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Executives

Philip J. Hawk – Chairman of the Board & Chief Executive Officer

Ted W. Owen – Chief Financial Officer, Senior Vice President & Treasurer

Analysts

Richard Wesolowski – Sidoti & Company

Analyst for Matt Duncan – Stephens, Inc.

Tahira Afzal – Keybanc Capital Markets

Arnold Ursaner – CJS Securities

[Mike Sheridan – Cobalt]

Team, Inc. (TISI) F3Q09 Earnings Call April 1, 2009 9:00 AM ET

Operator

Welcome to the Team IR call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session. Please note that this conference is being recorded. I would now like to turn the call over to Mr. Phil Hawk.

Philip J. Hawk

Welcome to the Team web conference call. Again, my name is Phil Hawk, I’m the Chairman and CEO of Team. Joining me again today is Mr. Ted Owen, the company’s Senior Vice President and Chief Financial Officer. The purpose of today’s conference call is to discuss financial results for the company’s third quarter ending February 28, 2009. As with past calls, our primary objective is to provide shareholders and potential shareholders with an enhanced understanding of our company’s performance and prospects.

This discussion is intended to supplement the quarterly earnings release and our filings with the SEC. Ted will begin with a review of the financial results. I will then follow Ted with a few remarks and observations about our performance and prospects. With that introduction Ted, let me turn it over to you.

Ted W. Owen

First as usual, I want to remind everyone that any forward-looking information that you 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 and 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 last paragraph of our press release and 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.

We assume no obligation to publically 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. With that out of the way, now to the financial results.

Obviously, a very challenging quarter for Team and again reminding new people who may be listening this is our most seasonably weak quarter of the year. Revenues from third quarter were $104.3 million compared to $108.8 million in the third quarter last year, a decrease of 4%. Net income was $2.2 million, versus $2.9 million in last year’s third quarter. Earnings per diluted share was $0.11 versus $0.15 in last year’s quarter. Currency exchange rates principally the Canadian dollar and the Euro had an unfavorable affect on revenue of $6.6 million and on operating income of $500,000 in the quarter.

Now, for a little more depth around industrial services, again, as a reminder, particularly for those who are new to the story, our industrial services an array of specialized services related to the maintenance and installation of pressurized piping and process systems as well as specialized inspection services. The industrial service segment is organized in to two divisions, TMS which includes our service lines of leak repair, hot tapping, fugitive emissions monitoring, field machining, technical bolting and field valve repair services and then TCM which is comprised of field heat treating and inspection.

TMS revenues in the quarter, which by the way includes LRS, the European company we acquired about a year ago were $48.1 million versus $49.7 million in the third quarter last year, a decrease of 3%. TCM revenues in the quarter were $56.1 million compared to $59.1 million last year, a decrease of 5%. TCM revenue excludes about $1.9 million in the current quarter associated with the joint venture in Alaska which is accounted for on the equity method.

Operating income for the quarter was $3.5 million versus $6.5 million in last year’s third quarter. For the third quarter our corporate costs were about $5.2 million which includes $400,000 of severance cost related to our previously announced reduction in force. But, for that item our cash corporate cost would have been relatively flat with last year.

In the quarter we benefited from a reduced tax provision as a result of the recognition of research and development and HR related tax credits totaling $600,000. This caused our tax provision for the quarter to be about 6% of pre-tax income. We expect the fourth quarter tax rate to return to a more normal rate of about 39% of pre-tax income.

Now, with respect to our balance sheet and cash flows, capital expenditures for the quarter was $4.3 million, depreciation and amortization was about $3 million and non-cash compensation costs was $1.4 million. Accordingly, our total adjusted EBTIDA for the quarter was $7.9 million. Our trailing 12 month adjusted EBITDA, when I say adjusted EBITDA that’s to include the non-cash compensation costs, our 12 month EBITDA is $65.5 million. At the end of the quarter our net debt was $70 million and our total debt was $88 million so our debt net of cash is down about $25 million in just the last quarter.

In the midst of this current economic recession, we continue to be pleased with the financial position that we’re in. At the end of the quarter we had $63 million of unused capacity under our credit facilities which mature in 2012. So, Phil, I’ll turn it back to you.

Philip J. Hawk

Now, I would like to add a few remarks about our recent performance, current market conditions and our outlook both for the next quarter and beyond. Let me begin with several comments on Team’s performance and the recently completed third quarter. Overall, it was a tough quarter impacted significantly by changing market conditions.

As Ted indicated, total revenues for the quarter decreased by 4% versus the prior year quarter. This compares to total growth of 21% and organic growth of 15% in the first two quarters of the fiscal year. Obviously, this is a significant slowdown in our business. Where did this decline occur? The short answer is that we’re seeing demand softness virtually across the board while several customer segments are more economically distressed than others, nearly all groups are adopting more conservative near term spending postures.

As a result, we are seeing more frequent deferrals and/or downsizing of turnarounds. As shift to a minimum necessary spending posture related to nearly all spending by many customers and more discussions about the need for rate adjustments from suppliers and service providers. Consistent with these observations we experienced revenue softness in virtually all service lines and all geographic areas.

Canadian revenue declines were somewhat higher than the US regions due to both the impact of reduced major project work in Western Canada and currency weakness however, all regions are being impacted. As another observation, typically we expect our overall activity level to significantly ramp up in the second half of February at the beginning of major turnaround projects.

This year, that seasonal ramp up did not begin until March. Shifting to profit performance, as Ted indicated, our total operating project in the quarter declined to $3.5 million. Our operating profit as a percentage of revenue declined to 3.3%. The decreases in operating profit and operating profit margin were principally driven by two factors: first, the reduced revenues and business activity in the quarter; and secondly, a less profitable mix of projects in the TMS division.

Specifically, in the prior year quarter TMS division benefited from a very profitable larger project. The absence of that project in this year’s third quarter created the unfavorable margin comparison. When that prior year project is excluded, the margins earned in the quarter by both the TMS and TCM divisions are roughly comparable to their prior year period results.

I’d also like to point out that our third quarter is seasonably the weakest quarter of the fiscal year for Team. The consequence is that smaller changes in volumes have a larger percentage impact in this quarter. While we are never satisfied with any quarter that includes decreases in revenues and profits for our business, there were some bright spots to note, specifically, we are pleased with several aspects of our organizations response to the extraordinary shift in our business environment during the quarter.

First, we are making good progress with our major cost reduction initiatives announced in early February. We have eliminated about 60 support positions in the company and are on track to hit our $6 million annual savings target. More importantly, we are also pleased at how our individual branches are managing their resources and businesses to their local market circumstances.

As an example, labor utilization levels, a key driver of branch productivity and performance remain at attractive levels similar to last year. Reflecting the volume declines experienced in the third quarter and expected demand softness in the fourth quarter, our field managers have reduced their total field staffing by more than 200 in the quarter. As we have said before, we manage our business one project at a time within each branch. Our management teams at each branch and region continue to manage the respective business in balance with their local market conditions and business opportunities.

Now, looking forward to the fourth quarter, I will begin with the observation that we are currently in a period of considerable uncertainty. Our near term environment is less clear to me today than at any time in my more than 10 years with Team. While I have read that the recession begin over a year ago, the impact on our customers and our businesses begin about 90 days or just one quarter ago.

Our customers are still developing their responses and plans to cope with their current business circumstances. Our markets are still evolving. Although we are in an uncertain period, we have concluded that providing the information we do have is still more helpful to our investors than going the path of providing no information at all.

Now, shifting back to our fourth quarter revenue forecast. We reported in our call in early February that we experienced a significant slowing of activity beginning in December and January and subsequently in February and March we experienced further declines in activity levels when compared to the prior year. With these considerations, we have revised our revenue outlook downwards by another $20 million to approximately $500 million for the full fiscal year.

This corresponds to a fourth quarter revenue level of about $120 million down 15% from last year reflecting the weaker activity levels experienced in February and March and the negative near term tone of the market. In view of this revised revenue forecast, we have made a corresponding adjustment in our earnings guidance. We are now estimating that earnings per share for the full year will be between $1.05 and $1.20 per fully diluted share. The implied earnings for the quarter is $0.17 to $0.32 per share. The wide range simply reflects the uncertainty inherent in our revenue forecast.

This revised forecast raises a number of related questions and issues. Let me try to ask and address several of them here. First, given the magnitude of the projected decline in fourth quarter revenues, as Team is overly conservative in its revenue estimates certainly relative to historical seasonality relationships specifically the historical growth rate in the seasonally stronger fourth quarter from the preceding third quarter, our current revenue estimate is lower. But, with the overall negative tone in the market and lack of any near term growth triggers, at this point we don’t feel we have any basis to forecast near term improvements over current activity levels.

Second, since the forecast decline in team revenues in the quarter is greater than the projected impact of reduced new project activity, doesn’t that imply a significant decline in general maintenance service activity during the quarter, isn’t this market suppose to be generally stable and not track the business cycles. I agree that our fourth quarter forecast does imply a reduction in general maintenance service activity within the quarter. I remain quite confident that maintenance services remain a necessary evil associated with ongoing plan operations in any business environment. If plants could do without maintenance, they already would have done so.

I suspect the extraordinary market pressures of the past quarter or so have pushed near term maintenance spending levels below average historical levels. We expect a return to the norm at some point. Finally, what does all this near term demand pressure mean for next year, fiscal 2010 and beyond? Candidly, the and beyond time frame is the easier of the two for me to address. As I mentioned in earlier comments, we remain quite confident in the fundamental demand drivers for our services and also the fundamentals of our business, our business model and our competitive position remain very attractive.

Of course, success is never automatic, we still need to perform. But, Team’s outstanding service capabilities, industry leading service line and service network breadth and our financial strength will remain as significant advantages over the long term. We remain confident that Team will continue to profitably expand its market position and grow attractively just as we have consistently done over the past 10 years.

The question gets a little less clear as we consider fiscal year 2010. The key underlying issue is this, when will the market outlook and maintenance spending levels revert to the norm. The timing of this recovery is not as clear to us at this point in time. I’ll make one final observation on this point, ultimately I expect these very difficult market conditions will prove beneficial to Team’s strategic position and long term growth.

The cost advantages to our customers of procurement consolidation should receive increased attention in these tough markets which we expect will accelerate that trend. Team, with the broadest service line offering and service network in North America is well positioned to benefit. Let me end with a few final perspectives and wrap up comments, this past quarter and perhaps the next few quarters may be choppy and uncertain.

With the global recession related issues many of our customers are dealing with an extraordinary set of pressures. The near term ramifications of all of their actions on Team and our industry are not yet completely clear. However, we do not require a market recovery to be successful. We believe we will remain profitable and healthy financially as we work through this difficult market. As a point of perspective, despite the current market pressures, the high end of Team’s current fiscal year ’09 earnings guidance equals the best performance in team’s history.

Our job margins remain healthy, our service network has proven its ability to quickly adjust and balance its resources to the market opportunities available. Also as Ted indicated earlier we have the strongest balance sheet in our history with declining debt and low debt leverage. We are blessed with an outstanding group of colleagues who will continue to earn and affirm our customer’s trust and confidence with consistent outstanding service.

As always we will maintain a diligent focus on the basis of our business, those are providing great service with every service opportunity, continuing to expand our business by capitalizing on our service and network advantages, managing the profitability of our business job-by-job and balancing our resources with activity levels. That concludes my remarks. Let’s now open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Richard Wesolowski – Sidoti & Company.

Richard Wesolowski – Sidoti & Company

Phil, you mentioned your headcount fell by about 200 this quarter which would take you only a bit below where you started the year yet your 4Q sales will likely be down 15% to 20%, do you still have excess technicians in the field?

Philip J. Hawk

I think the number I have that we are down, the field headcount now is down about 84 from the beginning June 1st count. A couple of things again, what I really look to is labor utilization levels and as I indicated, I’ve been pleased with the stability of those numbers in the face of declining volumes through the third quarter. But, candidly I would expect our count to probably drift lower at the current levels.

Richard Wesolowski – Sidoti & Company

Can you relay or give any detail on the type of pricing discussions that you’re having with your major customers and maybe comment on whether a low 50% direct margin is still a reasonable expectation?

Philip J. Hawk

Here are the facts, the facts are that a number of customers are raising questions, really they’re raising the issue to their necessity to reduce their costs. They’re challenging suppliers to assist and support them in those activities including rate reductions as part of those discussions. They’re taking them very seriously and so are we so we are actively engaged in those conversations and are working with our customers.

At this time the adjustments that impact our business have not been material and we’re working very, very closely with our customers. A point that I would make and again, I’m not forecasting, it’s just hard to see completely how all this will play out but I will just note that some of the generic kind of stress of kind of deflation in the market and things like that or kind of high profit levels in the past or in the peak periods that need to be adjusted really don’t apply as much to us. Our margins have been pretty consistent throughout time and we don’t have kind of major material components in our business. As I say, we’re working closely with all our customers. We’re taking their circumstances seriously and are fully engaged on the topic.

Richard Wesolowski – Sidoti & Company

Broadly speaking is the 50% plus job margin still realistic?

Philip J. Hawk

Yes.

Richard Wesolowski – Sidoti & Company

Finally, did you have more construction revenue in the second half of fiscal ’08 or the first half of fiscal ’09?

Philip J. Hawk

I didn’t perceive a big difference in that to be honest.

Operator

Your next question comes from Analyst for Matt Duncan – Stephens, Inc.

Analyst for Matt Duncan – Stephens, Inc.

My first question just kind of broadly speaking how are you guys seeing I guess today any sort of stabilization? I know you’ve seen significant declines over the last sort of 90 days but do you get the sense that things are beginning to stabilize at all or is it just too early to tell at this point?

Philip J. Hawk

I think it’s just too early to tell. A little bit of the challenge of our business is we’re the sum of lots of projects all of which are unique in their own right so it’s not like we have regular orders and we can see rate changes very specifically in one area. I will just say just as a broad general comment, I have heard no reports from any customers who feel like they’re environment has improved yet. So, I think it’s still kind of a work in progress.

Analyst for Matt Duncan – Stephens, Inc.

When you look at your customer’s maintenance spending, do you think they’ve kind of gotten down to the bare bones maintenance spending level at this point or do you think there’s still some more room for them to cut as far as that goes?

Philip J. Hawk

I don’t know quite how to respond to that. In the short run I would say as I’ve said in my kind of remarks, I think we are that necessary evil, over the long run no one spends maintenance dollars for kicks, they do it because it’s required and I believe that. So, I believe the historical spending levels for general maintenance are indicative of the general requirements. Having said that, what is possible in the short run, I don’t think we know but it’s certainly my speculation and point of view that we are below I’m going to say average levels of spending right now but could they go lower? I don’t know.

Analyst for Matt Duncan – Stephens, Inc.

You talked about the ramp up of turnaround activity generally takes place the last couple of weeks of February, this year it’s kind of taking place in March. Can you kind of give us some color on what part of March, was it early or sort of later in the month?

Philip J. Hawk

The second week of March, it was about three weeks later than last year. Again, we have lots of turnarounds going on, that’s again a key perspective that we’re talking about declines but the world isn’t ending, the business isn’t ending in total by any means just the level of intensity. As I said, the turnarounds that we are doing are kind of more conservative in their scope than they have been in the past and like I said they started later and they’re not peaking as high I think is our view at this point in time. Again, we’re kind of in a little bit of new territory here because of again, just extraordinary pressures many of our customers are under.

Analyst for Matt Duncan – Stephens, Inc.

Just a couple quick other things and I’ll jump back in queue. When you think about pricing you guys have really a pretty strong competitive advantage over a lot of your regional and mom and pop competitors with these national accounts or master service agreements. To what extent do you think that will help elevate the margin pressure you may face over the next couple of quarters?

Philip J. Hawk

I think it’s an outstanding win-win opportunity. To be honest because of the, I’m going to stay readiness cost of our business, the sliding scale volume discounts which are embedded in many of our alliance or national account agreements really are very attractive ways for us to kind of shear incremental business benefits that we receive from volume growth with those customers who create that or facilitate that for us. That’s kind of a very active discussion as we work with customers and look for savings opportunities.

Analyst for Matt Duncan – Stephens, Inc.

One last thing, just a housekeeping item, Ted can you give me the D&A down to the thousands for the fourth quarter?

Ted W. Owen

For the fourth quarter?

Analyst for Matt Duncan – Stephens, Inc.

I’m sorry for the third quarter.

Ted W. Owen

I don’t have it. Call me later and I’ll get that for you.

Operator

Your next question comes from Tahira Afzal – Keybanc Capital Markets.

Tahira Afzal – Keybanc Capital Markets

To start off with I just wanted to get a sense, when you talk to your customers would you say that a lot of these deferrals are because of the credit crisis which is perhaps leading them to save up on cash or would you say that it’s more because of utilization rates and demand?

Philip J. Hawk

To kind of generalize a large number of companies is somewhat fraught with difficulty but let me try this. I don’t think for the most part it’s a cash issue. It is a profitability issue or margin issues. They’re profitability and just their business environment is very weak and so they’re trying to adapt their cost structure to reflect those lower margins and volumes. You mention utilization levels, lower utilization levels would be consistent with that but I don’t think it’s the utilization level itself that creates less need for maintenance but just a very poor, weak economic environment for their business.

Tahira Afzal – Keybanc Capital Markets

So would we be looking at Phil, crack spread to see the business come back, is that what’s going to give them confidence? Or, if you do see the economic environment coming back you might see the maintenance?

Philip J. Hawk

I think crack spreads improving would be a positive for sure.

Tahira Afzal – Keybanc Capital Markets

Then if I look at the environment, it seems that a lot of this is deferrals versus shutdowns within your customer base, is that the correct view?

Philip J. Hawk

I think it’s really in all areas. If I look at our general maintenance activity, this is opposed to new projects or new capacity additions, our business really roughly breakdowns kind of half and half to on stream maintenance activities which are kind of while the plant is operating, turnaround or outage work which are these periodic planned shutdowns to rehabilitate – basically to overcome the deterioration of the facility that’s taken place due to operation and kind of restore it. It’s called a turnaround or refining or outage in the power industry.

We are seeing declines in both. There is just a more conservative posture and with regard to turnarounds there are a number that been just deferred to the fall. I think that’s principally what I’ve heard are ones that have been deferred to the fall but even the ones that we’re having there were reductions in scope. Again, I think my interpretation here is that kind of repair items that could wait until the next cycle were deferred or reduced or pulled from that scope of work so there’s kind of less work in the short run for both of those reasons on turnarounds.

Tahira Afzal – Keybanc Capital Markets

So when we see the work come back would you say we’ll probably see the work come back but maybe the margins will not come back at the same pace, the pricing?

Philip J. Hawk

That’s not my view. My view is that we have competitive pricing today. Will it be influenced by some of these kind of near term kind of pressures and discussions, possible but kind of my view is the work that’s deferred is just that, deferred not eliminated just because of the nature of maintenance. I don’t have a point of view that our margins will be worse in the future because of this downturn.

Tahira Afzal – Keybanc Capital Markets

If you look at your guidance for the fourth quarter, it’s fairly wide. Could you talk about what the variables are as we review the $0.18 to $0.33?

Philip J. Hawk

I think the biggest variable is volume.

Tahira Afzal – Keybanc Capital Markets

As you [inaudible] you said you’ve seen a ramp up in March to some extent. Would you say that within your guidance you’re still comfortable with probably let’s say the midpoint?

Philip J. Hawk

Well, what I would say is this, the ramp up we saw is a seasonal ramp up that’s typically, we saw it later and frankly it’s not as high as last year. So, what we have as we say is we have from 15% the first half of the organically we’re now looking at -15% running in March. That’s generally what we’re forecasting, -15%. So, we have not seen an uptick compared to last year in our business to date so I want to clarify that.

I think candidly with such uncertainty about where our demands are and kind of this thing evolving our belief is our job margins are roughly the same and so the earnings range I appreciate is very wide, reflects a pretty significant plus/minus around that $520 million for the quarter.

Tahira Afzal – Keybanc Capital Markets

Last question, I was actually at a refinery conference last week and the sponsors are concurring with what you’ve just indicated that the maintenance spending cannot be deferred forever. The sense I got was calendar fourth quarter, they really have to start getting the spending back on and that would sort of concur with your fall scenario. The other interesting thing I noticed was that there was a lot of talk on carbon footprint and some refinery sponsors mentioned that maintaining plants more efficiently helps reduce that. I haven’t done much research on it myself, would love to get an initial sense from both you and Ted on what you see the pros and cons for your business there?

Philip J. Hawk

I think I’m rooting for you on that Tahira. I think just generally well maintained plants are more efficient and productive in all respects so I think we certainly believe and our customers I think understand that by in large too that we can be a great facilitator to uptime so kind of just basic economic levers. I have not heard candidly that emissions are less from a well maintained plant but I’m all for it.

Operator

Your next question comes from Richard Wesolowski – Sidoti & Company.

Richard Wesolowski – Sidoti & Company

Just circling back to the cost cutting plan, was there any benefit in the third quarter?

Philip J. Hawk

Not net when you count all of the severance expenses that we had.

Richard Wesolowski – Sidoti & Company

So you expect roughly maybe $2 million in the May quarter and then the remainder in fiscal 2010?

Philip J. Hawk

I think with the $6 million run rate its $1.5 million per quarter or something like that.

Richard Wesolowski – Sidoti & Company

Is there an aim for the debt level?

Ted W. Owen

No again, we’ve paid down our debts or kind of our net debt levels are about $25 million less than at the end of the preceding quarter. They’re actually less today than they were at the end of the quarter but we’re going to use cash flow from operations Rich to continue to pay down debt.

Philip J. Hawk

Candidly Rich, a lower pay down rate would be a good sign because it would generally indicate that our activity levels are up and our receivables are up a little bit. So, I think that will be a key factor in this too, just what our run rates are. Lower run rates will generate more cash.

Operator

Your next question comes from Arnold Ursaner – CJS Securities.

Arnold Ursaner – CJS Securities

First question I have is can you comment a little bit more about project activity? I know you don’t want to give anything more formal about 2010 but give us a best sense of what you think 2009 project activity is likely to look at and what sort of magnitude of decline we should expect for next year?

Philip J. Hawk

I think project activity is significantly reduced but not zero by any stretch of the imagination. The high profile projects that we had early in the year that are not active today are up in the Canadian tar sands, oil sands, related to those upgrader projects. They are still on the books up there and deferred to the fall or later. Obviously, conditions will determine whether and how those go forward but we still have major refinery upgrading projects underway in several locations around the country. We have some major pipeline kind of activity still underway across North America and another major refining project planned for this fall that’s still on track.

So, there are still projects going forward, it’s just at a reduced rate. That’s a little of the point I wanted to make sure was clear, our declines are not just the absence of projects, they are in the change in behavior related to general maintenance spending which is the new phenomena that we’re dealing with right now.

Arnold Ursaner – CJS Securities

Project activity has been about 15% of your revenue which would be roughly $75 million or so this year. I know you said it’s not going to go to zero but is it more in the $15, $20, $25 million range for next year?

Philip J. Hawk

I haven’t really developed a number on that but this is just a kind of the top of the head swag would be it’s about half of what it use to be, or will be, something of that order of magnitude.

Arnold Ursaner – CJS Securities

Second question I have for you relates to thinking about your margin, one of the things on turnaround activity, normally the work is done as rapidly as possible. The employees you have on site are working 12 hour shifts as fast as possible, no time off and yet if they shift to more of an eight hour day I assume you still have your technician on the ground there, you’re still incurring a lot of expense how do we think about margin in an environment where you’re working your technicians in eight hour shifts rather than 12 hour shifts seven days a week?

Arnold Ursaner – CJS Securities

We don’t perceive a significant difference. You raise an interesting point that I didn’t really describe to the whole group, just as a little background one cost saving approach that has been used in turnarounds rather than a highly compressed short time frame turnaround with running double shifting 12 hours a day seven days a week, we’ve seen a couple of instances where turnarounds have gone to 40 hour one shift, 40 hour, five day, 80 hour shift work which of course extends the time of the turnaround by about three fold but in a time of very, very low margins and because of the lack of premium time associated with that over time it’s cheaper in terms of dollar costs to the customer although more lost production time. That’s the trade off from the customer perspective.

From our perspective, yes the rates are lower because there’s no overtime but our costs are significantly lower as well for the same reason, we’re not paying premium wages with that. So, to the extent we might have gotten a little something on the percentage margin on a little higher dollars there, we might get the offset in terms of the equipment and other kinds of expenses associated with that in terms of the margins related to our equipment rentals and all that. The net of that is we don’t see a big impact on profitability?

Arnold Ursaner – CJS Securities

But how can that be? Wouldn’t the utilization of that technician be dramatically lower for that two to three week period than normal?

Philip J. Hawk

Well, I’m thinking about margins as a percentage of revenue not as a per day. Yes, it’s lower, the margin percent would be the same, the dollars of profit would be less because there’s less revenue in that time period.

Arnold Ursaner – CJS Securities

But I know you focus on job margins again, wouldn’t this have a fairly significant impact on the job margin?

Philip J. Hawk

As a percent of revenue? Not as a percent of revenue, in terms of absolute dollars per hour, or per day, per technician or per day on a job of course it would because the revenues are so much lower.

Operator

Your next question comes from [Mike Sheridan – Cobalt].

[Mike Sheridan – Cobalt]

I think you had referred to customers approaching you, obviously it’s a strange market, a unique market, not in a good way but, customers approaching you for downward pricing revisions and I believe you said the word deflation. So, can you just expand upon kind of how those discussion go, percent decreases that they’re looking for, how you counter, etc.?

Philip J. Hawk

Well, I think again the context is customers dealing and getting a lot of pressure to reduce total costs, right. You can either reduce rate or volume making it in simplest terms and what they’re doing is pursuing both. As it relates to rate, I think the generic context is this, “Gee, we’ve just been through a boom period the last several years, everybody has had high inflation, increases in rates and profitability, we’ve had really high increases in all cost components.” A lot of that has now gone down, for example, steel prices are lower, dramatically lower than they were just a year ago, that’s the deflation if you will, component cost deflation we kind of referred to. “What we want you to do is kind of reflect the fact that we’re now in lower cost environment and you have to kind of get your margins back to realistic levels and give back to us the cost reductions that you’re benefiting from in your component costs.” That’s the generic kind of context for the request or the discussion.

[Mike Sheridan – Cobalt]

I’m sorry to have a follow up but, just two questions you actually raised for me. When you talk about again deflation feeding through, on a real basis you know I’ll make my own crazy estimate of what deflation is or isn’t but on a real basis would you expect negative pricing on a year-over-year basis? And, as a follow up, is this cycle different because when we look at companies like Dow Chemical, BASF, they have 100 factories closed worldwide, can you talk about whether that’s structurally playing out here as well as opposed to just temporary OEM deferral?

Philip J. Hawk

I think back to the deflation, I candidly don’t see much deflation in our business because we are an overwhelmingly labor based business. So, for there to be deflation in our costs we would have to reduce the wage rate of our individual colleagues and employees and we haven’t done that and don’t have plans to do that in our business. So, we are different than say an equipment provider and some other types of service companies.

What we expect in terms of do I expect a decline in our average rates over the next year? No. I expect them to be roughly where they are today. Will there be adjustments from here and there? Yes, I think that’s likely. I don’t also think it’s likely that we’re going to have any increase in prices or any significant increases in prices either again, because of the environment we’re in.

In terms of total demand and what’s happening there, I think to the extent that we have permanent closures of capacity, that will affect demand. A closed plant doesn’t need maintenance. I would just caution a little bit, you mentioned several petro chemical companies and very large numbers of plants, the industry norm there is to talk about individual production units as plants. So, these major facilities, the number of plants they talk about closing or idling are really units within a plant not kind of major stand alone plants themselves.

It’s all over the board for us. I’m aware of one very significant petro chem in one of our areas that has announced significant plant closures and idles yet our activities with them, that particular one, are unchanged. So, it’s a little bit to kind of read too much in to some of these plant closures that we’ve had a massive change in our infrastructure of kind of capacity and therefore demand for maintenance, I’m not there yet. While there are certainly some plant closures I don’t think percentage wise they’re very big.

Operator

At this time there are no further questions.

Philip J. Hawk

Just to wrap up let me thank all of you for your participation in this call and your continuing interest in Team. We look forward to visiting with you at our next conference call. In the meantime, have a good day.

Operator

Ladies and gentlemen this concludes today’s conference. Thank you for participating, you may all disconnect.

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Source: Team, Inc. F3Q09 (Qtr End 2/28/09) Earnings Call Transcript
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