Team, Inc. Q3 2014 Earnings Results Conference Call Transcript

Operator

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. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. And I would like to turn the call over to Phil Hawk, Chairman and CEO. Please proceed.

Philip Hawk – Chairman and CEO

Thank you, Morris, and good morning, everyone. Again, it’s 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 report. 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’ll then take questions from our listeners.

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

Ted W. Owen – Executive Vice President and CFO

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 the provisions of the Private Securities Litigation Reform Act of 1995. We have made reasonable efforts to ensure that the information, assumptions and beliefs upon which this forward-looking information is based are current, reasonable and complete. However, a variety of factors could cause actual results to differ materially from those anticipated in any forward-looking information. A description of those factors is set forth in the company’s SEC filings.

Accordingly, there can be no assurance that the forward-looking information discuss 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.

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Now with that out of the way, for the financial results. Our adjusted net income available to shareholder 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 the 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 is the 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

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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’ve 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’ve selected. This initiative will be rolled out on a phased approach over the next two years with our U.S. 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’ve incurred $2.7 million in capitalized costs, 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 month EBITDA was 0.6 to 1. And with that, Phil, I will turn it back to you.

Philip Hawk – Chairman and CEO

Thanks, Ted. Now I would like to supplement Ted’s remarks as a few additional comments or 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 that 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% from the prior year quarter.

As previously mentioned, we estimate that adverse weather conditions resulted in an approximately 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.

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Job margins, which are not directly impacted by the weather issues, was similar to both the prior year quarter and the most recent second quarter. Excluding weather-related issues, both gross margin and SG&A pro forma 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 9 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 of the significant business growth.

SG&A expenses were significantly higher, about $2.1 million versus the prior year, reflecting the significant ongoing investment in the 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 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’re pleased with this most recent performance and remain very encouraged by the business opportunities ahead for Quest 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 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.

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