Team Inc (TISI) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2013 TEAM, Incorporated earnings conference call. My name is Catena, and I'll be your coordinator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Phil Hawk, Chief Executive Officer. Please proceed.

Thank you, Catena, and good morning, everyone. It is my pleasure to welcome you to the TEAM, Inc. web conference call to discuss recent Company performance. Again, my name is Phil Hawk. I'm 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.

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, 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, 8-K, 10-Q and 10-K filings to the SEC, as well as our annual report.

Ted will begin with a review of the financial results. I will then follow Ted with a few remarks and observations about our performance and prospects. Following these remarks, we will take questions from our listeners.

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

Thank you, Phil. Again, as usual, I'll start with the lawyer's disclosure. 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 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.

Consistent with our May guidance, for the fourth quarter, we reported net income attributable to shareholders of $0.54 per diluted share on revenues of $201 million. That reflects a total growth rate of 7% for the quarter against a very strong comparable for the fourth quarter of 2012.

Our operating profit margin for the quarter was 9.5% compared to, again, the very strong 12.9% in last year's fourth quarter, primarily as a result of lower gross margins in the quarter as we also discussed on the May call and which Phil will more fully discuss in his remarks.

For the full year, our adjusted net income attributable to shareholders was $1.55 per diluted share on revenues of $714 million, which is up 15% over the prior year. The operating profit margin for the full year was 7.8%, down from 9.1% last year, again due to the imbalance in resources that we discussed on our last call.

The adjusted net income for the year excludes a $600,000 pretax nonroutine charge that we took in the third quarter associated with the Venezuelan currency devaluation announced by its government in February of this year. And, by the way, we remain concerned about the highly inflationary and restricted economy in Venezuela and believe that a further devaluation is possible in fiscal 2014.

Now with respect to some cash flow related items, capital expenditures were $7 million in the quarter and $26 million for the year. Depreciation and amortization was $5 million in the quarter and $19.7 million for the year. Non-cash compensation expense was $900,000 for the quarter and $3.9 million for the year. So Adjusted EBITDA for the quarter was $25.2 million and $79.2 million for the year. At year-end, our total debt was $73 million, which is down $16 million since the end of the third quarter due to strong cash flows in the quarter, and cash at the end of the year was $34 million.

Therefore, our net debt was $39 million, and our net debt to trailing 12-months EBITDA was 0.5 to 1.

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

Thanks, Ted. Now I would like to provide a few additional perspectives on both our recently completed quarter and year, as well as our outlook for the current fiscal year 2014. All financial results referred to in my remarks will be adjusted results that exclude nonroutine items consistent with the information in our earnings release.

Let's begin with the review of our fourth-quarter performance. Overall performance was in line with our most recent revised guidance but below our own expectations for our business over the longer term. As Ted indicated, our revenues for the quarter were $201 million, up $13 million or 7% from the prior year period.

When providing earlier revisions to our revenue guidance, we indicated that based on our field forecasts, we were expecting fewer very large turnaround projects in the quarter compared to the very strong activity in the corresponding prior year period. Our actual very large project results were directionally consistent with this forecast but a bit stronger than we had expected. Total very large project revenues declined by about $7 million versus the prior year rather than the $14 million originally projected in our field estimates. The total number of very large customers in the quarter was 5 versus 7 last year and 2 in the original forecast as several projects grew to be larger than the originally projected -- excuse me, to be larger than originally projected, exceeding the $2 million threshold that we used to define very large projects.

While we are continuing to use this forecast process going forward, as you can see, it's still a work in process.

Shifting back to fourth-quarter results, we are pleased that our small project day-to-day business continued to grow nicely in the quarter, resulting in overall 7% growth. Again, as we had previously discussed, I remain confident in our current and future organic business growth opportunities. We previously acknowledged that we were slow to anticipate and respond to the lumpiness and the large turnaround project timing.

However, our position in our markets remains very strong and attractive. The continued double-digit growth of our day-to-day business during the quarter is additional evidence supporting this perspective. We do not expect or anticipate any permanent shift in either our overall opportunities or our future mix of business. And as we indicated, despite our revenue growth, total operating profit in the quarter actually declined about $5 million from the prior year. The primary driver of this profit decline was disappointing gross margin performance.

For the quarter, TEAM's gross margin as a percentage of revenues was approximately 31%, about 3 percentage points lower than the nearly 34% gross margin earned in the corresponding prior period.

In fairness, in the prior year quarter, the quarterly results reflected extraordinary leverage in a couple of our regions due to several very large projects that had the effect of significantly increasing the resulting gross margin percentage.

Nevertheless, we still expect to achieve a 32% plus gross margin in seasonally strong quarters like this fourth quarter. As a result, our operating profit margin in the quarter was 9.5%. While consistent with our recent guidance, it was about 1.5 to 2 percentage points below our earlier expectations.

Let's now move to a discussion of our full-year results. Reflecting very strong revenue growth in the first half of the year, TEAM earned record revenues of $714 million, up about $90 million or 15% from the prior year period. Excluding acquisition-related revenues of about $20 million, total organic growth for the year was approximately 11%.

While we have enjoyed attractive growth rates in all of our service lines longer-term, our major growth drivers in this year have been inspection- and assessment-related services. The total growth this year for these services was $76 million, up about 29%. Within inspection services, TEAM grew significantly in the Quest Integrity Group, as well is with tank inspection, mechanical integrity and advanced inspection services.

We continue to be pleased with our progress in building and extending our market presence. And while organic growth continues to be our primary focus, we're also supplementing this growth with new business and additional complementary capabilities through acquisitions. In the past fiscal year, we added three small companies -- a North American-based tank inspection and repair services firm, an Asia-Pacific-based remote video inspection services company, and a European valve service repair company.

We are delighted with our new colleagues. Because of the businesses are small, they've had a very modest impact on results in this first year together. However, we remain very optimistic about our future growth that will be possible as a result of these new regional platforms and their respective capabilities.

And just a couple of weeks ago, we announced the purchase of a small US rope access services company with a leading position on the West Coast. Again, while the current business is fairly small, we have exciting plans to extend these service capabilities across our service network going forward.

From a business development perspective, I remain pleased with our overall performance this year and our attractive position for continued growth for many years to come.

Let's now shift to operating profits. Despite attractive overall growth in revenue, our operating profits for the year were about flat with last year. For the year, total operating profit or EBIT was about $56 million, and this corresponding operating profit margin was about 8%. We experienced a decline in both gross margin and operating profit margin of approximately 1.5 percentage points. As discussed previously, we believe the causes of this decline were primarily operational and execution missteps where we expanded our resource base ahead of our business growth.

Simply put, we were slow to react to the slower overall growth rates in the second half, leading to higher support expenses and lower utilization levels in some areas. We do not expect this to be a chronic issue or source of negative margin pressure for TEAM. In each of our service locations, we are focusing on the key performance levers that will guide our appropriate actions to maintain or restore the appropriate revenue and resource balance. These key areas of focus include labor utilization rates, indirect cost expenses, job margins and any erosion of job margins. While we believe the primary source of our short falls within the indirect expense line, we are also focused on obtaining rate increases to offset labor and market wage increases that are beginning to become more prevalent in some areas and appropriate SGA headcount and expense level for the level of business opportunities.

Our long-term track record of consistent profit margin performance demonstrates our capabilities to effectively manage our resources. We expect to return to that performance level soon.

Despite our challenges, I would like to note that both our fourth-quarter and full-year profits were each the second best in TEAM's history for their respective periods. With a little fine-tuning, we expect to return to our regular expectations of a TEAM new best performance in this current year.

Now looking forward to the current fiscal year 2014, I thought it would be appropriate to provide a little more detail to our earnings guidance than we have provided in past years.

First, as a planning context, we expect our markets and overall demand for our services during the year to continue to be attractive, on par with the most recent year. In particular, we expect North American markets to benefit from active E&P development levels, along with the associated infrastructure construction, stable to strong primary demand in the markets of our major customer segments due to both an improving North American economy and an improving relative cost position to non-North American competitors due to lower energy costs and feedstock costs, and the continuation of procurement consolidation trends which favor larger, more professional service providers like TEAM.

However, one headwind to this outlook is the likely continued postponement of new Canadian oil sands upgrader facilities due to the large volumes of light crude coming onstream from US shale production. Nonetheless, even in this region, there is still considerable maintenance demand for TEAM to serve.

Given this positive outlook, we are forecasting approximately 10% revenue growth to the $775 million to $800 million range for the current fiscal year 2014. We are expecting attractive organic growth from all three of our business groups, similar to our historical growth patterns.

With this revenue performance, we expect to earn between $1.90 and $2.05 per fully diluted share. This net income performance corresponds to EBIT or operating profit in the range of $68 million to $75 million and an EBITDA range of $92 million to $98 million. The implied operating profit margin of the midpoint of these ranges is about 9%, an improvement of slightly more than 1 percentage point from that achieved in fiscal year 2013 but slightly less than those results achieved in fiscal year 2012.

For this operating profit margin estimate, the corresponding gross margin forecast is 30.5% to 31%, a 0.5 percentage point to 1 percentage point improvement versus last year. SG&A expenses are estimated to be between 21.5% and 22%, up to a 0.5 percentage point improvement. To achieve this plan, we simply need to perform at the historical levels that we have achieved most of the years over the past decade.

Now similar to past years, we will not be providing quarterly financial estimates, but we will be providing updates to our annual guidance on a quarterly basis or whenever the situation warrants.

The last subject I would like to briefly touch on is our recent organizational alignment, which we announced in late June. With this alignment, we now have three primary business units, each headed by business group presidents reporting directly to me. As a reminder, the three business groups are inspection and heat-treating services, mechanical services, and Quest Integrity Group. The primary change with this new alignment is to combine all of the dedicated commercial, technical and operational support groups with their corresponding field service groups into integrated business units. While our previous approach with more centralized support groups had served TEAM well for many years, we expect our new alignment to provide greater focus, flexibility and agility to identify and capitalize on our business opportunities within each business group. I believe this will become even more important as our business gets ever larger.

A second-related objective is to foster a greater focus on innovation across all of our business groups. While this can include the development of new technologies or technical approaches, it also includes potential combinations of services or changes in business processes that can enhance the value of our services to our customers.

To supplement the primary development responsibilities of the business groups, we have established a technology advisory council to provide input, as well as oversight, to our innovation initiatives across the Company. This is a long-term initiative, but we do expect -- we do not expect immediate results from these efforts, but we do expect to identify and pursue a number of opportunities developed or improve service solutions for our customers. Our leadership in these initiatives will benefit TEAM in many positive ways.

That now concludes my remarks, and Catena, if I can turn it back to you, and let's open it up for questions from our listeners.

(Operator Instructions). Stephen Ragard, Stephens Inc.

My first question is on your fiscal 2014 revenue outlook. Can you maybe talk around what type of growth you're expecting from the three segments, the inspection turnaround on same service lines?

Again, as we've kind of said in the past, Stephen, I think it's very difficult to precisely forecast revenues kind of even in aggregate, let alone by segment. But, as I mentioned, we expect kind of attractive organic growth in all of our service lines, on par with or directionally consistent with what we've done historically.

I'll point out that this year, as you saw in the data, that inspection and assessment services led the way and had the bulk of the growth with again very attractive, I think, 29% overall growth.

If you would look -- and it was lesser growth in mechanical services, I think in the 3% or 4% range kind of overall. I would point out that the year prior that the growth rates of both the mechanical services and the inspection services groups were in the 20% range. And so what we -- I don't expect 20% or that's not what we are forecasting, but I'm expecting attractive growth rates for the mechanical services groups just like we've had historically in those areas.

I think the onstream services will tend to grow slower because of, again, a more mature position. But we have a lot of optimism for our turnaround services, as well as our inspection services.

Again, it may be a conservative posture. I think we just wait for the year to kind of unfold a little bit, but our 10% overall guidance is consistent with past years in terms of our revenue growth.

Sure. Okay. Thanks for that. And then my follow-up, I guess, is on the gross margin. I know you had talked about the decline in the quarter tied to indirect cost performance. You know, I appreciate all the color you provided on the puts and takes there. I guess maybe can you talk about when you guys feel like you will have the organization back in balance, obviously taking into account the seasonality of your business of August quarter versus November quarter?

Well, I think, you know, it's a work in progress, and we're -- we have very clear focus and a very clear vision of what success looks like, and it's really kind of getting back to our historical levels.

You are correct to point out it is because of the seasonality of our business, that affects the gross margin, and it fluctuates quarter to quarter to reflect in part that seasonality. But we expect to make progress throughout the year. If we didn't instantly get right or get everything perfect on June 1, but we've been working on it in terms of balance really throughout the back half of the quarter and into the new quarter, the first quarter of the current fiscal year. So we expect and anticipate improvement throughout the year.

Okay. Great. Thanks for the time.

Arnie Ursaner, CJS Securities.

During the course of the year, trends in Canada weakened pretty significantly and caught you a little by surprise. Can you freshen up what you are seeing in Canada and how this is embedded in your outlook for the upcoming year?

Yes, I think we had a couple of issues in Canada. I think the big macro issue was that the level of project work related to expansion of upgrader capacity, which started the year very strong last year, really ceased fairly suddenly around the end of the calendar year, kind of reflecting, I think, a realization of the market or the industry that the amount of, as I mentioned in my remarks, the amount of sweet crude coming onstream in the US, was really putting a -- really depressing the market prices and value and, therefore, the investment premise of some of these very large capital investments with upgraders.

That is continuing to be the case, and we see no change in that. So that continues to be a headwind there.

We also had a kind of a TEAM-specific issue with a major customer that changed ownership and that impacted our relationship with that customer. That continues to impact that, by the way, so that's a factor.

But on the positive side, there is still a tremendous amount of maintenance opportunities there, and we're continuing to build and expand our opportunities. So, while we don't kind of see a return to the specific business opportunities we had and the same scope we had historically, but we continue to see attractive opportunities in Canada.

And, by the way, again, while it was certainly lower business levels in the fourth quarter than we enjoyed the prior year, particularly in the Western Canada areas, it was an attractive, profitable business for us. So it's not an area of concern, in terms of kind of its overall kind of positive contribution, but it has those headwinds in that area. We continue to see Canada and view Canada as a very attractive and growth area of our business.

Yes, just to even tack on a little bit on that, Arnie, that while specifically in the oilsands, it is not as robust as it had been, we have a lot of really good, attractive opportunities outside of the oilsands. So our Canadian business is not just about the oilsands. We have great opportunities in other parts of Alberta. In Saskatchewan. In Eastern Canada. So there's a lot of good things going on.

And there's a lot of pipeline work going on in it as well that we are well-positioned to participate in.

So all-in for the upcoming year embedded in your guidance, what percent of your revenues do you expect from Canada, and do you expect it to be up year over year?

I don't -- I really -- you're giving us too much credit in terms of precision for the investment. I would say that Canadian growth for the year would probably be on par with or slightly less than the overall Company I would just say because of the very strong first half of last year. But we're expecting growth from kind of where we were in the second half of the year. I don't know if that's helpful.

Thank you.

Farah Afzal, KeyBanc.

Nice to see you back on track. This is great. It seems like you guys are back on track. I would love to get an idea of those large clients and the sort of overperformance versus what you were forecasting. Perhaps you can highlight what your expectations are, whether you feel bad conservatively going forward, and really the key driver for why you think clients probably expand scope a little above your expectations.

Sure. With regard to the kind of, I guess, increased revenues from large -- very large projects versus our forecasts, I think it's more a statement of our forecasting skills or experience than anything else. It's just very difficult with when projects get underway to know precisely how big they will be, and our field does the best they can with what they know and kind of what their estimates and sense of things are. And I think the fact that a few of them crept up in size, it wasn't that we got new customers that we didn't know about; it's that projects just got a little bit bigger. A few projects got a little bit bigger than they had been originally forecast.

So, again, I'm positive about our market position and as I mentioned several times, but I don't see that as indicative that it's a lot stronger that we had new conquests that we had not anticipated from that standpoint.

I think your next kind of question was just kind of related to revenue growth or whether it was conservative or not. I guess I'm going to say it somewhat facetiously as I hope it turns out to be, but I think it's a reasonable kind of baseline that we've used in past years that kind of reflects kind of just the fundamental advantages that we have and to continue to just edge out our business presence and activities. We didn't go through lots of the specifics, but as we have in past years, we've got a lot of initiatives underway to be more attractive to our customers and offer more capabilities, and we think those will -- that, plus just great service, will continue to be the basis for us to continue to grow our business. And I think it's a reasonable expectation. It's one that we have met or exceeded virtually every year, and we expect to do so again this year again to meet that level.

Regarding profit margins, what we're trying to basically do is just get back to basics and get back to where we've operated historically. And so I think that's a reasonable expectation. We have clarity on how to do it and kind of where the focus needs to be. Obviously we need to do it.

That's all for me, folks, and congratulations.

Rich Wesolowski, Sidoti & Company.

Good morning, Rich. Catena, I think we may have a connection issue there.

Please check your mute feature. We'll move to the next question. Charlie Redding, BB&T Capital Markets.

Just a little bit of a follow-up. Just kind of looking ahead to 2014 CapEx, are there any one-time items perhaps that we should be accounting for, or is it really too difficult to tell at this point looking ahead?

As we have in the last couple of years, we've expended on order of magnitude of about $5 million in each of the last couple of years on facility-related CapEx. I think that will still be true in fiscal 2014. So, again, I think that our total spend in 2013 was $26 million. About $5 million of that was facility related. Probably about the same order of magnitude for 2014.

Okay. Great. Thanks. And then really quickly, was there any impact on operations during the quarter from the Geismar fire in Louisiana back in June?

No.

Okay. Thank you much.

Tristan Richardson, D.A. Davidson.

Just a quick question. Past couple of quarters, you guys have talked about you seeing a lot of activity on the pipeline side. I'm sort of just curious, it's historically been mid-single digits as a percent of revenue. I'm curious where you see that going? I mean could it be as much as 10% or more this year or next year?

Well, that last two words maybe made it a little more difficult for me. I'm not sure about this year or next year, but longer term, as we look at the opportunities, we're excited about the -- expanding our service and kind of significant opportunities to expand our service in this area.

You know, with new construction there, we have historically had in the US small diameter pipe inspection activities in a number of areas. As we get to Canada, we also have the -- with our AUT capabilities have a chance to kind of participate in large diameter kind of pipe construction where automatic welders are installed or utilized kind of trailing those as well.

Where we are excited, I think, is just there is a growing interest in the industry, and we think we are well situated and have a lot of capabilities related to the inspection, monitoring and rehabilitation of existing kind of population or kind of existing installed pipelines. And they are aging, and there have been a lot of very high profile kind of failures that kind of, again, foster greater interest in, how do we as an industry do a better job of kind of monitoring and rehabilitating and repairing these systems appropriately and timely.

That's a great opportunity for us. We have some very advanced inspection capabilities at the Quest Group that are very active. Those are very active in terms of kind of inspecting on piggable pipelines and kind of getting insights into condition that heretofore wasn't impossible.

But in terms of true-up of those initial inspections and true-up activities and then rehabilitation activities and kind of managing projects related to those, rehabilitation activities are all fertile areas for us. We're dabbling in them now and kind of developing capabilities and kind of best and really learning how to make that best offering or kind of fine-tune that.

So longer-term I think it's a very exciting and very significant opportunity for the Company. But, to say that it will be 10% this year, I don't know.

I appreciate it, and then I appreciate the color on Canada. I know Europe is a small piece of your business, but I'm curious your sort of outlook or thoughts on Europe as far as growth or no growth or declines.

I think we are in the best part of Europe in terms of the northern Europe, and I think there is some indication that kind of things are stabilizing a little bit there. But I would just say that our opportunities in Europe are market share growth, not market growth. And we are -- we have a strong base in the Netherlands. We are expanding now into northern Belgium. We have presence in the UK. We're beginning to serve Germany from the Netherlands. But those are kind of I would say the near-term market opportunities for us, and we're looking at the -- we mentioned the valve services company. That was in the Netherlands, and we're integrating those services with our other mechanical services to that market and see some nice opportunities as well.

Your point is the right one, though, as is it's still a relatively small part of TEAM, and we don't expect it to be the needle mover in the short run.

Thank you, guys, and just one last one. In terms of your top line guidance for 2014, does it include any assumption for future acquisitions?

No.

Okay. That's great. Thank you, guys, very much.

Rich Wesolowski, Sidoti & Company.

Hello there. I apologize if this was asked. And if so, please disregard. But I was hoping you would flesh out something you had referred to on an earlier call this year, a business development effort in the pipeline integrity and program managing realm. I'm curious what services you are cultivating or bundling together, and what kind of scope you're aiming to manage there?

Well, actually, that was just the last call, but just to kind of briefly extend that a little bit, I would say it's still a work-in-progress as we are trying to kind of explore what the full range of service capabilities that would fit kind of within a service. But the ones that we offer today we have with the Quest smart pig, the true-up through our inspection services, and we have some project -- pipeline project management services, again, that is kind of part of a Quest group that is kind of working with that involved in pipe cleaning, pig tracking and kind of sometimes related to our in-line inspection services but not always.

On the mechanical services side, the biggest service we have is hot tapping, and we have some really high profile line connections and line isolations and line interventions kind of in that domain. I think what I mentioned I think what is yet to be determined or kind of will evolve over time is how and what kind of integration these services will make the most sense and offer the most value to our customers, and we continue to explore and work with them on that.

Thank you for the re-review. And secondly, lastly on Quest, you've gone from what was some $20 million you acquired, and it's approaching $60 million today. It's clearly more profitable than it was then, and I'm wondering, looking ahead is there continued leverage in the profitability as it continues to grow, especially in the pipeline tools, or do you approach some natural cap in the margin for that unit?

We'll be starting to report profitability because it's kind of one of our three business units beginning here in the first quarter. I think as you'll see, it's a little bit more profitable. It's incrementally because of the, again, the technology investments involved. For an incremental job, its margins are certainly higher than kind of our other field service activities of either of our other business groups. But on an overall profitability, it's somewhat higher, but not dramatically so, as you'll see the information. It's a few points higher.

I think there is probably kind of a diminishing returns to that operating leverage because of just the significant investment required to continue to develop new technologies.

Right. Then you have been pretty good for $43 million. You should --

Well, we love all our businesses, but they have been a great addition, and we're glad to have them on board.

With no further questions, I would now like to turn the call back to Mr. Phil Hawk for closing remarks.

Thank you, Catena, and I want to thank everyone for your participation in this call and your continuing interest in TEAM. We look forward to updating on our progress during this first quarter of our new fiscal year around the 1st of October. In the meantime, everyone have a good day. Bye now.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.