Q4 2020 Team Inc Earnings Call
Greetings and welcome to the team, Inc, fourth quarter and fiscal year, 2020 earnings Conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
And once you require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Kevin Smith Senior director of Investor Relations. Thank you you may begin.
Thank you Doug welcome everyone to teams and fourth quarter and year end 2020 earnings Conference call with me on today's call are and Merino Goudy, 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.
And the team Inc. Dotcom and information recorded on this call speaks only as of today March 10, and 22021 day.
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 teaming dotcom and addition, a telephonic replay will be available until March 17, and the information on how to.
These replay features was provided in yesterday's earnings release before 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 and Litigations Reform Act of 1995, including statements of 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 and any forward looking statements. These factors and other risk factors and uncertainties are described in detail and the Companys annual report and our form 10-K, and and the company's other documents and reports filed or firm.
<unk> 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 and Marino and will begin by highlighting significant events in 2020 and provide an update of our business and Susan will then detail our results and before we take your questions and Marina will discuss the market outlook as well as our near term and long term expectations.
I would now like to turn the call over to Amrita and thank you Kevin and good morning, everyone. We appreciate you joining us today and I Hope you and your families are safe and healthy.
Last few weeks have been volatile with record breaking winter storms, hitting many parts of the country, including southern states that do not typically experienced cold weather to that magnitude now after thawing out positive news on the declining number of Covid cases, and a significant increase and the pace of the vaccine Rollouts we.
We're starting to see the light at the end of the tunnel and our employees are energized and ready.
2020 was a year and which companies around the world faced unprecedented challenges and I'm extremely proud of the resilience of our entire organization.
While navigating incredibly difficult market conditions, we remain focused on managing what was and our control and took a series of proactive steps to ensure we exited the year stronger.
There are five key highlights that we achieved during 2021st the quick and progressive cost actions. We implemented early in the crisis allowed us to flex our cost structure to align with the dynamic activity levels, we achieved full year cost savings of $110 million exceeding the previously stated targa.
And of $85 million to $95 million of which approximately 40% are permanent.
Second in December we concluded a series of financial transactions to optimize our capital structure, including repurchasing approximately 60% of our senior convertible notes, providing significant financial flexibility and extending our debt maturity profile.
Third we published our inaugural ESG report that further demonstrates our core values and commitment to operating and environmentally sustainable manner fourth we developed a new strategic organization promoting leadership from within and to better position the company for the recovery continue sector diverse.
Suffocation and enhance client value I will share more about this new structure later in my prepared remarks, lastly, and perhaps what I'm. Most proud is our safety record, we achieved top quartile safety performance, representing the best safety results from the company's history. This achievement would not have happened without the dedication.
<unk> positive attitudes and behavior of our people and close collaboration with our clients now.
Now turning to our financial performance consolidated revenues for the second half of 2020 were $426 million essentially flat with the first half.
Activity levels increase during the months of September and October driven by call out projects and turnarounds and post hurricane repair work and the Gulf Coast divisions. However, beginning mid November further COVID-19 related global shutdowns and associated travel restrictions negatively impacted activity levels.
And revenue.
While we anticipated a slow holiday season. It was weakened further than expected due to the continued uncertainty and the market.
Adjusted EBITDA for the second half of 2020 was $31 $3 million and increase of $22 $5 million or up 258% over the first half of the year.
On a full year basis as a result of disciplined cost management, we limited our EBITDA margin decremental to 12, 9%, despite a 27% reduction and revenue compared to 2019.
We generated approximately $33 million of free cash flow and 2020, the highest level since 2016 team.
Team remains focused on generating free cash flow to pay down debt.
Our 2020 results demonstrate the flexibility of our asset light and scalable operating structure and coupled with the depth and breadth of our products and services allow us to flex with business demands.
Now I will provide a segment overview.
Beginning with mechanical services as I mentioned team realized and increase and call out and projects as well as and increase along the Gulf Coast divisions with Hurricane repair work in fact activity levels and October reached the highest point of the year, but declined in November and December due to holidays and further global Covid related shutdowns.
However, we did see a few bright spots MFS experienced year over year growth and the areas of mineral extraction, and steelworks renewable energy food and beverage government and military and storage tanks and terminals.
During the fourth quarter, our West Division began to work began work to repair leaks on a 400 foot long pipeline tunnel under a highway that the client initially believed to be unrepairable.
Team specialists presented a repair option using injectable water seeking grout hot bolting hardware to replace corroded fasteners, and and our pork C coding to prevent future leaks the repair saved our clients hundreds of millions of dollars and replacement costs and downtime.
Inspection and heat treating nested group is now running between 85 and 90% of pre COVID-19 levels.
Throughout 2020, the quality of our technicians and the strength of our relationships allowed us to retain and further expand our overall nested footprint.
Our nest and operating model provides team a stable and recurring growth platform.
Despite the increase in activity in September and October and similar to MFS activity levels and November and December were negatively impacted by Covid related travel restrictions, which led to reduced activity and lower staffing levels at several of our run and maintain sites supporting.
Our revenue diversification efforts IHT experienced year over year growth and the areas of pipeline pharmaceuticals, and pulp and paper.
IHT segment recently completed customized heat treating work on a turbine at our hydroelectric dam and the U S. Due to the shape and configuration of the veins traditional heat treating methods were not adequate.
Our subject matter experts and technicians and developed a solution utilizing magnets and flexible ceramic heaters used during the welding process decline was extremely satisfied with the results and we expect to work on additional projects at their facilities and the future.
Quest integrity as revenue growth continues to be impacted by the overall slowdown in industry activity COVID-19 related travel restrictions and quarantine requirements as of now we have only experienced project delays and minimal cancellations quest.
Quest fourth quarter revenues and adjusted EBITDA were up sequentially driven by an increase from international subsea inline pipeline inspection and domestic midstream inspection work that requires specialized services for regulatory approval.
As an example of cross segment collaboration Quest recently worked together with mechanical services to complete a corrosion repair and event stack by fabricating steel plates to fit over the damaged areas.
Once the place where and place a composite repair was applied.
Our expert technicians engineered a customized solution for the client using teams advanced manufacturing capabilities Quest and provided a detailed structural fitness for service assessment using our proprietary software to determine buckling capacity of the repair advent stack.
From a geographic perspective during the fourth quarter, we faced numerous COVID-19 headwinds around many parts of the world the.
And the United Kingdom went into a second Covid full lockdown and October along with Europe, and parts of Latin America, which negatively impacted our ability to travel and perform operations and these regions. However, we are seeing signs of improvement with some restriction is expected to be lifted and the U K and parts of Europe and mid <unk>.
March.
The Middle East is also showing improvement the vaccine rollout is going smoothly and economic activity is increasing aided by the increase and oil prices and global economic activity.
We recently completed a project in Oman and were awarded another project to work on a gas plant and Egypt.
Similar patterns of substantial Covid lockdown restrictions are present, and the U S, particularly in California, while other parts of the U S have started reducing COVID-19 restrictions <unk>.
During the fourth quarter team was awarded a competitively bid contract to perform leak repair work and a large refinery on the west coast.
This job requires as many as 40 on site technicians throughout the year as a result of this award we have been invited to participate in a bid on the client's midstream assets I will now turn it over to Susan for a more detailed financial review, Susan Thank you and Marino and good morning, everyone.
We'll review our quarter over quarter performance and highlights some of the 2020 full year results, our fourth quarter consolidated revenue of $207 million was down 80, $85 million and 28% from the fourth quarter of 2019 on a full year basis consolidated revenue.
And were $853 million compared to 1.1 dollars 6 billion in 2019, all three segments were down and the fourth quarter 2020 as compared to 2019. The bulk of the revenue dollar decline came from the mechanical services and inspection and heat treating segment while down.
Year over year Quest delivered 16, 6% sequential growth and the fourth quarter with quest, having increased activity on both our domestic and international markets on a percentage basis and mechanical services posted a 29, 9% year over year revenue decline and the quarter Wow inspection and.
<unk> was down 25, 7% requests was down 28, 2% consolidated gross margin for the fourth quarter 2020 was $60 1 million or 29%, which was in line with the same quarter a year ago, a 29, 2%, but down 24.
<unk> million dollars from the prior year period.
Despite the revenue decline, we were able to generate.
Favorable decremental fall through due to strong continued focus on managing our variable costs and the continued positive carryover are results of our quick cost actions taken earlier in the year with permanent cost reductions and the ongoing benefits of the <unk> program cost initiatives fourth quarter cost savings associated with it.
Discipline around our cost reduction actions taken in 2020 or approximately $35 million.
And again these cost actions include the permanent structural and variable temporary cost reductions to scale and flex with the market demand and activity levels.
And foundation of the one team and helped us to quickly respond to the reduced activity levels caused by the global pandemic, allowing us to accelerate cost reductions beginning in mid March.
2020, we achieved full year cost savings of approximately $110 million exceeding our previously stated estimate of $85 million to $95 million. The cost savings were realized nearly equally and both our SG&A and operating costs and gross margin.
I will provide more details around the SG&A cost savings later in my prepared remarks, the fourth quarter net loss was $14 $9 million when compared to a loss of $7 $2 million and the prior year quarter, adjusted net loss and non-GAAP measure was $11 6 million or <unk>.
38, and adjusted net loss per diluted share for the fourth quarter of 2020 compared to adjusted net loss of approximately $2 $3 million or <unk> and <unk>.
And net loss per diluted share for the same quarter in 2019 significant adjustments in the fourth quarter included approximately $600000 associated with the <unk> program costs $900000 and severance expense, primarily associated with head count reductions continuing from the permanent cost.
Actions taken due to COVID-19 $2 $2 million loss on debt extinguishment due to the early termination of a portion of our convertible senior notes and repayment and cancellation of our prior price.
Prior credit facility and $500000 of certain other non reoccurring costs consolidated adjusted EBITDA for the quarter was $13 $1 million, which was down from $23 $2 million and the fourth quarter of 2019.
Spite, realizing and $85 million decline in year over year quarterly revenue, our adjusted EBITDA EBITDA.
EBITDA declined by only $10 $1 million from the comparable quarter in 2019 as a result of our focused efforts on global cost reductions both in SG&A and variable costs and the gross margin.
Adjusted EBITDA as a percentage of revenue decreased to six 3% from 8% and the prior year quarter on a full year basis, adjusted EBITDA of $40 million declined approximately 51% and was a four 7% of our revenues compared to the 2019 and.
Adjusted EBITDA percentage of $6 nine now moving to SG&A.
As previously discussed throughout 2020, we were successful and our efforts to reduce SG&A costs total SG&A for the fourth quarter 2020 was $62 $5 million down $17 2 million or 21, 6% improvement from the year ago quarter.
Our annual SG&A reduction was even more impressive with the full year 2020, SG&A cost of $269 million. The lowest level achieved since 2016 annual SG&A costs were down $67 3 million or a 25% improvement from two <unk>.
19, slightly exceeding our expectation of 15% to 20% and.
Again. These total cost reductions included both accelerated one team program cost reductions as well as temporary cost actions that were initiated in mid March over the last two years, we have reduced our SG&A cost by approximately $100 million as we look to 2021, we do.
To see and incremental increase in SG&A from the staggered removal of certain temporary cost actions and the first half of the year as well as our investment and the business for growth such as R&D cost selling and selling related costs and approximately 50 to 65 per cent of reduced SG&A costs from too.
19 realized in 2020 are permanent in nature.
We do expect our full year 2021, SG&A cost to be and the range of approximately 275 million to $290 million.
Now turning specifically to our segment performance and <unk>.
Chemical services segment reported fourth quarter, 2020 revenues of $93 $4 million down 29, 9% from $133 $3 million and the fourth quarter of 2019, adjusted EBITDA was $10 $9 million and the fourth quarter of two.
'twenty down from the $19 $5 million earned and the same period last year.
Margin dollars decreased 31, 9% on the 29, 9% revenue decline.
Full year 2020 revenues were $392 $5 million down 26, 7% from $535 $4 million and 2019 adjusted EBITDA for the year was $51 $3 million down 34% from $77 6 million.
In 2019.
The inspection and heat treating segment reported fourth quarter 2020 revenues of $89 7 million down 25, 7% from the $129 million posted and the same period last year.
Quarter, adjusted EBITDA was $9 1 million down $1 6 million in the prior year quarter EBITDA.
EBITDA margin increased this quarter to 10, 1% as compared to eight 8% and the prior year quarter gross margin dollars declined 13, 7% on a 25, 7% revenue decline for the quarter full.
Full year 2020 revenues were $374 $7 million down 26, 9% from $513 million in 2019.
Adjusted EBITDA for the year was $33 $6 million down.
Down 19, 8% from $41 $9 million and 2019, but generated a higher full year EBITDA margin of 9% from the previous year EBITDA margin of eight 2%.
Quest integrity revenues of $24 $1 million were down 28, 2% from the prior year period revenues of $33 $6 million, but increased 16, 6% sequentially fourth quarter adjusted EBITDA was $7 7 million.
Down from $11 5 million and the year ago period gross margin dollars declined 38, 9% on the 28, 2% revenue decline.
<unk> EBITDA margin was 31, 9% compared to the prior year quarter of 34, 2% full.
Full year 2020 revenues were $85 3 million down 28, 525, 8% from the prior year record revenue level of $115 million adjusted EBITDA for the year was $26 million.
Down 36% from the $32 4.002 million 19, as a reminder.
Q4, 2019 for quest was the highest ever quarterly revenue and EBITDA with the continued international expansion.
However impact of quest more greatly on a percentage basis with the strict lockdowns and travel restrictions that occurred in 2020.
On a full year basis, and mechanical services gross margin dollars declined 29% on a 26, 7% revenue decline IHT gross margin declined 17% on and 26, 9% revenue decline and quest gross margin declined 37, 4% on a 25.
Five 8% revenue decline.
Overall on a full year basis, IHT was able to more quickly reduce the variable costs each quarter and for the year than the other segments as we've previously discussed.
Our full year effective income tax rate was approximately a five 8% benefit this lower rate than the statutory rate is primarily attributable to the reduced tax benefit related to the goodwill impairment loss taken during the year of which a portion is not deductible for tax purposes, and other permanent items not deductible as well.
Differing impacts of domestic versus foreign income and losses associated adjustments to the valuation allowance for net operating losses with a partial offset for certain favorable rate benefits of the cares Act the.
The company has domestic federal tax net operating losses of just under $170 million at the end of the year, which are available to offset future domestic federal taxable income.
And the fourth quarter, we generated $32 6 million and operating cash flow capital expenditures were $3 $3 million, our strong free cash flow for the quarter of $29 $3 million was the result of our effectively managing our variable costs through the temporary cost management actions.
And the Optimate optimize our working capital with our activity levels.
For the full year, we generated $52 8 million and operating cash flow capital expenditures were $20 million in 2020 down $9 1 million from 2019, we had previously closed would be down by approximately 33% and 2020, we delivered 32.
$2 8 million of free cash flow the highest amount of free cash flow since 2016.
Looking forward as the economy opens up and the activity levels increase we will require more working capital and would expect a significant reduction on a free cash flow in 2021 as compared to 2020, we do expect to generate positive free cash flow and 2021, the level to which we achieve.
And this will be dependent upon the growth on our revenue and the associated working capital needs. We expect our full year capital expenditures to be $25 million to $30 million for 2021, we will actively manage this accordingly, though to the business' growth levels and opportunities throughout the year.
In December 2020, we undertake multiple steps to refinance our capital structure and improve our balance sheet, including repurchasing $137 million of our convertible senior notes and.
Entering into a new $250 million senior secured term loan and a new $150 million secured ABL credit facility and connection with the new debt facilities. We retired our previous senior secured credit facility, including the revolving credit facility and the associated term loan debt.
Successful execution of our debt refinancing provides considerable financial flexibility and extends the company's debt maturity profile with no leverage ratio covenant requirement until the first quarter of 2022.
Our new capital structure gives us sufficient liquidity to support our working capital needs and execute on our immediate growth priorities for the year. We ended 2020 with approximately $24 $6 million of cash borrowings under our ABL facility were $9 million.
Did pay down debt of approximately $8 million.
In the fourth quarter and ended the year with our gross debt being down approximately $2 million from 2019, we ended 2020 with the lowest year and level of debt for the past four years. We are focused on aligning segment synergies and work processes across the organization to drive cash flow and maintain our capital at.
Allocation priorities, including maintaining a fortified balance sheet, we remain focused on our financial priorities to conserve cash through optimizing our working capital needs and generate free cash flow to pay down debt that completes the financial review with that I'll turn the call back over to Amrita and thank you Susan before we take your questions I will.
Provide an overview of our recently announced organizational changes review macro market trends and discuss our ongoing recovery readiness program and provide our business outlook.
In January of this year, we began implementing our new strategic organizational structure. The new operating structure includes the inspection and heat treating and mechanical and on stream services groups and was designed to accelerate global growth with a greater management focus on improving operational and financial performance and <unk>.
Increase and collaboration across groups. In addition to IHT and MLS and the new asset integrity and digital group, which includes the quest integrity segment will focus on expanding mechanical and pipeline integrity risk based inspection robotic inspection solutions and our digital platform.
We will also optimize our research and development activities, including product and technology development.
And bind with the other operating groups AIB allows for faster technology adoption across our global footprint.
The new organizational structure positions us to grow sales across groups share collective insights and subject matter expertise deliver stronger service quality and increase overall profitability. We believe team is well positioned to provide integrated and innovative solutions to our clients which includes supporting.
The energy transition.
Moving to the macro environment. The economic recovery is clearly visible with global Covid cases, declining and vaccine production rapidly increasing resulting in higher economic growth forecasts, especially for the second half of 2021.
Refining crack spreads have improved with refining margins now in line with seasonal norms.
Before the recent winter storms refinery Utilizations, we're approaching 80% to 85%, which is a range and that has historically incentivize maintenance and repair work.
And the storms for several U S refiners to reduce capacity, resulting in significant drawdowns and petroleum products. The drawdowns combined with an increase and demand has improved the refining outlook. Once the plants are fully recovered from the storm impact we expect utilization levels to increase rapidly.
OPEC plus continues to withhold supply and when combined with U S production declines and the oil market is expected to be under supplied further increasing the drawdown of inventories and the first half of 2021 and improving industry fundamentals refining margins and utilization rates.
Many plans delayed large project.
Turnaround projects and equipment upgrades over the past few years, which will ultimately benefit team when these more complex and comprehensive projects.
And coupled with an anticipated surge and discovery activity are executed over the next 12 months to 24 months. We also expect the current administration to increase regulations and the energy sector, which provides for a transition to a more proactive mindset when it comes to asset integrity management and compliance therefore, we expect.
The next several years to be robust in terms of activity levels. We.
We developed a recovery readiness program last year to prepare for the anticipated increase in activity.
Team has matured significantly as a company over the past three years and the macroeconomic outlook and client feedback has prompted us to evolve our commercial offerings to become a more competitive player and our end markets by investing and three internal initiatives workforce management revenue diversification and our asset integrity and dish.
Little group.
Starting with workforce management with the exceptions.
With the expectations for a tightening labor market in the coming quarters, our workforce management function allows us to quickly respond to clients' needs. Our global workforce management function allows us to essentially coordinate and forecast utilization communicate more effectively with our onsite field technicians and provides logistical support.
To quickly mobilize a list on that dynamic environment.
Team's technical school, and Texas State accredited offering technician and client based training and industry learning, but.
But we can also perform remote training from many of our technicians, our industry, leading training and certification programs plus our strong recruiting efforts in the military technical schools and universities will provide an opportunity to continue expanding our workforce pool to meet market demands in 2020, we achieved workforce utilization.
Asian rates greater than 90% or 4% improvement when compared to 2019.
Revenue diversification is also been a key initiative, we continue to look for opportunities to diversify our revenue streams and expand our operational footprint.
And there's like renewable energy LNG aerospace and infrastructure.
For example, the winter storms highlighted the benefits of teams asset integrity solutions and areas like LNG and wind energy team.
<unk> recently completed work for our Gulf Coast LNG liquefaction facility, we mobilized a crew that performed external inspections and <unk> scanning to assess any potential damage to a storage tank.
The rapid response of our technicians combined with expert engineering support restarted operations within 48 hours saving time and millions of dollars per day and lost revenue for the client.
I will now cover highlights of our expanding digital platform.
We continue to develop and deploy digital solutions to support how are people produce and deliver work products to our clients, our Salt Lake City District, and the North Division has moved to 100% digital workflow to improve business efficiency technicians operations managers and administration all work within one digital platform.
<unk>, which has improved safety and quality of services to our clients. We are currently scaling this solution across all U S based districts.
And the digital information portal, we launched and the fourth quarter allows team to track and review product orders. We have now opened the portal to our clients providing them with real time visibility of their orders and improving customer service.
And finally team launched.
And online subscription service for asset based data management. This digital database includes condition assessment analytics that enables asset integrity performance optimization and improved efficiency leading to greater productivity.
The database service offering added 900 assets and Q4, 2020, which doubled from Q3 levels. These applications when combined with the rest of our growing digital portfolio ensures team remains the service partner of choice.
Turning to our near term outlook.
While the market confidence is growing that was not the case. This january when the economy was dealing with uncertainty about the timing and magnitude of the recovery Covid cases were spiking throughout the U S and other parts of the world, which led to a slower start to the year following the prolonged holiday season in.
In addition, many Midwest and Gulf Coast refining and petrochemical plants shutdown in February as the winter storms caused electricity shortages and pipeline outages. This impacted our nest and operations since many facilities were down for several weeks before coming back online.
And even today some plants still have not returned to full operations.
Therefore, we expect our first quarter revenues will be the lowest of the year and below Q1, and 2020 levels more in line with Q4 2020.
As Susan mentioned this quarter, we began rolling back some of the variable cost measures that were implemented during 2020, as we planned for and anticipated ramp up and activity going into the February and March project season, We will maintain our focus on margin and expect our full year gross margin to be in line with 2020.
And 2019.
Despite the slow start to the year, given the improving activity outlook for Q2, and the second half of 2021, we anticipate a 10% to 15% revenue growth over full year 2020.
Mark and uncertainty notwithstanding I will provide a long term outlook for our end markets first.
Follow from Covid, 19 will likely have a lasting impact on how we live and work. One thing is for certain Covid has been a catalyst for increased adoption of technology or clients are requesting fewer boots on the ground and 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.
As the economy recovers petroleum demand is set to rebound at a pace that is historically unprecedented.
And bind with anticipated regulatory compliance requirements and and aging infrastructure that has largely delayed maintenance over the last year increased activity levels and the second half of 2021 look promising and team expects to benefit from renewed activity over the next several years.
Third the recent power outages and Texas have proven that the energy transition will not always be smoothed and that increased inspection.
And mechanical services work is needed across many different facets of the energy spectrum. We expect there will be additional opportunities for team to provide asset integrity solutions to ensure greater reliability across the entire supply chain.
In closing 2020 mandated that we respond aggressively to countless changes involving health team and our clients do business and an extremely difficult operating environment.
Despite that backdrop and the related shock to the global economy. We responded proactively by quickly and decisively reducing our operating costs in order to maintain strong gross margins, while at the same time, making critical investments and technology and targeting and market diversification.
And the steps we took in 2020 have made team a leaner more efficient company that is poised to see solid revenue and further margin expansion as the global economy recovers.
Operator, I will now turn it back over to you for the question and answer session.
Thank you, ladies and gentlemen, and we will now be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad, a confirmation and total indicate your line is and the question too.
You May press Star two if you would like to remove your question from the Q.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the star key.
Our first question comes from the line of Stefanos Crist with CJS Securities. Please proceed with your question.
Good morning.
Good morning Steph.
So my first question is on AI.
Could you maybe walk us through your thought process on creating a new group and includes quest and maybe your goals.
For the new group.
Well, thank you Seth for the question.
It was it was obviously an exciting opportunity for us to really leverage the strength of our quest segment and one that we've talked about quite a bit over the last couple of years.
But in conjunction with that we see a lot of progressive change in the industry and with our clients around remote operations robotics, mechanical and pipeline integrity and we have a lot of the.
The subject matter experts engineering support material labs that allow us to really move beyond the discrete service offering and provide our clients a more integrated.
<unk> solution.
And offering for their for their critical assets and when we looked across the company and we started designing the new structure mid last year.
We saw the opportunity to really pull that together.
Quest will remain a segment and we will continue reporting quest and it will be the foundation of AIG as a group, but we feel that its AIB will bring us a lot of the new more progressive technology and innovation opportunities that will actually enable IHT and quest to be.
Successful so we'll be managing.
R&D budgets will be looking at technology as a percentage of revenue will be leveraging our technical support across the company through the AIB group.
And we feel that it's a really strong way for us to partner and further collaborate even more than we have and 2020 with our clients.
Sure.
And that sounds great. Thank you.
And then looking at the severe weather and Texas, obviously that delayed work as you know refinery shut down.
Can we assume that created a lot of work for you as well.
And the headlines pipes bursting other damaged the facilities is that what you are seeing have you been have you been able to quantify that.
And any details there would be great.
So you are right and it's I'm not going to say, it's similar to a hurricane but in response and I think and the and some of the southern States, where obviously a lot more used to hurricanes and then the types of freezes that we saw in and.
In February but yes post.
Some some clients try and get ahead of the game and prepare for it but in most cases.
Once the facilities.
Get through the storm period, there is a startup phase, we're seeing and increase in activity around our heat treating operations some of our machining and bolting operations some of our valves and other.
Other product.
And product lines as well.
It's a little bit too early right now on to quantify that we are we're obviously pulling all that together and we'll provide more color at the next earnings release.
Theres, usually a slowdown before it.
It does impact our nested operations because during the shutdowns obviously, they reduced the amount of.
Staff and employees on site, but then following that we see improvements and leak repair and some of the other areas that I mentioned.
Got it thank you and I will.
Jump back in queue.
Our next question comes from the line of Sean Eastman with Keybanc capital markets. Please proceed with your question.
Hi, Tim Congrats on.
And getting through a tough year.
The big accomplishments, let a lot of hard work went into these results.
So congrats on getting through that.
I guess just to start.
And so it sounds like the first quarter first quarter revenues are going to be lower year over year, but you said for the full year youre looking at 10% to 15% growth and.
And just given there's a lot of moving parts around the recovery and.
How how refiners are going to be running and dealing with.
Drawdowns, and and a surge and demand.
Little bit more color on how you see that revenue trajectory playing out through the year.
And would be helpful to understand.
Sure. Thank you for the comments, Sean So I think obviously, there's a number of moving parts and you are correct.
We do expect our Q1 revenues to be the lowest of the year and as we look forward however, and in on.
And some of the macro trends that we're starting to see I would say led by.
The improvements just overall and how Covid is being managed and how we're starting to see some of the restrictions.
Say more domestically by countries and internationally at this point.
Starting to be lifted and we expect that to continue through the first half that will be a driver for demand.
We did see that utilization rates of our refining business prior to the winter storms were and the 80, 182% range and historically that gives us a good spot as our company provides our services to our clients. It's a good balance between Capex projects.
High Utilizations and the need to do maintenance and other type of pit stops and those type of things so.
And we feel that if some if the utilization remains at 80 to 85 range and we start to see demand picking up and because of all the deferments from 2020.
Q2, and Q3 will be two strong quarters. There is always the risk and in Q4 of holidays and seasonal normal impacts, but as we sit here today Q1 is expected to be our lowest quarter progressively increasing from there and obviously, we'll get more color on how Q.
Four would play out later in the year as we get closer to that and we will have to stay close to our clients, especially with the holiday seasons.
Okay, Great and and then just as you prepare for a recovery and the top line.
Some temporary costs or some temporary cost reductions are going to come back into the system youre going to have to staff back up.
And I'm, just kind of curious about that.
And the available availability of labor.
And how tight the market is going to be looking as you look to support this revenue recovery and.
And I guess, what I want to understand is just what sort of the.
The underlying incremental EBITDA incremental.
Incremental EBITDA margin there is around the revenue recovery this year and maybe into next year in light of all those moving parts sure ill take the first part on just the labor pool, and then I'll have Susan and provide some color on some of the permanent variable costs et cetera, So from us.
From a labor pool.
We do feel that it will start to tighten and obviously with the growth I think it will.
Most companies have had to reduce head count.
As I've stated in the past we've maintained.
Especially through 2020, good contact and in many cases benefits health benefits with our technicians and we've stayed and very close contact with our casual labor pool, which allows us to handle some of that.
Flex up and flex down so I don't want to say, we've done everything we could because obviously it was a moving target, but I feel very confident that our districts our workforce management group and now our new group groups have really stayed in close contact with with the labor pool.
<unk>.
We are starting to get our training ramping up again and preparing for that that need. We're reviewing all certifications that will be expiring during the year and making sure. We have plans in place we are ready to start recruiting and also remote training as needed including international.
We obviously through Covid, we've learned to do a lot remotely.
So when I look at it I feel that the last two or three years of our workforce management function is going to be put to the test, but they've got some really good foundation to build off of and.
And I would add that we're working closely with our key clients right now.
To start trying to map out our utilizations are head count needs by certification class and making sure that we're able to balance.
And the activity that they see on the ramp up with what we're able to provide so it's going to be tough, but I feel much better going into this recovery mode with our workforce management group, two or three years matured than.
And then prior time within the company. So that's how I see it and I'll, let Susan talk a little bit about the cost side, yes.
On the cost side as I mentioned.
And kind of gave the color on permanent cost versus the variable temporary on the SG&A. We do anticipate as I mentioned $275 million to 290 million SG&A range and again, that's down $100 million since 2018, as we kick out 32% and <unk>.
$33 million and 2019 as well.
On.
On the.
EBITDA and the growth I guess, the gross margin, we still are anticipating we're going to be on line.
Exceeding the 28%, but in line with the gross margin percentages that we've targeted the 28% and overall on the EBITDA margin.
2019 had improved over 2018, I think from the low sixes and 2018 to close to seven just under seven about $6 nine and 2019.
And as we look to what's occurred.
Looking at those revenue levels.
In between that 2019 2020 levels as you look to 2018.
And would expect that EBITDA margin is going to be.
Some where in between 2018 and 2019, so definitely improving over.
2020 and.
Getting the benefits of the growth and revenue, but more on the low cost Foundation.
So again.
Probably getting more and between EBITDA and margin percentage.
And the 2018 level of I think like six two and the 2019 level of 6.9 or so.
Okay very helpful I'll turn it over thanks guys.
Thank you.
Our next question comes from the line of Martin Malloy with Johnson Rice. Please proceed with your question.
Good morning, congratulations on maintaining margins and a difficult environment and generating net free cash flow. Good morning, Marty. Thank you.
We've seen them.
A continued stream of projects.
Related to biodiesel and renewable diesel.
And refineries could you maybe just.
Give us.
Your take on on what that means to team.
Sure.
So you are correct I think theres been a lot of projects that have either been talked about sanctioned or started.
In terms of bio diesel or on the renewable diesel front.
Many of our large integrated type or large clients have have been working on those projects some of their facilities, either new build or some conversion facilities are.
And going to move down that path over the next couple of years.
For team, there's still a run and maintain component within the renewable diesel or biodiesel market.
So that's an area that we continue to target there is a focus in terms of.
Let's call. It a project capital type project in terms of conversion and obviously, if it's a new facility.
Working with either and EPC or others, then there is activity there within.
Many of our product lines like machining bolting inspection.
Heat treating and other areas. So when it's project based that fits right into no different than a petrochemical or a.
Our refining facility.
The damage mechanisms, we are still working closely to understand that.
A lot of our business is built off of corrosion.
And <unk> thickness losses, and those type of things when it comes to damage mechanisms. So we've got our engineering teams along with our labs working hard to understand the different stresses and.
Different damage mechanisms there is still going to be regulatory requirements that are needed and the bio market, which play in our favor when it comes to especially more of the regulated service lines. So overall, we have to adjust and.
In terms of what drives our business, but it's still.
Treated very much like a site and a facility where we're able to provide our specialized services, our engineering support lab support et cetera, too to the client and including some of our digital offerings and remote monitoring offerings as well so.
And we see a lot of our products and service lines applicable within that space.
Alright, thank you.
The next question I had.
Just related to.
The data the digital.
Efforts that you have the data portal the real time data could you maybe just talk about how you package that to our customers is a subscription service.
And then maybe if you.
You could look out three to five years, what do you think this means for the margins when you look at the asset integrity and digital segment.
Well first of all in terms of the data.
We've had to put data policies, obviously and place and I would say that many of our clients manner.
Manage it differently, but the big ways, we're trying to be agnostic in terms of.
And the type of data that we handle and the way that we handle it so that we can work with multiple systems. So that's.
One of our let's say guiding principles.
We can either support their critical asset data and quality assurance and quality control data on their behalf through on Ibms type system and then we can feed their asset integrity management systems with that data. So there is the case, where we manage it.
On a case where.
It can be cloud based and then there is the case, where we can provide it over to them.
Directly into their <unk> are there.
Asset integrity management systems. So we are trying to handle at this point all three because quite frankly, depending on the maturity of the client at this point, we have to do all three I would say that some clients are further progressed.
And their hardware and their programs and and the way they handle data and some need a lot more of our support, especially the mid tier group.
And we partner a lot closely to not only manage the data, but also provide them engineering support analytics and those type of things so.
And it is right now a work in progress now if I if I look forward from that though we do see a couple of things I don't think the labor rate buildup type model is going to go away and the next three years I think that Theres always a service.
Slash data or efficiency productivity piece, and I think thats I don't want to say business as usual, but it is there is another part where.
We move to more commercial models that allow us to drive efficiency.
To make sure that our clients are getting more risk based inspection and we're being paid for our services and our risk based inspection, where we can drive margin and we hope to do that with less cost obviously and then there's a third type which is the subscription model, where we're helping our clients manage products and assets and inventory.
And they can subscribe and be able to see their data their assets and then be able to make analytical either with us or on their own analytical decisions from that so.
Still work in progress but.
And we're getting very clear on the lanes that we want to we want to align our commercial models on and those three areas in terms of.
And the margins.
We didn't create AIB.
Group to dilute the company, we created it to really progress our margins and as I've stated led by quest.
Going to take us a little bit of time to develop some of the other product and service lines within AIG like mechanical and pipeline and others robotics. So we do have businesses. There today, we're not starting from scratch and as we continue to grow those.
And we expect that group will be accretive to our overall margins over the next three to five years and.
Not as strong as quest total, but definitely not dilutive.
To the company so that we're targeting that quest foundational margin and then being accretive to the overall company with the growth of that group.
Great. Thank you very helpful.
Our next question comes from the line of Brian Russo with Sidoti. Please proceed with your question.
Hi, good morning.
Good morning, Brian.
The 10% to 50% year over year revenue growth you expect in 'twenty, one and over 20.
How reliant if at all is it turnaround.
And in the latter half of the year per can.
Majority of that be achieved show strength.
Your nest and run and maintain and maybe some emergency call out work following the recent storms.
So Brian it's a good question and obviously as a company we've been not only driving revenue diversification by sector, but we're really pushing to maintain diversification by what we call operating model.
And our nest and operating model, which is the most stable and it is a growth platform and the most repeatable we expect that through the year, we will get back to 90% or better we're not there yet, but we expect to get back to 90% or better compared to pre COVID-19 levels.
Call out we do expect that to be a significant driver definitely over 2020, and reaching 2019 type levels because of the reasons you just mentioned as well as what we've talked about today on a lot of the deferred projects and utilization refining utilization going up quickly.
So call out we think will be the second one.
Projects and turnarounds are the ones, we're seeing the most volatility or I guess movement with right now.
Even just in Q1, we saw because of the weather things get pushed a few weeks. So it is expected to be about a third of our revenue overall, but we are having to.
Try and accounts for by working with our clients how much of it will land and <unk> versus <unk> versus <unk> and how much of it might push out so I would say that nested more stable best visibility call out we expect it to be over 2020 levels and more in line with 2019, and then projects and turnarounds or <unk>.
And between the two years right now from the current visibility and we watched that by quarter and then we watch it by half right. So we can monitor as things move around.
Got it okay.
And that.
Net.
Our experienced and Texas Gulf.
During.
That debt.
And may have caused some revenue degradation on the net.
Syed.
Ultimately lead to bigger.
Projects.
And just.
Customer activity on an ongoing basis from them.
Our proactive nature, rather than a reactive.
And in terms of storm restoration type work.
Yes, I think that there was a lot of learnings.
From the storms and.
As I've talked to some of the clients and as we've seen some of the emergency calls come in.
I do believe that we are going to continue to see for the next <unk>.
Three to four weeks startup type callout emergency services.
But I do also think that there is an opportunity in terms of preparation.
With our clients I think it's a little bit too early Brian two to highlight.
Do we play and that I do think that especially utility.
<unk> some of the gas providers et cetera.
We are looking at that right now and postmortem assessing what could have been done and preparation for the storm I believe that we play a role and that in terms of.
Preventative or preparation with them in terms of helping them prepare.
With their assets, but right now I think everybody is working really diligently to try to get their facilities back online first and then we'll we'll be able to look at that business development opportunity by collaborating with different sectors and I don't think it is just oil and gas I think theres petrochemical those refining.
Definitely power.
And definitely some of the renewable areas. So I think that theres multiple sectors that theyre going to look at things.
Bit differently in terms of preparation going forward.
Okay.
Okay, Great and obviously, you leveraged to the oil and gas and refining sector.
It's quite.
Quite meaningful and <unk>.
You mentioned diversification of sales and and strategy with the Internet.
And segment reorganization et cetera can you talk more.
And specifically, Bob Aerospace and defense going forward, which might be less cyclical.
And then the oil and gas.
And markets for you and then which seems to be a low single digit percentage of revenue on the renewables side.
Exactly what services are you providing.
In terms of the wind sector.
Sure let me start with the second part because it's a little bit quicker and then I want to address aerospace so on the on the renewable side and specifically wind.
We were mostly today, providing mechanical services around machining.
<unk> and <unk>.
And that's both on land and offshore we're providing inspection work rollback.
Rope access activity as well as robotic type work so well.
And we feel that obviously, the higher the corrosive environment, especially offshore the new projects.
And we're able to really support them when it comes to many of our product lines.
We are looking at what we can do from a lab standpoint material materials composite repairs and those are areas that we're already generating revenue from so I feel confident on the wind side that we can play within four to five of our product lines, including engineering and lab support.
On the aerospace side, we started last year and following our strategy sessions with our board that aerospace was an area that we feel confident we can expand organically at this point.
We are investing.
And a center of excellence and expanding our capacity in in the Cincinnati area. We have other operations across the U S. That would then support that center of excellence as well and we have some training and service offerings and also in the Central Europe area. So we are in the process of.
Of expanding that facility state of the art.
From from chemical etching to inspection work and starting to build out our aerospace business line, which will reside under the IHT group in terms of the recovery, obviously, we feel that the international travel will be the slowest to recover but defense military.
Domestic travel we feel we're in a good spot right now that once we complete our project late this year and early next year, we will be able to take advantage with some some stronger contracts.
Growing market share and and then obviously subsequent to that the international market growth.
It's a focus area for us it has been and now we're actually investing.
One of our larger investments.
Along with quest when it comes to a capital standpoint.
Okay, Great that's helpful and then.
Earlier, there was debt.
While all this new route on changes in December it is.
Coke light gives you a lot of flexibility.
There is leverage ratio.
Measure.
And that's calculated and I think you said on the.
Quarter of 2000, and can you just specifically what that leverage ratio.
Okay.
And Brian and I apologize I may not have.
Caught all of that but with respect to the.
The ABL it is really in current space.
Clients with fixed charge coverage ratios.
And that has to be net and <unk>.
And at a minimum of one times and that's just.
And again more on current based on what you can do with other debt or acquisitions et cetera. So very very I would say from maintenance covenants from that standpoint on the term loan and the covenant ratio is that net leverage ratio it comes into effect.
At the end of Q1, so the first time March 31, 2022, and it is set at seven times, so that we would need.
Need to be below seven times net leverage ratio.
Okay, and then just lastly.
Looks like the majority of your 2020 free cash flow.
Derived debt.
Fourth quarter and I'm curious with the cares Act.
And with.
Some payroll tax type deferrals, which supported cash flows during the fourth quarter the kind of reverse maybe.
And maybe over the net.
In 2001 and 2022.
Aware of debt.
And kind of assume and then.
2021, and free cash flow guidance, yeah. So.
From the standpoint of the employer match payroll tax deferral.
And it did go into effect.
In March and April essentially and some carried throughout 2020.
We did defer approximately I would say about $14 million.
U S employer payroll tax match and 50% of that will be due by December 31, 2021, so half of that $14 million and then 50%.
At December 31, and 2022.
Alright, Great and then just lastly.
The biofuels transition and the inner transmit transfer just mentioned earlier.
And specifically at the refineries.
And does this create.
And a new opportunity for team or is it just going to displace other.
Work, you're already doing at.
And the refineries in terms of NTT type inspection.
Well, if it's a converted facility it would be a replacement if it's a new sanctioned project, obviously it would be new activity.
And as I've said before looking at damage mechanisms, we feel from an engineering lab.
Support standpoint that could create some new opportunities for us, but it just depends if its an existing conversion or if it's a new project.
Understood. Thank you very much. Thank you. Thank you.
As a reminder, it is star one to ask a question. Our next question comes from the line of Kevin <unk> with Thompson Davis. Please proceed with your question.
Hi team.
Kevin on for Adam.
Hi, good morning.
Most of the questions.
And I answered, but ive got some.
And some modeling based ones and I'd like to go over.
Interest expense for 2021, what's that look like.
So.
Our interest for 2020 was approximately just over 29 million so under $30 million.
As we have.
And increased our interest.
Level at percentage Wise and also we did incur more financing cost associated with the capital and restructure and the original OID associated with the term loan it won't all be cash and nor was the 29 from 2020, but we.
I would estimate probably around the 35 to 38 million and $36 million to $38 million interest expense on the P&L for 2021.
Okay that helps and then I wanted to maybe cover a little bit more on the cash flow too.
There is a particular range that youre looking through for 2021, Yeah for 2020, I mean, obviously, we did have a record free cash flow and that was.
Driven by.
Even as Brian mentioned, we had the deferred and employer match on payroll taxes, but it was really driven by the activity levels with the business. So.
Is that revenue is coming down we do generate more free cash flow generally because we're not incurring the cost ahead of the receipts coming and so what you saw in Q4.
And we also saw it in Q2 of 2020 that and Q4, the significant generation of free cash flow and Q4, it was really driven by.
Those revenue levels, not going up and not being able to really get the collections and on our outstanding accounts receivable.
And in greater amounts than the net revenue. So those amounts were coming and plus we werent having the cost.
The revenue so as you look to 2021 and the revenues ramping up.
Looking at pretty significant need on working capital as those costs will go out ahead and generally.
<unk> and even 90 days before we get the collections and the door.
And we.
Ted that we anticipate positive free cash flow.
Probably.
We wouldn't expect to get to the levels.
2018 on and free cash flow, which we're right around $15 million, but probably more closer to $10 million or slightly less.
Yes.
Okay that helps thanks.
Keith.
And I think that's all I've got.
There are no other questions in the queue I'd like to hand, the call back to management for closing remarks. Thank you. Doug we are extremely proud of what our organization accomplished in 2020, which would not have been possible without the commitment and dedication of our people.
Throughout 2020, we were proactive in taking a number of deliberate steps to prepare for the recovery cycle team expects to benefit from the delayed and deferred projects and our 2020 and accomplishments as well as our recent actions to scale and streamline the business have positioned the company for growth and 2020 and.
Beyond thank you for joining us on this call and for your continued interest and team. We look forward to speaking with you again next quarter.
Ladies and gentlemen, and this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
Yeah.
Yeah.