Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Team, Inc. (NYSE:TISI)

F2Q10 Earnings Call

January 6, 2010 9:00 am ET

Executives

Phil Hawk - Chairman and CEO

Ted Owen - Senior Vice President and Chief Financial Officer

Analysts

Matt Duncan – Stephens

Arnold Ursaner – CJS Securities

Rich Wesolowski – Sidoti & Company

Holden Lewis – BB&T

Max Ferret - Tudor, Pickering

Tahira Afzal – KeyBanc

David Yushak – Madison Williams

Operator

(Operator Instructions) Welcome to the Team IR Call. I will now turn the call over to Mr. Phil Hawk.

Phil Hawk

Welcome to the Team web conference call to discuss recent company performance. 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 our recently released financial results for the company’s second fiscal quarter ending November 30, 2009. 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; our 8-K, 10-Q and 10-K filings to the SEC as well as our Annual Report. Ted will begin with a review of the financial results and I will follow then follow with a few remarks and observations about our performance and prospects.

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

Ted Owen

As usual 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 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 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.

Revenues for the second quarter were $123.3 million compared to $148.8 million in the second quarter last year, a decrease of 17%. Similar to our first quarter, the sources of second quarter revenue declines when compared to the same period a year ago or broad based, reflecting the continued constrained maintenance and project activity in all our end markets.

Our revenue declines in Canada were even more severe then in the US and other areas due to the presence of a major oil sands project in the prior fiscal year which has since been completed. Reflecting primarily the impact of the Canadian facility project, CMS division revenues declined much more significantly then those of the PCM division.

Net income was $5.8 million in the current quarter versus $10.2 million in last year’s second quarter. Earnings per diluted share were $0.30 versus $0.51 in last year’s second quarter. Results for the quarter were negatively impacted by $1.2 million of non-routine costs associated with an independent investigation of potential SCPA violations in our TMS Trinidad Branch that we have previously disclosed in prior filings. Excluding these costs, net income would have been $0.34 for the quarter or $6.6 million.

On a year to date basis, revenues were $224.2 million, earnings were $7 million or $0.36 per diluted share. Again, excluding the impact of $2.3 million of non-routine costs on a year to date basis, year to date earnings would have been $8.4 million or $0.43 per share.

Now with respect to cash flow and balance sheet matters, capital expense was $2 million for the quarter and $3.9 million on a year to date basis which is down from $9 million in the first half of last year. Depreciation and amortization was $3 million for the quarter and $6 million year to date. Non-cash compensation expense was $1.4 million in the quarter and $2.6 million on a year to date basis.

Total adjusted EBITDA was $16 million for the quarter, $24 million on a year to date basis and trailing 12 months EBITDA was about $46 million. Please note that when we talk about adjusted EBITDA that reflects the add back of both non-cash compensation expense and the non-routine charges associated with the investigation.

We continue to be very pleased with our financial position during this difficult economic environment. Our net debt, that is total debt less cash, was $62.1 million at the end of the second quarter. That’s a reduction of $6.9 million since our May 31st year end. In the 12 months since the recession began for us at the end of the second quarter of last year, we reduced our net debt by more than $30 million.

With that Phil, I’ll turn it back to you.

Phil Hawk

Now I’d like to add several observations and comments to Ted’s remarks. As he indicated, we continue to work through a difficult market environment. Our earnings for the quarter are significantly below the record results achieved in last year’s second fiscal quarter. At the same time, however, I’m generally pleased with how we’ve managed our business in this very weak economic climate. Our focus has been on managing our costs, maintaining our profitability, expanding our financial flexibility, and staying well positioned for continued long term business growth.

While market conditions in the quarter remained difficult, there were a few encouraging signs. Our revenues for the quarter were up sequentially more than 20% over the first quarter and up slightly over our fourth quarter fiscal year 2009 revenues which was the last quarter encompassing the most recent prior turnaround period.

Further, while there are still many negative pressures at work in this market, we are cautiously optimistic that we’ll see some growth in activity level and revenues in the second half of the fiscal year. The primary driver of this revenue growth is expected to be expanded turnaround activity. Following nearly a year of fewer generally reduced scope major turnarounds in the industry, the current spring schedule is shaping up to be substantially larger then either the fall or spring 2009 turnaround seasons.

At the same time, we remain cautious in our outlook because most of the customer segments we serve continue to suffer from low demand and low profit margins when compared to historical levels. It is definitely not business as usual for anyone. We interpret the anticipated increase in maintenance activity to reflect the inability of our customers to defer major maintenance expenditures indefinitely.

Now let’s shift to our operating profits and profit margins. For ease of comparisons with prior periods, all of my remaining comments will refer to current financial results that exclude the investigation expenses. For the second quarter, operating profits were $11.5 million and operating profit as a percentage of revenues was about 9%.

Total operating profits were down 37% from the prior year period. Operating profit margin declined three percentage points versus that same prior year quarter. This decline reflects the impact of reduced pricing and lower job margins as well as a negative leverage effect of reduced volume partially offset by our cost reductions.

Total SG&A expenses have declined $3.8 million or 12% from the prior year quarter. I’m equally pleased with our cost performance above the gross margin line. Because labor is our largest expense category, technician labor utilization is a key driver of our overall productivity. Despite the significantly reduced activity levels versus the prior year periods, Team’s labor utilization levels are actually up more than one percentage point both divisions.

For those of you who have been listening to Team conference calls for several years, you will be familiar with this next discussion topic; operating leverage. At Team, we define operating leverage as the change in operating profit divided by the change in revenues. Because a portion of our costs do not vary directly with revenues or activity levels, incremental operation profit margins or operating leverage will be significantly higher then our base operating margin, both to the positive with growing revenues and to the negative with declining revenues.

Compared to the prior year quarter revenues and operating profits declined $25.5 million and $6.9 million respectively. The negative operating leverage was 27%. However, we expect to realize similar positive operating leverage as the market recovers and our revenues improve. We can see that impact by comparing second quarter results with the immediately preceding first quarter. Compared to the seasonally weaker first quarter, revenues and operating profits increased $22.4 million and $7.7 million respectively. The positive operating leverage compared to the sequential prior quarter was 34%.

We are focused on achieving similar positive operating leverage in the second half of the year. Given the existing infrastructure and capacity within our company, we believe the positive operating leverage around the 30% level is a reasonable expectation.

As our earnings release indicated, we are affirming our previously issued full year earnings guidance of $0.85 to $1.05 for fully diluted share for the fiscal year 2010 ending this May 31st. This estimate excludes expenses related to the FCPA investigation.

Let me provide a little more perspective on our earnings guidance. Team’s first half revenues on an annualized basis with no additional growth in the second half would equate to full year revenues of about $450 million. On the same no growth basis with similar operating profit margins to those achieved in the first half of the year, our full year earnings per share would be about $0.85.

As previously discussed today, we continue to expect Team’s revenues for the second half to be a little higher then the first half. With 10% revenue growth in the second half, total revenues would be about $470 million, representing incremental revenue growth of about $20 million. With the expected operating leverage discussed earlier, this level of revenue growth could result in earnings near the high end of the range.

Let’s now look to Team’s longer term prospects. Given the very difficult market environment over the past year, a number of fundamental issues naturally come to mind. We continue to revenue and explore these issues thoroughly and rigorously. Let me share some of our current thinking.

There are a number of issues related to our markets. As the markets changed fundamentally, this team still well positioned to capitalize on opportunities. Our conclusion is that the fundamentals that have provided the basis for our extraordinary growth over the past decade are as robust as ever. Demand for our maintenance services is very likely to return to historical levels.

We believe this to be true because one, it is unlikely that plants have been systematically over maintained in the past. Therefore, we believe that plants will continue to need a similar level of maintenance services as in the past. A customer can defer but not eliminate its service needs.

Two, it is unlikely that a substantial percentage of current operating plants will be closed. The announced closures of two US refineries by Sun and Valero in the past quarter certainly demonstrate that some plant closures can and will occur. However, as a percentage of total industry capacity we continue to believe that any reductions or closures will be small. It is also likely that future plant expansions for at least the next few years will be more limited. We will not have this extra tailwind for the foreseeable future.

Procurement consolidation with fewer, larger, more professional service providers we’ll remain a more powerful trend in the current economic environment. Plants have fewer and fewer in-house resources with which to supervise service companies. Service scale economies through procurement consolidation is a high leverage cost reduction opportunity for our customers. The larger service companies like Team can provide better support over a range of service needs and for all facilities in a company’s network. In short, Team continues to enjoy structural advantage over many much smaller competitors.

Another key issue relates to Team’s individual prospects. Specifically, can and will Team return to the high business growth rates the company has achieved historically? Despite its strong growth over the past decade, Team has very significant growth potential ahead in both North America and the rest of the world.

In North America, Team’s total market share today is still less than 20%. Total market share with major alliance customers is only slightly higher. We have an equally exciting opportunity in Europe. We have a solid foundation in the Netherlands and Belgium that can grow and expand in a number of dimensions. The market structure and overall size in Europe is similar to North America. Today our European business is only 5% of total Team revenues. It has the potential to be substantially larger in the years ahead.

Of course, having available market share to capture does not mean that Team will necessarily capture it. As has always been the case, we will have to earn it. Our success in that regard requires continued outstanding execution. The primary elements of outstanding execution are a customer service mindset where every colleague understands that customers choose us not visa versa and that we need to re-earn that next service opportunity everyday.

An outstanding organization that values the contributions of all of its colleagues and provides the appropriate resources and training to support world class service performance. An ability to focus on each and every job both operationally and financially. This isn’t trivial, with over 130,000 jobs annually. And a company culture that promotes safety, ownership, price, respect, and integrity in everything that we do.

The deep recession has caused us to react to significant near term declines and disruptions in our business in order to stay strong operationally and financially. We have not changed our long term strategy or our aspirations for the business. Team’s best growth opportunities are still ahead of us.

Before wrapping up, let me add just a couple of comments on the FCPA investigation. While the investigation has cost us more and has taken more time then we initially expected, I continue to believe that this unfortunate episode should have no significant impact on our business outlook. While the improper activity was limited in scope it is nevertheless counter to our standards and culture. It reflects negatively on our entire company. We have already strengthened our compliance processes and oversight in several significant ways and we’ll continue to enhance our compliance programs.

We have always been and continue to be fully committed to operating our business with complete integrity and honesty in all respects, with all parties including customers, Team colleagues, suppliers, and various government agencies.

Let me end with a few final perspectives and comments. We are blessed with an outstanding group of colleagues who continue to earn and affirm our customer’s trust and confidence with consistent outstanding service. As always, we intend to maintain a diligent focus on the basics of our business, providing great service with every service opportunity, continuing to capitalize on our service network advantages, managing the profitability of our business job by job, and balancing our resources with current activity levels.

That concludes my remarks. Now let’s open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Matt Duncan – Stephens

Matt Duncan – Stephens

The first question I’ve got for you really kind of goes back to the pricing environment. I know last quarter you had though it was about 100 basis points negative impact on your gross margin. You look at the gross margin this quarter and it was down a little bit less year over year then it was last quarter. Is that that pricing is improving a little bit or is that really more related to mix?

Ted Owen

I think it’s the latter. I think it’s related to mix. It varies, if you look at gross margins or we look at more even detailed direct profit margins vary a lot even by division and that reflects volume effects, mix effects, and a lot of the latter. I think on balance I would still swag, it’s hard to estimate but I’d still swag about that 100 basis points impact.

Matt Duncan – Stephens

Do you have any sense that with the expected up tick in the spring tied to turnaround activity that pricing may get a bit easier for you guys or do you think its going to stay tough?

Phil Hawk

I think its going to stay tough, and in the same vein we are. The driver of that is that the economic performance of our customers is poor. They are continuing to focus hard on anything they can do to address that issue for themselves.

Matt Duncan – Stephens

As you look at your various service lines, are there any that stand out that are doing better than others that may not be down as much and what’s driving that if there are?

Phil Hawk

If you look, I’m going to use year to date numbers, I think we’re, I’m rounding off here what are we down just a little less than 20% overall. Our on stream services are going to be down about half that amount. Our turnaround services about twice that amount. The turnaround services being heat treating, field machine bolting, field valve repair activities. The under pressure on stream servicing, leak repair, fugitive emissions monitoring, hot tapping. Inspection services have held up pretty well, not quite as good, it’s kind of a little bit of a blend, better then our overall averages but again reflecting a mix of on stream as well as some turnaround activity.

Our Alliance customers, our big customers, their rate of decline approximates the same as our total change in volume or decline so they’re basically representative of the whole as well.

Matt Duncan – Stephens

If I look at the investigation I remember last quarter we thought it was going to cost $2 million, now its $3 million. I’m curious what’s causing this to drag on and get more expensive?

Phil Hawk

My cute answer is lawyers. It’s an independent investigation and we’re really beholding to the independent investigators in terms of how they approach it. I really don’t have a lot to say other than like I noted it is a little bit more then we thought.

Matt Duncan – Stephens

Looking forward now to the spring, I know we’ve been talking about this for a long time and fairly in depth. It sounds like your expectations for the spring are still pretty much where they’ve been for the last six months, that things are going to be better, it’s tied to the fact that these plants simply cannot push out this maintenance too far, and they start having safety problems. Are you starting to sign on work for the spring at this point and have you seen any changes to the calendar, is it still pretty much the same as it would have been when we last spoke on this conference call three months ago?

Phil Hawk

Yes, it’s pretty much the same, although as we get closer and things aren’t moving or changing appreciably that’s a good sign. We are having discussions with many customers about their plans and activities, planned events this spring. We see a lot of industry data that supports that, that it will be a more active spring. The caution is that the economic environment for our customers in our area remains weak. I guess until it happens, we have a cautious optimism I guess.

Matt Duncan – Stephens

My recollection is these projects typically start up beginning in mid-February. Do you really have a sense when you might know how you think the spring really is going to shape up? Is it that mid-February startup point or is it really more after you get into these projects and find out really how much work sticks.

Phil Hawk

First of all I think we’re expecting to see some activity start as early as mid-January so there are some projects starting earlier then that mid-February range. Although it will then cover the entire period really into May and we’ll see perhaps in some years perhaps a little beyond that. We’re going to see some activity, some turnaround activity coming fairly soon we believe.

You are also correct that the scope of our work is significantly impacted by discoverables, when the project kind of gets underway. For us to have a real clarity even the revenue, projected revenue for particular turnaround it’s tough to estimate that with any precision really until it’s almost over.

Matt Duncan – Stephens

Am I correct in saying a mid-January turnaround start date is a bit earlier then normal?

Phil Hawk

It was certainly earlier then last year. I think over the last couple years we’ve seen some of those beginning in that time frame. I don’t think it’s particularly extraordinary.

Matt Duncan – Stephens

As you look at your various customer groups it sounds like the vast majority are still struggling. Are you seeing any signs in any of your major customer groups of improvement? Is there anything you’re seeing that points to potential improvement in the underlying fundamentals of your business, any time in the next 12 months?

Phil Hawk

That’s a very tough question to answer. I’d make a general observation just about business recoveries. It’s easy to see after it’s started; it’s hard to see before it’s started. I think maybe that’s a little bit where we are. I can’t point to specific positive things that are happening that are driving this forward but if the general economy is improving and there’s some indications I hear that if capital goods sales like autos improve that’s going to help the petrochem industry, that’s going to help the power industry, that’s going to help the steel industry.

A weaker dollar which we have certainly relative to a year ago, that will help exports of some of those same products or certainly the relative competitive vis-à-vis exports. Those are possible positive factors. I would just say from our standpoint our business position is we’re not investing or staffing ahead of actual activity because I think it could also stay soft for some time.

Operator

Your next question comes from Arnold Ursaner – CJS Securities

Arnold Ursaner – CJS Securities

I think you should ask your analysts to ask one question and then a follow up. In that skirt I would like to ask one question with a follow up. You mentioned the startup of seasonality and the turnaround season but you didn’t comment about the intensity of the work you expect to have. Last year you were being pretty much asked to bill eight hour days and not get a lot of overtime. Are you seeing more requests for 12 continuing work 12 hours shifts, seven days a week?

Phil Hawk

I don’t have a complete roll up of that but yes I think that is the case is that we’re seeing more typical, a higher mix of the normal seven day a week 24 hour a day turnaround schedule.

Arnold Ursaner – CJS Securities

When that occurs, typically doesn’t that enhance your margins into leveraging your SG&A a lot better?

Phil Hawk

In the sense, yes for that particular time period.

Arnold Ursaner – CJS Securities

Embedded in your revenue guidance or outlook for the rest of the year, what percent of expected revenue would be coming from project activity and are you seeing a change there?

Phil Hawk

I think, as I mentioned in my general comments, when you say project you’re talking about new construction or new capability as opposed to turnarounds?

Arnold Ursaner – CJS Securities

You’ve had a lot of work in the past in places like the oil sands and other project related activity.

Phil Hawk

If we looked a year ago I would have estimated about 15% of our revenues were tied to activities that I would say were new capability or new capacity projects. You mentioned the oil sands project was a good example, which was a Greenfield facility that was being constructed. I would say today that the percentage of our revenues associated with that, this is a little bit of a swag but is about half of what it has been historically. There are new pipeline projects, there are expansion projects still underway in the refining petrochem area and there still be fewer some of those it just is a much lower level.

Arnold Ursaner – CJS Securities

It had been more like 15% so you’re saying now its high single digits?

Phil Hawk

Yes, 5% to 7%, 5% to 8%, something like that. I have to say I haven’t actually gone back and added them up. It’s not going to be none because there’s just a need for replacement of pipelines here and there and there’s always some de-bottlenecking projects going on here and there.

Arnold Ursaner – CJS Securities

Typically strong companies gain share of market from weak competitors in downturns. Do you believe you’re gaining share of market though?

Phil Hawk

I believe the potential, I concur with your basic premise. I can’t say with just the level of disruption in the market that I can see it. That would be our hope and expectation that that will occur. Again, I’ll make a comment similar to the one I made, I think sometimes you see that better after the fact then while its happening.

Operator

Your next question comes from Rich Wesolowski – Sidoti & Company

Rich Wesolowski – Sidoti & Company

I’d like to drill a little deeper on that last question. You alluded to the fact earlier in the presentation that consolidating service providers becomes more appealing for customers when times are tight. Are there any anecdotal examples you could give of where maybe of one business that would have eluded you in a good economy?

Phil Hawk

I don’t think I have enough evidence that it’s happening in any way that’s material to really comment on. Can I say that we have earned business that a particular facility, sure but to say that I know the motives behind it and can say that its systematic to the consolidation trend, no I can’t. I can point to over the last several years just the expansion of our Alliance agreements or multi-plant, multi-service agreements have expanded extensively and that’s still continues to be a focus of ours. I can’t say that in the last 12 months that I’ve seen a huge change in behavior on that front.

Rich Wesolowski – Sidoti & Company

Going through the confluence of pricing agreements and the operating leverage that you sighted earlier it seems you’ve landed on an annualized gross margin range in low 30’s, 30% or 32% or whatever that equivalent is in your job margins that you look at internally. Give that you just exited a number of the pricing negotiations with your clients is that the range that we can expect until the economy picks up in earnest and you have the opportunity to revisit some of those agreements?

Phil Hawk

I think so. It’s going to be affected by mix and volume and all that but I think that’s a reasonable expectation.

Rich Wesolowski – Sidoti & Company

More than leverage would come from either the industrial SG&A or the SG&A.

Phil Hawk

Its going to come from volume because we’ll be able to handle more what we expect to be volume increases, we’re talking about overall margins will improve because of the operating leverage of principally the fixed costs fall below the line although also there will be some leverage in our indirects, gross margin line.

Rich Wesolowski – Sidoti & Company

How far do you trim the field headcount since the peak?

Phil Hawk

Our total headcount reduction is in the 350 range.

Ted Owen

It’s probably closer to, since the end of the second quarter a year ago it’s about 400 reduction. Out total headcount at the end of the second quarter right now are about a little more than 3,200.

Operator

Your next question comes from Holden Lewis – BB&T

Holden Lewis – BB&T

Building on some earlier questions, the first is when you commented about the turnaround seasonal that I assume that you’re sort of leaning heavily towards the refinery side of the business is half of what you do and you clearly said that everything remains weak. When you look at the other 50% of the business so it’d be chemical, petrochemical, metals, mining, whatever it is, do you have any similar type of visibility about that half of the business as you do on the refinery side? Are the dynamics of that visibility different? If so, are you also confident that that non-refinery business is going to be up 10% in the second half over the first half, that sort of guidance?

Phil Hawk

Because the individual plants and facilities are smaller in the other segments the flow of anecdotes and what I see personally is less then I see on the refining side. Anecdotally we hear about turnaround activity coming in those other areas but I would say that our basic premise is the refining petrochemical complex that’s where the big change that’s clearly visible to us. If we look at some of the markets, I don’t have a good sense one way or another on power and steel industries of whether there’s bigger turnarounds or not, honestly in the spring.

Ted Owen

When we talk about 50% of our business is refining remember that there’s another 15% that is the petrochemical complex and so the tracking data or the visibility relative to that piece, so its really more like 65% of our business that we have perhaps better tracking ability then pipeline and power.

Phil Hawk

On our books for this spring our expectation, our turnaround activity I’m familiar with several in the power industry. So we are seeing some activity there. It was surprising to me frankly how much the power industry was hurt by the lower economic activity. As I’ve been tracking industry stats the profitability of that industry was hurt quite a bit over the last year by reduced manufacturing output.

Holden Lewis – BB&T

The one area you didn’t address is on the project work. Oil being back around $80 are you increasingly encouraged that you’re going to start to see some of that new capacity work coming back on stream as you get into the second half of this fiscal year or into fiscal ’11?

Phil Hawk

I think as it relates to upstream activities, I’m referring to the Canadian oil sands, tar sands, yes we have some encouraging, I think its an encouraging trend. Actually we’re seeing some preliminary activity by the companies up there to restart projects in the oil sands. Whether that will happen the second half of this year or early next year or later remains to be seen but its encouraging activity that we’re seeing. As it relates to the refining complex in the US or North America I’m not particularly optimistic because crack spreads continue to be very, very low. I think we need a more robust environment for those things to be considered.

Holden Lewis – BB&T

You shaved out the $10 million in expenses on an annualized basis, what would it take for you to be sort of ticked back into growth mode where you begin to look to add those costs back and grow again? Do you need to see the macro indicators getting better because you’re pretty confident that revenues will be up year over year in the second half of 2010 but it sounds like that’s not enough to rekindle your spend. Under what scenario would you envision beginning to add those resources back into the model?

Phil Hawk

Let’s talk about the resources, the [inaudible] and the SG&A reduction our view is we didn’t completely revert back to where we were. We’ve maintained what we think we’ve done is really tighten and fine tuned our current capabilities. Our belief is that really with some substantial growth that we will not see expansions of SG&A expense, we’re anticipating holding the line.

A few things like we’ve really tightened the line on any kind of wage adjustments and any benefit programs that we would probably as our business improves try to get back more towards steady state in some of those areas. In terms of adding significant resources in anticipation of a stronger market that’s not our expectation.

Let’s talk about technicians or our direct resources. Again, our focus is going to be on high labor utilization and utilization of our technicians. As I pointed out in my comments, our utilization levels are very high but they’re very high frankly with low worked hours relative to what they’ve been historically for our technicians. I don’t have a precise number but somewhat illustrative number technicians today are working on average 40 to 45 hours, a year ago they were working 50 to 55 hours. We have a lot of capacity just built into our current workforce in order to capitalize on increased business opportunities.

I think we’ve also shown that we can ramp up fairly quickly in the face or in response to additional project opportunities. I’m not too concerned about our ability to serve new growth opportunities. We certainly commercially are focused on a number of dimensions on continuing to grow our business. What we’re not going to do is add resources ahead of that. We don’t perceive a need to add resources ahead of that, that’s not what we need to trigger growth, what we need is a little bit stronger market and then to get back into the positive momentum.

Operator

Your next question comes from Max Ferret - Tudor, Pickering

Max Ferret - Tudor, Pickering

You commented on the last call that you didn’t need the help of market fundamentalists to see 10% improvement in the second half of 2010 and that this would sort of get us half way back to normal. Based on the deferred maintenance and necessary evil pieces could we also see the first half of 2011 higher without the improvement in crack spreads and refinery utilizations, etc.?

Phil Hawk

That would be consistent with that thesis. Like I said, the cautious optimism is just the poor economics for our customers. I think the argument is the same.

Max Ferret - Tudor, Pickering

I was wondering how LRS fared in the quarter. You mentioned that this is sort of an area where you think you can grow. Also could you talk a little bit more broadly about the health of the European market and Team’s growth prospects over the next 12 months?

Phil Hawk

LRS did fine. It suffered proportionately to the North American operation just on a growth standpoint for the same reasons. Its margins are good and it’s profitable and it’s on par with our expectations and where we would have expected it to be.

We think there are phenomenal growth prospects particularly because of low base in a huge market. We are exploring lots of opportunities. Frankly we’re now kind of two years into our relationship with LRS and we a little bit of a year to get all our systems in place and we all dealt with the downturn this past year but we’ve got a number of step out opportunities that we’re pursuing. I’d really rather not dwell on individual ideas that haven’t happened yet but we’ll share them as we go. Our expectation is that we should see much more rapid growth percentage wise in Europe then we will in North American, again because of such a small base that we’re starting from.

Operator

Your next question comes from Tahira Afzal – KeyBanc

Tahira Afzal – KeyBanc

If I look at your compounded annual growth rate on earnings on a five year and 10 year basis, 10 year your earnings have grown as much as 30% on a compounded annual growth rate basis; over the last five years have grown at 17% on a compounded annual growth rate basis. When you talk about really getting back to historical growth levels, are we looking something around the 17% mark or 29% mark?

Phil Hawk

As you know the way math works, if you add a horrible year to a five years has more effect then if you add it to 10 and I think that reflects your numbers. Here’s our model of growth, we don’t expect much in the market, and we expect market share growth to drive it. Our historical aspiration has been 10% top line revenue growth and if we can achieve that organically we believe that translates into roughly 20% income growth. That would be our model and expectation going forward. Simply that continues to be our aspiration.

As you point out, we’ve had some acquisitions that will affect our top line growth a little bit more then that historically, and of course if you get a 10 year look we’re a little bit higher then that overall. I think that’s my personal aspiration is to achieve those results long term.

Tahira Afzal – KeyBanc

If you look at your G&A as you have discussed and I think it’s been fairly well thrashed out. If you look at your growth rate outside of 2010 and look at your top line growth rate really going back to let’s say 10% and on a non-normal level. How do you see G&A ramping up, have you pushed it down to the point where the ramp up would have to be a little more accelerated if business comes back just because you made your structure very lean? Or should we assume that G&A growth is really going to replicate historical levels on an organic basis?

Phil Hawk

I hope we do better. I’m going to give you a little historical perspective on where we were a year ago. One year ago we would have I think if you look at 10 year growth rates one year ago our compound growth rate was approximately revenue, our activity level was approximately 30% a year, our organic growth rate for the last 10 years at that point was 15% to 20% a year. This is going from $50 million to $500 million.

We were transforming our company from a support standpoint as we got bigger and bigger and frankly probably got a little ahead of ourselves as we put in some of the capabilities that we needed to manage that business really in all areas of accounting, finance, HR, IT, all those systems just to run a full sized business.

I think what we’ve done in this downturn is really not dismantle that but tighten that up and recognize that we were more concerned about covering the business and supporting our business then being as optimal as we could be from a cost standpoint because of the rapid growth that we were trying to manage. I think we’ve now tightened up to where we think we have a pretty good support and pretty efficient support activity.

Frankly I think we can add a substantial amount of business without significantly increasing that support activity. As I mentioned to one of the other callers, things that relate to just depressing, non-normal personnel management like depressed wage adjustments and benefit support I would like to restore that to more normal long term levels.

In terms of adding significant resources or seeing the need to add significant resources to support our business I certainly don’t see that from a corporate standpoint. I think even commercially the add backs will not be proportionate to a revenue growth I hope to be much lower.

Tahira Afzal – KeyBanc

If I look at your peak earnings before the economy sort of went all topsy-turvy and that was in 2008 you produced earnings of $1.20 and that was only on a partial contribution from LRS. Would it be fair to say as we look out to fiscal year 2011 and I know you’re not presenting any guidance at this early point, but as we look beyond 2010 would it be fair to say that you could well exceed that just because your G&A is going to be well under control?

Even if we look at fiscal year ’10 and if it turns out that its closer to your expectations cautiously optimistic expectations of close to the upper end of the guidance. Then your earnings really haven’t declined that materially over the last couple of years even though the market’s been fairly challenged. With a more lean structure would it be easy for you to surpass assuming global economy continues to recovery and EPS outlook organic which exceeds your 2008 levels?

Phil Hawk

I’m not going to let you pin me down on a forecast for ’11. I would say it this way, the operating leverage that we would expect significant operating leverage on revenue growth and to achieve what you’re asking about, what does it take to get beyond $1.20 its not very much, its revenue growth in the 10% range over running rate at the end of the fourth quarter, second half. To using your scenario, if we’re running at a 470 rate for the year or maybe a $500 million rate roughly for the second half of the year a little growth on that should exceed historical earnings levels.

Operator

Your next question comes from David Yushak – Madison Williams

David Yushak – Madison Williams

As far as you’re looking into the second half of this year and your optimism, do you think that you can probably do more with your alliances in this period in the next six months versus becoming more aggressive on the bidding for business away from your alliances?

Phil Hawk

I would expect because the major turnaround will be alliance customers, I would expect that business to grow a little more rapidly just because of the source of where the activity is. Generally speaking I would say that a plant’s a plant. Our service locations are calling on all those plants and we really don’t make a big distinguishing discernment between who the owner is or which ones we would go try to serve or call on. I expect us to continue to expand in a number of dimensions.

David Yushak – Madison Williams

With a good potential robust opportunity here in the spring, is it your thinking that you may have to become more aggressive on the bidding side just because everybody does have capacity to add new business? Is that pricing environment going to be more difficult maybe then what you’ve seen in the past based off of where we’re at in the way of utilization rates?

Phil Hawk

No, it is difficult now because of just the, as I mentioned earlier, the poor economics for customers. I think a lot of this work, I won’t say all of it but a substantial portion of it will be performed under the basic agreements that are in place. I don’t see the amount of work that we’re going to do this spring based on our success in bidding for activities, we have arrangements in place some of which that have been modified in the past year but its in place and that’s what we’re going to work under.

David Yushak – Madison Williams

Because of the weak economic conditions does that suggest that maybe there are more acquisition opportunities and would they be more focused in Europe for you guys then here in the US? Thinking that with the weak economy you may want to step up to the plate more then you would as recovery develops.

Phil Hawk

As we’ve said before, I think we always look at acquisitions as a possible supplement to organic growth. To the extent that you’re in a disruptive environment that might make some opportunities more available although that’s kind of a theoretical observation. We remain interested in opportunities that can accelerate our growth beyond our organic activities. That’s really going to be the key through is that we’re looking for opportunities that not barring growth that we would naturally earn anyway but buying capability or exploring capability that could allow us to expand in areas or expand more rapidly then we would otherwise do. We remain receptive to that.

The difficulty is, as you know, with any acquisition is it takes two consenting parties, they’re difficult to do so we don’t really forecast those. We continue to be opportunistically alert to things that might hit us.

Operator

Your next question comes from Holden Lewis – BB&T

Holden Lewis – BB&T

It looks like your debt overall went up sequentially in Q2. I understand there are some seasonal factors behind that. From the current debt position what is your expectation over the balance of the year; would you expect to reduce debt by a meaningful amount? Can you give a sense of what’s expected on that line?

Ted Owen

I would not really expect to see debt come down a lot over the course of the year because in the second half of the year we expect overall revenues to grow for reasons we’ve described. Certainly in the second quarter revenues grew 20%, our biggest capital requirement is working capital associated with periods of growth. In the third quarter you’ll see debt come down again but then in the fourth quarter it should go back up again.

You’re not going to see the extraordinary reductions that we saw over the course of the first half of the year in the second half of the year but we should continue to see, as a result of we will have constrained capital spending in the second half. Certainly we will continue to tightly manage receivables and so the effect of earnings should result in more reduction in debt but not on dramatic levels that we’ve seen in the first half of the year.

Holden Lewis – BB&T

A higher view question, I’ve asked before, didn’t know if there was any greater insights or anecdotes on it. When you think about the various federal initiatives that are in place whether it is toward clean energy which might work against oil sands or whether you think about cap and trade which I think the refiners are not all that pleased as what might come out of that. Do you have any greater insights into what some of these external federal driven items might have on you over the next several years?

Phil Hawk

We really don’t. The test I would make is there anything I’m rooting for or rooting against, what I thought would be good for us or not. The answer is really there isn’t anything. I just don’t have a perspective of what would be helpful or not frankly to our business.

Operator

At this time we have no questions.

Phil Hawk

I want to thank everyone for your participation in this call and your continuing interest in Team. We look forward to our next conference call at the end of next quarter, I think it’ll be sometime in late March, early April timeframe. In the meantime, everyone have a good day.

Operator

This concludes today’s conference. Thank you for participating. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Team, Inc. F2Q10 (Qtr End 11/30/09) Earnings Call Transcript
This Transcript
All Transcripts