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.

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.

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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

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.

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 one percentage point. This margin decline is due entirely to lower growth market 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’ve used this 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.

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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 — at 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 competitive environment combined with growing customer preference to work more extensively with fewer larger service providers. They bring companies like Team who have 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 continue 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.

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