Team is an industrial services company that provides maintenance to large facilities like refineries and chemical plants. A big chunk of its business consists of onsite inspections, routine service calls and small repairs during planned plant shutdowns. In good times its customers stick to their maintenance schedule. During a market downturn, Team tends to suffer because its customers will postpone preventative maintenance and non-essential equipment upkeep.

Team is a low-margin business with above-average fixed costs mostly because it has to continue to pay its highly skilled staff even when the work dries up. Technicians have to be available as soon as the service requests start rolling in again.

Why we liked it (a.k.a., the thesis)

As a cyclical business, it can be feast or famine for Team. We knew this going in. We felt others failed to see that there’s only so long a plant can run maintenance-free before machines just stop functioning properly. Eventually, deferred maintenance translates to increased demand for Team’s services. If you could stomach the decline in Team’s profits during a downturn, we believed that patience would be rewarded during an upturn.

This is exactly what happened when we owned the business in 2009. Team’s stock price and profits were depressed because oil prices had collapsed. This gave us the opportunity to buy the business while it was taking a beating. As anticipated, equipment had to be serviced and work came knocking on Team’s door. Once in the door, Team continued to experience growth through the sale of additional services and new products while onsite – like inspections, integrity testing and other new technologies. From a customer perspective, it worked. Instead of having one company perform a handful of services and another doing the rest, why not allow Team to do it all? We believed we would not only benefit from this cyclical rebound but also the business’s structural growth component. This proved to be a windfall for us as Team’s revenues rose with its project work.

2015 isn’t 2009

When oil prices collapsed again in late 2015, Team experienced a similar decline for its services. Believing our thesis remained intact, we followed the same formula as the first time we owned it. Except this time, the climate seemed to have changed.

Probably the biggest difference was that Team’s management saw diminishing profits and falling business valuations as an opportunity for industry consolidation. They bought the biggest competitors in each of Team’s two largest divisions. It didn’t trouble us immediately but we now see there was potential for this strategy to go sideways. One of the acquisitions involved taking on meaningful debt; the other, issuing Team stock at a relatively cheap price while paying up for the business.

What we think we missed

• We knew that even modest debt on a cyclical business could become very expensive to shareholders if the business experienced a prolonged slump like we’ve witnessed since owning Team in 2015 but didn’t respond as we should have to that knowledge

• Team’s second acquisition (mentioned above) also should’ve raised an eyebrow or two. When management started issuing stock at depressed prices to acquire competitors, it wasn’t a good sign. This acquisition exposed a trend of what we believe is poor capital allocation and we missed it

• We failed to identify what could be a dramatic shift in the business. We’ve already mentioned plants and refineries can only defer maintenance for so long. We owned Team for over two years and didn’t see a light at the end of this most recent downturn tunnel. Over this period maintenance and repair activity didn’t rebound and we question whether the business’s earnings power has been permanently impacted

After 24 months and no recovery in sight, we decided to part ways with Team.

What happened?

While we can’t say for sure what changed, we think it’s probably a combination of the following:

• Team lost market share because customers switched to other industrial service providers

• Plants and refineries have gotten so adept at monitoring their own systems and technology has become so accurate in detecting problems, that routine maintenance is no longer relied on to the same degree thereby disrupting Team’s dominance

• This could just be an abnormally long and seemingly endless downturn. One day Team may recover to an even greater extent than before because it now owns its largest competitors and has more ancillary products and services to sell

Over the time that we held Team in EdgePoint Global Portfolio, it returned -33%i.