Greetings, and welcome to the Team, Inc. Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Kevin Smith, Senior Director of Investor Relations. Thank you. You may begin..

Thank you, Doug. Welcome, everyone, to Team's fourth quarter and year-end 2020 earnings conference call. With me on today's call are Amerino Gatti, our Chairman and Chief Executive Officer; and our Chief Financial Officer, Susan Ball.

This call is also being webcast and can be accessed through the audio link under the Investor Relations section of our website, teaminc.com. Information recorded on this call speaks only as of today, March 10, 2021.

Therefore, please be advised that any time-sensitive information may no longer be accurate as of the date of any replay listening or transcript reading. There will be a replay of today's call and it will be available via webcast by going to the company's website, teaminc.com. In addition, a telephonic replay will be available until March 17.

The information on how to access these replay features was provided in yesterday's earnings release.

Before we continue, I'd like to remind you that this call contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities and Litigations Reform Act of 1995, including statements of expectations future events or future financial performance. Forward-looking statements involve inherent risks and uncertainties.

And we caution investors that a number of factors could cause actual results to differ materially from those contained in any forward-looking statements.

These factors and other risk factors and uncertainties are described in detail in the company's annual report in the Form 10-K and in the company's other documents and reports filed or furnished with the Securities and Exchange Commission.

The company assumes no obligation to publicly update or revise any forward-looking statements, except as may be required by law. Amerino will begin by highlighting significant events in 2020 and provide an update of our business. Susan will then detail our results.

And before we take your questions, Amerino will discuss the market outlook as well as our near-term and long-term expectations. I would now like to turn the call over to Amerino..

Thank you, Kevin, and good morning, everyone. We appreciate you joining us today, and I hope you and your families are safe and healthy. The last few weeks have been volatile with record-breaking winter storms hitting many parts of the country, including southern states that do not typically experience cold weather to that magnitude.

Now, after falling out, positive news on the declining number of COVID cases and a significant increase in the pace of the vaccine rollout, we are starting to see the light at the end of the tunnel and our employees are energized and ready.

2020 was a year in which companies around the world faced unprecedented challenges, and I am extremely proud of the resilience of our entire organization. While navigating incredibly difficult market conditions, we remain focused on managing what was in our control and took a series of proactive steps to ensure we exited the year stronger.

Here are 5 key highlights that we achieved during 2020. First, the quick and progressive cost actions we implemented early in the crisis allowed us to flex our cost structure to align with the dynamic activity levels.

We achieved full year cost savings of $110 million, exceeding the previously stated target of $85 million to $95 million, of which approximately 40% are permanent.

Second, in December, we concluded a series of financial transactions to optimize our capital structure, including repurchasing approximately 60% of our senior convertible notes, providing significant financial flexibility and extending our debt maturity profile.

Third, we published our inaugural ESG report that further demonstrates our core values and commitment to operate in an environmentally sustainable manner. Fourth, we developed a new strategic organization, promoting leadership from within to better position the company for the recovery, continued sector diversification and enhance client value.

I will share more about this new structure later in my prepared remarks. Lastly, and perhaps where I'm most proud, is our safety record. We achieved top quartile safety performance, representing the best safety results in the company's history.

This achievement would not have happened without the dedication, positive attitudes and behavior of our people and close collaboration with our clients. Now turning to our financial performance. Consolidated revenues for the second half of 2020 were $426 million, essentially flat with the first half.

Activity levels increased during the months of September and October, driven by call-out, projects and turnarounds and post-hurricane repair work in the Gulf Coast divisions. However, beginning mid-November, further COVID-related global shutdowns and associated travel restrictions negatively impacted activity levels and revenue.

While we anticipated a slow holiday season, it was weakened further than expected due to the continued uncertainty in the market. Adjusted EBITDA for the second half of 2020 was $31.3 million, an increase of $22.5 million or up 258% over the first half of the year.

On a full year basis, as a result of disciplined cost management, we limited our EBITDA margin decremental to 12.9% despite a 27% reduction in revenue compared to 2019. We generated approximately $33 million of free cash flow in 2020, the highest level since 2016. Team remains focused on generating free cash flow to pay down debt.

Our 2020 results demonstrate the flexibility of our asset-light and scalable operating structure, and coupled with the depth and breadth of our products and services, allow us to flex with business demands. Now I will provide a segment overview.

Beginning with Mechanical Services, as I mentioned, Team realized an increase in call-out and projects as well as an increase along the Gulf Coast divisions with hurricane repair work.

In fact, activity levels in October reached the highest point of the year, but declined in November and December due to holidays and further global COVID-related shutdowns. However, we did see a few bright spots.

MS experienced year-over-year growth in the areas of mineral extraction and steelworks, renewable energy, food and beverage, government and military and storage tanks and terminals.

During the fourth quarter, our West division began to work -- began work to repair leaks on a 400-foot long pipeline tunnel under a highway that the client initially believed to be unrepairable.

Team specialists presented a repair option using injectable water seeking grout, hot bolting hardware to replace corroded fasteners and an epoxy coating to prevent future leaks. The repair saved our client hundreds of millions of dollars in replacement costs and downtime.

Inspection and Heat Treating's nested group is now running between 85% and 90% of pre-COVID levels. Throughout 2020, the quality of our technicians and the strength of our relationships allowed us to retain and further expand our overall nested footprint. Our nested operating model provides Team a stable and recurring growth platform.

Despite the increase in activity in September and October, and similar to MS, activity levels in November and December were negatively impacted by COVID-related travel restrictions, which led to reduced activity and lower staffing levels at several of our run and maintain sites.

Supporting our revenue diversification efforts, IHT experienced [Audio Gap] optimized heat treating work on a turbine at a hydroelectric dam in the U.S. Due to the shape and configuration of the veins, traditional heat treating methods were not adequate.

So our subject matter experts and technicians developed a solution utilizing magnets and flexible ceramic heaters used during the welding process. The client was extremely satisfied with the results, and we expect to work on additional projects at their facilities in the future.

Quest Integrity's revenue growth continues to be impacted by the overall slowdown in industry activity, COVID-related travel restrictions and quarantine requirements. As of now, we have only experienced project delays and minimal cancellations.

Quest's fourth quarter revenues and adjusted EBITDA were up sequentially, driven by an increase from international subsea, in-line pipeline inspection and domestic midstream inspection work that required specialized services for regulatory approval.

As an example of cross-segment collaboration, Quest recently worked together with Mechanical Services to complete a corrosion repair and a vent stacked by fabricating steel plates to fit over the damaged areas. Once the plates were in place, a composite repair was applied.

Our expert technicians engineered a customized solution for the client using Team's advanced manufacturing capabilities, Quest then provided a detailed structural fitness for service assessment using our proprietary software to determine buckling capacity of the repaired vent stack.

From a geographic perspective, during the fourth quarter, we faced numerous COVID headwinds around many parts of the world. The United Kingdom went into a second COVID full lockdown in October, along with Europe and parts of Latin America, which negatively impacted our ability to travel and perform operations in these regions.

However, we are seeing signs of improvement with some restrictions expected to be lifted in the U.K. and parts of Europe in mid-March. The Middle East is also showing improvement. The vaccine rollout is going smoothly and economic activity is increasing, aided by the increase in oil prices and global economic activity.

We recently completed a project in Oman and were awarded another project to work on a gas plant in Egypt. Similar patterns of substantial COVID lockdown restrictions are present in the U.S., particularly in California, while other parts of the U.S. have started reducing COVID restrictions.

During the fourth quarter, Team was awarded a competitively bid contract to perform leak repair work at a large refinery on the West Coast. This job requires as many as 40 on-site technicians throughout the year. As a result of this award, we have been invited to participate in a bid on the client's midstream assets.

I will now turn it over to Susan for a more detailed financial review.

Susan?.

Thank you, Amerino, and good morning, everyone. I will review our quarter-over-quarter performance and highlight some of the 2020 full year results. Our fourth quarter consolidated revenue of $207 million was down $80.5 million and 28% from the fourth quarter of 2019.

On a full year basis, consolidated revenues were $853 million compared to $1.16 billion in 2019. All 3 segments were down in the fourth quarter 2020 as compared to 2019. The bulk of the revenue dollar decline came from the Mechanical Services and Inspection Heat Treating segments.

While down year-over-year, Quest delivered 16.6% sequential growth in the fourth quarter, with Quest having increased activity in both their domestic and international markets.

On a percentage basis, Mechanical Services posted a 29.9% year-over-year revenue decline in the quarter, while Inspection and Heat Treating was down 25.7% and Quest was down 28.2%.

Consolidated gross margin for the fourth quarter 2020 was $60.1 million or 29%, which was in line with the same quarter a year ago of 29.2%, but down $24 million from the prior year period.

In spite of the revenue decline, we were able to generate a favorable decremental fall through due to strong continued focus on managing our variable costs and the continued positive carryover results of our quick cost actions taken earlier in the year, with permanent cost reductions and the ongoing benefits of the OneTEAM program cost initiatives.

Fourth quarter cost savings associated with the discipline around our cost reduction actions taken in 2020 were approximately $35 million. Again, these cost actions include both permanent structural and variable temporary cost reductions to scale and flex with the market demand and activity levels.

The foundation of the OneTEAM program helped us to quickly respond to the reduced activity levels caused by the global pandemic, allowing us to accelerate cost reductions beginning in mid-March. In 2020, we achieved full year cost savings of approximately $110 million, exceeding our previously stated estimate of $85 million to $95 million.

The cost savings were realized nearly equally in both our SG&A and operating costs and gross margin. I will provide more details around the SG&A cost savings later in my prepared remarks. The fourth quarter net loss was $14.9 million when compared to a loss of $7.2 million in the prior year quarter.

Adjusted net loss, a non-GAAP measure, was $11.6 million or a $0.38 adjusted net loss per diluted share for the fourth quarter of 2020 compared to adjusted net loss of approximately $2.3 million or $0.08 adjusted net loss per diluted share for the same quarter in 2019.

Significant adjustments in the fourth quarter included approximately $600,000 associated with the OneTEAM program cost; $900,000 in severance expense, primarily associated with headcount reductions continuing from the permanent cost actions taken due to COVID; the $2.2 million loss on debt extinguishment due to the early termination of a portion of our convertible senior notes and repayment and cancellation of our prior credit facility; and $500,000 of certain other non-recurring costs.

Consolidated adjusted EBITDA for the quarter was $13.1 million, which was down from $23.2 million in the fourth quarter of 2019.

Despite realizing an $80.5 million decline in year-over-year quarterly revenues, our adjusted EBITDA declined by only $10.1 million from the comparable quarter in 2019 as a result of our focused efforts on global cost reductions, both in SG&A and variable costs in the gross margins.

Adjusted EBITDA as a percentage of revenue decreased to 6.3% and from 8% in the prior year quarter. On a full year basis, adjusted EBITDA of $40 million declined approximately 50.1% and was a 4.7% of our revenues compared to the 2019 adjusted EBITDA percentage of 6.9%. Now moving to SG&A.

As previously discussed, throughout 2020, we were successful in our efforts to reduce SG&A costs. Total SG&A for the fourth quarter 2020 was $62.5 million, down $17.2 million or a 21.6% improvement from the year ago quarter.

Our annual SG&A reduction was even more impressive, with the full year 2020 SG&A costs of $260.9 million, the lowest level achieved since 2016. Annual SG&A costs were down $67.3 million or a 20.5% improvement from 2019, slightly exceeding our expectation of 15% to 20%.

Again, these total cost reductions included both accelerated OneTEAM program cost reductions as well as temporary cost actions that were initiated in mid-March. Over the last 2 years, we have reduced our SG&A costs by approximately $100 million.

As we look to 2021, we do expect to see an incremental increase in SG&A from the staggered removal of certain temporary cost actions in the first half of the year as well as our investment in the business for growth, such as R&D costs and selling related costs.

Approximately 50% to 65% of reduced SG&A costs from 2019 realized in 2020 are permanent in nature. We do expect our full year 2021 SG&A costs to be in the range of approximately $275 million to $290 million. Now turning specifically to our segment performance.

The Mechanical Services segment reported fourth quarter 2020 revenues of $93.4 million, down 29.9% from $133.3 million in the fourth quarter of 2019. Adjusted EBITDA was $10.9 million in the fourth quarter of 2020, down from the $19.5 million earned in the same period last year. Gross margin dollars decreased 31.9% on the 29.9% revenue decline.

Full year 2020 revenues were $392.5 million, down 26.7% from $535.4 million in 2019. Adjusted EBITDA for the year was $51.3 million, down 34% from $77.6 million in 2019. The Inspection and Heat Treating segment reported fourth quarter 2020 revenues of $89.7 million, down 25.7% from the $120.9 million posted in the same period last year.

Fourth quarter adjusted EBITDA was $9.1 million, down $1.6 million in the prior year quarter. EBITDA margin increased this quarter to 10.1% as compared to 8.8% in the prior year quarter. Gross margin dollars declined 13.7% on a 25.7% revenue decline for the quarter. Full year 2020 revenues were $374.7 million, down 26.9% from $513 million in 2019.

Adjusted EBITDA for the year was $33.6 million, down 19.8% from $41.9 million in 2019, but generated a higher full year EBITA margin of 9% from the previous year EBITDA margin of 8.2%. Quest Integrity revenues of $24.1 million were down 28.2% from the prior year period revenues of $33.6 million, but increased 16.6% sequentially.

Fourth quarter adjusted EBITDA was $7.7 million, down from $11.5 million in the year ago period. Gross margin dollars declined 38.9% on the 28.2% revenue decline. Adjusted EBITDA margin was 31.9% compared to the prior year quarter of 34.2%. Full year 2020 revenues were $85.3 million, down 25.8% from the prior year record revenue level of $115 million.

Adjusted EBITDA for the year was $20.6 million, down 36.4% from the $32.4 million in 2019. As a reminder, Q4 2019 for Quest was the highest ever quarterly revenue and EBITDA, with the continued international expansion.

This, however, impacted Quest more greatly on a percentage basis with the strict lockdowns and travel restrictions that occurred in 2020.

On a full year basis, Mechanical Services gross margin dollars declined 29% on a 26.7% revenue decline; IHT gross margin declined 17% on a 26.9% revenue decline; and Quest gross margin declined 37.4% on a 25.8% revenue decline.

Overall, on a full year basis, IHT was able to more quickly reduce the variable cost each quarter and for the year than the other segments, as we've previously discussed. Our full year effective income tax rate was approximately a 5.8% benefit.

This lower rate than the statutory rate is primarily attributable to the reduced tax benefit related to the goodwill impairment loss taken during the year, of which a portion is not deductible for tax purposes.

Other permanent items not deductible as well as differing impacts of domestic versus foreign income and losses associated adjustments to the valuation allowance for net operating losses with a partial offset for certain favorable rate benefits of the CARES Act.

The company has domestic federal tax net operating losses of just under $170 million at the end of the year, which are available to offset future domestic federal taxable income. In the fourth quarter, we generated $32.6 million in operating cash flow. Capital expenditures were $3.3 million.

Our strong free cash flow for the quarter of $29.3 million was the result of our effectively managing our variable costs through the temporary cost management actions to optimize our working capital with our activity levels. For the full year, we generated $52.8 million in operating cash flow.

Capital expenditures were $20 million in 2020, down $9.1 million from 2019, as we had previously disclosed would be down by approximately 33%. In 2020, we delivered $32.8 million of free cash flow the highest amount of free cash flow since 2016.

Looking forward, as the economy opens up and the activity levels increase, we will require more working capital and would expect a significant reduction of free cash flow in 2021 as compared to 2020. We do expect to generate positive free cash flow in 2021.

The level to which we achieve this will be dependent upon the growth in our revenue and the associated working capital needs. We expect our full year capital expenditures to be $25 million to $30 million for 2021. We will actively manage this accordingly, though, to the business growth levels and opportunities throughout the year.

In December 2020, we undertook multiple steps to refinance our capital structure and improve our balance sheet, including repurchasing $137 million of our convertible senior notes; entering into a new $250 million senior secured term loan; and a new $150 million senior secured ABL credit facility.

In connection with the new debt facilities, we retired our previous senior secured credit facility, including the revolving credit facility and the associated term loan.

The successful execution of our debt refinancing provides considerable financial flexibility and extends the company's debt maturity profile, with no leverage ratio covenant requirement until the first quarter of 2022.

Our new capital structure gives us sufficient liquidity to support our working capital needs and execute on our immediate growth priorities for the year. We ended 2020 with approximately $24.6 million of cash. Borrowings under our ABL facility were $9 million.

We did pay down debt of approximately [$10 million] in the fourth quarter and ended the year with our gross debt being down approximately $2 million from 2019. We ended 2020 with the lowest year-end level of debt for the past 4 years.

We are focused on aligning segment synergies and work processes across the organization to drive cash flow and maintain our capital allocation priorities including maintaining a fortified balance sheet.

We remain focused on our financial priorities to conserve cash through optimizing our working capital needs and generate free cash flow to pay down debt. That completes the financial review. With that, I'll turn the call back over to Amerino..

workforce management, revenue diversification and our Asset Integrity and Digital group. Starting with workforce management, with the exceptions -- with the expectations for a tightening labor market in the coming quarters, our workforce management function allows us to quickly respond to clients' needs.

Our global workforce management function allows us to centrally coordinate and forecast utilization, communicate more effectively with our on-site field technicians and provide logistical support to quickly mobilize in this dynamic environment.

Team's technical school in Texas is state accredited, offering technician and client-based training and industry learning. But we can also perform remote training for many of our technicians.

Our industry-leading training and certification programs, plus our strong recruiting efforts in the military, technical schools and universities, will provide an opportunity to continue expanding our workforce pool to meet market demands. In 2020, we achieved workforce utilization rates greater than 90%, a 4% improvement when compared to 2019.

Revenue diversification has also been a key initiative. We continue to look for opportunities to diversify our revenue streams and expand our operational footprint in sectors like renewable energy, LNG, aerospace and infrastructure.

For example, the winter storms highlighted the benefits of Team's Asset Integrity Solutions in areas like LNG and wind energy. Team recently completed work for a Gulf Coast LNG liquefication facility. We mobilized a crew that performed external inspections and 3D scanning to assess any potential damage to a storage tank.

The rapid response of our technicians, combined with expert engineering support, restarted operations within 48 hours, saving time and millions of dollars per day in lost revenue for the client. I will now cover highlights of our expanding digital platform.

We continue to develop and deploy digital solutions to support how our people produce and deliver work products to our clients. Our Salt Lake City District in the North division has moved to 100% digital workflow to improve business efficiency.

Technicians, operations managers and administration all work within one digital platform, which has improved safety and quality of services to our clients. We are currently scaling this solution across all U.S.-based districts. The digital information portal we launched in the fourth quarter allows Team to track and review product orders.

We have now opened the portal to our clients, providing them with real-time visibility of their orders and improving customer service. Finally, Team launched an online subscription service for asset-based data management.

This digital database includes condition assessment analytics that enables asset integrity performance optimization and improved efficiency, leading to greater productivity. The database service offering added 900 assets in Q4 2020, which doubled from Q3 levels.

These applications, when combined with the rest of our growing digital portfolio, ensures Team remains the service partner of choice. Turning to our near-term outlook. While the market confidence is growing, that was not the case this January when the economy was dealing with uncertainty about the timing and magnitude of the recovery.

COVID cases were spiking throughout the U.S. and other parts of the world, which led to a slower start to the year following the prolonged holiday season. In addition, many Midwest and Gulf Coast refining and petrochemical plants shut down in February as the winter storms caused electricity shortages and pipeline outages.

This impacted our nested operations, since many facilities were down for several weeks before coming back online. And even today, some plants still have not returned to full operation. Therefore, we expect our first quarter revenues will be the lowest of the year and below Q1 2020 levels, more in line with Q4 2020.

As Susan mentioned this quarter, we began rolling back some of the variable cost measures that were implemented during 2020 as we planned for an anticipated ramp-up in activity going into the February and March project season. We will maintain our focus on margin and expect our full year gross margin to be in line with 2020 and 2019.

Despite the slow start to the year, given the improving activity outlook for Q2 and the second half of 2021, we anticipate a 10% to 15% revenue growth over full year 2020. Market uncertainty notwithstanding, I will provide a long-term outlook for our end markets.

First, the fallout from COVID-19 will likely have a lasting impact on how we live and work. One thing is for certain, COVID has been a catalyst for increased adoption of technology. Our clients are requesting fewer boots on the ground and more integrated solutions that utilize real-time data.

Team's digitally-enabled solutions, a few of which I described earlier, reduce overall costs and support a balanced mix between desktop and efficient field-based work while minimizing exposure risk. Second, as the economy recovers, petroleum demand is set to rebound at a pace that is historically unprecedented.

Combined with anticipated regulatory compliance requirements and an aging infrastructure that has largely delayed maintenance over the last year, increased activity levels in the second half of 2021 look promising, and Team expects to benefit from renewed activity over the next several years.

Third, the recent power outages in Texas have proven that the energy transition will not always be smooth and that increased inspection and mechanical services work is needed across many different facets of the energy spectrum.

We expect there will be additional opportunities for Team to provide asset integrity solutions to ensure greater reliability across the entire supply chain. In closing, 2020 mandated that we respond aggressively to countless changes involving how Team and our clients do business in an extremely difficult operating environment.

Despite that backdrop and the related shock to the global economy, we responded proactively by quickly and decisively reducing our operating costs in order to maintain strong gross margins, while at the same time, making critical investments in technology and targeting end market diversification.

The steps we took in 2020 have made Team a leaner, more efficient company that is poised to see solid revenue and further margin expansion as the global economy recovers. Operator, I will now turn it back over to you for the question-and-answer session..

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

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

Well, thank you, Stef, for the question. It was obviously an exciting opportunity for us to really leverage the strength of our Quest segment and one that we've talked about quite a bit over the last couple of years.

But in conjunction with that, we see a lot of progressive change in the industry and with our clients around remote operations, robotics, mechanical and pipeline integrity.

And we have a lot of subject matter experts, engineering support, material labs that allow us to really move beyond the discrete service offering and provide our clients a more integrated solution and offering for their critical assets.

And when we looked across the company and we started designing the new structure mid last year, we saw the opportunity to really pull that together. Quest will remain a segment, and we'll continue reporting Quest. And it will be the foundation of AID as a group.

But we feel that AID will bring us a lot of the new, more progressive technology and innovation opportunities that will actually enable IHT, MOS and Quest to be successful. So we'll be managing our R&D budgets, we'll be looking at technology as a percentage of revenue. We'll be leveraging our technical support across the company through the AID group.

And we feel that it's a really strong way for us to partner and further collaborate even more than we have in 2020 with our clients..

That sounds great. And then looking at the severe weather in Texas, obviously, that delayed work as refinery shut down. Is it all -- can we assume that created a lot of work for you as well? Just some headlines, pipes bursting, other damage to facilities.

Is that what you're seeing? Have you been able to quantify that? Any details there would be great..

So you are right, and it's -- I'm not going to say it's similar to a hurricane, but in response, and I think in some of the Southern states, who are obviously a lot more used to hurricanes than the types of freezes that we saw in February. But yes, post -- some clients try and get ahead of the game and prepare for it.

But in most cases, once the facilities get through the storm period, there is a start-up phase. We're seeing an increase in activity around our heat treating operations, some of our machining and bolting operations, some of our valve and other product lines as well. It's a little bit too early right now to quantify that.

We're obviously pulling all that together, and we'll provide more color at the next earnings release. But there's usually a slowdown before. It does impact our nested operations because during the shutdowns, obviously, they reduce the amount of staff and employees on site.

But then following that, we see improvements in leak repair and some of the other areas that I mentioned..

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

Congrats on getting through a tough year. A lot of big accomplishments, a lot of hard work went into these results. So congrats on getting through that. I guess just to start, so it sounds like the first quarter revenues are going to be lower year-over-year, but you said for the full year, you're looking at 10% to 15% growth.

And just given there's a lot of moving parts around the recovery and how refiners are going to be running and dealing with drawdowns and a surge in demand, a little bit more color on how you see that revenue trajectory playing out through the year would be helpful to understand..

Sure. Thank you for the comments, Sean. So I think, obviously, there's a number of moving parts, and you are correct, we do expect our Q1 revenues to be the lowest of the year.

And as we look forward, however, and some of the macro trends that we're starting to see, I would say, led by the improvements just overall in how COVID is being managed and how we're starting to see some of the restrictions, I'd say more domestically by country than internationally at this point starting to be lifted, and we expect that to continue through the first half.

That will be a driver for demand. We did see that utilization rates of our refining business prior to the winter storms were in the 81%, 82% range. And historically, that gives us a good spot as our company provides our services to our clients.

It's a good balance between CapEx projects, high utilizations and the need to do maintenance and other type of pit stops and those type of things. So we feel that if the utilization remains in that 80% to 85% range, and we start to see demand picking up.

And because of all the deferments from 2020, that Q2 and Q3 will be 2 strong quarters, there's always the risk in Q4 of holidays and seasonal normal impacts. But as we sit here today, Q1 is expected to be our lowest quarter, progressively increasing from there.

And obviously, we'll get more color on how Q4 would play out later in the year as we get closer to that. And we'll have to stay close to our clients, especially with the holiday seasons..

Okay, great. And then just as you prepare for a recovery in the top line, some temporary costs or some temporary cost reductions are going to come back into the system. You're going to have to staff back up. I'm just kind of curious about the availability of labor.

How tight the market is going to be looking as you look to support this revenue recovery? And I guess what I want to understand is just what sort of the underlying incremental EBITDA margin there is around the revenue recovery this year and maybe into next year in light of all those moving parts?.

Sure. I'll take the first part on just the labor pool, and then I'll have Susan provide some color on some of the permanent variable costs, et cetera. So from a labor pool, we do feel that it will start to tighten, obviously, with the growth. I think most companies have had to reduce headcount.

As I've stated in the past, we've maintained, especially through 2020, good contact, and in many cases, benefits, health benefits with our technicians. And we've stayed in very close contact with our casual labor pool, which allows us to handle some of that flex up and flex down.

So I don't want to say we've done everything we could because, obviously, it was a moving target. But I feel very confident that our districts, our workforce management group and now our new groups have really stayed in close contact with the labor pool. We are starting to get our training ramping up again and preparing for that need.

We're reviewing all certifications that will be expiring during the year and making sure we have plans in place. We are ready to start recruiting and also remote training as needed, including international. We obviously, through COVID, we've learned to do a lot remotely.

So when I look at it, I feel that the last 2 or 3 years of our workforce management function is going to be put to the test, but they've got some really good foundation to build off of.

And I would add that we're working closely with our key clients right now to start trying to map out our utilizations, our headcount needs by certification class and making sure that we're able to balance the activity that they see on the ramp-up with what we're able to provide.

So it's going to be tough, but I feel much better going into this recovery mode with our workforce management group 2, 3 years matured than prior time within the company. So that's how I see it. And I'll let Susan talk a little bit about the cost side..

Yes. On the cost side, as I mentioned, we kind of gave the color on permanent costs versus the variable temporary on the SG&A. We do anticipate, as I mentioned, $275 million to $290 million SG&A range. And again, that's down $100 million since 2018 as we took out $32 million or $33 million in 2019 as well.

The -- on the EBITDA and the gross -- I guess, the gross margin, we still are anticipating we're going to be in line, exceeding the 28%, but in line with the gross margin percentages that we've targeted to 28%.

And overall, on the EBITDA margin, 2019 had improved over 2018, I think, from the low 6s in 2018 to close to 7, just under 7, about 6.9 in 2019. As we look to what's occurred, looking at those revenue levels in between the 2019, 2020 levels, as you look to 2018, we would expect that EBITDA margin is going to be somewhere in between 2018 and 2019.

So definitely improving over 2020, getting the benefits of the growth in revenue, but more of the low-cost foundation. So again, probably getting more in between EBITDA margin percentage between the 2018 level of, I think, like 6.2 and the 2019 level of 6.9 or so..

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

Congratulations on maintaining margins in a difficult environment and generating that free cash flow. We've seen a continued stream of projects related to biodiesel, renewable diesel at refineries.

Can you maybe just give us your take on what that means to Team?.

Sure. So you are correct, I think there's been a lot of projects that have either been talked about, sanctioned or started in terms of biodiesel or on the renewable diesel front.

Many of our large integrated type or large clients have been working on those projects, some of their facilities, either new build or some conversion facilities, are going to move down that path over the next couple of years. For Team, there's still a run and maintain component within the renewable diesel or biodiesel market.

So that's an area that we continue to target. There is a focus in terms of, let's call it, a project, capital type project in terms of conversion. And obviously, if it's a new facility, working with either an EPC or others, then there's activity there within many of our product lines like machining, bolting, inspection, heat treating and other areas.

So when it's project-based, that fits right into no different than a petrochemical or a refining facility. The damaged mechanisms, we're still working closely to understand that. A lot of our business is built off of corrosion, wall thickness losses and those type of things when it comes to damage mechanisms.

So we've got our engineering teams, along with our labs, working hard to understand the different stresses and different damaged mechanisms. There's still going to be regulatory requirements that are needed in the bio market, which play in our favor when it comes to especially more of the regulated service lines.

So overall, we have to adjust in terms of what drives our business, but it's still treated very much like a site and a facility, where we're able to provide our specialized services, our engineering support, lab support, et cetera, to the client. And including some of our digital offerings and remote monitoring offerings as well.

So we see a lot of our products and service lines applicable within that space..

Great. And the next question I had was just related to the data, the digital efforts that you have, the data portal, the real-time data.

Could you maybe just talk about how you package that to a customer? Is this a subscription service? And then maybe if you could look out 3 to 5 years, what do you think this means for the margins when you look at the Asset Integrity and Digital segment?.

Well, first of all, in terms of the data, it's -- we've had to put data policies, obviously, in place. And I would say that many of our clients manage it differently. But the big ways, we're trying to be agnostic in terms of the type of data that we handle and the way that we handle it so that we can work with multiple systems.

So that's one of our, let's say, guiding principles. We can either support their critical asset data and quality assurance and quality control data on their behalf through an IDMS type system. And then we can feed their asset integrity management systems with that data. So there's the case where we manage it.

There's a case where it can be cloud-based, and then there's the case where we can provide it over to them directly into their IDM or their asset integrity management systems. So we are trying to handle at this point, all 3 because, quite frankly, depending on the maturity of the client at this point, we have to do all 3.

I would say that some clients are further progressed in their hardware, in their programs and in the way they handle data and some need a lot more of our support, especially the mid-tier group we partner a lot closely to not only manage the data but also provide them engineering support, analytics and those type of things.

So it is right now a work in progress. Now if I look forward from that, though, we do see a couple of things. I don't think the labor rate buildup type model is going to go away in the next 3 years. I think that there's always a service data or efficiency productivity piece. And I think that's -- I don't want to say business as usual, but it is.

There's another part where we move to more commercial models that allow us to drive efficiency, to make sure that our clients are getting more risk-based inspection. And we're being paid for our services and our risk-based inspection where we can drive margin, and we hope to do that with less cost, obviously.

And then there's a third type, which is the subscription model, where we're helping our clients manage products and assets and inventory and they can subscribe and be able to see their data, their assets and then be able to make analytical, either with us or on their own analytical decisions from that.

So still work in progress, but we're getting very clear on the lanes that we want to align our commercial models on in those 3 areas. In terms of the margins, we didn't create AID group to dilute the company. We created it to really progress our margins and as I've stated, led by Quest.

It's going to take us a little bit of time to develop some of the other product and service lines within AID, like mechanical and pipeline and others, robotics. So we do have businesses there today. We're not starting from scratch.

And as we continue to grow those, we expect that group will be accretive to our overall margins over the next 3 to 5 years. And not as strong as Quest total, but definitely not dilutive to the company. So we're targeting that Quest foundational margin and then being accretive to the overall company with the growth of that group..

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

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

So Brian, it's a good question. And obviously, as a company, we've been not only driving revenue diversification by sector but we're really pushing to maintain diversification by what we call operating model.

And our nested operating model, which is the most stable and it is a growth platform and the most repeatable, we expect that through the year, we'll get back to 90% or better. We're not there yet, but we expect to get back to 90% or better compared to pre-COVID levels.

The call-out, we do expect that to be a significant driver, definitely over 2020 and reaching 2019 type levels, because of the reasons you just mentioned as well as what we've talked about today on a lot of the deferred projects and utilization, refining utilization going up quickly. So call-out, we think, will be the second one.

Projects and turnarounds are the ones we're seeing the most volatility or, I guess, movement with, right now. Even just in Q1, we saw because of the weather, things get pushed a few weeks. So it is expected to be about 1/3 of our revenue overall, but we are having to try and account for by working with our clients.

How much of it will land in H1 versus H2 and how much of it might push out. So I would say that nested, most stable, best visibility. Call-out, we expect it to be over 2020 levels and more in line with 2019. And then projects and turnarounds are somewhere in between the 2 years right now from the current visibility. And we watch that by quarter.

And then we watch it by half, right? So we can monitor as things move around..

Got it. Okay.

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

Yes. I think that there was a lot of learnings from the storms. And as I've talked to some of the clients and as we've seen some of the emergency calls come in, I do believe that we are going to continue to see for the next 3 to 4 weeks, start-up type, call-out emergency services.

But I do also think that there is an opportunity in terms of preparation with our clients. I think it's a little bit too early, Brian, to highlight how do we play in that.

I do think that especially utility companies, some of the gas providers, et cetera, are looking at that right now and post mortem assessing what could have been done in preparation for the storm. I believe that we play a role in that in terms of preventative or preparation with them in terms of helping them prepare with their assets.

But right now, I think everybody is working really diligently to try to get their facilities back online first, and then we'll be able to look at that business development opportunity by collaborating with different sectors. I don't think it's just oil and gas.

I think there's petrochemical, there's refining definitely power, definitely some of the renewable areas. So I think that there's multiple sectors that are going to look at things a little bit differently in terms of preparation going forward..

Okay. Great. Obviously, your leverage to the oil and gas and mining sector is quite meaningful. You mentioned diversification of sales and strategy with the internal segment reorganization, et cetera.

Can you talk more specifically about aerospace and defense going forward, which might be less cyclical than the oil and gas end markets for you? And then what seems to be a low single-digit percentage of revenue on the renewable side, exactly what services are you providing in terms of the wind sector?.

Sure. Let me start with the second part because it's a little bit quicker, and then I want to address aerospace. So on the renewables side and specifically, wind, we were mostly, today, providing mechanical services around machining, bolting, and that's both on land and offshore.

We're providing inspection work, rope access activity as well as robotic type work. So we feel that, obviously, the higher the growth of environment, especially offshore, the new projects, we're able to really support them when it comes to many of our product lines.

We are looking at what we can do from a lab standpoint, material materials, composite repairs. Those are areas that we're already generating revenue from. So I feel confident on the wind side that we can play within 4 to 5 of our product lines, including engineering and lab support.

On the aerospace side, we started last year and following our strategy sessions with our Board that aerospace was an area that we feel confident we can expand organically at this point. We are investing in a center of excellence and expanding our capacity in the Cincinnati area. We have other operations across the U.S.

that would then support that center of excellence as well. And we have some training and service offerings also in the Central Europe area. So we're in the process of expanding that facility. State of the art from chemical etching to inspection work and starting to build out our aerospace business line, which will reside under the IHT group.

In terms of the recovery, obviously, we feel that the international travel will be the slowest to recover but defense, military, domestic travel, we feel we're in a good spot right now that once we complete our project late this year and early next year, we'll be able to take advantage with some stronger contracts, growing market share.

And then obviously, subsequent to that, the international market growth. So it's a focus area for us. It has been, and now we're actually investing, it's one of our larger investments along with Quest when it comes to a capital standpoint..

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

Can you just remind us specifically what that leverage ratio was?.

Okay. And Brian, I apologize, I may not have caught all that. But with respect to the ABL, it is really incurrence-based requirements with fixed charge coverage ratios that have to be met at a minimum of 1 times. And that's just, again, more incurrence-based on what you can do with other debt or acquisitions, et cetera.

So very, very, I would say, maintenance-light covenants from that standpoint. On the term loan, the covenant ratio is net leverage ratio. It comes into effect at the end of Q1. So the first time, March 31, 2022, and it's set at 7 times so that we would need to be below a 7 times net leverage ratio..

Okay. And then just lastly, it looked like the majority of your 2020 free cash flow is derived in the fourth quarter.

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

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

So half of that $14 million, and then 50% would be due by -- at December 31, 2022..

All right. Great.

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

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

But it just depends if it's an existing conversion or if it's a new project..

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

It’s Kevin on for Adam. Most of the questions I have, have been answered, but I guess some, I guess, modeling based ones I'd like to go over.

As far as interest expense for 2021, what does that look like?.

So our interest for 2020 was approximately just over $29 million, so under $30 million, as we have increased our interest level, percentage-wise. And also, we did incur more financing costs associated with the capital restructure. And the original -- the OID associated with the term loan, it won't all be cash nor was the $29 million for 2020.

But we would estimate probably around a $35 million to $38 million, $36 million to $38 million interest expense on the P&L for 2021..

Okay. That helps. And then I wanted to maybe cover a little bit more on cash flow, too.

If there's a particular range that you're looking through for 2021?.

Yes. For 2020, I mean, obviously, we did have a record free cash flow, and that was driven by -- even as Brian mentioned, we had the deferred employer match on payroll taxes, but was really driven by the activity levels with the business.

So as the revenue was coming down, we do generate more free cash flow generally because we're not incurring the cost ahead of the receipts coming in. So what you saw in Q4, and we also saw it in Q2 of 2020.

But in Q4, the significant generation of free cash flow and Q4 was really driven by those revenue levels not going up and us being able to really get the collections in on our outstanding accounts receivable in greater amounts than the revenue. So those amounts were coming in, plus we weren't having the cost with the revenue.

So as you look to 2021 and the revenues ramping up, we are looking at a pretty significant need on working capital as those costs will go out ahead generally 60 to even 90 days before we get the collections in the door. We said that we anticipate positive free cash flow.

Probably we wouldn't expect to get through the levels of 2018 on free cash flow, which were right around $15 million. But probably more closer to $10 million or slightly less..

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

Thank you, Doug. We are extremely proud of what our organization accomplished in 2020, which would not have been possible without the commitment and dedication of our people. Throughout 2020, we were proactive in taking a number of deliberate steps to prepare for the recovery cycle.

Team expects to benefit from the delayed and deferred projects in our 2020 accomplishments as well as our recent actions to scale and streamline the business have positioned the company for growth in 2020 and beyond. Thank you for joining us on this call and for your continued interest in Team. We look forward to speaking with you again next quarter..

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day..