Good day, ladies and gentlemen, and welcome to the Team Second Quarter 2017 Earnings Conference Call. At this time all participants are in a listen only mode. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Ted Owen, Chief Executive Officer. Sir, you may begin.

Good morning, and again, I’m Ted Owen, Team’s President and Chief Executive Officer. Joining me again, today is Greg Boane, our Chief Financial Officer. On July 24, we preannounced very disappointing results for the second quarter 2017. And yesterday, we reported our final results that were consistent with those preliminary disclosures. Importantly, in the last week, we also announced the completion of a $230 million convertible debt offering, as well as major cost reduction initiatives. Unfortunately, because of the convertible debt offering, I have been unable to speak to equity investors since our July 24 announcements. Frankly, during the time when being available to investors was most critical, I just wasn’t able to do that. I’m sorry for that, but I’m glad to be able to speak with you today. Before I do that, Greg will read through the safe harbor information and then review the financial results in detail. Greg?

Thanks, Ted. Good morning. This call will contain forward-looking information within the meaning of the federal safe harbor provisions. Any forward-looking information discussed today is provided in accordance with the Private Securities Litigation Reform Act of 1995. We’ve made reasonable efforts to ensure that the information, assumptions and beliefs upon which this forward-looking information is based are current, reasonable and complete. However, a variety of factors could cause actual results to differ materially from those anticipated in any forward-looking information. A description of those factors is set forth in the company’s SEC filings. There can be no assurance that the forward-looking information discussed today will occur or that our objectives will be achieved. We assume no obligation to publicly update or revise any forward-looking statements made today or any other forward-looking statements made by the company, whether as a result of new information, future events or otherwise. Today’s discussions will also include certain non-GAAP financial measures. We have excluded certain items that we believe are not indicative of Team’s core operating activities when arriving at adjusted net income, adjusted EPS, adjusted EBIT and adjusted EBITDA. All of these are non-GAAP financial measures. Reconciliations of these non-GAAP and adjusted financial measures are provided in our quarterly earnings release. I’ll now go over the results for the second quarter, and we’ll start off by discussing segment performance before moving on to our consolidated results. TeamQualspec current quarter revenues of $158 million were up approximately 1% from second quarter 2016 revenues. TeamFurmanite revenues of $133 million were down 17% from second quarter 2016 revenues. As we’ve stated in prior calls, the decrease in revenues in the TeamFurmanite segment is the result of a combination of project deferrals, job scope reductions and customer maintenance deferrals. While our TeamQualspec and Quest Integrity inspection and assessment…

Thanks, Greg. There are several things I want to cover today. First, why did we do a convertible debt offering? Secondly, why were our Q2 results so disappointing? Third, what are we doing about it? And fourth, what’s the near-term and long-term outlook for the business? First, let me address the convertible debt offering. As is well-known, we took on a lot of senior bank debt when we acquired Qualspec and Furmanite. Due to our declining EBITDA during the market softness of the past 18 months, our senior debt-to-EBITDA ratios have been increasing, which required us to amend our credit agreement several times to raise the maximum leverage ratio permitted under the credit agreement. During that time, we’ve evaluated several debt and equity offering alternatives to solve that problem, but the disappointing Q2 results required us to reject other alternatives in favor of the convertible debt offering. Why? Because it offered a much lower coupon than other debt alternatives and provided a great deal of financial flexibility to ultimately settle the debt in cash, stock, or a combination thereof. The immediate benefit to Team is that we’ve reduced our senior bank debt by more than 50% and eliminated total debt maximum leverage covenants through March of 2018, allowing us time to benefit from the expected market recovery and to realize the cost reduction initiatives that we’ve implemented. The immediate financial pressures on our balance sheet are over and we don’t expect covenants to be an issue prospectively. Now let me talk about the quarter at a high level. As Greg reported, total revenues in the quarter were down 7% from Q1 of ‘16, with TeamFurmanite revenues being down 17%; Quest Integrity’s revenues being up 9%; and TeamQualspec revenues being relatively flat year-over-year. It would be easy to attribute our shortfall…

Thank you. [Operator Instructions] And our first question comes from Tahira Afzal. Your line is now open.

First question is really in regards to what seems to be happening, as you said, the near-term is clearly a little more challenged in terms of activity levels. So in terms of the cost cuts you have announced, what are your underlying assumptions around the fall turnaround season and the next spring turnaround season?

We expect the fall turnaround season relative to our kind of internal forecasts and our cost cuts to be generally flat, if you will. We’re not anticipating a robust season. We’re expecting kind of a continued modest growth in inspection services. And a generally flat outlook for inspection, for -- sorry, mechanical services in the fall. We continue to believe though, that 2018 is going to be a pretty robust year. There’s a lot of scheduled project activity that we expect to benefit from in 2018. But we’re not seeing it again in -- for mechanical services in the second half of the year.

I guess, in terms of cost cuts then, as we go into a lighter seasonal quarter in a sense, do you feel your cost cuts will be in place to sort of deliver something that is breakeven or better? If there any help around that timeline would be helpful as well, Ted.

Yes, Greg, why don’t you discuss the timeline for the cost cuts?

We’re well underway on the cost cuts. The majority of the cost reductions, as Ted mentioned, are related to headcount reductions. A significant portion of those are completed, probably in the range of 90%. We would expect though, any remaining reductions, along with some of the soft costs that we’ve identified that we’re going to be working on, we would expect the majority of those to be completed and in place in the first part of Q4.

Okay. That’s helpful as well...

There will be savings impacts in Q3 as well, as a lot of the things that we did, we did at the end of July. So there will be 1 month of savings, or a couple of months of savings related to Q3. But we won’t achieve the full run rate until Q4.

And our next question comes from Matt Duncan from Stephens.

So Ted, first question just as a follow-up to your answer on Tahira’s question there. What gives you guys confidence that the fall turnaround season is going to be flat? And what are you seeing in the end market right now? I know, go back 12 months ago, we thought the spring was going to be pretty good and the fall was going to be great. And spring came in down a good bit for you. And so now you’re expecting fall to be flat. So what are you seeing that suggests that, that’s what’s going to happen?

Well, what we’re meant -- what we’re basically seeing right now, Matt, is our own project activity for the fall turnaround season. So we’re beginning to kind of get a sense of projects that are scheduled for the fall. And again, what I’m saying to you is that it is not -- that we’re not seeing an uptick in the fall. We’re seeing a -- kind of a continued pattern that existed in the first half of the year. So we’re not -- when I’m saying flat, I’m saying kind of flat to the spring season. We think it’s going to be -- look a lot like that.

I got you. So flat, flat with the spring down year-over-year, is what that would look like?

Well, perhaps -- down to fairly flat. I think, again, I think inspection is going to be up. And mechanical services, up, obviously it’s a -- because we haven’t seen the turn in mechanical services, we’re -- we don’t have a strong point of view about the fall. It feels like the spring to us.

Okay. All right. And then on the cost side, on the first quarter call, you guys told us that SG&A was going to run at an average of $80 million a quarter for the balance of this year. If -- like, current activity levels, and obviously, it came in at more like $84.5 million on an adjusted basis. So what surprised you guys on the cost side? And then as you look out on the cost cuts that you’re making here, how much of these would you call permanent, don’t come back in a recovery-type expenses versus things that you’re going to have to add back as the business grows?

Well, first of all, relative to the second part, all of these are what I call permanent type reductions. These are not costs that I would expect to add back as recovery grows. I think we are -- I think we have to learn to -- and our customers expect us to do more with less. And that’s the challenge. And -- so these are not reductions that are just temporary and when the world gets better, we just kind of add them back, that is not our intention at all. With respect to the first part of your question, again, there’s a couple of things that surprised us relative to the -- to costs in the second quarter, the $84 million. There were -- and I’m not going to wallow in what they were, but there were -- we had some kind of out of period-type costs that impacted the quarter. But the more important point was that our run rate was running higher than our targets and our expectations. And because of that, and as soon as it became apparent to us that, that was the case then we started taking action to make sure that, that cost curve in fact turns.

Matt, this is Greg. Just one of the things that’s a challenge for us right now is -- and as you can understand, all 3 businesses had legacy systems that they had been using for a long time. And we -- 2017 as it relates to IT, it is really a transition year as we’re pivoting from these legacy systems to the new system. There’s a lot of things that are fluid. One of the things that happens is as we -- as we’re pivoting from implementation in the field to actual support of live system, the accounting for those is what I’d call run and maintain as opposed to nonroutine. There’s just a lot of transition as it relates to IT as we’re getting our arms around the tools and the resources that are needed, both to complete the project and to support the system going forward. So there’s just a lot of -- just transition related to IT. And honestly, until we’re finished with the implementation in North America, it’s a bit of a challenge to sit back and say, "Okay, where are the areas within IT that we need to go after from a cost reduction perspective?" Because there’s just so much going on in that area right now as we transition to the new system.

Okay. Greg, if I can sneak one more in then. Is the -- I know you guys knew about ERP obviously, when you bought Furmanite. But it sounds like maybe there are other IT investments that you had to make, that maybe you weren’t anticipating, that are part of why costs are going up even as you’ve integrated Furmanite taking cost out presumably through that process. So are the higher IT costs something you contemplated when you guys bought Furmanite? Or is this something you kind of discovered as you put the pieces together, that you needed to invest in a more robust organization?

That is exactly what’s happened. As it’s related to our evaluation of all the -- there are a lot of tools that are being utilized in addition to just the ERP system. At the end of the day, one of the things we found out that -- is that across, I’ll just call it, the new organization with the 3 businesses, a lot of those tools were not as robust. There may have been some people that needed to use tools that didn’t have the license to use the tools. So there’s just a lot of -- there is a lot of investment in tools and capabilities within IT in addition to just the ERP rollout that, to your point, have come up this year as just part of this whole transition to the new system.

And our next question comes from Craig Bibb from CJS Securities. Your line is now open.

It’s Pete Lukas for Craig. I may have missed it earlier, I apologize, I had some phone problems here. Do you have an estimate for the range for the all-in annualized cost for the recent financing?

The all-in interest expense as it relates to the convertible, you should model the total interest expense, that’s the cash interest on the coupon plus the amortization of the equity component and transaction fees, it’s probably going to be in the range of $7 million to $8 million over the remainder of 2017 on the convertible.

Great. And then just one more follow-up for me. In terms of TeamFurmanite, do you see an opportunity for them to pivot to pursue more of the new construction business?

Kind of yes and no. The broader no is that we serve existing infrastructure. The services that we offer are typically -- particularly on the specialty mechanical side are particularly related to existing infrastructure as opposed to new construction. New construction gets us more into project management activities. While we do that on a small scale and in a very niche capacity, it will not be our intention at all to compete with many of our customers, if you will, who are offering broader scale project management type services that typically are associated with new construction. So I think 90%-plus of our activity levels will continue, have been and will continue to be existing infrastructure, which I think again, is a good thing.

And our next question comes from Martin Malloy from Johnson Rice. Your line is now open.

I was wondering if maybe you might address kind of the competitive situation out there. And my I guess concern is that -- are you all losing market share in any way? And we’re seeing some large public companies make some investments and trying to come into the space, Quanta, Fluor. And just trying to figure out if there’s any sort of loss of market share that you’re aware about there by Team?

Well, I mean that’s a very good question, Marty, and one that we ask ourselves continually. And again, when we bought Furmanite, we expected to lose some share particularly when we were both in the same plant. So we’ve contemplated that on the front end. And there is also, I would tell you, and I think I said this before, there’s been, and again in the early days, there was kind of what I call poaching and kind of unrational behavior by some competitors to poach technicians with the view of taking business. And honestly, that did not work and many or most of those guys have come back into our fold. So what we do is we look at, who are our customers today, who are our customers a year ago, do we have the same customer base, are we looking -- can we identify new competitors in our space that -- who we believe have taken more share or who are benefiting, if you will, from the TeamFurmanite merger? And honestly, we do not. We don’t see any. We can’t identify any significant loss of business that we would have -- that was unexpected, certainly on the front end. And I will also tell you that we look at this -- we look at publicly available data from competitors who have kind of adjacencies, have mechanical service adjacencies in our space. And the notion that we’re not alone, again, while it doesn’t make us feel good and it certainly hasn’t helped our performance, it is indeed indicative that the decline in TeamFurmanite mechanical service revenues is consistent with what other public companies who have mechanical services in adjacent spaces have reported. So we’re not seeing any significant new competitors in this -- in our space. We’re not seeing -- we can’t identify significant loss of business. It’s just there’s just less of it right now. But that’s why we focus a lot on -- kind of the notion of -- infrastructure’s under a great deal of pressure. Throughputs are high, utilization rates are high and Mother Nature is persistent, and I -- makes us -- and again, we’re starting to see the pickup in inspection-related activities. Not yet in mechanical service activities, but we believe that will come.

And that kind of leads into to my second question. We’ve seen this now for eight quarters, where the results have been below expectations. And eventually the course of nature, of a lot of what goes through your customers’ pipes, would lead one to think that they’re going to have to -- there’s going to be some catch-up here. Are you seeing any increase in terms of emergency call out work? Or any sort of incremental work that would indicate that there’s starting to become some issues here? And I guess relating to that, any impact on your business or your customers from the changing crude slate, with more sweet crude coming from the U.S. shale plays? Does that impact the amount of services that they might demand from you?

Relative to that question, Marty, we don’t think so. And we’ve looked at kind of crude slates and kind of the components over time of changing crude slates. And if you look at it on balance, it’s modestly moving towards sweeter crudes. But it’s a fairly slow, slow change. And so it doesn’t account, in our view, for any kind of change in the corrosive nature of the media, if you will. So we don’t think that’s a factor at all. And honestly, I’ve just -- I slipped on the first part of that question.

Just any sort of incremental work you’re seeing in terms of emergency call out work that might indicate that there’s kind of...

Yes, I mean, it’s a little hard to measure directly, but I will tell you, what we are seeing is, and kind of -- and data supports is that while -- and I indicated, I think, in my comments, that planned turnaround activity is like 40% of the 8-year average over the last couple of years, while unplanned turnarounds are -- have been increasing, I think they are like 15% higher over a couple of years, don’t hold me to that because I’m trying to recall the data that I’ve seen. But the point is, that’s not a very efficient -- that’s not very efficient for our customers in our view and in the view of others that we’ve talked to, if you’re deferring planned activities and the impact is to cause you to have more unplanned activities, there’s probably a better way to do that. And again, I don’t think that’s sustainable over a long period of time.

Marty, this is Greg. We heard of an example this week at a specific location, where there was some work that had been planned in the spring that was deferred. And they had an unexpected failure occur just recently and needed an emergency callout, which we went out and have worked on. So yes, there are those isolated one-offs that can and do occur.

And our next question comes from Tom Radionov from Corre Partners.

I was just hoping to get a bit more granularity around some of the end markets. And specifically, I’m curious if the trends you’re seeing in your refinery customers, if those are different from what you’re seeing from the petrochemical customers -- or anybody else, just trying to figure out if most of the pressure is coming from the refining side of the business, or if it’s a broader issue with everybody else as well.

The IIR data that we look at, specifically the petrochem planned spending activities thus far in 2017, and this is a forward-looking index, but for every month in 2017 as it relates to the petrochems, the planned spending activities over the remainder of the year have been robust, year-over-year increases in planned spending activities. As a comparison on the refining side, for -- through the first 7 months of the year, they were positive for the first 4 months of the year and they’ve just recently pivoted the other way. And the last few months of the -- and this is polling data. This is not actual spend data. This is polling data of refinery customers and their planned spending over the remainder of the year. That polling data has softened on the refining side.

I’m just trying to...

Just as a follow-up to that, there’s a lot of new construction and particularly in the petrochem space, in the LNG space, in the -- particularly along the Gulf as you probably are aware. We’re benefiting from that. And there’s a lot -- those facilities become infrastructure. And so certainly, the pressures we’re seeing in our business are concentrated principally in the refining space. Refining represents for us about 40% -- 40% to 45% of our business. Petrochemical is about 20%, pipeline is about 10%. So there’s a lot of positive developments in the petrochem space that I think is going to be very significant prospectively, even now as it relates to some of the new construction activity. But as those facilities come onstream, that creates maintenance and inspection opportunities. A lot of pipeline regulations, it’s an -- pipeline space is an aging infrastructure of pipelines. New regulations that are driving more inspection in kind of moderate-consequence areas and things like that. So it is fair to say that the most significant negative pressure on our business right now is in refining.

Got it. And as a follow-up to this, do you have the IT systems in place, given sort of all of the M&A that you were going through over the past couple of years to be able to look at any single customer within the refining business, for example, and be able to figure out precisely how much business you generated last year, the year before, how much you’re generating this year and sort of try to kind of draw some conclusions from that? Or is that a part of the problem, that maybe some of that visibility is not necessarily there...

Yes, that’s absolutely an issue for us, is the visibility, because we are -- if you think about it, we have 4 major legacy systems that we’re continuing to operate on. The new kind of modern dynamic ERP system that we are implementing across our North American network, that’s about 70% implemented at this moment in time. So as we’re standing that up, we’re laying down the legacy team systems. We’re laying down the legacy Furmanite systems and the legacy Qualspec systems. So you’re really kind of looking at data across 4 different platforms, if you will. That’s why the implementation of this ERP system across North America is so critical to us, to have the kind of data more visible that you’re referring to.

And I just want to sneak in a very quick second question. When you look at the -- your total business from a sales perspective, just roughly, like how much of that would you characterize as a percentage of revenue, would you characterize as being related to turnarounds, sort of the typical seasonal turnarounds versus your regular maintenance work that needs to be done throughout the year versus maybe emergency work? Just trying to get a feel for the relative size of these 3 buckets within the total revenue pool.

About one third.

I think you should look about it, like about -- it’s about one third.

Got it. And you’re saying the pressure is -- I guess, and the pressure is across all 3 buckets? Like, it feels like we spend a lot of time talking about the turnarounds, but it seems like you’re seeing a reduction in scope in all of these 3 buckets, is this sort of a fair...

Yes, I mean that’s absolutely true. The routine maintenance and inspection, there’s significant downward pressure there as well. There’s not -- no question about that. It is easier to identify turnaround spend, if you will, than perhaps those other buckets. But there’s no question, it’s not just turnarounds, it has been a minimalist mode on the part of our customers, really for the last 18 months.

[Operator Instructions] And our next question comes from Matt Duncan from Stephens. Your line is now open.

Greg, on the interest expense, to maybe get a clear answer to the question that was asked earlier, what is the total all-in corporate interest expense that’s going to flow through the P&L, both the convert and your other outstanding debt on a go-forward basis after the convert?

Well I think, rough-cut, we’ve got 230 million of convertible debt. I think the all-in effective rate on that is probably around 8.95%. That’s inclusive of the 5% coupon and the amortization of the equity component and the transaction-related costs. And then on the revolver, probably looking in the 5% range on the outstanding balance.

Okay. That helps. Because you’ve got this noncash component of interest expense, are you going to break out for us, each quarter, how much that is? So that if we want to come up with kind of an earnings number that takes away the effect of having to amortizing those costs on the convert, we’re able to do that, is that something you guys are contemplating doing?

Yes. I mean that would be very easy for us to break out. And I mean, there’s clearly going to be a component of the interest expense related to the convertible that’s noncash, that would be a calculated number every quarter using the effective interest method. And we can easily provide that information on a quarterly basis, yes.

Yes. I think I would. I think that’d be a good idea. And then lastly on the convert, you said in your prepared comments, it sounds like the company’s discretion if someone wants to convert those, you can give them cash instead of shares. Is that going to be your choice? And I guess, would you do that with bank debt? I assume obviously the EBITDA is going to have to gone back up to be able to add bank debt back again. But what is the company’s preference in terms of if someone -- if the stock does well, someone wants to convert that, what is your preference in terms of how you would handle that?

Well, that’s the thing about the structure of the deal. We’ve given ourselves optionality relative to -- we could pay the principal back in cash, and just pay the premium in shares, or we could do it all in shares. That’s something that we -- it was important to us to have that optionality in the structure of the deal, such that when the time came to "settle", we could make an evaluation. I think fundamentally, our view would be to sell as much in cash as possible.

Yes, just said another way, Matt, again, very complex instrument. But if you think about it this way, that we have -- it’s callable by us after four years. It’s -- the maturity of the notes are in six years. It would certainly -- so it’s a little bit difficult to answer the question you’re posing right now, when we’re really talking about an event that’s going to be six years from now, or four to six years from now, if you will. But clearly it was not -- would not be our first choice to have a significant dilution of EBIT relative to the convertibles debt.

And what is the premium on those, if you do call them earlier or if you want to buy them out with cash, what’s the premium?

Our premium is plus 130 over the conversion price, which, I think, is a little over $28 a share.

Conversion price was plus 40 to the stock price on the day of the deal.

Thank you. I’m not showing any further questions at this moment. I would now like to turn the call back to Ted Owen for any further remarks.

Thank you. And again, I appreciate your attention to today’s call. These are challenging times for Team. These are very difficult times for our -- certainly our long-term shareholders including us, management, the employees and our colleagues at Team. But again, my message now is more to our internal -- our colleagues at Team. Our job is to perform. We’re going to do that. We’re going to fix this, if you will. We’re not going to spend a lot of time worrying about the stock price, because we can’t control that. What we can control is our destiny, if you will, from the standpoint of our own -- of the performance of the company when we -- and that future is very bright. And the stock market, as I said, kind of will take care of itself. So thank you all for your interest in today’s call. And have a good day.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone, have a great day.