Philip J. Hawk - Executive Chairman, Chief Executive Officer and Chairman of Executive Committee Ted W. Owen - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer.

Matt Duncan - Stephens Inc., Research Division Arnold Ursaner - CJS Securities, Inc. Tahira Afzal - KeyBanc Capital Markets Inc., Research Division Tristan Richardson - D.A. Davidson & Co., Research Division Charles E. Redding - BB&T Capital Markets, Research Division.

Good day, ladies and gentlemen, and welcome to the First Quarter 2014 Team, Inc. Earnings Conference Call. My name is Katina, and I'll be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. Phil Hawk, Team's Chairman. Please proceed..

Thank you, Katina, and good morning, everyone. It's my pleasure to welcome you to the Team web conference call to discuss recent company performance. My name, again, is Phil Hawk. I'm the Chairman and CEO of Team. And joining me again this morning is Ted Owen, the company's Executive Vice President and Chief Financial Officer.

The purpose of today's conference call is to discuss our recently released financial results for the company's first quarter for fiscal year 2014 that ended on August 31. 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 filings with the SEC, as well as our annual report. Ted will begin with a review of the financial results. I will then follow Ted with a few remarks and observations about both our performance and future prospects.

Following these remarks, we will take questions from our listeners. With that, Ted, let me turn it over to you..

Thank you, Phil. First, as usual, I want to remind everyone that any forward-looking information that we discuss today is being provided in accordance with the provisions of the Private Securities Litigation Reform Act of 1995.

We have made reasonable efforts to ensure that the information, assumptions and beliefs upon which this forward-looking information is based are current, reasonable and complete. However, a variety of factors could cause actual results to differ materially from those anticipated in any forward-looking information.

A description of those factors is set forth in the company's SEC filings. Accordingly, there can be no assurance that the forward-looking information 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. Now for the financial results.

Adjusted net income available to shareholders was $0.23 per share in the current quarter versus $0.36 per share in last year's quarter. Adjusted net income for the current quarter excludes a $700,000 pretax nonroutine charge for severance costs associated with the business realignment that we announced in June.

Revenues for the quarter were $174 million versus $161 million in last year's quarter, an increase of 8%. However, adjusted operating income or EBIT was $8.8 million, 5% of revenues in the current quarter versus $12.8 million or 8% of revenues in last year's quarter.

Nearly the entire decline in operating income was a result of the slow start to the year at Quest. However, results for the first quarter were also negatively impacted by weaker-than-expected margins in both our Inspection and Heat Treating and Mechanical Service business segments. Phil will discuss both of these issues more fully in his remarks.

Now here's a breakdown of revenue and operating profit by business segment. First, revenues. Inspection and Heat Treating revenues were $95.8 million, up 17% over last year, about 10% of that -- or about 10% organically. Mechanical Service revenues were $66 million, virtually flat with last year.

And Quest revenues were $13 million, down about $1 million from last year. With respect to operating income or adjusted EBIT, Inspection and Heat Treating operating income percentage was 10.6% for the current quarter and the Mechanical Service operating income percentage was 10.3% in the current quarter, both down from last year's percentages.

Both business segments are facing a similar issue, pressure on margins. And as Phil will discuss more fully, Quest incurred an operating loss of $700,000 in the quarter versus an operating income of $3 million in last year's first quarter.

That's a year-over-year change of $3.7 million, which reduced our first quarter earnings by approximately $0.11 per share. Now with respect to cash flow-related items. Capital expenditures were $6 million in the quarter, and the combination of depreciation, amortization and noncash compensation charges was also about $6 million in the quarter.

So adjusted EBITDA for the quarter was $15 million and is $76 million on a trailing 12-month basis. At the end of the quarter, our total debt was $88 million, up about $13 million since the end of the fiscal year due primarily to borrowings associated with the July acquisition of Global Ascent.

Cash was $34 million at the end of the quarter, virtually unchanged from year-end. Therefore, net debt was $54 million, and our net debt to trailing 12-month EBITDA was 0.7:1.

I am also pleased to report today that our Board of Directors has authorized an initial $25 million stock buyback program, which reflects their confidence in Team's near-term and long-term prospects. The board and management believe that this will be an excellent investment for all Team shareholders. And with that, Phil, I will turn it back to you..

10% overall revenue growth and a 1-percentage-point improvement in overall profit margins from fiscal year 2013 -- the 2013 levels that would be back toward our historical performance levels.

Our revised forecast issued yesterday removes the projected 1-percentage-point improvement from our base assumptions and also provides for some potential shortfall in either Quest performance or our rest of Team revenue performance in the low end of the earnings range. I remain confident about our overall position and longer-term prospects.

I'm also confident that Team's margins will return to historical levels, and when they do, we will reflect that improved performance in our outlook and future earnings guidance. In the past few quarters, we have struggled to maintain the overall balance of our business opportunities and resources and have experienced corresponding margin pressures.

Our entire organization is focused on these improvement opportunities. I think you will all agree with me that it is time for Team to reflect these improvements in our results going forward. We are all committed to doing just that. I'm proud of our company and our Team colleagues.

We are extraordinarily well positioned for continued attractive, long-term business growth. Katina, that concludes my remarks. Let me now turn it back to you and open it up for questions..

[Operator Instructions] Your first question comes from the line of Matt Duncan representing Stephens Inc..

The first question I've got, really, I want to dig in a little bit more on what's going on with margins.

If I'm hearing you correctly, the pressure is primarily 2 factors, and it's that you've got wage rate increases without the corresponding price that you need and then in other -- and in some certain local markets, you've got an underutilization of your tech force.

Is that basically what it boils down to?.

Yes. I would make the latter a little broader. It's both underutilization of tech force and it's a kind of rebalancing of our leadership and kind of branch infrastructure to the current activity levels..

Okay. So Phil, in the past, when you guys have had substantial wage rate increases, your customers have been pretty willing to take price increases to help offset that for you.

So what do you think is the disconnect right now that's not allowing you to get the price that you need?.

I think there's not a -- there is a strong procurement kind of influence in the whole pricing kind of negotiation posture right now with our -- with, certainly, many major customers, and I don't think there's a perception of -- there's a perception of abundance, not shortage.

So I think they are -- I wouldn't say they're rejecting price adjustments, but they're slow-playing them..

So is it as simple as you need your customers themselves to start to feel that pain as well?.

Well, I think the issue is, I think, all of our competitors have exactly the same kind of environment that we're in, so I'm going to presumably -- presume they're seeing price or wage increases as well. It would have to be so for them to kind of maintain their crews and technicians.

And I think we have not had obscene profits in the past, so these things balance out, that we're going to be earning, I think, the profit levels that are necessary and that have been -- I guess, we need revenue -- or pricing that reflects the cost structure that we all have, and it's just a matter of timing for that to get back in balance..

Okay. I think, last quarter, you guys have said you expected a gross margin this year of 30.5% to 31.0%.

What is the new expectation in the guidance that you've given us last night?.

Well, I think you've got Quest roughly the same, it -- although Quest is only about 10% of the total, so it's about a 1-percentage-point reduction..

A 1-percentage-point drop, okay. And then last thing for me and I'll hop back in the queue. The TMS sales growth was 0.7% this quarter. I think that's probably a little bit below what maybe you would have expected, maybe not.

I know you had some big project work in Canada last year, so I'm hoping that you can help us bifurcate what's going on within your Mechanical Services segment.

How's Canada performing versus the rest of the company since you got that tough comp up in Canada?.

Yes. I think the -- actually, I was -- I'm pretty pleased with a lot of our business development activities in the Mechanical Services group. You're correct, we had huge activities in Canada last year, both first and second quarters, that are dramatically smaller, so that's a big drag on it, a headwind.

We also had very big projects in the first quarter in the Southeast regions that are much lower in this current quarter. If you look at the rest of Mechanical Services and you also look at the -- including Europe, by the way, there's some attractive growth there, and we've got a lot of interesting things going on.

So it's more of a kind of a mix issue there a little bit in the quarter. We continue to have a positive view about our opportunities there..

[Operator Instructions] Your next question comes from the line of Ernie (sic) [Arnie] Ursaner representing SCS (sic) [CJS] Securities..

It's Arnie Ursaner from CJS Securities. We've been involved with you guys for many, many years, and you almost never change your guidance, your annual guidance, at the end of Q1 unless you see a material change in your view of the outlook.

What are you actually seeing that's caused this material a change in your view in such a short time?.

Arnie, I think the candid assessment is, and it's an embarrassing one to admit, is that we've been on a -- we've been too optimistic and on the wrong for 3, we've changed the guidance 3 quarters in a row. And you are absolutely correct, that is not our practice and we hate it, probably as much as you hate it.

And we've just decided that when we looked at the first quarter and saw continuation of margin pressures, that it was time to get ahead of it and to kind of step up and get more conservative in our assumptions.

And we're not getting more conservative in our aspirations, by the way, in terms of our business, but get more conservative in our assumptions so that this is the last adjustment and the last time we talk about guidance on the downside for a while..

Ted --Phil, so normally you do it, though bottoms up at the end of Q4 entering the new year. And again, you do it line by line, manager by manager. Again, something caused more than a rounding error change. You've obviously gone back to your personnel.

What are -- are you making a choice to add more personnel in anticipation of future growth? Are you trying to make sure you don't lose people because of wage issues? Again, something has changed..

Well, I think what we certainly did not see in the first quarter -- we've had intense focus on margins, certainly in the last 6 months, and we did not see improvement. So we are trying to move pricing in line with our technician forces. We are trying and focused heavily on our utilization levels.

So this -- it's not that we are -- just discovered that this is an issue, but we have not yet moved the needle, and that's the realization of the results of the first quarter. Now it's very -- it's tempting to blame it on a softer region. By the way, it is a gross margin issue, and half our regions had gross margin increase, improved in the quarter.

So it's not that we're not seeing some areas of progress. But back to my comments in my statement, I think the bottom line is the average has to improve, and the average did not. And we can -- we are clear on what the fundamentals are.

But I guess what I don't want to do and what we chose not to do is rather than dribble this out and keep hoping that the margin improvement will click in, and we know it will, we are just not confident on the timing right now.

And we think the better place to be for all investors is to be more conservative and not to have that improvement baked into a forecast. And so that was a call we made kind of at the top, if you will, because we're not giving up on margin improvement, and I'm confident they will happen.

Obviously, given our poor performance -- forecasting performance the last few quarters, we're trying to get a little more conservative..

Can you clarify one thing, if you don't mind? When you have work coming up for turnaround in Q2 within Q4 and you are being approached to do the work, why wouldn't you be able to price it according to your new costs?.

Because you're working off master service agreements with pricing already in place and you have to negotiate a change in rates. You can refuse to do the work, but that's not what we have chosen to do. You -- and we have positive relationships with our customers and we're working through this, but it's a negotiation..

Your next question comes from the line of Tahira Afzal representing KeyBanc..

And so my first question is, is the refinery maintenance side, in general, just still too fragmented, that industry, where you don't have that pricing power when rates go -- start going up to, at least at the initial phases of an up-cycle, get that pricing fairly fast?.

I think so.

I think the -- to me, what changes the pendulum a little bit is the -- I'm going to say a little bit of the specter of shortage versus a confidence of abundance, as when there's a perspective of shortage, that there's much more kind of, I'm going to say, willingness and readiness of customers to move fairly quickly in adjustments because they are aware of the circumstances and aware that their own access to those resources from Team or others could be limited if they're out of balance.

And so that's what I think happens on the front side. It's not that we haven't had any price movement.

But I would just say that, in many instances, we're not seeing much -- I guess, we'll see -- we're seeing customers reflect or some customers reflect an abundance perspective rather than a shortage perspective in their negotiations with us right now..

Let me -- just following up on that, Tahira, for a second. Again, we're on the front end of this right now, and again, we believe that we are looking at an environment of a very, very tight labor, particularly in the Gulf Coast markets, because of all the infrastructure projects that are coming.

They're not here yet though, and so our customers aren't necessarily seeing the same kind of the -- experiencing the wage price increases themselves that we are experiencing.

Our history has been, as Phil indicated, when that happens, and when you think back to 2006, 2007 time frame, where we had a lot of infrastructure projects, very tight labor markets, that seems to be the period where the pendulum swings back to kind of the operations guys versus the procurement guys..

And just as a point of perspective, these are -- I mean, it's very serious, right? 1 point means a lot to us, but it's not the difference between kind of going out of business and staying in business. We're still healthy and profitable, we're just not as profitable here in the short run as that -- we're used to and expect..

Got it, okay. That is actually helpful. And then my second question is in regards to Quest.

Can you folks provide a little more color on the projects, the type of projects you're seeing some staging delays in? And what really gives you confidence that those projects will come back in the second to third quarter? Is that your conversations with clients? Or is it really looking at what's causing the staging issues and getting visibility outside of your discussions with the clients?.

Yes. I think we have -- our groups have very good relationship with their customers. They're working closely with them. There are -- a handful of very significant pipeline projects, I think, were some of the biggest ones that were deferred.

We're -- what we need to do with some of these, again, unpiggable pipelines, is they need to be cleaned and kind of put into a condition to be inspected. And there's just been logistical issues and kind of operational issues with the customer, and they have not been a responsibility of Quest, historically, to provide that front-end service.

So the difficulties and timeliness of getting that done is what has caused these projects to push. There is kind of no question that they're going to happen if that's what has caused the timing.

One of the things that Quest is doing or we're doing kind of through Quest is extending our whole project management service capabilities so that, in more instances, we can provide all those services on a turnkey basis that kind of increase value to the customer and provide a better -- kind of higher-value service to them, where they don't have to coordinate the various components of this..

Your next question comes from the line of Tristan Richardson representing D. A. Davidson..

I appreciate you guys providing some of the EBIT information with respect to the new segments, but I'm curious.

Because this is sort of new -- a new look at the business, can you give us a sense of where do you see average margins for -- or at least a targeted range for margins over the long term for each of the 3 segments? You talked about Quest integrity at 16%.

I mean, is that where you'd see that business sort of being over the long term and the same with respect to the other 2 segments?.

I think we've kind of thought our -- if we go back, last year, our fiscal year, our total composite EBIT was about 7.8%. If you go to the year before, and again, this includes all corporate costs, it was a little over 9%.

I think we've kind of always felt that our total business could be -- can approach or exceed, ultimately exceed 10% EBIT margins, again, because of continued growth and operating leverage on that activity. Quest will be higher than that.

I think, the 16%, will it get dramatically higher than that? I'm not sure because of the continued investment in new technologies and the like. If you take the remainder of Team, kind of our -- as a rough number, our corporate costs are kind of 4%, something in that order of magnitude.

So to kind of reach that 10% target, we would aspire to, kind of operating at EBIT margins full year. Remember, there's some seasonality, so this is not first quarter margins, but the operating margins for the other business is approaching 14%. We're running a little less than that today so we're -- because we're not at the 10% number.

But the -- I think we were kind of budgeting something in the 12% range with our original estimate that we've now kind of dialed back 1 point because of our kind of working through some of these short-term margin issues..

And then on the severance in the quarter, was that spread across -- I mean, widely across the organization? Or was there particular areas?.

No, that was -- it was an executive management. We had a couple of changes just as a result of the organization and elimination of positions..

[Operator Instructions] Your next question comes from the line of Charles Redding representing BB&T Capital Markets..

As a little bit of a follow-up, how do you view the overall market for refinery services, I guess, in a broad sense? I mean, can you see the declining crack spreads, I mean, materially impacting overall refinery spending for the industry? Or do you view sort of margin weakness more as a company-specific issue for Team?.

I think the total demand for our services from refineries is just fine, honestly. I think the -- our markets are good. I realize that refining crack spreads go up and go down and would probably vary by region and crude slates that various refiners are using.

But I think just the basic kind of fundamentals for refiners in North America have been and will continue to be very good. So I don't -- I think that's a positive for us in terms of stable demand.

I don't think our margin issues that we're challenged with in terms of balancing our pricing a little bit better really is -- it's unrelated to crack spreads. I think that's kind of a different -- that may affect -- their long-term view of crack spreads might affect their capital programs.

But again, I think the sense I have is that they're -- our customers are generally positive to optimistic long term about their businesses. That, by the way, would also extend to other segments besides refining. I think it would be the same for petrochemical.

It's booming in pipeline right now because of -- again, the very active development of new energy sources is kind of reconfiguring our whole logistical network in North America..

Very helpful.

And then in terms of the wage inflation, are there other areas really that, aside from the Gulf, where you are really seeing a material change there?.

I think that it's spotty, yes. There are -- I mean it's not solely a Gulf issue. It's just that, that's a kind of point of emphasis right now with the clear big projects coming more in Louisiana area than Texas, but really along the Gulf..

With no further questions at this time, Mr. Hawk, you may now proceed to closing remarks..

Thank you, Katina. And I want to thank everyone for your participation in this call and your continuing interest in Team. We look forward to updating you on our progress during our second quarter call that will take place in early January. In the meantime, everyone, have a good day..

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day..