Q3 2020 Team Inc Earnings Call

[music].

Hi, gentlemen, thank you for standing by welcome to the cheap Inc. third quarter 2020 earnings Conference call.

At this time, all participants are in listen only mode.

After the speaker's presentation, there will be a question and answer session.

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Please be advised that todays conference is being recorded.

I'd now like to hand, the conference over to your Speaker today, Kevin Smith Senior director of Investor Relations. Please go ahead Sir.

Thank you Daryl welcome everyone to teams 2023rd quarter Conference call with me on today's call are M. Marino Gotti, our chairman and Chief Executive Officer, and our Chief Financial Officer. Susan Ball. This call is also being webcast and can be accessed through the audio link under the Investor Relations section of our website.

Teaming information reported on this call speaks only as of today November 5th. Therefore, please be advised that any time sensitive information may no longer be accurate as of the date of any replay listening or transcript reading there will be a replay of today's call and it will be available via webcast by going to the company's website.

Jamie Dotcom. In addition, a telephonic replay will be available until November 12 information on how to access. The replay features was provided in yesterday's earnings release for we continue I'd like to remind you that this call contains forward looking statements made pursuant to the safe Harbor provisions of the private Securities litigation.

Our format, a 1995, including statements expectations future events or future financial performance.

Forward looking statements involve inherent risks and uncertainties and we caution investors that a number of factors could cause actual results to differ materially from those contained in any forward looking statements. These factors and other risks and uncertainties are described in detail on the company's annual report on form 10-K, and the company's other documents and report.

It's filed or furnished with the Securities and Exchange Commission. The company assumes no obligation to publicly update or revise any forward looking statements, except as may be required by law mm.

And throughout the year, we increased our our global sales efforts and revamped our proposal process to improve the administrative speed pricing consistency and to provide greater competitive advantages by highlighting our cross segment capabilities.

I have been pleased with our ability to maintain market share with our critical clients during the crisis.

We are collaborating more closely with our clients to develop flexible commercial models that mutually benefit both parties.

Second the actions implemented under the <unk> program allowed us to significantly reduce our cost structure to better align with market demands our attention to cost efficiencies as well as maintaining tighter controls on indirect and SG&A costs protect our balance sheet and provide additional cash flow during.

The third quarter, we achieved cost savings of $35 million and realized $75 million of savings year to date, which exceeded our previously stated target.

Third in order to further improve working capital, we enhanced our billing procedures. The digital job package initiative was rolled out domestically to significantly improve invoice processing time and accuracy reducing DSO.

We also expanded our global inventory management process and reduce capex by approximately 30% when compared to last year.

Fourth our workforce management function has been extremely successful in increasing operating efficiency and providing enhanced cost management the investments in the workforce management allow us to flex our resources to match market activity and enable better forecasting and planning for our clients future demands.

Domestically year to date, we achieved utilization rates greater than 90% or 4% improvement when compared to the same period last year.

Teams workforce management function in collaboration with our clients and our operations team have put over 700 field technicians back to work since the low point in the market earlier this year.

Before moving to our financial performance I would also like to highlight that we recently published our inaugural environmental social and governance report, which is now available on our web site. The report details team's effort to improve the environment through the reduction of greenhouse gas emissions and our recycling programs.

As well as how technological advancements have limited safety risks and operational exposure to our field technicians.

Teams daily focus on health and safety and industry best practices allowed us to achieve a top quartile safety record.

Now turning to our financial performance for the quarter.

Consolidated third quarter revenues were $219 million down 24, 5% year over year, but up 16% sequentially actually as our clients steadily increased project activity and adapted to operating in the current environment Ajar.

Adjusted EBITDA for the third quarter was $18 $2 million or eight 3% margin. Despite realizing the 71 million dollar decline in year over year revenues are cost savings drove the year over year increase of 120 basis points of margin expansion.

Turning to our segment performance mechanical services third quarter revenues were 101 $7 million up nine 6% sequentially and adjusted EBITDA was $16 $9 million in line with the second quarter.

We saw bright spots in our hop tapping and midstream product lines.

Onstream services, such as emissions control and leak repair. We're also strong benefiting from clients Opex spending.

Supporting our revenue diversification efforts m's experienced year over year growth in the areas of steelworks wasting water treatment tanks and terminals and nuclear power.

During the third quarter team completed a mechanical services pipeline repair project for an offshore platform in the North Sea.

The production platform had corroded and thinning pipes inside the base of the platform roughly 300 feet below sea level. Our technicians were certified to perform laser scanning composite repair and leak ceiling utilising rope access with self contained breathing apparatuses the project spanned approximate.

18 months and we estimate the lives of these lines were extended by five years.

<unk> specialized mechanical services technicians, coupled with our subject matter expertise across multiple disciplines prevented a multi week facility shutdown saving the client millions of dollars of Los production.

Inspection and heat treating revenues in the third quarter, where $96 $6 million up 20% sequentially and adjusted EBITDA was $11.4 million or 22% sequential increase.

<unk> nested group is now running at approximately 85% of pre covid levels.

August but experienced a rebound in September in addition to safely and strategically working within the constraints presented by Covid project deferrals and the Hurricanes Quest was able to successfully coordinate traveling logistics as well as perform demobilization and re mobilization of offshore projects.

Along the Gulf Coast.

For example, during the quarter Quest inspected a subsea pipeline project on an offshore production platform in the Gulf of Mexico.

Quest capabilities and technical expertise were ideal for this project due to the length of the pipeline the various diameters and high pressure of more than 5000 PSY quest.

Quest specialized pipeline team using our proprietary and Vista subsea technology have been in high demand as clients comply with their pipeline inspection requirements year to date Quest is inspected offshore pipelines all over the globe.

From a geographic perspective, we increased experienced increases in activity in better than expected results in our north and Canadian divisions.

Team faced continued headwinds in the West Division were pronounced covid related restrictions and the wildfires reduced activity levels.

The active hurricane season also negatively impacted our nested businesses due to temporary plant closures and the golf course divisions.

While many of our international businesses have been slow to recover, especially central Europe, and the United Kingdom, we have seen an uptick in activity in other areas. For example, mechanical services is experiencing increased activity in the Middle East Asia Pacific and Canada, all of which had growth in the quarter.

I will now turn it over to Susan for a more detailed financial review Susan Thank you and Marina and good morning, everyone as Amorino mentioned or third quarter consolidated revenue X two $290 million with $71 million and down 24, 5% from the third quarter of 2019.

But up 16% sequentially from the second quarter, all three segments were down year over year with the bulk of the revenue dollar declining coming from the mechanical services and inspection and heat treating segments on a percentage basis mechanical services posted a 25% revenue decline in the quarter Wow inspection and.

E trading list down 23.5% in class was down just over 26%.

Our consolidated gross margin for the quarter was 63 $7 million or 29, 1%, which was slightly above the same quarter a year ago of 28, 6% and down just over $90 million for the prior year period. The strong gross margin. Despite the revenue declines edminster.

It's our continued conscious efforts around the cost management of our variable cost with our ability to flex and managed to market demands.

The third quarter reported in that loss of nine $1 million when compared to a loss of seven $1 million and the prior year quarter. Adjusted net loss of non-GAAP measure with six $5 million or 21 suggested net loss per diluted share for the third quarter of 2020 compared to.

Just a net loss of approximately 1 million three.

III adjusted net loss per diluted share for the same quarter in 2019 significant adjustments in the third quarter include one $6 million in severance expense primarily related to headcount reductions as a result of permanent cost actions taken with Covid and some restructuring charges under the one team program.

Nearly $1.2 million in legal and professional expenses.

Recently, there was a 500 dollar cost associated with hurricane damage that will not be reimbursed by insurance.

Consolidated adjusted EBITDA for the quarter was 18 $2 million, which was down from $26 million in the third quarter of 2019, but up sequentially from 12 $7 million in the second quarter of 2020.

Despite realizing is $71 million.

Decline in year over year revenues are adjusted EBITDA declined by only $2.4 million from the comparable quarter.

As a result of the focus efforts on the global costs actions, both in SG&A and the costs and our operating costs third quarter total cost savings associated with the continued discipline around our cost reduction actions or approximately $35 million. These costs actions include both permits permanent structural cost.

<unk> and temporary costs productions, the cost savings were realized nearly equally in both our operating costs and SG&A.

A temporary cost savings initiatives remain in in fact through the fourth quarter of 2020.

Now turning to SG&A, we continue to see excellent progress in our year over year reductions to SG&A expense total SG&A costs for the third quarter of 2020 or $61 $1 million down 23, $6 million or 28% improvement from the third quarter of 2019.

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The largest dollar reduction we have seen year over year on a quarterly basis for SG&A.

For the nine months ended September 32020, or SG&A declined over $50 million or 20%. We anticipate total full year 2020, SG&A will be reduced by 15% to 20% when compared to 2019 of $328 million and we expect to be on the.

Hi end of this range. These total cost reductions include both accelerated one team program cost reductions as well as temporary costs actions initiate it in mid March which again as I mentioned continued through the end of 2020 now turning specifically to our segment performance Mechanical services segment report.

Third quarter 2020 revenues of $101.7 million down 25% from 135 $6 million in the third quarter of 2019, adjusted EBITDA was $16 $9 million in the third quarter of 2020 down from the 21 3 million.

Earned in the same period last year, despite lower revenues EBITDA margins for the business segment slightly increased to 16.6% versus 15.7% in the comparable quarter gross margin dollars decreased 26% on a 25% revenue decline.

Revenues of 96 $6 million down 24% from 126 $4 million posted in the same period last year third quarter, adjusted EBITDA was $11.4 million up one.

$9 million sequentially and up slightly from $11 million and the prior year quarter EBITDA margins increase this quarter to 11, 8% as compared to eight 7% in the prior year quarter gross margin dollars declined 7% on a 23, 5% revenue decline.

Quest integrity revenues of $27 million were down 26.2% from prior year period revenues of $28 1 million third quarter. Adjusted EBITDA was for $2 million down from $8 million in the year ago period class EBITDA margin declined to 20% compared to $28.

5% in the third quarter of 2019 gross margin dollars decrease 41% on the 26.2% revenue decline.

During most of the quarter quest continue to suffer more do the travel restrictions in quarantine requirements and industry activity.

And.

As Emerine I'd mentioned quest topline, though began to improve in September as the covid related travel restrictions.

Lifted.

Are effective tax rate on a nine month basis was approximately six 6% benefit we anticipate on a full year basis that the effective tax rate for 2020 will be approximately 7% to 10% this lower rate than the statutory rate is driven by a significant discrete discrete items recognized during.

The year, including impacts associated with the cares act permanent items, not deductible as well as differing impacts of domestic versus foreign income and losses and associated adjustments to our valuation allowance.

Company has domestic federal tax net operating losses of approximately $140 million, which are available to offset our future domestic federal taxable income due to the working capital needed to fund our third quarter revenue growth team was in that bar or under our credit facility for the quarter. The nine months free cash flow was <unk>.

Eight $5 million compared to nine 8 million over the nine months of 2019 capital expenditures for the nine months.

Or $16 $7 million compared to $23.2 million for the nine months into 2019, we continue to maintain a full year capital expenditure forecast of approximately $20 million.

We ended the third quarter of 2020 with approximately $20 million of cash.

Cash borrowings under our cash borrowings strong under a credit facility or approximately $132 million. We had total liquidity approximating $37 million. That's September 30th our senior secured leverage ratio was slightly above two nine times at September 30th.

We are compliant with all our covenants under a credit facility and believe our liquidity resources are enough to meet are working capital needs and cash requirements. We continue to evaluate all long-term capital structure options.

That's on our balance sheet and provide for future capital future growth.

In closing as previously mentioned, we have elected to extend our temporary costs actions through the end of 2020, and we will take further adjustments as market conditions warrant we remain focused on our financial priorities to conserve cash generate free cash flow to pay down debt, we expect free cash flow to be approximately 15 million.

For the full year 2020 that completes the financial review I will now turn the call back over to Amorino. Thank you Susan.

Four we take your questions I will review the progress of our one team program recovery readiness planning and provide our current market outlook expectations. We are expanding the next phase of the one team to note to deliver additional cost reductions that will further optimise the organization.

We accelerated key initiatives that will plan for 2021, including roofline consolidation further deployment of billing centers, making greater use of shared services and increasing back office automation we.

We now estimate the one team tuneup and other cost reduction actions will deliver between 85 and $95 million of annualized permanent and variable cost savings for the year up from our previous estimate of $50 million to $75 million.

Now turning to our recovery readiness program, our strategic investments in revenue diversification and our digital portfolio are preparing the company to rebound and what we expect will be a very robust activity period over the next two years.

Revenue diversification has been a key initiative for US as stated earlier, we continue to look for opportunities to diversify our revenue streams and expand our operational footprint in sectors like renewable energy.

LNG aerospace and infrastructure.

We have made progress in both hydro electric and wind energy.

Both of which are growing and markets and we're actively bidding on renewable energy projects globally for.

For example, five of the world's largest wind turbine farms are here in Texas, the wind turbines could move it speeds up to 200 miles an hour and due to the heavy wind and other environmental conditions. The blades must be routinely inspected for erosion in general damage using a remote visual inspection capabilities and robots.

<unk> technicians. We also recently provided an innovative mechanical services machining and bolting solution to repair wind infrastructures.

Now moving to digital in addition to the partnership with Microsoft to build the foundation of our field Service management program that we announced last quarter I would like to highlight three enhancements to our digital portfolio first during the quarter Quest unveiled its new streamlined data analysis and comparison software this for.

<unk> Terry industry, leading software platform allows quest to rapidly assess data across midstream assets, improving client integrity management decision, making an increasing our integrated and value sales positioning. Additionally, the software was developed to accept third party datasets in open source.

File format, which expands quests ability to integrate and analyzed multiple datasets. This platform. This platforms data to information conversion utility represents a step change in our ability to support the clients asset integrity management programs second we launched our digital information.

<unk> quarter during the quarter to allow team employees and ultimately our clients to track and review orders, providing faster support and improved customer service. We estimate. This software has already saved approximately 500 man hours during the quarter.

Finally, we added a new midstream clients, who are digital inspection data management platform. During the quarter approximately 400 assets were uploaded into the database and we are now monitoring more than 100000 components in the midstream sector.

This digital database combined with condition assessment analytics enables asset integrity performance optimization and provides more timely repair and efficiency leading to greater productivity.

These applications when combined with the rest of our growing digital portfolio are extremely beneficial to our clients and we will give them the ability to remotely access order information and receive real time updates about inspection and repair work while simultaneously ensuring team remains the service partner of choice.

Moving on to our macro outlook.

The economic recovery continues to give mixed signals. There are some positive trends combined with some headwinds specifically fuel demand growth and parts of Asia is being driven by gasoline and diesel while jet fuel remains suppressed demand for all three refined products collectively remains below 2019 levels.

We anticipate reduced activity in Europe, and potentially in the U S do to increasing covid concerns and the potential for a global economic pullback.

In addition, the oil markets are expected to continue to rebalance during the fourth quarter OPEC plus has indicated a willingness to withhold supply and when combined with the U S production declines will leave the oil market under supplied over the next several quarters further increasingly drawdown of inventories and improve.

<unk> industry fundamentals.

Refinery utilization rates were relatively volatile during the quarter due to the active hurricane season as product inventories continue to decline refining margins and Utilizations will increase this year's fall turnaround season was more active than the spring turnaround season, but overall turnaround active.

<unk> is below last year's levels. Many of these plants delayed large turnaround projects due to high utilization rates in 2018 in 2019, which will ultimately benefit team when those more complex and comprehensive turnaround projects are executed over the next 12 to 24 months.

During the fourth quarter and leading into 2021, we continue to see reduced capital spending budgets with most of our clients inquiries related to Opex projects as expected are on stream and call out activity is leading the recovery followed by Miss that operations.

I will now share expectations for the fourth quarter.

First we should benefit.

Benefit from the backlog conversion of projects that slipped from prior quarters into the fourth quarter. Additionally, we have seen increased call ode activity along the Gulf coast as Hurricane repair work continues.

Second we extended the cost actions that were implemented earlier in the year three year and as a result of the one team program and other cost actions. We expect our full year 2020 gross margin to be in line with 2019.

Finally, while we are cautiously optimistic about improving activity during the fourth quarter, we continue to monitor several risks, including covid restrictions and client operations around the holiday season.

We now expect second half 2020 revenue to increase approximately 5% over the first half. Meanwhile, we expect to generate approximately $15 million a free cash flow for the year.

Although there is uncertainty surrounding the pace and magnitude of the economic recovery I will now share some preliminary thoughts around our long term outlook.

Covid will continue to have a profound impact on the industry would be a catalyst for increased adoption of technology. Our clients will require more integrated solutions that utilize real time data teams digitally enabled solutions a few of which I described earlier reduce overall costs and support a balanced.

Mix between desktop and efficient field based work, while minimizing exposure risk.

Supported bought off expanding to address clients aging assets are backlog remains saw within consists of bold project and turnaround activity an improvement in our nested business and strengthening call load activity.

Finally, we expect the first half of 2021 to continue to show instability do decline budgets and the widespread availability of safe and effective vaccine. We expect the second half of 2021 will be significantly better in the first half of 2021 in.

In closing through most of 2020, we've been managing in a pandemic environment with countless changes to how we and our clients do business as well as the related shock to the global economy. Despite that backdrop, we proactively reduced our operating costs in order to maintain strong margins.

Even in a recessionary environment, we are executing on our playbooks to become a leaner more efficient company that is poised to see solid revenue and further margin expansion as the economy because it begins to recover.

This is a true testament to the criticality of our industry and our exceptional team, especially our technicians on the front lines, who have established a culture of teamwork in unity by boldly facing challenges head on they've been able to engage our clients leverage our technology offerings and manage our risks in finance.

Shall resources, operator, I will now turn it back over to you for the question and answer session.

Thank you we will now be conducting a question and answer session.

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<unk>, please while we pull for your questions.

Our first question comes from the line of Stefanos Christof C. J F Securities. Please proceed with your questions.

Good morning, and thank you for taking my questions.

Good morning.

So you're talking about the digital enhancements how impact will do thank those will be more important.

Well when we look at digital for our business, we really look at two or three main drivers and we're not ready right now to state a.

Percentage of revenue in the future, but we see that we're gaining already about 25% to 30% when it comes to.

Technician efficiency by reduced rework.

Waiting on sub contractors, and more consistent and sustainable quality assurance quality control. So that's more of an internal efficiency measure obviously that reflects onto our clients total cost of operations through their productivity.

<unk> games, which which obviously they see again through sub contractor management et cetera.

We also see what we talk about what I talked about the prepared remarks, using data and analytics to help our clients more around brisk based inspection more timely maintenance and less.

If you will.

<unk>.

Inspection requirements and what I mean by that is using more desktop analytics. So when we get to the field, we're actually expecting the areas that need to be inspected at the right time and making the right recommendations based on whatever damage mechanism and whatever critical asset decline is seeing so when you look at it.

The visibility on efficiency.

And quality the ability to use data and analytics to to help our clients move to more of a risk based.

Operation and then when you start doing repairs and maintenance, having that that ability to to be able to track that material or that data electronically helps our clients better manage their asset integrity program. So there's a lot of touch points.

We're seeing some of our digital capabilities be commercial revenue driven and we're seeing others be internal efficiency driven to support support margin. So we're excited about.

The future in terms of working with our clients working with other partners and feel that it's going to continue to drive both revenue in margin going forward into the future.

Thank you for calling.

And then on.

On the call you mentioned.

Maintaining market share could you give us a little more in detail on what the competitive work it looks like.

Sure. So I would say that overall when you look at the clients and again, we've got what we call our large clients more of our MSA clients.

And then we have kind of a mid tier sized Klein and then we have smaller we're obviously seeing some regional pricing pressures and some of the call out work right now specifically in some of the divisions like the Gulf Coast area and California.

But overall in our clients are are really working with us to see how they can reduce their overall total cost instead of always just talking about unit costs. So we are seeing regional pressures I would say in a few of those key markets and more of the call out on stream type product.

Lines, but in general we've been able to maintain good working relationships either picking up some additional cross selling revenue or being able to reduce their total cost I've talked about rope access in my prepared remarks.

Reducing scaffolding or other saw subcontractor costs and still performing their inspections more efficiently is.

Some examples where we've been able to to work closely with them.

Thank you all of them back in queue.

Thank you. Our next question comes over the line of Martin Malloy with Johnson Grace. Please proceed with your questions.

Good morning.

And I think you'll have done a great job.

In terms of the.

The cost reduction efforts and being able to increase margins in the face of some very difficult industry fundamentals.

First question I wanted to ask about your ESG presentation.

You had a Permian model case study in there about.

Greenhouse gas emissions at the wellhead in there seems to be more.

Attention from the majors and larger dependents in terms of trying to reduce the greenhouse gas emissions at the wellhead could you maybe talk a little bit more about.

Your role there and what the market opportunities.

Sure. Thank you and good morning Marty.

The.

We're actually very happy and proud to be able to put that USG program in place and it's something that as a company. Obviously, we've been working on on it for a few years and it covers a lot in total but you highlight a very good example.

We are seeing.

A lot of interest obviously right now from our clients and as well from communities around sustainability in that program, specifically and others like it.

Are using what we call emissions controls so we're able to.

Monitor in this case.

Methane emissions, we're able to then make sure that we're supporting our clients through <unk>.

Standardized QA QC program for their compliance reporting and then Furthermore, we're able to then find it and fix it if there is a problem. So we have multiple assets that were actually monitoring in this case, it's more along the midstream sector and we've got our technicians working.

[noise] closely but actually.

With their environmental Department is who runs a lot of those emissions programs and we're able to on a daily basis.

Monitor multiple assets and components and then that pulls through other mechanical services repair. So it's right now I would say, it's quite manual in terms of the use of technicians et cetera automated in terms of the reporting but we're also seeing opportunities to.

To further use.

Drones and sensors in other ways to monitor emissions.

And and satellite imagery et cetera, So we're actually working with partners to become let's say more automated in the in the collection or monitoring of emissions in the future.

Thank you and the next question I had was kind of in the along the same theme in terms of USG.

As we see more biodiesel being used refineries can.

Can you talk about how that impacts.

Packs your business and then.

As you look at hydro biodiesel and wind and there's more renewable sources of energy could you may be frame for us kind of what that is as a percentage of revenue now and where you think it could go to or your total bill.