Good morning, ladies and gentlemen. Thank you for standing by. And welcome to the Third Quarter Team, Inc. 2019 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I'd now like to hand the conference over to your speaker for today's, Mr. Don Bleasdell, Vice President of Finance. Sir, please go ahead.

Thank you, Olivia. Welcome, everyone, to Team’s Third Quarter Fiscal Year 2019 Conference Call. With me on today's call are Amerino Gatti, 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 link under the Investor Relations section of our website at teaminc.com. Information recorded on this call speaks only as of today, November 6, 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, and it will be available via webcast by going to the company's website, teaminc.com. In addition, a telephonic replay will be available until November 14. 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 and Litigation Reform Act of 1995, these including statements of expectations, future events or future financial performance. Forward-looking statements involve inherent risks and uncertainties, and we caution investors that a number of factors could cause actual results to differ materially from those contained 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 may be required by law. Amerino will begin by providing an update on our business. Susan will then detail our results. And before we take your questions, Amerino will highlight our OneTEAM progress and market outlook. I'd now like to turn the call over to Amerino.

Thank you, Don, and good morning, everyone. We appreciate you joining us today. Consolidated third quarter revenues of $290 million were flat from a year ago despite shutdown of underperforming businesses in 2018, the recent weather impacts in the Gulf Coast region and unfavorable foreign exchange. Normalizing for these items, revenues would be 3% above the prior year quarter. In addition, the current quarter activity was negatively impacted by regional market pressures along the Gulf Coast, and pockets of market share loss, some of which were anticipated as we apply more consistent pricing discipline. We remain committed and continue making improvements in free cash flow, EBITDA, gross margin and SG&A. Third quarter adjusted EBITDA was $20.6 million or 7.1% margin, representing the highest level for Q3 since 2016, and almost tripling the $7.2 million of adjusted EBITDA in the prior year quarter. Despite flat year-over-year quarterly revenues, our Q3 gross margin grew to $83 million, up $12.9 million or 18% from last year. Third quarter gross margin of 28.6% improved 450 basis points compared to the prior year quarter and represents the second consecutive quarter with the highest quarterly gross margin percentage since 2017. Third quarter SG&A was $84.6 million, a decrease of $3.1 million or 3.6% from the prior year period. We have successfully reduced year-to-date SG&A expenses by $22 million or 8% when compared to the prior year and remain focused on delivering additional SG&A improvements as we execute on our OneTEAM program. For the first nine months of 2019, free cash flow was $9.8 million, an improvement of approximately $24 million over the same period last year. We are taking actions, such as centralizing our accounting processes, making greater use of shared services, increasing back office automation and collaborating closely with our clients. We expect to generate…

Thank you, Amerino, and good morning, everyone. The third quarter net loss was $7.1 million, a $16.5 million improvement over the third quarter of 2018. Consolidated revenues were $390 million, which was flat with the third quarter of 2018. Revenues over the prior year quarter were up for both Quest Integrity and the Mechanical Services segment. The increase in revenues by Quest and the Mechanical Services segment were offset by a decline of revenue in our Inspection and Heat Treating segment. Additionally, foreign currency exchange negatively impacted revenues by $2 million. Major weather events impacted revenues negatively by another $1.5 million. And exiting the underperforming operations in the fourth quarter of 2018 contributed to an additional $5.6 million decline in the quarter. Consolidated gross margins improved significantly to 28.6% of revenues, which was an increase of 450 points when compared to the 24.1% gross margin achieved in the prior year quarter. Third quarter 2019 represents the second highest gross margin since mid-2016. We generated favorable fall-through due to the steady progress of the OneTEAM program, which includes the continued structure and focus of the workforce planning and overall utilization process improvements. MS gross margin increased 55% on a 14% revenue increase. Quest Integrity gross margin increased 21% on a 16% revenue increase. IHT gross margin percentage remained flat on a 14% revenue decrease. Consolidated adjusted EBITDA of $20.6 million in the third quarter of 2019 nearly tripled from the $7.2 million achieved in the third quarter of 2018. Adjusted EBITDA as a percentage of revenue increased 460 basis points to 7.1% from 2.5% in the third quarter of 2018. Now turning to our segment performance. The Mechanical Services segment delivered third quarter 2019 revenues of $136 million, up 14% from a $119 million in the third quarter of 2018. Adjusted…

Thank you, Susan. Before we take your questions, I want to review the progress of our OneTEAM program and provide a market outlook. The two OneTEAM cost improvement pillars generated savings of $6.2 million in the third quarter and a total of $17.8 million year-to-date. We expect to deliver our targeted $20 million to $22 million range for the full year, and remain on track to achieve annual run rate cost efficiencies of $35 million to $45 million by the end of 2020. Our focus on the revenue enhancement pillar enables us to create operating leverage, deemphasize lower value contracts and deliver sustained margin improvement. We continue to work closely with our clients to secure more favorable terms and conditions as each contract comes up for renewal. As mentioned earlier, we remain committed to improving margins and building a sustainable and profitable business, which, at times, requires us to forgo work that does not meet our internal hurdle rates and provides insufficient margins. We are collaborating with both our new and long-standing clients to optimize their schedules and total cost of ownership to realize efficiencies and cost savings. Complementary to the revenue enhancement pillar, our workforce management function continues to optimize our workforce, maximize utilization and maintain visibility and cost controls. We optimized our workforce, including casuals, by 11% year-over-year as end markets fluctuated, generating similar revenues to Q3 2018 by increasing utilization and leveraging technology. As an example, we expanded revenues 44% on a recent U.S. project. This project was originally scheduled for 28 days. The client had multiple startup delays and ultimately lasted five months. With their scheduling challenges and significant scope increased due to discovery activity, required us to mobilize personnel across multiple divisions in order to meet their needs. Our centralized workforce management function, working closely…

[Operator Instructions] And our first question coming from the line of Sean Eastman with KeyBanc Capital Markets. Your line is now open.

Hi team. Thanks for taking my questions. I’d just like to start on the overall kind of top line trajectory here, highlighted some weather and regional competitive pressure in 3Q, but it sounds like near-term demand trends look good and Canada is rebounding. So I'm just wondering where we're at relative to the sort of 2% to 3% market growth dynamics you guys highlighted on the 2Q call.

Good morning, Sean. So I want to start just by talking through this on a segment-by-segment basis, which I think will provide a little bit more color than general overall number. Our Mechanical Services segment continues its growth. And we are seeing that growth level – or slightly higher, driven by onstream repairs, as our clients try and maximize their margin and, generally, with higher utilization levels. So MS is growing beyond the 2% to 3%, and I feel confident that we're getting our fair share of growth beyond that. We have set ourselves up fairly well, not only in the oil and gas refining side, but I believe, as I stated in my prepared remarks, on pipeline, as well as process where those are some faster-growing markets for us. So I think Mechanical Services is that. Quest Integrity, they continue to play in a very niche part of the market, if you will. But we continue opening up new doors internationally as well as domestic with new clients. And that includes, as I said earlier, not only Gulf of Mexico, but West Africa, as well as Latin America when it comes to our integrated inspection, condition assessment services. On the inspection side, it's a bit different. I would say that we've broken it up into two buckets. The conventional inspection work is being – the market there changes slightly around performance, risk-based inspection techniques. And our clients are putting a lot more focus right now on their supply chain and procurement costs. So when I look at our nested business, we still see a lot of opportunity to leverage that. But I would say that, that part of the market is going to continue to be under some headwinds for the next couple of quarters. Outside of that, however, pipeline, aerospace and some other markets that we play in, including internationally, we expect to see that continue to grow. So holistically, I think the 2% to 3% makes sense at a top – kind of a total level. But with the changing market dynamics and some of the uncertainty out there, we're having to get a lot more eye detailed, if you will, on our workforce planning, our sales pipelines and using our market segmentation playbooks to really start dissecting the market below just the top level.

Okay. That’s really helpful. And then I guess, tying it in, tying in sort of that mix element, which is probably positive, some more work being done on the SG&A, probably positive overall growth. How are we looking relative to that 10% to 12% EBITDA margin target you have out there for 2020?

So for 2020, the first thing I'll say is, we're obviously right in the middle of budgeting season. And we're spending quite a bit of time with our clients to assess what they're going to do in terms of inspection, risk versus performance, going into next year. We're evaluating our expansion or what we're calling new venture markets, where we feel we can expand beyond the market. So again, I'll answer the question by segment. Mechanical Services, we expect the growth in 2019 to continue for the same reasons as this year. Quest Integrity, we expect that growth to be in line with the growth we've seen in 2019. We do expect low single-digit overall market growth going into 2020. Our targets in terms of SG&A reduction and OneTEAM are on track. And as we wind down some of our professional fees and other things, obviously, that's going to have positive improvement. Our gross margin continues to trend closer to 30%, so between the 28.5% to 29%. We expect that to continue. So as I stated, I think, this year, right now, we're tightening up our range to be 130 to 150 basis point improvement over 2018. And then we're still on track to see another 180 to 200 basis point improvement going into next year. So before I confirm the 10% to 12%, we've got to see where 2019 ends and finish our budget cycle.

Got it. And last quick one for me. I was really glad to see the free cash flow number for 2019 remaining intact despite kind of a lighter-than-expected 3Q here. Maybe you can talk through a little bit on how you were able to achieve that? And maybe just some directional commentary on how that EBITDA to free cash flow conversion should trend in the next couple of years?

Okay. I’ll do that. So again, we've had a very focused effort on our working capital management with inventory and accounts receivable. Really, we did see improvements where inventories has been utilized effectively through our districts and divisions, and we've decreased that approximately $2 million to $3 million. And then additionally, on the accounts receivable, that obviously – and again, we always direct to look on that half year basis because the timing of when revenue is generated can increase significantly when you look to the close of a quarter. So again, significant increase in revenue towards the end of September. Towards the end of June, it was tailing off because of the higher increases in the beginning of the quarter. So focused on that, you do see fluctuations quarter-to-quarter, so better to look at on a half year basis. But with the revenues generated in the second quarter, the collections, the ongoing current collections of those revenues, and then additionally, the continued focus on some historic receivables and bringing that down, that effectively helped and assisted with that strong free cash flow generation in Q3. When you look to Q4, again, we'll continue on the focused effort of working capital management. And then the payment of our interest for our convertible is in August and February, so you won't have that in Q4. We also have filed, we've mentioned that net operating losses from a tax perspective, a filed carryback claims and do anticipate we'll receive some refunds there. And then again, the focus with the continued reduction of professional costs is really, overall, managing that free cash flow. The trend when you look to adjusted EBITDA to the free cash flow, again, it's going to be lumpy. And it's going to change period-over-period because of the timing of, again, when those revenues come in. But overall, I would say – and I don't know if that's even fair to say that probably a 30% or-so recapture or capture of free cash flow over a total adjusted EBITDA. But again, you can't really look at it on a quarter-by-quarter basis for that nor even on a half year basis. But again, just the overall strong focus around the OneTEAM cost initiative is really helping drive that.

Thanks so much. Nice work everyone.

Thanks, Sean.

Thanks.

And our next question, coming from the line of Adam Thalhimer with Thompson Davis. Your line is open.

Thanks. Good morning, guys.

Good morning.

Hey. Just high level, I want to make sure I understand. So you guys are not seeing any kind of a broad-based pause in the oil and gas market, although you are seeing some headwinds at inspection?

Yes, that's correct, Adam. I would – I want to be a little bit cautious here in my answer, because one thing that's evolved with our company over the last couple of years is the strength of having three segments that can play in different cycles of the market. And a, the market has – is changing, more consolidation in refining space with our clients, moved more towards condition assessment, performance-based, risk-based inspection work, et cetera. So one of the benefits right now of us and the last couple of years going through the integration, is you can see the importance of our Mechanical Services segment as the market shifts to onstream. So we are going to see headwinds in different segments at different times. We do see projects and turnaround slide, like we have some projects that split out of H2 moving into H1 for inspection. But we feel that we're positioning ourselves by sector better, meaning not just oil and gas. And also by segment, they play at different strengths depending on the cycle we're in. So if I look at inspection conventional-only, as a product line, yes, we're seeing some headwinds. Our clients are reducing some of their guaranteed hours as they optimize their supply chain, procurement, spend, et cetera. So there is a headwind in that space. But I think we're a lot more diversified than we were a year or two ago. Our teams are looking at opportunities and pull-through and cross-selling better than we were. So that's basically where we stand. I do see – right now, our turnaround season started a week or two later in Q3 and it did extend into November. It is starting to wind down now as expected. We are going to have some holiday impacts because of the way Thanksgiving and Christmas play out in November, December. But overall, we're really working closely with our workforce team to align our technicians and our hours with our projects. And that's how we see it. So we've got, I think, a much better balance between the three segments than we did before.

Okay. And then I just want to zero in on Q4 and kind of your internal expectations. Do you guys see – versus the $21 million EBITDA in Q3? Do you guys see the potential for growth sequentially in Q4?

Yes. I think when I look at Q4 as we sit today, we expect the revenue to be equal to Q3 or slightly up. And if you look at our historical trends, Q4 is slightly better. That will depend a little bit on Quest. We're expecting a strong quarter as well as Mechanical Services. So revenue flat to slightly up versus Q3. We do expect to see further margin expansion – slight margin expansion in Q4 versus our results of Q3.

And then the last piece for me, just the corporate expenses, and you talked about some of the OneTEAM and the professional costs. So those have actually been creeping up all year. I'm curious, do you see further growth in Q4? And when do some of the professional expenses start to trail off?

Okay. Adam, so you do see those creeping up in Q3 for us sequentially from Q2 and from Q3 last year. They were up about $6 million quarter-over-quarter from last year to this year and up about $2 million from Q2 2019. This quarter, I will say, for third quarter was kind of an anomaly because what we had occurring, and we anticipated this would occur and actually planned for it, was that as we wound down the North American OneTEAM program and transitioned into the international, we were doing several things. But moving professional costs – that were normal reoccurring professional costs, not the adjusted professional costs, but moving those into permanent labor headcount in the corporate functions. Additionally, as Amerino mentioned earlier in the call, that we are centralizing some functions with back-office activities and other functions to corporate. So kind of an overlap occurring in Q3 with labor costs going up, travel costs going up, some professional costs going up that will go down in the future as we moved from some consulting costs to permanent labor costs. Additionally, we've had some increased technology costs with respect to these ongoing efforts. So looking forward, I would expect Q4 is still going to be higher than what you've seen on a normalized basis, but probably trend down a little bit from Q3. And then as we move into 202, we should see those costs starting to normalize back a bit with not as much overlap or additional costs. However, again, as we implement or start new initiatives or programs, the professional fees could go up.

Okay, great color. Thanks guys.

Thanks.

[Operator Instructions] And our next question coming from the line of Martin Malloy with Johnson Rice. Your line is now open.

Good morning.

Good morning, Martin.

I was wondering, if you could maybe talk a little bit more about some of the nontraditional markets that you're pursuing in the Inspection and the Quest area? And I think you mentioned aerospace. But can you just kind of help us with the runway there? What size they are now, and the opportunities that you see?

Sure. So, thanks for the question. First of all, one thing I will say is that our strategy is organic growth. So we feel we've got a very good mix of our 14-or-so product lines. When you look at the three segments, and we want to build off the strength of those product lines, plus the investments we've made in our technology development, our engineering resources as well as our training of our technicians. So we're really leveraging our existing organization and segments to grow. We've broken or grouped up – or, if you will, our sectors, up into two. We have our core industry sectors, which are the ones that we feel will grow with the market rates or slightly above, and those are more of our conventional core businesses. And then we're looking at our new venture markets, which means that they would grow faster than the rest of the market. And when we look at those areas, we – some of them are not new maybe to the industry, but we see faster growth for us. We do have an aerospace business today both in the U.S. as well as Europe. However, we see aerospace, and with some of the investments we've made, some of our certifications, et cetera, as one of those faster-growing areas. So when you look at the 20% of our other revenue that's not linked to pipeline process refining, that's made up of aerospace, that's made up of LNG, we see midstream in that same area. We've got a focused growth plan on midstream where we've got differentiation using project management as well as technology. And then the other big one for us is moving from an oil and gas view to more of an energy view. And we're putting a lot more…

Okay, thank you. Next question I had, just IMO 2020, is this going to be any sort of impact for you? Or what are the discussions like with your customers about this?

So I'll answer it like this. I've been working very closely, at least, to get our clients' input as well as different associations within our space. And I have the luxury as well that our Board has some very good operator experience that I get to leverage as well. And IMO 2020 is not a new phenomenon. It's been well-documented, why it's being done and the time line where it was going to be implemented. There's been a few delays, et cetera. But many of the U.S. clients have invested in IMO 2020 upgrades, if you will, or if you want to call it that, over the last three to five years. It's not where they're calling out IMO 2020, "We have a project coming up December 15 prior to January 1." That's not the way it's playing out. It was built in to different turnarounds and projects. It was built in to their capital plans. And a lot of the plants in the U.S. are capable of delivering the lower sulfur end product. And so we didn't include IMO 2020 as a headwind or a tailwind, and I think we talked about that in the few various quarters, because it's not called out like that for our services. We still look at it in terms of project turnaround or capital projects/maintenance. So we're not factoring in either, and we know that there's some IMO 2020 spend that’s embedded in capital projects. But it was very difficult to split that out, so we didn't take that approach. And like I said, I think you'll see that a lot of our clients have been factoring that in over the last three-plus years.

Okay, thank you.

Thank you.

And I'm not showing any further questions. I would now like to turn the conference call back over to Mr. Gatti for closing remarks.

Thank you. Before we close, I want to reiterate our priorities: strategic project selection and improved execution. Optimized work force management, continued pricing disciplines, leveraging innovation and technology, enhancing margins despite slower top line recovery, sustained cash flow improvement and the ongoing implementation of the OneTEAM program. And once again, thank you for joining us on this call and for your continued interest in Team, and we look forward to speaking with you again next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, you may now disconnect. Everyone have a great day.