Greetings, and welcome to the Team, Inc. Third Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Kevin Smith, Vice President of Corporate Development and Investor Relations. Thank you, sir. You may begin. .

Thank you, Laura. Welcome everyone to Team's Third 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, November 12, 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 November 19.

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

As a reminder, 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 in the company's Annual Report on Form 10-K and in the company's other documents and reports filed or furnished with the Securities and Exchange Commission.

The company assumes no obligation to publicly update or revise any forward-looking statements, except as may be required by law..

Given the recent capital markets transactions, we are limited in what we can say about our ongoing financing discussions. Therefore, we will be unable to take your questions during today's call..

I would now like to turn the call over to Amerino. .

Thank you, Kevin, and good morning, everyone. I will start with our recent financing announcement, then provide a high-level review of the quarter and outline our 3 key priorities. Susan will then detail our third quarter results and financial position. After which, I will give an overview of the market trends and outlook..

Earlier this week, we announced that Team entered into a new $50 million delayed draw subordinated term loan facility led by Corre Partners Management. The proceeds will be used to enhance our short-term liquidity position and provide Team the required capital to allow us to focus on growing the business and increasing the company's value.

As part of this transaction, Atlantic Park Strategic Capital Fund, our existing term loan lender, has agreed to waive the financial covenants under our term loan until September 30, 2022. Although we have more work to do to improve our balance sheet and our overall capital structure, we view this transaction as an important step to that process..

Now turning to the quarterly results. Third quarter consolidated revenues were $217.4 million, essentially flat from a year ago. Team experienced difficult market conditions during the third quarter, causing our top line performance to fall short of our expectations.

Hurricane Ida caused power outages that forced at least 10 refineries and numerous petrochemical plants to significantly reduce run rates or shut down completely. The temporary shutdown of the Gulf Coast facilities reduced our nested activity and routine call out work.

In addition, we continued to see global projects get pushed and experienced a delayed start to our fall turnaround season, which resulted in lower activity levels in late August and early September. We also experienced regional competitive pricing pressures that negatively impacted margins..

Gross margin was 24.5%, down from 29.1% in the prior year quarter. Gaining upward traction on gross margin remains a challenge.

During the quarter, Team faced underlying inflationary pressures in our supply chain, including raw materials, labor, equipment, logistics and travel, as well as absorbing the higher expenses associated from the elimination of the temporary cost actions that were put in place in late March of 2020.

We also incurred higher-than-normal costs, as we ramped up our investment in technician training and certifications to prepare for the fall turnaround season and an active 2022. Lastly, we experienced the shift in revenue mix that reflects fewer higher-margin services performed during the third quarter when compared to a year ago..

Adjusted EBITDA for the quarter was approximately $1 million, down from $18.2 million, due to the unexpected sequential revenue decline, coupled with inflationary pressures and absorbing the reinstatement of the pandemic-related temporary cost initiatives..

Turning to our segment view. Beginning with Mechanical Services, revenues were down 5.2% over the same quarter in 2020, due to the delayed fall turnaround season, inflationary and competitive pricing pressures, and a change in revenue mix with fewer higher-margin services due to a reduction in midstream construction spend when compared to last year.

We recently commercialized our proprietary double block and bleed SmartStop Technology. This service eliminates the need for complicated hydraulics or seal activation systems that are failure mechanisms in competitive line intervention tools. During the third quarter, we completed 5 separate Smartjob -- SmartStop jobs in the U.S.

As an example, our SmartStop Technology was used on a 12-inch NGL pipeline to enable downstream repairs. We quickly deployed the solution to isolate the pipeline for 3 days, while repairs were made.

Our SmartStop Technology averted the need to drain 40 miles of pipeline to complete the repairs and save time and expense when compared to a conventional line stop operation..

Our Inspection and Heat Treating segment revenue profile remains less volatile, due to the run and maintain nature of the business. Although IHT's revenue was up 5% year-over-year, it was also impacted by several project delays. As one example, in Canada, a large tar sands turnaround project was delayed until October.

As plant and facility operations have ramped up, our nested technician level is now approximately 96% of pre-COVID levels. We view nested activity as a leading indicator of both economic activity and our clients' focus on regulatory compliance requirements..

After several successful trials over the last year, we recently received approval for missile inspection work for the U.S. Navy. This award demonstrates the Navy's confidence in our technical inspection capabilities. We expect activity to begin in late 2021 or early 2022. Defense is a new growth area for Team that should deliver above-average margins..

Quest Integrity's revenue declined by 5.7% from the comparable quarter in 2020. Our clients' decisions to remain conservative with their maintenance spend during the recovery has limited Quest offline. In total, Quest has had more than $20 million of projects delayed or deferred from 2021 into 2022.

This has created a large and highly visible backlog for next year. To meet this forecasted demand, we continue to invest in technology development, and we are proactively and aggressively recruiting project managers and technical sales globally. Quest is expanding in existing markets and entering new geographic regions..

During the quarter, Quest completed its first in-line inspection work on a challenging pipeline project in a large country in Asia. The buildup of carbon in fired heaters is a major downtime issue for clients. It reduces efficiency of operations and increases the likelihood of overheating and mechanical failure.

Quest expanded its engineered life assessment service offering in Canada and completed its first heater optimization project in the U.S., where we provided an integrated performance assurance solution at a refinery along the Gulf Coast. This integrated approach assures we are efficiently executing across all phases of the project work scope..

From a geographic perspective, despite the COVID-related challenges that have limited our ability to travel to client work sites, we continue to realize year-over-year growth in many parts of the world. In Latin America, we realized a 91% increase in revenue year-over-year, as we continued to expand our presence.

We recently signed our first MSA in Guyana with a large integrated oil company for both IHT and MS segments. In addition, we are hiring and training new rope access technicians in Brazil to complete leak sealing and repair work..

In Canada, the revenue growth was muted this quarter, due to limited project scopes, lingering COVID-related activity reductions and a large tar sands project deferral. In Europe, our revenue was relatively flat year-over-year, as activity levels are slowly responding from the removal of the COVID-related lockdowns.

We recently completed our first international SmartStop job in the Netherlands as our proprietary technology continues to gain momentum..

Closer to home, we announced a multi-year inspection contract for Chevron's upstream assets in California. Our Asset Integrity & Digital group is collaborating closely with Chevron to provide technology-enabled inspection services and engineering assessment solutions.

Since the project start-up in October, we have actively increased our nested technician footprint..

Our management team has vast experience managing the business through adverse conditions. We have a focused execution plan to ensure stability and consistency throughout the company. Our playbook consists of cash management, expanding margins and investing in our people.

First, we are focused on executing efficient cash management strategies, which consists of working capital management by leveraging our centralized billing centers, digital tools that are automating and expediting our invoicing workflow, a rigorous global collections process, and disciplined CapEx allocation.

We are committed and remain steadfast in our goal to generate free cash flow to pay down debt..

Second, we are focused on the recovery and improvement of margins. In response to the economic recovery and rising inflationary pressures, we discontinued COVID-related discounts last quarter, and we are adjusting our pricing and contracts to reflect the current cost environment.

Strict pricing discipline and a rising demand in inflationary environment will help optimize margins across our segments and drive efficiencies. We continue taking measures to reduce operating expenses, corporate overhead, supply chain costs and facility rationalization.

Combined, these cost reduction actions are expected to further optimize our cost structure. Additional savings are targeted for 2022..

We remain focused on high-margin services, while also deploying technology like remote monitoring and our OneInsight digital platform. Higher-margin services will also assist Team to deliver profitable revenue growth that meets or exceeds internal margin thresholds..

Finally, and most importantly, we are proud to invest in our people. Our industry-leading accredited training programs and active recruitment provides a tremendous competitive advantage for Team.

Throughout the pandemic, Team's workforce management group has maintained contact with our permanent and variable group, and we have actively supported technicians by maintaining certifications and benefits. Our efforts during the pandemic assisted the ramp-up as technicians demand increased for turnaround season..

Given the tight labor market, Team's effective technician utilization rate reached a high of approximately 98% during the fall turnaround season.

As part of our robust recruiting efforts, we have enhanced our military recruiting program, participated in several job fairs across the country, increased our engagement with vocational and trade schools, implemented training and apprentice programs, and an active employee referral program.

Year-to-date, we hired approximately 500 technicians and expanded our variable labor group..

Our experience operating in difficult environments, in conjunction with increased activity and improving market fundamentals, provide confidence in our ability to deliver growth in 2022 and beyond..

Before I turn the call over to Susan for the final time, I would like to thank her for her leadership and partnership over the last 3 years. As you know, Susan elected to step down as our CFO. Susan has been a key player during the implementation of our OneTEAM program and has been an excellent addition to our executive team.

She was instrumental in helping navigate Team through the impact of COVID and successfully implemented a new capital structure and has been a critical part of our discussions to provide Team with additional financial liquidity. Each of these achievements have helped us immensely as we work to build a strong foundation for the future of Team.

Susan, I wish you and your family all the best in the future..

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

Susan?.

Thank you, Amerino, and good morning, everyone. I will first review our third quarter financial performance and quarter-over-quarter comparisons and then, provide more detail and information around our recent financing transactions..

As Amerino mentioned, our third quarter consolidated revenue of $217.4 million was down $1.7 million or a 0.8% decrease from the third quarter of 2020. This quarter's decreased revenue reflects impacts of delayed projects from the quarter to Q4 2021 and into 2022 with challenging market dynamics.

We also had a late start to our fall turnaround season and suffered negative impacts due to Hurricane Ida, impacting routine call out work with facilities off-line during the quarter. For the quarter, IHT grew revenue over Q3 2020 by $4.8 million or a 5% increase, while Mechanical Services and Quest revenues declined by 5.2% and 5.7%, respectively..

Consolidated gross margin for the third quarter 2021 was $53.3 million, a 16.3% decline over the prior year quarter of $63.7 million. We continue to be negatively impacted by inflationary costs that we have not fully passed on to our clients.

We also absorbed training and ramp-up costs leading up to our turnaround season, and lower margin services were performed without the blend of the higher-margin work performed by Quest and Mechanical Services.

On a comparative quarterly basis, we also had the impact of the reinstated temporary pandemic-related cost actions that were in effect fully in the third quarter 2020. The consolidated gross margin percentage declined to 24.5% compared to the prior year quarter of 29.1%..

The third quarter net loss of $91.2 million compares to a net loss of $9.1 million in the prior year quarter. This quarter's net loss was driven by a $55.8 million non-cash goodwill impairment charge in the Mechanical Services segment, the $10.4 million decrease in gross margin, and a $6.5 million increase in SG&A versus the comparable quarter.

Adjusted net loss, a non-GAAP measure, was a negative $31.2 million or $1.01 adjusted net loss per share for the third quarter of 2021 compared to an adjusted net loss of approximately $6.5 million or $0.21 adjusted net loss per share for the same quarter in 2020.

Adjustments in the third quarter included the non-cash goodwill impairment charge, approximately $2.7 million of legal costs, and $1.7 million of professional fees and severance costs..

Consolidated adjusted EBITDA for the quarter was $1 million as compared to the prior year quarter of $18.2 million. Our selling, general and administrative expenses for the third quarter of 2021 was $67.6 million, up $6.5 million from the prior year quarter.

The increase was primarily attributable to an increase in bad debt expense of $1 million, increased legal costs of $3 million, with the remainder being associated with the reinstatement of the prior year temporary cost actions. We remain diligent in managing corporate and other SG&A costs with a focus on optimizing our cost structure..

Now turning to our segment performance. IHT reported third quarter revenue of $101.5 million, as previously mentioned, up 5% from the $96.6 million posted in the same period last year. The growth reflects increased hours associated with nested sites and technicians and, to a lesser degree, increases in turnaround activities.

Third quarter adjusted EBITDA was $6.3 million, down $5.1 million over the prior year quarter. Adjusted EBITDA margin decreased this quarter to 6.2% as compared to 11.8% in the prior year quarter.

This reduction is primarily related to the inflationary cost pressures and increased cost of training and other labor costs incurred as we ramped up for our turnaround season..

Mechanical Services reported third quarter 2021 revenue of $96.4 million, down 5.2% from $101.7 million in the third quarter of 2020. Adjusted EBITDA was $7.7 million in the third quarter of 2021, down from $16.9 million in the same period last year. Adjusted EBITDA margin decreased this quarter to 8% as compared to 16.6% in the prior year quarter.

The overall mix of lower-margin work and the cost pressures significantly impacted this quarter's margin..

Quest Integrity's revenue of $19.5 million was down 5.7% from the prior year quarter. Quest activity levels were negatively impacted with delayed projects. Most of these projects have been delayed to 2022 and not canceled. Third quarter adjusted EBITDA was $2.3 million, down from $4.2 million last year.

Adjusted EBITDA margin for the quarter was 11.9% compared to the prior year quarter of 20.1% as Quest cost base is more fixed in nature..

We ended the third quarter with $17 million of cash. Borrowings under our ABL facility were $54.1 million. Additionally, we had undrawn letters of credit against the facility of $24.4 million. Cash flow from operations for the quarter was a negative $1.1 million.

Free cash flow was negative $4.2 million, which included $3.2 million in capital expenditures. We expect our full year 2021 capital spend to approximate $18 million..

As Amerino mentioned, we recently entered into a credit agreement with Corre Partners Management, providing for an unsecured $50 million delayed draw subordinated term loan facility. Upon signing, we borrowed $22.5 million, and we intend to borrow an additional $27.5 million on December 8 of 2021.

In conjunction with closing of the subordinated term loan, we entered into an amendment to our $250 million term loan credit agreement, which, among other things, waves our leverage covenant requirement until September 30, 2022 and increases the maximum leverage ratio required at that time with other modifications thereafter to provide us with additional flexibility.

Team has and does remain in compliance with its covenant requirements under its credit facilities..

Before I conclude, I want to address my resignation announcement. I have really appreciated and enjoyed my experience and time at Team, working alongside Amerino, the executive leadership team, the Board, the global finance and accounting organization and all Team employees that I have been fortunate enough to work with.

I feel very proud to have been able to work with some of the most dedicated and skilled employees with an incredible passion and commitment to Team, its clients and fellow employees throughout the global organization. I look forward to seeing the growth and improvements that will occur over the upcoming months..

I will now turn the call back over to Amerino. .

Thank you, Susan. Before I conclude the call, I will give an update on our technology and digital initiatives and provide a business and operational outlook. Starting with our technology and digital initiatives, during the third quarter, Team added several new clients to our OneInsight platform.

Through our remote monitoring portal, our clients can view information on a real-time basis, eliminating the need for daily or weekly site visits. We recently installed remote well monitoring sensors for a large producer in the Permian Basin.

Using sensors and the OneInsight platform, we can remotely monitor the temperature and wall thickness of piping and other storage facilities on a real-time basis. The remote monitoring solution provides our clients with a safe alternative and a significant reduction in cost versus conventional monitoring methods..

Now moving to our business and operational outlook. We are seeing improvements in our macroeconomic environment as our end markets gradually return to more normalized levels. Specifically, global petroleum demand reached levels nearing and in some cases, even exceeding 2019 demand. As an example, U.S.

gasoline demand recently reached a seasonal 5-year high. Team's operational environment has been positively influenced by these trends..

Based on the following factors, we anticipate a strong outlook for our products and services over the next several years. First, delayed maintenance and capital projects.

Over the last 2 years, we have seen a significant number of projects get pushed or delayed as operators postponed maintenance and repair work to conserve cash and now more recently, have delayed work in order to capture the strong operating margins.

This is a trend that is not sustainable and is creating a growing backlog of capital projects and unscheduled shutdowns due to equipment failures..

Third-party industry sources are forecasting a 40% increase in turnaround in large capital projects in North America in 2022. Given these trends, we expect next year to be an active year for projects. This includes at least one large project award that is scheduled to kick off in early 2022.

Additionally, we have started to see an uptick in emergency work as plants experienced unscheduled shutdowns, due to equipment failure as operators have pushed or delayed maintenance and repair work past the equipment's life cycle. We expect this trend will continue into 2022..

Second, the increase in regulatory compliance requirements for emissions-related solutions. The U.S. Department of Transportation's Pipeline and Hazardous Materials Safety Administration is expected to expand federal pipeline safety standards to all onshore gas gathering pipelines.

This will require pipeline operators to report safety information for their gas gathering lines. In total, this adds approximately 425,000 miles of pipelines that will be covered by federal reporting requirements.

Many of these pipelines have dynamics that will be difficult to inspect and will create increased demand for Quest Integrity's in-line inspection services.

As expected, the current administration recently announced regulations to significantly reduce greenhouse gas emissions from oil and gas operations and require operators to aggressively find and repair emissions leaks.

While the regulation is still being formalized, we are already seeing increased demand for Team services as producers place a greater importance on emissions' compliance and maintaining wellhead integrity..

Shifting to our fourth quarter outlook, we experienced a strong activity recovery in October. However, with the uncertainty around the timing and the magnitude of the holiday activity slowdowns, we expect Q4 revenues to be in line with the third quarter..

In closing, our management team has demonstrated a successful track record of operating both strong and challenging environments. Our execution plan is focused on cash management, expanding margins and investing in our people to ensure stability and consistency throughout the company.

The global economy has bounced back from depressed pandemic-driven activity levels with petroleum demand nearing all-time highs and multi-year record high oil prices. Across multiple end markets, our clients' financial positions have improved over the last 2 quarters.

Therefore, we expect to benefit from a robust recovery as delayed maintenance projects are scheduled and completed next year and beyond..

Finally, I want to express my gratitude once again to Team's dedicated employees for their commitment and perseverance.

As part of the critical and essential services network, we understand how important it is to provide reliable services and are committed to making continuous improvements towards service excellence for our clients now and into the future.

Through the execution of our strategic priorities, we see substantial opportunities to leverage our innovative and diversified service and product portfolio to both new and existing clients around the world..

Thank you for joining us on the call and for your continued interest in Team. We look forward to speaking with you again next quarter. .

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