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Team, Inc. (NYSE:TISI)

F2Q08 Earnings Call

January 8, 2008 11:00 am ET

Executives

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

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

Analysts

Arnold Ursner – CJS Securities

Matt Duncan – Stephens, Inc.

Byron Pope – Tudor, Pickering, Holt & Co., LLC

Michael Cohen – C.K. Cooper & Company

Michael Carney – Coker & Palmer Investment Securities

Mike Breard – Hodges Capital Management

Richard Nelson – J. Giordano Securities Group

Operator

Good morning ladies and gentlemen and 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. I will now turn your call over to Mr. Phil Hawk. Mr. Hawk you may begin

Philip J. Hawk

Good morning and happy New Year. Welcome to the Team, Inc. web conference call to discuss recent company performance. My name is Phil Hawk and I’m the Chairman & 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, 2007. 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 in intended to supplement our quarter earnings releases, our 8K, 10Q and 10K filings to the SEC and our annual report.

Ted will being with a review of the financial results. I will then follow Ted with a few remarks and observations about our performance and prospects before opening it up to questions. With that Ted, let me turn it over to you.

Ted W. Owen

First 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 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 any 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 other wise.

Now, to the financial results. Revenues for the second quarter were $112.3 million compared to $83.2 million in the second quarter last year or an increase of 47%. That revenue increased includes $15.9 million of revenues attributable to the Aitec acquisition that was effective on June 1st. So, therefore the organic second quarter growth rate was about 28%. Net income was $7.8 million in the current quarter versus $5.5 million in last year’s second quarter an increase of 23%. Earnings per diluted share was $0.40 in the current quarter versus $0.29 in last year’s second quarter. On a year-to-date basis our net income is $11.3 million and that is more than 60% ahead of last year and fully diluted earnings per share is $0.58 on a year-to-date basis is up well over 50%.

Now, let’s take a look at our industrial service business in more depth. First, as a reminder, our industrial services includes an array of specialized services related to the construction and maintenance of pressurized piping and process systems as well as specialized inspection services. The industrial service business is organized into two divisions TMS which includes leak repair, hot taping, fugitive emissions monitoring, field machining, technical bolting and field value repair services and then TCM which is comprised of steel heat treating and inspection.

TMS revenues in the quarter were $48.9 million compared to $39.2 million in the second quarter last year. That’s an increase of 25%. TCM revenues in the second quarter were $73.4 million compared to $44 million in last year’s second quarter or an increase of $29.4 million including the $15.9 million as I mentioned a moment ago from the acquisition. Organically TCM revenues’ increased 31% in the quarter.

Operating income for the industrial service business which excludes corporate costs not directly attributable to field operations was $18.6 million in the second quarter versus $13.5 million in last year’s second quarter or an increase of 38%. Field operating income as a percent of revenue was 15.2% in the current quarter down about a percentage point from last year’s quarter. However, that decline was largely offset by a reduction in corporate costs as a percent of revenue resulting in an overall operating income percentage of about 12% comparable to last year’s second quarter.

A point about corp costs. While decline as a percent of revenues corporate costs were impacted by an increase in non-cash compensation expense as FSAS 12R in the quarter. In October we granted 630,000 new options as part of our annual incentive option awards consistent with our previously announced long term plan to maintain a burn rate of about 3% of outstanding shares. Because of the significant growth in stock price in calendar 2007 however, the [Black Show’s] valuation of those new options caused an increase in our non-cash comp expense by about $200,000 and we expect total non-cash comp expense to be about $1 million per quarter over the next several periods.

Now, with respect to our balance sheet and cash flows. First, as we’ve discussed previously in order to finance our acquisition of Aitec we increased our revolving credit facility to $120 million which includes $34 million that was drawn on June 1st to complete that acquisition. Additionally, in the second quarter we borrowed $5 million to acquire 50 acres of land which will be used for future headquarters, manufacturing and equipment center development. At the end of the second quarter our debt net of $5.8 million in cash was $88.5 million. Our debt to EBITDA was about 1.9 to 1 and our available capacity under our credit facility was $33 million. We will be using about $19 million of that availability to complete the announced acquisition of Leak Repair Specam in Holland in the next few days.

Just some other finance numbers. Cap ex for the quarter excluding the land acquisition was about $5.6 million. D&A was about $2.7 million in the quarter. And, non-cash compensation expenses as I mentioned previously was about $600,000. DSO – day sales outstanding at the end of the quarter was 83 days and as we previously announced we expect total cap ex for the year to be about $15 to $20 million excluding the impact of the land acquisition.

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

Philip J. Hawk

I would now like to share a few additional comments and prospectus. Obviously, we are very pleased with the overall performance of our business. First, we are proud of our financial performance in the most recent quarter and year-to-date. As Ted reported overall earnings growth in the quarter and year-to-date exceeded 40% and 60% respectively. The driver of this earnings growth continues to be strong broad based revenue growth. As described in the earnings release and touched on by Ted in his remarks both divisions continue to achieve outstanding organic growth that is broad based both geographically and across service lines.

In my view this growth is a result of a number of factors. There’s no question that overall market demand for our services remains robust driven by continuing refinery turnaround and expansion project, significant pipeline projects and generally firm demand in most other segments. We also believe that we continue to gain market share by providing outstanding field service and capitalizing on long term customer procurement trends that favor larger, multi service and multi location service providers. And, we’ve been able to meet this increased demand by continuing to increase our service capacity.

Since the beginning of the fiscal year on June 1, 2007 Team has increased it’s full-time field employee rank by 217 people about 8% excluding the impact of the Aitec acquisition. Our organic growth is being supplemented by attractive performance of our new Canadian inspection activities, the former Aitec business. We are delighted with our new colleagues and very pleased with their performance to date. We are more enthusiastic than ever about our long term prospects related to these new capabilities.

As Ted indicated our operating income margin for the most recent quarter was about 12% flat with the prior year period. On an integrated basis an approximately two percentage point decline in gross margin was offset by an approximate two percentage point decline in SG&A expenses as a percent of revenue. Moving back to gross margins the majority of decline in gross margin percentage was mix related due to the inclusion of Aitec and the higher organic growth rate of the TCM division which has historically lower gross margin levels. Within TCM division the gross margin percent for the legacy regions were flat versus the prior year. The addition of the former Aitec business which currently has lower gross margins than the legacy regions reduced overall TCM division margins by about one percentage point. TMS margin declined about two percentage points from very strong prior year levels.

Overall SG&A expenses increased more than 35% for both the quarter and year-to-date periods. However, as a result of even more rapid revenue growth SG&A expense as a percentage of revenue decreased a couple of percentage points. While we are benefiting from the inherent operating leverage of rapid business growth rigorous attention to SG&A expense will also continue to be an ongoing priority.

We remain optimistic about our future. The outlook for overall market demand continues to be strong. The competitive market fundamentals which favor larger multi service multi location service providers like Team continue to be attractive. And, we are pleased with our continuing ability to add resources and expand our capacity. The key for our company is staying focused on our business fundamentals and remaining an outstanding service company.

Now, let’s shift to our new acquisition. Our planned purchase of Leak Repair Specam is an exciting new initiative for Team. It provides us with an initial service presence in Europe for Team’s current service lines. Let me share a few perspectives on this new business. Leak Repair Specam is a high quality company that we already know very well. For the last 20 years LRS has been a licensee of Team’s leak sealing, hot tapping and fugitive emissions technologies. They use the same technical approach as Team in their service activities. The current service lines of LRS are similar as those offered by our TMS division and include leak sealing, field machining, hot tapping, fugitive emissions monitoring, bolting and value repair. LRS has an experienced management team whom we know well from many years of working together. The entire organization will be joining us. LRS has a very strong market presence and a strong base of technical support capabilities. The company has about 90 employees based out of our service locations in the Netherlands and Belgium. Total annual revenues for the prior year were about $22 million.

In short, while it is already a strong company in its own right it is also an outstanding base for growth and expansion in Europe. We believe that Europe represents a market and business opportunity for Team that is similar to our North American opportunities. We estimate that the European and North American markets are similar in overall size with more than $2 billion in total European demand. We believe the customer structure, demand patterns for our services and the fragmented services of fire structure are similar as well. In short, we believe that an outstanding service provider who can leverage a multi service multi location network will have excellent growth prospects.

Our near term objective is to smoothly transition the business into the Team family. For starters we want to maintain the focus of our managers and new colleagues on providing outstanding service to our European customers. We have no plans to change the organization or service approach of the business. We will be working closely with our new managers to more fully understand our business and its opportunities. As we have done with all of our acquisitions over the next several months we anticipate implementing appropriate IT and financial systems similar to those we use in North America to make available our full suite of business analyst and management tools.

Finally, over the next several months we will be developing a longer term plan to capitalize on the most attractive growth opportunities available. For the remainder of the year we expect the business to be slightly accretive but not material to Team’s overall earnings. Again to recap, we’re delighted to take this initial step in Europe. The long term potential of our European business is very exciting indeed.

Now, let’s turn to our outlook for the remainder of the fiscal year. As we indicated in the earnings release due to the strong results achieved during the first half of the year and our continuing positive outlook we’ve again raised both our revenue and earnings guidance for the full year ending May 31, 2008. We are increasing our full year revenue estimate by $25 million to $450 million for the year. We are increasing our full year earnings guidance by $0.05 per share and now expect overall earnings to be between $1.10 and $1.20 per fully diluted share. These revised estimates exclude any impact related to the planned purchase of Leak Repair Specam. As always we will continue to review our guidance and make adjustments as appropriate at least on a quarterly basis. You can be assured that we will be working very hard to fully capitalize on all of our opportunities both in the remainder of this year and beyond.

Similar to last quarter I’d like to end with a quick comment on our recent recognition Team has received. Last quarter we were proud to report that Fortune magazine had named us to their 2007 list of 100 fastest growing companies. Last October in 07 Forbes magazine named Team to its 200 best small company list. For this listing we understand that Forbes considers all public companies up to $750 million in annual revenues. Team was ranked 36 in this year’s list which is based on current year and five year performance records.

To wrap up my comments our company continues to have positive momentum in many key areas and we are very excited about our prospects both in North America and now Europe. However, we also realize that we cannot rest on our laurels. All of our success and future opportunity depends on our continuing to provide our customers outstanding service and support every single day. Fortunately, I’m privileged to work with a great team of colleagues who are fully dedicated to doing just that. That concludes my remarks. Gretchen can we now open it up for questions?

Question-and-Answer Session

Operator

We will now begin the question and answer session. (Operator Instructions) Our first question comes from Arnie Ursaner from CJS Securities. Sir your line is open please go ahead.

Arnold Ursner – CJS Securities

The first question I have is regarding Aitec. I think at the time of acquisition it had roughly $50 million of revenue and your run rate right now based on the current quarter is materially above that. Are currencies one of the issues? Or, are you in fact seeing dramatically higher growth in Aitec?

Philip J. Hawk

I think it’s a combination of the two. I’m just trying to get a hold of that? Would you have the revenue today for Aitec?

Ted W. Owen

Revenue today of about $26 million for the year-to-date which is roughly that $50 million rate or slightly higher. We had $16 million in the quarter.

Philip J. Hawk

Arnie particular in the east should mirror the seasonality that we experienced in the US relative to turnaround season in the fall and the spring.

Arnold Ursner – CJS Securities

My second question relates to the acquisition you have made of LRS. Can you give us a little bit of feel for the customer base they have? Are they as exposed as you are if you will to refineries? A little more on their customer base and you mentioned it would be minimally accretive to 08 but I wanted to get a feel for what sort of revenue and EBITDA and margin we might expect in 09 with a full year behind you?

Philip J. Hawk

I think just answering the second question first I believe we’ll have a much better feel for the outlook of the business as we get involved with the managers and really detail out some of our attractive growth opportunities. It’s our premise that they’ll be very attractive organic growth opportunities there going forward. In addition we may supplement here and there as we go forward with other tuck in type acquisitions. The profitability of the business is approximately 10% EBIT in terms of margins. As I think it mentioned in the earnings release this has been part of a larger essentially an engineering and construction company a GGI group so we’re going to be carving out some of their corporate support as putting our own in place so it may not be completely apples-to-apples but we think it’s an attractive business that’s overall profitability is not all that dissimilar to ours from that standpoint.

In terms of customer and markets they have a heavy focus on the energy sector just like we do which would be refining, petro chem and power. They also have a more significant heavy industrial and marine business than we have in North America particularly related to their very extensive and considerable field machine capabilities. So, they’re doing a lot of work in terms of dock, harbor and also marine vessels as well as heavy industrial such as steel mill machining and that kind of activity. So, they’re a slightly less intense mix on the energy sector but kind of in the highest level abstraction it’s not greatly different.

Operator

Our next question comes from Matt Duncan from Stephens Incorporated. Matt please go ahead.

Matt Duncan – Stephens, Inc.

Did you guys have any new significant mass or service agreements in the quarter by any chance?

Philip J. Hawk

We’re updating them all the time so I don’t have any – there’s nothing that comes to mind that we had kind of a big one here or there. I would say that our organic gross rate from our master service agreements was about 30% in the quarter so it kind of mirrored our overall organic growth.

Matt Duncan – Stephens, Inc.

Okay. That was actually my next question – how much of that organic growth you think came from master service agreements and I guess if it’s really the same.

Philip J. Hawk

I think 25 to 30% of our total business is from those types of agreements right now.

Matt Duncan – Stephens, Inc.

Okay. But, year-over-year there’s not really any significant change in new agreements there?

Philip J. Hawk

No. I mean, we’re always working on them and we will expect to kind of incrementally add along the way. But, I think the broader point I’d make is we have a very broad based business by customer, by geography, by service line and I don’t think the additions of new – you know we’re trying to get business everywhere including the bigger companies but we don’t expect to see them dramatically increase as a portion of our total list.

Matt Duncan – Stephens, Inc.

Did you have any particular service lines that outperformed the others by a meaningful amount? I know you said that the growth was broad based across the board but, did you have any particularly strong performers?

Philip J. Hawk

You always have kind of noise because of a particularly big project here or there compared to the prior year quarter. I’d believe all but one service line had growth. I know if you look at year-to-date all 13 of our regions, legacy regions had growth. 11 of our 13 regions had double digit growth. That’s about as broad based as you can get. I don’t have that complete detail for each service line but I believe all service lines year-to-date had growth. If not all certainly seven out of eight did.

Matt Duncan – Stephens, Inc.

I want to talk a little bit more about the SG&A leverage that you guys are seeing. It’s about 200 basis points year-over-year so very high leverage there. Can you walk through just with us a little bit kind what’s the main drivers of that leverage? And then, how long do you think you can carry on this sort of 200 basis point year-over-year leverage there in SG&A?

Philip J. Hawk

Well I think the key driver of that is top line. As we’re growing very, very attractively both organically and of course, we have the impact of Aitec on there. I guess as we’ve kind of evolved we’ve kind of increased our size about ten fold over the last eight years and we’ve had good operating leverage through most of that. From time-to-time as we hit different thresholds I guess we hit points where we need significant upgrading of support activities in one area or another. But, we don’t anticipate any major increase in kind of support costs other than the kind of normal rates we’ve been running in the last year or so.

Matt Duncan – Stephens, Inc.

A couple of final question here and then I’ll just jump back into the queue. First, how’s the third quarter going so far? We’re about half way through. Then also, I know you guys have been talking about a pretty strong spring turnaround season. Is there any more background you can give us to that and kind of just maybe talk about the expectation for the spring turnaround season this year?

Philip J. Hawk

I think as I mentioned in my remarks, is generally our outlook and our optimism is high for both third and fourth quarter. We see a lot of activity out there it’s just up to us to execute it.

Operator

Our next question comes from Byron Pope from Tudor Pickering. Please go ahead Byron.

Byron Pope – Tudor, Pickering, Holt & Co., LLC

Just one question for you – with regard to how you think about Europe going forward could you speak to the state of the availability of field technicians. I know this has been an issue for the industry in the US market. Is that market as tight in Europe and does that impact the way you think about your approach to growth in Europe organic versus more kind of both on acquisitions?

Philip J. Hawk

To be real honest our level of understanding of that level of granularity is low right now. So, I can’t tell you precisely what the kind of workforce availability is for hiring. But, I guess our premise would be that organic growth supplemented by some acquisitions will be the way we go. As we have grown domestically, or not domestically, within North America it is creating demand and training and developing more personnel and it would be my hypothesis that that would be attractive to do in Europe as well.

Byron Pope – Tudor, Pickering, Holt & Co., LLC

So, is it fair to think that there are other LRS type companies in Europe which you’re already licensing equipment to that might over time fit that model?

Philip J. Hawk

It’s a possibility. We don’t have any plan at this point to do it. But, as we kind of look at opportunities that’s a possibility.

Operator

Our next question comes from Mike Cohen from CK Cooper. Michael please go ahead.

Michael Cohen – C.K. Cooper & Company

I wanted to ask about the acquisition in Europe. I know that we’ve had a lot of discussion about it but can you give us any sense in terms of the overlap with Furmanite and sort of their position there? Are you going to be sort of fighting it out a little bit here and are we going to see some price compression there and that type of stuff?

Philip J. Hawk

We are a direct competitor of Furmanite where LRS or Leak Repair Specam currently operates and that’s in Holland and Belgium. I’m not an expert on Furmanite but it’s my understanding that they have a broader European presence than just those markets that we are not currently in. A point I’d make though is that Furmanite is a direct competitor of Team throughout North America certainly, throughout the US. So, to the extent there’s any, if you will, price pressure from competitive intensity I think we’ve kind of experienced it and I would certainly not anticipate anything different than what’s already taken place.

Michael Cohen – C.K. Cooper & Company

Just one question I think maybe Ted if you might address it. I think in the first quarter you spoke about a 93 to 94% utilization rate ex of the vacation timing. Was that comparable in this quarter?

Ted W. Owen

Yeah. In fact if anything, it might be a little bit higher in the second quarter. Second quarter utilization is typically higher. We just run flat out Michael in both our second and fourth quarter during those turnaround seasons.

Operator

Our next question comes from Mike Carney from Coker Palmer. Mike please go ahead.

Michael Carney – Coker & Palmer Investment Securities

First, on the acquisition again is that your largest licensee in Europe?

Philip J. Hawk

Yes.

Michael Carney – Coker & Palmer Investment Securities

Then, where do you have other licensees in Europe? Is it other regions other than the Benelux? Or, is that most of it?

Philip J. Hawk

We have active licensees in the UK, Spain, and then in the Middle East.

Michael Carney – Coker & Palmer Investment Securities

Okay.

Philip J. Hawk

Arabia and Kuwait.

Michael Carney – Coker & Palmer Investment Securities

Phil, you mentioned the growth in the consultant base but I kind of missed that. Do you want to repeat that?

Philip J. Hawk

The total field personnel base excluding the acquisition, the Aitec acquisition was up from the beginning of the year about 217 people so that’s about 8%.

Michael Carney – Coker & Palmer Investment Securities

So, you had 225 or something from Aitec. So, basically you continue to add at about the same pace as you did in the first quarter that you did in the second quarter organically?

Philip J. Hawk

Approximately very similar, you’re right. It’s a little over 100 I think we added in the quarter.

Michael Carney – Coker & Palmer Investment Securities

That doesn’t include contractors through, correct?

Philip J. Hawk

Correct. These are full-time technicians and we supplement those with our project specific or project personnel.

Michael Carney – Coker & Palmer Investment Securities

Okay. What was the turnaround versus the online growth in the quarter?

Philip J. Hawk

They were actually – I don’t have a complete [inaudible] of that but they were actually pretty comparable. Both were quite strong.

Michael Carney – Coker & Palmer Investment Securities

So, both were above 20%?

Philip J. Hawk

Yes. Certainly above 15, I mean give me a little wiggle room. But, they’re high teens or twenties.

Michael Carney – Coker & Palmer Investment Securities

Ted you had mentioned the D&A was $2.7 million in the quarter, is that right?

Ted W. Owen

Correct.

Michael Carney – Coker & Palmer Investment Securities

How much of that was amortization?

Ted W. Owen

Mike I don’t have that number. I can get it for you.

Michael Carney – Coker & Palmer Investment Securities

Well, tell me was it small? I mean $100,000? Any idea?

Ted W. Owen

I think it was very small relative to the total.

Michael Carney – Coker & Palmer Investment Securities

It’s only coming from Aitec, right?

Ted W. Owen

No, no, no. We have a non-compete capitalized cost associated with a prior acquisition that’s being amortized.

Michael Carney – Coker & Palmer Investment Securities

So, there’s a little bit leftover from many years ago?

Ted W. Owen

Yes. Exactly. It’s not a lot though. It’s a fairly insignificant amount.

Michael Carney – Coker & Palmer Investment Securities

The intangible on the European business I assume are going to be pretty small, right? That’s going to be almost minimal amortization there?

Ted W. Owen

I think that will be correct, yes.

Michael Carney – Coker & Palmer Investment Securities

Phil, you had mentioned 10% EBIT on the current European business. Is that including any new synergies? Or, is that currently what they’re running at?

Philip J. Hawk

That’s our estimate of currently what they’re running at as if we owned them. So, in a sense as I mentioned, we’re going to transition off support activities. For example, financial systems, IT systems, HR, legal, support activities that are currently provided by GTI, their former parent company that we’re estimating what it will cost us to provide those to them. But, candidly in terms of synergies there aren’t really any because they’re servicing a different market. We’re going to collaborate technically and commercially to support their activities but the real leverage is growth that we think will be possible as we go at this on a more focused and aggressive basis.

Frankly, one of the issues they had at GTI when they were owned by GTI is that due to the GTI’s current company SUEZ and they have a country-by-country approach to their businesses. So, LRF was not permitted to seek market opportunities in contiguous areas such as Germany, France, etcetera so we see those as nice kind of opportunities just by opening the available market.

Michael Carney – Coker & Palmer Investment Securities

Does SUEZ have other services businesses?

Philip J. Hawk

Well GTI is a major engineering and construction company.

Michael Carney – Coker & Palmer Investment Securities

But in services that you compete?

Philip J. Hawk

No. [Inaudible] type businesses. No but, they essentially don’t, no.

Michael Carney – Coker & Palmer Investment Securities

And you’re keeping the entire management team?

Philip J. Hawk

Correct.

Operator

Our next question comes from Mike Breard from Hodges Capital. Please go ahead.

Mike Breard – Hodges Capital Management

Just a question on the European market is that characterized by any smaller competitors or [inaudible] larger ones? What happens with the structure there?

Philip J. Hawk

We believe that it is similar to the US in terms of lots of smaller competitors. Again, our detailed knowledge country-by-country is limited at this point. So, we can’t speak to it as knowledgeably as we will going forward. But, our premise is that having I’m going to say a technical base, a large deep technical base to support an ever expanding geographic service network much like we do in North America will be a very attractive approach to that business in Europe. It will give us flexibility to bring larger scale resources to bare that we think has historically been the case in some of those markets much like we’ve done in North America and that’s kind of the approach we’re looking at. And, we think that there’s lots of little or smaller more limited service companies currently in each of these individual countries that we’ll be an attractive alternative to perhaps some of those service approaches today.

Mike Breard – Hodges Capital Management

Okay. One other quick question is the second quarter your revenue growth how much of that might have been attributed to price increases for similar services?

Philip J. Hawk

That’s a difficult issue for us to measure precisely because of the effective mix. But, my estimate just based on the activity level, the billed hours is that we’re generating in our system, my estimate is that the price affect is about 5 to 8% of the revenue growth.

Operator

At this time we’re going to go to the line of Richard Nelson from J. Giordano Securities. Mr. Nelson please go ahead.

Richard Nelson – J. Giordano Securities Group

Just a couple of quick questions, most of my other questions have been answered. I noticed that your tax rate notched down a little bit here. Is there something there that we should know about? Any change in the way you’re handling things? Or, can we look forward to that being a little bit lower going forward?

Philip J. Hawk

I think in the aggregate you’re going to see about a 40% effective tax rate for the year. In the second quarter it’s a little less than it was in the prior quarter. It’s primarily a function of just higher earnings spooning the effect of permanent differences if you will. Then, the other thing with respect to our non-cash comp expense we changed the kind of awards that we make. We now make non-qualified awards for tax purposes that allow us to tax benefit new awards whereas relative to our incentive stock options those were non-tax benefit previously.

Richard Nelson – J. Giordano Securities Group

Cash, you might have mentioned this but, what is your ending cash balance for the quarter?

Philip J. Hawk

$5.8 million.

Operator

Our next question comes from Matt Duncan from Stephens, Inc. Matt your line is open.

Matt Duncan – Stephens, Inc.

A couple of quick follow ups – first of all with LRS just one last quick question. Do you have a trailing EBITDA number for those guys?

Philip J. Hawk

I think EBIT is roughly the same as EBITDA and as I said we’re roughly at $22 million so that would be like $2.2 million. That would be roughly EBIT or EBITDA really.

Matt Duncan – Stephens, Inc.

Next, on Aitec can you talk about how they’re performing relative to your expectations? I know you said they’re doing very well so far but just looking at the expectations you guys had when you bought the business how’s it performing?

Philip J. Hawk

Outstanding. We’re really pleased. From a financial standpoint I think they’re slightly ahead. I think revenue volume wise we’re probably about where we thought we’d be. I think margin wise we’re a little ahead of where we thought we would be. But, I will tell you one of the things that has pleased me most is just the enthusiasm of their entire organization to work closely with our group up in Canada; has been outstanding. So, just the commercial synergies that we’re in the process of generating and their leadership and kind of being part of that has been a very pleasant, it’s not a surprise so much but a very pleasant event I should say. And, like I say we just see those collaborations generating great opportunities for us down the road near term as well as longer term. So, we are extremely pleased with their efforts.

Richard Nelson – J. Giordano Securities Group

How’s it going taking their inspection service into [inaudible]? Have you had any successes there?

Philip J. Hawk

We’ve got a branch there. We got their personnel in Fort McMurray already. And vice versa by the way taking other services into account in geographic areas where they were strong and we had very limited presence.

Richard Nelson – J. Giordano Securities Group

The last thing here just on your acquisition pipeline can you talk a little bit about what that looks like right now? Specifically both in North America and in Europe. I know in Europe you’ve now basically acquired the TMS piece but I assume you’re probably looking for the TCM piece as well.

Philip J. Hawk

Actually, we don’t have a pipeline per say. Just as a little bit of a reminder organic growth has been the primary driver of our long term success. It’s about 60 to 70% of our overall revenue growth over time. We expect that to continue to be that way. We look at acquisitions as accelerators or enablers and I think both the recent two obviously, we had no presence in inspection in Canada that was a great enabler. Well, both an enabler and an accelerator. Obviously, we had no presence in Europe so just established a critical mass. I would just say that our focus as it has been historically is to let’s grow organically and let’s focus and make all of our business as strong as we can that way.

Having said that, we’re opportunistic so if a extremely attractive accelerator enabler out there that comes our way we’ll look at it. I think as Ted mentioned our level of debt relative to – I should say the level of financial leverage of our business is approximately two to one to we’re not heavily leveraged and we won’t be inclined to pass on great opportunities. But, having said that we’re really not looking to do three or four more in quick succession we’re looking to make what we have great.

Richard Nelson – J. Giordano Securities Group

So what level of leverage are you comfortable with? You’re two to one now.

Philip J. Hawk

I think it’s highly circumstantial.

Richard Nelson – J. Giordano Securities Group

Okay. So, it’s going to depend on the deal.

Philip J. Hawk

I would just say though and this is the way we think about it is organic growth only from here on out is extremely attractive. We’re talking about high profit growth business so we don’t want to do anything that doesn’t build on that. So, if it’s stretching to buy something that maybe at a value that isn’t right or maybe a business that isn’t a great fit that just doesn’t make sense irrespective of leverage. So, we’re going to be patient and try to be focused and disciplined so that we’ll only pursue things that are really attractive accelerators for us.

Richard Nelson – J. Giordano Securities Group

Then last thing back on your commentary on organic growth it has been outstanding 28% this quarter and it’s been strong for quite a while now. What’s your perspective on what organic growth should feel like going forward? I know you guys have historically talked about 10% but clearly we’re out stripping that number right now. How long do you think this will continue?

Philip J. Hawk

I think for along time if we execute. But, you are right we are now – our organic growth has exceeded kind of our 10/20 model by a considerable margin certainly last year and this year. And, part of it is we’re gearing up from a capacity increase standpoint. That we are systematically kind of focused on adding resources and we think the more resources and capabilities we have that tends to drive activity or demand almost rather than vice versa where we respond to demand with resource additions. We think kind of the demand as a function of our resources addition. So, we’re going to continue to focus on that. But, we don’t believe that we have a very robust market but we think the delta between a robust market and a normal market is only about 10% demand so we don’t think that’s the primary driver of it but candidly it’s really strong right now so we can’t be certain how big a component that is in our overall growth. We do know that execution is really important and just being here isn’t enough. We have to earn it and re-earn it every single day with every project. So, while we’re extremely optimistic [end of audio].

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Source: Team F2Q08 (Quarter End 11/30/07) Earnings Call Transcript
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