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Team, Inc. (NYSE:TISI)

F1Q09 Earnings Call

October 8, 2008 9:00 am ET

Executives

Phil Hawk - Chairman and Chief Executive Officer

Ted Owen - Senior Vice President and Chief Financial Officer

Analysts

Rich Wesolowski – Sidoti & Company

Arnold Ursaner – CJS Securities

Jack Atkins – Stephens Inc.

Holden Lewis – BB&T

Byron Pope – Tudor Pickering

Richard Nelson – Jesup & Lamont

Corbin Barnes – Houston Capital

Operator

Welcome to the Team IR conference call. (Operator Instructions) 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 first fiscal quarter ending August 31, 2008. 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 and our Annual Report. Ted will begin with a review of the financial results and I will follow Ted with a few follow up remarks and observations.

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 first quarter were $123.3 million compared to $103.5 million in the first quarter last year an increase of 19%. The revenue includes $5.9 million of incremental revenues attributable to the LRS acquisition that was effective January 1st last year and thus not reflected in last years first quarter. The organic growth rate in the quarter was 14%. Net income was $5 million in the current quarter versus $3.5 million in last years first quarter an increase of 41%. Earnings per diluted share was $0.25 versus $0.18 in last year’s quarter.

For a little more depth around our Industrial Services business, as a reminder, our Industrial Services includes an array of specialized services related to the maintenance and installation of pressurized piping systems and process systems as well as specialized inspection services. The Industrial Service segment is organized into two divisions; TMS which includes leak repair, hot capping, fugitive emissions monitoring, field machining, technical bolting and fuel valve repair services, then TCM which is comprised of fuel heat treating and inspection.

TMS revenues in the quarter were $58.1 million versus $43.7 million in the first quarter last year an increase of 33%, of that amount 20% would be the organic growth rate as the result of the inclusion of LRS in the current quarter. TCM revenues in the quarter were $65.3 million compared to $59.8 million last year an increase of 9%.

Operating income for the Industrial Services business which excludes corporate costs not directly attributable to field operations was $14.8 million in the first quarter versus $11.5 million in last years first quarter so operating income as a percent of revenue for the field was about 12% in the current quarter compared to 11% in last years quarter.

For the first quarter our corporate costs were about $5.1 million up $1.4 million over last year. About half of which increase is associated with non-cash compensation expense for FAS123R expense. We expect total non-cash comp expense for the year to be about $5 million as the result of high Black-Scholes evaluation of previously granted stock options. With that for fiscal 2009 we will suspend the use of stock options in favor of restricted stock units to provide long term equity incentives to our managers in order to better manage and reduce the future impact of non-cash comp expense.

With respect our balance sheet and cash flows, capital expenditures for the quarter was $4.3 million. Depreciation and amortization was $2.9 million and non-cash comp expense was $1 million so that our total EBITDA for the quarter was $13.6 million. On a trailing 12 month basis EBITDA is $63.7 million and at the end of the first quarter our net debt was $95.6 million and total debt was $104 million, up slightly from year end.

Just a word about liquidity and credit capacity, in the midst of the current financial crisis we’re pleased with the position that we’re in. We have $43 million of unused capacity under our domestic facility and have just opened an additional revolving facility in Canada for $8 million to support the working capital needs of our growing Canadian business. It’s also important to note that our credit facilities are long term in nature with all the facilities maturing in 2012. In the midst of the current economic times we feel very good about our position with plenty of liquidity and capacity.

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

Phil Hawk

Now I’d like to add a few additional comments and observations. Let me begin with a tip of the hat and special thanks to my Team colleagues for their special efforts and ingenuity during our two recent major hurricanes; Gustaf and Ike. Despite the lack of power from our local utilities following both storms I’m proud to report that all Team branches were open and we were serving our customers shortly after each storm. We were at full strength within a few days following each storm.

Our team utilized our own generators to power our branches and in several circumstances we provided small generators and room air conditioners to our colleagues without power in their homes so that their families could be more comfortable while we were helping out our customers with their plant restart needs. Sometimes we see the best in people during the worst of circumstances. I certainly feel that way about my colleagues and how they responded to the challenges caused by these storms. I couldn’t be prouder of our team.

Now let me turn to our first quarter results. The short summary is that we achieved record first quarter performance and are on track for another record year, 19% revenue growth and more than 40% growth in net income is a great start for the year.

Beginning with revenue we have discussed in many previous calls that Team is a growth company. We expect our strategy of providing our customers with outstanding service with our broad service line offering across our more than 100 branch service network will continue to lead to sustained revenue and market share growth as we capitalize both on our large network advantages and our customers continuing procurement consolidation trends. Team’s performance reflects continued progress with this strategy.

Let’s look at the components of Team’s 19% revenue growth this quarter a little more closely. As Ted indicated a portion of the growth was due to our purchase of Leak Repairs Specam or LRS, our European Industrial Services Company which was purchased last January. I will talk about our progress with our recent acquisitions in more detail in a moment. The remaining reported organic revenue growth was then about $14 million or 14%.

This is a strong start for the year particularly in light of the comparison to very strong performance in last years first quarter. You may recall that organic revenue growth for the first quarter last year was 42%, the highest of any quarter last year due to an extended turn around season in that period. All in all we’re off to a good start. Our outlook for the remainder of the year remains strong.

There are a number of factors supporting this conclusion. Basic demand for our maintenance services is a function of the population of operating facilities. We have seen and expect no significant change in print operating activities. Second, our overall market demand continues to benefit from several ongoing industry expansion projects particularly related to refining, pipeline and Canadian oil stance development. It is our belief that we will continue to benefit from these supplemental expansion projects throughout all of this fiscal year and well into the next as well.

Hurricanes Gustaf and Ike caused short term disruptions to our activities in the geographic areas affected but in our view they will not have a significant impact on Team’s overall activities or performance. First of all a large number of our branches were completely unaffected by the storms. Second, for those affected our experience has been that short term business losses are usually offset by additional business later related to the restart and related repairs in the affected customer plants. Overall, hurricanes tend to be about net neutral to a slight positive for Team.

We continue to build our technician and service resources to support our growth. Our total field personnel in our North American network at the end of the first quarter was approximately 500 employees above the same time last year, up 18%, compared to the beginning of the quarter total North American field personnel increased by 30 employees.

I’ll remind all of you that we accomplished this increase in a quarter were our revenues declined about $20 million or 14% from the seasonally stronger prior fourth quarter. As we ramp up in the seasonally stronger second quarter we expect to see our net staff additions in the current quarter back in the 100 plus range again.

Let me now add a word or two about out businesses which joined Team last year, the former Aitec and Leak Repairs Specam groups. Both businesses are doing very well. We are pleased with both our progress and continuing prospects. The Canadian inspection business formerly known as Aitec joined Team in June 2007 it is now fully integrated into our Team family. All branches are now fully operational with Team’s IT, financial, payroll and benefits systems and programs.

We are pleased in all respects with both the operational and financial progress this group has made over the first 15 months with Team. We are equally excited about our future prospects together. LRS has also made good progress. First, we continue to be delighted with the quality of the organization and their commitment to the Team values of safety, service excellence, business and personal integrity, respect and pride. Our new colleagues who’ve joined us are an outstanding team.

Second, their financial performance both in the first quarter and since the acquisition in January has been attractive and in line with our overall expectations. Third, we’re also making good progress on integration activities and expect to install Team’s financial systems within LRS during the current quarter. I am very pleased with both our progress and prospects with each of these newer businesses for Team.

As indicated in the earnings release we have affirmed our previously issued guidance for our full fiscal year ending May 31, 2009. We continue to expect overall revenues to be in the $530 to $545 million range and for earnings to be in the $1.45 to $1.60 for fully diluted share range. As a reminder the first fiscal quarter has historically represented a little over 20% of full year revenues and a much smaller percentage of full year earnings.

While we are pleased with our start to the year and very optimistic about our outlook we still have a long way to go this year. As always we will continue to review our guidance and make adjustments as appropriate at least on a quarterly basis.

On a different subject, I’m also proud to note that Team was recently named to this years Fortune Magazine list of the 100 fastest growing companies in America. This is the second year in a row that Team has received this recognition. According to the Fortune listing our three year compound average annual growth rates in revenue, profits and total return to shareholders were 31%, 63%, and 47% respectively. We take great pride in the consistent and sustained performance of our company over many years.

Let me end with a couple of comments about the extraordinary equity and credit markets that we all have been experiencing. I will ask and answer several related questions that may be on your mind.

Will market and bank credit issues impact Team’s ability to conduct its business? The answer is no. We are fortunate that our business generates sufficient cash flow to cover our capital investment requirements and organic growth capital requirements. We have no need to seek additional capital. Furthermore, as Ted indicated we have approximately $50 million in existing capacity on our current multi-bank credit agreements which have a term through 2012.

Will tight equity and credit markets reduce demand for Team Services in the market? We have seen no evidence of any slow down and frankly do not expect any. There are several positive factors to consider. First our customers typically are among the best capitalized companies in the market. In general we do not expect our customers to experience any major cash or credit issues. Second, the demand for our services are fairly stable and do not follow the business cycle. We are a necessary evil that is required as long as plants are operating.

When will Team’s stock value return to pre-crisis levels? Of course no one can predict with any certainty what will happen to stock prices either generally or specifically. Here’s what we believe, over the long term Team’s actual performance will be the primary driver of the company’s value. The best way we can positively influence Team’s overall value is to maximize our company’s short and long term performance. That is our overriding focus and objective.

As a management team we are very confident that we will continue to build our great company. Our consistent track record of performance over the past decade supports this confidence. In this time period our revenue growth has averaged 30% per year and our organic revenue growth has averaged about 20% per year. We have not had a single negative revenue growth year in the past decade.

In this time period our compound earnings growth rate has averaged more than 50% per year. The consistency of our growth is further evidenced by the fact that Team has experienced a year to year decline in earnings in only one year in the past decade. In each of the last three fiscal years we’ve achieved new record performance levels in all of the following measures; revenue, earnings, and company valuation. Simply put, Team’s success is not based on a new or unproven idea or concept that may not last.

We see no reason why Team will not set new performance records again this year. We continue to be extremely well positioned strategically and our activity levels early in our second quarter continue to be consistent with our positive outlook for continued attractive growth.

To wrap up, we are off to a good start this year but it’s certainly not time to rest on our laurels. We’ll stay very focused on the key fundamentals for success of our business. These are continuing to provide outstanding service to our customers at every opportunity, re-earning and reaffirming their confidence in Team. Continuing to build and expand our organization by recognizing the critical role every one of my colleague’s plays in our success and by remaining the employer of choice in our industry and continuing to sweat the details on each and every job and customer relationship.

Our success is the sum of more than 130,000 individual jobs completed annually and the great work of more than 100 service branches.

That concludes my introductory comments. Let’s now open it up for questions.

Question-and-Answer Session

Operator

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

Rich Wesolowski – Sidoti & Company

Can you talk about whether the recent economic financial events have prompted you to reconsider the strategy of adding headcount in anticipation of your business instead of in response to new business?

Phil Hawk

No, it hasn’t changed our view at all on that. As I mentioned we don’t see, obviously we’re watching it very, very closely, we don’t see, as I mentioned in my remarks, we don’t see any change in the basic demand for our services because again in our view it’s driven principally by the presence of the population of operating plants. We see frankly even with the severe downturn we don’t see scenarios where we’re going to see large scale plant closures or changes. Our view is basic demand is out there and our opportunity to gain share continues to be as robust as ever and we plan to continue that strategy.

Rich Wesolowski – Sidoti & Company

We spoke about wage inflation, other material cost inflation on the last call. Have you begun to revisit pricing on contracts to recoup some of those costs and if so do you think we’ll see the affect in TMS margins?

Phil Hawk

In fact, it’s an ongoing issue and challenge and yes we continue to address it. I would say the difficulty with looking at a single quarter’s data is that it is a single quarter and it’s reflecting and it includes the impact of lots of mix and puts and takes and changes, etc. I’m frankly pleased with the progress we’re making. We saw if you recall Ted’s summary kind of in field branch margin level which is really how we really focus on it we saw on average a point increase in the quarter versus a year ago. That includes a lot of ups and a few downs again because of the timing of projects here and there.

We’re seeing a lot of good focus on that. You saw a big decline in the gross margin in TMS; I think that may be what you’re referring to what we reported in the release. We don’t really look at and manage our business exactly that way but those are GAAP reports that we are required to put in there. The primary driver frankly is big projects particularly in Canada where we have a lot of pass through expenses per diem and living expenses so that just the inherent margins on the reported revenues of that are going to be lower than I’d say a stand alone business that doesn’t have some of that activity.

In terms of the basic margin and how we see things I think we’re pretty pleased with our quarter and think we’re continuing to make progress there.

Operator

Your next question comes from Arnold Ursaner – CJS Securities.

Arnold Ursaner – CJS Securities

Can you remind us of your CapEx expectations for the year and update us on the status of the training facility?

Ted Owen

We expect total CapEx for this year without the facility to be in order magnitude of $15 to $20 million. The facility will add another $25 million or so to that. The status is we expect to break ground on the facility within the next month or so.

Arnold Ursaner – CJS Securities

On Aitec, not that it’s fully integrated, you had argued originally that it was lower margin and you had hoped to bring it more in line with corporate averages. I know it’s fully integrated but can you give us a sense whether you accomplished that goal?

Phil Hawk

Yes.

Arnold Ursaner – CJS Securities

My third question relates to the competitive environment. I know while you’re the market leader you only have 15% to 16% of the market and obviously you’re very disciplined on price. Are you seeing any change or reaction given the craziness of the world from competitors that are struggling to keep or win some business? Are they trying to put any pressure on price and is your customer more interested in the quality of work in the national account relationship than pounding the low cost provider who may not do the quality of work you do?

Phil Hawk

The overall summary, we’ve seen no changes. A couple of elaborations on that; first of all in terms of the financial crisis I think while we’ve had weak markets for a while I think stock markets certainly in our space much more recent to say that we would have seen some reaction if there was going to be any. I’m not sure it might be premature. Although more broadly let me just talk a little bit about price and how the importance of price and other factors.

Price or cost to our customers is never unimportant. We have sophisticated customers that care; they want full value for all services they procure including those from Team or Team’s competitors. The point that we’ve made historically though is that rate, the labor rate or cost rate, again this is principally time and materials work that is charged is only a small component of either total cost or frankly the total value to the customer.

Again, we are very high value component in their overall economics because our services really directly affect plant up time. I think just what we would expect to see is we would expect to see no change in the basic view that our customers have about how they evaluate the whole value equation. They’re looking for the best value for their business and that’s going to put more emphasis on performance and capability than purely a rate. We think that’s not likely for that to change.

In terms of any actions by competitors in response to conditions I can’t say that we’ve really observed anything out of the ordinary.

Arnold Ursaner – CJS Securities

Regarding the current quarter I know clearly you don’t give quarterly guidance but obviously you lost a week or two of production in Texas and normally Q2 is a very busy period for you anyways with turn around activity. Is there any sense of quantification of what the two hurricanes may have cost you, did you see any movement out of any of the turn around? I guess I’m trying to get a better feel for the likelihood that you can make up whatever shortfall you had in September in the balance of the quarter, why are you confident that you can?

Phil Hawk

You are correct in that if you look anecdotally we can find a handful of individual projects or turn arounds whose scheduled has changed or moved out of you will because of the hurricane or related issues. Having said that, as I mentioned in my remarks we’re very busy. I don’t have revenues but I have activity levels or hours for our first month of the quarter versus a year ago and we’re doing fine. Our activity levels are high and we’re busy and we expect to have a good quarter.

Operator

Your next question comes from Jack Atkins – Stephens Inc.

Jack Atkins – Stephens Inc.

If you could maybe give us some color on how the fall turnaround season is shaping up for you guys I know you said you’ve had a couple of projects that maybe have been pushed back a little bit. How is that shaping up for you so far?

Phil Hawk

As I said, I think the simple answer is we’re busy. We expect a good quarter. We don’t see any major, certainly no material changes in our prior outlook and we continue to be optimistic and positive.

Jack Atkins – Stephens Inc.

I noticed that the TCM segment margins were up nicely year over year. I wonder if you could talk a bit about what’s driving that then what you’re doing to get some traction on margins there?

Phil Hawk

Broadly we’re trying to track our price increases or contract arrangements with our cost increases and maintain our margins. We’re trying to improve our execution and utilization of our resources across our network that’s where we kind of creep up those margins in individual branches. I mentioned earlier we’ve gotten some nice progress continuing progress from our Aitec Canadian inspection services they have really come on. They were a little below average our average a year ago, they’re not anymore. That’s a big plus.

A caution of us declaring victory based on a single quarters results, all results both this quarter and the year ago comps do reflect the projects that fall in those areas. There’s just some natural lumpiness, while we tend to focus maybe on the negative lumpiness I would just caution with declaring victory that we’ve had this whatever it worked out to be a three or four point increase on the TCM side to think that it necessarily is at that level magnitude because I think you just have puts and takes that come along. Overall we’re positive with our margin improvement and continue to focus on it.

Operator

Your next question comes from Holden Lewis – BB&T.

Holden Lewis – BB&T

Can you comment about the corporate piece a little bit because obviously when you’re growing your revenues your goal is to leverage that corporate piece and I think this time it was up about 30 basis points versus last years level? Are we expecting that this year we’ll be able to leverage the corporate at all or are we thinking that this is a year where we’re not going to be able to do that, can you give some color on trends there?

Ted Owen

The main ingredient of the change in corporate costs is the continuing increase in non-cash compensation expense. As I indicated in my remarks those costs for the current year are expected to be about $5 million as opposed to $3.9 million a year ago. In the quarter, non-cash comp expense which is all embedded in corporate costs was about $700,000 higher than same period last year about half of the increase in total corp. costs for the quarter.

The reason those comp costs are so high is because of frankly our success. Our higher stock values have resulted in higher Black-Scholes valuations. You might remember that we had consistently told investors that we couldn’t impact Black-Scholes that we were committed to a burn rate relative to the number of options that we would issue. We’ve actually changed that relative to the current year because of that high Black-Scholes valuation frankly again it’s a non-cash cost, its debit expense and credit equity so from a financial standpoint it has no affect.

It has a significant P&L affect and so we have changed our philosophy for the current year suspended the use of stock options for our fiscal 2009 long term incentive awards and we’ll be using restricted stock units instead in order to reduce the impact in non-cash comp going forward.

Holden Lewis – BB&T

The stuff that’s in there is going to continue to be volatile and have an impact on net number right?

Ted Owen

The stuff that’s in there it’s going to be about $5 million for the year. Once options are grant, for instance, last years grant of options sets the amount of the expense that’s been reflected over a full year period of time.

Holden Lewis – BB&T

Did you say that that $5 million this year is versus $3.9 million last year?

Ted Owen

Correct.

Holden Lewis – BB&T

You have a $1.1 million change and you recognize about $0.3 million of that. You’re going to run that across evenly across the year?

Ted Owen

That’s correct.

Holden Lewis – BB&T

If I take out that incremental $0.3 million then you’re still looking at $3.6 million versus $3.6 million last year so not a lot of leverage on the corporate any color on that should we have gotten some, is there something else in there that would limit that?

Ted Owen

Not really, it’s really a timing issue. We’ve had certainly some headcount increases over the course of the last year. Really not significantly over the course of a year.

Holden Lewis – BB&T

Looking at the margin improvement you talked about generally if you’re growing at 20% it’s going to be very difficult to leverage the business model because you have to keep investing to support that growth. This quarter obviously grew somewhat faster in that head at the same rate; you still had a 9.5% incremental margin. Should we have expected more than that given the slower growth, the slower head additions and is that number something of a disappointment or how should we look at that?

Phil Hawk

You have part of that being the non-cash costs which to me is unrelated to the operational activities on this. We’re talking about I think to my way of thinking you’re kind of trying to extract more information out of the data then exists. It is a one quarter; you have issues with regard to mix of projects here and there. No, I’m not particularly disappointed or thrilled one way or the other. I think on balance I’m thrilled with the continuing organic growth, the strategic position we have.

What I look at when I look at individual branches and look at that I see the progress we’re making in a large number of branches tightening up our operations and getting the margins that we’re striving for I’m pretty optimistic about it. In terms of looking at the leverage for that particular quarter I’m not quite sure what to draw from that.

Ted Owen

It’s important to remember that the first quarter is our seasonally weak quarter coming off of our seasonally strongest quarter in the fourth quarter of last year so that we have no expectations of getting terrific leverage in a quarter where revenues sequentially are dropping $20 million compared to the fourth quarter. The way we look at it is we are at expectations and we think we’re off to a great start for the year.

Holden Lewis – BB&T

Lastly, when you look at your revenue guidance this quarter was an unusually difficult comparison in both your businesses but particularly I guess on the TCM side. Given your outlook in terms of demand and that sort of think maybe the hurricanes grew things a little bit. Does the comp alone suggest that rates of growth at the top line should improve as you get into Q2 through Q4 just as the comps get easier or is that a reasonable expectation?

Phil Hawk

The premise I would make is that we’ve had one quarter. It was a good quarter but we have one quarter and it’s the seasonally weakest, one of the weakest quarters of the year. We continue to look at our guidance but I think historically we haven’t been real excited about trying to extrapolate from that one quarter which is kind of what you’re proposing or suggesting we might be thinking about here. If we sustain our progress, yes the math works as you said.

If we sustain this high level of progress again in the second quarter at these 20% growth rates we’ll be delighted to revisit our estimates and probably would take them up. I’m pretty proud of our estimate right now to be honest and our guidance for the year. In the environment that we’re in I think it’s a pretty strong forecast.

Holden Lewis – BB&T

You’ve grown in 11 of the last 12 quarters you’ve grown at a 20% plus type rate so this stands out as being somewhat different. I’m just trying to get a sense is it somewhat different because of the comp or is there, even though the demand looking good, anything north of 10% looking pretty good in this market. Is there reason to think that the market is different than it was when you were growing in the 20% over the last three years?

Phil Hawk

No, we don’t think the market is any different. I would also observe that we didn’t forecast 20%. We didn’t give long term forecast at 20% organic growth either. That’s very, very strong performance, we hope to do it again but remember our model and our guidance are based on slightly more conservative estimates than that.

Operator

Your next question comes from Byron Pope – Tudor Pickering.

Byron Pope – Tudor Pickering

I wanted to get your thoughts on acquisitions in this type of environment. I think back to 2004 when you guys did Cooper Heat and Thermal Solutions those were both kind of unique acquisitions but I guess my question is how comfortable would you be taking the net debt to capital higher if the right type of acquisition came around in this market environment. I realize you guys have tons of organic growth opportunities but curious as to how you think about net debt to capital if the right acquisition came along in this environment.

Phil Hawk

I have to say, just generally we are pretty confident about our cash flows and so we’re not so much worried about more or less debt from where we are. Having said that these are unprecedented credit market environments that we’re in. I think for us to just politely say it doesn’t matter would be incorrect. We would certainly want to assess that very carefully.

The more important point is why would we want to an acquisition and the answer is not because something is dirt cheap. The reason we would do an acquisition today is exactly the same reason we would have done it last year and that is because in our view it would be an attractive accelerator to the development of our business. That’s the only reason we’d be interested in that. In terms of our expectations about acquisitions I think there’s no difference in our view of that.

We’ve never viewed; I’m going to say financial arbitrage as the primary, or frankly any objective in terms of our M&A activity.

Byron Pope – Tudor Pickering

On the organic growth side as you look across your eight service lines and you look 12 to 24 months out which of those service lines do you think we’ll see perhaps disproportionate growth if you will, where are you most excited about the organic growth opportunities by service lines.

Phil Hawk

That’s the beauty of our company; I’m excited across the board. When we look back 24 months from now the law of averages will be that some will grow faster than others but in terms of what’s driving our growth is our, as we talked about the broad network advantages we have of our North American wide network but now increasingly we hope our increasing presence in Europe as well as just the breadth of our service lines.

If I had to predict which ones would grow faster I would say the newer services that have the lower shares I think mathematically have the opportunity for the greatest percentage growth rates but I think the absolute growth in all of our service lines should be good.

Byron Pope – Tudor Pickering

I wonder if you have handy there the geographic mix for the August quarter in the US versus Canada versus Europe if you have them handy?

Ted Owen

Yes, in the US it’s $79 million of revenue, Canada $33 million, Europe is $6.3 million and then other countries principally the Caribbean $5 million.

Operator

Your next question comes from Richard Nelson – Jesup & Lamont.

Richard Nelson – Jesup & Lamont

I sense from you that you’re not seeing any evidence of customers changing their spending habits at this point such as delays in accounts receivable collections or anything like that.

Ted Owen

That is correct.

Operator

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

Rich Wesolowski – Sidoti & Company

I appreciate the differences between your business and the downstream E&C firm but you do share the same customer base. I look at those stocks and they’ve been unmercifully hammered in recent weeks. Are you worried about that small slice that 10% to 15% of your business is arrived from refinery growth CapEx as you look past the next say four quarters?

Phil Hawk

Yes, in this respect, if I were a major integrated oil company right now would I be starting new projects very big projects that involve large outlays of capital, the answer may be less more conservative today than it was five years ago or even one year ago. Will there be as many new projects going on to the books being launched in the future I think that could be the answer to that could be no. It could be fewer or I’m giving you an extreme no, no new projects.

Having said that though we have so much that’s already underway and recall these projects we talk about expansions to refineries or the development with the Canadian high projects or new pipeline we’re talking about projects that have economical lives of 30 plus years. What does one do once one has invested a substantial amount of capital to launch and start under construction of these projects? Does your 30 year view of the world has it changed because of the last two weeks or the last two months? I think not.

I think the prudent and rational approach is you complete all the projects you started to do otherwise would ensure no benefit yet the incursion of most of the costs on that. We see no rational reason why you would not complete all the projects underway, that’s why we are bullish about the next year and a half because that’s about the timeframe of the stuff that’s already underway.

We have heard no indication of pull back of projects that are planned but not yet started but could that happen? Yes, of course. I think it depends on how long and how severe. As I said I think for our space and I think our customer spaces it’s a pretty good place to be right now relative to a lot of part of the world.

Operator

Your next question comes from Arnold Ursaner – CJS Securities.

Arnold Ursaner – CJS Securities

What was project work as a percent of revenue in Q1?

Phil Hawk

I don’t know how to measure that because it’s very, very difficult to know the definition of a project on that so we really don’t keep track of that. As we look at big projects or turn arounds or expansions I will just say this is a little bit of a visceral feel I don’t feel like it was much different than it was last year’s first quarter. It seemed about the same.

Arnold Ursaner – CJS Securities

Do you have real meaningful exposure to state or local government spending where there are issues, I don’t think you do but?

Phil Hawk

No we don’t. We do a minor amount of municipal work but very little.

Arnold Ursaner – CJS Securities

Typically when you have repair work from things like hurricanes is the margin similar to your core business or is it generally higher margin work.

Phil Hawk

It’s similar because it’s basically done on our current rate schedule that we have with our customers. You might have a little more because of the emergency nature around the clock approach that might have a little bit of premium to it but no much.

Arnold Ursaner – CJS Securities

You didn’t speak at all about either growth of new national accounts or the growth rate of existing national accounts can you discretion that up please for us?

Phil Hawk

I think for the quarter it’s such a small timeframe that to measure we continue to add accounts I think there isn’t any noteworthy improvement in our penetration of national accounts in the quarter.

Operator

Your next question comes from Holden Lewis – BB&T.

Holden Lewis – BB&T

Following up on that last question do you have a sense of the growth of national accounts versus the non-national account business has that retained a robust rate compared to the rest of the business or how should we look at that?

Phil Hawk

I think for the quarter it’s just lumpy because of the timing of projects. I think the stats are we were marginally, it depends on what you count in our national account group, but there’s really it was kind of flat for the national accounts for the quarter but again it’s because of timing of individual projects I really put none of the information to it. We have lost no national accounts, we have not served fewer national accounts than before it’s just the timing of projects.

Holden Lewis – BB&T

Do have the cash flow data, specifically just the operating cash flow do you have a sense where you were on that?

Ted Owen

I don’t have that in front of me.

Holden Lewis – BB&T

To clarify, did you say that the Aitec acquisition, maybe you’re not even really looking at it that was at the corporate margin at this point?

Phil Hawk

Yes, we said last year in ramp up that it was running a little below, behind the averages at the branch level. I would say today it’s at the average, its right in there, it’s performing well.

Holden Lewis – BB&T

You’re referring to the branch level as opposed to the total?

Phil Hawk

I’m comparing apples to apples so I’m comparing branches to branches.

Holden Lewis – BB&T

I think typically you’ve said you thought you’d get a couple hundred basis points per year and that would suggest that in year three you’d be at your corporate average which means you’d be about a year ahead of pace is that right?

Phil Hawk

Yes.

Holden Lewis – BB&T

How did we achieve that, how did we get there sooner than anticipated?

Phil Hawk

I think you’re trying to extract a lot more information from one quarter’s data than I would. I would say we had a good quarter. Whether it’s a point behind next quarter or not would still be good progress but I think they performed well and I congratulate them.

Holden Lewis – BB&T

The flattish growth on national accounts, your visibility suggests that that’s going to be growing going forward?

Phil Hawk

Yes.

Operator

Your next question comes from Corbin Barnes – Houston Capital.

Corbin Barnes – Houston Capital

I wanted to look at your big refinery customers and in terms of strong refinery profitability likely proactive and aggressively with their maintenance spend and if you look at your traditional refinery customers where you’ve been in there for a long time are you guys seeing any evidence of above average spending for the last few years, reversion back to normal levels. How do you guys think about that?

Phil Hawk

We’re not seeing any changes really. I will just preface that as a caveat that the variability in spending in our services for an individual facility year to year certainly if you get an even shorter time period quarter to quarter it is extremely high because it reflects the timing of individual major repairs or turn around or outages. For us to look at a facility where let’s say we have 100% share and say well is the revenue up or down this year versus last year.

Obviously we have this fact but to have any meaning to that knowing whether that’s because of changes in practices it’s virtually impossible for us to tell. I would just say anecdotally in our discussion with customers I don’t think we’re seeing changes in basic operating practices.

Operator

At this time I show no more questions.

Phil Hawk

Let me just close by thanking 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 early January. In the meantime have a good day.

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Source: Team, Inc. F1Q09 (Qtr End 08/31/08) Earnings Call Transcript
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