Good day, ladies and gentlemen, and welcome to the Third Quarter 2018 Team, Inc. Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn introduce your host for today's conference, Mr. Don Bleasdell, Vice President of Finance. Sir, you may begin.

Thank you, Chanel, and welcome, everyone, to Team's Third Quarter Fiscal Year 2018 Conference Call. With me on today's call are Amerino Gatti, the company's Chief Executive Officer; and Greg Boane, EVP and Chief Financial Officer. This call has been - 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, 2018. Therefore, please be advised that any time-sensitive information may no longer be accurate as of the date of any replay or transcript. 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 13. 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 such 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. And with that, I'd now like to turn it over to Mr. Amerino Gatti.

Thank you, Don, and good morning, everyone. We appreciate you joining us today. I'll begin by providing a brief update on our business, Greg will then detail our quarterly financials and hand the call back to me for additional commentary before we take your questions. Team delivered year-over-year quarterly organic growth in revenues. Consolidated Q3 revenues were $291 million, an increase of 2% from $285 million in the prior year period, representing Team's highest third quarter revenues since the acquisition of Furmanite in 2016. These improvements were led by our 2 Inspection and Assessment segments, Inspection and Heat Treating and Quest Integrity, which were up 7% and 53%, respectively. These gains were partially offset by a 9% decline in the Mechanical Services segment. However, the segment's year-to-date performance has improved 4% year-over-year. Consolidated adjusted EBITDA had a slight improvement to $7.2 million from $7.1 million a year ago. Adjusted EBITDA excludes the impact of certain charges that Greg will address in his prepared remarks. As mentioned on our previous call, a key component of our OneTEAM program is to streamline and reduce our overall SG&A costs. The program is making an impact as evidenced by a 6% or $6 million sequential reduction in SG&A. The flattened organization will create additional operating leverage in our business and has made us more agile in our execution. We continue to focus on working capital and cash flow management. As previously communicated, any free cash flow after the funding of the OneTEAM program would be used to pay down debt. I'm pleased that Q3 '18 cash flow from operations improved significantly throughout the quarter. We generated $30 million of free cash flow in the last 2 months to close out the quarter with $16 million of free cash flow, of which $15 million was…

Thanks, Amerino. I will focus my discussions on gross margin, adjusted SG&A, adjusted EBITDA and cash flow, and most of my comparisons will be sequential Q3 '18 versus Q2 '18. Q3 '18 is historically a seasonally weak quarter with reduced revenues coming off the spring turnaround season in Q2. Q3 historically generates lower gross profit margins across all operating segments compared to Q2 due to the lower seasonal revenue. Consolidated gross margin in the current quarter declined by 420 basis points to 24.1% from 28.3% in Q2 '18. Consolidated gross margin declined by $27 million sequentially in Q3 '18 due primarily to a $53 million revenue decline from Q2, coupled with headwinds around increased cost to serve such as labor, materials, freight, fuel, et cetera, which Amerino will discuss later. The negative leverage gross margin impact of around 45% to 50% on the sequential $53 million revenue decline equates to an approximate $24 million to $26 million gross margin decline in Q3 '18 from Q2 '18. Mechanical Services segment is the primary contributor to the gross margin decline where revenues decreased sequentially by 25% or $30 million from Q2 to Q3 '18. As Amerino mentioned earlier, the Mechanical Services segment experienced a significant demand reduction in Q3 '18, resulting from higher-than-normal U.S. refinery utilization. Additional Q3 gross margin pressure on the Mechanical Services segment came from extreme volatility in activity levels during the quarter. Specifically, Mechanical Services segment billable hours ramped down by 29% from June to July. Then 1 month later, September billable hours ramped up by 41% from August. In the services technician labor industry, it's very challenging to both manage workforce planning and to effectively adjust the cost structure when activity levels are this volatile over such a short period of time. The Mechanical Services segment also…

Thank you, Greg. Before we take your questions, I'll spend a few minutes reviewing OneTEAM's progress and our outlook. The OneTEAM integration and transformation program remains on track. During the quarter, we completed the majority of our restructuring and have set the foundation for profitable growth and enabling us to deliver both discrete specialized services and differentiated integration solutions to our customers. Through Q3 2018, we achieved $5.4 million of savings under the OneTEAM program and remain on track to achieve the higher end of the $8 million to $10 million of savings for the second half of this year. In total, the 2 cost pillars are expected to achieve annual cost efficiencies of between $35 million to $45 million. With the majority of the actions in progress, our focus is now shifting to the revenue enhancement pillar. During our last call, I noted that our commercial and contracts group completed the review of our top 25 contracts and initiated our prioritized negotiations. We continue to execute on these targeted contracts. And a key part of our negotiations is to ensure that we recover increasing costs related to tightening labor markets and other higher cost to serve. Each contract is an individual negotiation, and we anticipate this taking several quarters to complete. We have successfully negotiated 2 new contract terms with a few select customers and are in advanced stages with others. In addition, this quarter, we began to focus pricing improvements on our smaller call-out customers. Shifting to our outlook. Revenue growth over Q4 last year will be a challenge due to nonrepeating surge activity from Hurricane Harvey and anticipated continuing high refinery utilization rates. The forecast for 2019 for our core end markets, including refineries, is showing improvement over 2018. Additionally, we see growth opportunities in some of…

[Operator Instructions] Our first question comes from the line of Tahira Afzal of KeyBanc. You line is now open.

Hi folks.

Good morning, Tahira.

Congrats. Good free cash flow given the turnaround push out, so congrats on that. I guess, my first question is, Amerino, it's good to hear that the OneTEAM initiatives are going well. Can you talk a bit about 2019 to the extent you can qualitatively? It's good to hear 2020 outlook and what you want to do within that. But should we, based on some of the labor headwinds and you're early in your pricing traction, assume a more back-end loaded sort of trajectory for that profitability improvement?

So Tahira, I think, first of all, thank you on the comments. I think the OneTEAM program overall is progressing. It's taking a lot of effort from the Team, but it is the right thing in terms of the medium, long-term foundation for the company. And we're very happy with the way that our employees are embracing the change and moving forward. In terms of the look ahead, we are on a trajectory to continue finishing our OneTEAM cost pillars. Pricing is coming in a number of different ways. There's the small customer pricing, which is more of our call-out revenue, and that's more of a price list approach and meeting with our customers. There's contracts, large MSA customers, which we're having to negotiate Ts and Cs directly with them. And then we've got some leverage, and we're starting to see a few different commercial models related to productivity-type pricing using things like Team Digital. So we do expect the EBITDA percentage to grow throughout the year in 2019, reaching a couple hundred basis points year-over-year increase from '18.

All right, okay. That's good to hear. And then, Amerino, obviously, the cash flow performance in the last 2 months of the quarter was phenomenal. I don't want to over bake and get too excited. How should we think about free cash flow as we head into 2019? And can you talk about where you see debt levels potentially going as a consequence by the end of next year?

Tahira, this is Greg. Last - year-to-date, our cash flow is negative $14 million. We would anticipate having $7 million of CapEx in Q4. So without considering cash flow from operations, that would put us at negative $21 million. And as we've said, we generated $30 million on the back half of Q3. Q4 activity levels are front-end loaded with less activity on the back half of Q4. So as we look at Q4, we have a view of generating cash flow of mid-20s target to finish the year with positive free cash flow.

And then, I think, Tahira, going into 2019, clearly, the OneTEAM program will cycle down by the end of Q1. So that it will drop off, which is our $25 million to $30 million of investment. And then we continue to expect to see a 10% improvement in our working capital year-over-year. And our target is to generate between 5% and 6% of revenue on cash flow. So that gives you some of the targets that we're looking ahead into 2019.

That's great. Thanks you and congrats again.

Thanks Tahira.

Thank you. Our next question comes from the line of Craig Bibb of CJS Securities. Your line is now open.

Okay. The Quest Integrity performance in the quarter was outstanding. It sounds like the subsea inspection drove that. Could you give us some more details, maybe the size of that market? Is the seasonality any different than the rest of the business?

So that market, right now, we're mostly playing in the Gulf of Mexico part of it, and we're still in the phase of sizing it globally. It is exciting for us because we're able to leverage a lot of the architectural benefits of our tools around reliability, durability and just how rugged they are in the higher - to handle the higher temperatures and pressures. So I think I can't give you a market size, but we do think we're creating a market that, from regulation standpoint and customer standpoint, is an area they haven't necessarily been able to inspect in the past. So it is a new market. Our tools' sizes, from an HSE perspective, are very, very beneficial for the customers. And we're working directly with customers, as I mentioned, a couple of quarters ago on developing new tools and continuing to refine it. So we see it as a good opportunity, and it's an area we're going to continue to invest in our business.

I mean, how - could you - maybe how big was it for you guys as a percentage of Quest in the quarter or just a broad trick around that?

So right now, it's still fairly early. We're doing 2 to 4 operations per quarter, so it's not a major move yet. But it's exciting because, again, it's a completely - we're creating a new market that doesn't exist. So it's not a major, major percentage today.

Okay. So then, I mean, you had a huge entry for revenues. What was the real driver of subsea that's small?

Well, we've got good traction right now on inspections, pipeline work. We've got good decoking operation that we're making some good traction on globally, and that's an area that we're investing additional capital and people into. And the nice thing about that is it's an integrated solution from hardware, our people as well as an analytical predictive tool that were handing over to our customer. And the heater business is, if you look in the refining space, is one of the highest downtime risks for our customers. So we've got a very good integrated solution. So that's one that has helped us the last couple of quarters as we've gotten back on track with our Quest budget.

Okay. And then it sounds like Team Digital is going well. Could you give us a little more color around that? And does it improve stickiness or utilization? How do you look at the benefit?

Sure. So I think a few quarters ago, I mentioned around the efficiency and productivity of Team Digital, and that's still in the ballpark of 25% type efficiency gains. What's going well now is we're starting to take the platform to our customers, and it's - they're seeing how it fits into their overall turnaround project and plant maintenance-type work. So it's very - its ability to communicate with different systems is a positive. The productivity is a positive. And we're expanding the number of service lines that - our templates and service lines that are in Team Digital. So how I can tell you that - its stickiness is the number of projects, the number of customers and the feedback we're getting from customers that are technical domain part of the platform is much stronger than other things they've seen in the market. And now we're starting to have different commercial discussions with our customers, so we can both gain from some of the efficiency and productivity gains, starting with inspection. And it's going to take part of 2019 to implement some of those, but the traction is very positive. And it's also - discussions are happening at all levels within the customer. They're seeing the value at a plant level, and they're also seeing the value with their digital officers at a corporate level. So we're very happy with the progress we're making there. And that's one of the reasons we're going to invest or increase our investment to commercialize that platform.

Okay. And last one, you guys should be run rating with the full OneTEAM savings by the end of 2019?

So the first full year, if you look at the 2 cost pillars of, yes, I guess, let's call it run rate, would be 2020. So we'd be completed, the 2 cost pillars, to hit that level at the end of '19. But if you're looking for a first full year, it's 2020.

Okay, great. Alright, thanks a lot.

Thank you.

[Operator Instructions] Our next question comes from the line of Tom Radionov of Core Partners. Your line is now open.

Hey guys, good morning. Amerino, specifically, do you - had a question regarding one of the previous comments that I think you made regarding Q4. I think you suggested that given the more difficult compares versus last year and the high crack spreads, Q4 may be a little bit weaker than otherwise you would have expected it to be. Just wanted to drill down on that a little bit. Was that a comments that you're making vis-à-vis revenue or was that EBITDA? As I look at the Q4 EBITDA from last year, obviously, a very strong number. So just want to make sure if you're messaging to the market that it may be difficult to sort of reported EBITDA that is higher versus last year given some of these issues that you had implied.

Sure. So let me just start on the revenue first. We do expect, sequentially, revenue obviously will be up with a stronger turnaround fees in Q4 to Q3. However, my comment was specifically related to Q4 of last year versus Q4 this year because of the surge of both the Hurricane Harvey project work as well as now the headwinds we've got on some of the refinery utilization rates. We see a sequential increase, probably not as strong though as last quarter - last year's Q4. So that's on the revenue line. And then we've got a lot of our savings continuing to kick in to Q4. And when I look at quarter-on-quarter from an EBITDA level, we would have to take the drop in revenue obviously with the fall-through levels that Greg mentioned, plus some of the headwinds on cost to serve. But we still - we're still confident in reaching the plus $20 million levels from an EBITDA level for Q4.

Got it. And so I think that it's fair, kind of going back to some of the commentary from the second quarter, where you talked about $80 million. I guess, given in terms of EBITDA for the full year, given the sort of performance in Q3, I guess, that number probably goes down a little bit. But I guess, my question is more about 2020, to your point, which is the sort of more normalized way to think about revenue and EBITDA. And specifically, if I kind of do a very basic math here, and I assume that revenue goes up by 5% in 2019, sort of in line with the market, and then another 5% in 2020, that gets me to $1.4 billion of revenue. And then kind of based on your 10% to 12% EBITDA margin guidance, then that implies $135 million, $200 million, maybe $70 million of EBITDA. I guess, my question on that simple math is, if I run the math that way, the operating leverage at 10% EBITDA margin is about 50%, and the operating leverage at 12% EBITDA margin is about 75%. And I feel like historically, you've talked about operating leverage of more like 35% to 40%, and so I just want to kind of reconcile with these numbers and see how you think about your ability to sort of achieve that kind of operating leverage down the road.

Yes, I think there's 2 factors. Our operating leverage on a growth cycle is a little bit higher than that, probably between 40% and 45% between new growth and existing. So that's one thing. And the second thing is with our shift to the revenue pillar, a big part of our drive now is to recover the pricing that we've lost or because costs have increased, pricing has decreased over the last couple of years. We do see that pricing movement if we work well with our customers as gaining traction, as I said, through 2019. So between pricing, the 2 cost pillars and a 40% to 45% leverage, that's where we're getting our 10% to 12% for 2020.

Got it. Okay, understood. And then last question on working capital. Obviously, a very strong quarter in the third quarter. Is your Q4 typically a drag from a working capital perspective? And given the strong performance in Q3, would you expect any sort of trends that will be different from the way you typically see that quarter shake out from a working capital perspective?

Q4 operating cash flow last year was a use of about $4 million. Operating cash flow in Q3 last year was only $3 million. So I think we've done a good job of being focused on our receivables and our collections. And while, yes, there's more strain on Q4 than there is Q3, it's, as I said, it's front-end loaded with less activity on the back half of the quarter. And with our stronger focus today than we had a year ago, I expect that we're going to generate positive free cash flow in Q4.

Got it. Okay, great. Thank you so much. I really appreciate the color. Thank you, guys.

Thank you. And I'm showing you for the questions at this time. I would now like to turn the call over to management for closing remarks.

Thank you, Chanel. I'd like to just thank everybody once again for joining us on this call and for your interest in Team, and we look forward to speaking with you again next quarter. Thank you.

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.