Team Inc (TISI) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Team Inc. second-quarter 2016 earnings conference call. (Operator Instructions). As a reminder, today's conference may be recorded.

I would like to introduce your host for today's conference, Mr. Ted Owen, President and Chief Executive Officer. Sir, please go ahead.

Good morning. Thanks, Michelle. Again, my name is Ted Owen. I'm the President and CEO of Team. Joining me again today is Greg Boane, our Executive Vice President and Chief Financial Officer. The purpose of this call is to report on our second-quarter earnings, update you on the status of our business integrations and on our end markets, and to share with you the excitement about the platform we are building for 2017 and beyond.

This call will contain forward-looking information within the meaning of the federal Safe Harbor provisions. So I'll ask a Greg to read the full disclaimer relative to forward-looking information, and then go over the second-quarter results, after which I will provide more color as to our business outlook and integration activities.

So, Greg, with that?

Thanks, Ted. Good morning. I'll open with our Safe Harbor guidance. Any forward-looking information discussed today is provided in accordance with 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.

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.

The discussions today will also include certain non-GAAP financial measures. We have excluded certain non-routine items that we believe are not indicative of Team's ongoing operating activities, when arriving at adjusted net income, adjusted EPS, adjusted EBIT and adjusted EBITDA. All of these are non-GAAP financial measures. Reconciliations of these non-GAAP adjusted financial measures are provided in our quarterly earnings release.

I'll now focus on the results for the current quarter versus the prior-year quarter by walking down the income statement. We reported current-quarter revenues of $336 million, an increase of 43% over the prior-year quarter. GAAP net income was $7 million or $0.25 per diluted share versus $0.65 per diluted share in the prior-year quarter.

Non-GAAP adjusted net income was $11 million or $0.37 per diluted share for the current quarter versus $0.79 per diluted share in the prior-year quarter.

Current results include the results from Qualspec, which was acquired in July 2015, and Furmanite which was acquired in February 2016. In March 2016, we began integration activities; and certain business operations, locations, and technicians are in the process of being consolidated and/or transferred into legacy Team operations. As a result, the discrete stand-alone financial information of the acquired businesses for 2016 is no longer readily available, and we are not managing Qualspec and Furmanite as stand-alone business units.

In order to help you understand significant variances between the two quarters, I'll be comparing current-quarter revenues to prior-year quarter revenues on a pro forma basis. The following prior-year quarter revenue information is on a pro forma basis, assuming the Qualspec and Furmanite acquisitions had both occurred on April 1, 2015. As a reminder, we report results in three operating segments: TeamQualspec is our inspection and heat treating business. TeamFurmanite is our mechanical services business. Quest Integrity is our proprietary in-line pipeline and process equipment inspection and advanced engineering assessment services business.

Current-quarter consolidated Team revenues were $336 million and declined $35 million or 9% compared to pro forma revenues of $371 million for the prior-year quarter. The three major components of the 9% decrease in revenues are as follows. First, heat treat revenues were down $11 million or approximately 38% in the current quarter versus the prior-year quarter. Heat treating is a specialty TeamQualspec service with higher demand during large turnaround projects.

Second, Quest Integrity revenues were down $5 million or approximately 19% in the current quarter versus the prior-year quarter. Quest Integrity has been impacted by continued project deferrals with their pipeline and process equipment customers. The prior-year quarter also included a large international pipeline inspection project.

Third, Canadian oil sands area revenues were down $5 million in the current quarter as fires in the Fort McMurray, Alberta, region led to emergency facility shutdowns and evacuations of all personnel for approximately 2 months of the quarter.

Excluding the three major items, Team's current quarter revenues were down approximately $14 million or 4% compared to pro forma prior-year quarter revenues.

Following the same approach for the segments, TeamQualspec current-quarter revenues were $157 million and declined $17 million or 10% compared to pro forma revenues of $174 million for the prior-year quarter. After adjusting for reduced heat treating revenues of $11 million and Canadian oil sands disruption of $1.7 million, TeamQualspec revenues were down $4 million or 3% compared to pro forma prior-year quarter revenues.

TeamFurmanite current-quarter revenues were $160 million and declined $13 million or 7% compared to pro forma revenues of $173 million for the prior-year quarter. After adjusting for Canadian oil sands disruption of $3.7 million, TeamFurmanite revenues were down $9 million or 5% compared to pro forma prior-year quarter revenues.

I'll now provide some commentary on our segment operating results. TeamQualspec adjusted EBITDA or operating income margin was 11% in the current quarter versus 14% in the prior-year quarter. Adjusted TeamQualspec EBITDA margin was 14% in the current quarter versus 16% in the prior-year quarter. TeamFurmanite adjusted EBIT or operating income margin was 9% in the current quarter versus 12% in the prior-year quarter.

Incremental amortization expense related to the acquired Furmanite intangible assets represented around 1% of current-quarter revenues. Operating margins have been negatively impacted by market softness and project deferrals.

TeamFurmanite adjusted EBITDA margin was 13% in the current quarter versus 14% in the prior-year quarter. Quest Integrity adjusted EBIT or operating income margin was 20% in the current quarter versus 29% in the prior-year quarter. Quest Integrity adjusted EBITDA margin was 27% in the current quarter versus 35% in the prior-year quarter.

Total Team adjusted SG&A was $79 million or 23% of revenues compared to $49 million or 21% of revenues in the prior-year quarter. Excluding incremental SG&A of acquired businesses, SG&A increased by $3 million in the current quarter due primarily to higher IT infrastructure costs and higher stock-based compensation expense related to the conversion of the Furmanite employee stock grants into Team stock grants, as well as an earlier Board of Directors stock award in 2016 to match up with the new second-quarter timing of the annual shareholders' meeting.

For the current quarter, total depreciation and amortization expense was $13 million, and non-cash stock compensation expense was $2.6 million.

I'll spend a few minutes discussing the non-routine items in the current quarter that we do not consider to be indicative of our normal ongoing operating activities.

Non-routine items during the current quarter totaled $6 million before tax or $0.12 per diluted share after-tax. The most significant non-routine items related to a $2.2 million charge to increase the final earnout liability associated with an acquisition completed last year; non-capitalized ERP implementation cost of $1.2 million; acquisition costs related to two tuck-in businesses of $1.1 million; and legal fees and professional fees for acquisition integration of $1.5 million.

I'll now give you an update on the ERP project. As previously disclosed, we rolled out the new Microsoft Dynamics AX system to five pilot branches in February. We plan to roll out the system in November to 17 locations in the US. The plan forward is to roll out the system to the remaining North America locations in waves occurring every three months, and to complete the North American installation by the end of 2017. We've spent $41 million to date on the project. We've capitalized $35 million, and expensed $6 million.

I'll now wrap up with some balance sheet and cash flow information.

Year-to-date cash flow from operations was $38 million. Year-to-date CapEx was $22 million; $10 million related to ERP. During the quarter we invested $15 million, net of cash acquired in two small acquisitions. One is an inspection business in Europe, and the second is a furnace and pipe cleaning business in Europe that will be part of the Quest Integrity segment.

We paid down $12 million of debt during the quarter.

Our planned stock buybacks have been geared toward offsetting the dilutive effect of stock-based compensation awards of around $6 million to $8 million per year. Year-to-date we have bought back $8 million of stock. Going forward, our primary use of free cash flow will be towards debt repayment.

At quarter-end, total balance sheet debt was $426 million. Our leverage ratio, the debt to EBITDA ratio, including outstanding letters of credit, was below the existing leverage covenant of 4 times. Borrowing capacity under the facility was approximately $30 million at June 30. And our cash balance was $65 million at June 30. That completes the financial review.

I'll now turn it back over to Ted.

Thanks, Greg. As I reported to you in each of our calls this year, due to external market forces, calendar 2016 is a difficult year for our business and for our customers. Our clients continue to be strongly biased in 2016 toward deferrals or scope reductions wherever and whenever practically safe, regulation-compliant, and within applicable industry operating standards. Their heightened uncertainty about their business environment has resulted in our heightened uncertainty about our near-term outlook.

To provide perspective on that, as I reported in our last call, we've identified nearly $60 million in projects that have been deferred or canceled in 2016, including $16 million that we would've expected to occur in the first half of this year, but did not. Less than 40% of the deferred projects are still currently scheduled to occur later in 2016, with about 60% being either pushed into 2017 or whose timing is now uncertain. That's exactly the condition we reported in May, and there's no near-term change in that market outlook.

Adding to this market uncertainty, I also reported in May that our current second quarter would be impacted negatively by near-term disruption of our Canadian oil sands business due to the massive forest fires in Fort McMurray. As I'm sure you are all aware, those fires had a devastating toll, with the entire city of Fort Mac having been evacuated; but also virtually all production facilities in the oil sands.

We've now quantified this revenue loss associated with suspended Q2 projects to be about $5.4 million which negatively impacted our earnings for Q2 by about $0.04 per share.

With that, we are now pleased to say that the business environment is beginning to return to normal in the oil sands.

While 2016 is a difficult end market environment, we are not sitting still in the face of these market conditions. In parallel with our clients and many of our industry competitors, we've responded with cost rationalization measures extending across the enterprise: $20 million in targeted cost reductions achieved across our business units in addition to the merger-related synergies from the Furmanite transaction.

Great strides have been made to build a world-class platform where we are leveraging labor utilization and developing technology that solves customer problems, from digital solutions to advanced phased array technologies.

Integrating Furmanite and Qualspec to take full advantage of our respective strengths and expanded service capability and market access is hard work. We are consolidating customer contracts, moving people and equipment across all three legacy organizations, and combining physical locations, among other things.

As Greg pointed out, this is not just managing three distinct businesses. It's fully integrating Qualspec and Furmanite into our legacy businesses. And while we are doing it, we are focused on building upon the culture of Team that has been such an important part of our success for many years.

To that end, we've just completed seven two-day collaboration meetings across the United States involving over 400 legacy Team, Qualspec, and Furmanite managers where we have provided Team's leadership training, coupled with discussions of our safety, quality, and ethical culture. The deeper we have engaged in the integration processes for both the Qualspec and Furmanite businesses, the more confident I have become about the associated value creation.

When we announced the Furmanite transaction in November, we said we expected to realize $20 million to $25 million in costs synergies over the first two years. We've now pegged that cost synergy amount to be about $25 million. As mentioned in yesterday's press release, we realized about $19 million of those synergies on an annualized basis, although the impact of most of that is still prospective, as opposed to the second quarter.

Additionally, we've identified margin expansion opportunities for the combined TeamFurmanite well beyond the costs synergies identified. These performance improvement opportunities will take longer and involve process changes to capture, but are well within our direct control and influence.

I'm excited about the progress we have made and the opportunities we continue to expose. But I'd also like to take a minute and talk about how this deliberate business-building and positioning syncs with the key trends in our target markets. First, outsourcing: in the midst of ongoing workforce rationalization within many of our customers, we see an increasing dependence upon outsourcing for specialized knowledge and experience. Our customers have been focused on knowledge management and retention for some time, in anticipation of a retirement wave in experienced personnel. We are becoming an increasingly critical part of the solution to our clients' problems of more internally concentrated knowledge.

Second, more systemic management: plant operators are now responding to a market condition shift with a more holistic approach to plant performance and critical asset management. The market has long discussed asset lifecycle management. But we now have major operators engaging with us more actively on how to safely and economically improve total throughput, or to better empirically understand the cost effectiveness of predictive maintenance versus alternative maintenance approaches.

And third, data mining: in a budget-constrained environment, operators want to improve the information yield on current and historical data. We participate broadly in the collection of this data superset. But we also have the multidisciplined engineering assessment resources and software tools to interpret, synthesize, and manage it; and the mechanical services required to practically and timely implement corrective action.

Over the last several calls, I've spoken about the key -- the five key elements that we believe constitute our current value proposition, and the foundation by which we are extending the magnitude and sustainability of our competitive distinction.

In summary, those competitive advantages are, first, industrial services market leadership. That's that balanced portfolio of both inspection and in specialty mechanical services. Second, the ability to provide standardized -- to standardize service all the way up to customized, fully integrated solutions for our customers. Third, the highly trained and experienced workforce of more of more than 8,000 employees across the globe. Fourth, practical technology enablement. Fifth, regional resources and responsiveness. That's leveraging the availability of our resources and equipment over 220 locations in 22 countries.

This value proposition we are building will translate directly into measurable financial results for the enterprise. By the end of 2017, even with modest growth targets, we believe our total business should be achieving 9% EBIT margins and 13% EBITDA margins. For 2018, that would represent an adjusted EBIT target of about $130 million, and an adjusted EBITDA target of nearly $200 million on revenues of about $1.5 billion. That is the financial performance foundation that we are building.

So, what would have to be true to move us toward those goals? Think about that in terms of our second-quarter results. If revenues were 5% higher, which is absolutely achievable in a normalized market; and gross margin was 1.5% higher -- that is 30.5% rather than 29% -- again, we believe absolutely achievable with the resource rebalancing and performance improvement initiatives underway.

And finally, if adjusted SG&A percentage of revenue was 1.5 percentage points lower, that is 22% versus 23.4% that we achieved in the second quarter, again absolutely achievable with the realization of merger-related synergies and performance improvement enhancements. 1.5 points of margin and SG&A improvements in a normalized market will result in the achievement of those 2018 targets.

The soft market environment of 2016 is temporary. Customer project deferrals can only last for a short period of time, and we expect our markets will undoubtedly improve by 2017. No one will be better positioned than Team to capitalize on those improving market conditions.

And so, with that, let me open it up for questions.

(Operator Instructions). Matt Tucker, KeyBanc Capital Markets.

You know, Greg, you went through a lot of numbers. I wasn't quite able to catch up with all the kind of pro forma year-over-year comparisons. I won't make you go through all of that again. But maybe you could just kind of talk through where the biggest drivers were, year-over-year on a pro forma organic basis, and maybe what -- where the biggest areas of weakness were, and what was most surprising if anything.

Well, the biggest area of weakness was in the heat treat services, which was down $11 million or almost 38% this quarter versus the prior-year quarter. And those are specialty services provided by the TeamQualspec segment. And their demand is much higher during large turnaround projects. And so with the deferral of large turnaround projects, postponement of projects, we've been experiencing a pretty significant decline in heat treat services. And so that was one of the big drivers.

Quest revenues were down $5 million quarter over quarter, or about 19%. They've also been impacted by project deferrals, their pipeline and process equipment customers. And then the Canadian oil sands disruption was about $5 million of revenues, as well. And so when you back those things out organically, we are down quarter-over-quarter due to soft market conditions, but we are down about 4% at the Team consolidated level.

And just to follow-up on that, Greg did go through a lot of numbers relative to pro forma comparisons that obviously are not in the press release. We are going to, I think, just update the investor presentation that's on our website. And we'll file that as an 8-K this week to include that pro forma comparison. Because it is obviously very difficult to compare year-over-year results, and you really have to have that -- those pro forma revenue numbers as a point of comparison to make sense of it.

Yes, that would be very helpful. Just shifting to the outlook a little bit, I'm -- I think you did a good job of kind of laying out some of the assumptions in terms of longer-term targets, and those do seem pretty reasonable to me.

But maybe trying to focus a little bit more on the near-term here, how is your visibility on the fall turnaround season shaping up? And we've been hearing some speculation, maybe some commentary from certain refiners that they are considering going off-line earlier than usual for maintenance, potentially longer. Are you seeing that? And do you think that that will actually translate into higher spending levels?

Again, what we are seeing, Matt, is more commentary and kind of anecdotal discussions with customers and -- well, not just anecdotal, but just kind of project lining up more for 2017, even in the fall of 2016; again, which is consistent with what we have said before. And that's why we have pointed towards 2017 as the year we think we are going to start seeing kind of a major expansion of maintenance activity because of the significant deferrals that we've seen to date.

We have a lot of anecdotal evidence that perhaps this fall, we should start -- we may start seeing improved market conditions. But we also have more evidence that says the spring of 2017, for instance, is going to be a much better season, if you will, than the fall of 2016. So we are not seeing enough evidence pointing us to a major rebound beginning this fall to change our commentary or view of the short-term market.

Got it. Thanks. And just the last follow-up. Are you seeing any -- can you comment on any potential opportunities in oil Sands related to the fires that you might see in the second half here?

Again, I think it's a little too early. We are seeing some of the projects that were suspended are resuming; although, frankly, at a smaller scope than originally planned. But it's -- I think it's just -- it's still too early to know whether all of those projects will be resumed or not. As you can appreciate, it's -- it literally -- the facilities are just now getting back kind of up and running, and getting more into a rhythm, if you will. But it's too early to know whether there will be a recovery -- kind of a recovery of the projects that were deferred or not.

Thanks, Ted. I'll jump back in the queue.

Matt Duncan, Stephens.

Greg, just first, just a real quick point of clarification and then I'll get my questions. On the $11 million decline in heat treating, is that all at the legacy Team business? Or was there some -- was some of that from Furmanite or Qualspec, or somewhere else too?

There's some from Furmanite in that number, as well.

Okay. Can you again maybe size how much the $11 million would be, legacy Team versus legacy Furmanite? Just trying to kind of get to it.

Again, that's really hard to do, because technicians and heat treat assets are somewhat fungible as they are assigned to jobs, and we don't have that granularity.

Okay. It but probably not just about (multiple speakers) it's about half and half, I would think, right? Maybe a little more to the Team side. (multiple speakers)

Matt, it wouldn't be half and half in the sense that -- appreciate that Furmanite's legacy heat treating business was only about, on an annualized basis, about $25 million.

Okay. That helps.

But Team's legacy business is $100 million.

That helps, that helps. So moving on, then, just to get to kind of the crux of what I wanted to get to: so TeamFurmanite, the segment in general seems to be setting up for pretty significant margin expansion. I guess the original plan was $20 million to $25 million in cost synergies from Furmanite. It sounds like we are already at an annualized run rate of $19 million. First, would you characterize that as ahead of schedule?

No. I think it's precisely on schedule, because again the -- if you recall, I think what we had said is there's really two buckets of initiatives. The first bucket is cost synergies. And the cost synergies are -- are generally -- in effect, they've turned out to be this way. We expected them to be fairly easy to achieve -- not easy; nothing is easy in this world. I don't want to overstate that.

More visible.

More visible, if you will. And so very early in the process -- in fact, even as we were in diligence on the Furmanite process, that we started to develop an expectation around costs synergies, most of which we expected to occur fairly early. Again, that's public company costs, C-suite duplication, things like that. So, indeed, there were kind of significant amount of corporate-level headcounts and some redundancies there. And that, we expected to get pretty quickly in the process.

The second big buckets of that are insurance-related, primarily property and casualty insurance. But those become realizable on a prospective basis. So we have completed the procurement, if you will, of general liability property-casualty insurance that's effective in July. And so we know what the annualized savings associated with that in comparison to the spend of the three legacy companies, or the three big legacy -- Team, Qualspec, Furmanite. So that's kind of another big bucket. Group insurance is another big bucket.

Again, because of scale, being a company that is now virtually twice the size of legacy Team, scale from a group insurance standpoint occurs in January of next year. But now is -- we're, I think, probably 95% there, relative to procurement for insurance programs starting in January. But, again, those are things that we -- early on, we had a pretty good sense of the potential, and we simply are realizing that potential now.

To be clear, how much of everything you just mentioned is in the $19 million number? And what were annualized savings recognized in the second quarter? I'm just trying to get a sense on what the trend line on expenses looks like here.

We do estimate that what was actually realized in the second quarter was probably somewhere in the range of $1.5 million to $1.8 million for the second quarter.

Okay. So I annualized that out to somewhere around $6 million. So there's a big chunk of it that you are going to recognize here in the 3Q, relative to the 2Q, because you are at $19 million as of today.

Correct.

So we should expect (multiple speakers)

As Ted pointed out, yes, like for example, the insurance, the commercial property-casualty insurance savings begins July 1. So that will definitely be a Q3 item as opposed to Q2.

What about the group insurance? (multiple speakers)

But again, it's not a Q3 item in the sense that all of that (multiple speakers) we tend to ratably realize it --

Well, sure.

Right. Over the next four [quarters].

Sure. But I guess my point is, guys, if we were ratably at about $6 million in the second quarter, and as of the middle of August we are at $19 million, it seems like there should be a pretty sizable step down in cost, 2Q to 3Q.

I think that's a fair statement, because again there's significant realization of savings that begin to occur in the third quarter, particularly in July. Yes, well, that's the beginning of the third quarter, right.

And then the other cost item I wanted to get to, and I'll hop back in queue, is just on the last call you guys had laid out $20 million of planned legacy Team cost-cutting. Where were you at the end of the second quarter on an annualized basis relative to that number? And where are you today?

That's largely done. I think there --

$18.5 million.

I think we are like $18.5 million of that $20 million is realized. Again, on a (multiple speakers)

How much on the 2Q, Ted?

Greg, do you have that number? I don't have that number in front of me, Matt. We can get that for you.

All right. I'll hop back in queue. Thanks, guys.

Edward Marshall, Sidoti & Company.

I wanted to -- you talked about some anecdotal information that you saw maybe potentially -- the fall season might be a little bit better. I'm curious as to what those signs might have been for you. And more importantly I guess when you look kind of longer-term, what signs does the team -- no pun intended -- what signs are the team paying attention to, to kind of give you a sense that the industry is turning in your favor at some point in time? What are those key metrics that you are looking and paying attention to most?

Relative to the fall, the commentary is more -- there is anecdotal evidence of improving market. But there's also anecdotal evidence of kind of more of the same for the fall. So our view is that we are not anticipating a significant improvement in market conditions for the balance of 2016.

Now, when we get into 2017, there are actually several indicators. There's some industry data that would suggest more project turnaround activity. Conversations with major customers of ours tend to support the notion that -- there's some big turnarounds that are indeed planned for the spring of 2017. Specific customers who had no major turnaround activity scheduled in 2016, but have commented to us that 2017 -- and because of that, 2017 is expected to be the biggest turnaround in the history of this particular customer base.

But, moreover, I think history tells us that 2017 should begin to see significant improvement. Because, again, even in the worst environment of the last 50 years, being the kind of 2009/2010 Great Recession, what we experienced in our customer base is a kind of a maximum deferral that lasted about a year. Because we serve installed base of facilities; and for safe operations and compliant operations, you have to maintain them and inspect them. And our customers didn't -- there wasn't a lightbulb that went off with our customers and said, oh, we've spent way too much on maintenance and inspection over the last 50 years than we should have, and we can do with less. That's not -- we just don't believe that's true at all.

But, rather, what is true is mother nature's persistent and the operations of process facilities and pipelines is naturally degrading. And you have to maintain them, and our customers have not figured out a way to do less maintenance and inspection. It is true that you could defer it. And we've seen that. We saw in 2009/2010. We've seen it in earlier cycles, by the way, so it's not -- this isn't the first time this has ever happened.

In my tenure at Team, this is probably -- I think probably the third major deferral cycle we've been in. 2003 I think was the earlier one. But again, each time it lasts for about a year, because mother nature's persistent. And we don't think there is any -- there's anything different about that.

This seems to be year three, at this point, that we've been seeing slowdowns in the market. Is there something that's changed in the industry that you can kind of identify that --?

I certainly wouldn't -- I would take a big exception for you to suggest this is year three. Fiscal 2015 for Team was the best year that Team ever had. So I'm not sure where you are getting that from, Edward.

Okay. And in January, kind of talking about capital deployment in January, you said that the shares were under siege, and the best currency is Team shares, and we are a couple dollars higher here. You've got all these cost advantages coming. You've got 2018 goals which show significant improvement from today.

I'm curious, when you talk about share buybacks, you talk about just kind of offsetting dilution. I'm curious as to what's changed in the capital deployment plans since January regarding share repurchases.

Well, in January, the comments I made in January were kind of an emotional reflection on my disappointment of the kind of sudden decline of Team stock prices, to be honest about it. The only thing that's changed is that we have a fairly high level of debt, and our priorities for use of cash are going to be to pay down that debt. But if I didn't have any debt, I could assure you that we would be more active from a stock buyback standpoint. But we just have a lot of debt right now. We need to focus on delevering a little bit.

Got it. Thanks, guys.

(Operator Instructions). Craig Bibb, CJS Securities.

So, when will you guys be confident that the spring is locked in? Is that like you will know for sure in Q4?

In truth, you are never confident until you are there. Our business is not, as you know, is not a backlog business. And so, for us, the visibility on projects is not that long in advance. And so typically, let's say, in the winter, we start locking in on spring activities. And generally, it doesn't -- it doesn't move a lot in the absence of kind of operational issues from our customers, or market issues; as again as we've clearly seen this year with the project tracking that we've -- that I indicated in my commentary, with significant projects previously scheduled for 2016 having been moved or canceled.

So, again, since it's not a backlog business, there's a relatively short term of visibility on projects. And the scope of projects then can change fairly dramatically. Even if the project doesn't move, when you -- in a turnaround, as you kind of get into opening up units, discoverables change. And it's kind of like remodeling your house. When you start opening up walls, you may find out, well, there's a lot more work than you thought. Or there may be a lot less work than you thought. So, it's a law of large numbers kind of business as opposed to a backlog business.

Okay. And the gasoline refiners have telegraphed that they'll be shutting down early, and maybe staying shut longer because of high inventories. How does that affect you?

It has certainly affected us already, even in 2016, with fewer larger projects for that -- because of those high inventory issues that the refiners are dealing with. But I can -- so that may be good if refiners use these longer short-term shutdown periods to do maintenance. But on the other hand, it may signal that higher inventory levels mean generally less cash flow, and kind of continued more conservatism on the part of our customers.

So it's hard to note how exactly that impacts us. That's why, again, when I look at the balance of 2016, in the absence of clear evidence that the balance of 2016 is going to see a market turn, my assumption is that it's going to be kind of a continued slog, if you will. So I think that's what the rest of 2016 is going to be.

Okay. And then you might say it's a little early to tell with this, too. But it sounds like your Canadian customers are just coming back. Do you have a sense of -- are they coming all the way back, and is it progressing slower than you expected or --?

Well again, I didn't have any expectations one way or the other, because this is an extraordinary event in Canada. It doesn't surprise me that some of the projects come back a little slower because of the price of crude. And as you know, Canadian production is a higher-cost area than some others. And breakeven margins, if you will, are higher, or require a higher price of crude. So the notion that some projects would be -- that there would be kind of a slower return is not surprising to me, because of those reasons.

So, again, we are seeing a bit of a mixed bag right now. We are seeing a couple of projects that are among that $5 million are indeed resuming, but not all of them have yet. And it is uncertain as to whether all of them -- or kind of whether they will, or what the timing is. So we don't have kind of firm timing on some of the other projects. So, but it's not -- it isn't that surprising to me.

And should we take out $3 million out of the third quarter for --?

It's not a -- it's not a continued -- these were projects, discernible project activity that would have occurred in the second quarter. So it's not like there is additional downside that you take more out of future quarters. If anything, there could be some upside if these projects, in fact, restart, if you will, in the second half of the year.

Okay. Are there any other -- just looking broadly, other regional demand differences that we should be aware of, like California or Gulf Coast or --? Anything that stands out?

Not that I can think of.

Greg, is there anything that you --?

No.

Yes. No, I wouldn't -- I don't -- I can't think of any disruptions or anything like that in other parts of the world. Well, I'm sorry -- one thing you should think about relative to third quarter is the impact on currencies. We haven't talked about currencies in today's call because in the second quarter, really there was no significant impact.

But as I'm sure you are aware, because of the Brexit vote in the UK, the pound sterling has taken a beating relative to the US dollar. And so, I haven't actually looked to see what that is more recently. But if it stays at the levels it kind of went to, just the translation impact on -- of the pound sterling could have an impact.

Again, it's more of an impact on top line, though, not bottom line, because our costs are balanced with our revenue. So, it's just -- the revenues coming out of the UK are -- don't translate to as many dollars as they would have otherwise.

I don't know, Greg, do you have a sense of that?

Yes, for the second quarter, UK revenues were about $17 million.

$17 million in the second quarter?

Yes. Yes.

So that could have a -- so take a look at the currency exchange rates, and it could have an impact.

Okay. And then the last question is can you guys get to 22% SG&A in a weak demand environment, given all the savings you pointed out?

Well, as I said, I think -- in my commentary -- I think you have to have a more normalized environment. So my starting premise is that right now, modest growth on revenues are indeed necessary to get -- well, unless we take more cost reduction measures. Certainly, if we thought the environment was a permanent environment, we would absolutely do that. But it's a delicate balance between resource balancing and cutting your nose off, if you will.

So, but I think again, top line -- modest top line growth is an absolute reasonable expectation. We are in the worst market we've had since 2009/2010 right now.

Okay. All right, thanks a lot guys.

Matt Duncan, Stephens.

So back just on the cost side, real quickly. Ted, you mentioned that you guys had identified some margin opportunities that would go beyond the $25 million of cost savings. Can you elaborate a little bit on what those opportunities are, and how much you think it could add to profit if you are able to capture those?

Well, we've done that, Matt in our investor presentation, kind of the -- there is a slide in our investor presentation that talks about two buckets. It's kind of the path to $200 million of EBITDA, which in today's call I kind of expressed that in a little bit different way. But there's 25 -- we think there is $25 million of merger-related cost synergies that we've identified. And we also think that there's $20 million of performance improvement opportunity, and that's reflected in a slide in our Investor Day.

Now, to be honest about it, I think there's a lot more than $20 million of performance improvement opportunities. But we are only counting $20 million. And as we've said in -- before, there are -- again, there's a lot of what I would call discrete performance improvement initiatives, more than is even worth mentioning because we've identified probably 25 or 30 different opportunities.

The big buckets, though, are to extend -- Team and Furmanite, as I've talked about many times, Team and Furmanite have competed with each other for 40 years; not just around a standardized services on the mechanical side of our business, but also in specialty services that are kind of higher-value propositions to our customers.

In truth, though, we have tended to price those services -- both of us, Team and Furmanite, because we competed with each other -- just like their standardized services. So I think that there is a great opportunity for us to exercise some marketing rigor, if you will; and begin to value the higher-end, high-value propositions to our customers as if they are specialty services, as opposed to more standardized services where we are competing with local and regional service providers. So, that's an opportunity. And it's a significant one.

There are opportunities just that are a result of scale that are a little -- they are almost like cost synergies, but they require some process improvements to achieve. Scale does a lot. Travel and expense policies fully -- more back-office things that in addition to the kind of group insurance and P&C insurance that we already -- that are kind of nearer-term, if you will.

As you probably also know, from having covered Furmanite, Matt, Central European operations of Furmanite have been a tough, tough sled. Furmanite, to be honest about it, lost EUR2 million a year in each of the last five years in Central Europe. I think we can do better than that. And so that's an opportunity to just kind of stop the bleeding in a few areas. So it's things like that that kind of make up that second budget.

But again, the opportunity in that second budget is, frankly, I think, bigger than simply realization of merger-related synergies.

Sure, that's all very helpful. So the other thing I wanted to get at is just sort of looking at the outlook a little bit here, and it's been hit on a lot today. So another company that I follow that is a distributor of products into the turnaround market said that they expect next spring to be the best season they've had since 2012. You've said that a specific subset of your customer base, it may be there largest turnaround season ever.

So I'm trying to sort of think through what that can mean for the growth potential in your business. And if you don't want to get too specific to any one season, I think another way to look at this is that there has been a little bit of -- I don't know if pent-up demand is the right word for it -- but all this deferral activity has simply shifted work to the right. And it's going to have to get done over a short period time when the market comes back.

Maybe what kind of growth do you think your business is capable of, in an environment where the deferred activity is getting done, on top of -- at least a piece of the deferred activity is getting done on top of the normally-scheduled stuff, once your customers start to play catch-up?

I think that, again, we've got a much larger denominator than we've had before. But 10% to 12% organic growth in a more robust market is certainly very reasonable to me. Just go back and look at the -- go look at growth rates coming out of the 2009/2010 recession. So I think that kind of begins to kind of -- if you kind of look at just absolute growth rates coming of 2011, 2012 and even into 2015, I think that kind of gives you a fix.

There's -- again, it's a bigger denominator, but there's a lot of market that we don't have. It's still a very fragmented market, both in inspection and in mechanical services. And now we have a platform that frankly focus on what we refer to as, I mentioned many times, as Team solutions of kind of pushing and pulling and selling solution sets across our customer base of mechanical and inspection services. So I think -- I like the position that we are in to take advantage of growth when this kind of pent-up demand indeed happens.

That was actually my next question. Where are you on that Team solutions opportunity? And have you begun to go to Qualspec customers with mechanical services, and Furmanite customers with inspection? And are you seeing any fruit coming from those efforts, at this point? Or is it still in the early stages, and that's all kind of on the come?

I think it's still in the early stages and it's still to come. But we are working very hard at kind of identifying key account managers who -- to be responsible for major relationships; and those relationships to extend beyond not just inspection on the one hand, or mechanical services on the other hand, but to be in front of customers and making sure that we are taking advantage of opportunities and identifying opportunities. So it's very early in that process, but I like the foundation that we are building, for sure.

And then last thing for me. I know you are in the early stages with the ERP rollout. But are there any early insights you can give us on what you may be learning from that; and in places where you've gone live, any real-world examples you can give on sort of benefits that you are starting to see from it?

We are seeing more efficiency in the field with the technicians. One of the reasons you do a pilot is to identify the things that still need to be tuned and adjusted. And we found that we need to enhance our billing system design, which is one of the things that we've been doing in the pause. We've got a lot of individual jobs with a lot of different customers, and we don't have one-size-fits-all for everybody.

And so we need -- the biggest learning we got from the pilot is that we need to have a robust billing engine to automate, not 100%, but let's try to automate 80% of what we do from a billing standpoint. And that was the big finding from the pilot, which is part of what's going to be rolled out in the next wave.

All right. I appreciate it. Thanks for all the color, guys.

Thank you. And I'm showing no further questions at this time.

And I would like to turn the conference back over to Mr. Ted Owen any closing remarks.

Okay. Thank you Michelle. Again, thank you all for your attention today and your interest in Team. We covered a lot of ground today, particularly with respect to this pro forma comparison, which you really have to have to make sense of things. So we will figure out how to address that. I think the best way is simply to update and put that data in our investor presentation and then file it. So we will undertake to have that done by certainly the end of the week.

So again, have a good day, everyone, and thanks for your interest in Team.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.