

The primary driver of this margin improvement was improved gross margins due to slight improvement in job mix, good indirect cost management, and volume leverage. Overall we are obviously pleased with our performance in the quarter.

Let's now shift to more extensive discussion of our full-year performance. I'm pleased to note that many of the themes are very similar. Team achieved record performance in virtually every aspect of our business.

As Ted indicated, overall revenues for Team during the year were $624 million, an increase of $116 million, or 23% greater than last year. Approximately $16 million of that growth was related to the acquisitions either during last year or this year. The remaining $100 million in revenue growth was a result of organic business development or expansion.

Our overall growth during the year was broad-based across service lines, geography, and customers. Looking at our growth from a service line perspective, our business in every service line increased last year. Inspection and assessment service revenue grew approximately 28%. Currently, these services represent about 40% of Team's total business.

Turnaround service revenue grew approximately 21%. Currently, these service lines represent about 35% of Team's total business.

Online mechanical services grew approximately 10%. These legacy service lines for Team currently represent about 25% of our total Team revenues.

Looking at our growth from a geographic perspective, we also enjoyed strong growth in all regions. US business grew about 21%. Canadian business grew about 22%. European business grew about 30%. And our business in the rest of the world, including Asia and Central and South America, grew more than 40%.

Our business is also broad-based from a customer perspective. We are delighted to have developed significant relationships with virtually all the major energy companies as well as the leading companies in other industries we serve. However, no single relationship represents more than 5% of Team's total business. No single plant facility -- the level at which most service decisions are made -- represents more than 2% of Team's total business.

I'm pleased with and proud of this business growth and development by my Team colleagues. In my view there are a number of factors contributing to this performance.

First, in a service business such as ours, everything begins with outstanding service and support to our customers. A very high percentage of our business is repeat business for existing customers. We understand that that next service opportunity is earned with each current service job.

I am proud of my Team colleagues and their commitment to our customers. Every one of our 3,800 Team members has the opportunity to be a difference-maker for our customers and our Company. Our growth both this year and over the past decade reflects our outstanding service performance.

Second, we enjoyed a bit of a market tailwind this year as it relates to major turnaround projects. Our project activity on the Gulf Coast, West Coast, and Canada reflected very busy turnaround schedules in those regions.

Third, we keep expanding our capabilities. In the past year we have significantly expanded our business in valve service capabilities, facility mechanical integrity programs, guided wave inspection services, expanded heat-exchanger repair services beyond the Gulf Coast, expansion of the InsertValve product offering, new coating and structural composite service capabilities. And we enjoyed exciting growth and expansion of Quest Integrity Group capabilities in a number of areas, including newly developed and introduced in-line inspection tools for the 16-inch to 24-inch diameter pipelines, expanded pipeline project management capabilities, and pipeline integrity programs, and expanded tank inspection and assessment programs in conjunction with other Team units, and the launch of new HYDRA UT inspection capabilities for piping systems within both refining and petrochemical facilities as well as with both nuclear and fossil power facilities.

Finally, Team continues to benefit from long-term procurement consolidation trends by our customers. Put simply, larger customers increasingly prefer to work with fewer, larger, more professional service providers when it is appropriate.

This represents a natural advantage for the larger, multiservice-line geographically broad-based service companies such as Team. Approximately 35% of our total business is currently derived from our multiservice-line, multi-plant MSA agreements with our customers.

Despite our sustained growth over many years, our industry remains highly fragmented. This will remain an advantage for Team for many years to come.

To summarize, the key driver of Team's attractive business growth is not just one thing. It reflects a fundamentally good strategic position in an attractive market; great service performance and execution; and a continuing expansion of our capabilities in related areas.

Let me wrap up my discussion of our performance with this final comment. For the year we just completed, the revenue growth, operating profit growth, and earnings per share growth rates were 23%, 33%, and 33%, respectively. For the 13-year period between fiscal year 1999 and the recently completed fiscal year 2012, the compound average annual growth rates for revenue, operating profit, and earnings per share were 21%, 29%, and 36%, respectively -- virtually identical to this year's growth rates.

We are proud that we have sustained consistent and attractive business growth over the long term. Our growth isn't based on just one thing, and our growth isn't based on just one good year, either.

And our outlook remains bright. We continue to see attractive growth opportunities in virtually every area of our business.

Let's now shift to the year ahead. We expect to continue to build upon the strong business momentum we have generated in the past. As has been our practice for the past several years, we will provide full-year guidance that we will review and update as appropriate on at least a quarterly basis.

For our fiscal year 2013 ending May 31, 2013, we expect total Team revenues to be in the range of $680 million and $700 million. We expect our full-year earnings to be in the range of $1.85 to $2.00 per fully diluted share.

I also remind those of you modeling quarterly Team results to be mindful of the significant seasonality in our business. Please note that a disproportionate share of our total annual earnings will likely occur in our second and fourth fiscal quarters.

Let me wrap up my remarks with a couple of final comments before we take your questions. All of us at Team are proud of our Company and our performance track record. Looking ahead, our outlook and opportunities are as attractive as they have ever been.

Yet we can never rest on our laurels. To realize the growth opportunities available, we need to continue to stay focused on the basics of our business. These are -- providing great service with every service opportunity; continuing to capitalize on our service network advantages; creatively expanding our service capabilities and the value we can deliver to our customers; and conducting our business, all of the time, in all activities, in a manner that fosters pride from all Team colleagues and respect from our customers. In our view, that is how great organizations are built and sustained.

That concludes my remarks. Let's now open it up for questions.

(Operator Instructions) Arnold Ursaner, CJS Securities.

Hi, good morning, Phil and Ted, and congratulations on a very good quarter. When you had provided your revenue guidance in April, you exceeded it by almost 4%. With hindsight, what drove it? And did you in fact borrow some business from Q1 in Q4?

I think we just had very active project activity in the quarter. No, I don't think we actually pulled forward; but as always, it is just the timing of projects.

As we have talked, Arnie, it is just -- candidly, we are just not that good at estimating the precise timing of individual projects.

Okay, and my follow-up, separate question for Ted. How should we think about SG&A in the upcoming year? You had quite a few one-time items that impacted Q3 SG&A; and the number this quarter was substantially higher than we had modeled. How should we be thinking about it?

Well first of all, was there anything specific in Q4 SG&A? And more importantly, how should we think about it for the upcoming year?

No, I think, Arnie, going back to the third quarter for a second, we identified about three items that were kind of non-routine, nonrecurring; and indeed that was true, they did not recur. So you should carve those out, if you will, for 2013.

The increase in SG&A in the fourth quarter is largely attributable to how we account for incentive compensation expenses. As you will recall, we accrue incentive compensation fundamentally as a reflection of operating income. So when there is a -- obviously in Q2 and Q4 SG&A will increase simply by virtue of the large spikes in incentive compensation. On a year-to-year basis, though, that is not going to be a significant factor.

Certainly, in the fourth quarter, we added some business development personnel, and frankly it reflected in revenue generation in the quarter as well. So, I think the traditional -- on an annual basis percentages that you have seen in the past will continue to be true. We continue to expect to get good operating leverage, particularly from SG&A, as we grow revenue. So the operating leverage that we talk so much about, our modeling of 20% leverage on revenue growth, is generally in the SG&A line and not so much in the gross margin line.

Okay. In respect to your keeping to one question and a follow-up, I will stop and come back later. Thank you.

Rich Wesolowski, Sidoti & Company.

Thank you very much. Good morning. Your May quarter looked a lot like the May quarters you reported before the recession, and I was hoping you would offer a high-level view of the differences between your customers today, your business today, and back then, specifically with regard to the types of projects the customers are letting, the competitive climate you face, and perhaps the different service lines you are able to pitch.

I think the -- many, many aspects of our business, our markets today are similar to, I'm going to say, pre-recession periods in the sense that maintenance activities are normal and they are kind of broad-based. As we have all talked about before, is that when you're operating the facilities that we serve, Mother Nature creates the need for maintenance; and that is what we are seeing.

I would just say what is different on the negative side is that back before the downturn we had a tremendous level of expansion of facilities taking place, particularly up in the tar sands and also really in the Lower 48 as well in terms of expansion of facilities. We are beginning to see the return of expansion projects in the Canadian tar sands. But the intensity of the activity and just across-the-board the level of new facility growth is not nearly what it was in the, if you will, boom times or right pre-recession times.

I would say just more generally though, other segments are very strong in the US in our markets. So petrochem pipeline areas continue to be good markets. It is not that they weren't before, but I think it is noteworthy that I think the fundamentals for those segments are quite good.

What's different for Team is I think we are operating tighter than we were pre-boom. Just the whole experience has kind of tightened up our operation.

I think our quality metrics and performance metrics are better today than they have ever been, so we are proud of that. And I think the extent of and range of our capabilities, both geographically, but importantly within service line breadth, is significantly greater today than it was back in 2008.

The last time I recall hearing your direct margin was about 150 basis points below where it was before the recession. Is that still the case or have you recouped some of that?

No, that is still the case. It is really -- we were -- our direct margin for the year was virtually flat with the prior year.

So you suspect that Team can record a record operating margin and something better than when the market was probably better for what you do, or at least labor was a lot tighter, without the help of pricing?

Yes.

Great. Appreciate it. Thank you.

Adam Thalhimer, BB&T.

Good morning, guys. Congrats again on the quarter and the solid outlook.

Phil, you mentioned that you enjoyed or you benefited from strong turnaround activity in fiscal '12. I am just curious what your outlook would be for that business in fiscal '13.

It's going to be good. I think what I think I said is we did have overall kind of a good year. I think West Coast, for example, was noteworthy; it was a very heavy turnaround schedule on the West Coast.

But we see lots of turnarounds coming, really a good solid fall, and we are hearing rumors of a really big spring turnaround season. So, it's going to be normal. It's going to be good.

Great. Then I wanted to ask more broadly, what -- there was a press release intra-quarter about this, on the pipeline integrity side of your business. What are your capabilities broadly speaking in that business right now? And what does the addressable market for that look like right now?

Well, let's talk about our capabilities first. We have many -- many of our service lines are applicable to the maintenance of pipelines. On the inspection side we have the in-line inspection tools from Quest. We have just the prove-up inspection capabilities and activities of our, I'm going to say in the inspection services of our TCM division. Not within Quest, but within the TCM division.

We have line isolation, hot tapping capabilities, and our mechanical services areas that all relate to pipeline maintenance. The small acquisition we made last year provided us our initial cadre of, I'm going to say, pipeline project management personnel to work with customers in coordinating overall and integrating overall maintenance projects that include not only our services but other services.

And we see many opportunities to provide more of a turnkey-type service support to our pipeline customers through those kinds of capabilities. So that is an exciting expansion of our opportunities.

You know, honestly, Adam, it is so huge that we don't even think about it. It is a very small part of our business right now, but it is billions -- it's billions of dollars. And we are just trying to get a little cupful right now and learn from that, and then let it evolve as it will.

Okay. Thanks, Phil.

Matt Tucker, KeyBanc Capital Markets.

Good morning and congrats on a great fourth quarter and great year. Could you give a little more color around your outlook? You mentioned a strong, solid fall turnaround season.

But are there any end-markets in particular that are stronger than others? Any areas where you've seen customers pulling back at all?

I don't have a lot more color than I have already provided just in terms -- I think the best color is to look historically where our growth rates have been. One of the things -- the key theme I would just say is that we are seeing a lot of good things happen in a lot of areas.

I don't see any real points of stress among our customer groups at this point in time. Refining margins are pretty good. Their activity levels seem to be pretty good. Petrochem are expanding because of some of the shale gas liquids; we talked about that before. Pipelines have a lot of project activity going.

I mean the one just overhang generally is that we have a lot of global economic uncertainty. Obviously some huge government policy issues that have not yet been resolved as relates to where we are going as a country, going forward. All of those have the potential to be disruptive.

But as of this time, I think things look pretty normal, and we would expect a mix of business not a whole lot different than we have seen historically.

Great, thank you. Then when I look at the growth implied by the midpoint of your revenue guidance, relative to the midpoint of your EPS guidance, it implies margins that are a little flatter than I would expect, given the operating leverage within your business. Is there anything about the mix next year or about your outlook that would limit your ability to capture that kind of operating leverage that you have historically?

I think, Matt, you are giving us (technical difficulty) credit for precision. I think our basic view of our forecast is not dissimilar to what it has been historically.

Just because we don't see everything, we kind of estimate about a double-digit revenue growth rate, and we estimate approximate historical operating leverage on that growth. And that is really all we intended to communicate. Any more precision, we just don't have it.

Thanks a lot. I'll jump back in the queue.

Matt Duncan, Stephens Inc.

Good morning, guys. Congrats on a great year.

The first question I've got, Ted, looking at the gross margin in the quarter, that stood out. You were up 220 basis points year-over-year. And you guys walked through a little bit in your prepared comments behind what drove that.

Did you see job margins get any better? Is pricing changing? Or was this really just a function of some of the higher-margin mix making up more of your revenue?

I think it is really is just a mix effect, Matt. It really runs to the heart of why you've got to look at broader, longer periods than quarters.

We were disappointed in margins in Q3 and really spent a lot of time talking about those. We had a bounce-back in Q4. But truthfully, it is just the mix of projects and jobs and certainly a blend of some higher-end services in there.

But I would look more at the margins for the year rather than the particular margins in the quarter.

Yes.

Yes. So to help us, Ted, maybe think through the margins by service line, just as a refresher, the legacy services are a bit lower margin, and the more advanced inspection-type stuff is the higher margin ends of the spectrum, correct?

Not at a gross margin line necessarily, Matt. In fact, indeed at an operating margin line we don't think there is a lot of difference in the services.

Some of the legacy services, for instance, like leak repair actually has a very high gross margin because there is a lot of equipment and clamps and closures that are associated with it, with the labor. But we don't -- and clearly on the advanced inspection side, those are clearly higher individual margin service offerings.

But again, we think of it more broadly at an operating margin. There is not a lot of difference in our services. Some have more SG&A support than others, and some have higher perhaps job margins than others. But on a blended basis it's (multiple speakers).

Yes, I think the other thing that can affect gross margin numbers is the nature of the projects. If you have very significant remote projects where you have significant, I'm going to say, residence costs or personnel housing, occupancy costs that are really just passed through at cost or cost-plus, a very small administrative markup, that will affect. If you look at total revenues, it will affect some margin percentages a little.

I think that can -- if you're comparing just a quarter to a quarter, that difference can be a point here or there.

Okay, so that makes sense, then. Because Canada last year with the Horizon explosion you had obviously a remote project that was a big piece of the revenue. So maybe that's --

Yes.

-- explain the mix some. Okay.

Then last thing for me, turnaround season looks like it was very strong. I think last year I was a bit unusual in that it continued into June. Did something similar happen this year? Or was it more of the usual Memorial Day cutoff?

Then how have the first couple of months of the August quarter looked year-over-year, relative to the strength you guys had in that quarter last year?

I don't think it was -- it's good. We're off to a good start for the year is what I would say. I think some of the aspects of the season last year, they are a little different this year. But we are pleased with our start to the year.

Okay. Thanks, guys.

Tristan Richardson, Team, Inc. (sic).

Good morning, guys. Just the only question I had is -- and I know Europe, it's a small piece of your business now. But I guess could you just talk a little bit about that market and just what you're hearing from customers just generally there?

Well, you know, we serve the same type of customers in Europe, we are talking about, that we do in North America. There is some slight expansion in terms of some of the heavy industrials related to -- marine activity is a little heavier in Europe for us than it would be in the US. But the biggest customers over there are going to be refining, petrochem, power type customers.

And notwithstanding what you read in the paper, they are still running. The lights are still on.

We are principally a Northern Europe company with Belgium, The Netherlands, UK. And business is fine.

So we're focused on just being a little bit better and getting our fair share of that. So, I think that is what is reflected in our growth, is our business is small but growing, and we are pleased with our position.

Got you. Then I guess the same question in terms of Rest of the World. I guess, where are you seeing the most strength?

Well, I would just say where we are; we are not everywhere in the Rest of the World. Our presence in the Rest of the World is really roughly equally in two areas. We are in Central and South America. We have service operations along the top of South America, so we're in Venezuela, Trinidad, Suriname Colombia, Mexico. I guess that is really North America.

And then the other would be in Asia. We have two pockets of presence and strength.

Through the Quest group we have a significant presence in New Zealand and Australia. Then mechanical services we have a nice presence in Singapore, serving not only Singapore but some of the related area countries and regions, service areas nearby Singapore. So that is kind of where we are.

Okay. Then just in terms of the market, particularly in the US, you talked about it is obviously a very fragmented market. Just over the next few years, do you see yourself as more taking market share or becoming more of a consolidator as Team grows and becomes a larger company?

You mean via acquisition?

Correct.

I think if you look at our growth rate we think our growth rate for the last decade has been in the order of magnitude of 5 times the growth of the market.

Right.

Our acquisitions represent about one-third of our total revenue growth over that time period. So, two-thirds were organic.

I wouldn't use the word consolidator because consolidator sounds like what we are doing is buying. I think of a consolidation strategy as buying up companies and stripping out costs and an efficiency game, right? And that is not our focus at all.

Our focus is growth. So we buy companies to extend our capabilities, either geographically or service line standpoint, so we can leverage that presence and capability across our network. And that is I think what we will continue to do is look.

There will be -- I would expect there would be additional acquisitions, but they would be along those lines, not for the purpose of consolidating or taking out competitors.

Got you. Okay. Well, thank you guys very much.

Rich Wesolowski, Sidoti & Company.

Thanks again. If you didn't mention it already, how many techs did you have at year-end, and what would be your forecast for any change in fiscal '13?

We had 3,800 employees in total, our Team colleagues. I don't know how many of those were technicians, probably 3,200, 3,300, something of that order of magnitude.

I don't have a real forecast. We will just -- because we hire them on a decentralized basis, given our growth I would expect we will have more, that we will be continuing hiring across our network.

What we watch or manage is labor utilization. So we -- as all are managers do. So they are mindful about not getting way ahead of themselves in terms of hiring. But we have been a consistent hirer for years and would expect to continue to do so.

Yes, Rich, just some perspective around that. For the full year, we added about 400 full-time employees point-to-point from May 31 last year to May 31 this year. And obviously grew, as you know, 23%.

So that is -- that just gives you a relevant range. If we enjoyed the same kind of growth it would probably involve adding the same number of people.

Yes. We've I think continued to develop our capabilities to identify and utilize contract or project turnaround personnel to augment our full-time staff. And that was a significant additional capability this year, where we probably increased our use of contract personnel. It is still a small part of our total, maybe in the 10% range, but it probably increased 50% this year.

Even being a maintenance organization, I have always thought that your business in Western Canada is more oil price dependent than that elsewhere. Would you discuss whether there was any loss of momentum when oil went from $105 to below $80 over the early summer?

No. I'd challenge that a little bit. I think new projects might be tied to that. But I will tell you most of our business or a very significant portion of our business in the Fort McMurray area now is maintenance on existing facilities, not the construction of new facilities.

Has the Company seen any new customers in the oil sands area climb up the ranks over the last year or two? Or is your business coming from the familiar names that you have been serving for the past few years?

I can't -- I am not familiar enough with all the specifics to answer that. I do believe we are trying to call on everybody and expand our presence, but I don't have a specific [anecdote]. Do you?

Yes, without talking specifically about individual customers, I can clearly tell you that our roster of significant customers in Canada is expanding.

Okay.

We have added some very significant new customers over the last year.

Then last one. We discussed a lot of the momentum in your business and rightfully so. But Phil, you also touched on the global economic uncertainty. Would you mind discussing why you would expect Team to outperform the results of fiscal '09, fiscal '10, if customers again retrench their outsourced maintenance spending in response to any global economic shock?

Well, I guess the premise is that you think what uncertainty would lead to an environment like fiscal '09; I guess that wouldn't be in my belief.

We didn't have just a slowdown. What we had is a complete challenge of business as usual and would life as we know it continue (technical difficulty) was severe. First credit crisis, but then demand evaporation in our industries, which was unprecedented in fiscal year '09.

So if we have a replay of that environment, I would say all bets are off about what our performance in the short period will be. What I expect to be a more normal environment, because it has to -- again if you are running these plants, there has to be maintenance done on them.

And I personally think without being overly confident about it, I think we're a pretty good service company and that we are -- we have proven it with our record and we are going to earn our fair share and I think growing share of the opportunities out there.

Let me just tag on to that just a bit, Rich. I think one of the things that is clearly different about our business today versus, let's say, 2007 going into the Great Recession if you will, at that time about 15% of our total revenues were associated with new construction activities. So the C&E market as opposed to the maintenance market, largely associated with oil sands activities, as we've discussed. At that time it was -- what we were doing in the oil sands were associated with building new projects.

Today, on order of magnitude probably less than half of that amount of construction-related activities is indicative of our business. We are now more -- our business is more broad-based today; is not as refinery-dependant for instance as it would have been five years ago; and certainly, as Phil mentioned, our oil sands related activity is not new construction-related projects, which are the first thing to stop in a major downturn, but rather maintenance of existing facilities.

Again, I appreciate your time. Thank you very much.

Arnold Ursaner, CJS Securities.

Hi, as a natural follow-up to Rich's last question, there's a lot of funds from BP that will be working their way into the Gulf Coast region. Do you see that creating incremental opportunities for you?

Just marginal. Again, I believe the BP activity -- and I have -- just based on casual reading, is really upstream E&P work. They are going to go into the Gulf of Mexico, I believe deepwater drilling.

We will do a tiny little bit of work with subsea pipeline work and some platform work. But it's a very small part of our total business.

Okay. Two follow-up questions regarding your acquisitions. You mentioned $16 million of annual revenue, which is the same number you gave us on the Q3 call. How -- are those businesses seeing growth? And then I will ask a follow-up from that.

Yes is the short answer. Again, what we are getting for the full year effect, recall that the Quest acquisition -- let me get the right year, November 2010. So it was only a half year, roughly a half-year effect in the last fiscal year; we had a full-year effect this year.

So that was a significant portion. There was a significant portion of that effect impact in the year.

And then we had essentially a half-year effect from the EA West Coast mechanical services acquisition, and then the small pipeline integrity management company which is really quite small. Those were both around the midyear of this year.

So we had, if you will, a half-year effect of those two businesses. That is what comprised the $16 million of impact.

Yes, Arnie, just to tag on to that a little bit, the reason our number didn't change a lot from quarter to year is particularly the smaller -- well, specifically the small acquisitions that we did this year have been fully integrated into Team operations. So it's a little bit difficult to pull out how much of the revenue in the West Coast operations of the new business is acquired or attributable to the acquisition, and how much is attributable to the ongoing operations, because it is all now integrated into our existing operations.

I think that is where I was trying to head. When you had bought the pipeline integrity management business, which was smaller, you had talked about the strategic importance -- that you would be able to bundle the services and cross-sell. That is what I was trying to get a feel for.

Now that we are six months into this or so, are we in fact getting the revenue synergies that you were hoping to get?

Yes. Again, it is very early but we are excited about the progress there, the level of activity in that space.

Okay. Final question for me. You clearly indicated that you are not going to move forward with the $25 million or so expenditure for the new facility, but rather $5 million. Does that affect your view of either returning cash to shareholders through repurchase, potential acquisitions? How should we think about your availability of the incremental cash and how you might use it, since you're under-levered for you at the moment?

I don't -- I think it has no effect, to be honest. We are just trying to be prudent stewards of capital. Less capital-intensive solutions that have virtually the same benefit are better, and that is how we thought about that.

I think honestly we will use our proceeds to pay down debt and to support the growth of the business and to acquire companies that fit us. And back to our whole philosophy is that they can accelerate our growth and development in exciting ways, we are interested in that.

We don't perceive -- I don't perceive us to be limited by capital in terms of doing anything that would fit our business.

Arnie, the main point for us, relative to the not investing $25 million in facilities is simply a little bit of an Aha moment for us; it's that we would much prefer to invest that kind of capital, $25 million, in businesses or back in our business as opposed to facilities.

See you guys in two weeks at our conference. Thanks.

Look forward to it.

Look forward to it, Arnie.

Adam Thalhimer, BB&T.

Thanks, guys. I just have one more granular modeling question. The last two years your fiscal third quarter has been a lot lighter than fiscal Q1. Looking forward, should those two quarters look a little bit more similar? Was it just bad luck the last couple years as it relates to Q3?

No, I think -- you have -- this is kind of -- things are always a little bit choppy, but here is my view of it, is the first quarter has the disadvantage of much lower turnaround activity than either the second or the fourth quarter. So that is just the -- we have a huge infrastructure so that, if you will, the incremental leverage, the negative leverage of that lower volumes lead to lower profitability in the first quarter versus second or fourth.

The third quarter has an additional disadvantage, in addition to the lower turnaround, the holidays. So you essentially have two weeks of activity in a 13-week quarter that are -- we have expenses, but we don't really have much business.

I think again the volume leverage of just that extra two weeks of expenses with no revenues lead to -- when you incrementally do it, leads to what looks like low average margins and all that, even if job margins are good. And I think we saw that --

You have more of a resetting of a lot payroll benefit cost early in January affect that third quarter as well. So third quarter is going to be weaker than the first quarter. We have finally figured that out.

You would just say to us analysts, just tread very lightly as relates to Q3. I mean it's been -- Q3 has been disappointing for two years in a row. And I guess now we should just know to bake that in.

It's disappointing to whom, Adam?

Right. Disappointing to the analysts. Okay. Thanks a lot.

Thank you. There are no further questions waiting. I would now like to turn the call over to Mr. Phil Hawk for closing remarks. Thank you.

Thank you, Sue, and I want to just close by thanking all of you for your participation in this call and your continuing interest in Team. We look forward to updating you on our progress during this first quarter of our new fiscal year around the first of October. In the meantime, everyone have a good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a good day.