Team Inc (TISI) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter fiscal year 2015 Team earnings conference call. My name is Derek and I will be your operator for today. At this time, all participants are in a listen-only mode. We shall facilitate a question-and-answer session at the end of the conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Phil Hawk, Team's Chairman. Please proceed.

Thank you, and good morning, everyone. Again, it's my pleasure to welcome you to the Team web conference call. Again, my name is Phil Hawk. I'm the Chairman and CEO of Team. Joining me again this morning is Mr. Ted Owen, Team's President and Chief Financial Officer.

The purpose of today's conference call is to discuss our recently released financial results for the Company's first-quarter that ended August 31, 2014. As with past calls, our primary objective is to provide you with an enhanced understanding of our Company's performance and prospects.

Ted will review the financial and operational results for Team overall, as well as for each of our business groups. I will follow Ted with a few additional perspectives on our performance and outlook. And then following these remarks, we will take questions from our listeners.

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

Thank you, Phil. First, as always, 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've made reasonable efforts to ensure that the information, assumptions and beliefs upon which this forward-looking information is based, are current, reasonable and complete. However, a variety of factors could cause actual results to differ materially from those anticipated in any forward-looking information.

A description of those factors is set forth in the Company's SEC filings. Accordingly, there can be no assurance that the forward-looking information discussed today will occur, or that our objectives will be achieved. And we assume no obligation to publicly update or revise any forward-looking statements made today or any other forward-looking statements made by the Company, whether as a result of new information, future events or otherwise.

First, I will summarize the financial results for the quarter, and then I will provide a little more color about our operating results before turning it back to Phil for his comments on our outlook. Adjusted net income available to shareholders was $0.34 per share in the current-year quarter versus $0.23 in last year's quarter -- an improvement of 48% or $0.11 per share. The adjusted net income for the quarter excludes $200,000 in transaction costs related to an acquisition in the UK that we completed on the last day of the quarter.

We are delighted with our start to the fiscal year. Our adjusted EBIT margin improved 1.3 percentage points in the seasonally weaker quarter to 6.4% of revenues compared to 5.1% in last year's quarter. That reflects operating leverage [up] 23% on overall revenue growth in the quarter. As a reminder, operating leverage is measured by the change in EBIT divided by the change in revenues. 23% is excellent operating leverage in the quarter.

Why did it happen? Because of our focus on cost control, pricing and quality initiatives across all our business units, which Phil will discuss further in his remarks.

Overall, revenues were $188 million in the quarter, up 8% over last year's quarter. And we are particularly encouraged by the fact that our overall US growth rate was 12% in the quarter.

Now let's discuss our business unit performance in more detail. As you all know, we are organized into three business units -- Inspection and Heat Treating, which accounts for a little more than half our revenues; Mechanical Services, which is about 35% of our revenues; and Quest Integrity Group, which is about 10% of our revenues.

First, let's discuss IHT, or Inspection and Heat Treating. Total IHT revenues were $106 million in the quarter, up 10% compared to the first quarter of last year. $87 million of those revenues are from inspection services, both traditional NDE and advanced services. Total Inspection services grew 13% over last year's quarter, so we are continuing to see nice double-digit growth rates in our Inspection business.

IHT's heat treat services were relatively flat year-over-year. These services are generally associated with project or turnaround activities, and represented about $19 million of IHT revenues in the quarter, about the same as last year's quarter -- again, recognizing that the first quarter is a slow period for project activity.

Now let's shift the discussion to Mechanical Services. In total, Mechanical Service revenues (technical difficulty) [of $68 million] for the quarter were up 3% over last year's quarter. Onstream, or under pressure services, comprise about 60% of total revenues for Mechanical Services, and turnaround or project services are about 40% of Mechanical Service total revenues.

As we've discussed previously, last year was a transitional year in Mechanical Services, with new leadership in several locations, and enhanced focus on quality and job execution. We have also adjusted to an environment with fewer large projects, especially in Canada, where we had been overweighted toward new upgrader project opportunities. However, Canada is a particularly good story in the quarter for Mechanical Services. On relatively flat revenues, we improved operating income by 300%.

But that is just one story. We are also pleased with our performance and progress across many of our Mechanical Service regions.

We are also pleased to announce a recent addition to our Mechanical Services family. On the last business day of the quarter, we completed the acquisition of a specialty mechanical service business in the UK. This acquisition will add about $10 million in revenues, and will significantly enhance our footprint in the UK, as well as being an important addition to our European network. We welcome our new colleagues to Team.

And now let's talk about Quest. For the quarter, Quest revenues were $15 million, up 16% over last year's first quarter. Like the rest of Team, Quest's first quarter is traditionally a seasonally weaker period, with fewer process industry opportunities in the way of heater inspection projects.

You will recall that last year, Quest got off to an extremely slow start to the year -- actually losing $700,000 in the first quarter of fiscal 2014. So the good news for us this year is that we avoided that slow start. On a quarter-over-quarter comparison, our operating profit improved by $1.5 million on revenue growth of $2 million.

And in our last call, we talked extensively about capacity expansion at Quest -- personnel, equipment and infrastructure, as well as capability expansions; the continued development of next-generation ILI tools. Our next generation of smart pigs will address higher resolution and higher speed, pressure and temperature tolerances, all while maintaining the navigational capabilities that have made us the leader in difficult-to-inspect piping infrastructure in both pipeline and process industries.

We will begin commercial introduction this quarter of these high resolution tools. I liken the high resolution capability of these tools to viewing ultra HDTV versus standard definition TV, enabling better-informed condition assessment, as well as providing operators with enhanced confidence in their integrity management programs. So Quest is also very well-positioned as we move into the busy part of our year.

So wrapping up the commentary on the quarter, we are off to a really good start for fiscal 2015. Now, with respect to cash flow-related items, capital expenditures were $5.5 million in the quarter. And depreciation and amortization plus non-cash compensation charges were $6.5 million in the quarter. Adjusted EBITDA for the quarter was $18.5 million, and for the trailing 12 months was $81 million.

At the end of the first quarter, our total debt was $71 million, down about $3 million from the end of Q4 of fiscal 2014. At quarter-end, total cash was (technical difficulty) [$31 million]; thus, our quarter-end net debt was $40 million, and net debt to trailing 12 month's EBITDA was 0.5 to 1.

Now let me ask Phil to discuss our outlook a little further, share with you a few comments about the status of our leadership transition plan, as well as a brief update on some of our key performance initiatives. Phil?

Thanks, Ted. To begin, let me say that I'm encouraged by the improving momentum in our business. As was mentioned in our earnings release, this is the third consecutive quarter of earnings performance improvement by Team. Our profit improvement reflects both our business growth as well as margin improvement.

While we still have more progress to make, we are beginning to see positive results from our improvement initiatives. With regard to the latter, we are focused on several key performance drivers. They are -- providing outstanding customer service with every service opportunity.

While this is certainly not a new area of focus for Team, over the past year, we have strengthened several aspects of our business processes in this regard. As examples, we enhanced and expanded our technician training capabilities with the completion of our new world-class technology and training center in Alvin, Texas. We introduced improved at-the-job service checklists for greater support and consistency, and we placed one of our Region Vice Presidents in a newly-created position of Vice President of Quality to lead our expanded Quality program.

The second key performance driver is maintaining and/or improving our job margins. Our focus in this regard is on keeping prices and customer rates in line with increases in our technician labor rates, and on improving the mix of more advanced services. We are pleased with our progress in both of these areas.

And the final driver is balancing Team resources and costs with overall demand and revenue opportunities. We now have addressed many of the significant issues related to both fewer new upgrader projects in the Canadian oil sands, as well as to the timing of large turnaround projects in some US regions. But we remain focused on continuing to fine-tune our operations and capture additional opportunities in this area.

Overall revenue growth in this quarter was a little below our target, but there are encouraging indications here as well. Inspection Services, our largest service line, continues to grow well above the 10% rate. The same is true for overall -- Team's overall US business, reflecting favorable conditions for most of our service offerings.

Looking to the remainder of the year, we remain comfortable with our $2.00 per share budget for the current fiscal year. There are a number of reasons why we continue to believe that this is a reasonable expectation. We expect active turnaround and project activities in both the fall and spring turnaround periods this year. We have a number of significant new or expanded customer relationships, which we expect will further expand our business activities.

We expect to be growing again in Canada. And we expect our focus on key performance drivers, service excellence, and outstanding execution, to continue to drive improved margins. It is now up to us to capitalize on these opportunities and earn it. And we are committed to doing just that.

Let me end with a brief update on our leadership transition process. As most of you are aware, we announced a leadership transition plan in July in which Ted will become Team's President and CEO, and I will shift into the role of Executive Chairman. The specific timing of these moves is tied to putting Ted's CFO successor in place. We have an active search underway and are making good progress in that regard. Of course, until we have the new CFO identified and placed, we cannot know with precision exactly what the timing will be.

That concludes our remarks. Let's now open it up for questions. Derek, can I turn it back to you?

(Operator Instructions). Matt Duncan, Stephens Inc.

Just real quick on the internal budget, the $2.00 earnings number, I think you'd given us a $842 million revenue budget target. Is that still a good number?

Yes.

Okay. And then the questions I've got on Quest, you guys had seen some project deferrals there back in the fourth quarter. I think there's some question from the analyst community when those might flow back through? I get that that's a seasonal business, like the rest of your business. So should we expect to see a pretty good uptick at Quest here in the November quarter? And is that when you're going to see some of those project deferrals start to come through?

Yes. Well, I think some of them we've already started to see in the first quarter; again, these are pipeline projects predominantly. We do have a good backlog of activity that's falling into the second quarter as well. So, yes, as we had said in our last call, we expect the deferrals from 2014 to fall into fiscal 2015. Specifically what quarter is not -- I'm not -- I don't have that data on exactly when, but we do expect those projects to appear in 2015.

Okay. And then lastly (multiple speakers) --

Just as a little more color on that, Matt, there, the -- as Ted mentioned, I think, in his remarks, the process part of the business, it's roughly half and half. The process ILI business is highly seasonal because of the turnarounds. Pipeline, less so. So, you'll see a kind of a smoother flow of pipeline revenues.

So we have that because of the seasonally weaker process industry business in the first quarter, you would see a kind of a richer mix of pipeline business (multiple speakers) in that quarter.

Got it. That helps, Phil, thanks. And the last thing you guys mentioned, your expectation that you will have a pretty good fall and spring turnaround season. We are about a month into that fall season now. So what are you guys seeing out there? Are project deferrals still happening? And if so, are we seeing fewer of those than we did back in the spring? Just update us on sort of what you are seeing in the end market there.

Yes. Matt, we're not seeing, and at least for our customer base, any significant project deferral. We've got about a month of activity into the fall turnaround season. Our activity levels are quite good. So we expect a very strong fall season based on the activities that we've seen so far.

Okay. Very helpful. Thanks, guys.

Arnie Ursaner, CJS Securities.

Phil, in your prepared remarks in terms of growth opportunities, you mentioned two things that caught my ear. One is additional customer relationships, and the other is an expectation that you're going to see a renewal of growth again in Canada. Could you expand on both of those? On the customer relationship side, who do you think you're gaining share from and why? And then in Canada, given we still don't have a pipeline and are actually seeing some weakness in the price of crude, why you're positive that we'll see a pickup in Canada?

Sure. They are really both for the same related reasons is -- remember, again, we are a long-term, high-growth, high-organic-growth story. And the reason is, is that customers continue to consolidate with fewer larger, more professional service providers.

So if we are an outstanding service company, and provide excellent service kind of trends, and kind of customer preferences favor us and kind of drive growth. And we are seeing that and there -- we're seeing that in kind of expanded customer relationships. We don't kind of as a habit kind of go name individual customers, but we have several significant customers where we have expanded roles that we look forward to more revenues this year.

In the case of Canada, it's just kind of getting the adjustments behind us. It's not that we -- our kind of core business wasn't kind of creeping up, but we had to adjust for the massive kind of downturn and the big upgrader project base. That's really behind us. It's no longer kind of in our comps, so we are going to see -- again, it all depends on execution, but we are confident in that respect. But we just see it's a great -- it's always been a great market. We were just out of balance, and now we expect to grow.

So, again, if I can follow-up on both of those again. On the -- when you are gaining share, if you will, without mentioning the name of customers, I am more intrigued by, are you gaining it from the mom-and-pop's? Or are you gaining it from other national providers that maybe weren't able to do the quality of work that you're doing?

I think the systematic advantage we have is against the mom-and-pop's. There is always kind of ups and downs kind of versus individual other companies. But I wouldn't proclaim those to be any trends or anything that -- at least that we see.

And going back to Canada, just to clarify -- is this project work? Or is this still the normal everyday work that you do where projects are still being deferred?

It's -- while there are some turnaround projects is part of it, it's a mix of business that looks more like the lower -- the US business. So it's a mix of kind of ongoing maintenance activity along with project activity (multiple speakers) -- they're turnaround.

(multiple speakers) Thanks.

Edward Marshall, Sidoti & Company.

Listen, I wanted to -- I thought you had a pretty decent quarter on Quest, and I wanted to kind of circle back to some comments that were previously mentioned, I guess, in the fourth quarter, talking about some of the revenue growth expectations there. And the way I understood it is, it is a 20% topline grower this year. And you are just shy of that in 1Q. And maybe I'm being a little nitpicky, but I'm just curious if you could update us. Is it something to do with maybe just the timing of the weakness in the quarter? I mean, the comparisons are pretty easy comparisons 1Q to 1Q. I'm just kind of wondering if you had an update, particularly in that segment.

Yes. Again, I think we are -- as we've indicated previously, Quest is a 20% growth business on balance for -- over the course of the year. There is some lumpiness to that. In the first quarter, we had great strength in our pipeline business; we had a little weaker performance from a growth perspective in our -- in the process part of that business.

But again, we are off to a good start for the year. We are on target with respect to where we thought we would be with Quest from a growth trajectory, so it's not a 20% per quarter. There's the same degree of lumpiness in that business, as Phil indicated a couple moments ago. So we are on track and are pleased with our start for the year.

And when you talked about the introduction of higher-resolution, higher-speed capabilities in that segment, is that kind of factored into that forecast? Is that going to be a noticeable difference in the growth rate for the business to move forward?

I think -- it's baked into the growth rate. It's part of that continued 20% growth rate.

Thank you, guys.

Tristan Richardson, D.A. Davidson.

Not to pick on Quest or anything, but I'm just curious -- you know, you talked about being comfortable with the margins in this quarter and, obviously, a seasonally lower period. I mean, are single-digit margins -- I mean, is that sort of a reasonable expectation for Quest in the off-season quarters?

I think it's -- we always aspire to more, but it's -- again, we are not unhappy with the performance by Quest in the first quarter in the least. Remember, again, that we have a continuing investment in next-generation tools that, frankly, we don't slow down or modify, depending upon what the kind of the quarter-over-quarter growth rates might be. And the reason we don't is because we are looking beyond the quarter.

And so a -- Quest operating margins for the quarter were about 5%. Remember, again, there's high incremental margins on kind of the next project. So as revenue ramps up for Quest, so will operating profit. So, again, we look at Quest on a year-over-year basis and not on a quarter-to-quarter basis.

Sure.

Yes, I think just kind of elaborating on that, I mean, to kind of cut to the chase, our job margins remain very good and very stable in Quest. And they actually were a little bit improved in our other two groups that, frankly, where we had a little bit of slippage historically in the back. So, back to kind of our basic economic drivers, we feel pretty good about it. And then the -- kind of the volumes will be -- will take care of themselves, we expect; but it just reflects the seasonality.

Sure. No (multiple speakers) --

I'd just point out again, too, if you think back to a year ago, when we got off to a really slow start with Quest (multiple speakers) --

Right.

-- even an operating loss in the first quarter, we said then that we weren't worried about Quest even with that slow of a start. The same is doubly true right now. We are not in the least worried about where we will be at the end of the year.

No, that's helpful. Thank you, guys. And then I guess just the follow-up -- in terms of your expectations for the fall, I think your commentary was you're excited; you're seeing more come in, in the first month of the season. And I guess I -- just recalling from a year ago, I mean, it should make for somewhat easier comps, given that you saw the big decline from large projects, and I know that's where the leverage pays off. But I'm curious what the large project profile is looking like for the fall season?

Well, it's looking -- I mean, it's actually quite good for us. I mean, we have a few significant projects -- again, in our customer base is the timing of turnarounds. So, again, just based on the projects that are falling for us and the activity levels through the first month, we think we are going to have a very strong fall turnaround season. But as we have said before, saying it and doing it are two different things. And which -- so, let's just do it and we'll see. (multiple speakers)

Absolutely. (multiple speakers)

You are correct, though, Tristan, and we'll acknowledge your point that compared to, say, last year, where we were comping to a very strong prior year, that we have -- our comps are a little more favorable this year than they were last year. So that will help our percentages, if you will. I think just in absolute sense, as Ted said, it's -- we're -- we kind of -- we have strong expectations and are off to a good start.

Great. Appreciate it.

Tahira Afzal, KeyBanc.

Congrats on (multiple speakers). I guess a lot of my questions have been answered. Just had a couple more. And sorry to belabor already the progression of Quest during the year, but if you look at last year, obviously, second-quarter fiscal quarter was the high point in Quest revenues.

And if you look at the sequential ramp last year from first to second versus how we should build out this year, would you give us a bit more guidance so that we are not overbuilding Quest, if that be the case, into the second quarter?

And then I guess the second question was just on in terms of labor costs, et cetera. You know, you've seen maybe some of the markets on the construction side in terms of labor sort of slow down a bit; projects are rolling out a little more slowly in Texas. So would like to get your thoughts if that's providing you some leeway, or whether it's making it more difficult for you to pass costs on to your customers?

Let me talk to -- again, to the Quest revenue progression. Again, the -- like the rest of Team, Quest will have a stronger revenue profile in its second and its fourth quarter. And that's kind of the heart of the year for Quest because of really high -- again, very high incremental operating margins on a project-to-project basis. You know, again, about half of its business is associated with process industry.

So, in line inspection of heaters in the process industry. And again, that's associated with turnarounds. And those happen in the second and the fourth quarter. So, pipeline is steadier. But I think we have -- we've indicated and hope that for the year, we expect Quest to have revenues in the order of magnitude of about $80 million and operating profits of (technical difficulty) [15%] of that. And you should weight that toward the second and the fourth quarters.

Tahira, just on that, the challenge -- well, it's a challenge for modeling. It's not a challenge for the business, per se, is that because projects relative to the size of the business tend to be larger, it's lumpier. And because the margins, the incremental margins, are high, that makes it more significant in terms of just the swings.

So that's just the common nature of the business a little bit, is it is just kind of inherently a little more lumpy, and I appreciate the challenge it has for modeling. But it's not something that we are particularly concerned about operationally.

Your last one was labor (multiple speakers) --?

Yes, labor costs. Again, I think we are -- you are correct, that projects are coming in a little slower than expected, although we are starting to see new construction activity that is starting to benefit our business; although, as we've said, and others, we think the peak of that is probably another year away.

We have seen labor cost increases in particularly some of our -- certainly, our higher-end specialty services, higher-end inspection and other more advanced services. We are starting to be able to get relief on that. So we are getting some wins under our belt in terms of being able to pass cost increases to our customers.

I don't think that we are on balance all the way there yet. But the -- it has not been the issue for us that it might have been, and I think we managed through that so far relatively well. But again, as I indicated, I think the -- we are still in the front end of it and not at the peak of tight labor markets yet.

Got it. Thank you, folks.

(Operator Instructions). Adam Thalhimer, BB&T Capital Markets.

I was hoping to ask a question first off, just on the mindset of your refinery customers. Because it feels like it's been a year or two since we've had one or two robust turnaround seasons in a row. I mean, do you feel like there's any pent-up maintenance demand out there?

You know, I don't sense a pent-up demand; I sense strong demand. And a kind of -- Mother Nature, as we've talked before, is pretty persistent, and so the need for kind of the basic maintenance activities is always there. The plants are running; they are running. And I think there's -- if there is a little bit of a good favor to us, it's, again, because the reason our comps are a little better this year than last year was kind of just the circumstance of kind of the timing of customers, where we had the strongest relationship.

So, to the extent that they're -- that we are kind of back in the cycle a little bit on that, that's probably a little bit of a help to us. But I really don't think the industry is -- I think there we are maintaining plants, and our level of turnaround activity is kind of consistent with what we would expect. And I don't have -- don't have really much -- I don't see much in the way of any industry trends to kind of change kind of their pattern.

Well, I hear a lot about rumors of the refiners are doing smaller, more frequent turnarounds, and maybe they are underinvesting in the plants; but that's not the way you see it?

Not from where we sit, Adam. And again -- we are a little myopic in our vision, because we're -- our point of reference is our customer base. Right? And so it doesn't necessarily -- you know, our experience doesn't necessarily reflect an industry trend one way or the other; it's just kind of how our customers are behaving, if you will.

And from where we sit, and we don't see any particular change in behaviors, we don't see projects that were 2x three years ago being a 1x project this year. So, we don't observe that if that's so.

There are some very, very large turnarounds we're involved with this year. There are also some smaller ones. Where those smaller ones used to be one big one, there's now three smaller ones. Honestly, we don't track every plant like that. So I don't know that we would have a point of view one way or the other. But we certainly don't have a kind of a premise that this -- that it's changing in a big way.

So then for your customer base, I mean, you said there's potential for some very large turnarounds. Is there any way to -- I'm not sure how we think of what a very large turnaround -- I think you previously have said over $1 million in revenue? I can't remember.

Yes. (multiple speakers) We track them all now, given our kind of flat-footedness a few years ago. But I think the larger groups that we've had is greater than $2 million, and there will be several of those this year.

Okay. Thanks, guys.

Yes.

At this time, I'm showing no further questions in queue. I would like to turn the call back over to Mr. Phil Hawk for any closing remarks.

All right. Thank you, Derek. And on behalf of both Ted and me, we want to thank all of you for your participation in this call and your continuing interest in Team. We look forward to updating you on our progress during our second-quarter conference call in early January. In the meantime, everyone have a good day.

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.