Q1 2021 Team Inc Earnings Call
[music].
Greetings and welcome to the team Inc. First quarter 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. If anyone should 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. Mr. Smith, you may begin.
Thank you Devin and welcome everyone to team's first quarter of 2021 earnings Conference call with me on today's call Ray Marino Gaudy, 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 at <unk> Dot com.
Information recorded on this call speak only as of today may five 2021. 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 team dotcom and <unk>.
A telephonic replay will be available until may 12th the information on how to access. 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 Litigation Reform Act of $19 95.
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 materially from those contained in any forward looking statements.
These factors and other risks and uncertainties are described in detail on the Companys annual report on.
Form 10-K, and in the company's other documents and reports 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 and Marina will begin by highlighting significant events in the first quarter and providing an update of our business. Susan will then detail on our results and before we take your questions and Marina will discuss the company's outlook I would now like to turn the.
Call over to Amrita. Thank.
Thank you, Kevin and good morning, everyone when.
When we look back to more than a year ago. The entire world was confronted with a health crisis like no other the.
The difference today is the recovery cycle is more visible.
When compared to the economic uncertainty that we face them.
The acceleration of the vaccine rollout is having a positive effect on the U S economy.
While COVID-19 hotspots remain around the world. We are seeing signs that people are gaining more confidence to be active in their communities and increasingly traveling away from home.
We expect higher demand for petroleum products as more parts of the U S reduce COVID-19 restrictions supporting improved margins and cash flow from many of our clients. While our outlook is improving we faced numerous headwinds in the first quarter as we stated on our earnings call in March we expected the.
First quarter revenues would be in line with the fourth quarter of 2020.
Seasonally the first quarter typically starts off slow as our clients undertake internal budgeting and scheduling from maintenance and capital projects. However, the normal increase in activity that we see in February was negatively impacted by the unprecedented winter storms that resulted in large scale power outages across the Midwest.
And golf coast.
The shutdown led to a loss of approximately 6 million barrels per day of refining capacity and force roughly 60 petrochemical plants to go offline for several weeks.
Which reduced our nested activity and caused lengthy project delays inner.
Internationally, we also faced headwinds, especially in the U K and parts of Europe from re imposed COVID-19, Lockdowns that limited travel and necessitated quarantine restrictions.
March was an entirely different story activity picked up significantly as our clients return to a more stable operating environment billable hours in our IHT and MS segments increased by over 40% from February levels, We performed more call out work and started several large turnaround on capital projects.
These higher activity levels continued throughout April and into May as our clients began to allocate their capex dollars to delayed projects and turnarounds I will share more about our outlook later in my prepared remarks.
Now turning to our financial performance consolidated revenue for the first quarter of 2021 was $194 $6 million down 17, 8% from the same quarter in 2020 as I mentioned earlier the year over year drop in revenue was attributed to the negative impact of the COVID-19 pandemic.
And activity declines due to the February winter storms.
Gross margin was 22, 5% slightly below the prior year quarter margin of 24, 3%. The margin was impacted by a partial reinstatement of the pre pandemic cost initiatives lingering COVID-19 pricing concessions, a lower mix of high margin services and increased training and.
Vacation spend versus the comparable quarter in 2020.
Adjusted EBITDA decreased by $1.4 million in Q1, 2021 over the same period in 2020.
As a result of disciplined cost management, we limited our adjusted EBITDA decremental to 3%, despite a $42.2 million year over year reduction in revenue.
Turning to our segment overview, beginning with mechanical services, our business was negatively impacted due to the February winter storms, but demand for our emissions control services and leak repair worked improved in March when those plants and facilities came back online.
Our EMS technicians rapidly responded to the extreme weather events, along the Gulf Coast completing emergency work for 32 clients.
S used its new modular plant design.
Quickly deploy an off the shelf solution repairing damage caused by the freezing temperatures teams proprietary leak sealing solutions have resulted in several long term contracts and we're currently bidding on additional opportunities.
MFS experienced year over year growth in the areas of nuclear mineral extraction, and steelworks power utilities tanks, and terminals and marine and offshore operations. As an example, <unk> recently completed the first stage of work to support and offshore production expansion project in the Caspian Sea team.
He was hired to inspect and machine in oil rigs skidding system in order to meet tight tolerance requirements. Our technicians were able to reduce variances of the system's movement by using field machining laser trackers on three D imaging team expects to use its metrology solution throughout the remainder of the project, which is scheduled to be <unk>.
Completed in mid 2020.
Inspection and heat treating performed relatively well during the quarter due to our run and maintain activity while revenue was down year over year, even with the winter storms. It was largely in line with our forecast as the economy continues to open and plant Utilizations rise we have seen a steady increase in the demand for our technicians.
<unk> are nested operations are currently running approximately 90% of pre COVID-19 utilization levels.
IHT margins were above our expectations in February and March when followed from the winter storms drove an increase in heat treating work, we completed heat treating jobs at six facilities, where team had previously not performed similar work highlighting the success of our cross selling capabilities and opportunities to capture market share.
IHT experienced year over year growth in the areas of chemical and petrochemical pulp and paper food and beverage and aerospace in February our heat treating service line completed emergency call out work in the Gulf region on a water piping system was frozen due to extreme winter weather the agility of.
Our work force management function allowed us to quickly mobilize within 24 hours the necessary technicians on equipment in order to follow the product line tank and other piping ultimately returning our clients plant to normal operations.
Integrity as revenue growth continues to be impacted by sluggish industry activity and COVID-19 related restrictions.
Similar to the EMS and IHT segments.
The activity levels improved significantly in March as these restrictions began to lift revenue increased by approximately 40% over the January and February averages activity levels further increased in April and we continue to see growing demand, including offshore inspection projects.
During the quarter quest inspected a small diameter offshore pipeline in southeast Asia. The project required a customized tool capable of providing high resolution images and functionality and multi diameter lines with a single launch.
Quest inspection tool can transition from small diameter to a connected large diameter pipeline and has the durability to run over long distances. We expect this differentiated technology will open other subsea pipeline markets that were previously considered non inspect the bowl.
<unk> is currently pursuing similar lines on the Gulf of Mexico, and the North Sea.
From a geographic perspective, despite the COVID-19 related challenges that have limited our ability to travel to client work sites, we realized year over year growth in many parts of the world.
In Canada, our efforts to improve workforce utilization and drive down indirect costs allowed us to expand our gross margin and deliver a higher year over year. Adjusted EBITDA. Additionally activity levels increased in March as we started several large tar sands turnaround projects, while some provinces are deal.
With COVID-19 outbreaks, and Lockdowns, which could impact the second quarter activity, we expect to be at or near pre pandemic activity levels in the second half of the year.
Europe also delivered year over year growth as increased Utilizations and greater cost controls drove an increase in year over year adjusted EBITDA. The middle East remains volatile as Qatar, Oman, and Kuwait are expiring are experiencing COVID-19 spikes, however, as economic activity increases.
Due in part to the increase of oil prices team continues to win new business in the region. We recently completed a leak sealing repair project on our pipeline in Qatar and we're awarded a long term contract in our valve management solutions business at a power plant in Jordan I will now turn it over to Susan for a more detailed financials.
To review Susan Thank you on Marino and good morning, everyone. I will review, our first quarter financial performance and quarter over quarter comparisons Zane Marino mentioned, our first quarter consolidated revenue of $194 $6 million was down $42 $2 million or <unk>.
<unk>, 8% decline from the first quarter of 2020. This is a tough year over year comparable given that the COVID-19 pandemic did not impact operations until late March of 2020, as well as no comparable winter storms with the freezing and record breaking subzero temperatures and debt first.
Quarter of 2020, the revenue decline was consistent with what we have seen unexpected since the onset of the pandemic, except for the severe negative impact associated with the weather events during the quarter for the quarter. All three operating segments were down in revenue as compared to Q1 2020.
With the largest overall percentage decline in quest and the largest revenue dollar decline in mechanical services.
However, on a positive note inspection and heat treating delivered a one 6% sequential revenue growth in the first quarter as technician activity hours increase that nasty client sites on a percentage basis IHT posted a 15, 5% year over year revenue decline in the quarter while in asthma.
Down 16, 4% Inc.
<unk> was down 34, 2% consolidated gross margin for the first quarter 2021 was $43 7 million or 22, 5%, which was slightly below the same quarter a year ago of 24, 3%.
Majority of the temporary cost reductions that we enacted last year were rolled back and throughout the first quarter of 2021, we continue to remain focused on managing our variable costs to scale with increasing market demands on activity levels. The first quarter net loss was $34 $3 million when compare.
To a net loss of $199 $7 million in the prior year quarter, the comparable quarter in 2020 included $191 $8 million pretax non cash goodwill impairment charge.
Adjusted net loss, a non-GAAP measure was a negative $29 $8 million or 97 cents adjusted net loss per diluted share for their first quarter of 2021 compared to an adjusted net loss of approximately $18 million or 59, adjusted net loss per diluted share the same core.
In 2020.
Adjustments in the first quarter included approximately $3 $6 million of professional and accrued legal fees and costs from just over $2 million of severance charges, which were primarily associated with our operating group reorganization.
Consolidated adjusted EBITDA for the quarter was a negative $5 $3 million as compared to the prior year quarter of negative $3 $9 million. Despite realizing a $42 $2 million decline in year over year quarterly revenue, our adjusted EBITDA decremental fall through was limited.
Approximately 3% with a minimal $1 $4 million decline this day.
Administratively effective results of our permanent cost actions taken in 2020 as discussed on our fourth quarter earnings call. In March we had benefited significantly by the permanent removal of certain structural cost during 2020, providing a more agile structure with higher margins as we move throughout 2020.
One with increased revenue and an increased fall through to our bottom line selling general and administrative expenses were down nearly 16% from the year ago quarter. Our total SG&A cost for the first quarter of 2021 was $66 $1 million.
Down $12 $3 million from the prior year quarter SG&A costs were up sequentially from the fourth quarter by approximately $3 6 million as certain temporary cost reduction actions taken out.
As certain temporary cost reductions taken out at the inception of the pandemic began to be restored in January and were layered in throughout the first quarter, such as salary debt reductions and increased <unk> related sales investments.
All salary reductions have been reinstated as at March 31, as I mentioned during our prior call more than half of the SG&A savings. We realized in 2020 were permanent in nature, We do expect to see an increase in SG&A throughout the second quarter of 2021 as the impact of restoring the temporary cause.
Cost reductions only partially impacted the first quarter numbers, we continue to expect our full year 2021, SG&A cost to be in the range of $275 million to $290 million in the first quarter, our corporate adjusted EBITDA improved year over year by over 5 million.
We're at 24% improvement interest expense was approximately $9 $4 million.
$2 $6 million.
We expect that our interest expense will be between $9 million $10 million each quarter in 2021 now.
Now turning specifically to our segment performance. The ICU segment reported first quarter 2021 revenues of $991 $1 million down 15, 5% from the $107 9 million posted in the same period last year. However, IHT continued to show improved.
Sequentially. Despite the challenges presented during the quarter revenue increased by one 6% sequentially first quarter adjusted EBITDA was $4 $3 million up 680000 over the prior year quarter adjusted EBITDA margin increased this quarter to $4 seven per cent.
As compared to three 4% in the prior year quarter.
Mmm segment reported first quarter 2021 revenues of $87 $4 million down eight 4% from $104 5 million in the first quarter of 2020, adjusted EBITDA was $5 $7 million in the first quarter of 2021.
Down from the $6 6 million earn.
Same period last year.
Adjusted EBITDA margin, though increased this quarter to six 5% as compared to six 3% in the prior year quarter.
Quest integrity revenues of $16 $1 million were down 34, 2% from the prior year period of $24 $4 million.
First quarter adjusted EBITDA was 669000 down from 7 million in the year ago period, adjusted EBITDA margin was four 2% compared to the prior year quarter of 28, 6%.
<unk> remained more severely impacted by the Lockdowns and quarantines travel restrictions quest first quarter 2020, though was a record quarter and it's a difficult comparative without having suffered any impacts of COVID-19 during that period, and additionally, being on a record quarter.
As expected during the first quarter 2021 cash flow from operations was down significantly as we funded the increased working capital demands associated with the revenue growth and increase in activity levels experienced in March our cash flow from operations for the quarter was a negative $17 two.
Our free cash flow was a negative $26 million, which included $3 $4 million of investment in capital expenditures, our full year 2021 capital expenditures forecast is approximately $25 million as activity levels continue to grow.
We'll see increased working capital demands, although the magnitude of working capital change is difficult to forecast at this time, we expect to be free cash flow positive in 2021, we will actively manage capex and discretionary spending accordingly to align with our business growth opportunities throughout the year.
Or any unforeseen challenges that may arise last December we refinanced our capital structure, which gives us sufficient liquidity to support both our working capital needs and our immediate growth priorities. We ended the first quarter with $22 $3 million of cash borrowings under our ABL facility were 28 million.
We had total liquidity approximating $69 million at March 31 cash interest for the year is expected to be approximately $26 million to $28 million. While we are confident that business conditions will improve this year, we are maintaining our focus on the discipline that has enabled us to overcome the many.
The challenges of the past 15 months. This includes a focus on returns and cash flow enhancing synergies and greater efficiency. Among our business groups, we continue to standardize and optimize our processes and back office procedures to deliver further overall improvements to our working capital and generate free cash flow.
<unk> pay down debt that completes the financial review I will now turn the call back over to Amrita. Thank you Susan before we take your questions I will provide an overview of the macro market trends on update on our market positioning, including the transition to our new operating model and a review of our business outlook.
Starting with the macro environment, the economic recovery, which is clearly visible is not playing out evenly across the globe vaccination rates are rapidly increasing in the U S and U K, while hot spots continue across India, and Brazil with vaccination rates, increasing consumption on global economic activity has improved.
<unk> and we expect the pace to accelerate in the U S. The prolonged refinery shutdowns in February led to historically high drawdowns of petroleum product inventories. The economy is also rebounding achieving six 4% growth in the first quarter. The best period of domestic GDP growth since the third quarter of <unk>.
2003, as COVID-19 related restrictions are lifted people are driving more and returning to their workplace, resulting in a growing demand for gasoline in fact on a four week average basis gasoline demand has increased significantly and is now only 5% below the comparable period in 2019.
With this demand above pre pandemic levels the.
On the drawdowns and the increase in demand has improved the overall refining outlook refining crack spreads are currently above the comparable period in 2019. The ryzen refining margins has led to an increase in volumes with refinery utilization levels, increasing from a low of 56% in February two.
Approximately 85% currently.
We're also monitoring proposed government policies and spending plans, we anticipate increased regulations on the energy sector and a renewed focus on the reduction of greenhouse gas emissions as we shared on our inaugural ESG report published last November team has a long history of assisting clients with emissions control service.
As through leak detection emissions monitoring and repair work among other services. We continue to innovate in this area and plan to share updates on these solutions in future quarters.
Perhaps the most impactful change is the proposed two five trillion dollar infrastructure spending bill under by this current proposal, we have identified over $500 billion of end market opportunities, including transportation water infrastructure and clean energy team is active in these industries.
Its inspection work on stream repair heat treating services and asset integrity management solutions as the infrastructure spending materializes, we are well positioned to benefit from a portion of these expense expanded government funded projects.
Combined with the improving economic activity increased environmental compliance requirements and the potential for historically large infrastructure spending we expect activity levels over the next several years to be strong.
To prepare for the economic recovery, we have shifted our one team strategy from targeting operational efficiency and cost reductions to a new phase of the one team program that will be focused on enhanced service capabilities sector diversification and profitable revenue growth as part of the.
<unk> to the next phase of one team, we announced our new strategic organizational structure in January the structure is designed to accelerate global growth with a greater management focus on improving operational and financial performance during the quarter, we implemented the new organizational structure across all levels of the company.
<unk>, including moving to a collaborative regional sales model with centralized operation support and shared services.
Another part of our new externally focused one team program as our revenue diversification initiatives over the last two years, we diversified our revenue streams and expanded our operational footprint into new end markets.
Currently 35% to 40% of our revenue is attributed to the refining sector.
Proximately another third includes power and utilities midstream and chemicals, and roughly 30% is emerging and growth sectors like infrastructure renewables and aerospace. We expect this last group will outpace the company's growth profile over the next several years.
One area, where team has organic growth opportunities as our aerospace business line.
Domestic air travel is rebounding, which is increasing the need for inspection as planes that have been idled for many months are returned to service economists expect air traffic to reach pre COVID-19 levels in mid 2022, and we're starting to see new plane orders from several large airlines, which will increase the need for inspection.
<unk> on Newbuild engines, our aerospace business line was recently awarded an expanded.
Spectrum services agreement with a major component supplier of new engine parts. This agreement includes a significant increase in inspection activity throughout 2021 as the airline industry recovers.
We are excited about our future growth under the new group model.
As a leading service partner team is well positioned to provide integrated and innovative solutions to our diversified clients, which includes supporting the energy transition.
Turning to our business outlook on the year end call I mentioned, we could see light at the end of the tunnel, but as the first quarter reflects the path will not always be a smoothed one today as we move closer to the end of the tunnel. We are more confident in the timing of certain projects on our core markets specifically refining.
Chemicals and petrochemical.
Despite the slow start to the year, we expect the first quarter will be the lowest revenue quarter and given the outlook for Q2 and the second half of 2021, our full year revenue expectation remains at 10% to 15% higher than 2020.
As mentioned earlier in order to plan for the anticipated ramp up in activity, we began to reinstate some of the variable cost reduction actions that were implemented during 2020. We also increased our investment in technician training and certifications during the quarter. We completed approximately 27000 training hours, which is up.
Up 35% from the fourth quarter.
These investments put us in a better position to maintain our high safety standards and gain market share when the labor market tightens later this year, even with a tightening labor environment and these reinstatement we remain focused on margin expansion and expect our full year gross margins to be in line with the <unk>.
Prior two years.
Looking ahead, given the large number of aging assets across the industry.
Postponement of facility maintenance deferrals of plant turnarounds and delays of new capital projects as unsustainable team's portfolio of operational and technical capabilities supports our clients large capital projects and smaller pit stops are balanced operating model roughly split across <unk>.
<unk> project in turnarounds and call out work allows team the agility to successfully complete compete in the dynamic environment.
In addition, we continue to invest in the future as teams growing technology and digital portfolio is extremely beneficial to our clients. These advancements allow our clients to remotely access order information and receive real time updates about inspection and repair work, we have the capability to provide predictive risk.
<unk> inspection analytics and monitoring, allowing our clients to optimize their asset performance as clients continue to look for more accretive services with an integrated service provider are critical asset solutions and advanced technology applications will drive further collaboration these integrated did.
<unk> enabled solutions support a balanced mix between desktop inefficient field based work while simultaneously ensuring we remain the service partner of choice.
In closing with the post pandemic recovery in our line of sight. Our teams throughout the world are acting with a sense of urgency we are focused on capturing available opportunities, while driving profitability and improving results. In 2021, we will continue to invest in our people expand our.
<unk> digital portfolio and deliver top quartile execution excellence.
Most importantly, we have not lost sight of our number one core value safety first and remain dedicated to operating in a safe and reliable manner, each and every day.
We will continue to demonstrate the same relentless discipline that helped guide us through 2020, operator, I will now turn it back over to you for the question and answer session.
Yes.
Thank you we will now be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is on the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Our first question comes from the line of Martin Malloy with Johnson Rice. Please proceed with your question.
Good morning.
Marty.
I just wanted to ask about the.
The trends during the quarter. It was about a third of the way through March when you suggested that the first quarter revenues would be roughly.
Roughly in line with the fourth quarter and yet they were down 6% you seem pretty happy with the trends during March and from.
Lots of press articles and it seemed that there were a number of plants along the Gulf coast, because they shut down quickly during the winter storm that they were having trouble ramping back up and I'm, having trouble with their.
Their pipes not not flowing.
It seemed like debt would be exactly the type of work that it would be higher margin work for a company like team. So I guess can you maybe talk about what happened there in March and and maybe I'm missing something.
Well I think we were expecting the first quarter to be our lowest quarter of the year and I think that coming out of the holiday season, and moving into the turnaround season.
During the the.
The close of our February and March call.
A couple of things occurred one is that we did have a period of time seven to 10 days of downtime during certain or through certain divisions and regions that ended it ended up impacting our nested revenue for example, which it doesn't get recovered.
Ram backup excessively to make up the nested revenue.
The seven to 10 days, obviously also delayed our turnaround startups of the season and as clients had to push their turnarounds out two to three weeks.
Due to the weather that pushed us further into Q2.
Which will carry us deeper into June basically so.
As we as we looked at the quarter at the time of the last call.
We were still putting together I think as we stated what we expected the revenue impact to be power on stream services and heat treating and other <unk>.
<unk> lines that you are referencing that benefit from from the weather impact how quickly that would recover and when you. When you put all that together I think between the project delays.
And the and that seven to 10 day shutdown Inc.
Including the impact Marty of Quest strike the quest revenue.
January February.
Some of those projects got pushed into March that we expected would have been completed.
With some of the continued lockdowns that got pushed into Q2. So when you add all that together, we're looking at about $10 million on weather and another $5 million to $10 million on on quest that we just couldnt recover before the end of the quarter.
Which got pushed into into Q2 and some into <unk>. So that that kind of makes up that 15% to 20. Susan did you want to add anything no I mean, absolutely. We didn't have all the numbers at the time, we had the call with respect to the index to the weather but.
<unk> was a significant factor in and continuing to see the delayed projects occurring with them in February and in March.
Okay.
And then my second question.
Labour market.
Could you maybe talk about availability, what youre seeing there any any pockets of labor cost increases and what youre doing to mitigate that I think you know.
Going back a couple of years ago. When there were periods of labor cost increases it sometimes took you all a quarter or two to.
To.
Pass that through.
Well, it's a good question Marty I think the labor market.
I would say is a little different based on region and division in terms of how tight it is right now and also on job type.
So there is pockets that are tight today and there's pockets that we expect to be tight.
Going into the second half so in terms of when you look at COVID-19 pricing and trying to recover some of that I think right now we're still in that COVID-19 pricing.
We called it lingering COVID-19 pricing, but we're still in negotiations and when these COVID-19 price has come to an end with a lot of our large clients concessions.
We see the labor market extremely tight at least through.
May and into June.
Over the summer months, it could relax a little bit and then regained tightness going into Q3. So I don't think we're in a fully maxed out mode. Yet we have ramped up our training our recruiting.
We are working at pretty high utilization levels, we're starting to recruit more on the sales and account management front.
But the indexes that you referenced in terms of going back to our clients and pulling that back generally does lag.
At least a quarter.
Or so.
And that's the phase we're in right now you know I would expect that through Q2.
We'll be in a much better position to to start calling back some of the pricing.
Concessions and its not just labor right its raw materials logistics.
It's that whole index of cost to support the pricing recovery.
Okay.
Thank you very much thank you Marty.
Thank you. Our next question comes from the line of Adams on Meyer with Thompson Davis. Please proceed with your question.
Hey, good morning, guys good morning.
Arena I guess can you give us a little bit more detail on what youre seeing in April.
And a sense for how confident you are that that continues for the rest of Q2.
Sure. So when you look at April and into May and our current visibility with the delayed projects that I was just mentioning with Marty that pushed into the second quarter.
We feel that going into mid June timeframe.
We've got turnarounds that are that are happening in that because of the delay they'll continue into that mid June timeframe. We are seeing activity improvements in inquest, which includes some offshore operations and international operations.
I think may and first part of June is at least the calendar right. Now is is looking good.
Nested I think we've reached a non.
90%.
Level. If you will we are adding technicians on a week by week basis, and our nested I I would expect to see another couple of percent improvement towards pre pandemic levels, there and and when you look at the on stream side.
And markets like petrochemical where margins are extremely high and capacity is very.
Very much in demand I do expect to see our call out mechanical services work are on stream services work.
Continued fairly strong going into the summer months.
I think we've got fairly good visibility on nested.
To see a few points improvement versus pre pandemic projects and turnarounds I would say going into early June to mid June.
Cause of the delay continue to be strong at this point.
And and call out I think driven by on stream.
We've got projects in manufacturing and engineering visibility at that point and assuming there's no other international type lockdowns restrictions et cetera.
We expect April March and into June request.
We will have we will have some stronger months.
But what do you think about margins at quest.
Susan do you want to take that one.
So.
Yes.
Obviously class has always had had the higher margins.
We have and as we've mentioned before been able to take out the cost to debt balance with the.
Uh huh.
As we've been able to do with IHT NMS. So I mean, we are seeing obviously improving margins.
And would expect.
We're not going to get back to the.
Kind of the full pre pandemic margin level, just given where we're at with Q1 that would be expecting to get.
Get back more to closer I think we've.
I have always looked at kind of at 25% on average type.
Type of margin, so I do feel we'll get closer there, but not completely back there by the end of the full year.
Okay that makes sense and then another one for you Susan on I can't really find any covenants that kick in until early next year is that right on the new credit facility.
I mean, that's accurate with respect to the.
The term loan net $250 million term line debt first Kevin on it.
It does come into play at the end of Q1 2022, and that's the net leverage covenant.
Seven times or below and with respect to the ABL there in current space and it's a fixed charge coverage ratio debt again, it is only utilized to be able to incur other requirements.
And also looking at if you drop below a certain level of availability, but.
Yes, generally no covenants.
Throughout 2021.
Understood. Okay, I'll turn it over thank you. Thank you.
Thank you. Our next question comes from the line of Stefanos Crist with C. J S. Securities. Please proceed with your question.
Good morning.
Good morning.
First question could you maybe talk about your confidence in the 10% to 15% revenue growth.
And maybe your visibility for the rest of the year and how much of that 10% to 15%.
Based on turnarounds.
Sure so.
Obviously with.
With turnarounds I mentioned it in my prepared remarks, when you look at projects and turnarounds. It's about one third of our of our revenue split.
In terms of operating models, so nested approximately a third and then call out approximately a third.
I think that the turnarounds that got pushed out from 19% to 20, and then 'twenty into 'twenty one.
At least within the first quarter and first half sorry.
We've got pretty good visibility right now because we are either staffing on the turnaround increased discovery work et cetera. So the the first half specific turnaround portion is quite clear.
There still continues to be some moving parts in terms of discovery and when the turnarounds will officially end.
Getting ready for the summer months, but most of that.
I'd say it should be positive uplift not negative for the first half in the second half.
We're still working with our clients obviously for some of the turnaround plans the size of turnarounds I think that assuming the economy continues to improve and our clients continue to have to deal with some of the regulatory work.
Work and some of the large unit type work.
I do expect that the turnarounds will occur in many cases, I think some could push out but its more stefan on the size of the turnaround do they do it as a minimum pitstop or do they do it as a full scale turnaround in and that's the part we're working with our clients on how much of it is online how much of it is offline. So.
Think that H one at this point is pretty clear with maybe some discovery.
Outside H two I think we've got pretty good clarity on the turnarounds that have to occur.
And working with our clients on the size of those turnarounds and the timing I think there is always a probability that some of those turnarounds could get pushed out of the back end of the year.
So we're obviously monitoring that we're leveraging.
Variable labor for the turnarounds as well so that we don't over inflate our cost base with with full time technicians. So we maintain our variable pool.
And really we maintain that for the turnaround season. So.
I would say good confidence in H, one and.
We're working on finalizing our are scheduled for the second half right now.
Perfect. Thank you.
And then just one more from me on just the cost savings. So I think last year. It was.
Around $110 million from one team are you comfortable there in 'twenty one are there any other.
Areas for cost improvement.
So so.
So Stephanie.
I'll take that.
Youre accurate it was 110 million cost reductions.
In 2020 that were pretty much split evenly between our SG&A.
And our operating costs within the gross margin.
Sure.
Those were.
About 40% permanent and 60%.
Variable on a temporary so as we're looking at 2021, we have rolled in.
Throughout 2021.
Most of it.
Temporary cost reductions so youll.
Youll see an increase going into Q2 as they are in for a full quarter.
Also say that in January.
We rolled out had.
Only about $5 million on indirect cost.
As we were planning for a pretty robust February and March.
Those were brought in earlier than had we known what was going to occur with the weather, but as we look to 2021, specifically on on the SG&A side, We've said we're estimating.
Between $275 million to $290 million I would say that's net.
Closer probably to that.
And all of that on <unk>.
Reality that to 90 would.
To reach that if in fact, we did invest a lot more as the company was growing.
R&D or the selling side, but.
There are opportunities that we're still looking at I would say with both indirect and SG&A.
We haven't really built into our own analysis, but it would be continued looking at facility with the new group.
Reorganization looking at other facility costs reductions and.
Continuing to look at optimizing our head count levels on more.
Not the selling but that other <unk>.
SG&A costs related items, so while we haven't built it in.
There are always opportunities that we'll continue to look at.
Great. Thank you.
Thank you. Our next question comes from the line of Sean Eastman with Keybanc capital markets. Please proceed with your question.
Hi, everyone. Good morning, good morning.
And then.
So clearly a slow start to the year here, but it's definitely noteworthy that you've maintained.
The full year outlook on both revenue and margins I just wanted to understand.
What gives you the confidence there is it is it that a lot of the the one to Miss was just delays that are going to be made up in subsequent.
Quarters. This year, and then maybe combine that with a debt a bit better visibility around.
On the recovery or or or is there something else maybe knew that that is helping make up for the slower start, but maybe I haven't captured there.
No I think your first part Shawn is as accurate when you look at the Q1.
Mrs.
Clearly you know as we've stated here through the prepared remarks and in the first few questions.
It comes from two main buckets, which is a is really the weather impact and.
The slow start primarily January February request those are the two top line as we we don't feel that.
When you start looking at how we have built out our plan for the year I would say that we expected a slow start but those two are the or the Mrs. We do expect.
Again when.
When you look at the range we've provided.
10% to 15% there are some some areas with regards to quarantine.
And travel restrictions being lifted for segments like quest when you look at the economy and the demand for Opex spend.
More on stream services that drives a call out for us when you look at states that are moving at least in a positive direction like California in terms of opening things up that drives some of our nested recovery you know on so we're at 90%. So when you break it down by operating model by.
<unk> outside of the those two main Mrs. This year in January February on.
Our plan is still primarily intact I think things will continue to move quarter to quarter and half to half. So when we look at age two.
It's going to be more of does anything slide out of the back end.
Because of labor or because our clients decide to punt it to 2022.
Those are always going to be risks, but as we sit here today.
We feel that our plan is still intact for the year other than those two main revenue misses in January and February.
Okay got it thanks for that and then maybe just in light of the disclosure around March.
And into early May activity level increases I mean could.
Could you maybe.
Help set an expectation for the second quarter in terms of revenues and margins.
Margins within the within the context of the full year outlook being intact.
Yeah look I think that when we look at.
March and moving into April.
We were not necessarily giving quarter by quarter, but we do expect our march level to continue for.
For April and May.
On the variable for Q2, right now will be how far into June will the delayed turnarounds go right through either discovery or just overall activity. So.
It could be three months of March equivalent.
Or we could see a little bit of tail off in the month of June and primarily around mid June right now.
Because projects would start coming to an end so.
I think if youre looking for a number for revenue in terms of the second quarter.
We do expect to be more in that range of.
The $2 $30 million to $240 million on the top line.
And I'll, let Susan comment a little bit on gross margin.
Yeah.
Again as far as when you look to the gross margin here in Q1.
We're just about at that 22% which was.
Zambrano mentioned I would say the drivers were that the quest revenue plus not meaningful.
To take out costs and then additionally, kind of rolling in some of the costs with the expectation that February was going to be pretty robust. So then as you really look going into Q2.
Last Q2, we had taken out so many cost as youll recall that was our low quarter with respect to revenue, but we were able to really accelerate and take out the costs that we had.
Basically a record gross margin.
With the revenue increases again with the cost foundations that we've taken out and we would expect that we're getting to the higher levels.
We're really our target is to <unk> 28 per cent to 28, 5% with Q2 net cost foundation being reduced and overall revenue ex patients Inc.
I would expect that we're going to.
Exceed that 28, 28% target at 28 and 28, 5%.
Expectation on gross margin.
Okay got it and then lastly from me.
The gross margin outlook for 2021 annual is intact.
Has anything moved around because we think about EBITDA.
EBITDA margin for the full year.
So.
I think as we mentioned on the last call.
We're expecting to kind of be on the low end of day.
In between the.
2019, I'm, sorry, the 2018 and end of 2019 levels, obviously 2020.
Being kind of pulled out.
I would still say that that's still the expectation I think 2018 was like five 9% in 2019 was about $6 seven so I'd still say our expectation.
Is that will still kind of be in that lowers six.
Going up closer to the six 5% adjusted EBITDA.
Okay terrific I appreciate I appreciate the response thanks, so much thank you.
Thank you as a reminder, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad. Our next question comes from the line of Brian Russo with Sidoti. Please proceed with your question.
Hi, Good morning, good morning, Brian.
Follow through on some of the prior questions.
You know how much of the uplift you saw on March and that's continuing I mean, how much of the uplift in March was.
Storm response that you alluded to it in Texas with pipes freezing.
Much more of that interest.
Incremental type normalized activities, but by your customers.
I think the best way to look at that Brian is when you look at the nested operations.
Which as you know about a third overall approximately of our revenue.
Those.
I think were impacted negatively because of the plant shutdowns.
Our technicians, obviously werent at work those seven.
10 days and so that portion was an impact on revenue, but it's not one that you make up in future quarters. So that's.
That's a piece that.
<unk> was an upside but it was definitely on the bottom end.
When you look at the call out work, that's primarily what was being driven on on the recovery side like leak repair emissions control and some of the heat treating.
Activity in on and I think a lot of it along the Midwest Gulf Coast area, those two or three.
Service lines had had recovery in and quite frankly, you know it wasn't in March some of that because of the plant delays got pushed into even early April.
On the turnarounds it was more negative impact because again instead of starting with turnaround late February.
Timeframe.
Some of the turnarounds in Midwest Gulf Coast area got pushed into a into starting two three sometimes four weeks later, so we're obviously going to monitor.
The dollar value like we did on the impact we will monitor.
How much on the upside, but the nested was pretty much going back to normal.
On the call out we'll have some upside in the turnarounds were more project delays that debt are now just in Q2.
Instead of Q1, so we don't have a dollar value today that I'll be able to give you, but but we will have clarity on that at the next call. Once we are we start getting all the numbers together for the quarter.
Okay and in the 10% to 15%.
Year over year top line growth.
It seems and correct me, if I'm wrong, but it seems like entirely contingent on the refining industry.
You did reference growth market share on aerospace just curious.
You know what.
Can you give a contributor of growth in aerospace in some of your other <unk>.
Segments will be in that 10% to 15% growth.
Sure, Yes, so I think when you look at refining.
As I stated and we tried to give a little bit more color today on on our revenue diversification, which is 35% to 40% of our revenue obviously as as margins improve and clients capital allocation in Opex and demand goes up.
That is a large market, especially in the U S. So there that will be a.
Driver because refining plays in all three of our operating models. However, having said that there is a lot of other sectors like petrochemical and chemical that are pretty much or have been and continue to be at capacity.
So those are big drivers for us as well.
LNG continues to be a driver and even though the midstream market in terms of new capital is.
Has slowed down the work that we do in midstream around some of the tanks and terminals and storage as well as some of the smaller in niche type work.
That type of inspection work and repair work.
Continues so for us the power of the utilities, the chemical petrochemical and midstream.
We expect that to grow from a percentage basis, probably even higher than than the refining sector and then when you look at our emerging type markets offshore we expect growth in the offshore market, but.
That.
That's gonna be later on in the year as as as clients get back to normal activity and their projects get back on schedule, but offshore is a growth area.
Aerospace continues to be a growth area in.
<unk> will be as I've stated we.
Many sites across the U S and in international that perform aerospace operations, we are still seeing work, increasing obviously in the renewable sector driven by hydro and wind and then.
As I mentioned in the prepared remarks, the infrastructure portion for US. We expect will will continue to grow not only on the enhancements of the AR.
The bill that could be passed but.
As things get back to normal in terms of activity levels with the bridges.
Transportation roads water municipalities. So.
I think that we expect our emerging bucket too.
To be a strong contributor although on a smaller revenue base and the petrochemical chemical will exceed our refining growth. So it's really contributing from all three of our diversity sectors.
Okay, and just lastly on the SG&A.
The guidance range that you'd get there on the outlook for 2021.
You can kind of back into what looks like maybe mid to high 20%.
Our level of sales.
Is that does that kind of the runway run rate, we should look at.
Post 2021.
So.
You mean with respect to.
The bill that the SG&A as compared to the increase in revenue you mean.
Correct.
As a percentage of revenue, yeah, I would say that that Marty.
For 2021.
And some from the back at some of the temporary costs.
And additionally.
Have the permanent cost foundation, what I.
Guess, what I would envision is.
When I indicated a range of $2 75 to $2 90, and probably closer to the net or lower range that that inc. Incrementally increases really driven by as revenues continuing to grow that.
Would be additive and SG&A, but we do have other.
Expectations on being able to reduce and continue either reduce the permanent costs, but I think generally from the standpoint of.
<unk>.
Correlation to revenue it is probably more at it.
10% type increase.
Okay. Thank you very much.
<unk>.
Thank you at this time I'd like to turn the floor back over to management for closing comments. Thank.
Thank you Devin we're optimistic about our outlook, especially in the second half of the year I'd like to thank all of our employees for their dedication to operational excellence in health and safety, which enabled team to continue to operate during the pandemic from a position of strength, we remain excited about our growth opportunities in.
2021, and beyond thank you for joining us on this call and for your continuing interest in team and we look forward to speaking with you again next quarter.
Thank you Devin.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.