Greetings and welcome to the Team, Inc. First Quarter 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, Mr. Smith. You may begin.

Thank you, Devin. Welcome everyone to Team's first quarter 2021 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 at teaminc.com. Information recorded on this call speaks only as of today, May 5, 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 May 12. 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 of 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 in the company's annual report in 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 the first quarter and providing an update of our business. Susan will then detail our results, and before we take your questions, Amerino will discuss the company's outlook. I would now like to turn the call over to Amerino.

Thank you, Kevin, and good morning, everyone. When we look back to more than a year ago, the entire world was confronted with a health crisis like no other. The difference today is the recovery cycle is more visible when compared to the economic uncertainty that we faced then. The acceleration of the vaccine rollout is having a positive effect on the US economy. While COVID-19 hotspots remain around the world, we are seeing signs that people are gaining more confidence to be active in their communities and increasingly traveling away from home. We expect higher demand for petroleum products, as more parts of the US reduce COVID restrictions, supporting improved margins and cash flow for many of our clients. While our outlook is improving, we faced numerous headwinds in the first quarter. As we stated on our earnings call in March, we expected the first quarter revenues would be in line with the fourth quarter of 2020. Seasonally, the first quarter typically starts off slow as our clients undertake internal budgeting and scheduling for maintenance and capital projects. However, the normal increase in activity that we see in February was negatively impacted by the unprecedented winter storms that resulted in large-scale power outages across the Midwest and Gulf Coast. The shutdown led to a loss of approximately six million barrels per day of refining capacity and forced roughly 60 petrochemical plants to go offline for several weeks, which reduced our nested activity and caused lengthy project delays. Internationally, we also faced headwinds, especially in the U.K. and parts of Europe from reimposed COVID-19 lockdowns that limited travel and necessitated quarantine restrictions. March was an entirely different story. Activity picked up significantly as our clients returned to a more stable operating environment. Billable hours in our IHT and MS segments…

Thank you Amerino, and good morning everyone. I will review our first quarter financial performance and quarter-over-quarter comparisons. As Amerino mentioned, our first quarter consolidated revenue of $194.6 million was down $42.2 million, or a 17.8% decline from the first quarter of 2020. This is a tough year-over-year comparable given that the COVID-19 pandemic did not impact operations until late March of 2020 as well as no comparable winter storms with the freezing and record-breaking subzero temperatures in the first quarter of 2020. The revenue decline was consistent with what we have seen and expected since the onset of the pandemic, except for the severe negative impact associated with the weather events during the quarter. For the quarter, all three operating segments were down in revenue as compared to Q1 2020, with the largest overall percentage decline in Quest and the largest revenue dollar decline in mechanical services. However, on a positive note, inspection and heat treating delivered a 1.6% sequential revenue growth in the first quarter as technician activity hours increased at nested client sites. On a percentage basis, IHT posted a 15.5% year-over-year revenue decline in the quarter, while MS was down 16.4%, and Quest was down 34.2%. Consolidated gross margin for the first quarter 2021 was $43.7 million or 22.5%, which was slightly below the same quarter a year ago of 24.3%. The majority of the temporary cost reductions that we enacted last year were rolled back in throughout the first quarter of 2021. We continue to remain focused on managing our variable costs to scale with increasing market demands and activity levels. The first quarter net loss was $34.3 million when compared to a net loss of $199.7 million in the prior year quarter. The comparable quarter in 2020 included $191.8 million pretax noncash goodwill impairment…

Thank you, Susan. Before we take your questions, I will provide an overview of the macro market trends, an update on our market positioning, including the transition to our new operating model and the review of our business outlook. Starting with the macro environment, the economic recovery, which is clearly visible, is not playing out evenly across the globe. Vaccination rates are rapidly increasing in the U.S. and U.K. while hotspots continue across India and Brazil. With vaccination rates increasing, consumption and global economic activity is improving and we expect the pace to accelerate. In the U.S., the prolonged refinery shutdowns in February led to historically high drawdowns of petroleum product inventories. The economy is also rebounding, achieving 6.4% growth in the first quarter, the best period of domestic GDP growth since the third quarter of 2003. As COVID-related restrictions are lifted, people are driving more and returning to their workplace, resulting in a growing demand for gasoline. In fact, on a 4-week average basis, gasoline demand has increased significantly and is now only 5% below the comparable period in 2019, with distillate demand above pre-pandemic levels. The drawdowns and the increase in demand has improved the overall refining outlook. Refining crack spreads are currently above the comparable period in 2019. The rise in refining margins has led to an increase in volumes, with refinery utilization levels increasing from a low of 56% in February to approximately 85% currently. We're also monitoring proposed government policies and spending plans. We anticipate increased regulations in the energy sector and a renewed focus on the reduction of greenhouse gas emissions. As we shared in our inaugural ESG report published last November, Team has a long history of assisting clients with emissions control services through leak detection, emissions monitoring, and repair work among other…

[Operator Instructions] Our first question comes from the line of Martin Malloy with Johnson Rice.

I just wanted to ask about the trends during the quarter. It was about 1/3 of the way through March when you suggested that the first quarter revenues would be roughly in line with the fourth quarter and yet they were down 6%. You seem pretty happy with the trends during March and from lots of press articles, it seemed that there were a number of plants along the Gulf Coast because they shut down quickly during the winter storm that they were having trouble ramping back up and having trouble with their pipes not flowing. And it seemed like that would be exactly the type of work that would be higher margin work for a company like Team. So I guess, can you maybe talk about what happened there in March, and maybe I'm missing something?

Well, I think we were expecting the first quarter to be our lowest quarter of the year and I think that's coming out of the holiday season and moving into the turnaround season during the close of our February, March call, a couple of things occurred. One is that we did have a period of time, seven to 10 days of downtime through certain -- or through certain divisions and regions that ended up impacting our nested revenue, for example, which -- it doesn't get recovered. You don't ramp back up excessively to make up the nested revenue. The seven to 10 days obviously also delayed our turnaround start-up of the season. And as clients had to push their turnarounds out two to three weeks due to the weather that pushed us further into Q2, which will carry us deeper into June, basically. So as we looked at the quarter at the time of the last call, we were still putting together, I think, as we stated what we expected the revenue impact to be. How our on-stream services and heat treating and other product lines that you're referencing that benefit from the weather impact, how quickly that would recover. And when you put all that together, I think between the project delays and that 7- to 10-day shutdown, including the impact, Marty, of Quest, right? The Quest revenue, January, February, some of those projects got pushed into March that we expected would have been completed, but with some of the continued lockdowns, that got pushed into Q2. So when you add all that together, we're looking at about $10 million on weather and another $5 million to $10 million on Quest that we just couldn't recover before the end of the quarter, which got pushed into Q2 and some into H2. So that kind of makes up that, that $15 million to $20 million. Susan, do you want to add anything?

No. I mean, absolutely, we didn't have all the numbers at the time we had the call with respect to the impacts to the weather. But Quest was a significant factor in continuing to see the delayed projects occurring with them in February and in March.

Okay. And then my second question. The labor market, could you maybe talk about availability, what you're seeing there, any pockets of labor cost increases and what you're doing to mitigate that? I think, going back a couple years ago, when there were periods of labor cost increases, it sometimes took you all a quarter or two to pass that through.

Well, that's a good question, Marty. I think the market I would say is a little different based on region and division in terms of how tight it is right now, and also on job type. So there is, pockets that are tight today and there's pockets that we expect to be tight going into the second half. So in terms of, when you look at COVID pricing and trying to recover some of that, I think right now, we're still in that COVID-19 pricing. We called it lingering COVID-19 pricing, but we're still in negotiations. And when these COVID prices come to an end with a lot of our large clients concessions, we see the labor market extremely tight, at least through May and into June. Over the summer months, it could relax a little bit and then regain tightness going into Q3. So, I don't think we're in a fully maxed out mode yet. We have ramped up our training, our recruiting, we are working at pretty high utilization levels. We're starting to recruit more on the sales and account management front, but the indexes that you referenced in terms of going back to our clients and pulling that back generally does lag, at least a quarter or so. And that's the phase we're in right now. I would expect that through Q2, we'll be in a much better position to, to start clawing back some of the pricing concessions and it's not just labor, right? It's raw materials, logistics. It's that whole index of costs to support the pricing recovery.

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

Amerino, I guess can you give us a little bit more detail on what you're seeing in April? And a sense for how confident you are that, that continues for the rest of Q2?

Sure. So when you look at April and into May, and our current visibility with the delayed projects that I was just mentioning with Marty that pushed into the second quarter. We feel that going into mid-June timeframe we've got turnarounds that are happening and that because of the delay, they'll continue into that mid-June timeframe. We are seeing activity improvements in Quest, which includes some offshore operations and international operations that I think May, and first part of June is -- at least the calendar right now is looking good. Nested, I think we've reached a 90% level, if you will. We are adding technicians, on a week-by-week basis in our nested. I would expect to see another couple of percent improvement towards prepandemic levels there. And when you look at the on-stream side and markets like petrochemical, where margins are extremely high and capacity is very much in demand, I do expect to see our call-out mechanical services work or onstream services work, continue fairly strong going into the summer months. So, I think we've got fairly good visibility on nested to see a few points improvement versus prepandemic projects. And turnarounds I would say going into early June to mid-June because of the delay continue to be strong at this point and call out, I think, driven by onstream, we've got projects in manufacturing and engineering visibility at that point. And assuming there's no other international type lockdowns restrictions, etcetera we expect April, March and into June for Quest, we'll have some stronger months.

But what do you think about margins at Quest?

Susan? Do you want to take that one?

Obviously Quest has always had the higher margins. We haven't, as we've mentioned before, been able to take out the cost to balance with the -- as we've been able to do with IHT and MS. So, I mean, we are seeing obviously improving margins and would expect -- we're not going to get back to the kind of the full prepandemic margin level, just given where we're at with Q1 but would be expecting to get back more to closer. I think we have always looked at kind of a 25% on average type of margin. So I do feel we'll get closer there, but not completely back there by the end of the full year.

Okay, that makes sense. And then another one for you, Susan. I can't really find any covenants that kick in until early next year. Is that right, on the new credit facility?

That's accurate with respect to the term loan, the $250 million term loan. The first covenant does come into play at the end of Q1 2022, and that's the net leverage cover covenant of 7 times or below. And with respect to the ABL they're incurrence based. And it's a fixed charge coverage ratio that again is only utilized to be able to incur other requirements and also looking at if you drop below a certain level of availability, but yes, generally no covenants throughout 2021.

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

First question. Could you maybe talk about your confidence in the 10% to 15% revenue growth. Maybe your visibility for the rest of the year and how much of that 10% to 15% is based on turnarounds?

Sure, so obviously with turnarounds, I mentioned it in my prepared remarks. When you look at projects and turnarounds, it's about 1/3 of our revenue split in terms of operating models. So nested approximately 1/3, and then a call out approximately 1/3. I think that the turnarounds that got pushed out from '19 to '20 and then '20 into '21, at least within the first quarter and -- first half, sorry, we've got pretty good visibility right now because we're either staffing on the turnaround, increased discovery work, etc. So the first half, specific turnaround portion is quite clear. There still continues to be some moving parts in terms of discovery and when the turnarounds will officially end getting ready for the summer months. But most of that I would say should be positive uplift, not negative for the first half. In the second half we're still working with our clients, obviously, for some of the turnaround plans, the size of turnarounds. I think that assuming the economy continues to improve and our clients continue to have to deal with some of the regulatory work and some of the large unit type work, I do expect that the turnarounds will occur in many cases, I think some could push out, but it's more, Stefanos the size of the turnaround, do they do it as a minimum pit stop or do they do it as a full scale turnaround? And that's the part we're working with our clients on how much of it is online, how much of it is offline. So I think that H1 at this point is pretty clear with maybe some discovery upside. H2, I think we've got pretty good clarity on the turnarounds that have to occur and working with our clients on the size of those turnarounds and the timing. I think there's always a probability that some of those turnarounds could get pushed out of the back end of the year. So we're obviously monitoring that. We're leveraging variable labor for the turnarounds as well, so that we don't overinflate our cost base with full-time technicians. So we maintain our variable pool and really we maintain that for the turnaround seasons. So I would say good confidence in H1, and we're working on finalizing our schedule for the second half right now.

Perfect. And then, just one more for me on just the cost savings. So I think last year, it was around $110 million from one team. Are you comfortable there in '21? Are there any other areas for cost improvement?

So, Stefanos, I'll take that. You're accurate. It was $110 million costs reductions in 2020 that were pretty much split evenly between our SG&A and our operating costs within the gross margin. You know, those were about 40% permanent and 60% variable or temporary. So as we're looking at 2021, we have rolled in throughout 2021, most of the temporary costs reductions. So you'll see an increase going to Q2 as they're in for a full quarter. I would also say that in January, we rolled ahead probably about $5 million of indirect costs as we were planning for a pretty robust February and March. So those were brought in earlier than had we known what was going to occur with the weather. But as we look to 2021 specifically, on the SG&A side we've said we're estimating between $275 million and $290 million. I would say that's closer probably to the middle of that on -- in reality that $290 million would reach that if in fact we did invest a lot more as the company was growing in R&D or the selling side, but there are opportunities that we're still looking at. I would say with both indirect and SG&A, that we haven't really built into our own analysis, but it would be continued looking at facility with the new group reorganization, looking at other facility costs reductions. And continuing to look at optimizing our headcount levels on more, not the selling, but other SG&A cost-related items. So while we haven't built it in, there are always opportunities that we'll continue to look at.

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

So clearly, a slow start to the year here, but it's definitely noteworthy that you've maintained the full year outlook on both revenue and margins. I just wanted to understand what gives you the confidence there? Is it that a lot of the 1Q miss was just delays that are going to be made up in subsequent quarters this year, and then maybe combine that with a bit better visibility around the recovery, or is there something else maybe new that is helping make up for this slower start that maybe I haven't captured there?

No, I think your first part, Sean, is accurate. When you look at the Q1 miss clearly, as we've stated here through the prepared remarks and the first few questions, comes from two main buckets, which is really the weather impact and the slow start, primarily January, February for Quest. Those are the two top lines. We don't feel that when you start looking at how we had built out our plan for the year, I would say that we expected a slow start, but those two are the misses. We do expect, again, when you look at the range we've provided, 10% to 15%. There are some areas, with regards to quarantine and travel restrictions being lifted for segments like Quest. When you look at the economy and the demand for OpEx spend more onstream services, that drives a call-out for us. When you look at states that are moving, at least in a positive direction, like California, in terms of opening things up, that drives some of our nested recovery, and so we're at 90%. So when you break it down by operating model and by segment, outside of those two main misses this year in January, February, our plan is still primarily intact. I think things will continue to move quarter-to-quarter and half the half. So when we look at H2, it's going to be more of, does anything slide out of the back end because of labor or because our clients decide to punt it to 2022. Those are always going to be risks, but as we sit here today, we feel that our plan is still intact for the year, other than those two main revenue misses in January and February.

Okay, got it. And then, maybe just in light of the disclosure around March and into early May activity level increases, I mean, could you maybe help set an expectation for the second quarter in terms of revenues and margins within the context of the full year outlook being intact?

Yes. Look, I think that when we look at March and moving into April, we're not necessarily giving quarter-by-quarter, but we do expect our March level to continue for April and May. The variable for Q2 right now will be how far into June will the delayed turnarounds goal, through either discovery or just overall activity. So it could be three months of March equivalent, or we could see a little bit of tail off in the month of June, and primarily around mid-June right now, because projects would start coming to an end. So I think if you're looking for a number for revenue in terms of the second quarter, we do expect to be more in that range of the $230 million to $240 million on the top line. And I'll let Susan comment a little bit on gross margin.

Yes. Again, as far as when you look to the gross margin here in Q1, we were just above the 22%, which was, as Amerino mentioned, I would say the drivers were the Quest revenue, Quest not being able to take out costs. And then additionally, rolling in some of the costs with the expectation that February was going to be pretty robust. So then as you really look going into Q2, last Q2, we had taken out so many costs, as you'll recall, that was our low quarter with respect to revenue, but we were able to really accelerate and take out the costs that we had basically a record gross margin. With the revenue increases, again, with the cost foundations that we've taken out, and we would expect that we're getting to those higher levels over, really, our target is 28% to 28.5%. With Q2, the costs foundation being reduced and overall the revenue expectations increase. I mean, I would expect that we're going to exceed that 28% target, that 28% and 28.5% expectation on gross margin.

Okay, got it. And then, lastly from me. The gross margin outlook for 2021 annual is intact. Has anything moved around as we think about EBITDA margin for the full year?

So I think as we mentioned on the last call, we were expecting to be on the low end of the -- in between the 2019 -- I'm sorry, the 2018 and the 2019 levels. Obviously, 2020 being kind of pulled out. I would still say that that's still the expectation. I think 2018 was 5.9% and 2019 was above 6.7%. So I'd still say our expectation is that we'll still kind of be in that lower 6%, going up closer to the 6.5% adjusted EBITDA.

[Operator Instructions] Our next question comes from the line of Brian Russo with Sidoti.

Just to follow through on some of the prior questions. How much of the uplift you saw in March and that's continuing -- I mean, how much of the uplift in March was storm response that you alluded to in Texas with pipes freezing? And how much more of that is just incremental-type normalized activities by your customers?

I think the best way to look at that, Brian, is when you look at the nested operations, which is about 1/3 overall approximately of our revenue, those, I think, were impacted negatively because of the plant shutdowns. Our technicians, obviously, weren't at work those seven to 10 days. And so that portion was an impact on revenue, but it's not one that you make up in future quarters. So that's a piece that, it was an upside, but it was definitely on the bottom end. When you look at the call-out work, that's primarily what was being driven on the recovery side, like leak repair, emissions control, and some of the heat-treating activity. And I think a lot of it along the Midwest, Gulf Coast area, those two or three service lines had recovery. And quite frankly, it wasn't in March. Some of that because of the plant delays, got pushed into even early April. On the turnarounds, it was more negative impact because again, instead of starting the turnaround late February time frame, some of the turnarounds in Midwest, Gulf Coast area got pushed into starting 2, 3, sometimes four weeks later. So we're obviously going to monitor the dollar value like we did on the impact. We'll monitor how much on the upside, but the nested was pretty much going back to normal. The call-out will have some upside and the turnarounds were more project delays that are now just in Q2 instead of Q1. So we don't have a dollar value today that I'll be able to give you, but we'll have clarity on that at the next call once we start getting all the numbers together for the quarter.

Okay. And the 10% to 15% year-over-year top line growth, it seems -- and correct me if I'm wrong, but it seems like entirely contingent on the refining industry. You did reference growth in market share in aerospace. I'm just curious, what big of a contributor growth in aerospace and some of your other segments will be in that 10% to 15% growth?

Sure. Yes. So I think when you look at refining, as I stated, and we tried to give a little bit more color today on our revenue diversifications, which is 35% to 40% of our revenue. Obviously, as margins improve and client's capital allocation and OpEx and demand goes up, that is a large market, especially in the US. So that will be a driver because refining plays in all three of our operating models. However, having said that, there's a lot of other sectors like petrochemical and chemical that are pretty much, or have been and continue to be, at capacity. So those are big drivers for us as well. LNG continues to be a driver. And even though the midstream market in terms of new capital is slowed down, the work that we do in midstream around some of the tanks and terminals and storage as well as some of the smaller in-ditch type work, that type of inspection work and repair work continues. So for us, the power, the utilities, the chemical, the petrochemical and midstream, we expect that to grow from a percentage basis, probably even higher than the refining sector. And then when you look at our emerging-type markets, offshore, we expect growth in the offshore market. But that's going to be later on in the year, as clients get back to normal activity and their projects get back on schedule. But offshore is a growth area. Aerospace continues to be a growth area, and will be as I stated. We have many sites across the U.S. and international that perform aerospace operations. We are still seeing work increasing, obviously, in the renewable sector, driven by hydro and wind. And then, as I mentioned in the prepared remarks, the infrastructure portion for us, we expect will continue to grow, not only on the enhancements of the bill that could be passed, but as things get back to normal in terms of activity levels with bridges, transportation roads, water, municipalities. So I think that we expect our emerging bucket to be a strong contributor, although on a smaller revenue base. And the petrochemical, chemical will exceed refining growth. So it's really contributing from all three of our diversity sectors.

Okay. And just lastly, on the SG&A. The guidance range that you -- the outlook for 2021, you can kind of back into what looks like maybe a mid- to high 20% level of sales. Is that kind of the run rate we should look at post-2021?

You mean with respect to the buildup of the SG&A as compared to the increase in revenue or you mean what?

Yes, correct. As a percent of revenue.

Yes. I would say that, Marty, for 2021, we're rolling in some back of some of the temporary costs. And additionally, we have the permanent cost foundation. What -- I guess what I would envision is, when I indicated our range is $275 million to $290 million, and probably closer to the mid- or lower range, that incremental increase is really driven by -- as revenues continuing to grow, that we would be additive in SG&A, but we do have other expectations in being able to reduce and continue to reduce the permanent cost. But I think, generally, from the standpoint of correlation to revenue, it is probably more of a 10% type increase.

Thank you. At this time, I'd like to turn the floor back over to management for closing comments.

Thank you, Devin. We're optimistic about our outlook, especially in the second half of the year. I'd like to thank all of our employees for their dedication to operational excellence and health and safety, which enabled Team to continue to operate during the pandemic from a position of strength. We remain excited about our growth opportunities in 2021 and beyond. 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. Thank you, Devin.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.