Ted Owen - President, CEO Greg Boane - SVP, CFO, Treasurer

Matt Duncan - Stephens, Inc. Adam Thalhimer - Thompson Davis Marty Malloy - Johnson Rice

Welcome to the Fourth Quarter 2016 Team, Inc. Earnings Conference Call. [Operator Instructions]. As a reminder, this conference may be recorded. I would like to introduce your host for today's conference, Mr. Ted Owen. Sir, please go ahead.

Thank you and good morning. Again, my name is Ted Owen, and 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 fourth-quarter earnings, update you on the status of our Business integration activities and on our end markets, and to share with you the excitement about the platform we're building for 2017 and beyond. This call will contain forward-looking information within the meaning of the federal Safe Harbor provisions. I'll ask Greg to read the full disclaimer relative to forward-looking information, and then to go over the fourth-quarter results, after which I will provide more color to our Business outlook and integration activities. Greg?

Thanks, Ted. Good morning. 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 of functions 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 go over the results of the current quarter, and will start off by pointing out that during the current quarter, we closed down the legacy Furmanite operations in Belgium and the Netherlands. We incurred $5.5 million for one-time exit costs, and other related charges, primarily related to severance obligations associated with the closure which is disclosed as a separate line item on the income statement. Those businesses that generated operating losses averaging $2 million annually over each of the last five years, including a $1.1 million operating loss in 2016 from the date of our acquisition. We reported current quarter revenues as $320 million, an increase of 25 % over the prior-year quarter revenues of $255 million. Current-quarter results include the results of Furmanite, which was acquired and included in our operations, beginning March 1, 2016. GAAP net loss was $9.4 million, a $0.32 per diluted share, versus net income of $0.26 per diluted share in the prior-year quarter. Non-GAAP adjusted net income was $2.5 million or $0.08 per diluted share for the current quarter, versus adjusted net income of $0.39 per diluted share in the prior-year quarter. The following is a comparison of current-quarter revenues versus prior-year current revenues on a pro forma basis, assuming the Furmanite acquisition had occurred on January 1, 2015. We report our Business 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. Consolidated current-quarter revenues were $320 million, and declined $24 million or 7%, compared to pro forma revenues of $344 million for the prior-year quarter. For FY16, pro forma revenues were $1.24 billion, a decline of 9% from pro forma revenues of $1.365 billion in FY15. Our markets were soft for the entire year. Many of our customers experienced reduced operating profit metrics, with some customers performing at their lowest profit levels since 2010. This environment led to overall reduced discretionary spending, project deferrals and shorter turnaround project durations. All three of our business segments were negatively impacted by lower spending in 2016. Another significant operating challenge in 2016 was the fact that monthly revenues were unusually volatile in the latter part of 2016. Changes in activity levels on the front and back ends of the fall turnaround season were much steeper than what we experienced in 2015 and in the spring of 2016. During the four-month period from March through June 2016, monthly revenues ranged from $107 million to $119 million, a range of 11%. During the four-month period from August to November 2016, monthly revenues ranged from $84 million to $130 million, a range of 55%. On the front end of the fall turnaround season, we were coming off an August 2016 revenue decline of 23% versus August 2015. Then in September 2016, we experienced a 45% sequential ramp up in revenues as we shifted into fall turnaround season. The months of September and October 2016 were our strongest months of the year. Revenues were essentially flat, comparable to 2015. Our EBIT and EBITDA margins increased over 2015, and were the most profitable months of 2016, with October results being the best month of the year. November 2016 then ramped down significantly. Revenues declined by 28% sequentially. November and December combined revenues finished down 10% versus 2015. The steeper monthly volatility we experienced during the fall turnaround season led to a much more challenging operating environment for planning and scheduling jobs, managing labor, and travel costs. I'll now provide some information on consolidated gross margin. Consolidated gross margin in the current quarter declined by 80 basis points to 27.3%, versus 28.1% in the prior-year quarter. Here are some monthly optics on our last three quarters to help understand our consolidated gross margin fluctuations from quarter to quarter, and why the Q2 gross margin percentage was the highest of the year. In the second quarter, all three months were between $105 million to $120 million in revenues. Gross margin for Q2 was 29%. The second quarter was our only consistent high monthly revenue quarter and generated our highest gross margin percentage of the year. In Q3, one month exceeded $120 million in revenues. Two months were below $90 million in revenues. Gross margin was 26%. In Q4, one month exceeded $120 million in revenues, and two months were between $90 million to $100 million. Gross margin was 27%. I'll now discuss consolidated SG&A. Consolidated SG&A expense was $87.4 million, and includes $7.3 million of non-recurring items that I'll cover in more detail later on. In addition to the non-recurring items we called out, there were some unusually high expenses this quarter, totaling approximately $3.3 million. $2.5 million relates to the finalization of Furmanite purchase accounting, and standardization of accounting policy practice differences on some specific accruals. Intangibles amortization expense increased by $900,000 after final purchase accounting valuations as of the acquisition date. The incremental Q4 expense for the previous seven months was $900,000. Charges of $1.6 million were also recorded to standardize accounting policies for accruals, such as employee medical claims, allowance for doubtful accounts and other items. We also recorded an additional $800,000 of bad debt reserves in Q4 for a few isolated customer collection issues. Excluding these additional unusual items and the non-recurring items of $7.3 million, adjusted SG&A was $76.8 million or 24% of revenues. I'll now provide more specific business segment commentary. Revenue comparisons are on a pro forma basis, profit comparisons are as reported. TeamQualspec current-quarter revenues of $153 million were virtually flat, with pro forma fourth-quarter 2015 revenues. Heat treating revenues declined $1.5 million or approximately 6% in the current quarter versus the prior-year quarter. TeamQualspec's NDT inspection revenues were virtually flat in the current quarter versus the prior-year quarter. TeamFurmanite revenues were down $23 million or approximately 14% in the current quarter versus the prior-year quarter. Historically, maintenance and repair services have been less resilient than NDT inspection services during periods with softer end markets, as customers are more inclined to continue inspections and not run blind to maintain safe efficient equipment utilization, but with tighter discretionary spending on actual maintenance and repairs. Quest Integrity revenues were up $1 million or approximately 5% in the current quarter versus the prior-year quarter. I'll now cover the segment operating results, and will be comparing EBIT and EBITDA result as reported in the earnings release schedule. TeamQualspec adjusted EBIT or operating income margin was 7% in the current quarter versus 8.4% in the prior-year quarter. TeamQualspec adjusted EBITDA margin was 10.2% in the current quarter versus 11.5% in the prior-year quarter. TeamFurmanite adjusted EBIT margin was 5.6% in the current quarter versus 10.9% in the prior-year quarter. The decrease in the current quarter is related primarily to increased amortization expense from the Furmanite purchase accounting step-up of intangibles. TeamFurmanite adjusted EBITDA margin was 9.9% in the current quarter versus 13.3% in the prior-year quarter. Quest Integrity adjusted EBIT increased to 19.3% in the current quarter versus 18.5% in the prior-year quarter. Quest Integrity adjusted EBITDA margin was 29.1% in the current quarter versus 26.6% in the prior-year quarter. For the current quarter, total depreciation and amortization expense was $13.3 million, and non-cash stock compensation expense was $700,000. 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. As mentioned earlier, there were $5.5 million of one-time exit costs and other related charges, primarily related to severance obligations associated with the closure of acquired Furmanite operations in Belgium and the Netherlands. Other non-routine items during the current quarter totaled $7.3 million, and related to non-capitalized European implementation costs of $2.8 million, and legal fees and professional and other fees of $4.5 million, mainly related to integration efforts in the Quest patent lawsuit defense. I'll now give an update on the ERP projects. To date, we have approximately 50 locations in North America running on the new ERP system. We will be going live in a few weeks at our manufacturing support operations, which will be a major milestone. We're about halfway through the rollouts in North America. The rollouts have been successful. Other than normal change management, we have not encountered any significant business or transactional disruptions. The plan forward is to roll out the system to the remaining North America locations over the remainder of 2017 and to early 2018, and to then shift our focus on our international operations. We have spent $63 million to date on projects with capitalized $45 million and expensed $11 million. Going forward, implementation expense will be around $1.5 million per month through 2017. I'll now wrap up with some balance sheet and cash flow information. FY16 cash flow from operations was $80 million. We generated $17 million in cash flow from asset sales, primarily from the sale of the legacy Furmanite process management inspection business in December. We generated $6 million in cash flow from the sale of 168,000 shares of stock under our at-the-market or ATM program implemented in late Q4. Year-to-date CapEx was $46 million, $19 million related to ERP. We paid down $59 million of debt over the nine months subsequent to the March 2016 Furmanite acquisition. Going forward, our primary use of free pat cash flow will be towards a debt paydown. At December 31, total balance sheet debt was $367 million. Our cash balance was $46 million at December 31. That completes the financial review, I'll now turn it back over to Ted.

Thanks, Greg. I won't try to sugarcoat the discussion of the fourth quarter. We are very disappointed in our results. We were surprised by a sudden decline in revenues at the early conclusion of the fall turnaround season. Our financial performance was consequently poor, as we suffered the negative aside of our operating leverage. And we were impacted by finalization of true-up costs associated with the Furmanite merger. It was not what we expected, and we absolutely took a step back in financial performance in the quarter, even as we continued to make material gains in refining our business model, building tools to optimize resource allocations and utilization, and beginning to leverage our broader customer base. Our revenues disappointed, and our costs were not in line with those reduced revenues. I assure you that we're not sitting idle, and have and are taking concrete actions to rectify that misalignment. When I last spoke to you in early November, we were coming off two very strong months in September and October, signs that appeared to point to the start of an end-market recovery. Unfortunately, that trend did not continue through the end of the year, and in fact, extended into a slower-than-expected January of this year. Over the course of 2016, we pointed to a number of factors driving reduced scope, or complete spend deferrals within our customer base in the process pipeline and power sectors. Alongside crude price uncertainty, we heard in the fourth quarter about clients' concerns related to the political climate and the implications for infrastructure and related regulation. The bottom line is, that this energy market uncertainty drove further customer deferrals where practical, and in perhaps some cases were not practical, in terms of the cost effectiveness of our clients' maintenance and integrity management programs. The soft end market environment in 2016 is not just anecdotal. For instance, one of the nation's largest independent refiners recently reported its lowest operating income per barrel for 2016 since 2010, a metric that was also down for that refiner by 58% from 2015. Another independent refiner reported its worst Q4 in two years. And its reported refining segment income was down 89% from 2015. That reality for our customers resulted in disappointing demand for us in 2016. I can now point to any number of reasons that I continue to believe that 2017 will represent a recovery relative to 2016. But I won't. When I see broader data points for a more sustained period of time, I will report it to you. Let me spend a moment and talk about our progress with respect to merger-related initiatives. I'm pleased to report that we made significant progress in the fourth quarter. One example that I have commented on in prior calls relates to the significant losses that the legacy Furmanite business occurred in the [indiscernible]. I'm pleased to report that we've exited those legacy Furmanite operations in the fourth quarter. While incurring $5 million in exit cost, primarily severance, we will have avoided operating losses in those locations that have averaged $2 million a year in each of the last five years. Additionally, in the quarter, we completed the sale of a legacy Furmanite business, which we had determined to sell at the time of our acquisition, realizing nearly $15 million from that transaction. If you recall my commentary from our last call, I said that 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, which for calendar year 2018 would represent an adjusted EBIT target of about $130 million, and an adjusted EBITDA target of nearly $200 million on revenues of $1.5 billion. Our disappointing results for the fourth quarter have not changed our view of that at all. It is still our strong belief that the economic potential of the platform we're building is unsurpassed in our industry. I'm reminded, though, of our earliest years at Team, back in 1998, when our new Management team almost literally sketched on the back of a napkin the road map for our vision of growth for the future. The actual growth and development of Team closely followed the path we envisioned. Although admittedly, the timing was off a little. So, whether we achieve our new vision for Team in 2018 or 2019 or 2020, it won't matter in the long run. I am confident that we will achieve it. So, let's talk more about the integration of Furmanite and Qualspec. Let me first acknowledge that it is much more difficult than we thought it would be particularly with the overlay of the ERP implementation. We are consolidating customer contracts, moving people and equipment across all three legacy organizations, and combining physical locations among other things. This is not just managing three distinct businesses, it's fully integrating Qualspec and Furmanite into our legacy businesses, while at the same time building a new ERP platform. It entails identifying and institutionalizing collective best practices across our services and products, it also entails capturing the value inherent in the resource flexibility and addressable market expansion associated with our delivery models, call out, projects in turnaround, and finally, nested services. These are very real scalable improvements we are making to our platform that will drive material value, but we realize that it takes some time for it to begin trending in our financial results. While we are doing it, we are focusing on building upon the Team culture of safety and quality awareness, and service excellence that has been such an important part of our success for many years. While it is hard and more disruptive in the short term than we would have anticipated, I am more convicted than ever about the associated value creation opportunity in three dimensions. First, pricing and value positioning. Second, market penetration and addressable market expansion, and finally, technician and tool productivity enhancements. I love our new colleagues. What we are building together is a market present that is unparalleled in our industry. So, if we're so confident in the future, why will I not provide guidance for 2017? The short answer is, because there is still too much uncertainty in our end markets, and because we still have much to do in the way of integration activities. Our Business is not a backlog business. Visibility of future revenues is limited, projects move frequently, and scopes change regularly. We have been in an extremely soft demand environment for the past 15 months. There's plenty of evidence to suggest that environment is going to change, but it hasn't yet. Shifting gears now, a word about our recently-announced ATM. Since our last call, we announced the initiation of an at-the-market equity offering of up to $150 million, so I want to speak to that for a moment, since we've not had a call since its launch. Simply said, we view the ATM as a low-cost tool to accelerate the delevering of our balance sheet. Our intention with the ATM is to periodically sell stock to the public, with the proceeds used to reduce our senior indebtedness without negatively impacting trading volume. We will not always be in the market, and generally, our daily trades will not exceed 10% of average daily trading volume. So, the ATM is simply a tool, an arrow in our quiver so to speak, and is not expected to be a significant impact on our volumes or pricing in the future. I've also spoken during the last three calls about five key elements that we believe constitute our current value proposition, and the foundation by which we're extending the magnitude and sustainability of our competitive distinction. In summary, these competitive advantages are first, industrial services market leadership. That is a balanced portfolio of standard to specialty inspection and mechanical engineering and assessment services. Second, the ability to provide standardized services all the way up to customized fully-integrated solutions for our customers. Third, having a highly trained and experienced workforce of more than 8,000 employees delivering safe reliable service all over the world. Fourth, the practical application of technology. As an example, we're developing a fully-digitized process from data capture to data analysis to field level work order generation, and reporting of actions taken. And finally, regional resources and responsiveness. That is leveraging the availability of our resources and equipment at over 220 locations in 22 countries. That's what we're building. 2016 has been indeed a difficult year. Tough end markets, heavy lifts involving two major business integrations, and the implementation of a robust ERP platform to support our growth for the foreseeable future. Clearly, we took a step back in Q4, but that does not in the slightest change our view of the future. As we say internally, 2016 was the year to get it done, 2017 is the year to turn the corner, and 2018 is the year to hit our stride and fully realize the economic potential of being the premier global industrial services company. It's not a straight line northeast. In spite of our stumbles, we're well on our way. And with that, let me open it up for Questions.

[Operator Instructions]. Our first Question comes from the line of Matt Duncan with Stephens. Your line is open. Please go ahead.

So Ted I want to start with a Question on your targets that you had laid out for '18, you made a comment that at this point with the uncertainty in the market it's hard to say that will be '18 or '19 or '20 but I'm hoping you can may be refine that timeline a little bit because I think that’s an important timeline to your shareholders. So, how long do you anticipate it will take you to get to those targets based on what you are seeing and hearing from your customers right now?

Honestly Matt, we haven't backed off of internally of our expectations relative to those targets. We're going to be fully through integration and activities in 2017, all of the customer commentary we have is that 2018 is going to be a very robust year. I'm simply making a point that clearly fourth quarter was a step backward. It doesn't change directionally where we're going. Whether it changes timing and again my anecdote about kind of timing is more to the point that timing moves around a bit so it’s difficult to be predictive of completely predictive because a lot of circumstances matter. The point simply is, that our expectations haven't changed and our belief in the platform that we're building hasn't changed at all.

And I guess the other thing that I was hoping we could get a little bit of clarity on and like I certainly understand why don't want to give guidance for 2017 and I think it's prudent not to do so yet but are you seeing the market set up in a way where you continue to believe that you will have organic revenue growth this year and maybe if you can give us a little bit of clarity sounds like January was not a great month what did it look like, what did February look like, and are you seeing activity ramping into the spring turnaround season in March as you would expect it to?

Sure. First of all January is always invariably the weakest month of the year. In our business and so this January was no different than that. So, January you can't make any judgments about the month of January because it is absolutely the softest month so it continues to be true. We are seeing a ramp in February activity was quite good. We haven't closed the books on the month of February so I don't know what those financial results are but I can tell you activity levels were good the ramp-up to the spring turnaround season is good. We don't see it however as being a great turnaround season on a relative basis but it looks to be a decent turnaround season. We do when we look forward into the fall, I think what we believe is that we're going to see kind of a continuous improvement throughout 2017 and again customer commentary and projects that we're aware of that should impact our business which is just 2018 is going to be quite strong but you know how that is. Things move, things change and so while there's a lot of anecdotal customer commentary reasons to be optimistic about 2017 and 2018, it hasn't translated yet into work orders if you will and so on until it does I'm not counting on it.

Sure, so kind going back to part of the Question then, do you think you will be able to get organic revenue growth in 2017 and if you look at the spring turnaround season is decent translate to flat, is that up a little bit sort of what do you think based on your sitting here today you presumably know what projects you're going to work on obviously you don't know the timing of how long they will go and clearly that part of it kind of caught us all by surprise in the fall turnaround season just trying to get a sense for whether you see the opportunity for growth this year both full-year and in the spring season.

Well I don't want to comment on the spring season Matt because that's a little too close and I don't have the data to comment on it. I have good data on activity levels which are good but yes I expect organic growth for 2017.

Okay in the last thing all hop back on the queue, on the ATM, stock is obviously dropped a good bit since you guys announced that. Would you be willing to sell stock under the ATM at this price?

No.

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

It’s actually [indiscernible] filling in for Craig this morning. Just wanted to ask what are your expected savings from closing European operations and then perhaps more broadly overall any additional cost savings you've uncovered since Q3?

Well as we reported, the expected savings are in order of magnitude are about $2 million a year which is the magnitude of the annual losses that those two locations had incurred frankly and every year over the last five years. So that's kind of an immediate reduction so we incurred $5 million to save $2 million on an annual basis. I'm sorry, what was the other part of your Question?

I'm just asking probably outside of Furmanite just the overall potentially any cost savings you've uncovered since Q3?

Well we've discussed on many calls that we have categories of a merger related synergies that we are pursuing. Most of the direct costs synergies we have achieved in terms of the activity that will generate the cost synergies some of those fall into 2017, some into 2016. The total is about $23 million of direct merger related synergies. We've also talked extensively about performance improvement opportunities that we are pursuing and I think I've shared in other calls that we have a long list of initiatives relative to that. One of those by the way and a significant one was the closure and exiting of these operations in the [indiscernible]. So there are others as I've said before the achievement of many of those is a heavier lift, takes more time, process improvements and things of alike but are significant.

Our next Question comes from the line of [indiscernible] with KeyBanc Capital. Your line is open. Please go ahead.

Ted, first Question it seems like your clients in general for the last two years now seem to be turning on and off the GAAP and making it very difficult for you to plan. Within your structure and I know you mentioned some things earlier on in the call what are you changing to really flex utilization faster because it seems like this is something that might be here to stay.

One of the things, there are several things relative to performance improvement and workforce utilization that we're focused on broadly I'd say perhaps the most significant is kind of what we call global workforce management where we are tracking as opposed to tracking individual technicians at individual locations which we have done historically. We have in place a process that allows us to more globally if you will or kind of with better vision see availability of resources across our entire network and thus be able to move and improve overall utilization so that's an example of an ongoing initiative that again I think the scale of the business we now have, the processes that we are focused on improving and the clear recognition I mean as Greg pointed out the volatility of sequential month over month or quarter over quarter we saw more volatility kind of the spike was higher say from the low point of the summer to September to October and then lower again and that may well be a new reality and we have to adjust to that new reality. And so the example I gave kind of workforce management across the network is one way of doing that.

Okay, Ted when could we see more visible signs because clearly you know I know that's an ongoing initiative but clearly not enough to offset the utilization fall-off in the fourth quarter. Do you need to beef up your operational managerial side a little bit more to help you with that given the scale of the business?

No. I don't think so, I will tell you and I couldn't be happier with the operational management of our business. We have terrifically skilled and motivated managers and again it is largely about putting the right processes in place for a changing environment that we find ourselves in and so it's not, it isn't easy but we're doing it. I have full confidence in our team.

Okay and this is a follow-up to an earlier Question , to the extent you can seek out some organic growth on the top line. With all these initiatives in place where could your margins actually had, can you improve them versus where you ended the year?

Well again, I think as I commented in our aspirational goals of what we're building. Would suggest EBIT margins up quarter magnitude 9% is our expectation once we're kind of through these end market malaise and integration activities and that translate to an EBITDA margin of about 13% and that I think, again that's what we pointed to as an aspiration for 2018 once markets have recovered and we're through integration activities, that hadn't changed at all.

Our next Question comes from the line of Adam Thalhimer with Thompson Davis. Your line is open. Please go ahead.

As it relates to the Team prospect business your revenue there was flat but the margins were down a little bit, were the margins down just due to this integration activity you referenced?

Generally I'd say yes again we just had a broadly poor performance in the quarter we had some execution issues in the quarter that impacted margins a little bit even on that side of the business as well. But honestly it's all related to integration activities on top of ERP implementation. You know, I like to tell you that hasn't been a distraction but clearly it has.

Okay and then as you look towards 2017, between team Qualspec and TeamFurmanite which segment do you think would give more margin improvement or would you be more optimistic for margins to improve?

I'm optimistic that both segments margins will improve. I think on balance, if you kind of look we have lower operating margins in TeamFurmanite than we do in TeamQualspec that's where we have identified in the Furmanite merger a significant number of performance improvement and opportunities, process improvements and pricing improvements of things of that [indiscernible]. Again, the exit of Central Europe is a great example of those kinds of opportunities so in terms of absolute margin expansion I believe we'll see more of it in TeamFurmanite but we think there's a margin improvement opportunities across all of our businesses.

And then lastly, can you just give a quick update on Quest, Quest had a good quarter but in the top line and on the margin line and just curious what would be your thoughts on I think at one point you are thinking 100 million at the top line for Quest maybe just give a quick update there?

Sure, Quest has suffered the same market malaise if you will virtually same and again same end markets if you think about it that way in our Quest end markets are the same end markets as the rest of our business, it's applying different kinds of technology to those end markets but the markets are process industries and pipeline and power and there have been significant amount of project referrals that Quest has base just like TeamQualspec and our TeamFurmanite businesses. So, again I think the opportunities have moved to the right a bit again that's why, I keep coming back to the notion it's not a straight line northeast but there's nothing different, in fact we have some very exciting new tool development that we will be, that in fact we are rolling out that I'm not sure if we're going to leave it on first commercial application but again we're continuing to develop new tools better tools responding to our customers and we continue to believe that that in more normalized market environments, you're going to see a return to those robust growth rates that we have experience previously with Quest. So nothing's changed about the end market environment that lessen our belief in the outsize growth potential of Quest.

Our next question comes from the line of Marty Malloy with Johnson Rice. Your line is open. Please go ahead.

I apologize for the length of this question but just trying to get a feel for the end markets and if there's something structurally going on here now that it's lasted kind of five quarters where the demand has been challenging. Are you seeing increased competition from larger ENC [ph] companies [indiscernible] with their historic acquisition and take ups and others have talked about more focus on lifecycle management for some of the assets that they're building for customers? Are you seeing customers rely more on predictive analytics to try to limit their spending on maintenance and inspection or in some cases pushing the limits of safety of safety at the plants?

I don't think any customer is certainly intentionally pushing the limits of safety so that just doesn't happen. Are there structural changes, certainly you've referred to floors acquisition of Stork, what we look at Marty is the starting point is do we have any evidence that we are losing market share to new competitors or even existing competitors in the market and the answer is we do not. So we are seeing less spending and more deferrals. We don't think there's anything structurally different now, predictive analytics that's not new, if you think about inspection program risk based inspection, determining timing of turnaround activities, every I'd say virtually every customer we have would be applying those techniques and have been for some time. It used to be turnarounds where were conducted on the basis of passage of time, we just kind of did them every three years or five years depending on the program because we have always done them that way. Certainly inspection techniques are far, far better everyone uses a risk based inspection program of one sort of another that has been good for us by the way from the standpoint of our inspection business but I don't see any I don't think there's been any lights that have gone off on the part of any of our customers who have suddenly said we've actually spent more on maintenance and inspection of process facilities over the course of the last 20 years than we could have and we have suddenly gotten smarter or there's been kind of new composites or alloys that are less corrosive. I just don't, I don't see any evidence of that. We clearly are in a longer protracted end market downturn affecting our business and we have seen before because I've said many times that historically we've seen these downturns affecting our business for about a year and this would've last a little bit longer than a year. Again, there are a lot of things I could point to that would suggest that we're kind of near the end of that cycle, industry data, customer commentary but until we see it I'm not going to predict it. But the long answer to your long question I guess is I don't think we're not seeing any structural changes, we're not seeing any things that we could point to in the way of predicted analytics that have a marginally material change to demand for maintenance or inspection.

Okay. And then maybe could you go a little more in depth on the ERP system roll out and it sounds like it might be may be going a little slower more difficult than initially thought of where you are in that and how long that's going to take?

It slower and more difficult than initially thought but our initial thinking of three years ago like every other major ERP [ph] implementation it is taking longer and costing more than we would have thought. When we started it three years ago but I don't think it's changed any in terms of our expectations kind of where we are certainly over the last 18 months or so, Greg you want to comment further on that?

Yes, we're right in the middle of rolling it out across North America you know, we're experiencing the typical change management issues associated with learning a new system you know the J curve where initial employee efficiency starts off slow and then every month they gain increased efficiency. We have not had any material significant business disruptions or inability to pay employees, pay vendors and invoice customers so from that standpoint the rollouts have gone well but the original plan was to roll it out to team. We did two large acquisitions, now we're rolling it out to all of those businesses and all of those employees and they were all very manual in nature and have been utilizing the same system for decades. So, you know, change is hard but we've got a good project team, we've got good training programs and I think we're making good headway on it.

[Operator Instructions]. Our next question is a follow-up question from Matt Duncan with Stephens. Your line is open. Please go ahead.

Just back on the ERP, I think maybe what he was getting at is I believe last call the North American install was going to be done by the end of '17 now I think Greg you said it can flip into early 2018, is that sort of normal schedule slippage within the ERP install, has something been added to it that's extending the process and if you can maybe talk about in the 50 locations where you've put in, are you seeing benefits in your ability to use data to manage those locations and manage the business as it's been installed?

You know relative to the timing, we still have a goal of being completed by the end of 2017. If there is any slippage into early 2018 we're talking a handful of locations we're not talking a step change where there's going to be a third of the locations that are going to fall over into 2018 but there could be a handful that fall over into January and February timeframe but we're, you know, the goal is to try to have it all done by the end of the year so that's just you know basically give us some cushion in the event that we do have some that fall over into the first part of next year. You know, it's still really early I guess I would answer the question this way. For those locations that were technologically more technologically advanced and maybe had some more technologically advanced folks on their project team, they've adapted much easier and much faster to the change. I would also say that across the Board everyone's adapting to the change, it's like anything else, some are going to pick it up faster than others, I would say as a whole it's gone very well. We are seeing improvements related to cost transactions now having a trail in the system to see and verify that they have in fact been built our misses on items that didn't get billed manually. There's definitely been some improvement there. We've got more visibility in making sure that all transactions are accounted for and build to customers than we had in our old approach. So there's definitely been that benefit. But it's still pretty early you know we just went live with some other branches in February and so you know the ramp-up is going to be pretty fast paced over the rest of the year. But as a whole I would say it's going well and we don't see anything that leads us to believe that we're not going to be able to get this completed in the next several quarters.

Got it. On the million five a month of cost over the balance of the year as you install North America, how much of that is going to be expense to the P&L?

I would say virtually all of it.

Okay and then you'll continue despite that out I'm assuming in your releases that we see, so most of that amount would be expense, I will call $4 million to $4.5 million a quarter.

Yes and you'll see DNA increase at a run rate of about 3 million a year related to the capitalized component.

All right. And then last thing, just to help us with the models what is the pro forma revenue comparison for the first quarter of '16 [indiscernible] part of the business for the whole quarter?

It would've been $294 million a little under $300 million for Q1 '16.

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

Okay, thank you very much. Again, I appreciate your attention to this call. Again, difficult year, difficult quarter we have every reason to think that 2017 is going to be again turn of the corner year. So thanks for your attention and everyone have a good day.

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