Team Inc (TISI) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to First Quarter 2018 Team, Inc. Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Don Bleasdell, Vice President, Finance. You may begin, sir.

Thank you, Nicole. Welcome, everyone, to Team, Inc.'s First Quarter Fiscal Year 2018 Conference Call. With me on today's call are Team's Chief Executive Officer, Amerino Gatti; and Greg Boane, EVP and Chief Financial Officer. 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 9, 2018. Therefore, please be advised that any time-sensitive information may no longer be accurate as of the date of any replay.

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 filings with the Securities and Exchange Commission. The company assumes no obligation to publicly update or revise any forward-looking statements.

I would now like to turn the call over to Mr. Amerino Gatti. Amerino?

Thank you, Don, and good morning, everyone. I appreciate you joining us today. I'll begin by providing a brief update on our business. Greg will then share a detailed financial commentary before handing the call back to me, and then we will take your questions.

We will be discussing our financial results within the context of our recently renamed business segments. As of the first quarter 2018, we have renamed 2 of our reportable segments: TeamQualspec will now be referred to as Inspection and Heat Treating; and TeamFurmanite will be called Mechanical Services. The Quest Integrity Group will retain its name.

Team delivered consolidated first quarter revenues of $302 million, an increase of 6% from $287 million in the prior year period. This marked the highest Q1 revenue since the Qualspec and Furmanite acquisitions. We also experienced the highest single month revenues in March since October of 2016. Mechanical [Services recorded] revenue growth of 9%, followed by inspection and Heat Treating growth of 6%. Quest Integrity revenues declined 17% as several projects shifted later this year.

Excluding Quest, our consolidated revenue was up 7% year-over-year. Adjusted EBITDA increased 58% to $10 million from $6 million in the prior year quarter, and adjusted EBITDA margin improved 110 basis points. In addition to higher revenues and higher adjusted EBITDA, free cash flow improved by $10 million over the prior year first quarter. At the beginning of the quarter, we anticipated borrowing $10 million. And in fact, we paid down $3 million of debt while also funding $3.4 million of the OneTEAM program.

I will now move to an overview of our segment performance. The Mechanical Services segment delivered first quarter revenues of $133 million, a 9% increase when compared to $122 million in the same period last year. Adjusted EBITDA was $12.3 million in the first quarter or 138% higher than prior year quarter. This segment experienced higher activity levels and solid gross margin improvement from progressive changes implemented by the Team to improve pricing and project execution. These changes led to a 230 basis point gross margin expansion over the same period last year.

The Inspection and Heat Treating segment delivered first quarter revenues of $151 million, a 6% increase when compared to $143 million last year. Adjusted EBITDA was $12 million in the first quarter or 2% lower than the first quarter of 2017. This segment was stretched during the quarter due to growth in large project activity levels and expanded scopes. This resulted in technician workforce constraints that drove increased overtime and flexible labor costs to meet customer demand.

The Quest Integrity segment delivered first quarter revenues of $18 million and adjusted EBITDA of $2.1 million. This compares to revenues of $22 million and adjusted EBITDA of $5.6 million in the prior year quarter. As we mentioned last quarter, we expected lumpiness due to specific project deferrals into the remainder of 2018.

I will now provide highlights on safety, manufacturing and technology. We continue to focus on our safety performance and culture. I am proud of our team in the Midwest region for achieving a significant milestone, more than 1.6 million manhours worked with 0 recordable injuries over a 9.5-year period at a customer facility. We are beginning to realize the benefits of our investments in manufacturing and lean processes within our Mechanical Services segment. We achieved a 40% improvement in on-time delivery since November 2017. In this quarter alone, the volume of our work order completions have increased by 32% and lead times have decreased, in some cases, by more than 50%. These investments will allow us to better control costs and meet our customer needs.

Team Digital continues to make inroads through its proprietary technology platform. Our software integrated into 6 additional projects in the first quarter of 2018, and we successfully completed our first pilot project in Canada. We continue to be very excited about this differentiating technology. We are achieving 20% to 30% productivity gains from increased time on tools, reduced standby time and automated reporting.

I will now turn it over to Greg for the first quarter financial review.

Thanks, Amerino. As Amerino stated earlier, markets are improving and activity levels have picked up as Q1 '18 consolidated revenues increased $16 million or 6% over Q1 '17. Q1 '18 consolidated gross margin decreased to 25% from 26% in Q1 '17.

Mechanical Services had strong gross margin improvement in Q1 '18, increasing to 28% from 26% in Q1 '17. Mechanical Services had very good profitability fall through with Q1 2018 gross margin increase of $6 million on an $11 million revenue improvement. The Mechanical Services Team has effectively managed their workforce assignments and utilization and implemented targeted pricing improvements, while reducing cost in functions like manufacturing and engineering.

Quest, which has a higher semi-fixed cost structure related to their engineering and assessment resources, experienced a Q1 '18 gross margin decrease of $2.8 million related to lower revenues from projects shifting to later quarters in 2018.

The Inspection and Heat Treating segment had some operating challenges during Q1 '18, with higher project execution costs and a decline in gross margin to 19% from 22% in Q1 '17. Higher-than-planned overtime hours and flexible labor costs, coupled with certain unfavorable contract pricing terms, which carry lower profit margin markups on overtime hours, led to the gross margin decline. Overtime cost in Inspection and Heat Treating increased by approximately 30%, and flexible labor hours increased by 60% compared to the prior year quarter. Amerino will address these items later in the call.

Moving on to SG&A. I'll discuss spending trends on a sequential basis because I believe that comparison is the most relevant. Consolidated SG&A expense for the first quarter was $90 million and includes roughly $5 million of excluded items that I'll review in a moment. Adjusted SG&A expense for Q1 '18 was $84.5 million compared to $74 million in Q4 '17. As discussed on the Q4 '17 earnings call, we expected increases in Q1 '18 related to $3.1 million of accelerated amortization on the Furmanite brand name; approximately $1 million of R&D expense, which was reclassified to SG&A in 2018; and we have higher incentive and stock-based compensation of $2.1 million. When we factor in these items to Q4 '17, Q1 '18 pro forma SG&A would have been around $80 million to $81 million. The sequential increase in Q1 '18 SG&A to $84.5 million is primarily made up of the following items. The first item is Q1 '18 payroll taxes increased by $1.4 million sequentially as part of the normal annual January payroll tax resets. We expect payroll taxes to decline in Q2 '18 with further declines later in the year. Second item is our normalized allowance for bad debt expense runs around $2 million per quarter. Q1 '18 allowance for bad debt was $2.7 million and increased $1.5 million sequentially due mainly to a low expense amount in Q4 '17 of $1.2 million combined with a few isolated additional reserves recorded in Q1 '18. Q1 '18 corporate SG&A of $20 million was flat sequentially, inclusive of the payroll tax reset.

Shifting now to annual D&A and stock-based compensation. For full year 2018, we expect depreciation and amortization to be around $64 million, an increase of $12 million over '17 due primarily to the accelerated amortization related to shifting away from using the Furmanite trade name. Noncash stock-based compensation is expected to be around $10 million in 2018, no change from the last update.

I'll spend a few minutes discussing the excluded items in the current quarter that we do not consider to be indicative of our core operating activities. In the current quarter, there was a total of $5 million of excluded items before tax comprised of the following: there was a $3.4 million -- there was $3.4 million of organizational restructuring work during the quarter related to the OneTEAM program; and $1.6 million of legal and professional fees outside of the program, including $600,000 of severance-related expenses.

Moving down the income statement below operating income, interest expense net for the quarter was $7.6 million and includes $1.6 million related to noncash amortization of debt issue cost and debt discount on the convertible debt. Cash interest expense for Q1 '18 was $6 million.

Finally, there was a noncash gain of $5 million associated with the accounting of the conversion feature of the convertible debt, which is treated as a derivative. Taxes related to Q1 '18 are impacted by the amount of actual pretax losses, the impacts of NOLs and valuation allowances, the new tax on foreign earnings and the interest deduction limitation. The combination of all these factors have resulted in an effective rate in Q1 of less than 4%. A normalized rate for Team should be between 28% to 30%.

I'll now cover the balance sheet and cash flows. At March 31, our cash balance was $18 million, and we had approximately $60 million of available borrowing capacity under the revolver. Total liquidity of $78 million improved by $10 million sequentially.

We are seeing the impacts of our focus on improved cash generation in 2018. It is one of our key performance objectives in our 2018 incentive program. Q1 '18 cash flow from operations was a net generation of $2 million, an improvement of around $5 million from Q1 '17. Our focus on managing working capital, primarily AR and inventory, is having a positive impact as evidenced by the $6 million improvement in cash flow generated from working capital as compared to last year.

CapEx was $5.5 million or around $5 million lower than Q1 '17. Free cash flow improved by around $10 million in Q1 '18 versus Q1 '17. We paid down approximately $3 million in bank debt in Q1 '18. As of March 31, we're in compliance with our existing debt covenants. The senior secured leverage ratio improved to 3.3x EBITDA compared to a maximum covenant of 4.25x.

That completes the financial review. I'll now turn it back over to Amerino.

Thank you, Greg. We are taking immediate actions to accelerate the following initiatives under the OneTEAM program to increase our margins. First, we are focused on contract management. We reviewed our top 25 contracts, identified dilutive contract terms and conditions, such as unfavorable project overtime markups. We're taking actions to address these issues in order to improve margins in the second half of this year.

Second, we are deploying our successful Mechanical Services workforce management capabilities to the IHT business segment to improve project visibility, resource demand planning and maximize labor utilization, including reducing nonbillable time and overtime. Mechanical Services experienced a 3% to 5% improvement in labor utilization through the use of this function.

Third, we are accelerating our cost-reduction plans focused on streamlining SG&A and indirect costs and restructuring low-performing locations. We have identified approximately 10% to 15% of locations that are in the process of being restructured. Medium term, we look to our OneTEAM integration and transformation program to provide the foundation for the company. We have completed the design phase that was announced on the last call and have now entered the deployment phase of the program. As a reminder, the OneTEAM program focuses on 3 pillars: revenue enhancements; operations improvement; and center-led functional support cost improvement.

I will now cover some of the OneTEAM achievements since our last earnings call. As part of the revenue enhancement pillar, we have targeted incremental revenue growth from cross-selling initiatives, and we've already achieved early success of $5 million to $8 million of future project wins. Within the operations improvement pillar, we recently rolled out our new geographic division model. Each division will be led by one business leader with a manageable customer and geographic footprint and large addressable market poised for growth. The cross-segment division structure will allow us to consistently present our full enterprise strength and capability to our clients. As part of the center-led functional support cost improvement pillar, we are continuing to centralize our procurement function to gain cost savings leveraging our size and scale. We have already experienced early benefits for more favorable contracts, savings and enhancing commercial terms for the company.

As we disclosed in our last call, OneTEAM is expected to require an investment of between $25 million and $30 million to complete, with 90% of the spending expected to occur in 2018. The cost split is into thirds: 1/3 for external consulting; 1/3 for restructuring costs; and 1/3 for internal costs to deploy and train employees. We recently negotiated a revised monthly fixed price contract with Alvarez & Marsal, our external consulting partner, in order to manage program costs. It is important to note that we plan to fund the OneTEAM program with free cash flow. We are expecting cost efficiencies of approximately $35 million to $45 million from the operations and center-led functional support cost improvement pillars. The planned program payback is estimated to be 1 to 2 years.

Once the OneTEAM program is fully implemented, we expect our organic growth to be greater than the overall market growth rate and achieve a target of 10% to 12% EBITDA margins. From a macroeconomic perspective, our strengthening end market showed signs of improvement towards the end of the quarter. External data shows that refining capacity and utilization in the U.S. has been increasing every year for the past 5 years, which are positive indicators for our inspection and maintenance businesses. While we recognize that the recovery is still underway and that our customers will continue to strictly manage their CapEx budgets, we are watchful of the ongoing maintenance CapEx announcements for 2018 and beyond. This is the space where Team specializes and can best collaborate with our customers.

In closing, we remain committed to safety and returning Team to profitability, and we are focused on improving contract management, workforce planning and delivering accelerated cost reductions. Finally, I would like to personally thank all our employees for their loyalty, hard work and willingness to embrace change and drive execution excellence.

At this point, I'll turn it to the operator for our first question.

(Operator Instructions) And our first question comes from Tahira Afzal from KeyBanc.

I guess my first question is, we've always thought maybe perhaps the market trend maybe being a little higher than what we had expected would be a positive benefit. Given that you're facing some headwinds in terms of the overtime cost and pricing, et cetera, perhaps you can lay out how we should be thinking about the EBITDA buildup for progressively through the year? Is the $10 million to maybe $15 million a good sort of range on a quarterly basis? Or does it progressively build up because of Quest?

So I'd like to just address the first part, which is handling of the growth of the market, Tahira, and then we'll address the EBITDA. So on the market side, I don't want the inspection situation to be considered a negative. Actually, the tailwind of the activity increases project scope expansion. A lot of discovery work that was identified by our customers is a positive market move. We have and do have plans in place using our workforce planning capabilities to recruit and train and, obviously, work with our customers to get the overtime and the flexible workforce back aligned with that activity. So it's a positive thing. As we move forward, we will address it. And I'll let Greg comment on the buildup as we see it going forward through 2018 on the EBITDA.

Just, Tahira, as a clarification, your reference to $10 million to $15 million of EBITDA, what were you referring to there?

I was being sneaky and saying, well, we have got $10 million in the quarter, so I'm assuming you'll hopefully head [up] progressively through the year.

Yes. Our progression through the year will follow the seasonality of the, of the business. Obviously, we're expecting Q2 to be stronger than Q1. We're pleased with the progression, the margin expansion that we experienced at Mechanical Services. As Amerino said, the -- we're focused on improving the gross margins and EBITDA margins in Inspection. And we're also expecting Quest to be up sequentially over Q2 -- over Q1 and a much better profit generation from Quest looking into Q2.

And our next question comes from Craig Bibb from CJS Securities.

Amerino, you have kind of a broader perspective that you brought to Team. Oil is closing above $71. Could you talk about how the puts and takes on how that might impact refinery spending, the profitability of some of your customers?

Okay, thank you. So first of all, the tailwinds we're starting to see with increased oil prices and crack spreads have been positive. I've spent the last couple of months traveling throughout North America, including Canada. The thing we're seeing specifically on refining, however, is that the capital spend on new projects in refining is down year-on-year. However, our space, which is the maintenance capital projects where both mechanical inspection services play, is up significantly into the ranges of 40% to 50% year-on-year. And we're using, obviously, some of our key customers' public announcements. So from that perspective, what it's driving is additional turnaround project work. It's driving additional discovery work, and that's why we saw quite a few expansions of project scopes within the inspection business. So refining capital projects, I think we still see that down year-over-year. But when you get -- drill down one level into maintenance, that's up 40% to 50%.

But you guys aren't going to see anything like 40% or 50% increase in demand?

Well, that's their spend, and then we're, obviously, a percentage of that and then we have a market share associated with that increase. So you'd have to do the math, obviously, to go from that increase from a customer spend, our portion of that spend and then our market share within those service lines.

Okay. And could you maybe talk a little bit in more detail about the outlook for turnaround for the spring and later in the year?

So for this spring, continued turnaround season over the next 2 months, we see and expect a strong season to continue. As we've started in March, we actually saw a 65% to 70% ramp-up between January and March of activity. And we don't -- obviously, it's not going to continue at that pace, but the next couple of months of turnaround activity looks strong. And again, I expect that the discovery phase will continue as we've seen it in March. So from that perspective, it's good. We have put together our 4 quarter lookahead on project planning. And at this point, we expect to see the second half of the season projects to be in line on the turnaround side with the first.

In line with the first. So I mean, are we looking at like double-digit-type growth in demand to start in Q2?

So we're coming off a 6% revenue increase this quarter, and we do see high single digit to low double digit in Q2 growth.

And our next question comes from Martin Malloy from Johnson Rice.

I just want to make sure I understand the OneTEAM program here. And you talked about $25 million to $30 million of cost, with 95% of that occurring in '18 and the benefits that you have -- that you expect $35 million to $45 million. And I guess that's a combination of revenue increase and margin expansion. Is that -- should that be occurring in '19 then?

So let me just -- if you don't mind, let me clarify 2 points. So it's $25 million to $30 million spend with 90% spend in '18 and the remainder carrying over in Q1 of '19 to close out the project, so that's the $25 million to $30 million. The $35 million to $45 million, which we've now -- last quarter, we gave an estimate, we've now bracketed it to that. That is only from the cost pillars, which is the operations pillar, the division, branch and SG&A restructuring; and from the center-led pillar, procurement and other activities. It does not include anything for the revenue enhancement pillar. And we -- that's going to be done. As we go through, we'll continue to provide updates on that phase of the program.

And should we expect that $35 million to $45 million annual improvement to show up in '19?

So we expect $8 million to $10 million of that to show up in the second half of this year. And then we expect the 2020 to be a full year of implementation of the program. And then '19 will be in the middle of both. But we expect to see an $8 million to $10 million this year, and 2020 will be the next full year implementation. And in between that, we'll be in that $20 million to $25 million range.

Great. That's helpful. And then last question, could you maybe talk about the petrochemical market? And with the buildout on the Gulf Coast kind of what you're seeing there as it relates to your services?

So the petrochemical market is -- when we do services in petrochemical versus refining, it's very similar types of services that we perform in both facilities. We are seeing increase in capital projects on petrochemical that we're not seeing in capital projects on refining. And the rest of it, when it comes to maintenance capital, it's similar to the refining market. So the real difference is that we're seeing more capital growth in that market versus refining. And just to narrow it down a little bit for you, it's about a 20% improvement year-on-year in the refining market on the capital side -- petrochemical, I'm sorry, on the petrochemical side, 20% increase versus the refining -- sorry, versus the refining which is actually down year-on-year.

And our next question comes from Matt Duncan from Stephens Inc.

This is actually Will on the call for Matt. I just wanted to tie a bow around the overall market expectations and the commentary that we've been hitting on here, the last call you noted indicators for 4% to 5% growth. So is it fair to assume that, that has gone up now? And if you can update us on what you think that 4% to 5% range now is?

So the market projected growth of 4% to 5%, I haven't changed, Will, overall general market growth, if you look at all the service lines, combining, refining, petrochemical, pulp, paper, et cetera, et cetera. The pace we're seeing though is that the second quarter will reach a high single digit, low double-digit growth versus the first. And overall, I do think we're going to be reaching the higher single digit levels for the year-over-year growth rate.

Okay, that's helpful.

And remember, just as a clarification, without Quest, we saw about 7% year-over-year growth. And we know that Quest was a tailwind in the first quarter. And those specific projects have been pushed out into the other quarters in the year. And it's not market share loss in Quest, it is just deferred projects.

Okay. So just to clarify, high single-digit year-over-year growth into 2Q is what you're currently expecting?

Yes.

Okay. And then going over to the OneTEAM initiative. Can you give -- you hit on this a little bit. You called out some early benefits you're seeing around the revenue enhancement targets and the size. Can you provide some more detail on the potential opportunity there as you look -- I know it's early into '19, and we're possibly a couple years out, and what you think the revenue enhancement piece of this business can do, possibly turning...

Sure. Yes, no problem, Will. I'm going to give you a number here that's more focused on the near term because I don't want to start giving away information for the long term on revenue. We have a target of $25 million to $30 million in our cross-selling initiative for 2018. We've seen already $5 million to $8 million of project wins that will be awarded -- that have been awarded to be executed later in the year. And then, obviously, you can do the math on fall-throughs, et cetera.

Okay. Then on the unfavorable contract pricing, the headwind on the quarter, is there any way that you can quantify that and call out what that headwind was to gross margins? And have you seen any other contracts with similar terms that could cause headwinds, given this tight market into the fall?

Sure. So I'm going to address the contract piece, and I'm going to let Greg talk about specifically 2 lines that we were, obviously, breaking down, which is the overtime and the flexible contract. First of all, I want to reiterate that the growth is a good positive thing for us. It's a tailwind. This is not negative. We knew it was coming. But because of some of the project scope expansions, we did get into overtime and flexible contract workforce. So that's number one. Number two is, when we go through our contracts and we are starting now to work with our customers of how to manage that, so, obviously, the overtime rate markup is an easy thing. There's other items that are more discretionary costs that are built into these contracts, like per diems and travel, et cetera. As you move people around the U.S., there's a cost impact with that to try and service the customer needs and handle the ramp ups. So when you look at the Ts and Cs that are somewhat dilutive, it's overtime markup and it's all that logistical stuff that comes with it. We are working on better planning through the workforce management tool. We are meeting with our customers to get a longer-term view of their planning and project cycle. And then having, obviously, more local content versus moving people around, and it's always a balance between how much headcount you add for turnaround season versus handling the troughs in the quarters that there is no turnaround. So we have to always balance that, but those are the types of things that we're working on with our customers. It's not an immediate fix because you have to recruit, you have to train, and you have to, obviously, negotiate Ts and Cs with your customers. So I don't expect that to just flip over on a switch immediately. And I'll let Greg comment on the actual impact we saw through the quarter from those type of things. Greg?

So Will, as you know, we're the compilation of hundreds, thousands of jobs in a quarter. And we didn't -- going through and getting real specific on contracts and what the impact was, there's a lot of data. What I can tell you is when we look at the overtime costs and the flexible labor costs quarter-to-quarter, they were up $10 million this quarter. And obviously, there is some profit markup on that, but not at the same rates as standard hours. And so when you mash all that together, there was a significant component of our revenue stream that was at a much lower margin than our standard hours because of that uplift in customer activity and meeting customer demand through the incremental overtime and flexible labor.

And that will never be 0 because we have to always balance the turnaround season with the trough season. So we don't expect overtime and flexible hours to ever be 0, but it was definitely higher than previous quarter plans.

Sure, very helpful. Last thing for me, if I could sneak this in, just updated thoughts on free cash flow generation this year, they improved a lot in the first quarter. Can you give some thoughts there?

So I will say that as we've stated in the past, we are planning to finish the year at positive cash flow that's after the funding of the OneTEAM program, so we will be positive, and any free cash flow will go towards paying down senior debt. We've made some good progress on our receivables and our CapEx reductions to move us in that direction. So positive -- neutral to positive free cash flow after the program funding is still a good estimate for the year.

(Operator Instructions) And we have a follow-up question from Tahira Afzal from KeyBanc.

Guys, I guess it's still too early, Amerino, but if you're looking at the pathway towards that 10% to 12%, it seems like 10% to 12% is we're looking at 2020 perhaps. Is it sort of a fairly notable step-up into the first year? Or should we assume a more gradual back-ended approach?

Gradual, Tahira, because our deployment is on schedule. We expect the deployment to be 12 months. The revenue enhancements, we're already seeing some early wins and those will continue to grow as I mentioned earlier. So a gradual increase to the 10% to 12% near the back half of 2020, so that's the approach we're taking. Obviously, the market conditions, Tahira, there are assumptions in that based on top line growth, but it is a gradual approach. And as I stated last call, this program is a foundation over long term changing the structure of the company. It's not a light switch. It's not just headcount reductions. It's a significant program that we're putting in place, and it will take us that 12 months to deploy.

Got it, okay. And then, Amerino, just in terms of, if you look at Quest, we've seen that the pipeline market, in particular, it moves from region to region. We had Marcellus being big. Now there's more talk on the Permian side. How nimble is Quest in really moving with the market activities?

You mean Quest Integrity specifically, that product line?

Yes.

Yes. So the nice thing about Quest is, number one, they are very mobile because we continue to run them. We perform or handle the sales and commercial part near our customer, but we run it as a special services organization. They can travel with 1 to 2 technicians with 1 to 2 pelican cases due to the size of our tools and be on location within days. So they're very mobile. They don't have a lot of infrastructure, like facilities, et cetera, that bog them down, so they can move with -- where the markets are moving, both in North America as well as international. And their tool base and their platform allows to have backup people or backup tools in a very quick time frame. So they're probably one of our most mobile product lines because there's not a lot of manufacturing support required, et cetera, et cetera, like mechanical as an example.

And we have another follow-up from Craig Bibb from CJS Securities.

Yes. You mentioned the revenue enhancements, cross-selling a few times. Could you give us like an anecdote of like how cross-selling works kind of you were at x revenues and then you brought in more? Just maybe explain that with a little more specifics.

Sure. So first of all, on the cross-selling, the nice thing is that we have a lot of running room because this business in most of our service lines is so fragmented. Even with our market share across all the 3 business units, it's still very fragmented. So when you look at cross-selling, we're able to go into customers that we already have a footprint or already have a contract or already have a relationship, and I'm going to use an example like inspection. And then as we're doing the inspection services, discoveries on projects, we're then able to pull in our Mechanical Services. So if you look at the lifecycle, first thing that our customers do is they want to collect data and that's done through our inspection services, Quest Integrity services, leak detection services. The next thing they do is they analyze that data. We work with them hand-in-hand and collaboratively. And then the third thing is they have to move to repair. So an inspection-type customer, which we have a footprint into, expanding and pulling in Mechanical Services is a very common type of cross-selling and it can go vice versa both ways. But that's the [CAR] workflow that we use. That's the approach we take with our customers. And obviously, we then work a lot closely with those ones that buy more of the integrated offering with our engineering support and our final reports on the work that we've done. So that gives you an example of how it's happening today. Furthermore -- sorry? I was going to say, furthermore, Mechanical Services and Inspection have deployed regional sales managers, which now allows us to start -- that's the beginning of our commercial function and that allows us to start meeting with our customers, looking for opportunity pipelines and actually starting to collaborate earlier in the planning and project phase.

Okay. So in the past, Inspection was not bringing in Mechanical Services?

Well, in the past, depending how far back you go, the pre-Furmanite acquisition, we had a smaller mechanical business. So with the Qualspec and Furmanite acquisitions, we have a much broader portfolio of offerings and a much broader portfolio of our customer base. So it's not that they weren't bringing it in, but we're now much stronger in all 3 legs of the organization in Inspection and Heat Treating, Mechanical Services and, obviously, Quest Integrity. And part of the integration and transformation program is to leverage those acquisitions to grow our top line and improve our EBITDA. So we made these acquisitions over the last couple of years, but now we want to leverage and gain that the EBITDA improvement from those acquisitions. So it's not that they weren't doing it, but there's significant amount of upside that we want to capture.

And then when you do like a higher level in the organization marketing, are you offering kind of package deals? Or how has that changed?

So it's both. I think we don't expect that the whole market is going to shift to package deals. I would explain it into 3 categories. The first one is discrete services. The majority of the market will always -- or not always, but will want to buy discrete services, and that will continue to be a large base to our business. We then move into what we consider more bundled services, where we can have inspection and mechanical working together. And then the top of the pyramid is integrated offerings where it's not just pulling in another business unit, but it's advanced engineering, it's bringing in metallurgy support, working with our service lines, providing a fully integrated asset planning module. So it's really in 3 distinctive buckets. And a lot of our customers today are driving to reduce the number of suppliers. They want to select suppliers that have a broad breadth of services, strong safety programs, et cetera. So we're working very closely with both the operations and the asset group as well as procurement of our customers to move in that direction. But it's not something that will happen overnight. It's going to take time for us to build that relationship, provide that technical competency and use our strong service lines to grow those integrated offerings with our customer.

Okay. And then just one quick, easy one. So as you shifted to fixed price with Alvarez & Marsal, is there a savings associated with that or just managing your top line through your cost risk?

There was a savings, but more importantly we wanted to ensure we protected the scope creep of the project. So it was a very good discussion with Alvarez. It's now a very tight partnership with them. They did a lot of the analysis early on. And now we're both committed to delivering the [program] and hitting the KPIs.

And we have one more follow-up from Martin Malloy from Johnson Rice.

Just a quick question. IMO 2020 regulations have been in the news a lot more recently, and I was just kind of curious, do you expect to see any impact to you all from increased work associated with enhancements to the refineries to comply with that or provide the type of fuel being needed?

So I think it's a little bit too early to tell. We are meeting with customers to start looking beyond 2018. I think what I will say is, as regulations and programs become more strict, again, it does play into the specialized services that we offer. But more importantly, things like Team Digital and our advanced engineering groups, those are the ones that are very valuable because we want to be planning -- we want to be working a lot closer with our customer on future projects, improving turnaround times, reducing unplanned events. So I think IMO might be one example. But I think as the regulations improve -- or not improve, I guess, strengthen or change, that's where we do see our breadth and scope playing a large role with our customers.

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back to management for any further remarks.

Thank you, operator. We appreciate all of you joining us on the call today, and I want to thank you for your continued interest in Team. We look forward to speaking with you again next quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.