Team Inc (TISI) 2013 Q3 法說會逐字稿

Very good morning, ladies and gentlemen, and welcome to the Team's third-quarter fiscal year '13 earnings conference call. My name is Lisa and I'll be your coordinator for today. At this time, all participants are in listen-only mode. At this time, all participants are in a listen-only mode. Following the remarks, we will conduct a question-and-answer session, and instructions will be provided at that time for you to queue up for questions. (Operator Instructions) I'd also like to advise you this conference is being recorded for replay purposes.

I'll now turn the conference over to your host, Mr. Phil Hawk. Please proceed. Thank you.

Thank you, Lisa. And good morning, and welcome, everyone, to the Team quarterly earnings conference call. Again, my name is Phil Hawk. I'm Team's Chairman and CEO. Joining me again this morning is Mr. Ted Owen, the Company's Chief Financial Officer; and Mr. Pete Wallace, Team's Chief Operating 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 28, 2013. 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.

In view of our press release and conference call just two weeks ago, our prepared comments this morning will be fairly brief. Ted will begin with a review of the financial results; then Pete will provide some additional details and color on our operating performance and priorities. I will then follow Ted and Pete with a few personal observations about our performance and outlook. Following these remarks, we'll take questions from our listeners.

With that, Ted, let me turn it 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. As you all know, we preannounced disappointing results for the third quarter via a press release on March the 14th followed by a conference call on March the 15th. So, the full results that we reported yesterday are consistent with that earlier announcement. For the third quarter, we reported an adjusted net loss attributable to shareholders of $0.01 per diluted share on revenues of $151 million. That reflects a total revenue growth rate of 11% for the quarter and an organic revenue growth rate of 8% for the quarter.

The adjusted loss excludes a $600,000 pre-tax non-routine charge associated with the Venezuelan currency devaluation that was announced by its government in February this year. Including this non-routine charge, our GAAP loss for the quarter was $0.03 per share. In spite of the disappointing results for the third quarter, however, we remain on pace for another record year. For the year-to-date period, revenues were $513 million, up 18% over last year; and adjusted earnings were $1.01 per diluted share compared to adjusted earnings last year of $0.95 per diluted share.

Now, with respect to some cash flow and other financial-related items, capital expenditures for the quarter were $6 million. Depreciation and amortization was $4.8 million, and non-cash compensation was $900,000. Adjusted EBITDA for the quarter was $6.3 million and $84 million on a trailing 12-month basis. At February 28, our total debt was $89 million. Cash was $36 million, and thus net debt was $53 million. So our net debt to trailing 12-month EBITDA was 0.6 to 1.

And with that, I'll turn it over now to Pete, who will provide a little more color about our third-quarter revenues and business.

Thank you, Ted and Phil. It is my pleasure to be with everyone this morning. Let me provide some details on our recent business activity.

As indicated in our earnings release and Ted's remarks, our quarterly revenues were $151 million. Total revenue growth for the prior-year quarter was $15 million, up 11%. Organic growth was $11 million or 8% during the quarter. From a geographic standpoint, our US business units led our growth this quarter, more than offsetting the revenue declines in Canada and Europe, as compared to the prior-year period. In the third quarter, our US business grew approximately 17%, reflecting solid inspection and online service activity. Our Canadian business declined 13%, mostly due to very limited turnaround activity and project work. And our European business also declined approximately 15% in the third quarter, which is related to soft project work experience throughout Europe.

From a service line perspective, inspection and assessment continues to lead Team's growth this year for both the quarter and year-to-date periods. Third-quarter inspection assessment revenues grew 25%, reflecting continued strength in our Quest Integrity Group business unit, Team's Mechanical Integrity program, as well as our legacy non-destructive examination service offerings. Year-to-date, inspection assessment revenues have grown 35% versus the prior period. Online services grew 7% overall in the quarter, reflecting strong US business activity.

Turnaround services, which encompasses our heat treating and off-stream mechanical services, declined approximately 5%, due primary to weaker activity levels in Canada. For the year-to-date, inspection assessment services represent 45% of Team's total business. Turnaround services are approximately 30%, and our online services are about 25%, respectively, of total revenues. As we've discussed in previous calls, our third quarter is seasonally a weaker quarter. Our overall turnaround activity levels will be significantly higher in our current fourth fiscal quarter, corresponding with the industry's spring turnaround season.

That concludes my comments. Phil?

Thank you. Thanks, Pete and Ted. Let me just add a couple of additional comments prior to opening it up for questions.

As announced in our March 14 release, we now expect full-year earnings to be in the range of $1.70 to $1.85 per share, and revenues to be in the range of $705 million to $720 million. This full-year guidance implies fourth-quarter earnings guidance of $0.69 to $0.84 per share on total revenues of $192 million to $207 million.

As we indicated in our previous call, while we are forecasting a significant uptick in the total number of projects for the Team in the fourth quarter, we expect fewer very large projects -- that is those greater than $2 million in revenue compared to last year's fourth quarter. The reason for this is simply that our customers just do not happen to have as many of these very large projects scheduled in this period. But more importantly, we believe the overall market demand for our services remains strong. The underlying business fundamentals for most of our major customer segments remain attractive.

Despite some headwinds in the most recent quarter, we still expect Team to achieve record financial results in our current fiscal year. Our organization is focused on staying a great service company; delivering safe and effective service and support to our customers; earning a growing share of market service opportunities; and balancing our growth and resources appropriately with our growth in business. As has been the case for nearly all of the last 15 years, Team continues to be extremely well-positioned to profitably build and expand its business for the long-term. And we expect to do just that.

Lisa, that concludes our remarks. Let's now open it up for questions and let me turn it back to you.

(Operator Instructions) Stephen Ragard, Stephens.

Thanks for taking my questions. (multiple speakers) So it sounds like you haven't really changed expectations on the outlook for the spring turnaround season from when you talked about two or three weeks ago. I guess is it still fair to kind of characterize looking at it as the scope of turnaround projects can still change with maybe a higher probability to the upside? Is that fair?

I think your first comment that our outlook has not changed is absolutely correct. The same view as we discussed before, we do -- we think the industry is active and the turnaround season is active. So this is not a weak season generally.

What we said was -- and, in fact, the total number of projects that we've identified is larger than last year; significantly larger, in the 15% to 20% range larger. What we are not seeing for us are the very big projects that we have in the prior-year period. Could some of the projects change in scope? Most definitely, yes. Both up and down. They could also move in and out of the period as well.

So, to say that it's a -- the inference was that we're -- it will be this or higher, I wouldn't say. It is our best estimate of where we think we are, but we certainly recognize that there will be a lot of moving pieces that would -- could affect the ultimate actual number.

Okay. That's helpful. And then, recently, we've seen, I guess, last week, Suncor canceled its Voyageur upgrader project up in Canada. Can you maybe speak to that a little bit, just in terms of general activity up there? And, I guess, does this change your longer-term outlook there going forward?

Just general answer to that is it certainly is an additional headwind. It reflects a little bit of moderating attractiveness of the oil field -- the oil sands kind of environment for those investors and oil companies operating there. Having said that, there's still many projects still underway, and there's a growing installed base of projects that we will serve over the long-term. So, yes, it's a headwind, but we don't have a view that it's now no longer an attractive place to operate.

Okay. And then last question from me and I'll jump back in the queue, can you guys maybe speak to your outlook on the acquisition pipeline going forward?

I think the posture that we have with regard to acquisitions continues to be the same, is that organic growth continues to drive -- or, as it has this year, continues to be the core of our business. We're just so well-positioned to keep earning a greater share of the business, and expand our capabilities from the large base that we have.

But having said that, attractive supplement -- attractive acquisitions that extend our capabilities in ways we couldn't do internally, and that accelerate our growth or growth prospects, are attractive. Just in the last year, the most significant or the largest one was the TCI tank inspection company, which certainly fits that mold, in terms of giving us a very significant presence in one geographic area, with a very, very capable and leading service company in the tank inspection business. And we see some exciting opportunities to build on that with additional organic growth based on that enhanced capability. So we're going to continue to be receptive to and investigate those kinds of opportunities.

All right. Thanks, guys. Appreciate the time.

Tahira Afzal, KeyBanc.

This is Saagar on for Tahira. (multiple speakers) So the first question -- availability of craft labor for you guys -- if the need arises, if demand continues to tighten -- we've heard a lot of the larger EPC contractors down in the south start to get hit on some of their fixed-price, where, in terms of craft labor, could there be a research issue for you guys if the petrochemical cycle buildout ramps up over the next couple years?

I think, as -- I have read some of the same reports. I think there are a lot of big projects coming. And so, certainly, in certain areas, there could be competition for labor that will affect labor rates or wages. I think that's a possibility.

Our experience has been that we have not been short labor, and we've been able to find or develop labor sufficient to meet all of our needs. And we don't expect that to change. If labor rates in a region or an area are -- begin to escalate because of this type of competition, the advantage that we have is, we're basically a time and materials service. So, as our rates go up, they would be the same for any of our competitors. By the way, it would also be the same for our customers. So we will -- we would be -- feel confident that we'll be able to, I guess, address that increased cost through increased billing rates associated with that labor. That has been our experience historically.

Okay, great. And then one follow-up related to the hydrocracker projects. Several hydrocracker projects have come on the map, but some have been delayed in terms of timing. Wondering if these projects are within the Company's area of expertise? And specifically, what you could be doing on these [temp] projects?

I think -- I am not an expert on hydrocrackers, and we would certainly not be a lead contractor in constructing that. But what we would provide for any new facility construction would be inspection services, and an array of specialty construction services related to probably heat treating, field machining, bolting, probably some line isolation activity; hot tapping activity would be typical that would be involved in construction projects of that type.

All right, great. Thank you very much.

Martin Malloy, Johnson Rice.

Could you talk a little more about the drivers with the inspection business growth? Is it grabbing market share from competitors? Are there technological changes that you all are bringing? Or is it regulatory-driven?

I think it's a combination of those, would be what I would say. The -- you know, Pete mentioned several of the sources of the growth. It's pretty broad-based, actually. The Quest Integrity Group is growing very nicely. That's a nice kind of addition to our Company a couple of years ago. I think their growth is driven by technological advantage; as their in-line inspection tools and approaches to inspection are -- using proprietary approaches are quite effective. And there's been a lot of demand for, and I guess, demand for those services. And they're doing quite well.

But we're also kind of gaining share in a number of other areas as well. Team -- Pete mentioned Mechanical Integrity programs, which are kind of helping, particularly the small or non-major companies kind of establish programs to kind of monitor their facilities and inspect them on a systematic basis, using kind of industry-standard approaches. But, frankly, when you get into the NDE services, we have nice growth, both in advanced services, but also in the traditional services of radiography, UT, mag particle. So it's pretty broad-based.

One of the things I just looked at this morning, and I went back and looked at the TCM Division, which kind of provides all of those traditional NDE services, and six of our nine regions had double-digit growth year-to-date. So, again, it's, to me, a pretty broad-based story; not a single ID or a single approach. I do think that there's going to be an industry interest in more inspection services, because that gives them a kind of a better sense of the condition of assets, but I don't sense that there's a huge growth occurring in the industry.

I don't know, Pete or Ted, if you have anything?

I think one thing that's driving that, and Phil mentioned the Mechanical Integrity as I did, that there's some deadlines coming up with Process Safety Management, or the 1910, and the Code of Federal Regulations that comes up in 2016. And we estimate about 40% of our clients need help in that arena. And there's over 10,000 operating units or plants in the US alone, so that's -- it's a huge market for us and we see that segment growing.

Okay. And then, next question. Looking out past the next six, nine months, and assuming that there's a significant buildout along the Gulf Coast of chemical and petrochemical facilities, could you talk about the role that Team might play on those kind of capital projects in the next couple of years?

I think just kind of reiterating a comment I just made on the hydrotreater/hydrocracker comment is that, again, inspection as well as, really, our turnaround -- our full suite of turnaround services for the most part are also applicable as specialty construction services in a new facility or new capability build. So, heat treating, field machining, bolting, line isolation and the like.

We love new projects. That's great. I'd just kind of again comment or observe that the huge installed base, and the turnarounds and rehabilitation, and ongoing maintenance of those facilities, will continue to be the biggest opportunity for us. So, these are kind of nice adds, but it's the new constructions, the 10% to 15%, not the 85% of our business.

One of the things that's really propped up in the new construction, and it's related back to the Texas City BP fire, is the PMI work that is required on new construction builds. So that's where we see a lot of work generated from. And then it just leads into us becoming permanent residents when it comes to inspection work.

Okay. Thank you.

Arnie Ursaner, CJS Securities.

This is Michael Laskin filling in for Arnie. How you doing? (multiple speakers) So, my first question has to do with the preannouncement regarding Canada from a couple of weeks ago. Can you provide any more color as to what exactly occurred there?

I think, you know, again, we had a very, very strong first half of the year. We're kind of maining and planning for our continued growth and expansion, frankly, and we had a couple of -- we had some timing -- just incidental timing on little things. But a couple of -- as we mentioned in the last call -- a couple of kind of deferrals of the big project, and a change in ownership of one of our significant customers up there that, at least in the short-term, has changed our -- kind of the service relationship in the kind of near-term activity levels.

And then -- and the net of all of that was a decline in revenue after very significant growth in the first half of the year. We don't feel like we've lost our position, that we're disadvantaged, that -- you know, but it's just that we were out of balance from activity levels. And, obviously, we've been adding some resources up there.

As we look forward, I think we continue to be positive and optimistic about Canada. There are some headwinds, to be sure, in the -- as we mentioned with the Voyageur project, and just the kind of a little bit of pressure on margins, I think, in that environment for the Western Canada. But there's a lot of good things happening in Canada. And we continue to expect it to be a significant and attractive part of our business.

Got it. And my second question is, what do you see as the main factors that will impact where, in the guidance range for Q4, that results will fall out?

I think the main driver will be activity levels -- volume.

Got it. Okay. Thanks a lot, guys.

Adam Thalhimer, BB&T Capital Markets.

I wanted to ask quickly about Europe. Is there any reason for optimism there?

You know, I think -- if we look to the European market, it's new to us. We think we only have -- or less than 5% of the market share. Even though the European market has slowed down on project work, there's still a lot of opportunities for our online services and our legacy services to gain there. So we're very optimistic that we can continue some growth there in Europe. It slowed down, as we reported, for this past third quarter, but that's -- it's seasonality of the -- Europe. But if you remember the first and second quarter, we did well.

So that wasn't maybe more seasonality, not so much a shift in the overall marketplace or (multiple speakers) --

Yes.

-- in your off-season?

There's no question, Europe is kind of facing some kind of issues kind of broadly with the euro, but I think Pete's right on, is that we had low market share, huge installed base -- this looks a lot like North America. We're just a much smaller player right now over there. But we're building -- we have a very strong position in a couple of markets and we're building in some others. So, we are optimistic.

Okay. And then Venezuela, I kind of thought you guys had written that completely down and more or less out of Venezuela. Why the currency issue this quarter?

No, we have not. That is not the case, Adam. We have a small operation in Venezuela that is actually a very nice operation. It's in the TCM region providing inspection, and principally, heat treating services to the local market, principally PDVSA.

We had a -- we are required, because Venezuela is a hyperinflationary economy, we are required to periodically adjust the translation to the published translation rates. That change -- so it's not a floating rate. It is, rather, a fixed rate that changed initially two years ago. And so, what you're recalling is a write-down, but not a write-off, that occurred two years ago, which was fairly significant because of a significant devaluation of the Venezuelan currency. It has been fixed for the last couple of years, and was adjusted again by the Venezuelan government in February.

So, it is a fairly small investment that we have, equivalent to about US dollars -- maybe $2 million -- on that order of magnitude, but it is a -- so it's a fixed rate of exchange that is adjusted periodically. And if there are -- you know, when there are further adjustments, it would result in a additional charge or credit, whichever way it should go, when the government of Venezuela adjusts those rates. But there's -- again, there's only a continuing investment in Venezuela order of magnitude of a couple of million dollars.

Okay. And lastly, just kind of high picture, maybe a question for Phil. I mean, when you look out at all of the changes that are happening in the North American energy landscape, what gets you most excited vis-a-vis the impact to your business?

Well, I mean, you kind of -- the premise is certainly what I agree with is that, we are in an incredibly attractive kind of macro environment, I think, right now. And I think it's going to stay that way or perhaps even get better.

We have feedstock advantages for refining and petrochem. We have -- with lower-cost energy, we're going to have thermal advantages for energy-intensive manufacturing operations versus the rest of the world, I think, at least for the near-term. And I think kind of the prognosticators that I read about or read from, read their thinking, is that this could be a decade or maybe two-decade advantage for North America. That health, that activity level, just has to be a good construct for our activities.

I think the basic maintenance needs of facilities isn't changing, and it's not automatic that we get it. But surely, we surely love an opportunity in a market that's healthy and growing. And we like the fact that we're a structurally advantaged service provider, just given our size, scale of both, from a geographic standpoint across North America -- and other markets, but we're talking about North America as well as our service line breadth.

So we think we're just well-positioned. It's been a -- to those of you who followed us a long time, we've grown nicely, consistently over a pretty long period of time. And I just think the future looks -- can look just like the past. We have to earn it, but very, very strong fundamentals in terms of demand, and really, in practically all major industry segments.

Great. Thank you very much.

Tristan Richardson, D.A. Davidson.

Thanks for taking the questions. (multiple speakers) Just, I guess, a follow-up. You know, Pete, you had talked about the Mechanical Integrity programs, and I think we've definitely seen it over the past couple of years on the pipeline side for pipeline networks. And I'm just curious if you guys are seeing that in other markets?

And as a follow-up, just these tend to be two to three-year programs where everyone just sort of digs into the fleet. And are you seeing that once those two to three-year programs end, do they launch a new one? Or -- I'm curious sort of what you're seeing in that market.

Well, Process Safety Management or Mechanical Integrity has been around for a while. And as plants change and develop, and they reengineer things, they have to keep their P&IDs up. And that's where we have -- you get opportunities that have reworks or re-projects in there. So, you know, this is just -- we're at the second phase of the last -- coming up to the regulatory deadline is 2016. But as our government has done in the past, they change regulations and they're going to get more stringent. And I think there's going to be greater opportunities within this service.

I think, Tristan, you mentioned pipelines, which is a an exciting opportunity. We are -- really, all of our growth that we referred to is -- really, is plant-related. We see the pipeline programs as being a great kind of a new emerging opportunity for us in construct with the Quest Integrity Group and some of their proprietary in-line tools. But we're -- we are building and expanding our capabilities to kind of manage these pipeline maintenance programs and that whole development. And that's a segment that, frankly, as a company, we've been underrepresented in historically. So it's an exciting additional opportunity.

And on the pipeline side, is there sort of a sweet spot for you guys, in terms of either diameter or length range, et cetera? Or is it sort of run the gamut, I mean, you guys can do any diameter, any range?

If you -- it depends on what we're talking about.

Okay.

So if you're talking about in-line -- in terms of just actually an inspection of a pipe providing the, if you will, the taking -- the analogy is, taking the picture of the pipe and using the in-line Quest Integrity Group tools, their sweet spot are the unpiggable pipelines. So it's going to be the -- they have capability up to 24 inches now, but we're going to be looking at not the mainline pipeline, but the unpiggable lines, wharf lines, the feeder lines, lines that weren't anticipated to be kind of built before pigging -- electronic pigging became possible, those kinds of things.

But what I'm speaking to is a broader maintenance capability, which is kind of managing kind of programs, maintenance programs for pipelines, or kind of project management, and coordinating a number of services, including kind of in-line inspection tools, but it also would include true-up activities and kind of minor maintenance activities of that area. And that's something that, again, we have a small capability in, but we're developing that more fully.

In terms of new pipe construction, we'd be involved in the inspection activities for new pipe construction. And we're doing fairly large diameter pipelines in Canada with the Automated and Ultrasonic Technology, or AUT. We're less well-positioned candidly in North America for the large diameter pipelines, so we'd be more -- excuse me, in the US -- we'd be more likely to be involved in smaller ones, just because of kind of how the industry is structured.

Okay. That's great. Thank you. And then just to follow-up on M&A as well, I mean, we've seen several transactions on the inspection and NDT side. And I'm curious -- have you guys seen multiples expand? Or, I mean, in terms of seller -- have seller expectations gone up on price?

You know, the difficulty with that question is that our approach is very, very selective. So we're not buying kind of companies in bulk, kind of on a, let's say, if you will, on an industry margin. What we're -- as we've said, what's really important to us is fit with us culturally, and fit with us strategically, so that it can be a complementary capability that we -- from which we can accelerate growth somewhere, either helping that new entity grow more rapidly because of its support from Team, or maybe Team growing because of access to new customers or the like.

So we spend a lot of time on the front-end really getting to know these companies and vice versa. Because the intentions of management are also really critical, in terms of their desire to join our Team and be part of that. So, candidly, when we get to that point, kind of our view is that this is really -- you know, we have to kind of conclude, it's really going to be something that's special and good for Team. And then we try to go to kind of market ranges and rates. But frankly, half-point changes or half-turn changes in price at that point are really less significant than the fact that we are highly enthusiastic, and the selling companies highly enthusiastic about our working together.

I don't know if that's helpful. So we don't kind of look at huge numbers of deals and kind of track multiples so much.

Sure. Oh, that helps. Thank you. Thank you guys very much.

Thank you for your question. Okay, so ladies and gentlemen, that concludes the question-and-answer session for now. I would now like to turn the conference back to Mr. Phil Hawk for closing remarks. Thank you.

Thank you, Lisa. And I want to just thank everyone for your participation in this call and your continuing interest in Team. We look forward to updating you on our progress with our fiscal year call that should take place in early August. And in the meantime, I wish everyone a very good day.

Thank you all for joining, ladies and gentlemen. That concludes today's conference. You may now disconnect your lines. Have a good day. Thank you.