Team, Inc.
Q1 2016 Earnings Call Transcript

Published: 10 May 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the First Quarter 2016 Team 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. As a reminder, today's conference is being recorded. I would like to introduce your host for today's conference, Mr. Ted Owen, President and Chief Executive Officer. Sir, please go ahead.

[Ted W. Owen:]

Thank you, and good morning. My name is Ted Owen, and I'm the President and CEO of Team. Joining me again today is Greg Boane, our Chief Financial Officer and recently named chief – Executive Vice President of the company. The purpose of this call is to report on our first quarter earnings, answer questions about the Furmanite acquisition, update you on our end markets and 2016 outlook and to share with you the excitement about the platform we're continuing to build for 2017 and beyond. This call will contain forward-looking information within the meaning of the Federal Safe Harbor Provisions. So I'll ask Greg to read the full disclaimer relative to forward-looking information and then go over the first quarter results after which I'll provide more color to our business outlook and integration activities. Greg?

[Greg L. Boane:]

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 quarterly earnings release. I'll now focus on the results for the current quarter versus the prior year quarter by walking down the income statement. We reported current quarter revenues of $251 million, up 30% over the prior year quarter. Adjusted earnings were a loss of $0.01 per diluted share versus earnings of $0.25 in the prior year quarter. Revenues for the current quarter include $70 million related primarily to the recent acquisitions of Qualspec acquired in July 2015, and Furmanite acquired on February 29, 2016. Excluding acquisitions, current quarter revenues of a $181 million decreased 6% versus the prior year quarter. We estimate the effects of foreign currency translation impacts on our foreign operations had a 1% unfavorable impact on current quarter revenues. I'll now provide some commentary on our segment operating results. First off all, it's important to note that we renamed two of our three operating segments to incorporate the legacy brand name recognition of our two recent acquisitions, Qualspec and Furmanite. The Inspection and Heat Treat segment is now called Team Qualspec. The Mechanical Services segment is now called Team Furmanite. Our third operating segment, Quest Integrity remains unchanged. Market softness, which began in the second half of 2015 has continued in 2016 across all three business segments. Weak market conditions led to a combination of project deferrals or project scope, size, duration reductions. The following segment revenue information excludes acquisition growth, which impacts comparability between the current quarter and prior-year quarter. Legacy Team Qualspec revenues declined 9% in the current quarter. Most significantly, there was an unfavorable shift in service line revenue mix in the current quarter, as specialty services normally tied to large turnaround projects were significantly lower in the current quarter. For example, Heat Treat Services in North America were down 28% in the current quarter. Legacy Team Furmanite revenues were virtually flat in the current quarter. U.S. revenues were up approximately 1%. Outside of the U.S., a small increase in Canada was offset by a decrease from other international locations. Quest revenues were down 12% in the current quarter. Both pipeline inspections and process equipment inspections were down this quarter and impacted by discretionary project deferrals. Regarding Qualspec and Furmanite revenues, both Qualspec and Furmanite businesses have been impacted by the same end market factors, as the Team legacy businesses. Discretionary project spending has been deferred whenever possible. Qualspec revenues were $39 million in the current quarter, down 12% on a pro forma basis versus the prior year quarter. Furmanite revenues were $29 million for the month of March, excluding discontinued operations. Total consolidated gross margin was $66 million or 26% of revenues in the current quarter versus 28% of revenues in the prior-year quarter. Gross profit across all segments has been negatively impacted by lower activity levels and lower average margin service mix as higher margin advanced and specialty services normally tied to large turnaround projects were lower in the current quarter. Total SG&A increased by approximately $27 million in the current quarter as compared to the prior year quarter. The majority of the increase relates to incremental SG&A from acquisitions of approximately $15 million and non-routine spending of $9.7 million, which I'll cover later. On a comparative basis, SG&A increased approximately $4 million and relates primarily to IT infrastructure costs to support the new ERP system, higher stock-based comp expense and incremental audit fees related to the change in year-end to December 31. Adjusted earnings before interest and taxes or adjusted EBIT was $2.2 million for the current quarter compared to $9.2 million in last year's quarter. Adjusted EBITDA for the current quarter was $14 million, down from $16.2 million in the prior year quarter. Total depreciation and amortization expense for the current quarter was $10 million and non-cash stock compensation expense was $1.7 million. Based on the preliminary asset valuations, total D&A on the Furmanite acquired assets was $1.3 million for the month of March. On a full quarter basis, we would expect total D&A for Furmanite to be approximately $4 million, $16 million annually. Interest expense was $2.9 million in the current quarter, debt increased $66 million. Furmanite added $71 million of debt related to their outstanding revolver balance. The year-to-date effective tax rate on continuing operations was 36.5%, which is consistent with our expectations of around 37% for the full 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 quarter totaled $9.7 million before tax or $0.26 per diluted share after tax. We spent $6.1 million on Furmanite merger expenses, including transaction costs and change of control payments. Of this amount, $4.8 million is related specifically to Furmanite entity obligations for change of control and severance payments. We spent $2.2 million in professional fees related to business integration project cost and the project to change our fiscal year end to December 31. We spent $1.3 million related to non-capitalizable ERP system implementation costs. I'll now give an update on the ERP projects. In February, we rolled out the system to five Gulf Coast legacy Team branches across both the Team Qualspec and Team Furmanite segments. The initial rollout has gone well. The system is working as designed. We've spent $35 million to date on the project. We've capitalized $30 million in expense to $5 million. I'll now wrap up with some balance sheet information. At quarter end, total debt was $437 million. Our leverage ratio; the debt to EBITDA ratio is around 3.5 times. Our net debt leverage ratio, debt less cash, is around 2.7 times. Borrowing capacity under the facility is currently around $56 million. Any stock buybacks will most likely be geared towards offsetting the dilutive effect of stock-based compensation awards, which is around $6 million to $8 million per year. We acquired 60,000 shares during the first quarter. Our main focus for free cash flow use will be towards debt pay-down. Year-to-date 2016 CapEx was $12 million, approximately $4 million related to the ERP project. Subsequent to March 31, we acquired our first inspection operation outside of North America in the Netherlands for a total price of approximately $9 million, which will add about $8 million in annual revenue and 65 employees to our organization in Europe. That completes the financial review; I'll now turn it back over to Ted.

[Ted W. Owen:]

Thanks, Greg. As I reported to you in early March, due to external market forces, calendar 2016 is quite simply, a difficult year for our business and for our customers. As Greg reported, on an organic basis, our revenues declined 6% year-over-year in the first quarter. That's consistent with our expectations in this soft market environment, though frankly, the associated reduction in adjusted EBIT was more than we would have expected on that amount of revenue decline. Excluding non-routine items, adjusted EBIT in Q1 was $2.3 million versus $9.1 million in last year's quarter. The contribution of acquired businesses was $2.8 million in the quarter, so we actually experienced negative operating income from our legacy businesses of about a $1 million. That's nearly a $10 million reduction year-over-year, about $6 million more than we would have expected with a 6% reduction in revenues. About a $1 million of that decline is simply a timing issue, due to the change in year-end to a calendar year, we incurred approximately $1 million higher audit and professional fees due to the stub period audit. That's an acceleration of cost that would otherwise have been incurred later in the year. So that leaves about $5 million in lower than expected margins or about $0.13 per share, hence the reason for the significant cost reduction initiatives announced in light of the current environment. All of our business units, including our new acquisitions, Qualspec and Furmanite, have been similarly impacted by the soft market conditions. Our legacy Team Qualspec business had a revenue decline of 9% in the quarter, and as Greg mentioned, including 28% decline in Heat Treating revenues, all associated with projects or turnarounds and a 4% decline in NDT inspection and engineering assessment revenues. That reduction in revenue at Team Qualspec resulted in lower legacy operating income of $2.6 million versus last year. Our Quest Integrity business experienced a 12% decline in revenues, driven by a 20% decline in pipeline project revenues that resulted in a $3 million reduction in operating income contribution, in fact, Quest suffered the first operating loss since 2010, I believe. Our legacy Mechanical Services business fared best in this difficult environment because our customers appear to have turned down maintenance spending earlier than inspection and engineering assessment services with legacy revenues for Mechanical Services being relatively flat, and legacy operating income down about $1 million. You will recall, we experienced softness in our Mechanical Service business earlier than in our inspection and engineering assessment businesses and also initiated cost reduction initiatives sooner and we're seeing the benefit of those initiatives already. Our clients are strongly biased in 2016 toward deferrals or scope reductions wherever and whenever practically safe, regulation compliant and within applicable industry operating standards. Their heightened uncertainty about their business environment has resulted in our heightened uncertainty about our near-term outlook. To provide perspective on that, we have identified nearly $60 million in our projects that have been deferred or cancelled in 2016, including $16 million that would have expected to occur in the first quarter, but did not. About 60% of the deferred projects are still currently scheduled to occur later in 2016 and, in fact, industry data we track suggests that the second half of 2016 should be better than previously forecast. I hope that so and history suggests we should start to see an upturn but we do not necessarily count on it occurring in 2016 and are expecting to see continued softness during the balance of the year. To that uncertainty, we are now faced with near-term disruption of our Canadian oil sands related revenues due to the ongoing forest fires in Fort McMurray. As I'm sure you're all aware, these fires have had a devastating human toll with the entire City of Fort Mac having been evacuated, but also on virtually all production facilities in the oil sands. To provide perspective, Team's annual revenues associated with oil sands activity is in the range of $30 million to $40 million on an annual basis, that's in U.S. dollars. It simply too early to know what the short-term impact on our operations there will be. Fortunately, all our personnel have been safely evacuated and we are unaware of any significant property loss at this time. In our last call in March, I provided steerage for the year, even in the face of an acknowledged poor end-market environment that hasn't been seen since the great recession of 2009 and 2010. I expressed concern about market conditions and acknowledged I was no longer optimistic even cautiously in my outlook for 2016. I told you then that we've reduced our internal expectations for 2016 to $1.03 billion in revenue and our adjusted earnings target to $1.75 per share. The uncertainty we are facing when coupled with the unknown implications of the recent fires in Alberta, prevent me from credibly providing further steerage for revenue and earnings estimates for the balance of 2016. We haven't given up on 2016, however, and we are not sitting still in the face of these market headwinds. Internally, we're going through a process now to reset our budgets for the second half of the year, involving all of our legacy Team, Qualspec and Furmanite operations. And in parallel with our clients and many of our industry competitors, we have responded with cost rationalization measures extending across the enterprise as evidenced by the now $20 million in targeted cost reductions highlighted in the earnings release. We have also moved aggressively to materially change our platform and sustainable competitive advantages in the form of business mix and integrated service capability, geographic scope and fundamental scale economies with the Qualspec acquisition that closed in the second half of 2015 and the Furmanite merger just recently completed. As a reminder, these significant combinations with Qualspec and Furmanite position us as the premier industrial service company with the following primary competitive attributes

[Operator:]

Thank you. Our first question comes from the line and the Matt Duncan with Stephens. Your line is open. Please go ahead.

[Matt Duncan:]

Hey, good morning, guys.

[Ted W. Owen:]

Good morning, Matt.

[Matt Duncan:]

So, Ted, just for starters, can you talk little bit about sort of what happened on the cost side in the first quarter? I mean, your revenues came in pretty close to where you thought. I think you had told us that organically you were tracking down about 5%, came in at down 6%. So pretty darn close, but on the cost side, it seems things were little more out of whack. So was it mix, was it resource levels or maybe a little higher than they needed to be. Just sort of walk through with us, what happened?

[Ted W. Owen:]

I think it's all of the above, Matt. It is mix, it is less higher in advanced service associated with projects. So few less turnaround related revenues. As I mentioned, Heat Treating, for instance, was down 28% because of lack of project activities. So, it is first mix and secondly, continued pressure front on kind of pricing and rates from customers and third is just, I mean, frankly, it's just our own – we just haven't initiated resource balancing as quickly as we need to and are.

[Matt Duncan:]

So then let's talk about the $20 million in cost savings. What actions are you taking? What costs are you targeting? How much of this is more SG&A versus lowering your tech levels where necessary. Just how are you going to get the $20 million and over what timeframe? It sounds like all of this is in place by the end of 2016. I just want to make sure that that's correct.

[Ted W. Owen:]

Yeah. Actually, most of it is in place even now and frankly, it's primarily a head count reduction and reduction of indirect cost. There's also a significant reduction in SG&A embedded in that as well. Again, as I mentioned, for instance, in Mechanical Services, we experienced softness earlier. We began cost reduction initiatives earlier. Those are, I would say, fully baked in at this moment in time. We are probably half way towards achieving the cost reduction initiatives in the legacy IHT business, for instance, not as far along in the Qualspec business.

[Matt Duncan:]

So net-net, it sounds like, you're about halfway to the $20 million, and...

[Ted W. Owen:]

I would say that's about right.

[Matt Duncan:]

How much, Ted, is coming out of cost of sales versus how much is coming out of SG&A, I just want to make sure, we know sort of where the cuts are coming from?

[Ted W. Owen:]

Matt, I don't know that I have that in front of me, but I would say most of it is coming out of cost of sales.

[Matt Duncan:]

Okay. And then the last thing and I'll hop back in the queue. On the Inspection business, down 9%, I guess, that's a little bit of a surprising decline in this line?

[Ted W. Owen:]

Well, no, no, no, no. No, no, no, no. The Inspection business is not down 9%...

[Matt Duncan:]

Okay.

[Ted W. Owen:]

The legacy IHT business is down 9%.

[Matt Duncan:]

Yeah. I will.

[Ted W. Owen:]

Remember that...

[Matt Duncan:]

Yeah. And Heat Treating was a big chunk of that.

[Ted W. Owen:]

20% of that is Heat Treating. Heat Treating is down 28%, Inspection is down about 4%.

[Matt Duncan:]

Down 4%. Okay. That helps. And is that just that mix down effect that you were referring to that you are seeing with the new inspection business that caused that decline then?

[Ted W. Owen:]

Yes.

[Matt Duncan:]

Okay. All right. I hop back in queue. Thanks.

[Operator:]

Thank you. And our next question comes from the line of Edward Marshall with Sidoti & Company. Your line is open. Please go ahead.

[Edward Marshall, Jr.:]

Good morning, guys. How are you?

[Ted W. Owen:]

Good morning, Ed.

[Edward Marshall, Jr.:]

So I wanted to talk about the scope changes that you identify with your customers and just kind of trying to get a feel as to how you kind of manage through that? Are you preparing for specific jobs and then does the scopes are changing kind of either just before the job gets started or as you're going to work and therefore the head count kind of changes as well? I mean, is that some of the cost side issues that you're dealing with? I'm just trying to get a handle?

[Ted W. Owen:]

Part of it is. Again, this is a business that doesn't have a lot of long-term visibility to it. So we're not generally managing big projects ourselves; we're not managing the turnaround. So we're responding typically to customer demand. So, quite often, project shift on us at a late hour. So, not always, so I'm not – I wouldn't want to suggest that the nearly $60 million of projects just all of a sudden we went to work on a Monday morning and those were gone, that's not the case. But it's really a combination of all of the above. The projects we track – we began identifying what are the projects and looking at which ones are moving. And so, we've now started tracking the movement of projects that we had previously scheduled, if you will. Some of them move pretty quickly because of unforeseen circumstances, scope reductions or decisions on customer's part to move projects or turnarounds to a later date. Sometimes there is more advance notice of that. But it's a bit of a matrix, if you will. It's kind of an ongoing issue.

[Edward Marshall, Jr.:]

But, I mean, I guess you're saying that you're still caught kind of sometimes overstaffed and that's a portion of the differential there from the cost side.

[Ted W. Owen:]

Sure.

[Edward Marshall, Jr.:]

Okay. And I was – get a sense, I mean, you obviously have a finite number of customers, and when things get shifted, help me understand, does the shift – is it additive to the tally next year, is it just delayed out a year, and therefore that's new work that will occur next year, and it's not necessarily additive to what would already be planned in 2017 and so forth? How do I think about kind of the shifts?

[Ted W. Owen:]

Again, it's very difficult to be that granular about it. The projects, again, about 60% of the project deferrals that we've identified are still scheduled for 2016, for they've just – they've been – the timing has been moved to a later point in time. But as we've seen before, I don't know what that means, because quite often, other projects that we haven't identified yet as being moved when you get closer to the other things that move. So, it doesn't mean that, simply because you're moving something to a later period, that that later period is going to be a more robust season than it would have been otherwise because I think that something else generally would be moved at the same time.

[Edward Marshall, Jr.:]

Right.

[Ted W. Owen:]

So, it's hard to say.

[Edward Marshall, Jr.:]

Just a follow-up on that if I could, and then I'll get back in queue. Were these shifts – some of these projects already shifted from 2015 because you've been facing some project shifts for maybe even 12 months to 24 months now. Are these continually shifted programs or are these constantly new ones that are creeping up?

[Ted W. Owen:]

No, they're not. These are new ones because the ones that I'm reporting on – and again, I don't have a basis of comparison, so I just – let me be clear about that because we've just started tracking this data on a specific basis. So, I don't have comparable data, for instance, for the first half of 2015 about the number of projects that would have been scheduled for 2015 that moved. So, that's the missing data point that I don't have. So, what I do have is just the data that, these are the projects coming into 2016 that we expected to be initiated in 2016 that we now know the timing has changed, and about 60% of them are still scheduled for 2016, about 40% of them have either moved out of 2016 altogether or have been canceled. Now, is that $60 million of projects a big number? I think it is, and in fact, I know it is, just kind of given the general market conditions. But in truth and fairness, I don't have a number to compare it to.

[Edward Marshall, Jr.:]

Got it. Thanks very much guys.

[Operator:]

Thank you. And our next question comes from the line of Craig Bibb with CJS Securities. Your line is open. Please go ahead.

[Bob J. Labick:]

Good morning.

[Ted W. Owen:]

Good morning, Craig.

[Bob J. Labick:]

This is actually Robert Labick calling in for Craig.

[Ted W. Owen:]

Oh, how are you?

[Bob J. Labick:]

I'm doing great. What gives the confidence environment will get better in 2017, and what would be the green shoot that kind of confirm the improvement?

[Ted W. Owen:]

The first thing I would say is is history says that it will. If you go back and look at 2009 and 2010, and again, the kind of the worst market environment that we've ever seen in our space and most others have seen in any space, the downturn facing our business lasted about a year. And the reason for that is because Mother Nature is persistent and our business is serving installed base of facility. So, 90% of what we do is to maintain and inspect existing facilities to keep those facilities running. And we saw in 2009 and 2010 and we've seen in earlier periods by the way, to a lesser extent that that customers can kind of go into a minimalist mode on maintenance and inspection activities for a relatively short period of time, but the operation of facilities is a naturally destructive process and you have to maintain them to a minimal level, if you will, and there's nothing new about that. There's no, lights didn't go off, so that Exxons or Valeros of the world can suddenly decide, oh, gee, we can actually spend less money on maintenance than we historically have. These are very, very smart operators, but they do know that they can defer spending for a period of time, but it's only for a period of time because it's sort of like changing the oil in your car. You can defer an oil change and as long as you kind of get back to it the next time it's due, you're probably okay. So that's an imperfect analogy, but I think one that's relevant. And so history says that these market softness periods last about a year and that's why I would suggest that, and in fact, we bid in it for about nine months since the middle of 2015. And so, that's why I would suggest that by 2017 we should see an improvement in our end markets and indeed we track industry data that would actually suggest that we should start seeing improvement by the second half of 2016. But, again, we're simply not counting on that.

[Bob J. Labick:]

That was helpful. Thank you. And on international expansion, have your plans changed at all and can you kind of discuss the opportunity set?

[Ted W. Owen:]

I'm sorry, I missed that?

[Bob J. Labick:]

I was asking about international expansion, have your plans changed at all? Can you kind of discuss the opportunities that you're seeing?

[Ted W. Owen:]

No. In fact, our plans are completely unchanged, if you will. One of the things that Furmanite acquisition does for us is significantly enhance our presence outside of North America. Previously, we had a great operation based in the Netherlands and some smaller operations in the Asia-Pacific realm. Furmanite gives us a much bigger presence in the UK and in Australia. As Greg mentioned, we've just completed our first acquisition of an inspection company, kind of a small tuck-in in Europe, a great addition to our network, giving us some advanced inspection capabilities in Europe and frankly, our first inspection capabilities outside of North America. And so, we're not going to be doing any big deals for sure until we get the integration of Furmanite and Qualspec completed, but we'll still look at kind of the smaller tuck-in opportunities wherever they might be. And if they make sense for our business, we would do them.

[Bob J. Labick:]

Thank you. I'll hop back in queue.

[Operator:]

Thank you. And our next question comes from the line of Matt Tucker with KeyBanc. Your line is open. Please go ahead.

[Matt Tucker:]

Hi, gentlemen. Good morning.

[Ted W. Owen:]

Hi, Matt. Good morning.

[Matt Tucker:]

So, Ted, I understand that you don't want to provide formal guidance for the rest of the year. Should we consider first quarter to be the low point of the year though and can you get back to profitability in the core business and overall, at least from an adjusted basis for the rest of the year?

[Ted W. Owen:]

Yeah. Absolutely. Just remembering that – and I should have pointed this out in case there is new people. We changed our fiscal year to a calendar year, but the absolute softest period of time in our business is the winter months; December, January, and February. So, the March quarter included two of the kind of the weakest months of the year and then the third month is the beginning of our stronger turnaround season. So, yeah, we're not accepting or either expecting or accepting an operating loss in any quarter prospectively.

[Matt Tucker:]

Got it. Thanks, Ted. And with these two large recent acquisitions you've made, do you think the integration or the distraction or rather challenges from that has impacted execution at all or prevented you from being more proactive in managing your cost than you would have otherwise been or was this really had nothing to do with that?

[Ted W. Owen:]

No, of course it has. I mean, I would be, I'd be – it'd be naïve on me to tell you that the integration activities have not been a distraction, they certainly have. That's why we got to get through them as quickly as we can. It's not an excuse, but certainly, I mean, these are heavy lifts, these are big projects of integrating these two businesses, there is no question about that.

[Matt Tucker:]

Thanks, Ted. I appreciate the candidness there. And then, maybe on a more constructive note, PHMSA recently issued some new rule on pipeline safety, kind of geared toward Integrity Inspection, do you see that as driving any incremental demand for your services?

[Ted W. Owen:]

Matt, I'm not precisely sure what the regulations you're referring to, but I would just simply say this about regulations in general. Any time there are tighter regulations involving inspection of assets, be it pipeline or processed facilities, that's good for our business, because the things that drive demand are our customers' desire for safety and operating efficiencies, but also compliance with regulations. So if regulations get tighter around process safety management or pipeline integrity that has to be good for our business.

[Matt Tucker:]

Thanks. So, maybe I could just ask it another way too. That was helpful. But, can you just remind us what your exposure is to pipelines as in like transportation pipelines as opposed to the pipes within customer facilities?

[Ted W. Owen:]

Sure. Well, most of our exposure is within Quest business. So, I would say half of Quest revenues come from pipeline inspection, outside the plant or outside the gate, if you will. So – and that's the significant piece of our pipeline inspection activities.

[Matt Tucker:]

Prefect. Thanks, Ted.

[Operator:]

Thank you. And our next question comes from the line of Billy Harper with BB&T. Your line is open. Please go ahead.

[William A. Harper:]

Hey, guys. I'm on today for Adam Thalhimer and...

[Ted W. Owen:]

Okay. Good morning.

[William A. Harper:]

Hi, Ted. How are you?

[Ted W. Owen:]

Great.

[William A. Harper:]

And so, if you could just sort of run us through your end markets, just trying to find out, is this a refinery problem or is it more widespread across all industry customers?

[Ted W. Owen:]

Well, I'd characterize it frankly as probably a combination of refining and pipeline customers was kind of the most significantly impacted in this kind of soft environment. About 45% to 50% of our end markets is refining. About 20% is our petrochemical plants. So, refining is very soft from a spend, a maintenance and inspection standpoint. Chems are actually pretty good as you know, and I believe there is also a lot of project activity in, particularly in the petrochemical space along with the Gulf Coast, so that's good. Pipelines represent about, I would say maybe 10% to 12% of our total revenue base. There is some struggles there. In addition to the Quest business that I described a moment ago, we have kind of pipeline exposure in the Marcellus in the Pennsylvania area and the Bakken et cetera. So if you think about it, 45% to 50% refining, 10% pipeline and 20% petrochemical space and then the rest of our revenues would be, there is some upstream exposure and then heavy industry, if you will, steel, pulp and paper, things like that.

[William A. Harper:]

Okay. And then, on the pricing pressures, can you quantify the pricing pressure, I mean, or can you give us any color on customer conversations?

[Ted W. Owen:]

It's impossible to quantify, because pricing is a combination of a lot of things, so it's rates and it's hours and probably 90% of our business is time and material. So it's rates, times, hours and so, you can put pressure on pricing by putting pressure on A, rates, or B, reduction of hours. And we've seen, particularly in our kind of resident refining programs a significant reduction in hours. So it's like a matrix if you will.

[William A. Harper:]

Sure.

[Ted W. Owen:]

And so it's very difficult to quantify a specific pricing effect.

[William A. Harper:]

Okay. Thanks so much.

[Operator:]

Thank you. Our next question comes from the line of Davis Paddock with Invesco. Your line is open. Please go ahead.

[William Davis Paddock:]

Yes, Ted. Good morning. How are you doing?

[Ted W. Owen:]

Good morning, Davis. How are you?

[William Davis Paddock:]

Well, thanks. I was just curious, you mentioned that in history, past history that projects or deferrals can last around a year, I'm guessing that's an average. I was wondering kind of what the longest – what that range might be that the average works within?

[Ted W. Owen:]

I think, again, I think in – it was about a year in terms of the impact on our business of the soft environment of 2009 and 2010 when we were in a total minimalist mode. We had sectors of our customer base who, particularly on the chem side had no orders. And as you recall, there is just a lot of things going on. But even in that very difficult environment and again, the economic downturn lasted that was longer than a year. But relative to our customer base after about a year of kind of significant reduced spending, we saw an upturn. In fact, we saw a pent-up demand beginning in fiscal 2011, if you kind of went back and looked at our charts, that was about the longest cycle that we saw.

[William Davis Paddock:]

Okay. Thank you.

[Operator:]

Thank you. And our next question is a follow-up from Matt Duncan with Stephens. Your line is open. Please go ahead.

[Matt Duncan:]

Hi, guys. Just on the issue in Fort McMurray, can you remind us how your revenue is in Canada, you said it's about $30 million to $40 million annually up in the oil sands. How does that split up between your various segments?

[Ted W. Owen:]

About two-thirds of that would be Inspection and Heat Treating, and a third would be Mechanical Services.

[Matt Duncan:]

Okay. And...

[Ted W. Owen:]

I think that's right. I'd have to double check that, but something on that order of magnitude.

[Matt Duncan:]

And, Ted, I appreciate this is still a very fluid situation up there. So, can you talk a little bit about sort of how it's impacted the business? Are you guys completely out of there right now, not operating at all?

[Ted W. Owen:]

Yeah, absolutely. I mean, we've – it's zero, it's second (49

[Matt Duncan:]

Okay. Yeah. Very helpful. And then, moving on and then as it pertains to full year outlook, I appreciate it. It's obviously very difficult at this point. But on the revenues side, it seems like you are – Fort Mac notwithstanding, seems like you are relatively on track based on where you were in the first quarter versus your expectations. So should we assume that the revenue outlook hasn't changed all that materially that it's really more going to be a margin issue and think about it that way?

[Ted W. Owen:]

Yeah. I think that's right. I think that we would toe down our revenue expectations slightly. But, again, we're going through a – I mean, I wouldn't have any credibility at all if I were to give you a number because I have given numbers before and then we've changed them because of the circumstances that our customers are facing and therefore we're facing. So, again, what we're doing is going through a complete reset of our budgetary process and involving all of our businesses

[Matt Duncan:]

Okay. And then last thing for me just moving on to the Furmanite and the integration process there. Can you tell us how that's going? Where are you in terms of annualized cost synergies that are already in place relative to your $20 million to $25 million target? Maybe update us on when you think that you may have that target met in terms of when on the calendar are you sort of targeting to having all those in place. And it sounds like maybe you have found some additional opportunities. So should we really be thinking more $25 million plus or just what's the right way to think about (54

[Ted W. Owen:]

Well, I think the cost synergies – our targeted cost synergies is really in the realm of about $25 million I think is a reasonable number. We're about halfway there right now and I think it's going to take kind of into a – it'll be a year before we're fully baked and have all the cost synergies realized. There are some big opportunities, for instance, in economies of scale relative to insurance procurement, some travel procurement, benefits, things like that that really only begin to be realized as renewals of those programs come up. So, it's kind of into the – there's significant elements that's into the second year. So, it's going to take about a year to 18 months to fully to realize all of the cost synergies, but I'd say we're about halfway there right now.

[Matt Duncan:]

Okay. Very helpful. Thank you, Ted.

[Operator:]

Thank you. And our next question is a follow-up from Billy Harper with BB&T. Your line is open. Please go ahead.

[William A. Harper:]

Hey, Ted. Thanks.

[Ted W. Owen:]

Yeah.

[William A. Harper:]

Just – if you just give us a little bit more color on Quest? You mentioned there was a first operating loss since 2010. Was this just a timing issue?

[Ted W. Owen:]

Well, again, I think so. So, our internal forecast for the second quarter for Quest are actually quite good. Our month of April results preliminary, look, are quite good, kind of more back on track. So, we just had some significant project deferrals in the first quarter. I mean, a 12% revenue reduction year-over-year it's almost unheard of for Quest because we're used to growing Quest at 20% a year or 15% to 20% a year. So a lot of project deferrals. Again, we're tracking those, most of them are expected to occur later in the year. We're continuing to make significant investments in kind of next generation tool development. So I think our – we are very optimistic about that business. And so, again, it's facing the same issues, particularly around – well, not just in the pipeline but process both (57

[William A. Harper:]

All right. Thanks so much.

[Operator:]

Thank you. And I am showing no further questions at this time and I'd like to turn the conference back over to Ted Owen for any closing remarks.

[Ted W. Owen:]

Okay, thank you. Again, a difficult first quarter but I'll tell you the things that we're working on and building relative to the integration of Qualspec and Furmanite, the implementation of the ERP system, these are heavy lifts but they're just strategically imperative for us. And when we kind of come out on the other side of this, I mean, we'll have a built just an amazing platform that we're going to be very, very, very proud of. And I want to thank again, all of our hardworking employees of Team including our new colleagues at Furmanite and recent colleagues at Qualspec. It's a tough time right now but we're building something that's very, very special, and we have a tremendous group of colleagues that are leading this effort. So thank you all and thanks to all of our investors and analysts for your interest in Team and have a good day.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.