Team, Inc.
Q2 2016 Earnings Call Transcript

Published: 9 Aug 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the Team, Inc. Second Quarter 2016 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 maybe 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:]

Good morning. Thanks, Michelle. Again, my name is Ted Owen, I'm the President and CEO of Team. Joining me again today is Greg Boane, our Executive Vice President and Chief Financial Officer. The purpose of this call is to report on our second quarter earnings, update you on the status of our business integrations, and on our end markets and to share with you the excitement about the platform we're building in 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 second quarter results, after which I'll provide more color as to our business outlook and integration activities. So, Greg, with that...

[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 that we believe are not indicative of Team's ongoing operating activities, when arriving at adjusted net income, adjusted EPS, adjusted EBIT and adjusted EBITDA. All of these are non-GAAP financial measures. Reconciliations of these non-GAAP 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 $336 million, an increase of 43% over the prior year quarter. GAAP net income was $7 million or $0.25 per diluted share versus $0.65 per diluted share in the prior year quarter. Non-GAAP adjusted net income was $11 million or $0.37 per diluted share for the current quarter, versus $0.79 per diluted share in the prior year quarter. Current results include the results from Qualspec, which was acquired in July 2015, and Furmanite, which was acquired in February 2016. In March 2016, we began integration activities and certain business operations, locations and technicians are in the process of being consolidated and/or transferred into legacy Team operations. As a result, the discrete standalone financial information of the acquired businesses for 2016 is no longer readily available and we're not managing Qualspec and Furmanite as standalone business units. In order to help you understand significant variances between the two quarters, I'll be comparing current quarter revenues to prior year quarter revenues on a pro forma basis. The following prior year quarter revenue information is on a pro forma basis, assuming the Qualspec and Furmanite acquisitions had both occurred on April 1, 2015. As a reminder, we report results in three operating segments. TeamQualspec is our inspection and heat treating business. TeamFurmanite is our mechanical services business. Quest Integrity is our proprietary in-line pipeline and process equipment inspection and advanced engineering assessment services business. Current quarter consolidated Team revenues were $336 million and declined $35 million or 9% compared to pro forma revenues of $371 million for the prior year quarter. The three major components of the 9% decrease in revenues are as follows

[Ted W. Owen:]

Thanks, Greg. As I reported to you in each of our calls this year, due to external market forces, calendar 2016 is a difficult year for our business and for our customers. Our clients continue to be strongly biased in 2016, towards 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, as I've reported in our last call, we've identified nearly $60 million in projects that have been deferred or canceled in 2016, including $16 million that we would have expected to occur in the first half of this year, but did not. Less than 40% of the deferred projects are still currently scheduled to occur later in 2016. With about 60% being either pushed into 2017, or whose timing is now uncertain. That's exactly the condition we reported in May, and there is no near-term change in that market outlook. Adding to this market uncertainty, I also reported in May that our current – second quarter, would be impacted negatively by near-term disruption of our Canadian Oil Sands business due to the massive forest fires in Fort McMurray. As I'm sure you're all aware, those fires had a devastating toll with the entire city of Fort Mc having being evacuated, but also virtually all production facilities in the oil sands. We've now quantified this revenue loss associated with suspended Q2 projects to be about $5.4 million, which negatively impacted our earnings for Q2 by about $0.04 per share. With that, we're now pleased to say that the business environment is beginning to return to normal in the oil sands. While 2016 is a difficult end market environment, we're not sitting still in the face of these market conditions, in parallel. With our clients and many of our industry competitors, we've responded with cost rationalization measures, extending across the enterprise. $20 million in targeted cost reductions achieved across our business units. In addition to the merger related synergies from the Furmanite transaction. Great strides have been made to build a world-class platform, where we're leveraging labor utilization and developing technology that solves customer problems from digital solutions to advanced phased array technologies. Integrating Furmanite and Qualspec to take full advantage of our respective strengths and expanded service capability and market access is hard work. We are consolidating customer contracts moving people and equipment across all three legacy organizations and combining physical locations among other things. As Greg pointed out, this is not just managing three distinct businesses, it's fully integrating Qualspec and Furmanite into our legacy businesses. And while we're doing it, we're focused on building upon the culture of Team that has been such an important part of our success for many years. To that end, we've just completed seven two-day collaboration meetings across the United States involving over 400 legacy TeamQualspec and Furmanite managers where we have provided Team's leadership training coupled with discussions of our safety, quality and ethical culture. The deeper we have engaged in the integration processes for both the Qualspec and Furmanite businesses the more confident I have become about the associated value creation. When we announced the Furmanite transaction in November, we said we expected to realize $20 million to $25 million in cost synergies over the first two years. We've now pegged that cost synergy amount to be about $25 million. As mentioned in the yesterday's press release, we've realized about $19 million of those synergies on an annualized basis. Although the impact of most of that is still prospective as opposed to the second quarter. Additionally, we've identified margin expansion opportunities for the combined TeamFurmanite well beyond the cost synergies identified. These performance improvement opportunities will take longer and involve process changes to capture but are well within our direct control and influence. I'm excited about the progress we have made and the opportunities we continue to expose. But I'd also like to take a minute and talk about how this deliberate business building and positioning syncs with the key trends in our target markets. First, outsourcing. In the midst of ongoing workforce rationalization within many of our customers, we see an increasing dependence upon outsourcing for specialized, knowledge and experience. Our customers have been focused on knowledge management and retention for some time, in anticipation of a retirement wave in experienced personnel. We are becoming an increasingly critical part of the solution to our clients' problems of more internally concentrated knowledge. Second, more systemic management. Plant operators are now responding to a market conditionship with a more holistic approach to plant performance and critical asset management. The market has long discussed asset lifecycle management, but we now have major operators engaging with us more actively on how to safely and economically improve total throughput or to better empirically understand the cost effectiveness of predictive maintenance versus alternative maintenance approaches. And third, data mining. In a budget constrained environment, operators want to improve the information yield on current and historical data. We participate broadly in the collection of this data superset, but we also have the multi-disciplined engineering assessment resources and software tools to interpret, synthesize and manage it and the mechanical services required to practically and timely implement corrective action. Over the last several calls, I've spoken about the key, the five key elements that we believe constitute our current value proposition, and the foundation by which we are extending the magnitude and sustainability of our competitive distinction. In summary, those competitive advantages are, first, industrial services market leadership, that's that balanced portfolio of both inspection and in specialty mechanical services. Second, the ability to provide standardized service all the way up to customize, fully integrated solutions for our customers. Third, the highly trained and experienced workforce of more than 8,000 employees across the globe. Fourth, practical technology enablement. Fifth, regional resources and responsiveness that's leveraging the availability of our resources and equipment over 220 locations in 22 countries. This value proposition we're building will translate directly into measurable financial results for the enterprise. By the end of 2017, even with modest growth targets, we believe our total business should be achieving 9% EBIT margins and 13% EBITDA margins. For 2018, that would represent an adjusted EBIT target of about $130 million and an adjusted EBITDA target of nearly $200 million on revenues of about $1.5 billion. That is the financial performance foundation that we're building. So, what would have to be true to move us toward those goals? Think about that in terms of our second quarter results. If revenues were 5% higher, which is absolutely achievable in a normalized market and gross margin was 1.5% higher, that is 30.5% rather than 29%, again, we believe absolutely achievable with a resource, rebalancing and performance improvement initiatives underway. And finally, if adjusted SG&A percentage of revenue was 1.5 percentage points lower, that is 22% versus 23.4%, that we achieved in the second quarter, again, absolutely achievable with the realization of merger related synergies and performance improvement enhancements. 1.5% of margin and SG&A improvement in a normalized market will result in the achievement of those 2018 targets. The soft market environment of 2016 is temporary. Customer project deferrals can only last for a short-period of time and we expect our markets will undoubtedly improve by 2017. No one will be better positioned than Team to capitalize on those improving market conditions. And so with that, let me open it up for questions.

[Operator:]

Thank you. Our first question comes from the line of Matt Tucker with KeyBanc Capital Markets. Your line is open. Please go ahead.

[Matt Tucker:]

Good morning, gentlemen. Thanks for taking my questions.

[Ted W. Owen:]

Good morning, Matt.

[Matt Tucker:]

Greg went through a lot of numbers, I wasn't quite able to catch up with all the kind of pro forma year-over-year comparisons. I won't make you go through all of that again. But, maybe you could just kind of talk through where the biggest drivers were year-over-year on a pro forma organic basis and maybe where the biggest areas of weakness were and what was most surprising if anything?

[Greg L. Boane:]

Well, the biggest area of weakness was in the heat treat services which was down a $11 million or almost 38% this quarter versus the prior year quarter. And those are specialty services provided by the TeamQualspec segment and there's demand, as much higher during the large turnaround projects. And so with the deferral of large turnaround projects postponement of projects, we've been experiencing a pretty significant decline in heat treat services. And so that was one of the big drivers. Quest revenues were down $5 million quarter-over-quarter or about 19%, they've also been impacted by project deferrals of their pipeline and process equipment customers. And then the Canadian Oil Sands disruption was about $5 million of revenues as well. And so when you back those things out organically, we are down quarter-over-quarter due to soft market conditions, but we're down about 4% at the Team consolidated level.

[Ted W. Owen:]

Just a follow-up on that. Greg did go through a lot of numbers relative to pro forma comparisons that obviously are not in the press release. We're going to – I think just update the Investor Presentation that's on our website and we'll file that as an 8-K this week to include that pro forma comparison, because it is obviously very difficult to compare year-over-year results, and you really have to have that those pro forma revenue numbers as a point of comparison to make sense of it.

[Matt Tucker:]

Yeah. That would be very helpful. Just shifting to the outlook a little bit. I think you did a good job of kind of laying off some of the assumptions in terms of longer- term targets, and those do seem pretty reasonable to me. But maybe trying to focus a little bit more on the near term here, how is your visibility on the fall turnaround season shaping up? And we've been hearing some speculation, maybe some commentary from certain refiners that they're considering going offline earlier than usual for maintenance potentially longer. Are you seeing that and do you think that will actually translate into higher spending levels?

[Ted W. Owen:]

Again, what we're seeing, Matt, is more commentary kind of anecdotal discussions with customers. And, well, not anecdotal, but just kind of project lining up more for 2017 even in the fall of 2016. Again, which is consistent with what we have said before. And that's why we have pointed toward 2017 as the year we think that we're going to start seeing kind of a major expansion of maintenance activity because of the significant deferrals that we've seen to-date. We have a lot of anecdotal evidence that perhaps this fall we may start seeing improved market conditions, but we also have more evidence that says, the spring of 2017, for instance, is going to be a much better season if you will than the fall of 2016. So we're not seeing enough evidence pointing us to a major rebound beginning this fall to change our commentary or the view of the short-term market.

[Matt Tucker:]

Got it. Thanks. And just a last follow-up. Are you seeing any – could you comment on any potential opportunities in the oil sands related to the fires that you might see in the second half year?

[Ted W. Owen:]

Again, I think it's a little too early. We're seeing some of the projects that were suspended are resuming, although frankly at a smaller scope than originally planned. But I think it's just still too early to know whether all of those projects will be resumed or not. As you can appreciate it, facilities are just now getting back kind of up and running and getting more into a rhythm, if you will, but it's too early to know whether there will be a recovery of the projects that were deferred or not.

[Matt Tucker:]

Thanks, Ted. I'll jump back in the queue.

[Ted W. Owen:]

Thank you, Matt.

[Operator:]

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

[Matt Duncan:]

Hey, good morning, guys.

[Ted W. Owen:]

Good morning, Matt.

[Greg L. Boane:]

Hey, Matt.

[Matt Duncan:]

Greg, first, just a real quick point of clarification, I'll get to my questions. On the $11 million decline in heat treating, is that all at the legacy Team business or was some of that from Furmanite or Qualspec or somewhere else too?

[Greg L. Boane:]

There is some from Furmanite in that number as well.

[Matt Duncan:]

Okay. Can you maybe size how much the $11 million would be legacy Team versus legacy Furmanite? Just trying to kind to get to...

[Greg L. Boane:]

That's really hard to do because technicians and heat treat assets are somewhat fungible as they are assigned the jobs and we don't have that granularity.

[Matt Duncan:]

Okay. But probably...

[Greg L. Boane:]

I don't have it. (29

[Matt Duncan:]

About half and half I would think, right? Maybe a little more to the Team side, but...

[Ted W. Owen:]

Well it wouldn't be half and half. Matt, it wouldn't be half and half in the sense that appreciate that Furmanite's legacy heat treating business was only about on an annualized about $25 million.

[Matt Duncan:]

Okay. That helps.

[Ted W. Owen:]

Team's legacy business is a $100 million.

[Matt Duncan:]

That helps. That helps.

[Ted W. Owen:]

Yeah. Okay.

[Matt Duncan:]

Okay. So moving on then just to get with the kind of the crux what I want to get to. So TeamFurmanite, the segment in general, seems to be setting out for pretty significant margin expansion. I mean, I guess the original plan was $20 million to $25 million in cost synergies from Furmanite. It sounds like were already at an annualized run rate of $19 million. First, would you characterize that as ahead of schedule?

[Ted W. Owen:]

No. I think it's precisely on schedule because again, if you recall, I think what we had said, there is really two buckets of initiatives. The first bucket is cost synergies. And the cost synergies are generally and in fact it turned out to be this way, we expected them to be fairly, easy to – nothing is easy in this, I don't want to overstate that...

[Greg L. Boane:]

More visible.

[Ted W. Owen:]

More visible, if you will. And so very early in the process, in fact even as we were in diligence on the Furmanite process that we started to develop an expectation around cost synergies, most of which we expected to occur fairly early. Again, that's public company cost, C-Suite duplication, things like that. So indeed, there were kind of a significant amount of kind of corporate level headcounts and some redundancies there. And that we expected to get pretty quickly in the process. The second big buckets of that are insurance related, primarily property and casualty insurance, but those become realizable on a prospective basis. So we have completed the procurement, if you will, of general liability, property, casualty insurance that's effective in July. And so, we know what the annualized savings associated with that in comparison to the spend of the three legacy companies or the three big legacies Team, Qualspec, Furmanite. And so that's kind of another big bucket. Group insurance is another big bucket. Again, because of scale being a company that's now virtually twice the size of legacy Team, scale from a group insurance standpoint occurs in January of next year, but now we're I think probably 95% there relative to procurement for insurance programs starting in January. So those are – but again those are things that early on, we had a pretty good sense of the potential and we're simply are realizing that potential now.

[Matt Duncan:]

Okay. So to be clear, how much of what everything you just mentioned is in the $19 million number and what were annualized savings recognized in the second quarter? I'm just trying to get a sense on what the trend line on expenses looks like here?

[Ted W. Owen:]

Yeah, Greg.

[Greg L. Boane:]

Yeah. We'd estimate that what was actually realized in the second quarter was probably somewhere in the range of $1.5 million to $1.8 million for the second quarter.

[Matt Duncan:]

Okay. So, I annualize that up to somewhere around $6 million. So there is a big chunk of it that you're going to recognize here in the 3Q relative to the 2Q because you're at $19 million as of today?

[Greg L. Boane:]

Correct.

[Matt Duncan:]

Okay. So, big – so, we should expect...

[Greg L. Boane:]

As Ted pointed out, yeah, like for example, the insurance – the commercial property, casualty insurance savings begins July 1.

[Matt Duncan:]

Okay.

[Greg L. Boane:]

So that will definitely be a Q3 item as opposed to Q2.

[Matt Duncan:]

What about the group insurance. The group insurance...

[Ted W. Owen:]

Again, it's not a Q3 item in the sense that all of that, it's...

[Greg L. Boane:]

Yeah. It's....

[Ted W. Owen:]

We began to ratably realize...

[Matt Duncan:]

Oh, sure.

[Ted W. Owen:]

Right. Over the next...

[Matt Duncan:]

Sure. But I guess I my point is guys, if we were ratably at about $6 million in the second quarter and as of the middle of August, we're at $19 million. It seems like there should be a pretty sizeable step down in cost 2Q to 3Q.

[Ted W. Owen:]

I mean I think that's a fair statement, because again there is significant realization of savings that begin to occur in the third quarter...

[Matt Duncan:]

Okay.

[Ted W. Owen:]

...particularly in July, well it's beginning in the third quarter, right, yeah.

[Matt Duncan:]

And then the other cost item I want to get to and I'll hop back in queue was just on last call you guys had laid out $20 million of planned legacy Team cost cutting, where were you at the end of the second quarter on annualized basis relative to that number and where are you today?

[Ted W. Owen:]

That's largely done. I think there...

[Greg L. Boane:]

It's $18.5 million.

[Ted W. Owen:]

I think we're like $18.5 million of that $20 million is realized, again on a...

[Matt Duncan:]

And how much in the 2Q, Ted?

[Ted W. Owen:]

Greg, do you have that number? I don't have that number in front of me, Matt, we can get that for you.

[Matt Duncan:]

Okay. All right. I'll hop back in queue. Thanks, guys.

[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:]

Good morning, guys. How are you?

[Ted W. Owen:]

Hey, Edward, how are you?

[Edward Marshall:]

I'm okay. So I wondered, you've talked about some anecdotal information that you saw maybe, potentially the fall season might be a little bit better. I'm curious as to what those signs might have been for you? And more importantly, I guess when you look kind of longer term, what signs of the Team paying – no pun intended. What signs of the Team paying attention to, to kind of give you a sense that the industry is turning in your favor at some point in time and what are those key metrics that you're looking and paying attention to most?

[Ted W. Owen:]

Well, again, relative to the fall, the commentary is more that there is anecdotal evidences of improving market and but there is also anecdotal evidence of kind of more of the same from the fall. So our view is that we're not anticipating a significant improvement in market conditions for the balance of 2016. Now, when we get into 2017, there are actually several indicators. There's some industry data that would suggest more project turnaround activity. Conversations with major customers of ours tend to support the notion that, I mean there are some big turnarounds that are indeed planned for the spring of 2017, specific customers who had no major turnaround activity scheduled in 2016, but have commented to us that 2017 – and because of that 2017 is expected to be the biggest turnaround in the history of this particular customer base. But moreover, I think history tells us that 2017 should begin to see a significant improvement, because again even in the worst environment, the last 50 years being the kind of the 2009-2010, Great Recession. What we experienced in our customer base is a kind of a maximum deferral that lasted about a year, because we serve installed base of facilities and for safe operations and compliant operations, you have to maintain them and inspect them. And our customers didn't – there wasn't a light bulb that went off with our customers and said, oh, we've spent way too much on maintenance and inspection over the last 50 years than we should have and we can do with less. That's not – we don't believe that's true at all. But rather what is true is Mother Nature is persistent and the operations of process facilities and pipelines is naturally degrading and you have to maintain them. And our customers have not figured out a way to do less maintenance and inspection. It is true that you can defer it and we've seen that. We saw it in 2009-2010. We've seen it in earlier cycles, by the way. So it's not – so this isn't the first time this has ever happened in my tenure at Team, this is probably – I think probably the third major deferral cycle we've been in, 2003, I think was the earlier one. But again, each time it lasts for about a year because Mother Nature is persistent, and we don't think there's anything different about that.

[Edward Marshall:]

I mean this seems to be year three at this point that we've been seeing slowdowns in the market. I mean is there something that's changed in the industry that you can kind of identify that...

[Ted W. Owen:]

I certainly don't – I would take a big exception telling – for you to suggest this is year three. Fiscal 2015 for Team was the best year that Team ever had. So I'm not sure where you're getting that from, Edward?

[Edward Marshall:]

Okay. And in January, I'm kind of talking about capital deployment. In January, you said that the shares were under siege, the best currency is Team's shares and we're a couple of dollars higher here, you've got all these cost advantages coming, you've got 2018 goals, which show significant improvement from today. I'm curious when you talk about share buybacks, you talk about just kind of offsetting dilution. I'm curious as to what's changed in the capital deployment plans since January regarding share repurchases?

[Ted W. Owen:]

Well, in January, the comments I made in January were kind of an emotional reflection on my disappointment of the kind of a sudden decline of Team's stock prices, to be honest about it. The only thing that's changed is that we have a fairly high level of debt and our priorities for use of cash are going to be the pay down that debt. But if I didn't have any debt, I could assure you that we would be more active from the stock buyback standpoint. But we just have a lot of debt right now. We need to focus on delevering a little bit.

[Edward Marshall:]

Got it. Thanks, guys.

[Operator:]

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

[Craig Bibb:]

Thank you. Hi, Ted and Greg.

[Ted W. Owen:]

Hey, Craig, how are you?

[Greg L. Boane:]

Hi.

[Craig Bibb:]

Good. So, when you guys would be confident that the spring has locked out (43

[Ted W. Owen:]

No. First, you're never confident until you're there, our business is not a – as you know is not a backlog business. And so for us, the visibility on projects is not that long in advance. And so typically, let's say in the winter, we start locking in on spring activities. And generally, it doesn't move a lot in the absence of kind of operational issues from our customers or market issues, again as we've clearly seen this year with the project tracking that I indicated in my commentary with significant projects previously scheduled for 2016 having been moved or cancelled. So again, since it's not a backlog business, there is a relatively short-term of visibility on projects. The scope of projects then can change fairly dramatically even if the project doesn't move, when you – in a turnaround as you kind of get into opening up units, discoverables change and it's kind of like remodeling your house. When you start opening up walls, you may find out, wow, there's a lot more work than you thought or there might be a lot less work than you thought. So it's a law of large numbers and kind of business as opposed to a backlog business.

[Craig Bibb:]

Okay. And the gasoline refiners have telegraphed that they'll be shutting down early and maybe staying shut longer because of high inventories. How does that affect you?

[Ted W. Owen:]

Well, I think it has certainly affected us already even in 2016 with the kind of fewer larger projects because of those high inventory issues that the refiners are dealing with. So that may be good if refiners use these longer, short-term shutdown periods to do maintenance, but on the other hand it may signal that higher inventory levels mean generally less cash flow and kind of continued more conservatism on the part of our customers. So it's hard to note how exactly that impacts us. That's why again when I look at the balance of 2016 in the absence of clear evidence that the balance of 2016 is going to see a market turn, my assumption is that it's going to be kind of a continued slog, if you will, and so I think that's what the rest of 2016 is going to be.

[Craig Bibb:]

Okay. I mean, you might say it's a little early to tell of this too, but it sounds like your Canadian customers are just coming back, do you have a sense of are they coming all the way back, and is it progressing slower than you expected or?

[Ted W. Owen:]

Well, again I didn't have any expectations one way or the other, because this is an extraordinary event in Canada. It doesn't surprise me that some of the projects come back a little slower because of the price of crude. And as you know, Canadian production is a higher cost area than some others. And so, kind of breakeven margins, if you will, are higher – or require a higher price of crude. So the notion that some projects would be – that there would be kind of a slower return is not surprising to me because of those reasons. So again, we're seeing a bit of a mixed bag right now. We're seeing a couple of projects that are among that $5 million are indeed resuming, but not all of them have yet. And it is uncertain as to whether all of them – whether they will or what's the time. So we don't have kind of firm timing on some of the other projects. But it isn't that surprising to me.

[Craig Bibb:]

And should we take $3 million out of the third quarter for...

[Ted W. Owen:]

No. It's not a continued – these were projects – discernible project activity that would have occurred in the second quarter. So it's not like there's additional downside that you take more out of future quarters. If anything, there could be some upside if these projects, in fact, restart, if you will, in the second half of the year.

[Craig Bibb:]

Okay. Are there any other, just looking broadly, other regional demand differences that we should be aware of like California or Gulf Coast or anything that stands out?

[Ted W. Owen:]

No. Not that I can think of. Greg...

[Greg L. Boane:]

No.

[Ted W. Owen:]

Yeah. No, I can't think of any disruptions or anything like that in other parts of the world. Well, I'm sorry, one thing you should think about relative to third quarter is impact on currencies. We haven't talked about currencies in today's call because in the second quarter really there was no significant impact. But I'm sure you're aware because of the Brexit vote in the UK, the pound sterling has taken a beating relative to the U.S. dollar. I mean, I haven't actually looked at to see what that is more recently. But if it stays at the levels that it kind of went to, just the translation impact of the pound sterling could have an impact. Again, it's more of an impact on top-line though, not bottom line because our costs are balanced with our revenue. So it's just the revenues coming out of the UK don't translate into as many dollars as they would have otherwise. I don't know, Greg, if you have a sense of that?

[Greg L. Boane:]

Yeah. For the second quarter, UK revenues were about $17 million.

[Ted W. Owen:]

$17 million...

[Greg L. Boane:]

Yeah.

[Ted W. Owen:]

...in the second quarter?

[Greg L. Boane:]

Yeah.

[Ted W. Owen:]

So that could have a – so take a look at the currency exchange rates and that could have an impact.

[Craig Bibb:]

Okay. And the last question is, can you guys get to 22% SG&A in a weak demand environment given all the savings you've pointed out?

[Ted W. Owen:]

Well, as I said in my commentary, I think you have to have a more normalized environment. So my starting premise is that, right now – modest growth on revenues are indeed necessary to get that. Well, unless we take more cost reduction measures. Certainly, if we thought the environment was a permanent environment, we would absolutely do that. But it's a delicate balance between kind of resource balancing and cutting your nose off, if you will. But I think, again, top line – modest top line growth is an absolute reasonable expectation. I mean that's – we're in the worst market we've had since 2009-2010 right now.

[Craig Bibb:]

Okay. All right. Well thanks a lot guys.

[Ted W. Owen:]

You bet.

[Operator:]

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

[Matt Duncan:]

Hey, guys. So, back to just on the cost side real quickly. Ted, you mentioned that you guys had identified some margin opportunities that would go beyond the $25 million of cost savings. Can you elaborate a little bit on what those opportunities are and how much you think it could add to profit if you're able to capture those?

[Ted W. Owen:]

Well, we've done that Matt, on our Investor Presentation and kind of the – there is a slide in our Investor Presentation that talks about two buckets and really – and it's kind of the path to $200 million of EBITDA which in today's call, I kind of expressed that in a little bit different way. But we think there is $25 million of merger-related cost synergies that we've identified and we also think that there is $20 million of performance improvement opportunity and that's reflected in a slide in our Investor deck. Now, to be honest about it, I think there is a lot more than $20 million of performance improvement opportunities, but we're only counting $20 million. And as we've said before, there are – again, there is a lot of what I would call, discrete performance improvement initiatives more than even worth mentioning because we've identified probably 25 or 30 different opportunities. The big buckets though are to extend Team and Furmanite, as I've talked about many times, Team and Furmanite have competed with each other for 40 years, not just around standardized services and the mechanical side of our business, but also in specialty services that are kind of higher value propositions to our customers. In truth though, we've tended to price those services, both of us, Team and Furmanite, because we competed with each other just like they're standardized services. So I think there is a great opportunity for us to exercise some marketing rigor, if you will, and begin to value the higher in high value propositions to our customers as if they're specialty services as opposed to more standardized services where we're competing with local and regional service providers. So that's an opportunity and it's a significant one. There are opportunities that are result of scale that are a little hop. They are almost like cost synergies but they require some process improvements to achieve. Scale, does a lot, travel and expense policies fully – more back office things that in addition to the kind of group insurance and P&C insurance that we already – that are kind of near term if you will. As you probably also know from having covered Furmanite, Matt, Central European operations have Furmanite have been a tough sled. Furmanite, to be honest about it lost €2 million a year in each of the last five years in Central Europe. I think we can do better than that. And so that's an opportunity – to just kind of stop bleeding in a few areas. So it's things like that that kind of makeup that second budget. But again, the opportunity in that second budget is frankly I think bigger than simply realization of merger related synergies.

[Matt Duncan:]

Sure. Yeah, that's all very helpful. So the other thing I want to get at is just sort of looking at the outlook a little bit here and it's been hit on a lot today. But so, another company that I follow that is a distributor of products into the turnaround markets that they expect next spring to be the best season they've had since 2012. You've said that a specific subset of your customer base maybe their largest turnaround season ever. So I'm trying to sort of think through what that can mean for the growth potential in your business. And if you don't want to get too specific to any one season, I think another way to look at this is that, there has been a little bit, I don't know if pent-up demand is the right word for it, but all this deferral activity is simply shifted work to the right and it's going to have to get done over a short period of time when the market comes back. Maybe what kind of growth do you think your business is capable of, in an environment where that – the deferred activity is getting done on top of – at least a piece of the deferred activity is getting done on top of the normally scheduled stuff, once your customer starts to play catch up.

[Ted W. Owen:]

I think that again, we got a much larger denominator than we've had before, but 10% to 12% organic growth in a more robust market is certainly very reasonable to me. Just go back and look at growth rates coming out of the 2009-2010...

[Matt Duncan:]

Right.

[Ted W. Owen:]

...recession. So I think that kind of begins to kind of – if you kind of look at just absolute growth rates coming 11%, 12% and even into 15%, I think that kind of gives you a fix. Again, it's a bigger denominator, but there is a lot of market that we don't have, right. I mean, it's still a very fragmented market both in inspection and in mechanical services and now we have a platform that frankly focus on what we refer to as I mentioned many times that Team Solutions of kind of pushing and pulling and selling solution sets across our customer base of mechanical and inspection services. So I think I like the position that we're in to take advantage of growth when this kind of pent-up demand indeed happens.

[Matt Duncan:]

And that was actually my next question, where are you on that Team Solutions opportunity and have you begun to go to cost that customers with mechanical services and Furmanite customers with inspection and are you seeing any fruit coming from those efforts at this point or is it still in the early stages and that's all kind of on the come?

[Ted W. Owen:]

Well, I think it's still in the early stages and still to come. But we're working very hard at kind of identifying key account managers to be responsible for major relationships and those relationships to extend beyond not just inspection on the one hand and mechanical services on the other hand, but to be in front of customers and making sure that we're taking advantage of opportunities and identifying opportunities. So it's very early in that process, but I like the foundation that we're building for sure.

[Matt Duncan:]

All right. And then last thing for me, I know you're in the early stages with the ERP rollout, but are there any early insights you can give us on what you maybe learning from that and places where you've gone live, any real world examples you can give on sort of benefits that you're starting to see from it?

[Greg L. Boane:]

Well, we're seeing more efficiency in the field with the technicians. One of the reasons you do a pilot is to identify the things that still need to be tuned and adjusted, and we found that we need to enhance our billing system design, which is one of the things that we've been doing in the pause. We've got a lot of individual jobs with a lot of different customers and we don't have one size fits all for everybody and so we need – the biggest learning we got from the pilot is that we need to have a robust billing engine to automate not a 100%, but just try to automate 80% of what we do from a billing standpoint, and that was the big finding from the pilot, which is part of what's going to be rolled out in the next wave.

[Matt Duncan:]

Okay. All right. I appreciate. Thanks for all the color, guys.

[Ted W. Owen:]

You bet.

[Operator:]

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

[Ted W. Owen:]

Okay. Thank you, Michelle. Again, thank you all for your attention today and your interest in Team. We covered a lot of ground today, particularly with respect to this pro forma comparison, which you really have to have to make sense of things. So we will figure out how to address that. I think the best way is simply to update and put that data in our Investor Presentation and then file it. So we will undertake to have that done by the – certainly at the end of the week. So again, have a good day everyone, and thanks for your interest in Team.

[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.