Ted Owen - President, Chief Executive Officer Greg Boane - Senior Vice President, Chief Financial Officer.

Matt Duncan - Stephens Edward Marshall - Sidoti & Company Craig Bibb - CJS Securities Tahira Afzal - Keybanc Capital Markets Mary Willis - Johnson Rice.

Good day ladies and gentlemen and welcome to the Team Fiscal Year 2016 First Quarter Earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time.

If anyone should require assistance, please press star then zero on your touchtone telephone. As a reminder, this conference is being recorded. I will now turn the call over to your host, Ted Owen. Please go ahead..

Thank you, and good morning. It’s my pleasure to welcome you to the Team Inc. first quarter earnings conference call. Again, my name is Ted Owen and I’m the President and CEO of Team, and joining me again today is Greg Bowen, our Senior Vice President and Chief Financial Officer.

After giving you some disappointing news last week, I wanted to begin our call today with some really good news, especially for the benefit of our New York analysts and investors - Astros win! We’re going to the playoffs and the Yankees are not.

With that, the purpose of today’s conference call is to discuss our recently released financial results for the first quarter. As with past calls, our primary objective is to provide investors and analysts with an enhanced understanding of our company’s performance and prospects.

This discussion is intended to supplement our quarterly earnings releases and our SEC filings. In a moment, Greg will begin with a review of the financial statements and the Safe Harbor statement, but first I want to clarify some comments I made in last week’s pre-announcement call.

Last week, we pre-announced disappointing results for the quarter and reduced our forecast of adjusted earnings for the year to $2.15 per share. I’m aware that some of my comments in last week’s call confused rather than clarified. Unfortunately, in the interest of getting bad news out as quickly as I could, I wasn’t as clear as I should have been.

I apologize for that, and I want to clean that up this morning. So let me try again. Simply said, our first quarter problems were a result of resource imbalances caused by adding headcount in anticipation of growth that did not materialize, especially in our mechanical services business unit.

In fact, all of our three business units experienced slower growth than we expected, impacted by sluggish end-market demand associated either directly or indirectly by commodity price pressures as well as foreign currency weaknesses against the U.S. dollar.

A mistake I made last week was to suggest that our revenue forecast for the full fiscal year was unchanged at $1.1 billion. Of course, that didn’t make much sense in light of my comments on slower growth and a substantially reduced earnings estimate.

In fact, our revenue estimate is lower by $50 million, being reduced from $1.1 billion to $1.05 billion. Due to rounding, I reported the estimate to still be $1.1 billion, an obvious error on my part. That $50 million reduction is caused by the market softness I discussed and is reflected in our lower earnings estimate for the year.

I also want to reiterate another comment I made last week, and that is we’re off to a great start with the Qualspec acquisition and couldn’t be more pleased with our new TEAM colleagues. We’re getting to know each other and are beginning to successfully coordinate our efforts between Qualspec and IHT personnel.

Most importantly, we are listening to our customers, focusing on their expectations, and continuing to find ways to increase our value proposition to our customers. The downward adjustment to our earnings estimate is completely unrelated to the Qualspec acquisition.

So with that, let me turn it over to Greg to discuss more fully the financial results for the quarter..

Thanks Ted. Good morning. I’ll open with our Safe Harbor guidance. Any forward-looking information discussed today is provided in accordance with the Private Securities Litigation Reform Act of 1995.

We’ve 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. 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. The discussions today will also include certain non-GAAP financial measures.

We have excluded certain non-routine items when arriving at adjusted net income, adjusted EBIT, and adjusted EBITDA. Reconciliations of these adjusted financial measures are provided in our first quarter 2016 earnings release. I’ll now focus on the results for the current quarter.

Current quarter revenues were $223 million, up 18% over the prior year quarter. Qualspec, acquired in July, contributed revenues of $23.5 million in the current quarter.

Additionally, there were a couple of other smaller acquisitions subsequent to last year’s first quarter that contributed approximately $5 million in revenues during the current quarter. We estimate the effects of the strong U.S.

dollar and related foreign currency translation impacts on our foreign operations had an unfavorable impact on current quarter revenues of $6 million or approximately 3% of total revenues. Excluding acquisitions growth, revenues increased 3% in the current quarter versus the prior year quarter.

The following segment revenue information excludes acquisition growth. Inspection and heat treat revenues were up 7% organically. While U.S. revenues were up 13%, they were partially offset by a significant decline in Canada. Mechanical services revenues were down 7% organically due primarily to weaker demand and lower activity levels in Canada.

Quest Integrity revenues were up 20% due primarily to a large foreign pipeline inspection project. Adjusted earnings were $0.23 per diluted share versus $0.34 in the prior year quarter.

Gross margin was $63 million or 28% versus 30% in the prior year quarter, due primarily to a 300 basis point decline in mechanical services related to reduced labor utilization on lower activity levels. IHT gross margin was down 100 basis points to 26%, due primarily to reduced labor utilization on softer than expected demand for services.

Quest gross margin improved 280 basis points. Adjusted earnings before interest and taxes, or adjusted EBIT, was $10 million for the current quarter compared to $12 million in last year’s quarter.

The decline is due primarily to weaker than expected demand for mechanical services, coupled with higher corporate SG&A expenses primarily related to IT as we build out the infrastructure to support a more robust ERP system.

IHT’s EBIT margin was also lower in the current quarter as the straight line D&A charge on assets acquired in the Qualspec transaction was high as a percentage of revenues on less than two months of revenue in a seasonally weak quarter. Adjusted EBITDA for the current quarter was $19 million, up from $18 million in the prior year quarter.

The effective tax rate was 36.5% for the current quarter versus 36% in the prior year quarter. With Qualspec’s revenues being primarily domestic, the percentage mix of U.S.-generated income will be higher in 2016. The 2016 tax rate is expected to trend closer towards 37% rather than 36% last year.

I’ll spend a few minutes discussing the non-routine items in the current quarter that we do not consider to be indicative of our normal ongoing operating activities. Non-routine items during the current quarter totaled $5.5 million before tax, or $0.16 per diluted share after tax.

First of all, we spent $3.6 million before tax, or $0.11 per diluted share, on acquisition expenses. Secondly, as we discussed last quarter, we spent $0.7 million before tax or $0.02 per diluted share related to non-capitalizable ERP system implementation costs. We’re on track to begin a phased rollout to our U.S.

branch operations in 2016, beginning with an initial pilot test in January 2016 followed by four sequential rollouts over the course of calendar year 2016. We spent $0.7 million before tax, or $0.02 per diluted share, on legal fees related to the patent infringement suit related to Quest Integrity’s data presentation software.

We also had a charge of $0.5 million before tax, or $0.01 per diluted share, related to an increase in the estimated earn-out liability of a prior year acquisition. I’ll now wrap up with some balance sheet information. At quarter end, total debt was $359 million.

Our leverage ratio, the debt to EBITDA ratio, is slightly higher than three times, well below the existing leverage covenant of four times. Borrowing capacity under the new facility is around $95 million. Year-to-date CAPEX was $11 million, $4 million related to the ERP project. That completes the financial review. I’ll now turn it back over to Ted..

Thank you, Greg. Given the extensive discussion we had in last week’s call, I will limit my additional comments about the quarter; however, there are a couple of additional points I want to make about fiscal 2016. First, it is a fair criticism that we have difficulty in seeing changes in business outlook very far ahead.

In August, our outlook for the year was undiminished. We were coming off the best year and best fourth quarter in our history, and activity levels through the first month of the quarter were strong. As the growth trajectory changed, we got caught with unbalanced resources. I assure you, we will get our resources rebalanced in a hurry.

We are not waiting for an upturn in general market conditions and will adapt to the environment we are in. Another point I want to make is that generally our business is driven by the infrastructure of mid and downstream operating facilities, and not much of it is directly tied to upstream production activities. We are not an oilfield service company.

In fact, only about 5% of our revenues in the quarter were derived from upstream customers. That activity was down about 28% year-over-year, some of which was due to the weak Canadian dollar that we previously discussed. So most of our activity, again, is derived from existing infrastructure of mid and downstream facilities.

Even so, in this lower commodity price environment, much of the infrastructure around the globe is being pushed harder, and we are seeing deferral of discretionary projects in our midstream and downstream customers.

While challenging, we believe this environment favors several elements inherent with Team’s broad-based services portfolio, including our single point of accountability for integrity management and related inspection assessment and repair; our responsiveness to our customers’ desire for minimized downtime by virtue of our distributed infrastructure and the breadth and depth of our resources; our ability to escalate seamlessly from more standardized services to customized advanced solutions as damage discovery demands; and our practical application of technology to enable operators to be better informed about their asset condition as they push utilization within the current operating environment.

Said another way, we like our market position in this difficult environment and are confident that our historic growth rates will resume as conditions improve. Now before turning this over to questions, I want to once again end today’s call by reminding everyone why we’ve been successful over a very long period of time.

It’s because of the dedication of our now nearly 6,000 colleagues responding to customer service requirements every day, all over the world. Our success depends upon outstanding service execution by all of us, all of the time.

I would also point out in closing that even with these market headwinds, I remind everyone that we are still forecasting the best year in the history of Team. So with that, let’s now open up the line for questions..

[Operator instructions] Our first question comes from Matt Duncan with Stephens. Your line is open. .

Good morning, guys..

Good morning, Matt..

Hey Ted, just to make sure we’re clear on this, the revenue guidance didn’t actually change from last week, it was just sort of a communication thing. So it’s not that the business is any worse--.

Correct..

Okay. .

No, no, no. There is no change from last week. It was just bad communication last week of what it was..

Okay. Can you help us sort of think through the revenue by segment, or are you thinking the growth is going to be better? It sounds like the inspection and heat treating side is probably doing a little bit better than mechanical services.

Is that a fair way of looking at it, and do you expect the mechanical services business to grow on an organic basis this year?.

I think the mechanical services business is going to be generally flat organically this year, remembering that we’re down 7% in the first quarter.

Now, we have some very nice projects coming up in the second half of the year in mechanical services that could shift that needle; but on balance, it’s going to be a very slow growth because of the market conditions that we’re in..

Okay..

Clearly, our inspection division and Quest are growing at faster rates.

The good thing about these slower environments is that while we see maintenance being deferred or kind of ratcheted down, if you will, which affects mechanical services first, we generally don’t see a lot of similar deferral of inspection activity, if you will, because to do so would cause our customers to choose to go blind about the status of operating condition, which of course they shouldn’t and don’t do.

So, we will expect to see inspection and heat treating growth rates a little higher, mechanical services generally flat; and again Quest is off to a really good start for the year in the first quarter. We’re seeing some deferral of some of their projects out of the second quarter.

We think they will come back in the second half of the year, but again, given the environment, we’re just being really cautious..

Okay, that helps.

And then, Ted, on the cost side, is there some granularity you can give us there on what you guys are doing? How have you responded to the lower revenue rate? Is it primarily sort of a rebalancing of the labor force on the mechanical services side, or are there other things that you’re doing as well?.

No, it’s fine tuning. It’s not major changes. It is getting our resources balanced to the activity levels that we see in front of us, and we’re doing that even now..

Okay. Last question I’ve got, I’m curious on your current ERP systems. I know you guys are obviously doing an install of a new one, which clearly implies it was needed.

Do you feel like you have the information at your fingertips that you need to manage the business in real time or is there a lag and maybe that’s part of the impetus for the new ERP system? I’m just trying to better understand sort of where the information disconnect may be..

Well, I think we’ve said many times that the reason we’re doing--installing a new ERP system is to give us better information, dashboard information, key performance metrics around our business in more real time basis. We have a lot of data in our existing ERP system. It’s not great forward-looking data, however, as I’ve said.

We don’t have contract administration or forecasting embedded in the existing system. That will be enormously improved with the implementation of the new ERP.

So it’s a lot of--you know, we have a lot of good data, good understanding of kind of where we are, but as I’ve said many times, the forward-looking information is difficult with the systems that we have in place..

So that does improve, then, with the rollout of the new system?.

Absolutely, absolutely..

Okay, thanks Ted..

Our next question comes from Edward Marshall with Sidoti & Company. Your line is open..

Morning guys..

Morning, Ed..

So you mentioned cost revisions last week, and you mentioned it quickly. You talked about the resources and you will adapt quickly this morning, and I just wanted to follow up on that if I could. How fast can--I mean, you’re in the heart of the fall turnaround season now, and admittedly you said it was strong, not robust but, I guess, strong.

I’m curious - how fast can you react into that environment, and what are the cautions and some of the management thought process that goes into kind of cutting costs and maybe going too far? Would that be a bad thing, or--?.

Well, certainly going too far would be a bad thing. I mean, again, we are meeting with our vice presidents and looking at resource requirements, utilization in each of our regions and making appropriate plans given our activity levels. So it is not a long-term effort to get rebalanced. It will be a short-term effort..

Okay.

You cut the sales guidance, I guess, by about 4%, so if I think about that, is that the appropriate thought process that you’re thinking about from the cost side, or is it going to be deeper than that?.

Ed, I really don’t want to talk about right now what precisely our plans are. Again, as you can appreciate, we are very, very busy at this moment in time, so what I can only tell you is that we’re going to get the resources balanced in order to achieve the revised forecasts that we gave you..

Okay.

If you look at Qualspec and your guidance for the year, I’m just curious, what’s implied in the guidance as far as the contribution from both maybe a revenue and an EPS perspective?.

Greg, do you have that in front of you?.

From a revenue perspective, it should be between--I’m just going to give a range. It should be, let’s call it $170 million to $180 million. That’s for 11 months of activity. On an EPS basis, it should be in the range of, call it $0.15 to $0.20..

Recognizing, Ed, again that Qualspec is now reported up under IHT, and while we will be reporting the revenue results, we won’t be reporting separate operating results for Qualspec. .

I got it. So if we just think about it on a year to year basis, and if it’s $0.15 to $0.20, is it safe to say--I mean, your guidance is $2.15.

Is it safe to say then that you’re expecting at best a flat year from--you know, on the organic business?.

Certainly not at best. I mean, again, what we’ve said is that we’re giving a revised forecast with the intention of not having to revise it again, so we’ve given you what we think is a fairly conservative outlook given the market conditions that exist. But certainly, it’s not the best outlook at all.

I mean, there are lots of models that we have that would have guided us much higher than that, but again what I said is my intention is I only want to do this one time..

Got it..

Let me ask you, if you don’t mind - I’ve taken about four or five questions from you.

If you don’t mind jumping back in the queue to let others have a chance to ask their questions, would that be alright?.

Our next question comes from Craig Bibb with CJS Securities. Your line is open. .

Hi Craig..

How are you doing? I think I actually saw you at the game last night..

Yeah - go ‘Stros!.

Well, you have one good pitcher, a really good pitcher. At IHT, the year-over-year decline in EBIT margin, could you talk about that a little bit? You mainly have focused on mechanical services and the margin change there. .

Yes, that one, I don’t read a lot into that one. That’s impacted a little bit, again, by the straight line D&A charge for Qualspec during a seasonally weak period, so because we only had Qualspec for less than two months, in the weak period they still get charged with a straight line D&A, so that’s the main reason for that decline..

Okay.

The overseas pipeline that Quest was working on in the first quarter, is that done?.

It is. It finished in the first quarter. .

So the underlying--.

Although I say it finished, that doesn’t--although we believe that there will likely be other opportunities, that particular project was completed in the first quarter. But we are hopeful that it will lead to indeed other opportunities..

So is that kind of an outlier in terms of its impact on the growth rate, and what would the growth rate be without it?.

Well I mean, it’s an outlier in the sense it was a large project, but understand that we always have some large projects in Quest, so it wouldn’t be fair to say let’s take that project completely out of Quest, because much of what we do at Quest is associated with some big projects.

Again, that’s why there’s a volatility to Quest, because it’s not every quarter, and sometimes there’s two or three in a quarter, sometimes there’s not. When there is, they usually have some pretty high incremental contribution margins, so it just wouldn’t be fair to say, but for, because that’s part of what we do at Quest..

Okay. Then you were saying that there were some deferrals at Quest out of Q2 into the second half..

Yes, we have seen some activity levels that we had anticipated to happen, to occur in this quarter being pushed out into other quarters, and that’s part of the overall context of--you know, we have lots of observations about slowed maintenance, slowed activities in the midstream, downstream spaces across all of our business units, and that’s part of why our estimate for the balance of the year is cautious..

Okay. Other than the straight line D&A charge, Qualspec is neutral to margins.

Is that how we should look at it--to IHT margins?.

It would be positive to--it’s neutral after the D&A charge..

Neutral after - okay. Great, thanks a lot..

Our next question comes from Tahira Afzal with Keybanc Capital Markets. Your line is open..

Thanks a lot. Hi Ted..

Morning, Tahira..

First question for you - you know, if you look in terms of your human resources right now, your labor force and where it was right after the ’08, ’09 crash, and I know you were only impacted by perhaps a lag effect a year out, where would you say--how much do you think your labor force has grown outside of Qualspec?.

You know, Tahira, I don’t have that data in front of me. I mean, our business has grown substantially, as you know, since that period of time, so I just don’t have that data..

Got it, okay. So as you look to trim your labor resources, it seems you will still have sufficient staff as the business picks up again. It seems you said that earlier on - I just want to confirm that’s the case..

Absolutely. I mean, again, this is fine tuning. This is not a major surgery that we’re contemplating at all..

Got it, okay. Second question, Ted, is in regards to Qualspec.

I know you’ve been busy with guidance preparing for the year, but as you’ve gone out to the customers who are looking at that cross-selling bundle opportunity, how have those talks gone? Are you feeling still pretty comfortable around that?.

Yes, I’m feeling very comfortable around that. Again, what I’m most impressed by is just the depth and breadth of customer relationships that Qualspec has developed over time, the confidence that those customers have in Qualspec. Again, we’re going slow in Qualspec.

This is about making sure and sending very clear messages to our customers and our employees that we’re not--this is not about Team-izing and trying to change things. This is how do we help build on those relationships, so I am even more confident today than I was prior to the completion of that acquisition. .

Got it, okay. Last question from me, Ted. I know you’ve been active and gaining traction with some west coast clients on the integrity side. I know there are new projects and initiatives which are fairly similar that have just started in the northeast.

Can you give us an idea of your presence in the northeast in terms of integrity work as well?.

Well, we have a stronger presence certainly in the west than in the northeast, if you will, but we have a lot of just resources and focus not just in a particular geography.

I mean, our focus on integrity management, technology innovation is across our entire network, if you will, so I’m as excited about opportunities in the northeast or the south or the Gulf, or Canada or even in Europe as anywhere else. .

Got it, okay. Thanks. Ted, I’ll hop back in the queue..

Again ladies and gentlemen, to ask a question, please press star then one on your touchtone telephone. Our next question comes from Marty Malloy with Johnson Rice. Your line is open..

Good morning, guys. This is actually Mary filling in for Marty..

Okay. Hi Mary..

We were wondering if you could break down how much revenue comes from traditional upstream and how much comes from oil sands..

Yes, I think Greg has that handy..

So for the first quarter, oil sands and shales, and oil field service customers amounted to about $10 million compared to about $14 million last year..

Okay, so the breakdown for that $10 million between oil sands versus shale?.

Oil sands is going to be around 5-ish..

Okay, that’s it. Thanks guys..

You bet..

Our next question comes from Edward Marshall with Sidoti & Company. Your line is open. .

I just had one follow-up.

The Qualspec contribution to EPS in 1Q, do you have that?.

It would be, again, generally neutral because of the D&A on seasonally weak revenue, so Qualspec would be neutral to the quarter..

So the $0.15 to $0.20 will be coming in the next three quarters?.

Correct..

Okay, thanks guys..

I’m showing no further questions. I will now turn the call back over to Ted Owen for closing remarks..

Okay, well thank you. Again, thanks so much for everyone’s participation in this morning’s call. That’s all from us, so have a great day. Thank you..

Thank you. Ladies and gentlemen, that does conclude today’s conference. You may all disconnect, and everyone have a great day..