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Team Inc  (NYSE:TISI)
Q3 2018 Earnings Conference Call
Nov. 05, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2018 Team, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I'd now like to introduce your host for today's conference Mr. Don Bleasdell, Vice President of Finance. Sir, you may begin.

Don Bleasdell -- Vice President of Finance

Thank you, Chanel, and welcome, everyone to Team's third quarter fiscal year 2018 conference call. With me on today's call are Amerino Gatti, the Company's Chief Executive Officer; and Greg Boane, EVP and Chief Financial Officer. This call has been -- is also being webcast and can be accessed through the audio link under the Investor Relations section of our website at teaminc.com.

Information recorded on this call speaks only as of today, November 6, 2018. Therefore, pleased be advise 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 November 13. 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 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 such forward-looking statements. These factors and other risks and uncertainties are described in detail in the Company's Annual Report on Form 10-K and in the Company's other documents and reports filed or furnished with the Securities and Exchange Commission. The Company assumes no obligation to publicly update or revise any forward-looking statements.

And with that, I now like to turn it over to Mr. Amerino.

Amerino Gatti -- Chief Executive Officer

Thank you, Don, and good morning, everyone. We appreciate you joining us today. I'll begin by providing a brief update on our business. Greg will then detail our quarterly financials and hand the call back to me for additional commentary before we take your questions. Team delivered year-over-year quarterly organic growth and revenues. Consolidated Q3 revenues were $291 million, an increase of 2% from $285 million in the prior year period, representing Team's highest third quarter revenues since the acquisition of Furmanite in 2016. These improvements were led by our two inspection and assessment segments. Inspection and Heat Treating and Quest integrity which were up 7% and 53%, respectively. These gains were partially offset by a 9% decline in the Mechanical Services segment. However the segments year-to-date performance has improved 4% year-over-year.

Consolidated adjusted EBITDA had a slight improvement to $7.2 million from $7.1 million a year ago. Adjusted EBITDA excludes the impact of certain charges that Greg will address in his prepared remarks.

As mentioned on our previous call, a key component of our OneTEAM program is to streamline and reduce our overall SG&A costs. The program is making an impact as evidenced by 6% or $6 million sequential reduction in SG&A. The flattened organization will create additional operating leverage in our business and has made us more agile in our execution. We continue to focus on working capital and cash flow management. As previously communicated, any free cash flow after the funding of the OneTEAM program would be used to pay down debt. I'm pleased that Q3 2018 cash flow from operations improved significantly throughout the quarter. We generated $30 million of free cash flow in the last 2 months to close out the quarter with $16 million of free cash flow, of which $15 million was applied to our debt balance.

We remain committed to generating positive free cash flow for the full year 2018. We have seen early signs of success from our transformation and integration program. Some of these highlights include, year-to-date revenues of $937 million, an increase of 6% over prior year; year-to-date adjusted EBITDA increased by 63% versus the prior year; SG&A reduced sequentially by 6% and continues to track favorably; year-to-date free cash flow increased by 62% over prior year; year-to-date CapEx spend has been reduced by 27% versus prior year; and finally, our bank leverage ratio is 2.7x at the end of Q3 2018 compared to 3.7x for the same period last year.

I'll now turn to our third quarter segment performance. The Inspection and Heat Treating segment delivered Q3 revenues of $148 million, a 7% increase when compared to $138 million last year. Adjusted EBITDA was $14 million in Q3 of 2018 or 33% higher than the $10.6 million in the third quarter of last year. This segment has consistently delivered 6% or more year-over-year revenue growth for the last three consecutive quarters.

The Mechanical Services segment performance did not meet expectations for the quarter. The segment delivered Q3 revenues of $119 million, a 9% decrease compared to $131 million in the same period last year. Adjusted EBITDA was $250,000 in the third quarter down from $10.4 million in the prior year quarter. This drop in activity was primarily due to increased refinery utilizations in Q3 versus prior year impacting both our Gulf Coast and West Coast divisions, as well as some non-repeat projects.

Greg will provide additional financial details on MS later in his comments. US refinery operators are running facilities at higher than historical utilization rates. The average US refinery utilization percentage for Q3 2018 was 95% compared to less than 90% for the previous 10-year average. This was driven by improved regional crack spreads, reset midstream pipeline capacity constraints and widened crude oil pricing differentials. Higher utilization rates lead to incremental asset wear and tear, which are ultimately positive drivers for our business. However, when operators defer maintenance in projects, it creates demand planning changes that adversely impact our activity levels in the near term.

We continue to optimize and invest in our workforce management function to proactively support operations with these resource fluctuation challenges. Although, Q3 revenues declined, year-to-date revenues for MS increased over prior year by 4% and adjusted EBITDA increased 21% over prior year. The Quest Integrity segment had a strong quarter. Achieving a record Q3 revenue of $24 million, a 53% increase when compared to $16 million last year. Adjusted EBITDA was $6.3 million in the third quarter as compared to $661,000 in Q3 of 2017.

Similar to last quarter, Quest Integrity successfully completed inspection work in the subsea deep water pipeline environment and continues to make inroads in this market with our proprietary tools and services. Quest successfully completed its longest pipe pressure subsea inspection to date, covering 27 miles. Our key differentiator for this INVISTA application was the ability to perform under high pressure and temperature for 23 hours of continuous inspection operations. Quest integrity remains on track to achieve back-to-back record annual revenues. I will now provide highlights on our safety performance.

Our highest priority continues to be safety and quality. Through our district safety audits and deployment of our fleet monitoring systems, we have decreased our recordable injuries by 23% year-to-date when compared to the same period last year and continue to focus on our goal of reaching 0. Our team in the Central Division successfully completed two turnarounds with a significant customer without a first-aid or recordable incident. We also achieved a milestone of 1.6 million man hours at the same facility.

In our West division, we recently achieved a 2 million man hour milestone without incident for one of our major customers.

Moving on to technology, Team Digital is our proprietary platform that maximizes quality and efficiency through digitally enabled workflows. During the quarter, we successfully started projects at four new facilities and are now supporting 10 projects simultaneously with six different customers. The projects range in crude production capacity from approximately 50,000 to 400,000 barrels of oil per day exemplifying the versatility and scalability of our technology platform. We continue to invest in Team Digital as demand and traction grows. In Q3 alone, we trained an additional 100 technicians. The increasing adoption has enabled us to accelerate deployment and we expect to move forward with full commercialization in early 2019. It is also worth noting that there were significant market interest around digital applications within the energy sector and we are consistently receiving strong customer recognition for the proven functionality and domain driven applications of our platform.

I'll share more about our OneTEAM progress and outlook after Greg's third quarter financial review. Greg?

Greg L. Boane -- Executive Vice President, Chief Financial Officer & Treasurer

Thanks, Amerino. I will focus my discussions on gross margin, adjusted SG&A, invested EBITDA and cash flow and most of my comparisons will be sequential Q3 2018 versus Q2 2018. Q3 2018 is historically a seasonally weak quarter with reduced revenues coming off the spring turnaround season in Q2. Q3 historically generates lower gross profit margins across all operating segments compared to Q2 due to the lower seasonal revenue. Consolidated gross margin in the current quarter declined by 420 basis points to 24.1% from 28.3% in Q2 2018. Consolidated gross margin declined by $27 million sequentially in Q3 2018, due primarily to $53 million revenue decline from Q2, coupled with headwinds around increased cost to serve such as labor, materials, freight, fuel et cetera, which Amerino will discuss later.

The negative leverage gross margin impact of around 45% to 50% on a sequential $53 million revenue decline equates to an approximate $24 million to $26 million gross margin decline in Q3 2018 from Q2 2018. Mechanical Services segment is the primary contributor to the gross margin decline or revenues decreasing sequentially by 25% or $30 million from Q2 2018 to Q3 2018. As Amerino mentioned earlier, the Mechanical Services segment experience a significant demand reduction in Q3 2018 resulting from higher than normal US refinery utilization. Additional Q3 gross margin pressure on the Mechanical Services segment came from extreme volatility and activity levels during the quarter.

Specifically, Mechanical Services segment billable hours ramped down by 29% from June to July, than 1-month later September billable hours ramped up by 41% from August. In a services technician labor industry, it's very challenging to both manage workforce planning and to effectively adjust the cost structure when activity levels are this volatile over such a short period of time. The Mechanical Services segment also had some incremental costs in Q3 2018 related inventory charges of approximately $1 million. Inspection and Heat Treating segment gross margin declined on a sequential drop in revenues of 14% or $21 million. Quest Integrity segment gross margin decreased on a 13% sequential revenue decline.

Moving on to SG&A, offsetting some of the Q3 gross margin declines are the savings generated from the OneTEAM program and the related SG&A cost reduction initiatives that were deployed in Q2 2018. Consolidated SG&A expense for Q3 2018 was $87.8 million and include $6.4 million of professional fees of which $4.3 million related to the OneTEAM organizational restructuring work during the quarter that we do not consider to be indicative of our core operating activities. Adjusted SG&A expense for Q3 2018 declined by $6 million sequentially to $81.4 million from $87.4 million in Q2. The sequential decrease related to OneTEAM cost reductions and lower incentive compensation in stock-based compensation.

Looking at adjusted SG&A since we started deployment of the OneTEAM program in Q2 2018 and excluding non-cash items like stock compensation in D&A, as well as variable incentive compensation, the controllable SG&A we've been focused on reducing in 2Q 2018 -- in 2018 has declined by $4 million cumulatively over the last two quarters.

We view this achievement as part of our successful transition from strategy to performance.

Shifting to adjusted EBITDA expectations for Q3 2018. Analyst consensus adjusted EBITDA was approximately $13 million in Q3 2018, we generated approximately $7 million of adjusted EBITDA in Q3 2018. The Inspection and Heat Treating segment came in with revenue growth of 7% in Q3 2018 over Q3 2017, which was up slightly from their year-to-date June 2018 versus 2017 revenue growth of 6%. Inspection and Heat Treating segment Q3 2018 adjusted EBITDA margin improved to 9.5% from 7.7% in Q3 2017.

Quest Integrity came in with a record Q3 revenue level of 53% over Q3 2017. Quest Integrity Q3 2018 adjusted EBITDA margin improved to 25.9% from 4.2% in Q3 2017. Offsetting the performance of our two inspection and assessment businesses and the key driver of the Q3 2018 EBITDA shortfall was the Mechanical Services segment's revenue decline of $12 million or 9% in Q3 2018 versus Q3 2017. Total recorded revenues were $291 million versus consensus revenues of $303 million, a shortfall of $12 million. We estimate the margin leverage impact of the revenue shortfall is approximately $5 million to $6 million.

Additionally, in Q3 2018, we had incremental charges of approximately $3 million related to inventory, bad debt provisions and legal claims, which have not been backed out of adjusted EBITDA.

Shifting to Q3 2018 versus Q3 2017 adjusted EBITDA. We generated around $7 million in adjusted EBITDA on both Q3 2018 and Q3 2017, again, the largest item impacting Q3 2018 is the $12 million revenue decline in Mechanical Services in Q3 2018 and the estimated margin impact of $5 million to $6 million.

On the SG&A cost side, I'll give some color on Q3 2018 versus Q3 2017 and how the OneTEAM program has made favorable savings impact, which is a little difficult to see because Q3 2018 adjusted SG&A was $81.4 million, an increase of $3.5 million compared to $77.9 million in Q3 2017. There are approximately $7 million of incremental SG&A cost in Q3 2018 versus Q3 2017 comprised as follows; Q3 2018 D&A classified as SG&A was $3 million higher and related primarily to the accelerated Furmanite trade name amortization, Q3 2018 non-cash stock compensation was approximately $1 million higher, Q3 2018 incentive compensation was $2 million higher and Q3 bad debt expense was $1 million higher.

The main takeaway here is offsetting the above increases the OneTEAM program has favorably impacted the remaining categories of SG&A spending as they have decreased by about $3.5 million in Q3 2018 versus Q3 2017.

Shifting now to annual D&A and stock-based compensation. For full year 2018, we expect depreciation and amortization expense to be around $64 million. For 2019, D&A will decline by $12 million as the Furmanite trade name amortization will be eliminated beginning January 1, 2019. Non-cash stock-based compensation is expected to be around $13 million in 2018, consistent with our previous guidance. I'll spend a few minutes discussing the $8.4 million excluded items in the current quarter that we do not consider to be indicative of our core operating activities. There was $4.3 million of professional fees related to the OneTEAM program work during the quarter, $2 million of restructuring costs primarily severance costs and $2.1 million of certain legal and other professional fees.

Moving down the income statement below operating income, interest expense net for the quarter was $8 million and includes $1.8 million related to non-cash amortization of debt issue cost and debt discount on the convertible debt. Cash interest for Q3 2018 was approximately $6.3 million. Reported taxes are impacted by the amount of actual pre-tax losses, the impact of NOLs and valuation allowances, the new tax on foreign earnings and the interest deduction limitation. The combination of these factors resulted in an effective rate for Q3 2018 of approximately 18%. Normalized effective rate for Team should be around 28%. Domestic tax NOLs of $116 million are available to offset future taxable income. I'll now cover the balance sheet and cash flows.

As Amerino mentioned, we have also improved our operating cash flow and senior secured leverage ratio as of September 30. Q3 2018 operating cash flow of $23 million represents the highest quarterly operating cash flow generated since 2015. Operating cash flow was over $30 million in the last 2 months of Q3 2018. CapEx was $7 million in Q3 2018 and $19 million year-to-date, which represents a decrease of $7 million from around $27 million in 2017.

Including CapEx of $7 million Q3 2018 free cash flow was $16 million, which was used to repay $15 million of outstanding debt in Q3 2018. Year-to-date cash flow is a used borrowed $14 million and we still expect to close out the year with positive free cash flow. The senior secured leverage ratio improves sequentially to 2.7x adjusted EBITDA, which is down from 3.7x adjusted EBITDA last year.

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

Amerino Gatti -- Chief Executive Officer

Thank you, Greg. Before we take your questions, I'll spend a few minutes reviewing OneTEAM's progress and our outlook. The OneTEAM integration and transformation program remains on track. During the quarter, we completed the majority of our restructuring and have set the foundation for profitable growth enabling us to deliver both discrete specialized services and differentiated integrated solutions to our customers. Through Q3 2018, we achieved $5.4 million of savings under the OneTEAM program and remain on track to achieve the higher end of the $8 million to $10 million of savings for the second half of this year.

In total, the two cost pillars are expected to achieve annual cost efficiencies of between $35 million to $45 million. With the majority of the actions in progress, our focus is now shifting to the revenue enhancement pillar. During our last call, I noted that our commercial and contracts group completed the review of our top 25 contracts and initiated prioritized negotiations. We continue to execute on these targeted contracts and a key part of our negotiations is to ensure that we recover increasing costs related to tightening labor markets and other higher cost to serve.

Each contract is an individual negotiation and we anticipate this taking several quarters to complete. We have successfully negotiated two new contract terms with a few select customers in advanced stages with others. In addition, this quarter, we began to focus pricing improvements on our smaller call out customers. Shifting to our outlook. Revenue growth over Q4 last year will be a challenge, due to non-repeating surge activity from Hurricane Harvey and anticipated continuing high refinery utilization rates.

The forecast for 2019 for our core end markets including refineries is showing improvement over 2018. Additionally, we see growth opportunities in some of our underserved markets by leveraging our newly formed sales and commercial organization. Notwithstanding, these recent demand fluctuations, we are maintaining our projections of a 4% to 5% end market growth and remain confident that we will exceed these levels in 2019. Recently there have been many discussions regarding the disruption to the labor market and the increasing demand for technical labor. The labor market is contracting causing wages to increase and while we have made improvements in our utilization rates, we're not exempt from these labor constraints in the associated pressures on our cost to serve.

As our core markets grow finding the right people with the right skill sets will be an ongoing challenge. We continue to focus on delivering our key 2018 performance objectives of improving safety, growing EBITDA and increasing free cash flow, while we still face a number of challenges we expect to close out the year strong and we remain confident that we're on track to deliver 10% to 12% annual adjusted EBITDA margin by 2020.

Finally, before we take your questions, I'd like to again 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 about what the future holds for Team.

At this point, we'll be happy to take your questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Tahira Afzal of KeyBanc. Your line is now open.

Tahira Afzal -- KeyBanc -- Analyst

Hi. folks.

Amerino Gatti -- Chief Executive Officer

Hello, Tahira.

Greg L. Boane -- Executive Vice President, Chief Financial Officer & Treasurer

Good morning, Tahira.

Tahira Afzal -- KeyBanc -- Analyst

Congrats, good free cash flow given that out -- there around pushout. So congrats on that. I guess my first question is Amerino, it's good to hear that the OneTEAM initiatives that going well. Can you talk a bit about 2019 to the extent you can quantitatively, it's good to hear 2020 outlook and what you want to do is be backed, but should be based on some of their labor headwinds and you're early in your pricing traction assume more back end loaded sort of trajectory for that profitability improvement?

Amerino Gatti -- Chief Executive Officer

So, Tahira, I think, first of all thank you on the comments. I think the OneTEAM program overall is progressing. It's taking a lot of effort from the team, but it is the right thing in terms of the medium, long term foundation for the Company. And we're very happy with the way that our employees are embracing the change and moving forward. In terms of the look ahead, we are on a trajectory to continue finishing our OneTEAM cost pillars, pricing is coming in a number of different ways. There's the small customer pricing which is more of our call out revenue and that's more of a price list approach and meeting with our customers. There is contracts, large MSA customers, which we're having to negotiate Ts and Cs directly with them. And then we've got some leverage and we're starting to see a few different commercial models related to productivity type pricing, using things like Team Digital. So we do expect the EBITDA percentage to grow throughout the year in 2019, reaching a couple of hundred basis points year-over-year increase from 2018.

Tahira Afzal -- KeyBanc -- Analyst

All right, OK, that's good to hear. And then Amerino, obviously, the cash flow performance in the last 2 months of the quarter was phenomenal. I don't want to over bake and get too excited. How should we think about free cash flow as we head into 2019? And can you talk about where you'd see debt levels potentially going as a consequence by the end of next year?

Greg L. Boane -- Executive Vice President, Chief Financial Officer & Treasurer

Tahira, this is Greg. Last -- year-to-date our cash flow is negative $14 million. We would anticipate having $7 million of CapEx in Q4. So without considering cash flow from operations that would put us at negative $21 million. As we've said, we generated $30 million on the back half of Q3. Q4 activity levels are front-end loaded with less activity on the back half of Q4. So as we look at Q4, we have a view of generating cash flow of mid-20s target to finish the year with positive free cash flow.

Amerino Gatti -- Chief Executive Officer

And then I think Tahira going into 2019, clearly the OneTEAM program will cycle down by the end of Q1. So that will drop off which is our $25 million to $30 million of investment. And then we continue to expect to see a 10% improvement in our working capital year-over-year. And our target is to generate between 5% and 6% of revenue on cash flow. So that gives you some of the targets that we're looking ahead into 2019.

Tahira Afzal -- KeyBanc -- Analyst

That's great. Thank you and congrats again.

Amerino Gatti -- Chief Executive Officer

Thank you, Tahira.

Operator

Thank you. Our next question comes from the line of Craig Bibb of CJS Securities. Your line is now open.

Craig Bibb -- CJS Securities -- Analyst

Okay, the Quest Integrity performance from the quarter was outstanding. It sounds like the subsea inspection drove that. Could you give us some more details and maybe the size for that market and some seasonality, any different than the rest of the business?

Amerino Gatti -- Chief Executive Officer

Good morning, Craig. So that market right now we're mostly playing in the Gulf of Mexico part of it and we're still in the phase of sizing it globally. It is exciting for us because we're able to leverage a lot of the architectural benefits of our tools around reliability, durability and just how rugged they are in the hire -- to handle the higher temperatures and pressures. So I think, I can't give you a market size, but we do think we're creating a market from regulation standpoint and customer standpoint is an area they haven't necessarily been able to inspect in the past. So it is a new market. Our tool sizes from an HSE perspective, are very, very beneficial for the customers. And we were working directly with customers as I mentioned a couple of quarters ago on developing new tools and continuing to refine it. So we see it as a good opportunity and it's an area we're going to continue to invest in our business.

Craig Bibb -- CJS Securities -- Analyst

I mean, how could you -- maybe how big was it for you guys as a percentage of the Quest in the quarter or just broad trick around that?

Amerino Gatti -- Chief Executive Officer

So right now it's still fairly early. We're doing two to four operations per quarter. So it's not a major move yet. But it's exciting because, again, it's a completely -- we're creating a new market that doesn't exist. So it's not a major, major percentage today.

Craig Bibb -- CJS Securities -- Analyst

Okay. So then -- I mean you had a huge increase in revenues there. What was the real driver of subsea that's small?

Amerino Gatti -- Chief Executive Officer

Well, we've got good traction right now on inspections, pipeline work. We've got good decoking operations that we're making some good traction on globally and that's an area that we're investing additional capital and people into. And the nice thing about that is it's an integrated solution from hardware, our people, as well as, an analytical predictive tool that we're handing over to our customer. And the heater business if you look in the refining space is one of the highest downtime risks for our customers. So we've got a very good integrated solution. So that's one that has helped us in the last couple of quarters as we've got back on track with our Quest budget.

Craig Bibb -- CJS Securities -- Analyst

Great. And then it sounds like Team Digital is going well. Could you give us a little -- or color around that and does it improve stickiness or utilization? How do you look at the benefit?

Amerino Gatti -- Chief Executive Officer

Sure. So I think a few quarters ago I mentioned around the efficiency and productivity of Team Digital and that's still in the ballpark of our 25% type efficiency gains. What's going well now is we're starting to take the platform to our customers and they're seeing how it fits into their overall turnaround project and plant maintenance type work. So it's very -- it's ability to communicate with different systems is a positive, the productivity is a positive and we're expanding the number of service lines that -- templates the service lines that are in Team Digital. So how I can tell you that its stickiness is the number of projects, the number of customers and the feedback we're getting from customers that our technical domain part of the platform is much stronger than other things they've seen in the market and now we're starting to have different commercial discussions with our customers. So we can both gain from some of the efficiency and productivity gains starting with inspection. And it's going to take -- it's going to take part of 2019 to implement some of those. But the traction is very positive and it's also -- discussions are happening at all levels within the customer they're seeing the value at a flat level and they're also seeing the value with their digital officers at a corporate level. So we're very happy with the progress we're making there and that's one of the reasons we're going to invest or -- increase our investment to commercialize that platform.

Craig Bibb -- CJS Securities -- Analyst

Great. And last one, you guys should be run rating with a full OneTEAM savings by the end of 2019?

Amerino Gatti -- Chief Executive Officer

So the first full year if you look at the two cost pillars of -- yes, I guess, let's call it run rate would be 2020. So we'd completed the two cost pillars to hit that level at the end of 2019. But if you're looking for first full year, it's 2020.

Craig Bibb -- CJS Securities -- Analyst

Okay, great. All right. Thanks a lot.

Amerino Gatti -- Chief Executive Officer

Thank you.

Operator

(Operator Instructions) Our next question comes from the line of Tom Radionov of Corre Partners. Your line is now open.

Tom Radionov -- Corre Partners -- Analyst

Hey, guys. Good morning. Amerino specifically, do you had a question regarding one of the previous comments I think you may -- regarding Q4, I think you had suggested that given the more difficult compares versus last year and the high crack spreads, Q4 maybe a little bit weaker than otherwise you have expected it to be. Just wanted to drill down on that a little bit. Was there a comment that you are making vis-a-vis revenue or was that EBITDA? As I look at the Q4 EBITDA from last year, obviously a very strong number. So just want to make sure if you're messaging to the market that it may be difficult to sort of report EBITDA that is higher versus last year given some of these issues that you had implied.

Amerino Gatti -- Chief Executive Officer

Sure. So let me just start on the revenue first. We do expect sequentially revenue obviously will be up with a stronger turnaround season Q4 to Q3. However, my comment was specifically related to Q4 of last year versus Q4 of this year, because of the surge of both the Hurricane Harvey project work, as well as now the headwinds we've got on some of the refinery utilization rates. We see a sequential increase probably not as strong as last year's Q4. So that's on the revenue line. And then we've got a lot of our savings continuing to kick into Q4. And when I look at quarter-on-quarter from an EBITDA level, we would have to take the drop in revenue obviously with the fall through levels that Greg mentioned, plus some of the headwinds on cost to serve. But we still -- we're still confident in reaching in the plus $20 million levels from an EBITDA level for Q4.

Tom Radionov -- Corre Partners -- Analyst

Got it. And so I think that it's fair kind of go back to some of the commentary from the second quarter where you talked about $80 millions, I guess, given in terms of EBITDA for the full year, given the sort of performance in Q3, I guess that number probably goes down -- it goes down a little. But I guess my question is more about 2020 to your point which is sort of the more normalized would think about revenue and EBITDA is specifically if I kind of do very basic math here and I assume that revenue goes up by 5% in 2019 sort of in line with the market and then another 5% in 2020 that gets me to $1.4 billion of revenue and then kind of based on your 10% to 12% EBITDA, margin guidance, then that implies $135 million, $200 million, maybe $70 million of EBITDA. I guess my question on that simple math is, if I run the math that way, the operating leverage at 10% EBITDA margin is about 50% and the operating leverage at 12% EBITDA margin is about 75%. And I feel like historically, you've talked about operating leverage of more like 35% to 40%. So I just want to kind of reconcile these numbers just to see how you think about your ability to sort of achieve that kind of operating leverage down the road?

Amerino Gatti -- Chief Executive Officer

Yes, I think there's two factors, in our operating leverage on the growth cycle is a little bit higher than that probably between 40% and 45% between new growth and existing. So that's one thing. And the second thing is with our shift to the revenue pillar a big part of our drive now is to recover the pricing that we've lost or because cost of increase, pricing is decreased over the last couple of years. We do see that pricing movement if we were well with our customers as gaining traction, as I said through 2019. So between pricing, the two cost pillars and a 40% to 45% leverage that's where we're getting our 10% to 12% for 2020.

Craig Bibb -- CJS Securities -- Analyst

Got it. OK, I understand. And then last question on working capital. Obviously, a very strong quarter in the third quarter -- is your Q4 typically a drag from a working capital perspective? And given the strong performance in Q3, would you expect any sort of trends that will be different from the way you typically see that quarter shake out from a working capital perspective?

Greg L. Boane -- Executive Vice President, Chief Financial Officer & Treasurer

Q4 operating cash flow last year was a use of about $4 million, operating cash flow in Q3 last year was only $3 million. So I think we've done a good job of being focused on our receivables and our collections. And while -- yes, there's more strain on Q4 than there is Q3, it's as I say, it's front-end loaded with less activity on the back half of the quarter. And with our stronger focus today than we had a year ago, I would -- I expect that we're going to generate positive free cash flow in Q4.

Craig Bibb -- CJS Securities -- Analyst

Got it. Okay, great. Thank you so much. Really appreciate the color. Thank you, guys.

Amerino Gatti -- Chief Executive Officer

All right. Thank you.

Operator

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

Amerino Gatti -- Chief Executive Officer

Thank you, Chanel. I'd like to just thank everybody once again for joining us on this call and for your interest in Team and we look forward to speaking with you again next quarter. Thank you.

Operator

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

Duration: 41 minutes

Call participants:

Don Bleasdell -- Vice President of Finance

Amerino Gatti -- Chief Executive Officer

Greg L. Boane -- Executive Vice President, Chief Financial Officer & Treasurer

Tahira Afzal -- KeyBanc -- Analyst

Craig Bibb -- CJS Securities -- Analyst

Tom Radionov -- Corre Partners -- Analyst

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