Team Inc (TISI) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the second-quarter 2013 Team web conference call. My name is Karissa, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I will now turn the presentation over to your host for today's conference, Mr. Phil Hawk, Chief Executive Officer. Please proceed.

Thank you, Karissa, and good morning and Happy New Year to everyone. It's my pleasure to welcome you to the Team web conference call to discuss recent Company performance. Again, my name is Phil Hawk. I'm the Chairman and CEO of Team. Joining me again today is Mr. Ted Owen, the Company's Executive Vice President and Chief Financial Officer. Also joining us on the call today for the first time is Mr. Pete Wallace, Team's Executive Vice President and Chief Operating Officer. A little later in the call I will provide a brief introduction of Pete, describing his experience and background.

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, 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, filings to the SEC, as well as our annual report. Ted will begin with a review of the financial results. Then Pete will provide some additional details and perspectives on our operating performance and priorities. I will then follow Ted and Pete with a few personal observations about our performance and prospects. Following these remarks, we'll take questions from our listeners.

Ted, with that, let 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.

And now for the financial results. Once again, I am pleased to report the best second quarter of operating results in our history. And our first ever $200 million revenue quarter. For the second quarter, net income available to shareholders was $13.9 million, or $0.66 per share on revenues of $201 million. That's an increase of $43 million, or 27% over last year's second quarter. Nearly 90% of the growth in the second quarter was organic.

For the year-to-date, revenues were $362 million, up 21% over last year. Earnings were $1.03 per diluted share, compared to adjusted earnings per share last year of $0.86. We continue to be on track for a record year.

Now, with respect to some cash flow related items, capital expenditures for the quarter were $6.9 million. Depreciation and amortization was $5.1 million. And non-cash compensation expense was $1.2 million. EBITDA for the quarter was $29.4 million. And on a trailing 12-month basis was $86.5 million. At November 30, our total debt was $105.5 million. Our cash was $34.5 million. And thus, net debt was $71 million. Our net debt to trailing 12-month EBITDA continued to be less than 1 to 1.

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

Thank you, Ted. Before turning the call over to Pete for his remarks, let me more fully introduce him to our listeners. Pete has spent his entire business career with Team, celebrating his 25th anniversary with the Company in the past year. He joined Team as an operation supervisor in New Jersey, and over the years has held a variety of leadership positions across our service network, both inside and outside of the United States. These positions have included Branch Manager, Country Manager, Region Vice President, and Senior Vice President for Business Development. For the past couple of years, Pete has served as Team's Chief Operating Officer. Pete will provide additional details on our operating performance, and will discuss some other initiatives and activities related to our business priorities.

Pete, let me now turn it over to you.

Thank you, Phil. It is my pleasure to be with everyone this morning. As indicated in our earnings release and Ted's remarks, Team has achieved strong performance in both the quarter and year-to-date periods. The primary driver of our performance is our continuing strong revenue growth. Let me provide some additional color on our recent growth. As Ted indicated, our quarterly revenues exceeded $200 million for the first time ever. Total revenue growth for the prior-year quarter was $43 million, or up 27%.

From a geographical standpoint, Team enjoyed fairly broad-based growth across our service network, with the exception of Europe. Our US business grew approximately 24% over the prior-year period, reflecting strong inspection and turnaround activity. Our Canadian business grew 41%, due largely to strong turnaround activity, expanding project work, and improving inspection activities within this region. Our business in Asia, Central and South America grew about 43%, reflecting our continued business growth activities. In total, our revenues in these regions now represent roughly 5% of Team's business.

Now turning to Europe. Revenues in this region declined about 7% for the quarter. While we believe the softer European economy is impacting some service work, the primary driver of this decline is related to the timing of refinery turnarounds. On a positive note, we expect an active turnaround schedule this Spring.

From a service-line perspective, inspection and turnaround services led the way for Team's growth in the quarter. Our inspection and assessment service revenue grew approximately 41% for the quarter, reflecting continuous growth for the Quest business, Team's Mechanical Integrity program, and significant turnaround work. Turnaround service revenues, which encompasses our heat-treating and all-stream mechanical services, grew approximately 32% as a result of significant turnaround activity, as well as continued market penetration by Team. Overall, we are very pleased with our growth in the quarter and year to date. Team is well-positioned for continued attractive business growth for the remainder of this fiscal year and beyond.

Now let me turn my discussion to some of our key themes and initiatives we have undertaken. Over the past year, we conducted an internal in-depth review of our business. In this review, we identified four key levers we believe that have driven and will continue to drive our long-term success. I will briefly introduce these levers and discuss a few of our current initiatives.

The first lever driving Team's long-term success is building and nurturing a great organization as the foundation for our business. In short, it's being the employer of choice, enabling and empowering all of our colleagues, and establishing a high-energy culture. The second key lever for Team is being a great local service company, which is maintaining and developing strong local relationships, reputation and service presence. The face of Team to our customers is our local technicians and managers, which are the ones that directly support them and solve their service needs.

The third key lever is working as one team. This is bringing the full capabilities at Team to bear in every service opportunity. And finally, the fourth and final lever, leveraging new technologies and capabilities. This is the continuous expansion of Team's service capabilities in high-leverage areas, through both in-house development and acquired companies to maintain and extend Team's leadership reputation and market presence.

Let me describe some specific ongoing initiatives pertaining to these levers. We are always focused on ways to improve the development of our Team colleagues and overall organization. Over the past couple of years, we've expanded our management training programs. This past quarter, we initiated a new round of leadership training, which involved over 150 supervisors and managers. These training programs help us attract and develop Team's future leaders across our Company. Extensive industry-leading technical, safety and leadership training has been a key component of our approach for many, many years.

As for other initiatives, the two acquisitions completed this quarter, TCI Services and Digital Insight, both expand Team's technical capabilities in exciting areas. We also continue to internally develop new approaches. Quest Integrity Group has extended its smart pig applications, which now cover up to 24-inch diameter piping. Additionally, we are currently testing 84-inch line stop heads to expand our hot tapping service line. And we are finalizing major enhancements to our fugitive emissions monitoring program capabilities. On future calls, during the operational update, I will highlight other initiatives related to these levers as we continue to pursue new and exciting opportunities to improve our business.

That concludes my comments. Now back to you, Phil.

Thank you. And now let me add a couple of additional comments to both Ted's and Pete's remarks. Overall, I'm 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. Clearly, our strong overall revenue growth is driving our results. We are proud of the first $200 million revenue quarter in Team's history.

And we are pleased with the greater than 20% revenue growth rates in both the quarter and year-to-date periods as well. Because we have consistently achieved high-revenue growth rates in past years, it may be natural for you to take them for granted or assume they will just happen. I can assure you that we don't. We know that our success is directly related to the quality of service we provide our customers. We depend on all 4,000-plus Team colleagues to provide this outstanding service and support.

We are also pleased with our overall profits and profit margins achieved for both the quarter and year to date. Overall, quarterly operating profit of $23 million, up 29%, and operating profit margin of 11.5%, were the best ever achieved in the second quarter. Similarly, overall year-to-date operating profits of $36 million, up 21%, and operating profit margin of 9.9%, were record results as well. As Ted indicated, year-to-date net income was $1.03 per share, which was also a new high for Team.

While pleased with our overall financial performance, I also note that we have some improvement opportunities as well. Our quarterly gross margin performance was down nearly 1 percentage point compared to the prior-year period. About 50% of that difference in gross margin was due to businesses acquired in the quarter, which had substantially lower margins than our legacy businesses. The rest of the decline is due to a change in project mix compared to the prior-year quarter.

We remain positive about our business prospects for the remainder of the year. Obviously, general economic uncertainties could impact our business in currently unforeseen ways. On the other hand, we see many positive indications in our markets as well. And we expect strong turnaround activities this Spring in North America.

Shifting to earnings guidance. We are raising our current full fiscal-year earnings expectations to a range of $1.90 to $2.05 per fully diluted share. We now expect total revenues to be between $700 million and $730 million. As a reminder, Team's third fiscal quarter, which spans December through February, is our seasonally weakest quarter. The weak demand over the holiday season, plus increased cost with the beginning of the calendar year related to taxes, are special challenges in this period. As usual, we intend to review and update our earnings guidance on a quarterly basis or whenever 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 2013. And we are well-positioned for continued attractive broad-based growth, both for the remainder of this fiscal year, as well as 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. Karissa, may I turn it back to you?

Sure.

(Operator Instructions).

Matt Duncan of Stephens.

Good morning, guys, and congrats on another great quarter. Phil, the first question I've got is with regards to your organic growth. You guys have really been sustaining a pretty healthy organic growth rate for the better part of two or three years now. Can you talk a little bit about how much of that do you think is the market growing right now, versus market share gains that you guys are seeing?

In a very short time period, it's hard to kind of measure it precisely. I guess what I might do is go back a little bit further, Matt, and say -- if you look at our compound growth rate over the last 10 to 15 years, it's about 20% a year. And the organic growth rate in that time frame is at least 15%, or maybe a little bit north of that. I don't think the market has been growing on a sustained basis anywhere close to that. Maybe kind of at the rate of inflation, something like that, would be our estimate. So we think the bulk of our long-term organic growth has been share growth. Share growth because we're increasing share in existing service lines where we've been currently operating, but also as we expand our space with new service lines and expanded geographic presence.

Having said all that, though, and back -- I think the gist of your question is how much organic growth is left for us. If you just look in North America with existing service lines, we think our market share today, despite all our growth, is still less than 20%. So we continue to believe we have exciting organic growth opportunities ahead. Back to a comment I made in the remarks, though, is that just because we're here doesn't mean we get it. Is that you've got to earn it with outstanding service. And we're really proud of our team and really focused on maintaining that outstanding service. And we think with that, that we've got a lot of attractive organic growth opportunities.

Okay, that's helpful. Phil, maybe specific to the inspection and assessment business, which has been your fastest growing service line, can you talk about what's driving that growth? Do you think you're getting a lot of market share? Is it some of the new capabilities, such as the ones you picked up with Quest? Or, how are you driving that 40%-plus kind of growth you've been seeing at inspection?

Yes, I think, well, as Pete kind of indicated, I think it's coming from a lot of different areas. It's fairly broad-based geographically. Quest is clearly a very helpful contributor to that, but it's by no means the only one. Our expansion of our kind of mechanical integrity programs, which are online, and our on-stream inspection programs at various facilities, are expanding. As well as we had very extensive turnaround activity, kind of the industry did, during the quarter. And we benefited significantly from that as well.

Okay. And then last thing from me is just on the outlook. Can you talk about sort of the timing and the scope of the spring turnaround season? And as you look at your business beyond the spring, it sounds like you feel pretty confident you can keep up this double-digit organic growth. Have you started booking projects for the fall yet? What do you think lies beyond the spring season?

I don't have a really good visibility beyond the next few months, really, Matt, as far as that goes. I would just say I think the -- again, we're a 90% North America Company, and if you look at the health of the energy sector in North America that we serve, I think it's as good as it's been for quite some time, and the prospects are very good. So I just think we're in a -- I think the basic fundamentals of our underlying markets are good. Obviously, we're just a maintenance-driven demand function. But having healthy customers with good fundamentals, we think portend good things for us.

Okay. Then on the spring season?

Like I said, we expect an active spring season. We've seen a lot of planning going on, and we expect to play a key role in that.

Are you mobilizing on any projects yet or is that still in the future?

I think it's a little bit earlier than last year. But I don't have the specifics about any particular projects. Again, that's the great thing about Team, as you appreciate, Matt, is that we just are so broad-based that kind of the timing of an individual project here or there isn't something that -- at least at our level -- we're focused on day to day.

Okay, thanks for all the color. I appreciate it.

Matt, I would just also say that we're only just about right now coming out of the holiday season. So as you know, the third quarter, as Phil indicated, is weak for that reason, and we're just now getting back to kind of full work, if you will.

Okay, thanks, Ted.

Arnie Ursaner of CJS Securities.

Hi. I'll try to limit myself to your two questions as you request. On gross margin, you mentioned that it was impacted by the acquired business. But there weren't a lot of revenues in the acquired business. How should we think about gross margin on a go-forward basis?

I think you are correct, there weren't a lot of revenues on that. There's a construction business that's part of TCI, which does -- will inherently have slightly lower margins than us. But any time you have a conversion or a transaction, an event like that, that kind of creates a little noise in numbers. So how I would view our businesses and our expectations is that we don't have a view that our margins are going to be fundamentally different going forward. ¶ We're still learning about all the businesses that's joining us, so we'll see how that kind of shakes out. But our experience has been with other businesses that joined us, even if they were slightly different margins going in, that as we work together, sometimes those margins improve. So I think the best way to look at it is that longer-term, that for the remainder of the year and so forth, we expect margins to continue to be stable and kind of near historical levels.

And Arnie, just to tack on a bit to that. Again, our focus primarily is on operating margin, not gross margin. And so even the acquired business that has a slightly lower gross margins, because of construction activities right now, also has a lower G&A burden. So our real focus is kind of maintaining those EBIT margins. Whether you get it at the gross margin line and reduce SG&A, it doesn't matter a lot.

Perfect, thank you. My second question is a little more longer-term or strategic, if you will, for Phil. For several years, oil companies and your clients were doing everything they could to tighten and control whatever spending they had on maintenance. And I think most people would conclude they underspent for several years. Going to Matt's general thrust of his question, are in fact we seeing a resurgence of activity reflecting the underspending for several years and getting back to more of the appropriate maintenance that should have been done through this period?

I think there could have been a little bit of an argument for that right after the downturn, the financial downturn of 2009 and '10, a little. Because we did see some deferrals of turnarounds that clearly was related to kind of underspending in the short run. Personally, I don't know that I see much of that in the last year or so. Maybe with newer technologies we have a little more opportunity, more intensity of maintenance to monitor facilities than we've had historically. Because we have the ability to do it with some technologies. But I'm not even sure about that, to be honest, Arnie. So I don't feel like there's been underspending or that we're kind of catching up or there's just a window here for us. I don't know. Pete or Ted, do you have any thoughts --

No, I don't think that's true at all. I think they deferred back in the time when we had a downturn. But I never saw a change in philosophies how they carry on their maintenance. Because they're trying to maintain $1 billion worth of assets. And they're not going to let them sit there and decay away.

Yes.

I think that probably was kind of a little bit in a different period there, Arnie.

Perfect. See you guys next week in New York.

Tahira Afzal of KeyBanc.

Hi, good morning. Congratulations, great quarter. I guess most of my questions have been answered. The one question I had was earlier on where you provided some great information on your compounded annual growth rate, your organic growth rate. I wish other E&C companies did the same. I guess when I look at your growing organically at 15% -- I mean, and you guys are 20%, or roughly that, market share, North America. How should I think of where you can take that market share? Because if you grow at 20% -- sorry, 15% -- on an annual basis organically, essentially means you're hitting around 30%, 35% in a couple of years. How do you sort of maintain that? Where do you think you can take that market share going forward?

Well, the one premise of your question is that our market -- that the current served markets and segments that we're in is fixed, and that all our growth has to come from those areas. And what we've found is that, again, if you had -- if we had the same discussion 15 years ago when we had three service lines, you would have had the same question -- well, where could we -- we couldn't possibly be as large as we are.

And I think what happens is that because of our success and presence and the relationships we develop, that that naturally leads to kind of an expansion of service capabilities where we are, and also the ability to take those service lines elsewhere. So I think if we look at it maybe five years from now, Pete mentioned kind of our rest-of-world business is 5% and Europe is about 5% of our business, is that I expect those would be bigger chunks of the total. But I expect we would also see kind of exciting expansions to our service line in that same time frame.

Now, putting all that aside, so how much is too much market share? When you're at 20% -- I guess if we were at 80%, I would say that's probably not likely that we can grow much from there. But at 20%, my own opinion is that we could easily double our market share in our existing services to our existing kind of served markets without any kind of major structural limitations. As we talked before, you still have to earn it. And just being there doesn't mean we get it. But like I said, I -- my main point to you is that we can grow as fast and as long as we can earn it.

Got it, okay. Thank you very much.

Rich Wesolowski of Sidoti & Company.

Thanks. Good morning, everyone. Pete, it's great to have you on the call. How would you characterize the labor availability in your largest markets versus a year ago? Perhaps the Gulf Coast and Western Canada and any others you'd like to call out. And the pricing leverage for services for the industry as a whole, if not for Team in specific, versus a year ago?

Versus a year ago, I don't think there's a whole lot of change. I mean, we're -- versus the downturn when there was, I would say, some softness in labor markets, I wouldn't say we generally see that. That there is tightness in particularly areas where there's a lot of activity and kind of particularly development construction activity. You know, our customers, in terms of pricing pressure or pricing leverage, we serve major customers that are sophisticated purchasers of services. So there's never not a kind of good give-and-take in terms of the kind of pressure on margins and pricing, or kind of demands to be as lean as we can be.

On the other hand, though, that we offer a very high-value service. We have good relationships. And I think we still continue to expect to be able to maintain our margins and recover cost increases of labor that are coming and occurring, through modest rate increases kind of overtime. I think that's generally been our experience. I don't know that it's a big difference today versus a year ago. Pete, do you have a view that it's tougher or easier?

No. Rich, to touch on your question about, in the larger markets, about finding that labor, I think we have a very -- I know we have a very active recruiting department. And it hasn't been this year, this past year, an issue finding people to staff our projects. Now, with that said, there is some -- we had some major projects that took a little more coordination and took a little more effort. But it's not like pre-recession where we were all struggling to find the quality in the craft out there.

What is the Company's head count, if you haven't mentioned it already?

I've got it. It's a total of about -- just less than 4,000.

And that excludes our project labor that would just be hired on a project basis.

Okay. And then lastly, you mentioned having expanded Quest inspection products to cover the 24-inch lines. When you look out over the next year or two in Quest R&D program, are the next batch of new products aimed at still larger diameters? Or perhaps moving into natural gas pipes or something that I don't see?

Yes. They have some very interesting -- they're chasing a lot of very interesting ideas about, I guess, the whole idea of system integrity. And certainly new applications like gas is in there. New applications of industries -- nuclear is in there. Some very exciting stuff coming. Stay tuned.

Thanks, best of luck.

Adam Thalhimer of BB&T Capital Markets.

Hi, good morning, guys. And welcome to the call, Pete. I wanted to ask first, dig into a little bit on the gross margin line. I know you said you focus a little more on operating margin. But on the gross line, if some of these project mix issues get taken care of, even with these kind of acquisition headwinds, if you want to call it that, could you still see some year-over-year expansion?

Well, I think when we say mix, some of that mix is -- an example would be if we have major projects with a lot of occupancy costs associated with them that -- an example would be if we're doing very major work in Fort McMurray, where we're housing people and passing along the cost of that to our customers. The cost of that housing comes with a markup of probably 5%. That's part of revenue. So that's part of that project mix that we're talking about. So if you will, the value added, the revenue or the margin per the hour of labor may be comparable.

But what will show up in our results will be more revenues, lighter margins, because of this, if you will, mix effect of kind of major projects or projects that require occupancy, depending on where they are, versus those that don't. And so having said that, if we have less of that in another quarter, we can have higher gross margins. Yes, mix affects it. And it can go up or down.

Hey, we are -- the reason I called it out is it's -- as a management team and kind of in our regions and all that, we all get that anything we can do to kind of tweak up or improve our margins, even slightly through pricing, through productivity and performance improvement, is really good for us. So we continue to focus heavily on that. We're just suggesting not to guide toward natural expansion just because we're growing or the market's getting better. But it's a -- we understand it's a very high leverage area for us and one that we focus a lot on. I don't know if that's helpful to you.

Yes, just tacking on that, Adam, as we said in our, I think our prior call, our expectation is that kind of by the end of the fiscal year, our margin should be relatively comparable to margins of a year ago, setting aside the impact of acquisitions.

Okay. And that's on the gross line or the operating line?

That's on the gross line. We talked on the gross line.

Okay, perfect. And then I wanted to ask another question about Quest. When you acquired Quest, the target I think was $100 million in revenue over five years. Where are you in that goal as it stands today, and is that still a reasonable target for a five-year growth rate for Quest?

We're happy. (laughter)

Yes, I think so. I mean, they're doing very well. And we're very pleased with the group and the team and their success, progress and plans. Not just Quest, by the way, but including Quest, for sure, that they really are doing well.

Okay. And then lastly, on the construction side of your business, is that still around 5% of revenue, versus back in 2006, 2007, maybe 15%?

Are you talking about the kind of new projects or new capability, kind of supporting new capability development of our customers, as opposed to maintenance activity?

Right. New facilities, expansions.

I don't know. I think it's 5% to 10%. It's very hard to measure. And I think we have talked about that before. Here's the gray area, is a turnaround takes place and during a turnaround we -- the customer, as part of that turnaround, they either put a new unit in or replace a unit. Is that new construction or is it maintenance? You know, so it's kind of a hybrid. The plant's more capable than it was otherwise, but it's sometimes hard for us to see all those.

It is true that it is certainly significantly less today than it would have been in the kind of pre-recession time frame, particularly with a big build out of the oil sands that was going on at that time.

There's still a couple of big projects going in the US, though, a couple of big refinery. Not as many as there were, but I'm thinking of the Midwest, there's a big project still going on.

What about in the chemical side? That's where a lot of investors are excited about.

Yes. It's not as intense a user of our services as refining. There's a lot of reasons why -- temperatures and pressures and all that. But yes, we're all excited about chems. I think it's going to be a -- we're on the front end of a bull market for North American chemicals. The shale gas liquids is really creating a feed stock advantage, as we understand it, for the industry, versus the rest of the world. And I think we're going to see more plants.

Okay.

Now whether that's enough to move the needle for us or not, I mean, we're delighted about it. Obviously for the health of our customers and for the -- any incremental projects are great for us. But I think just for the industry and for the country, it's really great.

Okay, thanks again, Phil.

Tristan Richardson of D.A. Davidson.

Good morning, guys. Most of my questions have been answered. But just, when you look at forecasts out there for North American pipeline investment, and given sort of your ramped-up capabilities on the inspection side. Do you see that pipeline piece becoming a larger percent of your business overall over the next several years? Or, just curious how that industry pie chart looks.

Yes. I think where the big opportunity in pipeline for us is, is in the maintenance side. It's existing pipelines that require more intense monitoring and maintenance than they've had historically. We have a huge aging infrastructure of pipeline in the US, and we have a lot of tools and, frankly, a lot of capabilities that we're kind of focused on, kind of pulling together, in a more integrated way where appropriate, to deliver more expanded pipeline maintenance services.

Brand new pipelines, whether they need our services, there is some -- if it's welded pipe, there will be some inspection activity for that. Frankly, for a large diameter pipe, we're better suited to do that in Canada with our capabilities and position than we are in North America. So we're not likely be a big player in brand new large diameter piping systems in the US. But in terms of kind of the maintenance of those pipes, once they are built and on the ground, with any kind of a tie-in activity, mechanical work with that, again, we have a range of services that really fit that market. And frankly, it hasn't been our historical focus, but it is now. So as you said, it's maybe 10% of our business today, and I would expect that to expand significantly.

Okay.

Over the next few years.

Okay, that's great. And just on the acquisition side, with TCI and the New Zealand Company late in calendar '12. I'm curious what calendar 2013 looks like for you guys, or whether it be priorities or just what you're seeing out there in the market.

You mean in terms of companies that might join Team?

Correct. Yes.

You know, I think our attitude is the same as it's always been. The organic growth drives our business. If we are a great service company, do it the right way, we are just so well-positioned and think there is some just industry forces that -- we didn't speak so much at this call, but we have in the past, that just favor larger, multi-location, multi-service line companies like Team. So we continue to believe that if we never bought another company, we can have great growth and great development and performance of the Company.

Having said that, back to the levers that Pete alluded to, that last lever is continuing to expand our technical technologies and capabilities in interesting ways that leverage our business and accelerate our growth. So the Company -- if you look at TCI and Digital Insights, both were capabilities that we didn't have. It's not that we had none of that, but we had very limited capability. This dramatically expands our presence and capabilities. And we see those as things that will accelerate our growth in those service areas in exciting ways going forward. That will be the test for other acquisitions, is -- are these capabilities that fit us, and is it something that we can leverage in an exciting way?

We're not into buying a financial arbitrage, if you will, buying something just to own it. It needs to fit us. It needs to be something that we can, kind of working together, can be a source of additional growth. So that's, again, will be the test. Whether we buy a little or a lot, it won't be -- we're not going to change the structure, the flavor of our Company with kind of some massive bet the Company acquisition. I'm quite certain of that. But whether we buy any other smaller companies or several will really depend on -- we have the -- we certainly have the financial wherewithal to buy several if we have companies that come our way that we're excited about and that fit us.

And I guess, just more the transactions more recently have tended to be more on the inspection and assessment side. I guess, do you expect that to continue in terms of opportunities out there?

Well, I just -- the last two were. But then if you look back one year ago, we bought the mechanical services of EA Services -- in the mechanical service arena, we bought EA Services on the West Coast. Which gave us expanded -- a significant presence in the Portland, Oregon, and Seattle, Washington, up there and north of that area, basins where we really didn't have much of a presence. So I wouldn't presume it's just going to be inspection. We're excited about the growth. As I mentioned earlier, we're excited about the growth opportunities in all of our service lines.

Great, okay. Well, thank you, guys.

Martin Malloy of Johnson Rice.

Good morning. Could you talk a little bit more about the two acquisitions that you mentioned during the quarter, the TCI Services and Digital Insight, what that brings to Team?

Okay. TCI Services, which is the larger of the two, is a company based in Tulsa, Oklahoma. It's a premier, above ground tank inspection and repair company founded -- let's see -- in the mid-'90s. Kind of the founder and his team is still basically in place, is joining us. We see it as an exciting opportunity to extend our inspection and mechanical services full capabilities to the above ground tank world. It has been limited -- this company -- geographically, to basically the mid-continent area.

So we see exciting and they see exciting opportunities to take those skills and processes and approaches with our kind of broader presence, first in the US and North America. But it will be interesting to see where it might evolve longer-term. But that's the basic gist of it is that it's an exciting kind of mechanical integrity for tanks kind of business and we can -- we have a service footprint that can leverage that. And we're excited about that.

Digital Insight is now part of Quest. It's about remote -- using remote video inspection capabilities. And basically, this is part of a trend to trying to get men out of very high-hazardous environments wherever possible for inspection activities. Do things electronically, remotely where possible. It's a very small company. But they have leading experience and capabilities in this area. And their focus initially will be in the Asia-Pacific basin where they're based. They're out of New Zealand.

But we see a lot of -- in fact, we're already seeing some possibilities of linking that to some capabilities that we can develop here in the US with them to kind of extend that capability. So it's a small, niche market. But what we like about it is it's on some of the leading-edge mechanical integrity and inspection technologies, is what they're focused on. So that's kind of the point behind that.

Okay. And then for your refinery customers. Are you seeing your customers start to consider investments in their facilities to better enable them to process some of the -- an increasing amount of lighter crude that's coming out of the shale plays, or more efficiently process it?

Honestly, no. But we're not going to be in the room with the process engineers who are having those conversations at the refineries. But I'm not aware of any projects that we've been involved with that have been to expand the sweet crude lines of a plant.

Okay, thank you.

Rich Wesolowski of Sidoti & Company.

Hi, thank you. With Quest's revenue becoming dominated by the pipeline tools, I'm wondering whether you would expect their profit to run along the same seasonality as the remainder of the Company. Or does that pattern no longer apply for them?

No, I think it does. I think it always has, actually. And I wouldn't say, by the way, that it's just related to their pipeline tools. I think just the assessment business as well also has the -- it has the same challenges in the holiday season that we have for all of our business.

Okay. And then secondly and lastly, aside from Quest, you've added a number of what I would call second-tier service lines over the last 18 months to two years. Wondering if you wouldn't mind discussing a few of those that have gained the most traction and are generating material sales.

I don't know that we kind of really don't really carve out the individual service lines, Rich. I think that we can try to give you kind of some guidance just on our revenue growth and all our services. Our turnaround services continue to expand, as you heard with our activity. And there's lots of new services in there with our line isolation tools, our fuel valve repair, our heat exchanger repair activity, insert valve, is all part of those activities. Obviously, the inspection assessment is growing very nicely.

But if you could look at the magnitude of the growth, it clearly can't just be Quest. Although Quest is growing very, very nicely. Because just by virtue of its size, it's not big enough to be all of that. So we're -- again, mechanical integrity programs, high-end service capability that we developed internally, all positives. Frankly, that's what I like about our business, is that we have just many points of energy and development and presence, both service line and geographically.

One of the exciting things for me is -- really all of us here at this table -- is we meet quarterly with our real business leaders of our Company, the 25 vice presidents that run our various regions around the world in our various service lines. Just to see the number of initiatives we have going on and the different things we are doing to serve customers in various markets, it's quite exciting. So I come away from all of these meetings saying -- boy, isn't this a great place to be? It's about a great organization that's well-positioned to serve our customers well. And it's that breadth of presence that really, I think, leads to the consistent, sustained, development of our Company. And that's -- we're proud of that.

We're proud of the fact that we're not just growing, chasing a hot service line or chasing a hot market. But that we kind of in a sustained way continue to grow and expand our Company. And like we said earlier, we feel pretty good about where we sit right now and think that we have to go earn it, for sure. But that there's a lot of opportunity ahead of us.

Again, I appreciate your time, thanks a lot.

John Krulock of Bluefin Investment Management.

Hi, guys. I just had one quick question. Was wondering what your cash flows were this quarter? And then where they are year-to-date.

Hang on just a second, I'll see if I can address that. Yes, I think I only have just the year-to-date cash flows. Cash flows from operating activities in the quarter were about $20 million. And --

Year-to-date.

I'm sorry, I said quarter. That's year-to-date. And then, CapEx for the year-to-date period is $13 million. Cash used for business acquisitions, $18 million. So total cash used year-to-date -- investing activity is about $30 million. And then we borrowed about $23 million for the year-to-date period.

By the way, our 10-Q will be filed, I think, later today. That will have all that information in it.

Okay, great. And then, do you have any comment about how that looks -- I'm not exactly sure how -- I have the information here, but how that looks on a year-over-year? And any view as to how anything's changed with how you're getting paid? Or just anything to kind of pull from that?

No, not really. Not much change at all in a year-over-year view. In fact, our operating cash flows in the first-half of this year are relatively the same as in the first-half of a year ago. Our DSO is, again, about the same year-over-year. So there's not a lot of change in those metrics.

Okay, great.

But I think you appreciate here that by far the largest investment we have is receivables. And as we're growing rapidly with our 20%-plus growth, we're adding -- if you will, we're -- a significant portion of cash goes to expanded working capital.

Great, thanks a lot, guys.

Arnie Ursaner of CJS Securities.

Hi, Phil. So you brought Pete into the call for the first time today. Should we read into this that you are thinking about or undertaking some changing role within Team?

No. I thought Pete would have some interesting additional perspectives to offer, and that's kind of why we did it.

Okay, thank you.

And there are no further questions at this time. I'd like to turn the call over to Mr. Hawk for closing remarks.

Thank you, Karissa. And thank you to all of our listeners 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 in early April. In the meantime, have a good day, everyone.

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