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Operator
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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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.
Kevin Smith
Thank you, Devin. Welcome, everyone, to TEAM's first quarter 2021 earnings conference call. With me on today's call are Anne-Marie Nogatti, 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 5th, 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 12th. The information on how to access these replay features was provided in yesterday's earnings release. Before we continue, I'd like to remind you that this call contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities and Litigation Reform Act of 1995, including statements of expectations, future events, or future financial performance. Forward-looking statements involve inherent risks and uncertainties, and we caution investors that a number of factors could cause actual results to differ materially from those contained in any forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's annual report and and 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. Ann Marino 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, Ann Marino will discuss the company's outlook. I would now like to turn the call over to Ann Marino.
Devin
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 6 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 UK 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 increased by over 40% from February levels. We performed more call-out work and started several large turnaround and capital projects. These higher activity levels continued throughout April and into May as our clients began to allocate their CapEx dollars to delayed projects and turnarounds. I will share more about our outlook later in my prepared remarks. Now turning to our financial performance, consolidated revenue for the first quarter of 2021 was $194.6 million, down 17.8% from the same quarter in 2020. As I mentioned earlier, the year-over-year drop in revenue was attributed to the negative impact of the COVID-19 pandemic and activity declines due to the February winter storms. Gross margin was 22.5%, slightly below the prior year quarter margin of 24.3%. The margin was impacted by a partial reinstatement of the pre-pandemic cost initiatives, lingering COVID-19 pricing concessions, a lower mix of high margin services, and increased training and certification spend versus the comparable quarter in 2020. Adjusted EBITDA decreased by $1.4 million in Q1 2021 over the same period in 2020. As a result of disciplined cost management, we limited our adjusted EBITDA decremental to 3%, despite a $42.2 million year-over-year reduction in revenue. Turning to our segment overview, beginning with mechanical services, our business was negatively impacted due to the February winter storms, but demand for our emissions control services and leak repair worked improved in March when those plants and facilities came back online. Our MS technicians rapidly responded to the extreme weather events along the Gulf Coast, completing emergency work for 32 clients. MS used its new modular plant design to quickly deploy an off-the-shelf solution, repairing damage caused by the freezing temperatures. Teams proprietary leak sealing solutions have resulted in several long-term contracts and we're currently bidding on additional opportunities. MS experienced year-over-year growth in the areas of nuclear, mineral extraction and steelworks, power, utilities, tanks and terminals, and marine and offshore operations. As an example, MS recently completed the first stage of work to support an offshore production expansion project in the Caspian Sea. TEAM was hired to inspect and machine an oil rig skidding system in order to meet tight tolerance requirements. Our technicians were able to reduce variances of the system's movement by using field machining, laser trackers, and 3D imaging. TEAM expects to use its meteorology solution throughout the remainder of the project, which is scheduled to be completed in mid-2020. Inspection and heat treating performed relatively well during the quarter due to our run and maintain activity. While revenue was down year over year, even with the winter storms, it was largely in line with our forecast. As the economy continues to open and plant utilizations rise, we have seen a steady increase in the demand for our technicians. Our nested operations are currently running approximately 90% of pre-COVID utilization levels. IHT margins were above our expectations in February and March, when fallout from the winter storms drove an increase in heat treating work. We completed heat treating jobs at six facilities where TEAM had previously not performed similar work, highlighting the success of our cross-selling capabilities and opportunities to capture market share. IHT experienced year-over-year growth in the areas of chemical and petrochemical, pulp and paper, food and beverage, and aerospace. In February, our heat treating service line completed emergency call-out work in the Gulf region on a water piping system that was frozen due to extreme winter weather. The agility of our workforce management function allowed us to quickly mobilize, within 24 hours, the necessary technicians and equipment in order to thaw the product line, tank, and other piping, ultimately returning our client's plant to normal operations. Quest Integrity's revenue growth continues to be impacted by sluggish industry activity and COVID-related restrictions. Similar to the MS and IHT segments, Quest's activity levels improved significantly in March as these restrictions began to lift. Revenue increased by approximately 40% over the January and February averages. Activity levels further increased in April, and we continue to see growing demand, including offshore inspection projects. During the quarter, Quest inspected a small diameter offshore pipeline in Southeast Asia. The project required a customized tool capable of providing high resolution images and functionality in multi-diameter lines with a single launch. Quest's inspection tool can transition from small diameter to a connected large diameter pipeline and has the durability to run over long distances. We expect this differentiated technology will open other subsea pipeline markets that were previously considered non-inspectable. Quest is currently pursuing similar lines in the Gulf of Mexico and the North Sea. From a geographic perspective, despite the COVID-related challenges that have limited our ability to travel to client worksites, we realized year-over-year growth in many parts of the world. In Canada, our efforts to improve workforce utilization and drive down indirect costs allowed us to expand our gross margin and deliver a higher year-over-year adjusted EBITDA. Additionally, activity levels increased in March as we started several large tar sands turnaround projects. While some provinces are dealing with COVID outbreaks and lockdowns which could impact the second quarter activity, we expect to be at or near pre-pandemic activity levels in the second half of the year. Europe also delivered year-over-year growth as increased utilizations and greater cost controls drove an increase in year-over-year adjusted EBITDA. The Middle East remains volatile as Qatar, Oman, and Kuwait are experiencing COVID-19 spikes. However, as economic activity increases due in part to the increase of oil prices, TEAM continues to win new business in the region. We recently completed a leak ceiling repair project on a pipeline in Qatar and were awarded a long-term contract in our valve management solutions business at a power plant in Jordan. I will now turn it over to Susan for a more detailed financial review. Susan?
Kevin
Thank you, Amarino, and good morning, everyone. I will review our first quarter financial performance and quarter-over-quarter comparisons. As Amarino 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 sub-zero 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 pre-tax non-cash goodwill impairment charge. Adjusted net loss, a non-GAAP measure, was a negative $29.8 million or a $0.97 adjusted net loss per diluted share for the first quarter of 2021 compared to an adjusted net loss of approximately $18 million or $0.59 adjusted net loss per diluted share in the same quarter in 2020. Adjustments in the first quarter included approximately $3.6 million of professional and accrued legal fees and costs and just over $2 million of severance charges which were primarily associated with our operating group reorganization. Consolidated adjusted EVDA for the quarter was a negative $5.3 million as compared to the prior year quarter of negative $3.9 million. Despite realizing a $42.2 million decline in year-over-year quarterly revenues, our adjusted EVDA decremental fall through was limited to approximately 3% with a minimal $1.4 million decline. This demonstrates the effective results of our permanent cost actions taken in 2020. As discussed on our fourth quarter earnings call in March, we have benefited significantly by the permanent removal of certain structural costs during 2020, providing a more agile structure with higher margins as we move throughout 2021 with increased revenue and an increased fall through to our bottom line. Selling general and administrative expenses were down nearly 16% from the year-ago quarter. Our total SGMA costs for the first quarter of 2021 was $66.1 million, down $12.3 million from the prior year quarter. SGMA costs were up sequentially from the fourth quarter by approximately $3.6 million as certain temporary cost reduction actions taken out at the, certain temporary cost reductions taken out at the inception of the pandemic began to be restored in January and were layered in throughout the first quarter, such as salary reductions and increased related sales investments. All salary reductions have been reinstated as of March 31. As I mentioned during our prior call, more than half of the SG&A savings we realized in 2020 were permanent in nature. We do expect to see an increase in SG&A throughout the second quarter of 2021 as the impact of restoring the temporary cost reductions only partially impacted the first quarter numbers. We continue to expect our full year 2021 SG&A costs to be in the range of $275 to $290 million. In the first quarter, our corporate adjusted EVA improved year over year by over $5 million or a 24% improvement. Interest expense was approximately $9.4 million, up $2.6 million. We expect that our interest expense will be between $9 million and $10 million each quarter in 2021. Now, turning specifically to our segment performance, the IHT segment reported first quarter 2021 revenues of $91.1 million, down 15.5% from the $107.9 million posted in the same period last year. However, IHC continued to show improvements sequentially despite the challenges presented during the quarter. Revenue increased by 1.6% sequentially. First quarter adjusted EBDA was $4.3 million, up $680,000 over the prior year quarter. Adjusted EBDA margin increased this quarter to 4.7% as compared to 3.4% in the prior year quarter. MS segment reported first quarter 2021 revenues of $87.4 million, down 15.4% from $104.5 million in the first quarter of 2020. Adjusted EBDA was $5.7 million in the first quarter of 2021, down from the $6.6 million earned same period last year. Adjusted EVA margin, though, increased this quarter to 6.5% as compared to 6.3% in the prior year quarter. Quest Integrity revenues of $16.1 million were down 34.2% from the prior year period of $24.4 million. First quarter adjusted EVA was $669,000 down from $7 million in the year-ago period. adjusted EVA margin was 4.2% compared to the prior year quarter of 28.6%. Quest has remained more severely impacted by the lockdowns and quarantine travel restrictions. Quest's first quarter, 2020, though, was a record quarter, and it's a difficult comparative without having suffered any impacts of COVID during that period and additionally being a record quarter. As expected during the first quarter 2021, cash flow from operations was down significantly as we funded the increased working capital demands associated with the revenue growth and increase in activity levels experienced in March. Our cash flow from operations for the quarter was a negative $17.2 million. Our free cash flow was a negative $20.6 million, which included $3.4 million of investment in capital expenditures. Our full year 2021 capital expenditures forecast is approximately $25 million. As activity levels continue to grow, we will see increased working capital demands. Although the magnitude of working capital change is difficult to forecast at this time, we expect to be free cash flow positive in 2021. We will actively manage CapEx and discretionary spending accordingly to align with our business growth opportunities throughout the year or any unforeseen challenges that may arise. Last December, we refinanced our capital structure, which gives us sufficient liquidity to support both our working capital needs
Devin
including the transition to our new operating model and a 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 US and UK, 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 US, 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
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