Mistras Group Inc

Thank you for joining MISTRESS Group's conference call for its third quarter ended September 30, 2020. My name is Sarah, and I'll be your event manager today. We'll be accepting questions after management's prepared remarks. Participating on the call for MISTRESS will be Dennis Bertolotti, the company's president and chief executive officer, Ed Breschner, executive vice president, chief financial officer and treasurer, and John Wood, the Senior Executive Vice President and Chief Operating Officer. I want to remind everyone that remarks made during this conference call will include forward-looking statements. The company's actual results could differ materially from those projected. Some of those factors that can cause actual results to differ are discussed in the company's most recent annual report and Form 10-K and other reports filed with the SEC. The discussion in this conference call will also include certain financial measures that were not prepared in accordance with US GAAP. Reconciliation of these non-US GAAP financial measures to the most directly comparable US GAAP financial measures can be found in the tables contained in yesterday's press release and in the company's related current report on Form 8K. These reports are available at the company's website, in the investor section, and on the SEC section's website. I'll now turn the conference over to Dennis Bertolotti.

Thank you, Sarah. Good morning, everyone. Our financial performance was strong in the third quarter of 2020, with revenue, as we forecasted, up nearly 19% sequentially, gross profit up from the year-ago quarter by nearly 200 basis points, and overhead was down over 12%. As a result of this solid execution, we reported a net income of $1.6 million, or five cents per share, for the third quarter of 2020. Additionally, we continued to generate positive cash flow in the third quarter of 2020 as we had anticipated. Consequently, we generated more operating cash flow and free cash flow in the first nine months of 2020 than we did in the same period of 2019. This in turn has allowed us to pay down nearly 19 million of outstanding debt thus far in 2020, including over three and a half million this quarter. MISRUS has been adapting and evolving throughout the current pandemic and has been remarkably responsive to its customers. For that, I want to thank the many dedicated MISRUS employees who have endured these extremely volatile times over the past month. all while ensuring the safety of our employees and customers. I am also pleased to report that we recently restored the remaining salary reductions for overhead positions that we had initiated at the beginning of April 2020 as part of our pandemic plan response. We remain all together in working through this unprecedented period. Our results in the third quarter reflect a gradual strengthening in our key oil and gas end markets. and lesser than expected reductions in our domestic aerospace sector. We also benefited from modest market share gains driven by the increasing value of our comprehensive service offering, delivering to our customers the added ongoing success of our diversification efforts as we further leverage our investment in technology into adjacent markets. Continuing the efficiency trend that began last quarter, We once again recorded a strong gross profit margin of 32% for the quarter, up from 30% a year ago, and down only slightly from last quarter when we posted the best gross profit margin in five years. Gross profit margin improvement continues to reflect the mix and the impact of efficiency initiatives, productivity enhancements, and a better sales mix. So far this year, for the first nine months, Gross profit margin is ahead of last year by 60 basis points, despite the volatile end markets, significant revenue decline, and the impact of the global pandemic. We have sequentially improved our annual gross profit margin for the past two years, and we anticipate continuing this trend for full year 2020. Selling, general, and administrative expenses were also reduced significantly from a year ago. and the quarterly reduction in the third quarter was the highest rate experienced in 2020 at over a 12% year-over-year reduction. Through this combination of strong gross profit margin and tight expense control, we were able to achieve a sequential quarterly improvement of over 50% in adjusted EBITDA, despite the adverse impact of August hurricane activity that reduced adjusted EBITDA by over $1 million during the quarter. The adjusted EBITDA margin in the third quarter was 11.8%, which is one of the highest levels we have generated in recent quarters. We had another quarter of positive operating cash flow and free cash flow, with our year-to-date free cash flow nearly 37% higher than a year ago. This enabled us to further reduce debt in the third quarter by over $3.5 million. For year-to-date thus far in 2020, we have paid off nearly $19 million of debt. Debt service remains a top allocation priority for our residual free cash flow. All in all, it was a strong quarter marked by steady progress. Our sequential revenue growth is due to improvement in our existing markets, diversifying into emerging, growing, adjacent, and complementary markets, and continued tight cost controls. Looking out at the market landscape, conditions are beginning to improve in the energy sector, with signs of stabilization in the oil and gas markets, although it is running slower and using fewer hours than last year. We constantly monitor our field technician headcount and have seen improvements from a year-on-year decline of 21% during the second quarter to a current decrease of approximately only 5%. Revenue is down more than headcount, because of fewer hours being worked on the contracted work scopes, which customers have reduced to save on spend, while also reducing travel and headcount at sites in response to COVID concerns. There are signs of improvement, for instance, in Canada and other locations where we are seeing some demand for overtime on projects. And we are experiencing robust bidding opportunities in pipelines, refinery, and offshore markets. Geographically, while North America is experiencing this slowdown, conditions in Europe for the oil and gas market have not deteriorated to nearly the same degree, thus showing signs of strength. The aerospace market continues to lag in Europe and recently announced COVID shutdowns in France, Germany, and UK will create additional headwinds in those countries. In contrast, the North American aerospace business has been stable in 2020, and is up modestly year-over-year by nearly 3%. This is a result of our diversification efforts beyond our commercial markets and into defense and space. For instance, for one customer, we have essentially become a project manager, overseeing not only our own work, but other mechanical tasks related to our typical work scope, such as welding. This project arose from the customer's desire to limit the amount of testing and rework required to yield usable parts. Using our process expertise and industry know-how, we substantially reduced the number of inspection and repair cycles previously required for those parts and even repaired and validated a number of parts that were previously deemed unlikely to be salvaged. This resulted in an extended work scope that will likely span several years and hundreds of parts for this customer. Our energy diversification efforts continue to be an emerging growth opportunity, particularly in wind energy. Our beta test of sensors on wind turbine blades is progressing nicely. Our sensors are now being tested on different types of turbines, and the results to date have been impressive. This represents not only an increase in the growing alternative energy space, but it's also part of our digital and IoT strategy as well. Licenses for our MISRUS digital technology continue to rise. Though COVID has slowed some of this technology's acceptance, we believe when our customers return their employees to their facilities, license demand should rise accordingly. In OnStream, we are making great progress in the U.S., which is being somewhat offset by the challenges facing the Canadian energy market. Today, our largest tool is 26 inches in diameter, but we have been invited to bid on jobs, that will take us to a 48-inch diameter tool, potentially getting us into larger lucrative markets. So between our sensors, ruggedized tablets, bridge monitoring applications, PCMS, and more, we believe our data strategy is well positioned. If not for COVID, we are convinced we would be much further along. When markets improve, we expect data revenues to show strong growth, and our MISROS digital strategy to be an even bigger part of our future. Third quarter 2020 once again demonstrated our ability to flex the organization to match market conditions. At the same time, we are making steady progress leveraging our core strengths to penetrate new and growing markets. And despite the dual challenges created by the pandemic and in-market volatility, we continue to generate strong positive cash flow. which we are using to reduce debt. While we believe fourth quarter revenues could be relatively flat slightly down from the third quarter, we are extremely optimistic that we will see steady improvement over the course of 2021. We are committed to our strategy to use the tremendous flexibility of our organization to maintain, if not grow our position in our primary markets, while strategically investing in growth initiatives that will capitalize on coming shifts in the market toward more comprehensive solutions, predictive analytics, and better use of technology. As you heard today, despite the cautious nature of the markets, we are already demonstrating tremendous value through MISROS Digital, supply chain consolidation, IoT sensor technology, and more. As market conditions improve, We believe these capabilities will be in high demand and that we will have a significant footprint on which to build. I would now like to turn the call over to Ed to give you more detail on our financial results for the third quarter and first nine months of 2020.

Thank you, Dennis. For the second consecutive quarter, revenue was consistent with our forecast, increasing nearly 19% sequentially from the second quarter to $148 million. This was at the high end of the range in our outlook last quarter. And as Dennis mentioned, the impact of the August hurricanes reduced revenue by nearly $4 million this quarter, which would have put us over the top of our previous revenue outlook for the third quarter. While both services and international results were each down by more than 20% compared with prior year, international revenues were relatively a little weaker due to the ongoing challenges in the European aerospace market. where aerospace comprises a larger percentage of the total international revenue as compared to the services segment. For the nine months ended September 30, 2020, our revenue was approximately 76% of prior year revenue for the same period. Despite the dual challenges of energy market volatility and the disruption caused by the global pandemic, customers still need our essential services to comply with safety and regulatory standards and ensure their plants are operating at peak efficiencies. This demand requirement essentially creates a floor underneath our market. Furthermore, we continue to gain market share as customers increasingly adopt our more comprehensive service offerings, including mechanical services. For instance, at the expense of other companies providing narrower solutions. Consistent with the second quarter, gross profit margin increased 190 basis points to 32%. This was down only slightly sequentially from our second quarter gross profit margin, which was the highest quarterly gross profit margin level achieved over the past five years. Gross profit margin improvement is once again attributable to productivity improvements and a favorable sales mix. In particular, gross profit margin benefited from the relative increased sales mix of on-stream, aerospace, and PCMS, all of which offer higher-than-average profitability. Year-to-date 2020 gross profit margin is running ahead of the first nine months of 2019 by 60 basis points, despite revenue being down 24%. The year-to-date gross profit margin benefited from the same positive factors that impacted the quarterly performance. Third quarter selling general and administrative expenses decreased by 12.3% compared to the year-ago quarter. This is the largest quarterly decrease in our year-over-year overhead cost in 2020. The contraction in the underlying SG&A cost was even more impressive when considering that overhead costs also included the impact of unfavorable FX costs in both the Q3 and year-to-date periods versus prior year. The overhead cost decreases realized in the last two quarters, as well as those expected in the fourth quarter, are the product of the cost reduction and efficiency program we implemented in April 2020. We expect fourth quarter overhead costs will also be lower than the prior year although the magnitude of the decrease will be less significant as certain cost-saving measures taken at the inception of the pandemic have been restored, as Dennis mentioned earlier. Adjusted EBITDA for the quarter was $17.4 million, a $5.9 million or 51.3% sequential increase from the second quarter of 2020, although down compared to prior year. We were in compliance with all of our bank covenants as of September 30, 2021. Specifically, we maintained a minimum liquidity of $57.4 million versus a requirement of maintaining a minimum liquidity of $20 million, with liquidity being defined as cash and cash equivalents and unused credit on our revolving credit agreement. And number two, we exceeded the minimum even requirement for the six months ended September 30, 2020, by $3.7 million. Although the maximum funded debt leverage ratio is currently suspended until the fourth quarter of 2020, when it resumes at a level of five and a quarter, At September 30, we were in pro forma compliance on a 12-month basis, and we expect to be in full compliance with all debt covenants at December 30, 2020. We generated $41.8 million of cash from operations in the first nine months of 2020, compared with $40.5 million in the year-ago period. This is despite the significant decline in revenue year-over-year. Even more impressive, free cash flow was $30.8 million in the first nine months of 2020, compared with $22.5 million in the comparable period last year, an increase of 37 percent. Free cash flow benefited from a $7 million reduction in capital expenditures year-to-date, in line with our commitment to limit spending. We do not expect any catch-up capex spending in the fourth quarter of 2020. Our net debt, defined as total debt less cash than cash equivalents, at September 30, 2020, was $214.4 million, compared to $239.7 million at December 31, 2019, a decrease of over $25 million, or just over 10%. We reduced gross debt by $18.2 million over the first nine months of 2020 to $236.5 million at September 30, 2020, from $254.7 million at the end of last year. Again, debt reduction remains the top allocation priority for our residual free cash flow. We remain confident in our sustainable business model and remain firmly committed to carrying out our strategy today and over the long term. And with that, I will now turn the call back over to Dennis.