Thank you for standing by. And welcome to the Second Quarter 2020 Team, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Kevin Smith, Senior Director of Investor Relations. Please go ahead, sir.

Thank you, Shaun. Welcome everyone to Team’s 2020 second 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 our 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, August 5, 2020. Therefore, please be advised that any time-sensitive information may no longer be accurate as of the date of any replaying or listening to or transcript readings. 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 August 12. The information on how to access this replay feature 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 in the company’s other documents and reports filed or furnished with the Securities and Exchange Commission. The company assumes no obligation to publicly update or revise any forward-looking statements, except as may be required by law. Amerino will begin by providing an update of our business, Susan will then detail our results and before we take your questions, Amerino will highlight our market outlook, OneTEAM program and second half 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. Team’s second quarter was extremely challenging as we navigated through the global pandemic and an oversupplied oil market, which resulted in significant stress and volatility for our clients and employees. Based on our performance, Team’s global workforce was up for the challenge and I am proud of our people for their execution and perseverance during these dynamic times. Before we get started, I would like to formally introduce Kevin Smith, our new Senior Director of Investor Relations. Kevin has over 15 years of industry experience in the energy sector, including E&P, midstream and LNG, working in Investor Relations and previously as a research analyst. Susan and I are glad to have Kevin join our team and we are sure you will enjoy working with him. Despite the unprecedented drop in industry activity, we are pleased with our second quarter results, which reflect the tremendous efforts made by everyone in the company. Consolidated second quarter revenues were $189 million, down 40% from a year ago, but in line with the revenue outlook we provided on the last earnings call. The quarter got off to a difficult start as many of our clients implemented stay-at-home restrictions, delayed projects and significantly cut CapEx plans. The unprecedented reduction in activity began in mid-March, troughed in April and May, and slowly started to recover in June when global economies, travel and other regulatory restrictions began to relax. Second quarter gross margins of $57 million or 30.3% exceeded the comparable quarter’s high watermark and set a record quarterly gross margin since 2015 pre-acquisitions. Adjusted EBITDA for the second quarter was $12.7 million or 6.7% margin. Despite realizing a $126.5 million decline in year-over-year revenues, our second quarter cost savings of $35 million supported…

Thank you, Amerino, and good morning, everyone. As Amerino mentioned, our second quarter consolidated revenues of $189 million were down 40% from the second quarter of 2019. All three segments were down year-over-year. The largest dollar amount of the revenue decline did come from Inspection and Heat Treating and Mechanical Services segments. On a percentage basis, Mechanical Services posted a 36% revenue decline in the quarter, while Inspection and Heat Treating was down 42% and Quest Integrity was down 50%. Stay-at-home restrictions due to the pandemic caused an extensive disruption to our business across all geographies and industry sectors during the quarter. The movement of critical personnel and subsequent quarantine restrictions made travel difficult and severely limited client engagement and productivity. These restrictions hit our Quest segment especially hard given the nature and locality of its product offering. The reduction in demand in the energy sector and macroeconomic conditions caused many of our clients to reduce capital spending and delay key projects. However, we did realize a nice rebound in the latter part of the quarter as economic and industry activity increased. Our consolidated gross margin for this quarter was $57.4 million or 30.3%, which was above the same quarter a year ago and marks our highest gross margin percentage achieved since 2015. Our adjusted EBITDA for the quarter was $12.7 million. Despite realizing $126.5 million decline in year-over-year revenues, our adjusted EBITDA declined by only $20 million from the comparable quarter in 2019 as a result of our global cost actions. As a point of reference, our second quarter 2019 was one of the strongest quarters in recent history from a revenue standpoint, gross margin and adjusted EBITDA. The second quarter total cost savings associated with our immediate actions were approximately $35 million. These cost savings reduced both our…

Thank you, Susan. Before we take your questions, I will provide a market outlook, review the progress of our OneTEAM tune-up and our current expectations for the second half of the year. Team’s core end markets remain highly volatile with COVID-19 hotspots throughout the country and internationally. From a macro perspective, we are seeing positive signs of increased economic activity as parts of the world are steadily resuming operations. Global oil demand is recovering, driven by gasoline and diesel, while jet fuel remains suppressed. However, demand of all three refined products collectively remained below 2019 levels. Given the combination of cuts in oil supply from OPEC Plus and U.S. production declines, we expect the oil market to be undersupplied in the second half of 2020, resulting in a drawdown of inventories and eventually improvements in industry fundamentals. Refinery utilization rates are now approximately 80%. Historically, these levels have provided healthy margins for refineries and should lead to increases in both OpEx and CapEx spending. In addition, many of these plants delayed large turnaround work due to high utilization rates in 2018 and 2019, and will now need to undertake more comprehensive turnaround projects over the next 12 months to 18 months. Team benefits in the long-term as higher utilization levels lead to additional asset wear and tear due to the corrosive nature of the operating environment. Our downstream clients continue to schedule off-cycle projects that have shorter durations, known as pit stops, to perform limited scope maintenance. By collaborating with our clients on these smaller projects and leveraging our stable and extensive nested footprint, we are able to optimize our gross margins. During the second half of 2020, we expect our clients will maintain tight capital spending budgets and instead focus on OpEx projects. As a result, our onstream and…

[Operator Instructions] And your first question comes from the line of Adam Thalhimer from Thompson Davis.

Hey. Good morning, guys.

Good morning, Adam.

Amerino, when I plug everything in, that’s a pretty good outlook for the back half of the year, I come up with full year EBITDA right around, maybe a little bit better than $50 million, is that in line with what you are thinking?

I would say, Adam, that going through the numbers and plugging it in, that would be a general range of based upon the commentary and discussion points with SG&A reductions and gross margin.

And I think, Adam, the one variable will be how the recovery on the topline occurs, and the balance between permanent and variable cost reductions. So I think from an SG&A standpoint, the 10% to 15% drop is in line with our plans compared to 2018 -- 2019, sorry. The variable, the permanent balance will depend on that topline growth. And the range is 15% to 25% right now, but as revenue recovers, some of the costs, obviously, will be needing to be put back into the system, like, some of the nondiscretionary spend, overtime, training, travel and those type of things, more of the indirect costs.

Okay. What did you see in July, Amerino?

In terms of activity?

Yes.

Yeah. So what we have seen, Adam, is that April, May troughed, we did see a nice improvement in June, and the July, August, I would say, has been we forecast that to be a bit more moderated right now. So we were on a good pace of improvement. I think the second wave of some states taking additional precautions, like, I mentioned, the West Coast as an example has moderated the growth improvement. So we are seeing an improvement in activity in terms of utilization in hours. But not as big of a move as May to June, obviously, so it has moderated slightly but still improved over June.

Okay. And then from a seasonality standpoint in the back half, it sounds like Q3 EBITDA, obviously, up from Q2 and then Q4 another step-up from Q3.

Yeah. I think, again, at the top level, as the year goes on and we start freeing up some of the travel and quarantine restrictions, obviously, we expect Quest to have a stronger second half than first, as I said in the prepared remarks. The improvement of the market, the demand, as inventories start to draw down we do expect to see a revenue growth going into the second half of the year, maintaining some good cost controls in place. So I would say that, Q3 will be improved over Q2 and Q4 over Q3. That’s a fair assessment in terms of EBITDA.

Okay. Great. Well, good job in a tough environment. Thanks.

Thank you, Adam.

Thank you.

Your next question comes from the line of Stefanos Crist from CJS Securities.

Good morning and congrats on the quarter.

Thank you. Good morning, Stefanos.

First, on the $50 million to $75 million of cost savings for the year, are those inclusive of the $35 million and also what percentage of that $50 million to $75 million will be permanent versus temporary?

The $30 million to $75 million is inclusive of the $35 million that’s been recognized. Additionally, we are still estimating approximately 40% of the cost reductions would be permanent in nature. That obviously can vary and will continue to change as we progress, and we recalibrate our cost structure, but right now currently it would be about 40% permanent.

Got it. Thank you. And also in the press release, you mentioned, midstream activity is close to 2019 levels. Can you maybe remind us what percentage of your business is midstream and maybe what segments that’s most exposed to?

Sure. So we don’t list it specifically, but if you look at some of our pipeline percentages and a little bit actually moving into our other category. That’s where you will see we are in the range of 8% to 12% of our revenue coming from what we would consider pipeline midstream and other type of terminals, et cetera, so that type of work. What was the second part of your question?

What segments that’s exposed to?

Yeah. So the biggest impact for that part of the segments right now comes from Mechanical Services and that addresses some of our pipeline integrity, hot tapping, line intervention. And then once you get that work, what a lot of the midstream clients do is they provide project or they require project management support and then that allows us to pull in other segments like inspection, and obviously, Quest plays a large role as well in the midstream and pipeline sector. So it generally starts on either the midstream or the inspection side, but what we are finding is that that overall integrated package fits very well with what our clients are demanding right now.

Got it. Thank you very much. I will jump back in queue.

Thanks.

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

Hi, guys. Thanks for taking my question. I think it was a commendable effort this quarter so compliments to the team there.

Thank you, Sean. Good morning.

Good morning. So I just wanted to start, just from a high level, if we go back to sort of pre-COVID-19, you guys were looking at maybe low single-digit topline growth in 2020, let’s say, $1.2 billion in topline is what you were sort of planning around and now we are looking at sort of $940 million for the year topline. I am just curious from a high level to get a sense from you on relative to that pre-COVID outlook? How much of this revenue pressure is a deferral and how much just never comes back? I hope that question makes sense, it would be helpful to get your thoughts on that dynamic?

Yeah. Yeah. We are constantly monitoring, Sean, I think, it makes a lot of sense. We are constantly monitoring each segment for exactly what we think is COVID or oil and gas imbalance delays versus cancellations. And one way to look at it is that, if you look at the nested business. That one is hard to make up, right? Because it’s constant run and maintain. So the biggest impact of what would be canceled, let’s say, or non-repeat is going to come from nested and that’s about one-third of our revenue. We are not quantifying publicly right now what the impact is but that’s the biggest impact. On a project/turnaround perspective, I think, that the smaller pit stops are occurring and we believe will continue to occur. A lot of the larger turnarounds are being delayed not canceled. So they are being pushed into the second half of this year and some into 2021. Now the -- I guess the good news for us is generally when those type of projects and turnarounds get delayed, and with the high utilization rates that have been experienced, we generally have increased discovery activity during that time. So we go in with a certain plan scope and then because of the delayed projects and corrosive environments, we find the discovery increase, which is good. But I would say most of that third of our business is delayed not canceled. Then on call-out, it’s a bit of a mixed bag, some stuff is that can be delayed, that would be considered call-out is being delayed. But I would say, that was probably 50-50 between delayed and canceled. So I think that’s probably the best way to look at it is almost by business type.

Yeah. That’s really helpful. And the next one is just an update on the competitive environment. So you did mention you guys are gaining some share on the West Coast. But as we think about the softer macro environment alongside sort of the gross margin discipline you guys stick to. Does pricing continue to be a pressure point there or is there a point here at which smaller competitors become distressed and Team’s market positioning becomes incrementally better, any thoughts on that dynamic, Amerino?

Sure. I would say, Sean, that we are obviously starting to have discussions and we did last quarter as well with our clients that are under margin pressure. We have been able to maintain or contain our price reductions to 2020. So none of them at this point are leaking over into 2021, our clients have been very open, collaborative, in some cases, we have gained more revenue with a drop in price, in other cases, we have been able to pull through some additional segments and services. But from a client perspective, I feel it’s been constructive and collaborative, and I think, we are trying to work together as a team to get through this dynamic environment. From a competitor standpoint, I think, a lot of our major competitors by segment are doing similar to what we are doing in terms of focus on cost, et cetera, especially for the standard work. We are seeing regional pressures in certain markets where, as you said, clients some of our smaller competition is focused on cash generation if you will. So they are getting very aggressive, especially on the standard front. When it comes to customized, engineered, integrated and more advanced services, I feel that’s when we are -- that’s when we step up and that’s when our clients are willing to work closely with us and we start looking at total cost, not just the cost of a flange or the cost of a piece of hardware. And there, I think, we have been successful in shifting some of our revenue to more integrated advanced customized solutions, and looking at total cost for our clients, not just the Team price. So that’s how we have managed it. We continue to refine our sales and business development organization. I think we have got a strong toolbox and portfolio of offerings, and as I stated, I think last quarter, going into this year, we felt very confident with our portfolio and we still do and this market has almost given us a catalyst to start looking at diversification of revenue in some of the sectors that I mentioned earlier. So I like where we are. Our leadership team has become very agile. They are very close to our field operations, and we are getting a lot more visibility on RFPs and really focused on how we can differentiate ourselves with our clients beyond just a price discussion.

All right. Helpful. Very helpful. One last one for me, so just as we think about the increased scope of cost reduction here, I still think 40% of that’s permanent in nature. To the extent we do see sort of a healthy revenue recovery in 2021. How should we be thinking about the incremental margin on that in light of the cost saves, plus maybe some one-time savings like travel and entertainment coming back into the system, any sort of high level thoughts on that dynamic would be great, Amerino?

Yeah. I will let Susan comment. I think what we would expect as the market recovers, we will see a larger fall-through in the first half of the year because, obviously, revenue will probably outpace cost additions.

Yeah.

We have remained a very disciplined in how we are tracking and monitoring our cost savings, obviously, to deliver the numbers that we are. My expectations would be that over a full year, it would be front-end, high fall-through and then level off to a range of about 40% to 45% in terms of fall-through. Susan?

No. No. I would agree. I mean it’s going to very dependent on the period of time as you move up and the classification or the categories of our revenue. I definitely agree that you are going to see it the cost the revenue outpace the cost as you move through the year.

Excellent. Thanks for the time. Very helpful.

Thank you, Sean.

Thank you.

[Operator Instructions] Your next question comes from the line of Martin Malloy from Johnson Rice.

Good morning. Congratulations on what you are able to do on the margin side.

Thank you. Good morning, Marty.

You mentioned renewables in your prepared comments in talking about new sectors, maybe could you expound on what you are doing there, and also are you all involved in inspection and taking care of hydrogen infrastructure, whether it be the production of hydrogen or refueling facilities, I am just thinking about pipes under pressure and the need to be inspected.

Yes. Good question. So maybe let me start with renewables. For us it’s not a lot on solar, but we are on hydro and we are on wind. And on the inspection front, a lot of visual inspection work, as well as some drone work and other rope access type activity where we are either doing a visual or actual inspection on corrosive environments and some of that is in offshore environments and some of that on land. On the Mechanical side, we are doing everything from machining, bolting type work on site, including some repair work as well and different mechanical services, depending if it’s new construction or repair. And then when you look at some of the Quest services and going more into the hydrogen and what we consider more high energy piping, we do have some very differentiated, high resolution technology, fit-for-service processing and then helping our clients manage their critical assets both in terms of maintenance, as well as life extension. We do some work in our own labs, but the majority of it would be on-site, on our client sites. So it’s that type of activity and those type of markets.

Great. And my next question relates to your comments about technology and digitization, asset management, are you seeing as a result of COVID-19 that customers are looking more seriously at these programs or getting more involved in these programs. And I realize there are some headwinds near-term to probably implementing some of these programs, but maybe any anecdotes that you have from conversations with customers about this?

Sure. Yeah. And we have spent a lot more time, obviously, virtually speaking with clients to get a better handle on how they are viewing their critical asset or their asset management programs, and that’s been very insightful for how we spend our R&D dollars as well. What I would say is that the, on the inspection side, the use of more analytics risk-based inspection is becoming more discussed and it’s not going to be a light switch that goes on. It will be a transition. We estimate between two years to three years of a move where we start getting enough analytics to make the right decisions of when to inspect, which assets require repair, so you are not doing additional repair, et cetera. So that’s getting a lot more attention right now in a lot more systems, which is one of the reasons we are making our digital pivot to more critical asset-based, as well as data and analytics. We are finding a lot more efficiency driven results for our technicians, but also the clients are seeing a lot less rework right now and a lot better management of permitting and subcontractor activities, so that’s real and here and now. On the Mechanical side, we are finding the use of digital and technology tools. I referenced the one of the systems we have for Touch Point Corrosion, where we are using technology instead of people and cranes, and other high safety risk items. We are also using a lot more laser scanning to help move from an engineering hands-on approach to get better accuracy, so that’s real. And then I think the other big one for our clients when it comes to their assets is being able to almost 6create an asset -- digital asset file that allows them to manage their fit-for-service techniques, which is what they are starting to build around critical assets. So I think it’s going to be an evolution. But anything right now that is safety driven, reducing exposure and the use of analytics is what I would say is getting the highest attention and then making sure that our systems are agnostic to some extent, so we can communicate across different clients using different platforms.

Great. Thank you. I will turn it back.

Thank you.

I will now turn the call back over to management for additional comments.

Thank you. While the outlook for the economy remains uncertain for the foreseeable future, we will successfully navigate this dynamic environment by focusing on execution excellence and deepening our client engagement. We remain steadfast on our priorities, free cash flow generation, debt pay down, expanding margins and quality topline growth to build a sustainable and profitable business for the long-term. Thank you for joining us on this call and for your continued interest in Team and we look forward to speaking with you again next quarter.

This concludes today’s conference. You may now disconnect.