Team Inc (TISI) Q3 2020 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by and welcome to the Team, Inc. Third Quarter 2020 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kevin Smith, Senior Director of Investor Relations. Please go ahead, sir.

Thank you. Daryl. Welcome everyone to Team's 2020 third quarter conference call. With me on today's call are Amerino Gatti, our Chairman and Chief Executive Officer; and our Chief Financial Officer, Susan Ball. This call is also being webcast and can be accessed through 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 5. 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 12. The information on how to access this replay feature was provided in yesterday's earnings release. Before we continue, I'd like to remind you that this call contains forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities and Litigation Reform Act of 1995, including statements of expectations, future events or future financial performance. Forward-looking statements involve inherent risks and uncertainties, and we caution investors that a number of factors could cause actual results to differ materially from those contained in any forward-looking statements. These factors and other risks and uncertainties are described in detail on the Company's Annual Report on Form 10-K and in the Company's other documents and reports filed or furnished with the Securities and Exchange Commission. The Company assumes no obligation to publicly update or revise any forward-looking statements, except as may be required by law. Amerino will begin by providing an update of our business. Susan will then detail our results. And before we take your questions, Amerino will highlight our OneTEAM program, market outlook and fourth quarter 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. COVID cases are once again increasing around the world reminding everyone about the importance of staying healthy and following safety guidelines and protocols. Safety is our number one core value and I can assure you that even during this time of uncertainty, Team has not neglected our unwavering commitment to keeping our clients, communities, employees and their families safe and healthy. Year-to-date we achieved a top quartile safety performance representing the best safety record in the Company's history. To say that 2020 has been a challenging year would be an understatement, but I am proud of what has been accomplished during these unprecedented times. Throughout the crisis, Team's resilient employees have shown an allegiance to the Company and its leadership, creating a leaner and more efficient business, improving the Company's overall financial health, and delivering the value and service our clients deserve and expect. There are four key areas where Team has made significant progress during the pandemic and economic downturn: high grading revenue, implementing a reduced cost structure, working capital improvements and our workforce management function. First, Team has been successful in diversifying and streamlining its approach to revenue generation throughout the year. We increased our global sales efforts and revamped our proposal process to improve the administrative speed, pricing consistency and to provide greater competitive advantages by highlighting our cross-segment capabilities. I've been pleased with our ability to maintain market share with our critical clients during the crisis. We are collaborating more closely with our clients to develop flexible commercial models that mutually benefit both parties. Second, the actions implemented under the OneTEAM program allowed us to significantly reduce our cost structure to better align with market demands. Our attention to cost efficiencies as well as maintaining tighter controls on indirect and SG&A costs, protect our balance sheet and provide additional cash flow. During the third quarter, we achieved cost savings of $35 million and realized $75 million of savings year-to-date, which exceeded our previously stated target. Third, in order to further improve working capital, we enhanced our billing procedures. The digital job package initiative was rolled out domestically to significantly improve invoice processing time and accuracy, reducing Days Sales Outstanding (DSO). We also expanded our global inventory management process and reduced capital expenditures by approximately 30% when compared to last year. Fourth, our workforce management function has been extremely successful in increasing operating efficiency and providing enhanced cost management. The investments in workforce management allow us to flex our resources to match market activity and enable better forecasting and planning for our clients' future demands. Domestically, year-to-date we achieved utilization rates greater than 90%, a 4% improvement when compared to the same period last year. Team's workforce management function in collaboration with our clients and our operations team have put over 100 field technicians back to work since the low point in the market earlier this year. Before moving to our financial performance I would also like to highlight that we recently published our inaugural Environmental Social and Governance Report, which is now available on our website. The report details Team's effort to improve the environment through the reduction of greenhouse gas emissions, and our recycling programs as well as how technological advancements have limited safety risk and operational exposure to our field technicians. Team's daily focus on health and safety and industry best practices allowed us to achieve a top quartile safety record. Now turning to our financial performance for the quarter; consolidated third quarter revenues were $219 million, down 24.5% year-over-year, but up 16% sequentially as our clients steadily increased project activity and adapted to operating in the current environment. Adjusted EBITDA for the third quarter was $18.2 million or 8.3% margin. Despite realizing the $71 million decline in year-over-year revenues, our cost savings drove the year-over-year increase of 120 basis points of margin expansion. Turning to our segment performance, Mechanical Services third quarter revenues were $101.7 million, up 9.6% sequentially and adjusted EBITDA was $16.9 million, in line with the second quarter. We saw bright spots in our hot tapping and midstream product lines. On-stream services such as emissions control and leak repair were also strong benefiting from clients' OpEx spending. Supporting our revenue diversification efforts, Mechanical Services experienced year-over-year growth in the areas of steel works, waste and water treatment, tanks and terminals and nuclear power. During the third quarter, Team completed a Mechanical Services pipeline repair project for an offshore platform in the North Sea. The production platform had corroded and thinning pipes inside the base of the platform, roughly 300 feet below sea level. Our technicians were certified to perform laser scanning, composite repair and leak sealing utilizing rope access with self-contained breathing apparatuses. The project spanned approximately 18 months and we estimate the lives of these lines were extended by five years. Team's specialized Mechanical Services technicians coupled with our subject matter expertise across multiple disciplines prevented a multi-week facility shutdown saving the client millions of dollars of lost production. Inspection and Heat Treating revenues in the third quarter were $96.6 million, up 20% sequentially and adjusted EBITDA was $11.4 million, a 20.2% sequential increase. Inspection and Heat Treating's nested group is now running at approximately 85% of pre-COVID levels. Despite the increase in activity across the U.S. late in the quarter, the Gulf Coast region was negatively impacted by a very active hurricane season with Hurricanes Laura and Marco striking Texas and Louisiana within days of each other, followed by Hurricanes Sally and Delta, which struck a few weeks later. These storms significantly disrupted offshore oil and gas production, refining and petrochemical operations resulting in lost revenue of approximately $3 million during the quarter. Supporting our revenue diversification efforts, Inspection and Heat Treating experienced year-over-year growth in the areas of steelworks, pulp and paper and pharmaceuticals. We recently completed hurricane-related repair work at a Gulf Coast chemical plant. The job required our rope access crews working on insulation repairs to tanks and cooling towers that were damaged by strong winds. While on site, the scope of this project was extended due to additional discovery work on other damaged units. Our rope access technicians have been in high demand along the Gulf Coast due to the time and cost savings of using rope access over scaffolding and other subcontractor services. Quest Integrity's third quarter revenues were $20.7 million, up 29.4% sequentially. Adjusted EBITDA was $4.2 million for the quarter, a 143% sequential increase. As we reported last quarter, Quest continued to be impacted by the overall slowdown in industry activity, travel restrictions and quarantine requirements in July and August, but experienced a rebound in September. In addition to safely and strategically working within the constraints presented by COVID, project deferrals and the hurricanes, Quest was able to successfully coordinate travel logistics as well as perform demobilization and remobilization of offshore projects along the Gulf Coast. For example, during the quarter, Quest inspected a subsea pipeline project on an offshore production platform in the Gulf of Mexico. Quest's capabilities and technical expertise were ideal for this project due to the length of the pipeline, the various diameters and high pressure of more than 5,000 PSI. Quest's specialized pipeline team using our proprietary InVista subsea technology have been in high demand as clients comply with their pipeline inspection requirements. Year-to-date, Quest has inspected offshore pipelines all over the globe. From a geographic perspective, we experienced increases in activity and better than expected results in our North and Canadian divisions. Team faced continued headwinds in the West Division where pronounced COVID-related restrictions and the wildfires reduced activity levels. The active hurricane season also negatively impacted our nested businesses due to temporary plant closures in the Gulf Coast divisions. While many of our international businesses have been slow to recover, especially Central Europe and the United Kingdom, we have seen an uptick in activity in other areas. For example, Mechanical Services is experiencing increased activity in the Middle East, Asia-Pacific and Canada, all of which had growth in the quarter. I will now turn it over to Susan for a more detailed financial review. Susan?

Thank you, Amerino, and good morning, everyone. As Amerino noted, our consolidated revenue for the third quarter was $290 million, which reflects a decline of $71 million or 24.5% compared to the third quarter of 2019, but an increase of 16% from the second quarter. All three segments saw year-over-year declines, with most of the revenue decrease coming from the Mechanical Services and Inspection and Heat Treating segments. In percentage terms, Mechanical Services experienced a 25% revenue drop in the quarter, while Inspection and Heat Treating decreased by 23.5%, and Quest saw a decline of just over 26%. Our consolidated gross margin for the quarter was $63.7 million, representing 29.1%, slightly higher than the same quarter last year at 28.6%, but down just over $19 million from the prior year. The robust gross margin, despite revenue decreases, showcases our continuous focus on managing variable costs effectively in response to market demands. During the third quarter, we reported a net loss of $9.1 million, compared with a loss of $7.1 million in the same quarter of the previous year. The adjusted net loss, which is a non-GAAP measure, was $6.5 million, or $0.21 per diluted share for the third quarter of 2020, compared to an adjusted net loss of approximately $1 million, or $0.03 per diluted share for the same quarter in 2019. Notable adjustments this quarter included $1.6 million in severance expenses mainly tied to headcount reductions due to permanent cost measures initiated by COVID, along with some restructuring charges from the OneTEAM program, and nearly $1.2 million in legal and professional expenses. Additionally, there was a $500,000 expense related to hurricane damage that will not be covered by insurance. Consolidated adjusted EBITDA for the quarter was $18.2 million, down from $20.6 million in the third quarter of 2019 but up sequentially from $12.7 million in the second quarter of 2020. Despite a year-over-year revenue drop of $71 million, our adjusted EBITDA only declined by $2.4 million from the comparable quarter due to our focused global cost management strategies in both SG&A and operational costs. Total cost savings from our ongoing cost reduction measures amounted to around $35 million for this quarter, achieved through both permanent and temporary cost cuts, and realized nearly equally in our operating costs and SG&A. Our temporary cost-saving initiatives will continue through the fourth quarter of 2020. Regarding SG&A, we have made significant progress in reducing these expenses year-over-year. Total SG&A costs for the third quarter of 2020 were $61.1 million, a decrease of $23.6 million or 28% from the same quarter in 2019, marking the largest dollar reduction we've seen annually on a quarterly basis for SG&A. For the nine months ending September 30, 2020, our SG&A fell by over $50 million, or 20%. We expect the total SG&A for 2020 to be reduced by 15% to 20% compared to the 2019 figure of $328 million, with an inclination towards the higher end of that range. These reductions include both expedited OneTEAM program cuts and temporary measures initiated in mid-March, which will extend through the end of 2020. Turning to segment performance, the Mechanical Services segment reported third-quarter 2020 revenues of $101.7 million, down 2% from $135.6 million in the same quarter last year. Adjusted EBITDA for this segment was $16.9 million in the third quarter of 2020, a drop from the $21.3 million earned in the same period last year. Despite the lower revenues, EBITDA margins improved slightly to 16.6% from 15.7% in the previous year's comparable quarter. Gross margin dollars fell 26% alongside a 25% revenue decline. The Inspection and Heat Treating segment's revenues were $96.6 million, down 24% from $126.4 million reported last year. Adjusted EBITDA for the third quarter was $11.4 million, an increase of $1.9 million sequentially and a slight rise from $11 million in last year's third quarter. EBITDA margins jumped to 11.8% from 8.7% in the same period in the past year, while gross margin dollars declined by 7% due to a 23.5% revenue drop. Quest Integrity's revenues were $20.7 million, down 26.2% from $28.1 million in the prior year. Third quarter adjusted EBITDA was $4.2 million, down from $8 million in the same quarter last year. Quest's EBITDA margin decreased to 20% from 28.5% in the third quarter of 2019, with gross margin dollars falling 41% on a 26.2% revenue decline. For most of the quarter, Quest faced challenges due to travel restrictions and quarantines impacting industry activity. However, as Amerino mentioned, Quest's top line showed signs of improvement in September following the easing of COVID-related travel restrictions. Our effective tax rate was approximately 6.6% benefit for the nine-month period. We expect the full-year effective tax rate for 2020 to be in the range of 7% to 10%. This lower rate compared to the statutory rate is influenced by various discrete items recognized throughout the year, including those resulting from the CARES Act and differences in domestic versus foreign income and losses. The Company holds domestic federal tax net operating losses of about $140 million, which can offset future taxable income. Due to the working capital requirements for our revenue growth in the third quarter, Team was a net borrower under our credit facility for the quarter. Free cash flow was $3.5 million for the nine months, down from $9.8 million in the same period in 2019. Capital expenditures over nine months totaled $16.7 million compared to $23.2 million in the same period the previous year. We are maintaining a forecast of approximately $20 million in capital expenditures for the full year. At the end of the third quarter of 2020, we had around $20 million in cash and approximately $132 million drawn on our credit facility, resulting in total liquidity of about $37 million at September 30. Our senior secured leverage ratio was slightly above 2.9 times at that date. We are compliant with all covenants related to our credit facility and believe our liquidity will suffice for our working capital and cash requirements. We continue to explore all long-term capital structure options to enhance our balance sheet and facilitate future growth. In conclusion, as indicated earlier, we have opted to extend our temporary cost measures until the end of 2020 and will make further adjustments as market conditions dictate. Our focus remains on conserving cash and generating free cash flow to reduce debt. We expect free cash flow to be around $15 million for the entire year of 2020. That wraps up the financial review. I will now hand the call back to Amerino.

Thank you, Susan. Before we take your questions, I will review the progress of our OneTEAM program, recovery readiness planning, and provide our current market outlook expectations. We are expanding the next phase of the OneTEAM tune-up to deliver additional cost reductions that will further optimize the organization. We accelerated key initiatives that were planned for 2021 including roofline consolidation, further deployment of billing centers, making greater use of shared services and increasing back office automation. We now estimate the OneTEAM tune-up and other cost reduction actions will deliver between $85 million and $95 million of annualized permanent and variable cost savings for the year, up from our previous estimate of $50 million to $75 million. Now turning to our recovery readiness program; our strategic investments in revenue diversification and our digital portfolio are preparing the Company to rebound in what we expect will be a very robust activity period over the next two years. Revenue diversification has been a key initiative for us. As stated earlier, 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. We have made progress in both hydroelectric and wind energy, both of which are growing end markets, and we're actively bidding on renewable energy projects globally. For example, five of the world's largest wind turbine farms are here in Texas. The wind turbines can move at speeds up to 200 miles an hour, and due to the heavy wind and other environmental conditions, the blades must be routinely inspected for erosion and general damage using our remote visual inspection capabilities and rope access technicians. We also recently provided an innovative Mechanical Services machining and bolting solution to prepare wind infrastructures. Now, moving to digital; in addition to the partnership with Microsoft to build the foundation of our Field Service Management Program that we announced last quarter, I would like to highlight three enhancements to our digital portfolio. First, during the quarter, Quest unveiled its new streamline data analysis and comparison software. This proprietary, industry-leading software platform allows Quest to rapidly assess data across midstream assets, improving client integrity management decision-making and increasing our integrated and value sales positioning. Additionally, the software was developed to accept third-party data sets in open-source file format, which expands Quest's ability to integrate and analyze multiple datasets. This platform's data to information conversion utility represents a step change in our ability to support the client's asset integrity management programs. Second, we launched our digital information portal during the quarter to allow Team employees and ultimately our clients to track and review orders providing faster support and improved customer service. We estimate this software has already saved approximately 500 man-hours during the quarter. Finally, we added a new midstream client to our digital inspection data management platform during the quarter. Approximately 400 assets were uploaded into the database and we are now monitoring more than 100,000 components in the midstream sector. This digital database combined with condition assessment analytics enables asset integrity performance optimization and provides more timely repair and efficiency leading to greater productivity. These applications when combined with the rest of our growing digital portfolio are extremely beneficial to our clients and will give them the ability to remotely access order information and receive real-time updates about inspection and repair work while simultaneously ensuring Team remains the service partner of choice. Moving on to our macro outlook, the economic recovery continues to give mixed signals. There are some positive trends combined with some headwinds, specifically fuel demand growth in parts of Asia is being driven by gasoline and diesel while jet fuel remains suppressed. Demand for all three refined products collectively remains below 2019 levels. We anticipate reduced activity in Europe and potentially in the U.S. due to increasing COVID concerns and the potential for a global economic pullback. In addition, the oil markets are expected to continue to rebalance during the fourth quarter. OPEC plus has indicated a willingness to withhold supply and when combined with the U.S. production declines will leave the oil market undersupplied over the next several quarters further increasing the drawdown of inventories and improving industry fundamentals. Refinery utilization rates were relatively volatile during the quarter due to the active hurricane season. As product inventories continue to decline, refining margins and utilizations will increase. This year's fall turnaround season was more active than the spring turnaround season but overall turnaround activity is below last year's levels. Many of these plants delayed large turnaround projects due to high utilization rates in 2018 and 2019, which will ultimately benefit Team when those more complex and comprehensive turnaround projects are executed over the next 12 to 24 months. During the fourth quarter and leading into 2021, we continue to see reduced capital spending budgets with most of our clients' inquiries related to OpEx projects. As expected, our on-stream and call-out activity is leading the recovery followed by nested operations. I will now share our expectations for the fourth quarter. First, we should benefit from the backlog conversion of projects that slipped from prior quarters into the fourth quarter. Additionally, we have seen increased call-out activity along the Gulf Coast as hurricane repair work continues. Second, we extended the cost actions that were implemented earlier in the year through year-end. As a result of the OneTEAM program and other cost actions, we expect our full-year 2020 gross margin to be in line with 2019. Finally, while we are cautiously optimistic about improving activity during the fourth quarter, we continue to monitor several risks including COVID restrictions and client operations around the holiday season. We now expect second half 2020 revenue to increase approximately 5% over the first half. Meanwhile, we expect to generate approximately $15 million of free cash flow for the year. Although there is uncertainty surrounding the pace and magnitude of the economic recovery, I will now share some preliminary thoughts around our long-term outlook. COVID will continue to have a profound impact on the industry and be a catalyst for increased adoption of technology. Our clients will require 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. Supported by our OpEx spending to address clients' aging assets, our backlog remains solid and consists of both project and turnaround activity and improvement in our nested business and strengthening call-out activity. Finally, we expect the first half of 2021 to continue to show instability due to client budgets and the widespread availability of a safe and effective vaccine. We expect the second half of 2021 will be significantly better than the first half of 2021. In closing, through most of 2020 we have been managing in a pandemic environment with countless changes to how we and our clients do business as well as the related shock to the global economy. Despite that backdrop, we proactively reduced our operating costs in order to maintain strong margins. Even in a recessionary environment, we are executing on our playbooks to become a leaner, more efficient company that is poised to see solid revenue and further margin expansion as the economy begins to recover. This is a true testament to the criticality of our industry and our exceptional team, especially our technicians on the front lines who have established a culture of teamwork and unity. By boldly facing challenges head-on, they've been able to engage our clients, leverage our technology offerings and manage our risks and financial resources. Operator, I will now turn it back over to you for the question-and-answer session.

Thank you. Please proceed with your questions.

So you talked about the digital enhancements. How impactful do you think those will be going forward?

Well, when we look at digital for our business, we really look at two or three main drivers and we're not ready right now to state a percentage of revenue in the future. But we see that we're gaining already about 25% to 30% when it comes to technician efficiency by reduced rework, waiting on subcontractors and more consistent and sustainable quality assurance, quality control. So that's more of an internal efficiency measure. Obviously, that reflects onto our clients' total cost of operations through their productivity gains, which obviously they see again through subcontractor management etc. We also see what we talked about in the — what I talked about in the prepared remarks, using data and analytics to help our clients more around risk-based inspection, more timely maintenance and less, if you will, failed inspection requirements. And what I mean by that is using more desktop analytics, so when we get to the field, we're actually inspecting the areas that need to be inspected at the right time and making the right recommendations based on whatever damage mechanism and whatever critical asset decline is seen. So when you look at it, the visibility on efficiency and quality, the ability to use data and analytics to help our clients move to more of a risk-based type operation. And then when you start doing repairs and maintenance, having that ability to be able to track that material or that data electronically helps our clients better manage their asset integrity program. So there is a lot of touch points. We're seeing some of our digital capabilities be commercial revenue driven and we're seeing others be internal efficiency driven to support margins. So we're excited about the future in terms of working with our clients, working with other partners and feel that it's going to continue to drive both revenue and margin going forward into the future.

Thank you for the color. And then on the call you mentioned you're maintaining market share. Could you give us a little more detail on what the competitive market looks like?

Sure. So I would say that overall when you look at the clients and again, we've got what we call our large clients more of our MSA clients and then we have kind of a mid-tier sized client and then we have small. We're obviously seeing some regional pricing pressures and some of the call-out work right now specifically in some of the divisions, like the Gulf Coast area and California. But overall, our clients are really working with us to see how they can reduce their overall total cost instead of always just talking about unit cost. So we are seeing regional pressures, I would say in a few of those key markets and more of the call-out on-stream type product lines. But in general, we've been able to maintain good working relationships either picking up some additional cross-selling revenue or being able to reduce their total cost. I talked about rope access in my prepared remarks, reducing scaffolding or other subcontractor costs and still performing their inspections more efficiently is — are some examples where we've been able to work closely with them.

Good morning. And I think you all have done a great job in terms of the cost reduction efforts and being able to increase margins in the face of some very difficult industry fundamentals. First question I wanted to ask about, in your ESG presentation you had a Permian model case study in there about greenhouse gas emissions at the wellhead. There seems to be more attention from the majors and large independents in terms of trying to reduce the greenhouse gas emissions at the wellhead. Could you maybe talk a little bit more about your role there and what that market opportunity is?

Sure. Thank you and good morning Marty. So, we're actually very happy and proud to be able to put that ESG program in place and it's something that as a company obviously, we've been working on it for a few years, and it covers a lot in total but you highlight a very good example. We are seeing a lot of interest obviously right now from our clients and as well from communities around sustainability. And that program, specifically and others like it are you using what we call emissions control. So we're able to monitor — in this case methane emissions, we're able to then make sure that we're supporting our clients through standardized QA-QC program for their compliance reporting. And then furthermore, we're able to then find it and fix it if there is a problem. So we have multiple assets that we're actually monitoring. In this case, it's more along the midstream sector and we've got our technicians working closely, but actually with their environmental department is who runs a lot of those emissions programs and we're able to, on a daily basis monitor multiple assets and components. And then that pulls through other Mechanical Services repair. So it's, right now, I would say it's quite manual in terms of the use of technicians, etc, automated in terms of the reporting, but we're also seeing opportunities to further use drones and sensors and other ways to monitor emissions and satellite imagery, etc. So we're actually working with partners to become, let's say, more automated in the collection or monitoring of emissions in the future.

Thank you. And next question I had was kind of in that — along the same theme in terms of ESG. As we see more biodiesel being used at refineries, can you talk about how that impacts your business? And then as you look at hydro and biodiesel and wind and there's more renewable sources of energy. Could you maybe frame for us kind of what that is as a percentage of revenue now and where you think it could go to or your total addressable market down the road?

Sure. First, regarding the renewable diesel conversions, whether at new facilities or existing ones, the main change lies in the incoming products. When assessing the transition from incoming product to plant output, significant mechanical assets, high-energy piping, and regulatory inspection requirements remain critical. This indicates that there will be an increase in project capital work driving our services during both conversions and new builds. The process itself will change, but we continue to provide inspection services for crucial assets. We don't anticipate significant changes in our ongoing maintenance efforts. As assets age and clients undertake conversions, we foresee further expansion of capital projects. An upfront capital shift is expected, which will influence our project work in mechanical and integrated health technologies. The run and maintain aspect will closely resemble our current operations, as the processes for critical units remain similar. Furthermore, as new capital investments are made in refining—given that there has been limited investment in the last 30 years—this will prompt capital projects as they are approved, but that's expected to occur later, beyond the conversion stage. As for the renewable energy sector, it currently represents a small percentage of our overall business, with activities in the U.S. and Europe, but it only amounts to low single digits today, which indicates significant potential for growth. Our Inspection and Mechanical Services are currently the primary drivers of our business. We're involved in both construction and maintenance phases, and we're beginning to see increased needs for repairs as these assets age and corrosion becomes a concern. In the future, we plan to share details regarding our revenue diversification beyond oil and gas. However, due to market instability, we will hold off on this information until 2021. We aim to provide more insight into our diversification percentages moving forward.

Hi, this is Afzal on for Sean. Thanks for taking our questions.

Good morning.

And congrats on the quarter.

Thank you.

So first, have you seen a big drawdown of your workforce, technician furloughs, etc. I guess the question is, with activity ramping back up in 2021 especially in the second half of next year, how do you plan around staffing and capacity to get ready for that uptick in activity levels next year?

Thank you for the question. I want to emphasize that over the past two years, we have concentrated on enhancing our workforce management function globally. We have gained significantly better visibility into utilization rates, training, and certification needs, and we have an accredited training facility in Alvin, where we also conduct remote training for many of our technicians. Currently, we are already starting to plan projects for the first half of 2021, assessing demand in terms of labor hours. Although conditions may change, we generally plan at least two quarters in advance, which is why we often discuss managing our business in two halves. Our workforce team provides substantial visibility, with managers deployed in each operating division, working closely with a central function on a weekly basis. We have an effective recruiting program, sourcing from the military, colleges, technical schools, and experienced individuals from the industry. Our onboarding program is established, focusing on safety and structured training to certify our employees quickly. Additionally, we maintain strong contact with our casual labor pool, which, while a more variable cost group, is highly qualified and has received training and safety equipment from us. We have networked with as few as 500 and as many as 2,000 individuals in this group. As the economy improves and demand rises, we anticipate labor will be tight, posing challenges, but we have laid the groundwork over the years to prepare for this recovery. Our district managers have strong connections with our technicians and local communities, and we utilize referral programs. These are some of the strategies we have in place for planning the recovery. I also want to mention that despite a challenging year for many employees, where furloughs were necessary, we worked hard to keep our technicians certified and maintain their benefits, which has enabled us to bring back over 700 technicians since the low point. These are the ways we are leveraging our developed workforce and management.

Thanks, that's helpful. And then my next question is around rope access. I guess why are these technicians in such high demand? What is the outlook there? Is Team differentiated there or do most of Team's competitors have rope access capabilities?

Well, I would say that there are competitors out there obviously, in rope access. But I think what makes us unique is the scale of our ability, again, using workforce for project planning, bringing in project managers and we've got some people that are rope access project managers, so that we can actually coordinate the job as a total, not just our small little piece so our project management skill set. Also, our ability to have certified inspectors that are also rope access people and then our ability to have Mechanical Services technicians, certified in both rope access and their product line. So what — I think when you look at Team versus our competitors, obviously, it's size and scale, it's the training program, its project management. And then it's our ability to cross-train and make sure that our technicians that are rope access can also do those other product line certification capabilities of that group. So that's the package. And then I would say furthermore, we have a large nested revenue base and that allows us to leverage that grouping to be able to pull in and really partner with our clients on services like rope access because we're there on a daily basis project planning with our clients, looking at what their needs are, finding ways to help them on an efficiency standpoint, reduce the number, especially during COVID, the number of subcontractors on site. So all that stuff plays into our differentiation.

Thanks. I'll hop back in line. Congrats again.

Hey, good morning guys. Congrats on the EBITDA beat versus still tough environment.

Thank you. Good morning.

Hey, a couple of questions on Quest. The growth in September, can you flesh that out a little bit for us and then just talk about Q4 expectations? And then how your level with Quest, Amerino you mentioned a couple of projects. One in the North Sea, one in the Gulf of Mexico. And can you just talk about the opportunities from there?

Sure, I'll take the market one and then I'll have Susan talk a little bit on the financial side. So we've been, as you know, very aggressive in developing Quest technology, investing capital into Quest. But what I really like what Quest is doing today as a segment is that they are really working hard to maintain their project managers and their inspection team and we've got the ability through regional hubs to deploy — technicians and tools to jobs all over the world. We've had to get creative because of some of the quarantines. The team is working countless hours. The same revenue in 2020, the effort that goes into generating a monthly revenue this year versus last year is compounded by at least two times when you look at all the challenges with travel with quarantines not only in-country but then on projects. So they're finding creative ways to manage the people, they're finding creative ways to use remote support to — on-site operations. They're finding ways to handle maintenance programs, etc. So my hats off to how Quest is managing the business because they are very much impacted on a global basis. But when you look at it, it doesn't change our strategy. A lot of our projects have not been canceled. They've been delayed. So we are starting to work with clients now on rescheduling. Our focus on international integrated solutions remains intact, places like Asia-Pacific, Middle East, Latin America and then some of the more mature markets that you mentioned earlier. And offshore is an area that clients want to do inspection work, they want to have their asset integrity programs and requirements met. And what we're doing is we're opening up new markets with the range of our tool sizes, with our ability. There are very few companies that could have mobbed and demobed on one platform three or four times during hurricane season and done it with a chopper or a helicopter and not needed a bunch of other access — with vessels, etc. So that ability to be flexible is how we're opening up new markets, both from a technical standpoint as well as a logistics standpoint. And we continue to remain excited on the future outlook. Our clients are providing very good feedback to us on the need for our services and then like I said earlier, our digital capabilities around asset integrity continue to open up new markets. So that's from the market standpoint, and I'll let Susan talk a little bit about the financials in the quarter.

Yes. And I would say obviously for Q3, as I mentioned, July and August Quest was still very much hampered by the travel restrictions, the quarantine, industry impacts overall. But we did see a significant robust increase into September. And as Amerino mentioned with respect to Quest, we keep the technicians and the employees in place for Quest. We can't pull and flex with them like we can IHT and MS. So the impacts to the EBITDA margin, the gross margin are still felt with costs that aren't able to be pulled out as we can with the other two segments. But again, seeing that increase in September and as we look into Q4, the fourth quarter generally is the strongest quarter for Quest. And it's not going to be any different this year. That's when really the projects kind of come ahead, a lot of focus and get closed out. Obviously the one gating item will be if there are additional travel restrictions our quarantines that get put into place that we do as we're looking at Quest, seeing that continued improvement in growth getting back to more levels that we're used to seeing when you look into the future periods.

Okay, thanks. And then I just wanted to ask about the overall outlook for large turnarounds. It seems like the best chance for a lot of large turnaround work would be the back half of next year. Is that right?

Yes, I will say right now, a lot of the projects that were pushed from H1 '20 to H2 '20 are landing on the books in H1, but I think that when push comes to shove, and you look at the ramp-up in activity, the potential demand not recovering as quickly as we think, some of the labor that we discussed earlier, I think we're going to see a little bit more gradual growth into the second half turnaround season. So I think H1 will definitely be stronger than 2020 obviously, but I do agree that when everything shakes out, it will probably be a stronger second half than first because of cash conservation, capital demand requirements, etc. So I agree with you. Today on paper, it's probably more equally split. But I think the reality is that will be reassessed as our clients I think finalize their capital budgets and start to really look at permitting and requirements, etc.

Okay. And last thing Amerino there's so many little tidbits in your prepared remarks, but the only thing that struck me was the — you had a midstream customer who kind of loaded all of their assets into your tracking. Is there — I don't know is that a recurring revenue like you all must charge them like a software fee?

Yes, different parts of our digital program are different, but some of them are subscription, yes. Others we use the digital to pull through service revenue but yes, there are some subscription models for certain digital programs, yes.

What percentage of revenue could that potentially represent?

We are currently working on assembling our portfolio. At this moment, we are not in a position to disclose specific percentages of revenue. However, we plan to provide more details as the market stabilizes and we move back into recovery mode. When we evaluate our revenue diversification, which includes areas like digital, offshore, infrastructure, renewables, and aerospace, we will share more insights, but it's too early for me to provide a specific number right now.

Okay. I'll turn it over. Thank you.

Thank you.

Thank you.

Thank you. This does conclude today’s conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.