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Team Inc (NYSE:TISI)
Q2 2020 Earnings Call
Aug 5, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by, and welcome to the Second Quarter 2020 Team, Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Mr. Kevin Smith, Senior Director of Investor Relations. Please go ahead, sir.

Kevin Smith -- Senior Director of Investor Relations

Thank you, Shevonne. Welcome, everyone, to Team's 2020 Second Quarter Conference Call. With me on today's call are Amerino Gatti, our Chairman and Chief Executive Officer; and our Chief Financial Officer, Susan Ball. This call is also being webcast and can be accessed through our 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, August 5, 2020. Therefore, please be advised that any time-sensitive information may no longer be accurate as of the date of any replaying or listening to or transcript readings. 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 August 12. The information on how to access this replay feature was provided in yesterday's earnings release. Before we continue, I'd like to remind you that this call contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities and Litigation Reform Act of 1995, including statements of expectations, future events or future financial performance. Forward-looking statements involve inherent risks and uncertainties, and we caution investors that a number of factors could cause actual results to differ materially from those contained in any forward-looking statements. These factors and other risks and uncertainties are described in detail on the company's annual report on Form 10-K and in the company's other documents and reports filed or furnished with the Securities and Exchange Commission. The company assumes no obligation to publicly update or revise any forward-looking statements, except as may be required by law. Amerino will begin by providing an update of our business. Susan will then detail our results. And before we take your questions, Amerino will highlight our market outlook, OneTEAM program and second half expectations.

I would now like to turn the call over to Amerino.

Amerino Gatti -- Chairman and Chief Executive Officer

Thank you, Kevin, and good morning, everyone. We appreciate you joining us today. Team's second quarter was extremely challenging as we navigated through the global pandemic and an oversupplied oil market, which resulted in significant stress and volatility for our clients and employees. Based on our performance, Team's global workforce was up for the challenge, and I am proud of our people for their execution and perseverance during these dynamic times. Before we get started, I would like to formally introduce Kevin Smith, our new Senior Director of Investor Relations. Kevin has over 15 years of industry experience in the energy sector, including E&P, midstream and LNG, working in Investor Relations and previously as a research analyst. Susan and I are glad to have Kevin join our team, and we are sure you will enjoy working with him. Despite the unprecedented drop in industry activity, we are pleased with our second quarter results, which reflect the tremendous efforts made by everyone in the company. Consolidated second quarter revenues were $189 million, down 40% from a year ago, but in line with the revenue outlook we provided on the last earnings call. The quarter got off to a difficult start as many of our clients implemented stay-at-home restrictions, delayed projects and significantly cut capex plans.

The unprecedented reduction in activity began in mid-March, troughed in April and May and slowly started to recover in June when global economies, travel and other regulatory restrictions began to relax. Second quarter gross margins of $57 million or 30.3% exceeded the comparable quarter's high watermark and set a record quarterly gross margin since 2015, pre-acquisitions. Adjusted EBITDA for the second quarter was $12.7 million or 6.7% margin. Despite realizing a $126.5 million decline in year-over-year revenues, our second quarter cost savings of $35 million supported our strong 16% adjusted EBITDA decremental performance. The second quarter cost savings exceeded our previously committed target of $20 million to $25 million. Team generated over $22 million of free cash flow in the second quarter, which given the economic backdrop, is a noteworthy achievement. We paid down more than $26 million of debt in the quarter, achieving the lowest debt levels since 2016. We remain committed to paying down debt with any free cash flow generation. The second quarter performance was driven by a few key factors. First, our aggressive and decisive cost actions aligning with the significant decline in activity. Second, the permanent structure changes that were implemented make Team a much leaner, market-responsive and more profitable organization. And finally, the success to date of our revenue diversification initiative, which is expanding our addressable markets with differentiated products and services through a variety of clients.

Turning to our segment performance. Mechanical Services second quarter revenues were $92.8 million, down 36% from the second quarter of 2019, and adjusted EBITDA was $16.9 million, a decline of 35% when compared to the same period last year. Despite lower quarterly revenues, MS activity improved throughout the quarter. In fact, June was the best month of the year for our hot tapping and line intervention businesses. Onstream services, such as emissions control and leak repair also performed better on a relative basis and were less impacted by the overall market conditions. One example is that our onstream service line recently completed the world's largest on-site heat-cured composite repair of a petrochemical reactor. In just 14 days, Team's highly trained technicians were able to repair a 17-foot diameter reactor that had over 2,200 square feet of repaired area. The comprehensive repair work extended the life of the facility for another two years. The client selection of our onstream offering, which delayed their capital expenditure to replace the full unit, reflects the current decision-making in many of our core end markets. As we focus on diversifying into new sectors, MS experienced growth in the areas of nuclear, power, municipal and renewables. Inspection and Heat Treating revenues in the second quarter were $80.5 million, down 42% from the second quarter of 2019, and adjusted EBITDA was $9.5 million, a 32% decrease from the same quarter last year. Despite lower activity levels across most of our core sectors, IHT realized growth in the pharmaceuticals and nuclear industries. Additionally, our pipeline integrity solutions business performed well with limited impact from market pressure and the pandemic. In the second quarter, pipeline integrity solutions received long-term commitments from three large pipeline operators. We expect this trend to continue and will be further supported by the PHMSA gas mega rule that will go into effect later this year. Our IHT segment remains focused on maintaining margin, growing revenue through well-informed cross-selling and delivering specialized and more fully integrated value-added solutions to our clients. For example, IHT repaired a chemical refinery steam line located 170 feet above ground level that ultimately required multiple capabilities across different product lines. We delivered both our rope access technology and welding services, significantly reducing weeks of time that would have been required to complete the operation by eliminating scaffolding and cranes. Team's integrated service offering allowed the client to consolidate service providers and reduce the number of on-site personnel, saving time and expense. Quest Integrity's second quarter revenues were $16 million, down 50% from the same quarter last year. Adjusted EBITDA was $1.7 million for the quarter, a decline of 83% when compared to the year ago quarter. As expected, several of Quest's planned projects for the quarter were pushed to the second half of the year, resulting in a weaker performance. Quest was impacted by the overall slowdown in industry activity, and both domestic and international stay-at-home orders, travel restrictions and quarantine requirements. Quest, however, did make inroads in Latin America, where we have a successful track record. Quest's heater performance optimization has led to additional opportunities in specialty and conventional inspection and mechanical services. As an example, Quest is currently performing both asset integrity and reliability management programs for a large client in Mexico. Given our solid backlog of projects, we expect Quest's financial performance to improve in the second half of the year and into 2021.

From a geographic perspective, there were varying levels of global recovery. Canada and many of our international businesses were slow to return. In addition to Quest's success in Latin America, our other segments are also seeing increased activity, with large onstream projects in Mexico, Peru and Brazil. Domestically, we experienced activity increases along our Gulf Coast and North divisions, which collectively cover pads 2, three and 4. Given the pandemic's geographic impact, we have yet to see the West Coast improve to the same degree as the rest of the country, but we have been successful in gaining market share in this region.

I will now turn it over to Susan for a more detailed financial review. Susan?

Susan M. Ball -- Executive Vice President & Chief Financial Officer

Thank you, Amerino, and good morning, everyone. As Amerino mentioned, our second quarter consolidated revenues of $189 million were down 40% from the second quarter of 2019. All three segments were down year-over-year. The largest dollar amount of the revenue decline did come from Inspection and Heat Treating and Mechanical Services segments. On a percentage basis, Mechanical Services posted a 36% revenue decline in the quarter, while Inspection and Heat Treating was down 42% and Quest integrity was down 50%. Stay-at-home restrictions due to the pandemic caused an extensive disruption to our business across all geographies and industry sectors during the quarter. The movement of critical personnel and subsequent quarantine restrictions made travel difficult and severely limited client engagement and productivity. These restrictions hit our Quest segment especially hard given the nature and locality of its product offering. The reduction in demand in the energy sector and macroeconomic conditions caused many of our clients to reduce capital spending and delay key projects. However, we did realize a nice rebound in the latter part of the quarter as economic and industry activity increased.

Our consolidated gross margin for this quarter was $57.4 million or 30.3%, which was above the same quarter a year ago and marks our highest gross margin percentage achieved since 2015. Our adjusted EBITDA for the quarter was $12.7 million. Despite realizing $126.5 million decline in year-over-year revenues, our adjusted EBITDA declined by only $20 million from the comparable quarter in 2019 as a result of our global cost actions. As a point of reference, our second quarter 2019 was one of the strongest quarters in recent history from a revenue standpoint, gross margin and adjusted EBITDA. The second quarter total cost savings associated with our immediate actions were approximately $35 million. These cost savings reduced both our SG&A and operating expenses almost equally. The cost-reduction actions included furloughs for non-billable technicians as well as other overhead and corporate positions, suspension of 401(k) match, reduced salaries, minimized contractor and professional fees, headcount reductions and elimination of nonessential costs. Now moving to SG&A. We continue to see excellent progress in our year-over-year reductions to SG&A expense due to our cost management actions, including the expansion and acceleration of certain initiatives under the OneTEAM program. Total SG&A costs for the second quarter of 2020 were $58.9 million, the lowest quarterly SG&A expense since 2015 pre-acquisitions. The second quarter's SG&A expense was down $22.7 million or a 27.8% improvement from the second quarter of 2019. On a sequential basis, SG&A was down $19.6 million. We anticipate that total full year 2020 SG&A will be reduced by 10% to 15% when compared to 2019 of approximately $328 million. This includes both the specific cost reduction actions undertaken in 2020, as discussed, as well as other net period-over-period impacts not specific to these cost actions that had previously been in place. The second quarter reported net loss was $13.5 million when compared to a profit of $6.1 million in the prior year quarter.

Adjusted net loss, a non-GAAP measure, was $10.3 million or $0.33 adjusted net loss per diluted share for the second quarter of 2020 compared to adjusted net income of $9 million or $0.30 adjusted net income per diluted share for the same quarter in 2019. Significant adjustments in the second quarter included $3.2 million in severance expense primarily related to restructuring charges and approximately $1 million in legal and professional fees. Consolidated adjusted EBITDA was $12.7 million in the second quarter, which was down from the $32.8 million in the second quarter of 2019 but up sequentially from the negative $3.9 million in the first quarter of 2020. Now turning to our segment performance. The Mechanical Services segment reported second quarter 2020 revenues of $92.8 million, down 36% from $144.9 million in the second quarter of 2019. Adjusted EBITDA was $16.9 million, up $10.3 million sequentially, but down from the $25.9 million earned in the same period last year. Despite lower revenues, EBITDA margins for the business segment slightly increased to 18.2% versus the 17.9% in the comparable quarter. Gross margin dollars decreased 35% on a 36% revenue decline. The Inspection and Heat Treating segment reported second quarter 2020 revenues of $80.5 million, down 42% when compared to the $138.7 million posted in the same period last year. Second quarter adjusted EBITDA was $9.5 million, up $5.9 million sequentially, but down from $13.9 million in the prior year quarter. EBITDA margins increased this quarter to 11.8% as compared to 10% in the prior year quarter. Gross margin dollars decreased to 28% on a 42% revenue decline. Quest Integrity revenues of $16 million were down 50% from prior year period revenues of $32.3 million. Second quarter adjusted EBITDA was $1.7 million, down from $10.3 million in the year ago period. Given the large decline in revenue, Quest's EBITDA margin declined to 10.7% compared to 32% in the second quarter of 2019. Gross margin dollars decreased for Quest 68% on a 50% revenue decline.

As previously discussed, Quest's performance was more severely impacted by the travel-related restrictions and extended quarantine periods. Our effective tax rate on a six month basis was approximately an 8% benefit on the pre-tax six month loss. We anticipate on a full year basis that the effective tax rate for 2020 will be approximately 7% to 10%. This lower rate than the statutory rate is driven by significant discrete and permanent-type items recognized in the year, including impacts associated with the CARES Act and permanent items not deductible as well as differing impacts of domestic versus foreign income and losses. The company has domestic federal tax net operating losses of approximately $120 million, which are available to offset our future domestic federal taxable income. Under the CARES Act, we were able to carry back certain domestic federal net operating losses to previous years. During the quarter, we received $12.1 million of income tax refunds allowable percent of filings associated with the CARES Act. In the second quarter, Team generated $26.3 million of operating cash flow, representing an improvement of over $28.4 million over the same period in 2019. Capital expenditures in the second quarter of 2020 were $4.2 million, resulting in free cash flow for the quarter of $22.1 million. We continue to maintain a full year capital expenditure forecast of approximately $20 million.

We ended the second quarter of 2020 with $15.6 million of cash and had available borrowing capacity under the credit facility of approximately $53 million, with total liquidity approximating $69 million at June 30, 2020. We paid down $26 million of debt during the quarter and reduced debt by nearly $8 million from the end of 2019, achieving the lowest debt level since 2016. As discussed on the last earnings call, we completed the credit facility amendment and extension in June 2020. The amended facility matures January 15, 2022, and provides us the additional covenant flexibility to operate through this recovery period. We believe that our liquidity resources are enough to meet our working capital needs and cash requirements. Our financial priorities continue to be to conserve cash, generate free cash flow, pay down debt and protect our balance sheet. In closing, we are pleased with the results we achieved with our disciplined cost actions, and we'll continue to manage our cost structure down, and we'll take further actions as needed if market conditions warrant further adjustments. Our cost actions can be expanded as needed throughout 2020.

That completes the financial review. With that, I will turn the call back over to Amerino.

Amerino Gatti -- Chairman and Chief Executive Officer

Thank you, Susan. Before we take your questions, I will provide a market outlook, review the progress of our OneTEAM tuneup and our current expectations for the second half of the year. Team's core end markets remain highly volatile with COVID-19 hotspots throughout the country and internationally. From a macro perspective, we are seeing positive signs of increased economic activity as parts of the world are steadily resuming operations. Global oil demand is recovering, driven by gasoline and diesel, while jet fuel remains suppressed. However, demand of all three refined products collectively remain below 2019 levels. Given the combination of cuts in oil supply from OPEC+ and U.S. production declines, we expect the oil market to be undersupplied in the second half of 2020, resulting in a drawdown of inventories and eventually, improvements in industry fundamentals. Refinery utilization rates are now approximately 80%. Historically, these levels have provided healthy margins for refineries and should lead to increases in both opex and capex spending. In addition, many of these plants delayed large turnaround work due to high utilization rates in 2018 and 2019 and will now need to undertake more comprehensive turnaround projects over the next 12 to 18 months. Team benefits in the long term as higher utilization levels lead to additional asset wear and tear due to the corrosive nature of the operating environment. Our downstream clients continue to schedule off-cycle projects that have shorter durations, known as pit stops, to perform limited scope maintenance. By collaborating with our clients on these smaller projects and leveraging our stable and extensive nested footprint, we are able to optimize our gross margins.

During the second half of 2020, we expect our clients will maintain tight capital spending budgets and instead focus on opex projects. As a result, our onstream and call-out activity should lead the recovery followed by nested operations and later in the year, projects and turnarounds. In order to proactively prepare Team for the recovery and the future, we are committed to the following: leaner cost structure through our OneTEAM program; concentrated focus on key clients and quality revenue, supported by enhancements to our business development and sales model; diversification across targeted markets and sectors; and sustained investments in technology and digital innovations. I will now expand on a few of these commitments. First, starting with OneTEAM. We announced the expansion and acceleration of the next phase of the program to deliver additional permanent and variable cost reductions that will further optimize the organization. We estimate the OneTEAM tuneup and other cost reduction actions will deliver between $50 million and $75 million of annualized structural and variable cost savings for the year. In addition to our leaner cost structure, we are successfully leveraging our technology and digital applications.

Team has a long history of operations, over 45 years, and even a longer history when it comes to technology application and development, over 100 years. Our investments in technology, integrated solutions and digitally enabled operations, especially within the current environment, are becoming even more important to support our ability to work remotely and limit the number of people needed on site. One example of this is our touch-point corrosion solution. Team is applying an engineered line lifting solution that provides pipeline supports to be directly assessed for corrosion. This unique system allows our inspectors to identify pipe corrosion without the use of conventional lifting methods such as cranes. This technology has been proven to increase safety and quality as well as reduce costs.

Our Team Digital applications have been extremely successful in driving assurance and efficiency through quality digital capture and analytics, completing over 75,000 project and turnaround inspections since 2018. Leveraging our knowledge and best practices for Team Digital, we are now beginning to transition to a more comprehensive technology platform. Team continues to support our clients as they seek differentiated and cost-effective solutions for their complex asset management challenges. During the second quarter, we partnered with Microsoft to build the foundation for our new field service management system. This digitized workflow enables Team to further enhance our safety, service quality and client relationships. We will soon begin pilot opportunities to measure end user adoption, starting with advanced inspection and onstream mechanical services. Team's technology and digital applications further enhance our integrated solutions that help our technicians perform our services more efficiently and effectively as well as foster deeper nested relationships. Our three segments are well positioned to provide integrated asset management solutions and digital applications to streamline client operations. For example, our digital asset data management program was used for a midstream client to import client asset data for the purpose of corrosion rate monitoring, code compliance and asset performance management.

Team's digital workflow processes and data automation have become extremely important, especially now as our clients are trying to limit exposure and manage margins. Clients are reassessing how they manage their existing assets and leveraging our engineering, specialized labs and subject matter expertise around the world. This collaboration further established establishes our role as a trusted advisor when it comes to their critical assets. I will now share our current expectations for the second half of the year. We are cautiously optimistic that the worst is behind us, which should lead to improved macroeconomic conditions for our clients and the restart of their planned projects and turnarounds in late 2020, leading into 2021. At a company level, we anticipate second half revenues will be between 15% and 25% above the first half of 2020. As a result of the OneTEAM and other cost actions, we expect our full year 2020 gross margin to be in line with 2019. Strict working capital management, capital spending discipline and cost controls should allow us to generate more than $15 million of free cash flow in 2020.

As we enter the second half and look to 2021, we will continue to make disciplined decisions and prudently manage our business based on current economics to ensure costs do not outpace the recovery. Certain macro trends remain outside of our control, such as COVID-19 impact, the oil and gas imbalance and the upcoming election. In response, we are proactively managing our business to focus on what is in our control. First, team's asset-light and scalable operating model, coupled with the depth and breadth of our products and services, has made us even more agile, allowing us to flex with business demands. Second, our global workforce management function allows us to centrally coordinate and forecast employee utilization, communicate more effectively with our on-site field technicians and provide ongoing logistical support to mobilize in this dynamic environment. Third, our business stability and reliability stem from being client-centric with our investments in technology.

Fourth, as assets age, onstream services become more critical for our clients to reduce unplanned downtime and comply with environmental regulations. And finally, as past cycles have proven, demand for crude oil and other refined products will rebound, and our clients will become more comfortable over time, shifting back from opex to a capex mindset. In closing, we believe our geographic footprint and product mix offer Team a unique market position, particularly in this environment. We remain committed to driving execution excellence and strong financial performance with responsible and profitable revenue growth while generating significant cash flow. Finally, I would like to say how proud I am of the people at Team and especially our technicians on the front lines. They have worked tirelessly during this time to engage and serve our clients, leverage technology and manage our risk and financial resources.

Operator, I will now turn it back over to you for question-and-answer session.

Questions and Answers:

Operator

[Operator Instructions] And your first question comes from the line of Adam Thalhimer from Thompson, Davis.

Adam Robert Thalhimer -- Thompson, Davis & Company -- Analyst

Hey, good morning guys. Amerino, when I plug everything in, that's a pretty good outlook for the back half of the year. I come up with full year EBITDA right around, maybe a little bit better than $50 million. Is that in line with what you're thinking?

Susan M. Ball -- Executive Vice President & Chief Financial Officer

I would say, Adam, that going through the numbers and plugging it in, that would be a general range of based upon the commentary and discussion points with SG&A reductions and gross margin.

Amerino Gatti -- Chairman and Chief Executive Officer

And I think, Adam, the one variable will be how the recovery on the top line occurs and the balance between permanent and variable cost reductions. So I think from an SG&A standpoint, the 10% to 15% drop is in line with our plans compared to 2018 2019, sorry. The variable, the permanent balance will depend on that top line growth. And the range is 15% to 25% right now. But as revenue recovers, some of the costs, obviously, will be needing to be put back into the system, like some of the nondiscretionary spend, overtime, training, travel and those type of things, more of the indirect costs.

Adam Robert Thalhimer -- Thompson, Davis & Company -- Analyst

Okay. What did you see in July, Amerino?

Amerino Gatti -- Chairman and Chief Executive Officer

In terms of activity?

Adam Robert Thalhimer -- Thompson, Davis & Company -- Analyst

Yes.

Amerino Gatti -- Chairman and Chief Executive Officer

Yes. So what we've seen, Adam, is that April, May troughed. We did see a nice improvement in June. And the July, August, I would say, has been we forecast that to be a bit more moderated right now. So we were on a good pace of improvement. I think the second wave of some states taking additional precautions, like I mentioned the West Coast as an example, has moderated the growth improvement. So we are seeing an improvement in activity in terms of utilization in hours, but not as big of a move as May to June, obviously. So it has moderated slightly, but still improved over June.

Adam Robert Thalhimer -- Thompson, Davis & Company -- Analyst

Okay. And then from a seasonality standpoint in the back half, it sounds like Q3 EBITDA, obviously up from Q2. And then Q4, another step-up from Q3.

Amerino Gatti -- Chairman and Chief Executive Officer

Yes. I think, again, at the top level, as the year goes on and we start freeing up some of the travel and quarantine restrictions, obviously, we expect Quest to have a stronger second half than first, as I said in the prepared remarks. The improvement of the market, the demand, as inventories start to draw down, we do expect to see a revenue growth going into the second half of the year, maintaining some good cost controls in place. So I would say that Q3 will be improved over Q2 and Q4 over Q3. That's a fair assessment in terms of EBITDA.

Adam Robert Thalhimer -- Thompson, Davis & Company -- Analyst

Okay, great. Well, good job in a tough environment. Thanks.

Operator

Your next question comes from the line of Stefanos Crist from CJS Securities.

Stefanos Chambous Crist -- CJS Securities, Inc. -- Analyst

Good morning, congrats on the quarter. First, on the $50 million to $75 million of cost savings for the year, are those inclusive of the $35 million? And also, what percentage of that $50 million to $75 million will be permanent versus temporary?

Susan M. Ball -- Executive Vice President & Chief Financial Officer

The $30 million to $75 million is or the $50 million to $75 million is inclusive of the $35 million that's been recognized. Additionally, we're still estimating approximately 40% of the cost reductions would be permanent in nature. That obviously can vary and will continue to change as we progress and we recalibrate our cost structure. But right now, currently, it would be about 40% permanent.

Stefanos Chambous Crist -- CJS Securities, Inc. -- Analyst

Got it. And also in the press release, you mentioned midstream activity is close to 2019 levels. Can you maybe remind us what percentage of your business is midstream and maybe what segments that's most exposed to?

Amerino Gatti -- Chairman and Chief Executive Officer

Sure. So we don't list it specifically, but if you look at some of our pipeline percentages, and a little bit actually moving into our other category, that's where you'll see we're in the range of 8% to 12% of our revenue coming from what we would consider pipeline midstream and other type of terminals, etc, so that type of work. What was the second part of your question?

Stefanos Chambous Crist -- CJS Securities, Inc. -- Analyst

What segments that's exposed to?

Amerino Gatti -- Chairman and Chief Executive Officer

So the biggest impact for that part of the segments right now comes from Mechanical Services, and that addresses some of our pipeline integrity, hot tapping, line intervention. And then once you get that work, what a lot of the midstream clients do is they provide project or they require project management support. And then that allows us to pull in other segments like inspection. And obviously, Quest plays a large role as well in the midstream and pipeline sector. So it generally starts on either the midstream or the inspection side, but what we're finding is that, that overall integrated package fits very well with what our clients are demanding right now.

Stefanos Chambous Crist -- CJS Securities, Inc. -- Analyst

Got it. Thank you very much.

Operator

Your next question comes from the line of Sean Eastman from KeyBanc Capital Markets.

Sean D. Eastman -- KeyBanc Capital Markets -- Analyst

Guys, I think it was a commendable effort this quarter, so compliments to the team there. So I just wanted to start, just from a high level, if we go back to sort of pre-COVID-19, you guys were looking at maybe low single-digit top line growth in 2020, let's say. $1.2 billion in top line is what you were sort of planning around. And now we're looking at sort of $940 million for the year, top line. I'm just curious from a high level to get a sense from you on relative to that pre-COVID outlook, how much of this revenue pressure is a deferral? And how much just never comes back? I hope that question makes sense. It would be helpful to get your thoughts on that dynamic.

Amerino Gatti -- Chairman and Chief Executive Officer

Yes. And we're constantly monitoring, Sean. I think it makes a lot of sense. We're constantly monitoring each segment for exactly what we think is COVID or oil and gas imbalance delays versus cancellations. And one way to look at it is that if you look at the nested business, that one is hard to make up, right, because it's constant run and maintain. So the biggest impact of what would be canceled, let's say, or non-repeat is going to come from nested, and that's about 1/3 of our revenue. We're not quantifying publicly right now what the impact is, but that's the biggest impact. On a project/turnaround perspective, I think that the smaller pit stops are occurring and we believe will continue to occur. A lot of the larger turnarounds are being delayed, not canceled. So they're being pushed into the second half of this year and some into 2021. Now the I guess the good news for us is generally when those type of projects and turnarounds get delayed and with the high utilization rates that have been experienced, we generally have increased discovery activity during that time. So we go in with a certain plan scope, and then because of the delayed projects and corrosive environments, we find the discovery increase, which is good. But I would say most of that 1/3 of our business is delayed, not canceled. Then on call-out, it's a bit of a mixed bag. Some stuff is that can be delayed, that would be considered call-out, is being delayed. But I would say that was probably 50-50 between delayed and canceled. So I think that's probably the best way to look at it is almost by business type.

Sean D. Eastman -- KeyBanc Capital Markets -- Analyst

Yes, that's really helpful. And the next one is just an update on the competitive environment. So you did mention you guys are gaining some share on the West Coast. But as we think about the softer macro environment alongside sort of the gross margin discipline you guys stick to, does pricing continue to be a pressure point there? Or is there a point here at which smaller competitors become distressed and Team's market positioning becomes incrementally better? Any thoughts on that dynamic, Amerino?

Amerino Gatti -- Chairman and Chief Executive Officer

Sure. I would say, Sean, that we are obviously starting to have discussions, and we did last quarter as well with our clients that are under margin pressure. We've been able to maintain or contain our price reductions to 2020. So none of them, at this point, are leaking over into 2021. Our clients have been very open, collaborative. In some cases, we've gained more revenue with a drop in price. In other cases, we've been able to pull through some additional segments and services. But from a client perspective, I feel it's been constructive and collaborative. And I think we're trying to work together as a team to get through this dynamic environment. From a competitor standpoint, I think a lot of our major competitors by segment are doing similar to what we're doing in terms of focus on cost, etc, especially for the standard work. We are seeing regional pressures in certain markets where, as you said, clients some of our smaller competition is focused on cash generation, if you will. So they're getting very aggressive, especially on the standard front. When it comes to customized, engineered, integrated and more advanced services, I feel that, that's when we're that's when we step up and that's when our clients are willing to work closely with us and we start looking at total cost, not just the cost of a flange or the cost of a piece of hardware. And there, I think we've been successful in shifting some of our revenue to more integrated advanced customized solutions and looking at total cost for our clients, not just the Team price. So that's how we've managed it. We continue to refine our sales and business development organization. I think we've got a strong toolbox and portfolio of offerings. And as I stated, I think last quarter, going into this year, we felt very confident with our portfolio and we still do. And this market has almost given us a catalyst to start looking at diversification of revenue in some of the sectors that I mentioned earlier. So I like where we are. Our leadership team has become very agile. They're very close to our field operations. And we're getting a lot more visibility on RFPs and really focused on how we can differentiate ourselves with our clients beyond just a price discussion.

Sean D. Eastman -- KeyBanc Capital Markets -- Analyst

All right. Helpful. Very helpful. One last one for me. So just as we think about the increased scope of cost reduction here, I still think 40% of that's permanent in nature. To the extent we do see sort of a healthy revenue recovery in 2021, how should we be thinking about the incremental margin on that in light of the cost saves, plus maybe some onetime savings like travel and entertainment coming back into the system? Any sort of high-level thoughts on that dynamic would be great, Amerino.

Amerino Gatti -- Chairman and Chief Executive Officer

Yes, I'll let Susan comment. I think what we would expect as the market recovers, we will see a larger fall-through in the first half of the year because, obviously, revenue will probably outpace cost additions. We've remained very disciplined in how we're tracking and monitoring our cost savings, obviously, to deliver the numbers that we are. My expectations would be that over a full year, it would be front-end, high fall-through and then level off to a range of about 40% to 45% in terms of fall-through. Susan?

Susan M. Ball -- Executive Vice President & Chief Financial Officer

No. No, I would agree. I mean, it's going to vary, dependent on the period of time as you move up. And the classification or the categories of our revenue, I definitely agree that you're going to see it, the cost the revenue outpace the cost as you move through the year.

Sean D. Eastman -- KeyBanc Capital Markets -- Analyst

Excellent, thanks for the time. Very helpful.

Susan M. Ball -- Executive Vice President & Chief Financial Officer

Thank you.

Operator

[Operator Instructions] Your next question comes from the line of Martin Malloy from Johnson Rice.

Martin Whittier Malloy -- Johnson Rice & Company -- Analyst

Congratulations on what you're able to do on the margin side. You mentioned renewables in your prepared comments in talking about new sectors. Maybe could you expound on what you're doing there? And also are you all involved in inspection and taking care of hydrogen infrastructure, whether it be the production of hydrogen or refueling facilities? I'm just thinking about pipes under pressure and the need to be inspected.

Amerino Gatti -- Chairman and Chief Executive Officer

Yes. Good question. So maybe let me start with renewables. For us, it's not a lot on solar, but we are on hydro and we are on wind. And on the inspection front, a lot of visual inspection work as well as some drone work and other rope access type activity where we're either doing a visual or actual inspection on corrosive environments. And some of that is in offshore environments and some of that on land. On the mechanical side, we're doing everything from machining, bolting-type work on site, including some repair work as well and different mechanical services, depending if it's new construction or repair. And then when you look at some of the Quest services and going more into the hydrogen and what we consider more high-energy piping, we do have some very differentiated, high-resolution technology, fit-for-service processing and then helping our clients manage their critical assets both in terms of maintenance as well as life extension. We do some work in our own labs, but the majority of it would be on-site, on our client sites. So it's it's that type of activity in those type of markets.

Martin Whittier Malloy -- Johnson Rice & Company -- Analyst

Great. And my next question relates to your comments about technology and digitization, asset management. Are you seeing as a result of COVID-19 that customers are looking more seriously at these programs or getting more involved in these programs? And I realize there are some headwinds near term to probably implementing some of these programs. But maybe any anecdotes that you have from conversations with customers about this?

Amerino Gatti -- Chairman and Chief Executive Officer

Sure. Yes. And we've spent a lot more time, obviously, virtually speaking with clients to get a better handle on how they're viewing their critical asset or their asset management programs. And that's been very insightful for how we spend our R&D dollars as well. What I would say is that the on the inspection side, the use of more analytics, risk-based inspection is becoming more discussed. And it's not going to be a light switch that goes on. It will be a transition. We estimate between two to three years of a move where we start getting enough analytics to make the right decisions of when to inspect, which assets require repair so you're not doing additional repair, etc. So that's getting a lot more attention right now in a lot more systems, which is one of the reasons we're making our digital pivot to more critical asset-based as well as data and analytics. We're finding a lot more efficiency-driven results for our technicians, but also the clients are seeing a lot less rework right now and a lot better management of permitting and subcontractor activities. So that's real and here and now. On the mechanical side, we're finding the use of digital and technology tools. I referenced the one of the systems we have for touch-point corrosion, where we're using technology instead of people and cranes and other high safety risk items. We're also using a lot more laser scanning to help move from an engineering hands-on approach to get better accuracy. So that's real. And then I think the other big one for our clients when it comes to their assets is being able to almost create an asset digital asset file that allows them to manage their fit-for-service techniques, which is what they're starting to build around critical assets. So I think it's going to be an evolution. But anything right now that is safety-driven, reducing exposure and the use of analytics is what I would say is getting the highest attention. And then making sure that our systems are agnostic to some extent, so we can communicate across different clients using different platforms.

Martin Whittier Malloy -- Johnson Rice & Company -- Analyst

Great, thank you.

Operator

I will now turn the call back over to management for additional comments.

Amerino Gatti -- Chairman and Chief Executive Officer

Thank you. While the outlook for the economy remains uncertain for the foreseeable future, we will successfully navigate this dynamic environment by focusing on execution excellence and deepening our client engagement. We remain steadfast on our priorities, free cash flow generation, debt paydown, expanding margins and quality top line growth to build a sustainable and profitable business for the long term. Thank you for joining us on this call and for your continued interest in Team. And we look forward to speaking with you again next quarter.

Operator

[Operator Closing Remarks]

Duration: 52 minutes

Call participants:

Kevin Smith -- Senior Director of Investor Relations

Amerino Gatti -- Chairman and Chief Executive Officer

Susan M. Ball -- Executive Vice President & Chief Financial Officer

Adam Robert Thalhimer -- Thompson, Davis & Company -- Analyst

Stefanos Chambous Crist -- CJS Securities, Inc. -- Analyst

Sean D. Eastman -- KeyBanc Capital Markets -- Analyst

Martin Whittier Malloy -- Johnson Rice & Company -- Analyst

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