Greetings, and welcome to the Team, Inc. Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kevin Smith, Senior Director of Investor Relations. Thank you. You may begin.

Thank you, Doug. Welcome, everyone, to Team's fourth quarter and year-end 2020 earnings 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, teaminc.com. Information recorded on this call speaks only as of today, March 10, 2021. Therefore, please be advised that any time-sensitive information may no longer be accurate as of the date of any replay listening or transcript reading. There will be a replay of today's call and it will be available via webcast by going to the company's website, teaminc.com. In addition, a telephonic replay will be available until March 17. 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 Litigations 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 risk factors and uncertainties are described in detail in the company's annual report in the 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 highlighting significant events in 2020 and provide an update of our business. Susan will then detail our results. And before we take your questions, Amerino will discuss the market outlook as well as our near-term and long-term expectations. I would now like to turn the call over to Amerino.

Thank you, Kevin, and good morning, everyone. We appreciate you joining us today, and I hope you and your families are safe and healthy. The last few weeks have been volatile with record-breaking winter storms hitting many parts of the country, including southern states that do not typically experience cold weather to that magnitude. Now, after falling out, positive news on the declining number of COVID cases and a significant increase in the pace of the vaccine rollout, we are starting to see the light at the end of the tunnel and our employees are energized and ready. 2020 was a year in which companies around the world faced unprecedented challenges, and I am extremely proud of the resilience of our entire organization. While navigating incredibly difficult market conditions, we remain focused on managing what was in our control and took a series of proactive steps to ensure we exited the year stronger. Here are 5 key highlights that we achieved during 2020. First, the quick and progressive cost actions we implemented early in the crisis allowed us to flex our cost structure to align with the dynamic activity levels. We achieved full year cost savings of $110 million, exceeding the previously stated target of $85 million to $95 million, of which approximately 40% are permanent. Second, in December, we concluded a series of financial transactions to optimize our capital structure, including repurchasing approximately 60% of our senior convertible notes, providing significant financial flexibility and extending our debt maturity profile. Third, we published our inaugural ESG report that further demonstrates our core values and commitment to operate in an environmentally sustainable manner. Fourth, we developed a new strategic organization, promoting leadership from within to better position the company for the recovery, continued sector diversification and enhance client value. I will…

Thank you, Amerino, and good morning, everyone. I will review our quarter-over-quarter performance and highlight some of the 2020 full year results. Our fourth quarter consolidated revenue of $207 million was down $80.5 million and 28% from the fourth quarter of 2019. On a full year basis, consolidated revenues were $853 million compared to $1.16 billion in 2019. All 3 segments were down in the fourth quarter 2020 as compared to 2019. The bulk of the revenue dollar decline came from the Mechanical Services and Inspection Heat Treating segments. While down year-over-year, Quest delivered 16.6% sequential growth in the fourth quarter, with Quest having increased activity in both their domestic and international markets. On a percentage basis, Mechanical Services posted a 29.9% year-over-year revenue decline in the quarter, while Inspection and Heat Treating was down 25.7% and Quest was down 28.2%. Consolidated gross margin for the fourth quarter 2020 was $60.1 million or 29%, which was in line with the same quarter a year ago of 29.2%, but down $24 million from the prior year period. In spite of the revenue decline, we were able to generate a favorable decremental fall through due to strong continued focus on managing our variable costs and the continued positive carryover results of our quick cost actions taken earlier in the year, with permanent cost reductions and the ongoing benefits of the OneTEAM program cost initiatives. Fourth quarter cost savings associated with the discipline around our cost reduction actions taken in 2020 were approximately $35 million. Again, these cost actions include both permanent structural and variable temporary cost reductions to scale and flex with the market demand and activity levels. The foundation of the OneTEAM program helped us to quickly respond to the reduced activity levels caused by the global pandemic, allowing us to…

Thank you, Susan. Before we take your questions, I will provide an overview of our recently announced organizational changes, review macro market trends, discuss our ongoing recovery readiness program and provide our business outlook. In January of this year, we began implementing our new strategic organizational structure. The new operating structure includes the Inspection and Heat Treating, and Mechanical and Onstream Services groups and was designed to accelerate global growth with a greater management focus on improving operational and financial performance, and increasing collaboration across groups. In addition to IHT and MOS, the new Asset Integrity and Digital group which includes the Quest Integrity segment, will focus on expanding mechanical and pipeline integrity, risk-based inspection, robotic inspection solutions and our digital platform. AID will also optimize our research and development activities, including product and technology development. Combined with the other operating groups, AID allows for faster technology adoption across our global footprint. The new organizational structure positions us to grow sales across groups, share collective insights and subject matter expertise, deliver stronger service quality and increase overall profitability. We believe Team is well positioned to provide integrated and innovative solutions to our clients, which includes supporting the energy transition. Moving to the macro environment. The economic recovery is clearly visible with global COVID cases declining and vaccine production rapidly increasing, resulting in higher economic growth forecasts, especially for the second half of 2021. Refining crack spreads have improved, with refining margins now in line with seasonal norms. Before the recent winter storms, refinery utilizations were approaching 80% to 85% of which is a range that has historically incentivized maintenance and repair work. The storms for several U.S. refiners to reduce capacity, resulting in significant drawdowns in petroleum products. The drawdowns, combined with an increase in demand, has improved the refining…

[Operator Instructions] Our first question comes from the line of Stefanos Crist with CJS Securities.

So my first question is on AID, could you maybe walk us through your thought process on creating the new group that includes Quest and maybe your goals for the new group?

Well, thank you, Stef, for the question. It was obviously an exciting opportunity for us to really leverage the strength of our Quest segment and one that we've talked about quite a bit over the last couple of years. But in conjunction with that, we see a lot of progressive change in the industry and with our clients around remote operations, robotics, mechanical and pipeline integrity. And we have a lot of subject matter experts, engineering support, material labs that allow us to really move beyond the discrete service offering and provide our clients a more integrated solution and offering for their critical assets. And when we looked across the company and we started designing the new structure mid last year, we saw the opportunity to really pull that together. Quest will remain a segment, and we'll continue reporting Quest. And it will be the foundation of AID as a group. But we feel that AID will bring us a lot of the new, more progressive technology and innovation opportunities that will actually enable IHT, MOS and Quest to be successful. So we'll be managing our R&D budgets, we'll be looking at technology as a percentage of revenue. We'll be leveraging our technical support across the company through the AID group. And we feel that it's a really strong way for us to partner and further collaborate even more than we have in 2020 with our clients.

That sounds great. And then looking at the severe weather in Texas, obviously, that delayed work as refinery shut down. Is it all -- can we assume that created a lot of work for you as well? Just some headlines, pipes bursting, other damage to facilities. Is that what you're seeing? Have you been able to quantify that? Any details there would be great.

So you are right, and it's -- I'm not going to say it's similar to a hurricane, but in response, and I think in some of the Southern states, who are obviously a lot more used to hurricanes than the types of freezes that we saw in February. But yes, post -- some clients try and get ahead of the game and prepare for it. But in most cases, once the facilities get through the storm period, there is a start-up phase. We're seeing an increase in activity around our heat treating operations, some of our machining and bolting operations, some of our valve and other product lines as well. It's a little bit too early right now to quantify that. We're obviously pulling all that together, and we'll provide more color at the next earnings release. But there's usually a slowdown before. It does impact our nested operations because during the shutdowns, obviously, they reduce the amount of staff and employees on site. But then following that, we see improvements in leak repair and some of the other areas that I mentioned.

Our next question comes from the line of Sean Eastman with KeyBanc Capital Markets.

Congrats on getting through a tough year. A lot of big accomplishments, a lot of hard work went into these results. So congrats on getting through that. I guess just to start, so it sounds like the first quarter revenues are going to be lower year-over-year, but you said for the full year, you're looking at 10% to 15% growth. And just given there's a lot of moving parts around the recovery and how refiners are going to be running and dealing with drawdowns and a surge in demand, a little bit more color on how you see that revenue trajectory playing out through the year would be helpful to understand.

Sure. Thank you for the comments, Sean. So I think, obviously, there's a number of moving parts, and you are correct, we do expect our Q1 revenues to be the lowest of the year. And as we look forward, however, and some of the macro trends that we're starting to see, I would say, led by the improvements just overall in how COVID is being managed and how we're starting to see some of the restrictions, I'd say more domestically by country than internationally at this point starting to be lifted, and we expect that to continue through the first half. That will be a driver for demand. We did see that utilization rates of our refining business prior to the winter storms were in the 81%, 82% range. And historically, that gives us a good spot as our company provides our services to our clients. It's a good balance between CapEx projects, high utilizations and the need to do maintenance and other type of pit stops and those type of things. So we feel that if the utilization remains in that 80% to 85% range, and we start to see demand picking up. And because of all the deferments from 2020, that Q2 and Q3 will be 2 strong quarters, there's always the risk in Q4 of holidays and seasonal normal impacts. But as we sit here today, Q1 is expected to be our lowest quarter, progressively increasing from there. And obviously, we'll get more color on how Q4 would play out later in the year as we get closer to that. And we'll have to stay close to our clients, especially with the holiday seasons.

Okay, great. And then just as you prepare for a recovery in the top line, some temporary costs or some temporary cost reductions are going to come back into the system. You're going to have to staff back up. I'm just kind of curious about the availability of labor. How tight the market is going to be looking as you look to support this revenue recovery? And I guess what I want to understand is just what sort of the underlying incremental EBITDA margin there is around the revenue recovery this year and maybe into next year in light of all those moving parts?

Sure. I'll take the first part on just the labor pool, and then I'll have Susan provide some color on some of the permanent variable costs, et cetera. So from a labor pool, we do feel that it will start to tighten, obviously, with the growth. I think most companies have had to reduce headcount. As I've stated in the past, we've maintained, especially through 2020, good contact, and in many cases, benefits, health benefits with our technicians. And we've stayed in very close contact with our casual labor pool, which allows us to handle some of that flex up and flex down. So I don't want to say we've done everything we could because, obviously, it was a moving target. But I feel very confident that our districts, our workforce management group and now our new groups have really stayed in close contact with the labor pool. We are starting to get our training ramping up again and preparing for that need. We're reviewing all certifications that will be expiring during the year and making sure we have plans in place. We are ready to start recruiting and also remote training as needed, including international. We obviously, through COVID, we've learned to do a lot remotely. So when I look at it, I feel that the last 2 or 3 years of our workforce management function is going to be put to the test, but they've got some really good foundation to build off of. And I would add that we're working closely with our key clients right now to start trying to map out our utilizations, our headcount needs by certification class and making sure that we're able to balance the activity that they see on the ramp-up with what we're able to provide. So it's going to be tough, but I feel much better going into this recovery mode with our workforce management group 2, 3 years matured than prior time within the company. So that's how I see it. And I'll let Susan talk a little bit about the cost side.

Yes. On the cost side, as I mentioned, we kind of gave the color on permanent costs versus the variable temporary on the SG&A. We do anticipate, as I mentioned, $275 million to $290 million SG&A range. And again, that's down $100 million since 2018 as we took out $32 million or $33 million in 2019 as well. The -- on the EBITDA and the gross -- I guess, the gross margin, we still are anticipating we're going to be in line, exceeding the 28%, but in line with the gross margin percentages that we've targeted to 28%. And overall, on the EBITDA margin, 2019 had improved over 2018, I think, from the low 6s in 2018 to close to 7, just under 7, about 6.9 in 2019. As we look to what's occurred, looking at those revenue levels in between the 2019, 2020 levels, as you look to 2018, we would expect that EBITDA margin is going to be somewhere in between 2018 and 2019. So definitely improving over 2020, getting the benefits of the growth in revenue, but more of the low-cost foundation. So again, probably getting more in between EBITDA margin percentage between the 2018 level of, I think, like 6.2 and the 2019 level of 6.9 or so.

Our next question comes from the line of Martin Malloy with Johnson Rice.

Congratulations on maintaining margins in a difficult environment and generating that free cash flow. We've seen a continued stream of projects related to biodiesel, renewable diesel at refineries. Can you maybe just give us your take on what that means to Team?

Sure. So you are correct, I think there's been a lot of projects that have either been talked about, sanctioned or started in terms of biodiesel or on the renewable diesel front. Many of our large integrated type or large clients have been working on those projects, some of their facilities, either new build or some conversion facilities, are going to move down that path over the next couple of years. For Team, there's still a run and maintain component within the renewable diesel or biodiesel market. So that's an area that we continue to target. There is a focus in terms of, let's call it, a project, capital type project in terms of conversion. And obviously, if it's a new facility, working with either an EPC or others, then there's activity there within many of our product lines like machining, bolting, inspection, heat treating and other areas. So when it's project-based, that fits right into no different than a petrochemical or a refining facility. The damaged mechanisms, we're still working closely to understand that. A lot of our business is built off of corrosion, wall thickness losses and those type of things when it comes to damage mechanisms. So we've got our engineering teams, along with our labs, working hard to understand the different stresses and different damaged mechanisms. There's still going to be regulatory requirements that are needed in the bio market, which play in our favor when it comes to especially more of the regulated service lines. So overall, we have to adjust in terms of what drives our business, but it's still treated very much like a site and a facility, where we're able to provide our specialized services, our engineering support, lab support, et cetera, to the client. And including some of our digital offerings and remote monitoring offerings as well. So we see a lot of our products and service lines applicable within that space.

Great. And the next question I had was just related to the data, the digital efforts that you have, the data portal, the real-time data. Could you maybe just talk about how you package that to a customer? Is this a subscription service? And then maybe if you could look out 3 to 5 years, what do you think this means for the margins when you look at the Asset Integrity and Digital segment?

Well, first of all, in terms of the data, it's -- we've had to put data policies, obviously, in place. And I would say that many of our clients manage it differently. But the big ways, we're trying to be agnostic in terms of the type of data that we handle and the way that we handle it so that we can work with multiple systems. So that's one of our, let's say, guiding principles. We can either support their critical asset data and quality assurance and quality control data on their behalf through an IDMS type system. And then we can feed their asset integrity management systems with that data. So there's the case where we manage it. There's a case where it can be cloud-based, and then there's the case where we can provide it over to them directly into their IDM or their asset integrity management systems. So we are trying to handle at this point, all 3 because, quite frankly, depending on the maturity of the client at this point, we have to do all 3. I would say that some clients are further progressed in their hardware, in their programs and in the way they handle data and some need a lot more of our support, especially the mid-tier group we partner a lot closely to not only manage the data but also provide them engineering support, analytics and those type of things. So it is right now a work in progress. Now if I look forward from that, though, we do see a couple of things. I don't think the labor rate buildup type model is going to go away in the next 3 years. I think that there's always a service data or efficiency productivity piece. And I think that's -- I don't…

Our next question comes from the line of Brian Russo with Sidoti.

The 10% to 15% year-over-year revenue growth you expect in '21 over '20, how Reliant, if at all, is it to turnaround the latter half of the year? Or can majority of that be achieved just to your nested and running and maintenance and maybe some emergency and call-out work following the recent storms?

So Brian, it's a good question. And obviously, as a company, we've been not only driving revenue diversification by sector but we're really pushing to maintain diversification by what we call operating model. And our nested operating model, which is the most stable and it is a growth platform and the most repeatable, we expect that through the year, we'll get back to 90% or better. We're not there yet, but we expect to get back to 90% or better compared to pre-COVID levels. The call-out, we do expect that to be a significant driver, definitely over 2020 and reaching 2019 type levels, because of the reasons you just mentioned as well as what we've talked about today on a lot of the deferred projects and utilization, refining utilization going up quickly. So call-out, we think, will be the second one. Projects and turnarounds are the ones we're seeing the most volatility or, I guess, movement with, right now. Even just in Q1, we saw because of the weather, things get pushed a few weeks. So it is expected to be about 1/3 of our revenue overall, but we are having to try and account for by working with our clients. How much of it will land in H1 versus H2 and how much of it might push out. So I would say that nested, most stable, best visibility. Call-out, we expect it to be over 2020 levels and more in line with 2019. And then projects and turnarounds are somewhere in between the 2 years right now from the current visibility. And we watch that by quarter. And then we watch it by half, right? So we can monitor as things move around.

Got it. Okay. The storms that were experienced in Texas Gulf in February, that may have caused some revenue degradation on the net side, ultimately lead to bigger projects and just more customer activity on an ongoing basis from a proactive nature rather than a reactive nature in terms of storm restoration type work?

Yes. I think that there was a lot of learnings from the storms. And as I've talked to some of the clients and as we've seen some of the emergency calls come in, I do believe that we are going to continue to see for the next 3 to 4 weeks, start-up type, call-out emergency services. But I do also think that there is an opportunity in terms of preparation with our clients. I think it's a little bit too early, Brian, to highlight how do we play in that. I do think that especially utility companies, some of the gas providers, et cetera, are looking at that right now and post mortem assessing what could have been done in preparation for the storm. I believe that we play a role in that in terms of preventative or preparation with them in terms of helping them prepare with their assets. But right now, I think everybody is working really diligently to try to get their facilities back online first, and then we'll be able to look at that business development opportunity by collaborating with different sectors. I don't think it's just oil and gas. I think there's petrochemical, there's refining definitely power, definitely some of the renewable areas. So I think that there's multiple sectors that are going to look at things a little bit differently in terms of preparation going forward.

Okay. Great. Obviously, your leverage to the oil and gas and mining sector is quite meaningful. You mentioned diversification of sales and strategy with the internal segment reorganization, et cetera. Can you talk more specifically about aerospace and defense going forward, which might be less cyclical than the oil and gas end markets for you? And then what seems to be a low single-digit percentage of revenue on the renewable side, exactly what services are you providing in terms of the wind sector?

Sure. Let me start with the second part because it's a little bit quicker, and then I want to address aerospace. So on the renewables side and specifically, wind, we were mostly, today, providing mechanical services around machining, bolting, and that's both on land and offshore. We're providing inspection work, rope access activity as well as robotic type work. So we feel that, obviously, the higher the growth of environment, especially offshore, the new projects, we're able to really support them when it comes to many of our product lines. We are looking at what we can do from a lab standpoint, material materials, composite repairs. Those are areas that we're already generating revenue from. So I feel confident on the wind side that we can play within 4 to 5 of our product lines, including engineering and lab support. On the aerospace side, we started last year and following our strategy sessions with our Board that aerospace was an area that we feel confident we can expand organically at this point. We are investing in a center of excellence and expanding our capacity in the Cincinnati area. We have other operations across the U.S. that would then support that center of excellence as well. And we have some training and service offerings also in the Central Europe area. So we're in the process of expanding that facility. State of the art from chemical etching to inspection work and starting to build out our aerospace business line, which will reside under the IHT group. In terms of the recovery, obviously, we feel that the international travel will be the slowest to recover but defense, military, domestic travel, we feel we're in a good spot right now that once we complete our project late this year and early next year, we'll be able to take advantage with some stronger contracts, growing market share. And then obviously, subsequent to that, the international market growth. So it's a focus area for us. It has been, and now we're actually investing, it's one of our larger investments along with Quest when it comes to a capital standpoint.

Okay, great. That's helpful. And then earlier, there was a comment that while all this [numeric] continued in December is -- [asset-light] gives you a lot of flexibility. There is a leverage ratio measure that's calculated, I think you said in the fourth quarter of [2022]. Can you just remind us specifically what that leverage ratio was?

Okay. And Brian, I apologize, I may not have caught all that. But with respect to the ABL, it is really incurrence-based requirements with fixed charge coverage ratios that have to be met at a minimum of 1 times. And that's just, again, more incurrence-based on what you can do with other debt or acquisitions, et cetera. So very, very, I would say, maintenance-light covenants from that standpoint. On the term loan, the covenant ratio is net leverage ratio. It comes into effect at the end of Q1. So the first time, March 31, 2022, and it's set at 7 times so that we would need to be below a 7 times net leverage ratio.

Okay. And then just lastly, it looked like the majority of your 2020 free cash flow is derived in the fourth quarter. And I'm curious with the CARES Act, with the -- some payroll tax type deferrals, which supported cash flows in the fourth quarter that kind of reverse maybe over the next -- in 2021 and 2022, that we should be aware of that's kind of assuming in your 2021 free cash flow guidance?

Yes. So from the standpoint of the employer match payroll tax deferral, those did go into effect in April, essentially, and so carried throughout 2020. We did defer approximately, I would say, about $14 million of U.S. employer payroll tax match. And 50% of that will be due by December 31, 2021. So half of that $14 million, and then 50% would be due by -- at December 31, 2022.

All right. Great. And then just lastly, the biofuels transition and the energy transition mentioned earlier, and specifically at the refineries, I mean, does this create -- is this a new opportunity for Team? Or is it just going to displace other work you're already doing at the refineries in terms of NDT type inspection?

Well, if it's a converted facility, it would be a replacement. If it's a new sanctioned project, obviously, it would be new activity. And as I said before, looking at damage mechanisms, we feel from an engineering lab support standpoint, that could create some new opportunities for us. But it just depends if it's an existing conversion or if it's a new project.

[Operator Instructions]. Our next question comes from the line of Kevin Gainey with Thompson Davis.

It’s Kevin on for Adam. Most of the questions I have, have been answered, but I guess some, I guess, modeling based ones I'd like to go over. As far as interest expense for 2021, what does that look like?

So our interest for 2020 was approximately just over $29 million, so under $30 million, as we have increased our interest level, percentage-wise. And also, we did incur more financing costs associated with the capital restructure. And the original -- the OID associated with the term loan, it won't all be cash nor was the $29 million for 2020. But we would estimate probably around a $35 million to $38 million, $36 million to $38 million interest expense on the P&L for 2021.

Okay. That helps. And then I wanted to maybe cover a little bit more on cash flow, too. If there's a particular range that you're looking through for 2021?

Yes. For 2020, I mean, obviously, we did have a record free cash flow, and that was driven by -- even as Brian mentioned, we had the deferred employer match on payroll taxes, but was really driven by the activity levels with the business. So as the revenue was coming down, we do generate more free cash flow generally because we're not incurring the cost ahead of the receipts coming in. So what you saw in Q4, and we also saw it in Q2 of 2020. But in Q4, the significant generation of free cash flow and Q4 was really driven by those revenue levels not going up and us being able to really get the collections in on our outstanding accounts receivable in greater amounts than the revenue. So those amounts were coming in, plus we weren't having the cost with the revenue. So as you look to 2021 and the revenues ramping up, we are looking at a pretty significant need on working capital as those costs will go out ahead generally 60 to even 90 days before we get the collections in the door. We said that we anticipate positive free cash flow. Probably we wouldn't expect to get through the levels of 2018 on free cash flow, which were right around $15 million. But probably more closer to $10 million or slightly less.

There are no other questions in the queue. I'd like to hand the call back to management for closing remarks.

Thank you, Doug. We are extremely proud of what our organization accomplished in 2020, which would not have been possible without the commitment and dedication of our people. Throughout 2020, we were proactive in taking a number of deliberate steps to prepare for the recovery cycle. Team expects to benefit from the delayed and deferred projects in our 2020 accomplishments as well as our recent actions to scale and streamline the business have positioned the company for growth in 2020 and beyond. 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 does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.