Team, Inc. (TISI) Earnings Call Transcript

Welcome to the Team, Inc. Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Joseph Caminiti with Alpha IR Group. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Team, Inc.'s Second Quarter 2026 Earnings Call. Joining me on today's call are Gary Hill, Team's Chief Executive Officer; and Clinton Roeder, Team's Chief Financial Officer. Before we begin, I would like to remind everyone that management's remarks today may contain forward-looking statements, including statements regarding revenue, gross margin, operating expenses, adjusted EBITDA, cash flow and the company's future business outlook. These statements are based on management's current expectations and beliefs and are subject to risks and uncertainties that could cause actual results to differ materially. For a discussion of these risks, please refer to the Risk Factors section of Team's most recent annual and quarterly reports filed with the Securities and Exchange Commission as well as the company's second quarter earnings release. Team undertakes no obligation to update any forward-looking statements, which speak as of their respective dates. With that, I will turn the call over to Gary Hill, Team's Chief Executive Officer.

Good morning, everyone, and thank you for joining us. I'll begin with a brief overview of the second quarter, then spend most of my time discussing what I've learned during my first roughly 120 days as CEO and the actions we are taking to position Team for stronger and more consistent performance. Lastly, I will cover some additional news, which we shared yesterday regarding a significant change in our shareholder base. Clinton will then provide a more detailed review of the financial results, balance sheet and outlook. Our second quarter results reflected the underlying strength of our operating model and foundational business. Overall, our results came in soft relative to the year ago period, driven largely by the timing of customer turnaround outage and maintenance activity, particularly within the mechanical services. Given the macro environment and downstream effects of the ongoing conflict in the Middle East, several customers extended operating runs to take advantage of favorable refining economics, shifting certain planned projects out of the quarter. This resulted in lower turnaround activity and a less favorable revenue mix, which compressed margins and operating leverage. Additionally, I'd like to note that we are carrying one-off impacts to our Middle East business, more acutely impacted by the ongoing conflict. At the same time, the relative stability of our overall revenue base demonstrated the underlying resilience of the business. Inspection and Heat Treating was comparatively more stable, supported by nested and recurring inspection activity and the ongoing need for customers to safely and reliably operate their assets. On top of that relative stability, our results are capturing added resilience from the revenue growth we are driving in other markets and industry verticals, which will continue supporting results on a go-forward irrespective of the macro backdrop. We believe a meaningful portion of this specific Mechanical Services activity has been deferred and pushed out to later quarters. We expect some of that work to begin returning during the second half of the year, although the precise timing remains dependent on individual customer operating decisions, the crack spread environment and ultimately, a timely resolution to the conflict. The quarter also reinforced the importance of the transformation work already underway across Team. In my first 120 days, I spent considerable time with our employees, customers and commercial and operating leaders in order to better understand the strengths of the organization and identify areas where we can improve and capture greater value across the enterprise. Team has a strong foundation. We have highly skilled employees, deep technical expertise and long-standing relationships with many of the largest operators across our core markets. The services we provide are critical to the safe, reliable and efficient operation of customer assets. I have also seen a high level of commitment throughout the organization. Our employees understand the importance of their work and take considerable pride in supporting our customers. Building on that foundation, we identified several opportunities to improve consistency across commercial execution, labor utilization, operating efficiency and cash generation. Commercially, we see opportunities to improve how we manage our sales pipeline, estimate and price projects and strategically select the work we pursue. Operationally, we see opportunities to deploy our workforce more efficiently, create clear ownership across the organization and improve coordination between teams. We are also evaluating our global facility footprint, our fleet and overhead structure while improving the data and systems that support decision-making. Those findings became the basis for the action plan we are now executing. Our plan is centered on 3 areas: leadership and accountability, commercial execution and operational efficiency. First, we have strengthened leadership team and established clear ownership of our key priorities. In addition to my role as CEO, Clinton has joined us as Chief Financial Officer. We have also added a new Chief Operating Officer, a new Chief Human Resources Officer and a Senior Vice President of Operational Excellence, all of whom I am very excited to have part of the Team organization and will contribute meaningfully to our execution and strategic direction. We continue to evaluate opportunities to strengthen our commercial leadership and ensure we have the right structure in place to support the company's priorities. These additions are intended to improve accountability, coordination and operating discipline across Team. I also want to formally welcome Clinton. He brings relevant financial, operating and capital market experience and has already become an important partner to me and the broader leadership team. The second area of focus is commercial execution. We are putting a clear commercial structure in place and introducing greater consistency around pipeline management, estimating, quoting and account ownership. Our objective is not simply to generate more revenue, it is to pursue profitable growth in areas where Team's technical expertise, safety record and execution capabilities are valued. That includes improving pricing discipline and ensuring that travel, training, vehicles, overtime and other customer-specific requirements are appropriately reflected in our commercial terms. We are also making thoughtful investments in our systems, including opportunities to leverage AI where applicable. These system investments will be aimed at generating better visibility into customer activity, upcoming opportunities, win rates and project economics across the organization. The third area is operational efficiency. We are reviewing our global facility footprint, procurement, fleet, organizational structure and overhead costs. We are also focused on labor utilization, billable hours and better coordination between inspection and Heat Treating and mechanical services. Some actions have already been completed, while others are underway or expected to be implemented over the balance of the year. The goal is to create a more efficient and scalable operating structure that improves execution, supports stronger operating leverage and enhances cash generation as activity grows. Clinton will provide additional detail on the expected benefits, implementation costs and timing of these initiatives. Improving the performance of the existing business remains our first priority. Refining and petrochemical customers will continue to be core to Team. These facilities are complex, highly regulated and require ongoing inspection, maintenance and repair. We believe there is a meaningful opportunity to deepen our existing customer relationships and capture a greater share of the work available within our current markets. At the same time, Team's capabilities are applicable across a broader range of industrial and infrastructure end markets. We are expanding our commercial focus and see significant near-term opportunities to apply our capabilities across selected areas, including aerospace, potentially LNG, nuclear, utilities, aviation and other industrial markets. These opportunities are at different stages of development, and we are not suggesting that each is already a material contributor. Our objective is to build a broader and more balanced opportunity funnel over time with a greater mix of recurring activity and less dependence on the timing of large turnaround projects. This broader commercial strategy, together with better pricing, project selection and execution should help create a more resilient and consistently profitable business and buffer against end market cyclicality. Looking ahead, we expect a portion of the deferred Mechanical Services activity to begin returning during the second half of the year. There is a practical limit to how long customers can delay required inspection, maintenance and repair work. However, the timing remains dependent on customer operating decisions, and we are not assuming that all deferred activity returns within any single quarter based on the timing of a resolution of the conflict in the Middle East. We do note, however, that the deferral of this work may also create a stronger setup for future quarters as customer maintenance schedules normalize. More importantly, the actions underway across commercial execution, labor planning, productivity and cost management should improve Team's ability to capture that activity and generate stronger operating leverage and thus returns as it rebounds. We are still early in the transformation, but the diagnostic work is largely complete. Our priorities are clear, and implementation is underway. Team has valuable technical capabilities, long-standing customer relationships and an experienced workforce. Our focus is on pairing those strengths with stronger leadership, greater commercial discipline and a more efficient operating structure. We believe these actions will position Team to deliver more consistent performance, stronger earnings and improved cash generation over time. Before I turn the call over to Clinton, I want to briefly touch on the announcement we shared last night around the same time that we issued our earnings release. As you likely saw, Stellex Capital Management is now our largest common equity shareholder. We are excited to continue working with the Stellex team and recognize this transaction as a strong vote of confidence in the significant embedded value of the Team franchise that can be unlocked. This increase in Stellex's holdings came through a negotiated transaction with our prior shareholder, CORE Partners, and we thank CORE for their engagement and support in the years leading up to this transition. With that, I'll turn the call over to Clinton.

Thank you, Gary, and good morning, everyone. I am pleased to be joining Team and participating in my first earnings call as Chief Financial Officer. Since joining the company, I have spent time with Gary and leaders across the organization, reviewing the business, our financial processes and the transformation initiatives underway. I'm encouraged by Team's underlying strengths and the opportunity to improve margins, cash generation and operational consistency. Turning to the second quarter. Revenue was $229 million compared with $248 million in the prior year period. Inspection and Heat Treating revenue was $131 million, a 5% decrease year-over-year. This decrease was largely attributable to a $5 million drop in the U.S. and a $2.6 million reduction in Canada, both due to reduced turnaround activities in those regions. Mechanical Services revenue was $97 million, an 11% decrease year-over-year. As Gary discussed, results reflected the deferral of planned turnaround and maintenance activity as certain customers extended facility operating runs. As we have mentioned, our results have carried the impact of deferred turnaround activity as refining customers have deferred maintenance to capture strong crack spreads. To date, turnaround revenues are down a little more than 50% versus the prior year, driven by this current dynamic. Notably, the activity tied to these revenues cannot be forgone, and we expect to capture these revenues in later periods with expectations for pickup beginning in the second half of the year. While consolidated revenue remained relatively resilient, the lower contribution from turnaround work resulted in a less favorable mix of sales and also affected labor utilization and operating leverage. Selling, general and administrative expenses for the second quarter were $46.6 million, decreased by $3.9 million or 7.8% from the second quarter of 2025. Adjusted selling, general and administrative expense, which excludes expenses not representative of Team's ongoing operations such as nonrecurring professional, legal, financing and severance expenses and noncash expenses such as share-based compensation expense, decreased by $2.3 million or 4.8% to $44.6 million compared to the prior year period. Adjusted EBITDA was $13.7 million compared with $24.5 million in the second quarter of 2025. The change primarily reflected lower Mechanical Services activity and the related impact on revenue mix and labor utilization and fixed cost deleveraging. Turning to our structural cost improvement program Gary highlighted earlier, we have identified approximately $20 million to $35 million of annualized savings and productivity benefits across our facility footprint, fleet, procurement, organizational structure and operating processes. We anticipate that these initiatives will support future cash flow generation in the range of $5 million to $15 million this year. We note that while these initiatives are underway, they are very much in the early stages and are not yet reflected in our results. We expect approximately $8 million to $15 million of benefit during the second half of 2026 and expect to achieve the full annualized run rate by 2027. We currently anticipate onetime implementation costs of approximately $5 million to $10 million. These initiatives are largely within our control and intended to create a more efficient cost structure and stronger operating leverage as customers' activity improves. Alongside these actions, we are sharpening our commercial focus and extending our specialized capabilities into a more diversified set of high-value industrial end markets. Together, we expect these steps to improve our margins, support stronger performance in the second half and strengthen Team's underlying earnings power and cash flow generation over time. Turning to cash flow and the balance sheet. Cash used in operating activities was $0.7 million and capital expenditures were $3.9 million. We ended the quarter with total liquidity of approximately $51.2 million and net debt of $300.3 million. Net working capital and cash generation remain key priorities. We are focused on improving order to cash, increasing accountability throughout the organization and using future cash generation to further reduce debt. Turning to guidance. We are reaffirming our full year 2026 outlook for revenue of $920 million to $945 million, gross profit of $240 million to $260 million and adjusted EBITDA of $68 million to $73 million. In the near term, we expect our results to likely come in towards the lower half of the provided ranges, given the uncertainty of timing regarding a rebound in deferred maintenance and turnaround activity tied to the ongoing Middle East conflict and its impact on global fuel markets. Our outlook assumes that a portion of the mechanical service activity deferred during the second quarter begins returning over the balance of the year. The precise timing remains dependent on customer operating decisions, and our current expectations are, therefore, more weighted toward the second half. Guidance also incorporates the expected benefit from some of the initiatives underway, along with continued stability within inspection and Heat Treating and improved labor utilization as productivity returns. We remain focused on executing the transformation priorities Gary outlined and delivering improved margins, adjusted EBITDA and cash generation. With that, I'll turn the call back over to Gary.

Thank you for taking the time this morning dialing in and participating in our call. We look forward to updating you on our transformation initiatives and growth as we go forward with the year. Thank you.

Thank you, Gary and Clinton. When we announced this call, we invited investors to submit their questions ahead of time. We'd like to thank those investors who took the time to do so, and we appreciate your continued engagement. In addition, we will be opening the call up to a live Q&A following the responses to those submitted questions. Correction, we will only be taking questions today that were submitted in advance. Question one. Yesterday's announcement detailed a significant increase in ownership from Stellex Capital Management and a significant premium to market value. Can you comment on the transaction and what you believe is driving Stellex's increased ownership? And what may this additional Stellex investment mean going forward?

Sure. This is Gary. We can't speak on behalf of Stellex, but I can say this sends a very strong message to the management team that Stellex has confidence in our business strategy, the value to be unlocked here, the ongoing transformation and our ability to work to deliver differentiated value to our customers. We also look at it as confidence from CORE's perspective that they would not sell unless there was a significant premium. We have an incredible brand and technician workforce here at Team, and we believe there's a lot of opportunity to improve margins with structural efficiencies and by obtaining more business in markets that value our services and safety record, and we'll pay accordingly for that, whether it be in aerospace, nuclear power, midstream, data centers and so on. We can assume that Stellex shares our confidence and they have seen the opportunity before us after being a strategic investor in Team since September 2025, and it's been a very positive and constructive relationship since they initiated their position last year. We look forward to the continued collaboration with Stellex, and we view their interest as being aligned with the company and its shareholders with the ultimate goal of long-term value creation and unlocking the value of this business with improved margins while also having the highest safety standards and striving to be the employer of choice for service technicians in our industry.

This quarter, you introduced concrete targets for structural cost improvement for this year and at a full run rate. Do you anticipate sourcing structural benefits? Are there upfront capital costs associated with implementing these actions?

Yes. This is Clinton. Yes, related to the anticipation of the sourcing of the structural benefits, optimization of the supply chain, facility, fleet, global footprint and organizational structure as well as sharpening our commercial focus. It's important to note that we have started this improvement plan, but there's still a lot to do and the impacts may take some time to fully run through the financials. We have begun our efforts on the commercial side, but there's still a lot to do there as we look to the back half of 2026 and into 2027. But we have specific identified plans with goals to achieve our objectives. Regarding the upfront costs associated with implementing these actions, yes, we have estimated between $5 million to $10 million of onetime costs to implement the changes, which includes global changes to our footprint and certain technology upgrades to improve our efficiencies. We are also evaluating capital needed to drive growth in areas where we have customers asking to provide new services to them and looking for ways to ensure we get the returns needed from those customers.