Ladies and gentlemen, thank you for standing by, and welcome to the Q4 and Full Year 2019 Earnings Call. [Operator Instructions]. I would now like to hand the conference over to your speaker for today, Mr. Don Bleasdell. Please go ahead, sir.

Thank you, Deborah. Welcome, everyone, to Team's 2019 Fourth Quarter and Year-end 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, March 13, 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 web cast by along to the company's website, teaminc.com. In addition, a telephonic replay will be available until March '20. 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 described in detail on the company's annual report on Form 10-K and on 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 would now like to turn the call over to Amerino. Amerino?

Thank you, Don, and good morning, everyone. We appreciate you joining us today. Before we get started, I would like to comment on the recent market developments resulting from the coronavirus and the decline in crude oil prices. First and foremost, we are taking active precautions to help protect the health and well-being of our employees and working closely with our clients. While it is too early to forecast the ultimate impact of these events, Team's agile and scalable operating model, coupled with a strong track record of rightsizing our cost structure has prepared us for these dynamic times. Team is well positioned to lead in this volatile market leveraging our unexploited competitive advantages, which includes the breadth of our subject matter expertise and cross-segment integrated solutions. In partnership with our clients, we are working to develop and deploy technologies across our inspection, engineering assessment and mechanical services portfolio to deliver increased productivity and extend the economic life of their assets. I will now review our performance. We are pleased with the fourth quarter results as we continue to deliver improvements in free cash flow, EBITDA, gross margin and SG&A despite various top line challenges. Consolidated fourth quarter revenues were $288 million, down 7% from a year ago, primarily due to lower activity in our Inspection and Heat Treating segment and the 2018 shutdown of underperforming businesses. Here are some highlights of the quarterly and full year achievements. Fourth quarter adjusted EBITDA was $23.2 million or 8% margin, full year adjusted EBITDA was $80.3 million or 7% margin, a year-over-year increase of 11.4%. Despite lower year-over-year quarterly revenues of $22 million, fourth quarter gross margin was $84.2 million or 29.2%, a 160 basis point improvement over the prior year. For the full year, gross margin was $328 million or 28.2%…

Thank you, Amerino, and good morning, everyone. I will review our quarter-over-quarter performance and highlight some of the 2019 full year results. Consolidated revenues of $288 million in the fourth quarter were down 7% from the fourth quarter of 2018. On a full year basis, consolidated revenues were $1.16 billion, compared to $1.25 billion in 2018. In the fourth quarter, both Quest Integrity and Mechanical Services increased revenues as compared to the prior year with Quest driving the majority of the year-over-year growth and posting a record quarterly revenue performance. The Quest and Mechanical Services revenue increase was offset by a revenue decline of 19% in our Inspection and Heat Treating segment. Full year revenues were negatively impacted by foreign exchange of approximately $12 million. Additionally, exiting underperforming operations in late 2018, contributed to a full year variance of approximately $20 million, with the fourth quarter impact of $3 million. Consolidated gross margin for the fourth quarter 2019 improved significantly to 29.2% of revenues, which was an increase of 160 basis points when compared to the 27.6% gross margins achieved in the prior year quarter. This represented the highest fourth quarter gross margin in over 4 years. In spite of our revenue decline, we were able to generate favorable fall through due to the progress of the OneTEAM program. The fourth quarter 2019 cost savings benefits of the OneTEAM program approximated $5.1 million. On a segment basis for gross margin, mechanical services increased 8% over a 1% revenue increase. Quest increased 27% and on an 18% revenue increase, while IHT was down 25% on a 19% revenue decrease. The fourth quarter net loss was $7.2 million, which was down from a $4 million profit in the fourth quarter of 2018, primarily due to the impacts of the effective tax rate…

Thank you, Susan. Before we take your questions, I will recap the last 2 years of our successful OneTEAM program and provide our market outlook. The OneTEAM program's two cost pillars generated savings of $22.9 million in 2019 and delivered within our targeted range of $20 million to $25 million for the full year. We remain on track to achieve the projected run rate savings of $35 million to $45 million by the end of 2020. We controlled costs through enhanced supply chain management and improved project execution, utilizing our workforce function to generate a 240 basis point gross margin expansion during this 2-year period. This expansion was achieved despite a 3% top line revenue decline, primarily resulting from the shutdown of underperforming locations in late 2018 and various external market impacts. Our adjusted EBITDA grew by approximately $28 million or 50% and more than 250 basis points. And most importantly, our commitment to capital management and deleveraging the company led to a free cash flow improvement of more than $80 million during this 2-year period. On the last call, we discussed the deployment of the OneTEAM program into our international operations using the successful and scalable North American blueprint. This strategy further positions Team for profitable growth. We are now able to deliver discrete and specialized services and differentiated integrated solutions globally. Implementation activities for OneTEAM international are now more than 2/3 complete and will complete through -- sorry, will continue through 2020. We have transitioned the focus of OneTEAM to the revenue enhancement pillar, highlighting pricing strategy, product and service mix prioritization and integrated project management benefits. This includes important actions such as deploying an enterprise account management approach, driving cross-selling across our segments to further expand margins and centralizing our billing processes. Additionally, we are focused on…

[Operator Instructions]. And your first question comes from the line of Sean Eastman with KeyBanc Capital Markets.

Team, this is Alex on for Sean. Congrats on meeting the cash flow guide for 2019. I'm just kind of wondering how we should think about cash for 2020? And maybe if you can give some directional commentary on how EBITDA to free cash flow should trend in 2020 and on.

Okay. Thanks for the question. So first of all, I'll start a little bit with the overall market trends. I think that, obviously, a lot has happened over the last 30 days or so. We continue to monitor the budgets for 2020 and we will have full Q1 - at our Q1 call, which is not far from today, we will have a full, let's say, better picture for first half and second half together. But directionally, we do expect at this time that our EBITDA would grow in the range of about 5% to 8% when you look at year-over-year growth in terms of EBITDA. And through strong and disciplined working capital and CapEx management, we do expect to see about a 10% improvement -- 10% to 12% improvement on free cash flow. Now again, I will just highlight that there's a lot going on today in the markets. There's a lot of instability. Obviously, from a demand standpoint, a lot of instability when it comes to oil price, consumer GDP levels. So we have to continue to refine our model. I think, even more than the last 2 years, looking at the business in 2 halves will be extremely critical for us, and we will have to stay very close to our clients. Now what I like about our positioning and that's because of the hard work over the last two years by the leadership team and the company, is we now have 3 segments that are able to play in different cycles of the market between IHT, mechanical services, which plays in a lot of the on stream market, which I expect as cash tightens from the capital side, there will be a lot more OpEx and on-stream repairs. And then Quest continuing to expand international offshore, et cetera, we're just a healthier business when you look at not only the financials, but also the 3 segments that are now able to play in different parts of the market. Susan, would you like to add anything?

Yes, I would only say or reiterate that the free cash flow, Amerino mentioned the expected increase there that those are lumpy and usually back-ended. So as you see the improvement in free cash flow that generally does fall in the second half of the year or latter part of the year.

Very helpful. And then can you just give us an update on the diversification into the markets like aerospace, LNG and renewables? And maybe just like an update on how much of the business that is in 2019 and maybe where you expect this to trend in 2020 and beyond?

Sure. So the best way to look at our business right now is if you take the refining, we generate approximately 40% to 45% of our revenue in that sector. And then when you look at other related oil and gas or chemical businesses, it adds up to about 75% to 80% which leaves 20% to 25% of our revenue coming from what we consider new venture emerging noncore markets, meaning noncore to our existing revenue stream. So that 20% to 25%, we do expect it to grow up to about 1/3 of our total revenue, but that would take us over the next 2 to 3 years. So I'm not going to go into detail of each specific sector. Aerospace, obviously, is extremely exciting for us. We've been in this space for a lot of years. We will be investing some capital expansion into the aerospace business. And we feel that both in the U.S. as well as in Europe, we've got expansion opportunities there. We made significant investments over the last few years in other sectors that are able to allow us to play in renewables. Some of the midstream space, although it is oil and gas related, it's a lot more integrated project management, expansion into offshore being led by Quest and the opportunities that, that brings us to cross-sell. So we're going to, over time, bring more color to the growth of our, let's say, emerging markets. But right now, that we're targeting about 1/3 of our revenue from that space over the next 2 to 3 years.

And your next question comes from the line of Edward Marshall with Sidoti & Company.

Amerino, Susan, I hope you are well. That probably means a lot more today than it did a few weeks ago. But as I look at the fourth quarter calls from a lot of the refineries, a lot of your customers, they pointed to higher maintenance spend for 2020. And it kind of makes sense. Inputs versus output spreads narrowed and refined inventory levels are pretty high. So as you kind of step back and I think about if that spending is higher in 2020 than it was in 2019, how does that affect the on-stream services of Mechanical Services? And what does that do to that business versus what might -- the positives that might help with IHT.

Thanks for joining this morning. So right now, we're relooking, obviously, at the 2020 budget, considering the current, mostly, let's say, oil price impacts and what it does to capital. And the best way to look at this, at least from our view at this point is the following. You've got 2 or 3 tiers -- or not tiers, but groupings of clients. You've got the integrated clients that have upstream, downstream, midstream that as you're seeing, there's a lot of capital reductions, OpEx reductions happening hourly right now. And that grouping of clients that is -- that also has refining is going to take some time to evaluate their capital projects and how they're going to spend their OpEx. So I do expect that in that group, it won't be necessarily a slowdown, but I think that we're going to have a period of time here for the next 30 to 45 days for things to settle in terms of their CapEx and OpEx budgets. So that's one grouping. Then you have the other grouping of clients that aren't fully integrated that, let's say, more on the refining space that are going to try to obviously increase utilizations right now, maximize their differentials and cracks using the drop in the input costs. So I think that when I look at the latter on stream services similar to last year, while they want to maintain high utilizations and try to maximize margins is good for on-stream. It's also good for some of our Quest offerings that are used like fire heaters, which is one of the largest downtimes in a refinery. We've got a fully integrated offering. So that's how we're looking at it is that on stream in H1 is going to -- as things settle, we expect that to be strong and continue on. I would be right now cautious on project work, specifically CapEx. So we do see H2 turnaround stronger than H1, but we are staying very close to our clients in terms of those capital type delays. And it's not only CapEx related, there's a lot of concern right now just bringing in hundreds of people into a site when it comes to health and coronavirus. So I don't want to panic yet. I think we've got to be close to our clients. We've got to monitor, but I think having the three segments allows us to better handle that cyclicality. And I would expect that over the next 30 to 45 days, we're going to get a lot clearer picture in terms of the types of clients and if they're going to be focused more on OpEx in run and maintain versus CapEx and project work.

Got it. Got it. And then if you look at Quest, there's been some good incremental margins as there generally is. I'm curious, you've talked about a few emergency solutions that you provided during the quarter and I'm wondering how much of that was what I'm identifying in the margin versus maybe the scale on the top line or just overall? I know there's no restructuring in that business, but overall, kind of just better execution.

The biggest push right now for Quest is they continue to create and gain share in the international and offshore markets. So that's really what's driving their overall growth and margin improvement. The -- what comes with that though is that there are some specialty services like robotics, for example, where when that hits, obviously, it's a good impact. It's a good integrated solution for our client, but the majority of the growth is coming in those markets. And we -- as I've explained a little bit before, they are essentially creating new markets in terms of the size of the lines that they're inspecting in terms of the integrated offerings around the refining and process and petrochemical space. But the specialty services are good at, so as advanced engineering providing fit-for-service support to our clients, but the bulk of the growth is in those new sectors.

Got it. And I guess, looking at Quest, you've talked about some new applications, some new processes that you're using or that customers are using with your services core. I'm kind of curious, how do you accelerate the growth in that business? I mean, what's your vision ultimately for that division? And can it be as big as a Mechanical Services and IHT over time.

So it's a good question. And their growth rate over the last 2 to 3 years, obviously, is far exceeding the core industries. And what we're doing now is when you look at how we prioritize our investments around capital, recruiting, sales efforts, R&D investment as well as starting to set up service centers globally for their tools instead of being fully centralized in one location. So we're setting up a model that would allow them to continue to expand their business development efforts. We're setting up a model that allows them operational support globally and we're continuing to recruit and train our talent to be able to handle. The nice thing about Quest is when we go to a job, if you're looking at just the high-end inspection equipment, you're sending two technicians and two tools. So it is a very low investment compared to some of our competitors and that allows us to scale. Now what's important, though, is that we do this scaling safely. Obviously, we do it with quality. So we're pushing the growth and managing the quality, but this model of continuing to run the business centralized with the decentral support will allow us to continue to grow Quest as we move. Now when you ask, where is the top end. Obviously, we continue to see good growth in that market because they're creating new market. We don't want to be naive. I think there's always competition that we've got to be aware of. But I think the clients are giving us extremely good feedback. They like the investments we're making in R&D. We're collaborating with a lot of our clients. We're increasing our engineering support and resources so we're prioritizing the investments to keep Quest growing as quickly as possible.

Your next question comes from the line of Adam Thalhimer with Thompson, Davis.

So for Q1, do you think EBITDA is kind of in line with last year?

So at this point, yes, we would project that we're going to be similar to last year at this time with some slight improvement. But again, with the changing environment right now. We're continuing to focus on what's occurring here in March.

Okay. And then as it relates to coronavirus, you haven't seen any facilities shut down. You said you just -- maybe it seem less project work?

Yes, at this point, Adam, if I look at it overall, what is happening, obviously, as everybody is seeing the demand side is coming down. We have had some projects delayed where it would be bringing in a significant number of people into a project like a turnaround or a capital project. So due to the social distancing and rules around trying to keep things minimized for the time being, we have seen some things push. We've also seen some call out reductions, not necessarily due to the coronavirus only, but as our clients are looking at how they're going to manage their OpEx and Capex. And so I expect that, like I said earlier to last 30 to 45 days until we can get a better read on where that's going, but yes, nothing has physically shut down completely. There is some operations that have moved to shift work where to limit exposure of just being around significant number of people. They're going to shift work. We've had some of them run and maintain projects, reduce hours per employee, again, to reduce some of the exposure, but I guess, directly to answer your question, no shutdown so far. And obviously, we're staying very, very close with our clients to manage the situation.

Okay, perfect. And then I think you said up MS up this year, Quest up this year, IHT flat. Is that revenue or EBITDA?

So the comments are on revenue. I didn't clarify on IHT in terms of flat, that's the one that we see we're going to need at least another month or so with the changes in the environment to get a better handle on the IHT full year. So right now, I think as you've stated, yes, revenue up for the 2 IHT projecting to be flat, but we do see a stronger second half turnaround season which could push things, but we need a little bit more time here to see how the exact -- your first question, how that plays out for IHT, where we're a lot more nested and embedded within the client plants.

Okay. But if you had flat revenue in IHT, you might have some EBITDA growth just with the cost saves. Is that fair? In terms of margin expansion, yes. I think that if we're at a flat, overall, right now, as I said earlier, we're driving and anticipating an expansion on EBITDA year-over-year. I think that mechanical services. When you look at last year, we expect the top line growth hold gross margins somewhat in line and really try and gain market there. Quest, top line growth. And through the investments, there might be a small drop in an EBITDA percentage, but the growth is our focus. On IHT, I would plan for flattish revenue. And right now, slightly up on EBITDA due to the cost improvements that we would be implementing throughout the year.

[Operator Instructions]. You have a question from Stefanos Crist with CJS Securities.

So you mentioned competitive pressures in the Gulf Coast affecting IHT. Have those been in your expectations with pricing discipline? Or is there something different there?

I guess, the last couple of quarters, I've highlighted the fact that we are focused on gross margin improvement and pricing discipline and price of project selection, let's say. So it is a continuation of that and it's primarily been West Coast and Gulf divisions. The only thing I would add, Stefanos, that I would be concerned with or I am concerned within the next quarter or 2 is depending on how the market plays out, some of the smaller regional players that are going to need to try and continue to generate profit, et cetera, we're going to have to monitor the pricing and gross margins very closely because I think it's if the market wasn't going through the volatility that we're seeing right now, I would give you the same answer as I did the last two quarters. Due to the volatility in the market and depending -- especially like in IHT and some of the more commoditized product lines, I would need to monitor that a little bit closer over the next 30 to 60 days.

I'm showing no further questions at this time. I would like to hand the call back over to Don Bleasdell for closing remarks.

Actually, Deborah, I'll close. This is Amerino. So thank you, everyone. And looking ahead, we will continue to leverage innovation and technology, apply pricing discipline and execute on the OneTEAM strategy focused on our revenue enhancement pillar. 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.