Team Inc (TISI) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 FY2014 Team Inc. earnings conference call. My name is Morris. I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Phil Hawk, Chairman and CEO. Please proceed.

Thank you, Morris. And good morning, everyone. It's again my pleasure to welcome you to the Team web conference call to discuss recent Company performance. Again, my name is Phil Hawk; I'm Team's Chairman and Chief Executive Officer. 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 third-quarter for fiscal year 2014, which ended on February 28. 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 reports.

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

With that introduction out of the way, Ted, let me turn it over to you.

Thank you, Phil. As usual, let me begin with the Safe Harbor statement. I want to remind everyone that any forward-looking information we discuss today is being provided in accordance with 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. And we assume no obligation to publicly update or revise any forward-looking statements made today or any other forward-looking statements made by the Company, whether as a result of new information, future events, or otherwise.

Now with that out of the way, for the financial results, our adjusted net income available to shareholders was $0.01 per share in the current year quarter versus a $0.01 loss in last year's quarter. The adjusted net income for the quarter excludes a $1.9 million pretax accounting loss associated with a revaluation of our net assets in Venezuela, as I discussed at length on our call on March 20.

Revenues for the quarter were $163 million. That's up 8% over last year's quarter, despite the weather issues that we discussed previously in our March 20 call. Now, here's a breakdown of those revenues by business group. First, inspection and heat treating revenues were $85.1 million, up $4 million from last year's third quarter. Mechanical service revenues were $63.4 million, also up $4 million from last year. And finally, Quest revenues were $14.6 million, up 43% from last year's quarter.

Now with respect to cash flow-related items, capital expenditures were $10 million for the quarter and depreciation and amortization plus non-cash compensation charges were $6.3 million in the quarter. Adjusted EBITDA was $7.3 million in the quarter and on a trailing 12-month basis was $76 million.

Now a further word about capital expenditures -- just after the close of the quarter, we opened our renovated and repurposed Alvin, Texas technology and training center that formerly served as our corporate headquarters. This campus has been transitioned to a world-class training, technical support, and equipment center and continues to house our manufacturing, engineering, and commercial support activities as well as our IT support functions.

The completion of this project concludes a two-year journey of upgrading our technical and training facilities and positions us well to continue to attract, train, and retain the next generation of skilled labor to meet customer demands over the coming expansion cycle. The total cost of the technology and training center will be about $9 million, including $6.7 million incurred through the end of the third quarter.

Also in the third quarter, we began in earnest the design phase of a major IT system upgrade, the implementation of a new ERP system for the Company. Over the past year, we have been evaluating and testing various ERP systems, and we are excited about the operating efficiencies and business process improvements we will gain from the solution we have selected. This initiative will be rolled out on a phased approach over the next two years with our US operations and corporate functions scheduled for full implementation by the end of fiscal year 2015. We expect the total cost of this initiative to be about $10 million to $12 million over the course of the next two years. To date we have incurred $2.7 million in capitalized cost, including $1.8 million in the third quarter. We will continue to apprise you on our progress with this exciting initiative.

Now, at the end of the quarter our total debt was $84 million and cash was $40 million. Therefore, our net debt was $44 million and our net debt to trailing 12-months EBITDA was 0.6 to 1. And with that, Phil, I will turn it back to you.

Thanks, Ted. Now I would like to supplement Ted's remarks with a few additional comments and perspectives on our recent performance and outlook. Rather than fully repeat the discussion from our conference call two weeks ago, my brief remarks are intended to expand upon that earlier discussion, providing a little more color and detail. All financial results referred to in my remarks will be adjusted results and exclude the non-repeat items described by Ted and set forth in our financial statements.

Ted shared the overall results with you. Total revenues were $163 million, up about $12 million or 8% for the prior-year quarter. As previously mentioned, we estimate that adverse weather conditions resulted in an approximately $6 million loss of revenues during the quarter. Adjusted earnings per share was $0.01 per share, due to both the loss of revenue and reduced labor utilization and related inefficiencies from this weather impact. We estimate that our adjusted earnings were lowered by approximately $0.10 to $0.12 per share as a result.

But for the weather challenges that were also felt by many others as well, our financial results would have been fairly close to our expectations. Job margins which are not directly impacted by the weather issues were similar to both the prior-year quarter and the most recent second quarter. Excluding weather-related issues, both gross margin and SG&A performance as a percentage of revenues would have been favorable to last year's third quarter and consistent with our expectations.

Now, let me provide some additional commentary and details on our specific businesses, beginning with the Quest Integrity Group. Quest had strong performance in what is also a seasonally weak quarter for this business group. Revenues were nearly $15 million in the quarter, up approximately $4 million or 43%. Operating profit and operating profit margins increased $1.2 million and nine percentage points, respectively, versus the prior-year period. Job margins improved slightly due to a richer mix of in-line inspection services. Gross margin increased substantially due to the operating leverage and the significant business growth.

SG&A expenses were significantly higher, about $2.1 million versus the prior year, reflecting the significant ongoing investment in new technology development, geographic expansion, and service capacity. Quest continues to have very attractive business growth opportunities in all of its primary segments, from inspection and related support services to engineering assessment and extending across the pipeline, process, and power industries.

During the quarter Quest's process business unit generated particularly strong growth versus the prior-year quarter. The variability of growth between business units is indicative of project timing and is not particularly unusual. We are pleased with this most recent performance and remain very encouraged by the business opportunities ahead for Quest's existing services as well as with newer market opportunities enabled by our commitment to innovation and proprietary technology development. I mentioned during the last call a few of these exciting specific growth opportunities that are in hand for Quest.

Similar to the discussion in previous quarterly conference calls, I will now discuss our remaining two business groups, inspection and heat treating services and mechanical services, together because the performance trends and underlying factors are similar. On a combined basis, the revenues of IHT services and mechanical services were about $149 million, up $8 million or 6% compared to the prior-year quarter. Operating income for the two business groups in the quarter was about $6.7 million, a decrease of $1.1 million from the prior-year quarter. Operating profit margin was about 4.5%, a decrease of approximately 1 percentage point. This margin decline is due entirely to lower gross margin performance, which in turn was impacted by the weather-related loss revenues and resulting inefficiencies in our indirect costs.

As mentioned in the previous call, job margins for both groups were very similar to the prior-year period. SG&A expenses for these business groups increased slightly versus the prior-year quarter and were consistent with expectations. I would also note that we have used the slower period to strengthen our business capabilities and processes through the review and strengthening of our operational management, ongoing refinements in our service delivery, and leveraging of new rapidly growing capabilities such as tank inspection services and rope access.

Looking ahead, our guidance for the current fourth quarter, ending May 31, remains unchanged. We expect total revenue for the quarter to be in the $210 million to $225 million range. This revenue guidance reflects a 5% to 12% revenue growth versus the prior-year period. As mentioned in our last call, we expect to participate in a significant number of turnaround and other projects during the quarter. The lower end of the range reflects our cautious posture that there may be some softness and possible scope reduction in the project work available, consistent with the guidance provided on our prior call.

The corresponding earnings for this revenue range is $0.65 to $0.80 per share, which would represent a significant increase versus the prior-year quarter.

To wrap up, let me highlight the exciting long-term business growth opportunities that continue to be available for Team. We serve a market with very attractive fundamentals. These fundamentals include: stable demand tied to necessary maintenance requirements of a very large installed base of facilities, combined with an attractive tailwind due to both a new energy infrastructure construction boom and a heightened industry focus on more progressive asset integrity management of aging infrastructure across all energy sectors; a large and diverse customer base with more than 10,000 potential customers in North America -- and remind you that no single corporate entity today represents more than 5% of Team's total business; and a fragmented competitor environment combined with growing customer preference to work more extensively with fewer, larger service providers, favoring companies like Team who have more broader, more integrated service capability and national or international service networks.

And we have demonstrated that we can serve our customers effectively and capitalize on these opportunities, as evidenced by our attractive long-term historical growth. And most importantly, our future opportunities are just as robust. Despite our considerable growth, our North American market share is less than 20%. Our structural advantages of broad presence, technical and operational depth and size, and a culture of service excellence will be more important than ever as our customers demand more from all service providers.

And Team will be able to continue expanding its presence to both additional complementary special services and current territories as well as in additional new markets beyond North America. We also fully recognize that great position and potential is not automatically great performance. We have to earn our customers' continuing trust and confidence every day with safe, effective, and responsive service and support. And we intend to do just that. We look forward to a strong finish to this fiscal year and continued strong momentum into fiscal 2015 and beyond.

That concludes our remarks. Morris, let me now turn it back to you and open it up for questions.

(Operator Instructions) Matt Duncan with Stephens Inc.

Phil, first question I've got -- you made a comment that at the low end of the range, that's just reflects the cautiousness that maybe you could see some deferrals of projects. Have you seen any of that yet, or are things so far -- beyond the weather-driven deferrals, are things so far proceeding on schedule?

I think we are off to a good start in the quarter. I would just remind you we are just getting started and it's a long quarter. So the key to our growth or where do we end on that range will be really how the entire scope of business is sustained throughout the entire quarter. So I think it's too early to tell, and we are not really changing our point of view at all at this point.

Sure. In terms of wage inflation (multiple speakers) -- go ahead, Ted.

Yes. I was just going to say, just a reminder from our prior call, that the quarter did start to ramp a little slower than usual, we think, again, because of the continued weather in the first couple of weeks of March. But we are fully ramped right now.

Okay. In terms of wage inflation, I know the last few years it has been much lower, but I think maybe six, nine months ago you guys started to see that creep in a little bit. And it sounds like maybe it's expected to get even greater in the future. Where are you seeing wage rates right now in terms of how much are they up and what is your expectation for 6, 12 months down the road?

It's a bit of a mixed bag in terms of we are seeing significant wage pressure, particularly with respect to inspectors, again particularly on the Gulf coast. And many of our wages there are up 8% to 10% year over year. Haven't really seen it nearly as much in other parts of the country or in other skilled labor categories, if you will.

Okay. And the last thing for me -- we have talked a lot about Petrochem, and obviously you have one an LNG export terminal inspection contract, which is clearly part of this coming cycle. But one other thing that I guess could drive some volume for you guys and excess demand would be these tier 3 vehicle emissions standards that are coming in 2017. Have you talked to your customers much yet at this point about what sort of things they are going to need to be doing to prepare for that, your refinery customers, and what that might mean for you guys?

Honestly, Matt, we really haven't engaged on that particular issue. So I don't really have any kind of perspective to share on that.

Okay, fair enough. Thanks, guys.

Tahira Afzal with KeyBanc.

Good morning. This is Saagar on for Tahira. First question, around Quest -- I know you mentioned in your prepared remarks that fiscal third-quarter does see seasonality. But if I'm going to look back at your prior comments, you guys had guided for the full year something around $70 million in revenue for Quest and $11.5 million in operating profit, which implies a very big ramp in the fiscal fourth quarter. Can you just give us any color on those numbers or if we should still expect that kind of ramp up in the fiscal fourth?

No, I think that's pretty close to what we are expecting. We are not changing that perspective.

Okay, and then I know we are still in the midst of spring turnaround season. But any color you can provide a quick you are hearing from your customers in terms of the fall season? And we know that projects over the last couple of years -- it seems like they are being broken up a bit more and spread out. Any early indications from the customer side?

I don't have a lot of specificity to share on that. I would just say broadly or generally it's a bullish perspective, that there's a lot of activity, obviously a lot of new construction along the Gulf. But it's generally an active and busy time. So, we are encouraged by the tone of what we are hearing.

Perfect. Thank you very much.

Arnie Ursaner with CJS Securities.

First, just a mechanical question for Ted. You had about a 100-basis point decline in your EBITDA margin in mechanical services. Is it simply weather?

Yes. Well, it's largely weather, Arnie. We are probably impacted more in mechanical services than any other group with respect to weather. So that plus the rebalancing issues in Canada over the course of the last year have really impacted that margin.

It would be more of a year-to-date guesstimate there, for sure.

Yes.

Okay, and then just going back to Quest, which seems to be the topic du jour, you had two very exciting technologies, HYDRA and [10X] that you have been developing. You are obviously excited about the growth prospects. Can you size the opportunities for these? And looking at the Q3 margin in Quest, it was well -- your EBIT margin was well below both the year to date and your goal for the year. How much of that is investments to grow these exciting opportunities? So size them and the cost of sizing them, the cost of growing them.

Just a couple of points of clarification. I'm not really in the position to kind of -- other than say they are very, very large, I don't have a lot of specificity on size. The 10X control technology is basically the -- it's the backbone of our data management and sensor management technologies for all of the ILI tools. So it is not itself a product; it is an enabler for the next generation of tools. And services that we will use. So it will affect everything that we do.

Basically takes us to a high definition from standard definition, if you will.

The HYDRA technology is basically, if you will, spanning from, I'm going to say, the small tubes and process work of the FTIF service lines of Quest to the InVista, the bigger pipeline. So it's a shorter lines and piping systems. It's what the HYDRA, by the way, is the basic base technology that's being used in the nuclear industry for some of the concrete and case piping inspections that we mentioned are exciting new opportunities.

So these are very large markets and very exciting. So I don't have specifics for each of the individual components to share. But we are very, very excited about the growth opportunities.

Well, HYDRA was a test program. Has it now expanded to more commercialization from your key customer?

In the nuclear energy we still just have to -- yes, because we issued a paper with the participating nuclear plant. Because of the actual [that we will run] full test runs on identical systems with them, the actual run in their plant was pushed to June due to, frankly, the fact that the engineers are in Japan helping out on some of those issues from a year or so ago.

Just a real simple question, if I may -- on Bakersfield, California you indicated you opened a branch for two significant new customers. Can you expand on that at all?

What we are doing is providing broad-based inspection services related to the E&P and then related processing activities up in that area.

Thank you.

Tristan Richardson with D.A. Davidson.

Just curious on the Quest business, you guys talked about the in-line work and the process business performing very well. And I'm curious. Am I thinking about it the right way? Are those types of scopes of work somewhat less susceptible to weather, just because of the work being performed? Is that fair to say?

Well, I would say that there's a lot -- if we look at in-line work done in pipeline activity, it has more challenges due to its reliance on set-up activities and pre-job cleaning activities of that sort. So, we tend to have more delays and changes in schedule related to some of the pipeline work, just inherent in the nature of that type work. But I think when you are frozen out -- first of all, it's a very short time period. So it's easy to catch back up. But the weather that caused us this kind of sit down in the mechanical and IHT services was just frozen roads and severe cold. They would also affect the Quest services. They would be unperformable on those dates. It's just the timeframe. It's more condensed work, I think, for the Quest work.

Got you, okay.

Just to elaborate a little on that, relative to our estimate of lost revenue for the quarter, Quest was also in that boat, and about $1 million of pipeline-related activity was deferred because of weather.

Okay, okay. That's helpful. And then, Ted, just on the ERP schedule, you talked about two years and $10 million to $12 million. Will any of that the expensed, or should we expect most of that just to be capitalized?

Most of that will be capitalized. There are elements of expense, and as we incur those we will call those out to let you know what that is. Basically, it's training costs or the cost of training personnel is expensed. All of the design and really fundamentally everything else is capitalized except for that.

That's helpful. And then you just talked about over the past year you guys have added a couple of new service lines, namely tank inspection and then your rope acquisition. But I'm curious. As you look forward, what are some interesting service lines or things that we should be thinking about that same attractive to you that you guys would like to add to the punch list or the portfolio?

Tristan, I think the range of possible services is broad. Rather than just to speculate on the -- to me, let's go back to what are the requirements for something to join our portfolio. I think that's maybe the more helpful way to think about it.

First of all, it has to be a service that's complementary, obviously, to the same customer groups. It has to be a service where the skills or capabilities have similar requirements as ours. So this is going to be specialized services delivered on the decentralized basis, generally with small crews. Those are the things that we have good skills to do.

But as importantly, there has to be a good cultural fit within any business that we would consider bringing aboard, a part of Team. So operating philosophy, kind of fit of their management teams, a clear path forward of how that management team will join us and how we can accelerate the growth of our combined businesses by the fact that we are together. Those are going to be the key, as they have been historically, the key drivers of our kind of the focus and activity. So it could be new capability, as you said. It could also be new geographies in some areas if we have those other components that fit.

So, I think it's a broad range of capabilities. But just to list things that could fit that don't have maybe these other components I don't think would be helpful to you, frankly.

Understood. Okay, thank you guys very much.

Charles Redding, [BD Net Capital Markets].

One last follow-up on Quest nuclear -- are there additional permitting requirements on these nuclear jobs that could impact bidding opportunities in select areas?

You mean, do we require other another -- additional permits to do the work?

Sure. Is there -- just from a state level, regional, federal, what have you, in terms of permitting (multiple speakers)?

Not to my knowledge. No, I don't think there's other permitting issues I'm aware of. I would just observe this, is that with our kind of successful -- and again, we have that -- as I said, we have done a complete test run with the plant. The actual final run will be in June. But with a successful run and a successful presence in the industry, our expectation is that it would be extremely unlikely that there would be other service providers in the near term providing that service, just because of the demonstrated success of this approach and technique. So that's not a permit, per se, but I think just the confidence that the industry will have in the solution because of all the development work and demonstrated success that has taken place.

Great.

Just a reminder, Charles, that this work is driven by a NRC directive relative to the requirement that these cased piping systems be inspected and an industry process of selection of the methodology. So, it's not something -- we are at the end of the beginning, if you will.

Sure, that's very helpful. Thanks. And then real quick, have you seen any uptick in inspection demand or really any new regulatory overtures following the March explosion in New York, the natural gas explosion in Harlem?

No, not related to an event like that, no.

Okay, thank you very much.

Thank you. And you have no further questions at this time. (Operator Instructions) And there are no more questions at the moment.

Well, then, I'll just take the call back here, Morris. And just let me -- to wrap up, let me thank everyone for your participation in this call this morning and your continuing interest in Team. We look forward to updating you on our progress during our year-end conference call that will take place in late July or early August. In the meantime, everyone have a good day.

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