Q2 2019 Earnings Call
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I'd now like to introduce your host for today's conference Mr. Dudley, So vice President of Finance surface go ahead.
Thank you Liz.
Welcome everyone to teams second quarter fiscal year 2019 conference call.
With me on today's call are immaterial Gotti, the company's Chief Executive Officer.
And our Chief Financial Officer, Susan Ball.
This call is also being webcast and can be accessed through the audio <unk> under the Investor Relations section of our website.
T. make dotcom.
Information reported on this call speaks only as of today August seven 2019.
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 will be available via webcast by going to the company's website.
Teaming up.
In addition, a telephonic replay will be available until August 15.
Information on how to access. This replay feature was provided in yesterday's press 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 1995.
These statements of expectations of future events.
Or future financial performance.
Forward looking statements involve inherent risks and uncertainties and we caution investors that a number of factors could cause actual results to differ materially from those contained in any forward looking statements.
These factors and other risks and uncertainties are described in detail in the company's 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 maybe required by law.
M. Reno will begin by providing an update on our business season will then detail our results can before we take your breath questions and renewal will highlight our one team progress and market outlook.
I'd now like to turn the call over to <unk> <unk>. Thank you Don and good morning, everyone. We appreciate you joining us today.
We're pleased to share the following highlights driving teams strong second quarter results.
Strategic project selection and improved execution.
Optimized workforce management continued pricing discipline.
Leveraging innovation and technology enhanced margins despite slower topline recovery.
Sustained cash flow improvement and the ongoing success of the one team integration and transformation program.
Consolidated second quarter revenues of $316 million were up $46 million or 17% sequentially.
But down approximately $28 million were 8.2% from a year ago.
The current quarter activity was negatively impacted by continued softness in the Canadian market.
Exiting certain underperforming operations and some non recurring projects.
We are very pleased with the improvements in adjusted EBITDA gross margin SGN, AE and free cash flow.
Second quarter, adjusted EBITDA was $32.8 million or 10.4% margin, representing the highest level since 2016.
The 10.4% adjusted EBITDA margin provides further support for our previously stated target of 10% to 12% adjusted EBITDA margin in 2020.
Despite lower year over year quarterly revenues, our Q2 2019 gross margin was $94.6 million up $28.6 million and 550 basis points sequentially.
Gross margin percentage of 30% improved 170 basis points over last year, representing the strongest quarterly gross margin since 2015.
Gross margin improvement was led by mechanical services and quest integrity segments.
Driven by strong execution in these businesses ongoing strategic and operational initiatives and further implementation of our pricing plans.
In addition, we successfully managed labor utilization and other associated costs.
Second quarter SG any of $81.6 million was the lowest since 2016.
SGN, a decreased $11.6 million or 12.4% from the prior year period and $600000 sequentially.
The year over year reduction in SG any reflects further reflects the successful implementation of our cost savings plan within our one team transformation program.
Typical of the second quarter, we were a net borrower and our credit facility. The first half free cash flow was negative $8.8 million, an improvement of approximately $21 million over the first half of 2018.
We expect to generate more than $30 million of free cash flow in 2019.
Doubling the $15 million generated last year.
Now I'll provide a high level segment review.
The inspection and heat treating segment reported revenues of $139 million and adjusted EBITDA of $13.9 million, while revenue and margin were lower year over year, both achieved sequential improvements of 9% and 120% respectively.
We attribute the declines NIH tees year over year performance, primarily to the ongoing Canadian end market softness and to the underperforming businesses that were shuttered last year.
More recently I HCCI has also experienced some regional competitive pressures in the Gulf and West Coast divisions.
The mechanical services segment delivered second quarter, 2019 revenues of $145 million and adjusted EBITDA of $25.9 million or 17.9% margin.
While revenues were slightly lower than prior year, adjusted EBITDA increased by 30%.
The M.S. second quarter adjusted EBITDA represents the highest quarterly adjusted EBITDA since 2016.
Our Hot top service line contributed to the strong second quarter performance.
Previous technology and manufacturing investments in our hot tapping line stop fittings are driving growth and creating competitive advantages through improved quality and reduce delivery times.
The quest integrity segment achieved record second quarter 2019 revenues of $32 million.
23% increase when compared to last year.
Adjusted EBITDA in the second quarter was $10.3 million or 53% higher than the prior year period.
We are experiencing increased demand related to both further penetration into existing markets and growth into new markets.
For applications of our proprietary Invista technology, enabling high resolution ultrasonic inspection.
Quest expanded margins, despite the previously announced strategic growth investments in recruiting training and tools.
I will now provide highlights on our safety performance technology and other updates.
Safety is our number one core value our company wide focus on safety generated zero lost time cases in the second quarter.
We improved our tier I, our year over year by more than 40% and reduced recordable injuries.
We remain committed to improving and achieving world class safety performance across our operations I could not be more proud of our employees for their focus on safety and quality.
Moving on to innovation and technology applications.
As part of our ongoing responsible revenue enhancement initiative, we expanded our focus on the midstream market and our project management capacity for integrated solutions delivery in both the us and Canada.
Growing demand for hot tapping in line stop services, along with the continuing support of transmission pipeline projects provides a solid mid stream backlog through 2019. In addition, we have seen an increasing volume of client requests and projects are being quoted for 2020.
Quest integrity continues its rapid growth and is on track for yet another record revenue year.
Quest successfully expanded its smart cleaning solution, which includes d. coking inspection and condition plus process assessment into the middle East and Latin America markets working for several clients in each region.
Quest remains the only company in the industry with combined process heater de coking high resolution ultrasonic inspection and comprehensive condition assessment.
This fully integrated domain and critical assets specialized solution enables fitness for service heater performance optimization and asset life extension all of which are critical to our clients.
And lastly team digital our proprietary platform that maximizes quality and efficiency through digitally enabled workflows continues to provide value for our clients.
During the quarter, we implemented our mobile digital services for several repeat clients and are expecting our highest number of digital projects during the fall turnaround season.
So far in 2019.
We have completed 12% more digital turnarounds compared to the same period last year.
I will now turn it over to Susan for a detailed financial review and then I will share more about our one team progress and outlook. Susan. Thank you Amrita and good morning, everyone second quarter net income was $6.1 million, a 37.4 million dollar increase over the second quarter of 2018.
Second quarter consolidated revenues were $360 million.
Which was down 8.2% from second quarter 2018.
Approximately $5.6 million of underperforming operations that were shut down over the course of 2018.
Additionally, foreign currency exchange negatively impacted revenues by $3.3 million the Canadian market experience better results sequentially that remains soft when compared to 2018 and contributed to over half. The overall revenue decline year over year for the company.
Quarterly revenues.
We're at $46 million or 17% higher than the first quarter 2019 revenues.
A $270 million as refining utilization rates backed off the highs experienced earlier in the year.
Consolidated gross margins improved significantly to 30% an increase of 170 basis points when compared to the second quarter of 2018 of 28.3%. Despite the top line decrease we generated favorable fall through and the highest quarterly gross margins since 2015, both primarily attributable to the ongoing success of our one team program, which includes the continued rigor and focus of workforce planning and the utilization process improvements.
Quest integrity gross margin increased 22% on a 23% revenue increase I see gross margin decreased 20% on an 18% revenue increase.
Mass gross margin increased 3% on a 3% revenue increase.
The bulk of the ITC margin changes were the result of the ongoing softness in the Canadian market as well as volume impacts and associate a fall through.
Consolidated adjusted EBITDA of $32.8 million in the second quarter of 2019 was up 7.7% from the second quarter of 2018.
Adjusted EBITDA as a percentage of revenue increased to 150 basis points to 10.4% from 8.8% in the second quarter of 2018.
Now turning to our segment performance.
Inspection and heat treating segment reported second quarter 2019 revenues of $139 million, an increase of 9% sequentially, however, down 18% when compared to the same period last year.
Second quarter, adjusted EBITDA was $13.9 million, an increase of 120% sequentially.
However, down from $19 million in the second quarter of 2018.
And the capital services segment delivered second quarter, 2019 revenues of $145 million, an increase of 19% sequentially, but slightly lower than $149 million in the second quarter of 2018.
Adjusted EBITDA was $25.9 million or 17.9% margin, an increase of 134% sequentially and an increase of 30% when compared to the same period last year.
Mm second quarter adjusted EBITDA represents the highest quarterly adjusted EBITDA since 2016.
The quest integrity segment achieved record second quarter 2019 revenues of $32 million, a 23% increase when compared to last year adjusted EBITDA in the second quarter was $10.3 million or 53% higher than the prior year period.
Moving now to SDMA.
We continue to improve our SGN, a spin through cost management actions as well as the implementation of our one team program total estimate for the second quarter 2019 was $81.6 million compared to $93.2 million in the second quarter of 2018.
A decrease of $11.6 million or 12.4%.
Sequentially, the $81.6 million down from $82.3 million incurred in the first quarter of 2019.
Due to our ongoing focus on improving cost and managing spend rigor and rigorously.
Second quarter 2019, SGN eight was the lowest quarterly SNA spends since 2016.
Our effective income tax rate for the six months ended June 32019, approximated 3.5%. The company has domestic federal tax tax net operating loss carry forwards of approximately $128 million as of December 30, Onest 2018, which are available to offset our future taxable income.
For the six month period, ending June 30 team generated $5.6 million of operating cash flow, representing an improvement of $23.3 million over the same six months in 2018 capital expenditures were $14.4 million in the first half of 2019.
Lightly higher than the $12.1 million in the first half of 2018.
First half 2019 free cash flow was a negative $8.8 million, representing a 21 million dollar improvement when compared to the first half of 2018.
We are also able to reaffirm our guidance for the full year capital spend to be in the range of $30 million to $33 million and remain on track for doubling our free cash flow.
2018 more than $30 million in 2019.
We ended the second quarter of 2019 with $12.8 million of cash and had available borrowing capacity under the credit facility of approximately $56 million with total liquidity approximating 60 mine $69 million at June 32019.
As expected we were a net borrower this quarter due to increased labor costs associated with the time lag of cash collections on increase sequential revenue generating higher working capital requirements in the second quarter, we remain committed to paying down debt with any free cash flow generation, our senior secured leverage ratio at June 32019 was at 2.66 times cash interest expense for the second quarter 2019 was approximately $5.8 million.
Exiting the quarter, our focus continues to be on generating free cash flows and returns being disciplined with our cash allocation.
Working capital management with continued expectations receivable and inventory reductions in the second half of the year.
And achieving additional cost control and associated reduction.
In closing I do want to provide an update on our senior credit facility.
We currently are in active discussions regarding the extension on our credit facility that matures in July of 2020.
We believe extending the credit facility will ultimately provide us with the ability to obtain a more cost effective and flexible long term capital structure with additional time that allows us to further execute and realize the continued benefits from the cost savings reductions of the one team program.
As well as to continue to demonstrate the overall improvement on the gross margin as we continue to responsibly manage revenue.
That completes the financial review I will now turn the call back over to AMRI now Thank you Susan.
Before we take your questions I want to review the progress of our one team program and provide a market outlook.
We are in the second year of our one team transformation and integration program and remain on track to achieve annual run rate cost efficiencies of $35 million to $45 million by the end of 2020.
The two costs pillars generated savings of $11.6 million in the first half of this year and we expect to deliver the targeted $20 million to $22 million for the full year.
Our focus on the revenue enhancement pillar has enabled us to realize operating leverage deemphasize lower value contracts and deliver sustained margin improvement.
In the second quarter gross margins expanded despite an overall revenue decline driven by both the shift in mix to higher value projects and a lift from efficiencies and productivity improvements.
Simultaneously, we have internalized the one team North America program.
Allowing us to reduce expenditures for some of our third party advisors by bringing the expertise in house.
Now shifting to the market outlook the latest global economic growth projection is approximately 3% for 2019. This is a reduction from earlier forecasts for the year due to a general decline in business confidence the associated tightening of financial conditions, and higher political and trade policy uncertainty across many economies.
According to IRI.
Data us refinery utilization rates soared in January but backed off in late February through July .
Q2, 2019 utilization levels remained high at 90%, but were lower than prior year. The month of July had an average of 94% compared to 95% in 2018.
A return to a slightly lower utilization will translate into stronger demand for our services in the near to medium term.
Over the long term higher Utilizations will also benefit team due to the corrosive nature of the operating environment and additional asset wear and tear.
The macroeconomic factors driving our end markets have enabled team to begin capitalizing on shifting market trends.
Such as the integration of our inspection <unk> heat treating and mechanical services operations to prepare for more on stream maintenance and remedial repair work.
Meanwhile, inflationary pressures on labor materials, and logistics continue in order to offset some of these headwinds we have made strategic investments in manufacturing and engineering to be more competitive.
On the labor front, our workforce management tools have been fully deployed and we are benefiting from increased technician utilization.
The depressed Canadian market continues to result in economic uncertainty due to regulatory hurdles and delays.
Canadian turnaround activity has been significantly lower than last year, mainly impacting the H.T. segments.
This lower turnaround activity has led to aggressive project bidding by competitors. Despite this market environment Canadian revenues and profitability increased sequentially and we anticipate increased project activity in 2020.
Before taking your questions I will update some of our goals and objectives first from a revenue perspective, we expect 2019 to be an inverse of last year with the second half of 2019 being comparable to the first half of 2018.
We are scheduling several off cycle projects, mostly in the form of smaller pit stops that have not historically occurred.
Additionally, due to recently high refinery utilization rates and delayed projects, we are experiencing increasing increasing discovery activity.
Second we expect the H.T. segment to improve its performance in the second half of the year given higher planned activity from the refining midstream and aerospace sectors.
Third we expect to deliver 180 to 200 basis point improvement in 2019 for adjusted EBITDA margins over the prior year and finally, we expect to generate more than $30 million of free cash flow in 2019, doubling the $15 million generated last year.
In closing I would like to thank our clients suppliers and shareholders for their support and in particular teams employees for their hard work and ongoing focus on safety, which is essential to creating value for all of our stakeholders.
Our new structure is allowing us to be more agile responsive and scalable based on demand fluctuations in the market.
At this point, we will be happy to take your questions.
Ladies and gentlemen, if youd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.
If your question has been answered or you wish to remove yourself from the queue. You may do so by pressing the pound key.
Given that Star then one if you'd like to ask a question at this time.
Our first question comes from the line of Tahira Afzal with Keybanc. Your line is now open.
Hi, Marino congrats on a good quarter.
Thank you Tahira.
The Aberdeen.
I know you've talked about some macro uncertainty and clearly we are seeing across the industrial space.
So your comments seem to be aligned with what the environment is.
I guess the EBITDA outlook.
So the margin improvement.
Slightly notched down perhaps would love to get color stocks and bonds due.
The macro climate, though.
Whether its something else on a company specific level.
So overall, our adjusted EBITDA is is not projected to be down we're still forecasting.
The 180 to 200 basis points improvement year over year, we're seeing a 2% to 3% market growth.
With the exception of Canada, and our underperforming businesses.
And.
We feel that the quarterly.
EBITDA delivery that we made this quarter.
It will be in line in terms of reaching the target of that basis point improvement through the end of the year to here.
Got it.
How about next steps as you see some of the uncertainties developing does it change your outlook for that.
Sort of 10% to 12% EBITDA margin and due 2020 or is it too early to call.
Well I think we're doing two things to hear our number one is we are very focused on what we can control, which is the two cost pillars and weve.
We're very confident that we're on pace to deliver the $35 million to $45 million. We're not stopping there. We were also now looking at our international operations in terms of the transformation as well as further gionee consolidation and opportunities going into 2020 and beyond so in terms of the effort to focus that Susan talked about we're clearly focused on those two pillars.
On the revenue side.
We've done some some work there in terms of historically, the midstream downstream and other sectors generally delay any shift in market by 12% to 18%. So 12 to 18 months I'm sorry.
So even if there is a little bit of a slowdown which were not seeing yet.
You know our business generally as utilizations come down and the the facilities age we have the opportunity through that that delay in the cycle to still grow and capture the.
The growth and margins that we would need so for US right now looking into 2020, the 10% to 12% is strong.
In terms of where we expect to finish we continue to focus on the two costs pillars. We do expect at least the 2% to 3% overall end market growth. Even if there is a bit of a slowdown in some other sectors because of that delayed and.
We've still got opportunities to diversify our revenue base.
Beyond refining.
Aerospace is a good example, we've got two hubs one in Europe , one in the US we've gotten.
Good support I was just up in Cincinnati.
Visiting one of our clients and opportunities to expand so I think there's opportunity. It also diversifies, our topline as well as cross sell.
Very helpful and congrats Dan Marino.
Thank you.
As a reminder, ladies and gentlemen that is star then one if you'd like to ask a question at this time.
Our next question comes from the line of Adam Thalhimer with Thompson Davis. Your line is now open.
Hey, good morning Congrats.
Thank you Adam good morning.
Hey, when you talk about the back half.
This year being similar to the first half of 18, what do you are you talking about revenue or margins.
Revenue.
So from an activity.
Yes from an activity standpoint.
As we stated last quarter, we were our hours our activity our project plans turnarounds, it's laying out that our revenue will be in line with each one of 2018, which is where we are we're looking at the inverse model because of the high utilization rates in Q4, two three Q4 of last year Q1 of Q2. This year. So it's a revenue with with improved margin year over year to to reach the 180 to 200 basis point improvement on the on margin.
Okay, but that math adds up to your best half of EBITDA in.
Years.
So just want to make sure that's consistent.
No no that that is consistent.
Again, we had a very strong second quarter, but when you look into the third and fourth quarter with our increased activity levels and again the.
Reductions in our cost.
No you're right when you're looking at the map on that.
Okay and then the Q2 margin in mechanical you said that was the best in 16, I think it's the best and teams history. It was there anything onetime in there or was that just.
Just your ongoing.
Progress.
I would say, it's it's again, the continuing ongoing process with cost reduction workforce management improvements and overall.
Looking at the contracts and revenue improvement.
So Adam we went back to 16, obviously because of the acquisition timeframe right. So that's when we've combined from an IDE plus team.
The investments we've made in manufacturing and engineering over the last year and a half have have contributed.
Significantly to helping us be more competitive we've also diversified our revenue stream in.
Mechanical services.
Not only by product line, but also by sector.
As I talked about with more midstream growth, which in the midstream market, it's allowing us to leverage some of our project management capabilities a lot of our midstream clients want us to lead that project management exercise and bring all the pieces to the table when you're doing that type of work.
And so between those two things and some pricing improvements. We've we've had obviously a good quarter and mechanical services with the shift in the macro market to more remedial repair on stream. We were very confident that thats an area that we want to continue to invest into to improve the overall results of the company.
All right and then just one more and I'll hop back in queue, but.
Curious what you're seeing in July and August in terms of demand what gives you the confidence.
In the bat that back half revenue outlook and then also can you help us.
You think about how much EBITDA, we should put in Q3 versus Q4.
So in terms of the the activity right now were seeing between a 6% to 8%.
Improvement in terms of hours activity hours, which is how we're forecasting.
H two versus H., one we're expecting the second half turnaround season, as we stated to be a lot simpler more similar to the first half turnaround season of last year.
One of the benefits were seeing right now is because of the high utilizations on the refining side.
Some of the project delays as I have stated are creating more pit stops which are basically small mini.
Project turnarounds and more discovery work, so we're seeing a strong August .
And September play out right now.
Which the August and summer July is uncommon in terms of what happens what's happened historically, but we're seeing that because of the high utilization rates.
And you know I think Furthermore, we do expect Canada, although it's not going to it's going to be lumpy for the rest of the year their age two will be stronger than H, one so thats a positive and on the international front. We're also seeing a stronger second half this year than we did last year. So overall.
Activity up.
In the in the activity side.
Between those percentages that I that I, just mentioned and then revenue in line with H one of 19.
Sorry, Okay. Thanks, Congrats wanted to be.
Thank you I got you thanks, guys.
I'm showing no further questions in queue at this time I'd like to turn the call back to Mr. Getty for closing remarks.
I think we have one more question.
We do have a follow up from Tahira Afzal with Keybanc. Your line is now open.
Hi, Thanks, a lot for squeezing me in I guess, you know when you're talking about revenues being the San Marino, what's the profile of quest or within that.
So question is will continue to grow.
In the second half of the year, we expect quest to be in the range of 12% to 13% year over year growth.
Okay, great great. So.
So when you're talking about being similar to the first half of last year.
And also for the other segments.
That's correct.
Okay, Okay, Great and then I guess.
You know when you're talking about and you've shown great success in terms of 30 generating free cash.
Am I getting a little ahead of myself and Susan correct me, if I'm pushing my luck, but you know you're doing more than.
30 million this year, what couldn't next year potentially look like once all the.
Efforts to put in on the cost side I in place your integrated sales modeling.
It has had time to settlement.
Okay.
Well I mean, we are forecasting and looking as we look into the future. We are again with the.
In the future 2020 with the cost reductions.
You could see another.
10% to 20 million more in free cash flow.
Very impressive.
Okay, great. Thank you very much folks.
Thank you very much.
And so I want to just.
Go ahead.
I'm, saying I'm not showing any further questions.
Okay. Thank you Liz.
So once again, thank you for joining us on the call and for your continued interest in team and we look forward to speaking with you again next quarter.
Ladies and gentlemen, thank you for your participation in today's conference.
This concludes the program and you may now disconnect.
Everyone have a great day.