Team Inc (TISI) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2018 Team, Inc. Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Don Bleasdell, Vice President of Finance. Sir, you may begin.

Thank you, Jamie, and welcome, everyone, to Team's Fourth Quarter Fiscal Year 2018 Conference Call. With me on today's call are Amerino Gatti, the company's Chief Executive Officer; and our new 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, March 13, 2019. Therefore, please be advised that any time-sensitive information may no longer be accurate as of the date of any replay or transcript. 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 March 20. The information on how to access these replay features was provided in yesterday's earnings release.

Before we continue, I'd like to remind you that this call contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities and Litigation Reform Act of 1995, including statements of expectations, future events or future financial performance. Forward-looking statements involve inherent risks and uncertainties, and we caution investors that a number of factors could cause actual results to differ materially from those contained in any forward-looking statements. These factors and other risks and uncertainties are described in detail on the company's annual report on Form 10-K and the other -- and 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 on our business. Susan will then detail our results. And before we take your questions, Amerino will highlight our OneTEAM progress and market outlook. Now I'd like to turn the call over to Amerino. Amerino?

Thank you, Don, and good morning, everyone. We appreciate you joining us today. Before I begin, I would like to formally introduce our new Executive Vice President and Chief Financial Officer, Susan Ball, who joined us in December.

Prior to joining Team, Susan served more than 12 years at CVR Energy in various roles of increasing responsibility, including Chief Financial Officer and Treasurer. She brings more than 30 years of experience in finance and accounting and in just a short time, has become a valuable addition to our leadership team.

I will now start with our consolidated results. Consolidated revenues for the fourth quarter were $310 million compared to $316 million in the prior year quarter, which was down primarily due to lower activity in our Mechanical Services segment and was partially offset by higher activity levels in the Quest Integrity and Inspection and Heat Treating segments. As mentioned during the previous call, year-over-year revenue growth was challenged due to nonrecurring surge activity from Hurricane Harvey in Q4 '17, coupled with higher refinery utilization rates in Q4 '18.

Fourth quarter gross margin improved 180 basis points over the same period last year. The improvement was a result of the continued strength of our Quest Integrity segment and realized benefits from our ongoing cost reduction pillars of the OneTEAM program. Fourth quarter adjusted EBITDA of $24.5 million increased 5% from $23.4 million in the same period last year on lower revenues. We are pleased with the progress we made in 2018. We delivered on each of our key performance objectives: to improve safety, grow EBITDA and increase free cash flow generation.

Some of these full year highlights as compared to 2017 include: revenues of $1.25 billion, an increase of 4%; adjusted EBITDA increased by 37%; free cash flow increased by $65 million; CapEx spend reduced by 26%; and finally, our bank leverage ratio improved to 2.6x at the end of 2018 compared to 3.5x at the end of 2017. Full year 2018 revenue improvements were led by our 2 inspection and assessment segments, Inspection and Heat Treating and Quest Integrity, which were up 5% and 19% respectively.

Mechanical Services revenue was relatively flat when compared to the prior year. Taking into account the impact of shutting down underperforming districts, Mechanical Services revenue was up 1%. Full year adjusted EBITDA improved 37% to $72 million, up from $53 million a year ago. All 3 segments delivered higher revenues and improved adjusted EBITDA for the full year with Quest Integrity leading the way.

Team remains focused on capital discipline and cash flow management. We delivered strong cash flow in Q4 of 2018 with the record quarterly free cash flow of $29 million, representing a year-over-year improvement of $43 million. For the full year of 2018, we generated $15 million of free cash flow, which is a $65 million improvement over the prior year. We are extremely pleased that we exceeded our previously disclosed target of generating positive free cash flow for the year. In the fourth quarter, we paid down an additional $26 million of debt. We remain committed to paying down debt with available free cash flow.

Now I will review our full year performance by segment. The Inspection and Heat Treating segment delivered full year 2018 revenues of $617 million, a 5% increase over $588 million in 2017. Full year adjusted EBITDA was $60 million or 12% higher than the $54 million in 2017. This segment has now delivered 4 consecutive quarters of year-over-year revenue growth.

The Mechanical Services segment delivered full year 2018 revenues of $532 million, slightly higher than the $530 million in 2017. Full year 2018 adjusted EBITDA was $47 million, an increase of 5% when compared to $45 million in 2017. This segment experienced maintenance delays and project deferrals due to higher refinery utilization rates that persisted from the third quarter.

U.S. refinery operators are running facilities at higher than historical utilization rates and deferring certain projects to actively manage the opportunity cost associated with bringing assets offline. The average U.S. refinery utilization for Q4 of '18 was 93% compared to less than 90% for the previous 10-year average. Higher utilization rates and deferred maintenance lead to incremental asset wear and tear, which will ultimately drive demand for our business.

For the second year in a row, the Quest Integrity segment achieved record revenues. 2018 revenues were $97 million, a 19% increase when compared to $82 million last year. Adjusted EBITDA in 2018 was $25 million or 45% higher than the $17 million in 2017. Quest Integrity continues to benefit from additional offshore pipeline inspection work and growing demand for the performance assurance enabled by our proprietary tools and advanced engineering services.

I will now provide highlights on our safety performance. We are committed to achieving best-in-class safety performance. Through focused district safety audits and the deployment of our fleet monitoring systems, (inaudible) recordable injuries by 21% and our TRIR by 18% when compared to the previous year. Also I would like to recognize our central division for achieving 9 years without a recordable incident, working over 1.8 million man-hours with a key client in Wood River, Illinois.

Delivering top quartile safety and quality performance begins with investing in our industry-leading recruiting and training programs. We offer structured career development and apprentice programs through our world-class training facilities in Texas and the United Kingdom. Our technical school in Texas is state-accredited, offering technician and client-based training and industry learning. In 2018, through instructor-led sessions, we trained more than 2,400 employees in various programs, representing 25% of our technician workforce. The investments in safety, quality and training differentiate us, particularly in light of tightening labor market, pricing pressures and recruiting challenges.

Moving on to technology. Team Digital is our proprietary platform that maximizes quality and efficiency through digitally enabled workflows. In Q4 2018, we successfully executed nondisruptive inspection-related projects with 4 clients at 4 new facilities and supported 9 simultaneous projects. In 2018, Team Digital-related revenues increased 400% from the prior year. The digital landscape within our end markets remains dynamic. We are receiving positive customer recognition for the proven functionality and domain and technical-driven applications of our platform.

I will now turn it over to Susan for a more detailed financial review. And then I will share more about our OneTEAM progress and outlook. Susan?

Thank you, Amerino, and good morning, everyone. As I walk through the results, I will focus my discussions on gross margin, adjusted EBITDA, SG&A and cash flow. Most of my comparisons will be sequential Q4 2018 as compared to Q3 2018.

Consolidated gross margin percentage in the current quarter increased by 350 basis points to 27.6% from 24.1% in Q3 2018. Consolidated gross margin increased by $15 million sequentially in Q4 2018 due primarily to the top line increase, partially offset with headwinds around increased labor, materials and logistics. The incremental gross margin impact in Q4 2018 of 75% to 80% on a sequential $90 million revenue increase equates to an approximate $14 million to $16 million gross margin increase in Q4 2018 as compared to Q3 2018. A revenue pillar under OneTEAM has begun to provide positive leverage, which Amerino will discuss later.

Inspection and Heat Treating segment gross margin increased by 9% on a 2% sequential revenue increase. Mechanical Services segment gross margin increased by 36% on a 10% sequential revenue increase, driven by demand in remedial, onstream and call-out work. Quest Integrity segment gross margin increased by 19% on a 17% sequential revenue increase. As Amerino noted, the Quest Integrity segment delivered back-to-back record revenue years.

Consolidated adjusted EBITDA of $24.5 million in the fourth quarter increased by 540 basis points to 7.9% from 2.5% in Q3 2018, the highest fourth quarter adjusted EBITDA percentage since 2015. All 3 segments reported positive sequential adjusted EBITDA growth over the third quarter of 2018.

The Inspection and Heat Treating segment Q4 2018 adjusted EBITDA percentage increased to 10.4% from 9.5% in Q3 2018, delivering a $2 million or 11% sequential increase. The Mechanical Services segment Q4 2018 adjusted EBITDA percentage increased to 10.9% from 0.2% in Q3 2018, driven by top line and gross margin improvements. Building on another record revenue year, Quest Integrity segment delivered record full year adjusted EBITDA of $25 million with Q4 2018 adjusted EBITDA of $9.7 million or 34% of revenues.

Total SG&A for the fourth quarter 2018 was $90.1 million compared to Q3 2018 of $87.8 million. There were a number of items not indicative of our core operating activities that impacted SG&A in the fourth quarter 2018, which approximated $10 million. These impacts included professional fees and related charges primarily associated with the OneTEAM initiative and other legal fees and associated costs. We also had asset write-offs of $1.4 million related to dispositions of underperforming districts during the quarter. Q3 2018 impacts not indicative of our core activities approximated $6.4 million, resulting in a net SG&A sequential reduction of approximately $1 million from Q3 2018 to Q4 2018.

Full year 2018 SG&A was $361 million as compared to $348 million in 2017. 2018 SG&A was unfavorably impacted on a full year basis by an increase of bad debt expense of approximately $4.6 million, increased depreciation and amortization from the Furmanite amortization acceleration of $12 million and increased incentive compensation and noncash stock compensation expense of $10 million as compared to full year 2017 SG&A. Full year 2018 included cost of approximately $27 million as compared to $38 million for full year 2017 for those items not indicative of our core operating activities. As a result, year-over-year SG&A reduced by approximately $11 million, driven by the OneTEAM cost reduction pillars and our continued focus on cost rationalization.

For the full year of 2018, depreciation and amortization expense was $65 million, which included the $12 million we previously spoke to in incremental expense versus 2017 due to the acceleration of the Furmanite trade name amortization, which now is fully amortized. Interest expense, net for the quarter, was $8 million and includes $1.7 million related to noncash amortization of debt issuance cost and debt discount on the convertible debt. Cash interest expense for the fourth quarter 2018 was approximately $6.3 million. The full year 2018 effective income tax rate approximated 31%. For 2019, we would expect a normalized tax rate of approximately 28% to 30%. The company has domestic federal tax net operating loss carryforwards of approximately $126 million, which are available to offset future taxable income.

Turning to the balance sheet. We ended the fourth quarter of 2018 with approximately $18.3 million of cash and available borrowing capacity of approximately $66 million. Our liquidity position of $84 million was up $16 million from December 31, 2017. As Amerino mentioned, we improved our senior secured leverage ratio and operating cash flow as of December 31, 2018. The senior secured leverage ratio improved sequentially to 2.6x adjusted EBITDA down from 3.5x at the end of 2017.

Q4 2018 operating cash flow of $37 million represents record-high quarterly operating cash flow since prior to 2016. CapEx was $8 million in Q4 2018 and $27 million year-to-date, which represents a decrease of $10 million from $37 million in 2017. Including CapEx of $8 million and the funding of the OneTEAM program, Q4 2018 free cash flow was $29 million, which was used to repay $26 million of outstanding debt in the fourth quarter of 2018.

We generated full year free cash flow of $15 million, exceeding our previous expectations to close out the year with positive cash flow. As evidenced by the cash generation in Q4 2018, we remain focused on capital discipline and cash flow management and are committed to paying down debt with any free cash flow generation.

That completes the financial review. I will now turn the call back over to Amerino.

Thank you, Susan. Before we take your questions, I want to review the progress of our OneTEAM program and provide a market outlook. 1 year ago, we rolled out the OneTEAM integration and transformation program. This program remains on track and provides us a foundation to drive sustainable, profitable growth and deliver both discrete specialized services and differentiated integrated solutions.

As reported on the last call, we projected to achieve the higher end of the $8 million to $10 million of savings under the OneTEAM program in the second half of 2018. I'm pleased to announce that we have reached a total of $10.1 million of savings, including a $4.7 million contribution in the fourth quarter. We expect to ultimately deliver cost efficiencies of $35 million to $45 million annually from the 2 cost pillars of OneTEAM. While we have more work ahead of us to realize the full financial impact of our cost improvement pillars, these initiatives are approximately 80% to 90% complete. We are now focused on the revenue enhancement pillar, which includes the following initiatives: contract management, improving gross margin and cross-selling.

Our commercial group has successfully completed several MSA contract negotiations with many of our large clients over the past few quarters and are actively engaged with others. In addition, we are gaining traction with the implementation of our small client price book and released an enhanced mid-tier price book earlier in 2019. These initiatives are driving price discipline across our organization and partially offsetting the continuing cost to serve headwinds we are experiencing. Combined with operational improvements, these actions have delivered improved margins. As evidenced by our Q4 '18 performance, we delivered expanded gross margin by an incremental 260 basis points on similar revenues as Q1 '18.

We continue to execute on our cross-selling strategies to strengthen our integration capabilities across our client base. Our clients recognize the breadth and depth of our portfolio, enable them to consolidate services with better economics and quality. For example, we recently completed a project for a key midstream Permian client to provide a fully integrated solution that started as a single line stop operation and expanded to 2 sites simultaneously, including multiple disciplines within our MS and IHT segments and project management services.

Shifting to the market outlook. As we enter the first quarter, we see some demand fluctuation in our core end markets. Refineries, our largest served industry, continues to experience higher than historical utilization rates with the 4-week average exceeding 95% in January. Inclement weather is also playing a role in this fluctuation, including the delay of certain projects as temperatures plummeted well below normal levels, particularly in Canada and the Northern U.S.

Finally, earlier in the quarter, the government shutdown caused several weeks of project delays. However, we anticipate these projects will ramp up quickly as they start to come back online and recover throughout the first half of 2019. We expect our Mechanical Services segment to be back-end loaded in the second half of 2019. This is an opposite trend when compared to last year. The current above-normal refinery utilization rates increased demand for our onstream, remedial and emergency call-out operations. However, other MS service and product lines, which are more dependent on maintenance projects, become impacted.

We remain encouraged by the macroeconomic factors driving our end markets and expect these favorable market conditions, coupled with deferred maintenance projects, will lead to higher spending as the year progresses. For the company as a whole on a full year perspective, some projects are shifting to the right but still within the year. Notwithstanding these current demand fluctuations, we are maintaining our projections of a 4% to 5% end market growth in 2019. We anticipate 2019 to deliver increased revenues, expanded gross margin and higher levels of free cash flow compared to 2018. We remain on track to deliver our 2020 goals.

In closing, I would like to thank all of our employees for their dedication to our company. Together with their hard work and commitment to change, we have made significant progress and are optimistic on what the future holds for Team. At this point, we'll be happy to take your questions.

(Operator Instructions) Our first question comes from Tahira Afzal with KeyBanc.

I guess, first question, Amerino, as we look to build out our 2019 numbers, you're still in transition. So any help on how we should think about the trajectory of maybe your EBITDA margins as you build towards your 2020 outlook?

Sure. Thank you. So first of all, as I stated in the prepared remarks, we do see a back-end loading primarily for our project maintenance-based service and product lines in Mechanical Services. So I think when we look at H1 to H2, that's probably the biggest swing factor. We're seeing H1 turnaround season to be a lot similar to H2 of '18. And we're seeing the H2 turnaround season to be a lot more similar to H1 of '18 for the reasons of Mechanical that I just discussed.

Quest Integrity continues on a good trajectory. And we expect that they're going to continue to grow throughout the year, expanding in new markets like offshore, international and other integrated offerings, which they laid a good foundation for in 2018. And we expect about a 200 basis point improvement year-over-year on adjusted EBITDA percentage with the top line growth that I mentioned earlier on the range of 4% to 5% is what we see the market doing. Now I will state that we are becoming a lot more disciplined on top line growth with our pricing, working closely with our customers to make sure we improve gross margin, which is one of our top priorities going into '19.

Got it, okay. Very helpful, Amerino. And with your free cash flow now becoming much more consistent, which is great to see, and given your guidance on improving free cash flow, when will you guide the -- to a range where you can go and renegotiate some of that expensive debt?

So I'm going to let Susan give you an update on that. Obviously, we were very pleased with our H2 progress on free cash flow. The team as a whole did well. And we expect that our free cash flow will at least double from the $15 million that we achieved in 2018 going into 2019. But I guess, keep in mind that as we know the cyclicality of the business could impact that quarter-to-quarter. But those are the full year type of improvements we're planning and projecting on free cash flow. And I'll let Susan give a brief update on the capital restructuring point.

Yes. As Amerino mentioned, we were very pleased with the second half and fourth quarter results, specifically with the free cash flow generation. And as you know, we do look to utilize free cash flow to pay down our debt. We are currently evaluating options or alternatives for looking at more cost-effective and flexible debt. So looking at the capital structure currently, I -- looking at probably about 3 different options. And we would hope that by May, we'll probably come to some decisions around how we move forward. And definitely with Q2, we'll provide that insight. But we do have good relationships and partnerships with several things that we have been working with over the past 6 to 8 weeks.

Our next question comes from Craig Bibb with CJS Securities.

Could you talk about -- Quest obviously had a tremendous quarter and it was on top of a tremendous quarter a year ago. The strength there is a function of what exactly? I know that's been moving into some adjacent markets but maybe some more details.

Sure. So first of all, Quest continues to have a strength in terms of not only expanding in existing markets but growing, as you stated, in new markets. We've talked quite a bit in the last 3 quarters in the offshore environment. Both their tool configuration, the ruggedization of the tool, the ability for it to be bifunctional in a high-risk environment under high pressure and high temperature is definitely leading the way there. They're also getting traction in terms of refineries and especially international, outside the domestic world. Their integrated offering of smart clean, which addresses one of the highest nonproductive pieces of equipment in the refinery space, which is around heaters, both cleaning as well as being able to provide the engineered solution and analytics, is helping them significantly.

And I think the biggest thing though that I'm most impressed with is the fact that they've got the foundation to deliver the operation. But putting the tools and putting the operations aside, the technical team, the domain team, the ability for them to partner with customers from early on in a project all the way through is where I think their differentiation comes. I had the opportunity last week to be in a meeting where I saw that firsthand with the client partnership. And our bottom line here is that I think we've got a lot of strong people and a lot of strong product lines. As we continue to fine-tune the organization, we're going to continue leveraging on our technical domain and digital platforms to expand the company. And I think that's really the benefit that Quest brings beyond just their tools.

Great. And then with Team Digital, you mentioned from a small base, revenue is up to 400%. I guess, I kind of view that as more of a sticky -- an effort to increase your stickiness with clients more than revenue by itself. So could you give us a little more insight there on like how big can Team Digital be over time?

Sure. So I think you're exactly right. We break up our Team Digital into a couple levels. There's what we call the digital technician, which allows us to help our technicians on more of the utilization, quality assurance, quality control side so that we are increasing utilization and productivity -- or actually utilization. And we're seeing between 20% and 30% improvements there. The stickiness with our customers comes in the form of increasing their productivity with less rework opportunity to help manage waiting on subcontractors, for example, and delivering them standard quality control and quality assurance that feeds their databases, their asset integrity databases through a cloud system.

So it's 2 parts. However, the objective we took for ourselves is although there's the internal utilization, we want to have a key performance objective that allows us to measure how we quantify the commercial part of digital, which is what increased 400%. We do obviously expect to -- for that to continue to grow as a percentage of our total revenue. It does improve obviously our margins either through productivity or efficiency gains. But more importantly, the stickiness again, just like Quest, comes with the ability for us to sit with the customer, have better planning, have better quality assurance and a lot less wasted, nonproductive and rework. And that's the model that we're following.

And the revenue that's associated with that, is that an up-sell on services or...

Yes. Today, it is an up-sell on services. And that commercial model will continue to evolve. As the program becomes more mature, we'll have various levels of commercial offerings. But yes, it is an up-sell.

Okay. And then last one, just we're getting a little closer to IMO 2020. Is that an opportunity for you guys or any impact that you expect?

So Craig, we're not including any IMO-specific 2020 increases in our budget today. And there's 2 reasons for that, mostly I'm talking domestically right now. One reason is that a lot of the U.S. refineries, especially the later-generation ones, are already capable of handling the high sulfur input and dealing with that. And number two, we're seeing that if there is a project or capital, it's generally being lumped in with other projects and capital work. So it may expand the project length and a little bit of upside on revenue, but it's not to the point where we feel we've got to project that.

If it does expand, it will be more of a tailwind, but it's not built-in necessarily to our 2020 budget other than just through the normal project and turnaround activity. Internationally, we're monitoring it closely to see how quickly the policies and regulations are implemented. So we're keeping our ear to the ground there. But that one, I think, will probably take a little bit more time, in my opinion anyway, to come to fruition. But I think it will give us some upside. I don't know if it will be '19 or 2020.

Our next question comes from Adam Thalhimer with Thompson, Davis.

The margin improvement, you talked about the 200 basis points. I was curious, was that consolidated or Quest?

The improvement from Q1?

Or sorry, the EBITDA margin improvement for the full year.

The total, the look-forward, okay. No, that's consolidated. So as I stated as well last quarter, we're projecting and forecasting right now a 200 basis point improvement on total company adjusted EBITDA, which obviously includes Quest as well. So it's a combination of all 3 segments.

Got it, okay. And at mech, do you see margins up in the first half of the year even if their revenue growth gets pushed to the back half?

So in terms of margin for H1, we do see it similar to what we would have delivered in H2 of last year with the improvement of the OneTEAM cost savings, if you will, taking traction for the full year, including the carryover. So the rest will take more of H2 of last year with the savings of OneTEAM built in.

Okay. And then Amerino, where are we on the mechanical segment? The branch consolidation and kind of getting that segment to look the way you want it to look, where are we in that process?

So I would say for mechanical specifically, we're probably in the mid-50% range of getting it to look the way we want. I like -- I'll tell you what I like that we've done. We've got a lot better visibility on project-driven product lines versus call-out and emergency remedial product lines. So that visibility is helping us manage the business stronger. We've shut down some underperforming businesses in the range of $5 million to $8 million, which as Susan stated, we took some asset write-downs there. We've got the mechanical and Inspection and Heat Treating now being managed at a divisional level under one management organization. And lastly, we're coming to the end or near the end of improving our manufacturing capabilities with higher-end equipment to bring down manufacturing costs. So I think we're probably 50% there.

Where I still see opportunities is the cross-selling and pull-through with inspection because we have a lot of nested revenue and activity when it comes to inspection. So I think we're not yet clicking on all cylinders when it comes to that. And the other thing is I think that our portfolio mix of Mechanical Services between nested or embedded call-out and projects is not yet as strong as inspection. And that's going to take a little bit of time, which is why we see a little bit more cyclicality in mechanical than IHT. So that will take us a little bit of time. But I would say, Adam, we're in that 50% range right now of getting it to where we want it to be. And you saw in H1 of last year, when it's clicking, it's accretive to our business. So it fits well. We've just got to make sure commercially, we're leveraging the rest of the business to pull through.

(Operator Instructions) Our next question comes from Martin Malloy with Johnson Rice.

First question, I just want to inquire about the pricing and how those conversations are going with clients, given the labor environment. Are we expecting that over the course of the year, we're going to start to see the impact of the new short-term contracts with the medium-sized clients and the MSAs with larger clients impacting margins in the revenue side?

Yes. So Marty, I think the short answer to your question is yes. We've broken up our action plans into 3 buckets. The MSA contracts are taking some time. And there are more term and condition discussions versus rewriting the whole contract. And the reason for that is we've got a very strong customer base. We're diversified. We have less than 5% of revenue that comes from any one customer. So we are having the one-on-ones. And we're showing a lot of our training commitments. Our cost base is going up. So those are more one-on-ones and we've successfully closed a handful. And as I've stated, we're still in negotiations with others.

When it comes to small and mid-tier, we are taking a bit more of a price list model there, so introducing a price book and allowing our divisions and our districts to manage that more at the goal phase by giving them gross margin ranges that they can play within to get more project discipline. So doesn't mean that we walk away, but there's escalation methods if they want to raise an exception, et cetera. But it's just a lot more structured. And we feel that's our most effective way when we break it up into those few buckets. And to answer your question specifically, part of our margin improvement year-over-year will come from pricing, which is why we want to be disciplined on the revenue we take, staying close to our customers when it comes to project planning, so we don't get dilutive-type impacts. But yes, we expect the benefit on pricing to start to trickle in through the second half of the year.

Okay. And then a question for you, Susan. On the working capital, how should we look at that trending through the course of this year? Are there further opportunities to reduce the net working capital?

Yes. So you'll see, and you did probably see in the earnings tables, the reduction of some current assets. But we are very focused on the accounts receivable collections. And I would say that we would continue to see an improvement on reduction where we bring that cash in. Additionally, we're focused on inventory. So overall, there was, I believe, around a $30 million -- $20 million to $30 million reduction. And we're focused on continuing to reduce that by at least that much in 2019.

And I'm showing no further questions in queue at this time. I'd like to turn it -- we have a follow-up from Martin Malloy from Johnson Rice.

On the Quest segment, in terms of new products and services that you're introducing there, could you maybe talk a little bit about some of the new products or services you're working on or have introduced into the market?

Sure. So I think the main thing we're doing is continuing to expand our InVista line both in terms of catalog and size, durability and functionality of that line, to work in different pressers, allow it to have longer runs based on life of the tool and the power sources. So that's a big part of the expansion. But more importantly, I think reaching smaller sizes allows us to play in some of these markets like offshore. And just so I'm clear, the in-line inspection market that Quest is playing in, especially when you get to some of the smaller sizes, is generating or is creating new market. We weren't able to inspect those type of lines, especially some of the offshore smaller diameter lines, until we partnered with one of our customers and client to develop that technology. So that's kind of the tool piece. More importantly though, the measurements of the tool is giving us higher resolutions. So generation 1 was about a 10x resolution improvement versus what the market had. And generation 2 and 3 will be more 100x resolution. So we're able to see wall thickness and different anomalies to different metallurgy, including heavy wall pipes. So again, those are the things we're doing from a product development. So we do -- we are investing in R&D in that front.

The other big one is linking more of their products and services to an integrated offering, which is what I've mentioned earlier around things like heaters, which is high nonproductive time, being able to go in and assess the damage, go in and clean the damage and then be able, from a time perspective, to continue inspection, so they're not causing additional damage but also not adding downtime to their operation. So that's more in the integrated solution piece. And then we're expanding our advanced engineering and lab support to support overall the higher-end services that we provide and products that we provide. And that's generally working, Marty, with the subject matter experts within our clients. So our new model aligns very well with that. And I think that is how we build longer-term partnerships and we're part of the solution with our customer.

And is there any help you can give us in terms of thinking about the size of the addressable market in some of these advancements?

I think the in-line inspection market is fairly well documented for the general market. And that creates a bit of a foundation for this in-line inspection market, which is around $1 billion. But we don't necessarily play in that part of it, which is why we still have the ability to grow offshore and some of these other places that are creating new market, and that hasn't been captured in more the public data that you're seeing. So we are doing our own market assessments and projections. But what I'm most excited about is the fact that we're able to create that new market where there's less competition for our services and our engineering. So that kind of gives you a benchmark of what the public data is. But we really play in the top end of that market.

And we have a follow-up question from Craig Bibb with CJS Securities.

I guess, two follow-ups. One, when you guys do your presentations, you always show power as being a very large market, where you have a pretty small piece of. I don't know, you're planning to grow on power. Is there -- 2019, 2020, where do we stand on that?

So I think there's a few markets like power and pipeline, Craig, where we've got playbooks that we're creating now to expand further into those markets. I think it's going to depend a little bit on the pricing levels as well as the labor pool. So I think as a percentage, I don't think it's going to swing double in 1 or 2 years. But we want to put the foundation in place to better diversify our portfolio, maintaining our strength in refining, capturing petrochemical through the capital projects and then expanding into some of the less cyclical business, like power, building off what we have, aerospace, building off what we have. And pipeline right now is definitely one of the largest growing segments of the percentage or sectors. So those -- what I don't want to take away from though is the fact that we're still 1 year into our OneTEAM integration and transformation program. So that's what we're focused on first through most of 2020 while we lay the foundation out for better diversity going forward.

Okay. And then I guess, it's always helpful, and maybe if we're ending, restate your goals for 2020. I remember we're looking at up 200 basis points in the EBITDA margin this year. And where is that going?

So yes, we finished '18 right in the [57, 58] range. We're projecting to add 200 basis points going into '19 through the gross margin, some growth in revenue and some of the cost that will carry forward. And then in 2020, we're maintaining our 10% to 12% adjusted EBITDA range. And again, as we continue the cost pillars and bring in the revenue pillar, that's the plan in place and that's what we're maintaining. And probably a little bit to expand on the cash flow, the $15 million in '18, we do -- based on the working capital that Susan talked about earlier, we're going to push ourselves to get that closer to $30 million in '19 and then obviously continue improving that. That's a big focus for us in '19 and '20, so we're going to be laser-focused on free cash flow.

And I'm showing no further questions in queue at this time. I'd like to turn the call back over to management for any closing remarks.

Thank you. Once again, I'd like to thank everyone for joining us on the call today and your continued interest in Team. We do look forward to speaking with you again next quarter.

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