Ladies and gentlemen, thank you for standing by, and welcome to Team, Inc. First Quarter 2020 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference to your speaker for today, Don Bleasdell, Vice President, Finance. Please go ahead, sir.

Thank you, Joelle. Welcome, everyone, to Team's 2020 First Quarter Conference Call. With me on today's call are Amerino Gatti, 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 teaminc.com. Information recorded on this call speaks only as of today, June 18, 2020. 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 June 25th. 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 and Litigation Reform Act of 1995, including statements of expectations, future events or future financial performance. Forward-looking statements involve inherent risks and uncertainties, and we caution investors that a number of factors could cause actual results to differ materially from those contained in any forward-looking statements. These factors and other risks and uncertainties are detailed on 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. I'd now like to turn the call over to Amerino. Amerino?

Thank you, Don, and good morning, everyone. We appreciate you joining us today and I hope you and your families are safe and healthy. During this challenging dynamic period, I would also like to thank the healthcare workers and those on the front lines of containment for their efforts and dedication. These are extraordinary times and this quarter’s earnings call and will be far from routine. My management team and I remain focused on the wellbeing of our employees and their families as well as supporting our clients and the community. We will provide transparency around three key initiatives that ensure team’s corporate health and position us for the recovery: First, the safety of our people and business continuity; second, the previously announced decisive actions taken to align the business and our capacity with the near-term decrease in activity; and third, our end-market revenue diversification strategy. This morning, I will start with a high level financial review and outline how we are managing our business through the pandemic. Susan will then detail our first quarter results and financial position after which I'll provide an overview of the market trends and an update on our OneTEAM program. Our first quarter results were noticeably impacted by adverse market conditions. Consolidated first quarter revenues were $237 million, down 12% from a year ago, despite lower year-over-year quarterly revenues of $33 million, first quarter gross margin was $57.5 million or 24.3%, on par with 24.5% in the prior year quarter. In addition, we were able to generate positive operating cash flow of approximately $1 million and reduced SG&A expenses by $3.8 million with compared to the first quarter of 2019. Turning to our segment performance. Mechanical Services first quarter revenues were $104.5 million, down 14% from the first quarter of 2019 and adjusted EBITDA…

Thank you, Amerino, and good morning everyone. As Amerino mentioned, first quarter consolidated revenues of $237 million were down 12% from the first quarter of 2019. Quest Integrity increased revenues by 16% over the prior year, which was offset by revenue declines of 14% and 15% in our Mechanical Services, and Inspection and Heat Treating segments, respectively. The COVID-19 pandemic and oil & gas supply-and-demand imbalance impacted our revenues by approximately $23 million. Also contributing to the lower revenue was unseasonably poor weather in North America and a delayed ramp up of activity following the extended New Year holiday. After a slow start in January, our international operations rebounded until mid-February, when several projects in Asia Pacific, United Kingdom and the Central European markets were delayed and subsequently deferred due to the pandemic. Consolidated gross margin was $57.5 million, or 24.3%, compared with 24.5% in the same quarter a year ago. Despite the revenue decline, we generated favorable fall-through due to the progress of the OneTEAM program and the implementation of our decisive cost cutting actions. The first quarter 2020 cost savings benefits of OneTEAM approximated $6.6 million. On a segment basis for gross margin, Mechanical Services decreased 22% on a 14% revenue declined; Inspection and Heat Treating was down 17% on a 15% revenue decrease; and Quest increased 28% on a 16% revenue improvement. Now, moving to SG&A. We continued to realize year-over-year reductions of SG&A expense through our cost management actions, including the expansion of the OneTEAM program. Total SG&A costs for the first quarter 2020 decreased $3.8 million or 4.7% from the first quarter of 2019 to $78.4 million, primarily due to overall reduced compensation and travel costs. On a sequential basis, SG&A was down $1.3 million from $79.7 million in the fourth quarter of 2019. COVID-19,…

Thank you, Susan. Before we take your questions, I will provide an overview of the current market conditions and review some of our anticipated restructuring actions, as we prepare for the recovery. Despite the OPEC Plus announcement in April to cut production output, crude oil prices remained weak as a result of the shelter-in-place directives that were implemented to contain the spread of COVID-19. The demand disruption created by the pandemic occurred much faster than supply could be reduced, triggering a rapid increase in crude inventory volumes. According to EIA data, reduced demand for refined products caused refinery utilization rates to decline to 2008 levels. Utilization rates have declined further in the second quarter, but we do expect to see a gradual recovery through the second half of the year. Team would typically benefit for a period of 12 to 18 months following utilization rate drop. However, the pandemic and current market dynamics have delayed the demand growth for our products and services. Before I share Team's near-term, mid term and long-term objectives, I want to reiterate that no one can predict with any certainty the scale or length of disruption from COVID-19 or how deep and severe the economic and health impacts will be. Our near-term objective was to aggressively reduce our variable cost structure to align with the lower activity levels. We remain prepared to take additional actions as warranted, to respond to the evolving business environment. We believe the current market dynamics present three near term opportunities for Team. First, pure play refiners need to remain operational while they evaluate maintenance projects and ongoing regulatory compliance requirements. Second integrated clients will leverage their downstream businesses to mitigate the impact of lower oil prices on their consolidated results. And third, given the oversupply of production and increasing inventory…

Thank you. [Operator Instructions] Our first question comes from Adam Thalhimer with Thompson Davis.

Amerino, could you walk us through just trends in kind of April versus May versus June, and kind of the latest on what you have for how things might look in the back half, core demand?

Sorry. What was the last part that you said core demand?

Well, I'm just thinking about core demand.

Yes, okay. So, basically, if we look into April, May and then coming out in June, if we take a look at Q2, we do expect April and May to be our slowest few months of the year. We've seen obviously quite a bit of impact due to the demand side of core services, especially on the refining some pipeline side. On the flip side, petrochemical is starting to probably see the first parts of the recovery as shelter-in-places and consumer demand increases. Coming into the second half of the year, as I said in the script, the prepared remarks, we expect on-stream callout type work to be first on the recovery followed by nested. We see our nested business returning by the end of June and into July as the summer demand increases, obviously. And then, going into the second half of the year, although there's still variability on some projects and turnarounds, we're getting a lot better visibility on the timing of those turnarounds. And obviously, they're going to be stronger than the first half. But, we do see a good project turnaround pickup in the second half of the year, again, in our core industries. The one thing that I'll say, Adam, is that it's really difficult right now for anybody to paint the market with one brush. And what I mean by that is the different divisions and different pads on the refining side are recovering at different speeds. So, we're seeing some good recovery right now going into June in the west division driven by California. We still see slow recovery in the Rockies area, for example, but the east side is starting to open. Texas Gulf and Louisiana Gulf, we feel that they troughed and we should start to see an improvement coming out of that area. So, it is becoming a region by region or pad by pad type business going forward. Again, because we have the three legged stool of our segments, our Mechanical Services able to play in the on-stream business very well, we've got a good nested footprint that's getting back to work, we're starting to see the potential recovery going into the second half. All of that considered, obviously, I'm not factoring in any COVID, shelter-in-place ramp-up or anything, but continuing on the current path. That's how we see the core business and things evolving into the second half of the year. Internationally, Europe is probably the laggard in terms of utilization increases. Middle East, we do see has remained fairly strong. They've had to put some shelters in place, but things are starting to open up there a little bit as well.

Perfect. And then, Susan, just two quick ones for you and then I'll turn it over. In IHT, what's the go forward quarterly D&A after the goodwill impairment? And then, curious on your thoughts on corporate costs, because they're a little higher in Q1 at $21 million. How would you set that for the rest of the year?

Okay. With D&A on the IHT, I mean, we would still look to be slightly -- I'd say, 10% drop over the average quarterly D&A on IHT. And then with respect to the corporate costs, we are overall on the total Company looking at a 10% to 15% expectation of a decline in our SG&A. Corporate has had from fluctuations with respect to services that we've transitioned from consultants to permanent employees, and then additionally, looking at some technology and other programs that -- adjustments that we adjust out for the OneTEAM program. But, again, overall, we would expect to see a decline of a 10% to 15% reduction. This cost as we've mentioned on previous calls, we had the increases associated with it, we're looking at centralizing activities and cost functions. So, while we've had the increase overall, again, we're going to see that decline going forward in the benefits of that structure change.

Okay, thanks. I'll turn it over. I appreciate it.

Thank you. Our next question comes from Sean Eastman with KeyBanc Capital Markets. Your line is now open.

Hi, everyone. Thanks for taking my questions. Is there anything to note on the competitive environment here just in terms of pricing behavior? And [Technical Difficulty] positions through the kind of crisis period, and maybe as we start to see a recovery, any kind of shifts in customer requests or anecdotal evidence that perhaps a [Technical Difficulty] larger scale could come out of this in a stronger position?

Sure. Sean, I'll start. So, basically, with the reduction in demand, obviously, there's a significant amount of discussions around competitive pressures and their actions as well as the client working closely with us. And I would break it up into two buckets. There's the client group that is just wanting a price reduction; and then, there's the client group that wants to reduce their total cost of ownership, which includes things like technologies, combining product lines to increase volume, reduce exposure, using technology to reduce labor and exposure around risk, safety, et cetera. So, I'll take them one at a time. The first one is the group that's just looking for a straight price reduction. Obviously, there's safety costs that have increased. But, we're working with them, again, just like on the way up on the pricing and gross margin improvement, we're working with them one on one to try and minimize any cost or price relief to a short amount of time. And I would say, three to six months for us to get through this recovery period. So, in no cases right now have we had to go beyond at the end of the year, basically. And I think that, we've got strong client relationships. We have our enterprise account group and strong relationships with our sales team. So, in that group, so far we've been successful to do that. There is a group that's looking at total cost reduction overall of their spend just to be ready for the ramp up again, if you will, of the increasing utilization. And that group, we've been successful at assigning project managers, we've been successful at bringing in multiple segments, and increasing our footprints within that client to reduce their overall cost, and that's headcount, cost sharing of resources, et…

Got it. And then, I was just wondered in light of the pretty aggressive cost action, accelerating the OneTEAM initiatives around this challenging environment, just how you would frame the margins in a recovery scenario to the extent we're starting to march back towards a more normalized operating environment in 2021? Just how much kind of margin flow through, incremental margin you could get post all of the cost actions being taken in the second quarter? Any idea on how to frame that would be helpful.

Sure. So, I think the first thing is, we're not providing right now -- at the Q2 call, we are going to have a lot better visibility on the second half and the recovery. So, I'm going to limit my answer on this one, but I will provide a little bit of color. Overall, our leadership team for the last couple of years has been dealing with restructuring and cost reductions. And we've continued to deliver quarter-by-quarter on the commitments that we've made. What we did once the pandemic and the demand reduced is, we looked at what we had pushed out to 2021. And when I said we accelerated that to OneTEAM, that's a lot of our centralized initiatives, re-looking at our district and division footprint, both domestically and internationally and doing a full review of our underperforming businesses. So, we accelerated some of those because it was a good catalyst period to take action. The savings that we're looking at right now, which I mentioned and Susan highlighted as well, it's about a 50-50 split between SG&A versus let's call it indirect and variable. And we expect between 40% and 45% of those costs to be permanent, going forward.

Okay.

In terms of the overall impact for the year of the costs, our variable costs through furloughs, supply chain and other measures, salary reductions, et cetera. A lot of that stuff, we're going to be reviewing it quarter-by-quarter and we're not going to take any movement upwards obviously or add costs. And so, we have a good handle on the stability of the recovery. We're prepared to take additional actions, as or if it goes lower. But we are starting to see our billable hours increasing in through June. Like I said to Adam, May and April were the troughs. But overall, I feel that the organization and I have full confidence that they acted quickly, they followed the action plans and trackers. And one thing that they've shown over the last two years is the ability to execute once a plan is put in place, both on the way down as well as on the way up. And obviously, we continue to keep a very structured approach on that. But, I would say, 40% to 45% will be a permanent cost removal and rest variable.

[Operator Instructions] Our next question comes from Stefanos Crist with CJS Securities.

Good morning, and thank you for the time. Since we’re just talking about the cost savings, I just wanted to clarify, the $20 million to $25 million in Q2, is that inclusive of the $5 million from Q1, or is that an additional? And is that about a run rate of what we should see or is there a potential for further cost cuts?

The 20 to 25 is additional in the second quarter, but it would include any of the cost reductions or anything that started in the last week of March, essentially. So, it's just the comparative on the reduction in Q2. Going forward, again, we are looking and will continually recalibrate cost reductions and where we need to make adjustments. So, that could adjust out over the next few quarters. But, I think for now that 20 to 25 is a good range, and again, looking at overall 10% to 15% reduction with SG&A costs.

Got it. Thank you. And then, I just wanted to ask about the credit facility. So, you talked about covenant changes and the capacity was reduced to $200 million. Are there any other major changes to covenants that we should know about?

So. Yeah. With respect to covenants, we did have a net leverage ratio that is being waived from Q2 through the end of the year, and it comes back in effect in Q1 2021. Additionally, there are reductions to the net debt coverage ratio, and that also is waived in the second quarter 2020. And then, the senior secured leverage ratios have been brought down. Additionally, there are minimum requirements that have been put in place with respect to Q2, Q3, and then cumulatively Q4, which will be fully disclosed. And you'll be able to see that within the 10-Q that will get filed tomorrow.

Thank you, I'm not showing any further questions at this time, I would now like to turn the call back over to Amerino Gatti for closing remarks.

Thank you. Notwithstanding the effects of the ongoing pandemic, we remain confident in team's performance and potential, as well as our ability to achieve our long-term strategic targets. We again want to thank you, our shareholders for your support and patience. We will continue to make disciplined decisions to move the business in the right direction. Thank you for joining us on this call and for your continued interest in Team. 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.