Mistras Group Inc

Ladies and gentlemen, thank you for joining MRS Group's conference call for its fourth quarter and year-end 2020. My name is Tawanda, and I'll be your event manager today. We'll be accepting questions after management's prepared remarks. Participating on the call for MRS will be Dennis Bertolotti, the company's president and chief executive officer, Ed Prasner, executive vice president, chief financial officer and treasurer, and John Walt. 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 can cause actual results to differ are discussed in the company's most recent annual report on 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 the U.S. GAAP. Reconciliation of these non-U.S. GAAP financial measures to the most directly comparable U.S. 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 8-K. These reports are available at the company's website in the investor sections and in the SEC's website. I will now turn the conference over to Dennis Bertolotti. Sir, you may begin.

Thank you, Tawanda. Good morning, everyone. We entered the year on a high note, with strong performance across virtually every key performance metric, as well as with significant strengthening of our core financial condition. On the top line, it was our strongest revenue quarter of the year. In a quarter that is not historically high on a relative basis due to seasonality, revenues benefited from offshore mechanical, longer-running turnarounds, and growth in data services, particularly within PCMS and new century software. Gross profit margin was also up in the quarter to 30.7% compared to 28.3% in the same quarter last year, continuing the favorable trend over the past several quarters. Most importantly, we have now expanded gross profit margin by 100 basis points or more on a full-year basis for the third consecutive year. We also continued to drive down costs, which contributed to improvements broadly across our key profitability metrics, with operating income in the quarter nearly doubling over the year-over-year period and adjusted EBITDA up nearly 22%. And once again, we generated very strong cash flow, with both operating and free cash flow exceeding adjusted EBITDA in the quarter, as well as on a full-year basis. As a result, we actually generated more operating and free cash flow in 2020 than we did in 2019. This was quite an accomplishment, given the significantly lower level of revenue in 2020. This was, in part, attributable to an improvement in working capital, which we'll get more detail on later. The first priority remains using the free cash flow we generate to pay down debt, and by the end of 2020, we have reduced our net debt position by nearly 19% to under $200 million. This was all accomplished while continuing to assure the health and safety of our employees, customers, and vendors. In addition to paying down our debt, we also continued to invest in our sales and marketing infrastructure as we felt it was important to be prepared for the market's return to a more normal level of activity. We have also been making great strides in our expanding Mistrust Proprietary IP, which will position us to have one of, if not the most comprehensive asset integrity service offering in the market for our customers. It is a very strong finish to an extremely challenging year, and it puts us in an excellent position to build upon our success in the upcoming year and beyond. The fourth quarter represents the culmination of the steady progress achieved over the course of the year. adapting to a slowdown in economic activity, volatility in energy markets, and a quickening pace of change across nearly all of our end markets. The demand for services that assure safety, reliability, and regulatory compliance of our customers' valuable assets is on the rise and is being modified and enhanced by lessons learned during the remote working conditions imposed during the pandemic of 2020. The energy market will remain core for us. It is an extremely large market where we have ample opportunity to grow. We believe the changes in the energy market precipitated by the pandemic impact on supply and demand are working to our advantage as they are accelerating changes to which few competitors in our industry will be able to respond. We have been anticipating these changes by expanding vertically beyond NDP into mechanical and other services as vendor consolidation trends continue. We are also addressing rapid shift to new sources of energy by accelerating our horizontal expansion into renewables and especially wind. We are also accelerating development of new product offerings, such as a suite of data services that include much sought after predictive capabilities, which significantly improve efficiency. According to the Deloitte Analytics Institute, The ability to predict failures can increase equipment uptime by 20% and productivity by 25%, while lowering breakdowns by 70% and maintenance costs by 25%. Consequently, we are quite excited about the forthcoming introduction of our insights-based asset protection software ecosystem. The new platform is an integrated suite, bundling our existing data services together with improved connectivity to our customers. The changes we are making are key to profitably growing our energy revenues, expanding market share, enhancing our service offering, and delivering unique mistrust capabilities that meet industry's emerging needs. The sequential revenue growth experienced since the onset of the pandemic in the second quarter of 2020 is clear evidence that this strategy has been successful. We are adapting and changing our offerings in response to customer demand. Our strong relationships and diversified service capabilities helped us win work in a receding market. Renewable energy revenues are picking up, and the promise of more data services, a full line of required services, not just inspection, is attracting a lot of attention. Gross margins are likewise benefiting from our ability to demonstrate how NISTRUST offers customers more value that has been generally available to the market. The goal over the long term is to diversify both our end markets and our proprietary products and services in order to reduce volatility, generate more stable growth, and improve gross margins. As part of that strategy, we believe revenues from oil and gas will grow, but slower than consolidated revenues, ultimately representing less than half our total revenues in the future years, along with improved profitability. In the near term, a continued strengthening of energy prices seem to have stimulated the With demand increasing, there is more talk of a traditional spring turnaround maintenance season, which could materialize for us late in the first and into the second quarter of 2021, probably delayed by the severe weather seen in the Gulf this year. It should also provide the opportunity to exit the later part of 2021 at a revenue run rate approaching that of fiscal 2019. In aerospace, we continue to have success penetrating the private space flight operator and military market, while the commercial market works through its near-term challenges. Aerospace is a strategic market where we believe we can generate strong growth through horizontal expansion and increased penetration to adjacent markets and through the introduction of bundled services that are in strong demand. It is a large market where we can achieve better than corporate average margins, in which we are confident has an excellent long-term growth prospects. We see it generating a larger portion of our revenues over the next several years. Onstream, our midstream inline integrity testing business, had a very good year in 2020. This was due to its introduction of tools for larger diameter pipes, which is increasing its addressable market, as well as continued penetration of the U.S. market as we first design into our acquisition plans. Margins at OnStream also remain above the corporate average. OnStream is strategic not only because it serves a large and less volatile segment of the energy market, but also because it is another vertical in which we are able to grow by adding value through specialized data services. In MISRUS Digital, our mobile platform continues to evolve into more than an inspection tool. While prevailing economic conditions may have slowed new adoptions, They are also accelerating the pace of change across industries and creating more robust users of our digital platform. We are confident that owners in all of our end markets are anxious to adopt our new technology, which has already demonstrated the ability to improve both the productivity and efficiency of its users for not only inspection, but also for related services. Over the next few years, we believe we can significantly grow our digital revenues, which will represent an increasing proportion of our total revenues as well. Consequently, by staying focused on what customers will need in this changing market, we are confident that the hard work put in this year has positioned Mistrust for a strong rebound in fiscal 2021. For instance, we have created the right mix of resources to offer turnkey solutions to problems which many markets with significant assets never envisioned. For instance, in the wind turbine market, We can offer services to monitor, inspect, and repair the blades, housing, and hubs of those turbines. Probably most exciting, the beta test that we are developing using remote sensing technology that identifies potential damage in real time are demonstrating value with our customers. This will provide dramatic improvements compared to the slow, cumbersome, and expensive inspection and outdated monitoring methods currently in use. A new era for mistrust is now beginning. Over the longer term, we believe we can grow and diversify mistrust to generate more stable financial performance. All of our efforts today are positioning us for the markets of tomorrow. While fiscal 2020 may have been a pause in our growth, which was driven by the COVID-19 pandemic, it did not stop us from making great progress strengthening our organization to capitalize on existing and emerging opportunities. At the same time, we strengthen our financial condition. Another competitive advantage in an industry where owners are consolidating their vendors and the financial viability of their partners is becoming more and more important. Fiscal 2021 is setting up to be a strong rebound year. In newer, faster-growing markets such as space and alternative energy and data, we have already established a market presence and are building awareness around our brand and our offerings. We are essentially on the ground floor in these industries, building relationships and using our experience as a springboard to keep our products and services ahead of the competition. In addition, it is important to note that our existing markets remain very large and offer plenty of growth potential by growing share and introducing new solutions. We are confident in achieving steady improvement over the course of this year, especially in the second half of 2021. although we expect first quarter revenues could be relatively flat to slightly down in the fourth quarter of 2020 due to lingering COVID effects, weather, and usual seasonality. This optimism is not only due to anticipated recovery in our end markets, but also due to our strategic initiatives to grow in adjacent and new markets, introduce new products, and grow share, particularly in the oil and gas markets. Because of the various efficiency and productivity improvements achieved, we further believe our model will enable us to maintain our strong gross margins, keep costs under control, and grow the bottom line faster than ever. I would now like to turn the call over to Ed to give you more detail on our financial results for the fourth quarter and full year of 2020. Thank you, Dennis.

We grew our key performance measures significantly in the fourth quarter, once again illustrating how our asset-light strategy consistently generates strong cash flows even in the most challenging of times. Adjusted EBIT was up nearly 22 percent to $17.6 million. Operating cash flow of $26 million was up approximately 40 percent, and free cash flow was up an even more impressive 55 percent to $21.2 million for the quarter. we converted over 100% of our adjusted EBIT into free cash flow in the quarter, and that's quite a feat. For the year to date, we also converted over 100% of our adjusted EBIT into free cash flow. Again, that's rather remarkable and attributable in part to a reduction in trade receivables, a benefit from the CARES Act, which allowed us to defer certain payroll taxes, and a reduction in capital expenditures. Given our expectations for 2021 to be a growth year, We expect the cash conversion to adjusted EBITDA to trend back down to our historical norms of averaging about 50%, mostly due to working capital considerations as we invest in growth. Back at the top line, the fourth quarter was our strongest revenue quarter of the year, with nearly 9% sequential growth from the third quarter of 2020. It was also the third consecutive quarter in which we met or exceeded our revenue guidance. As Dennis noted earlier, energy markets have been recovering and are currently stable. Longer-running turnarounds supplemented our steady run and maintain business in the fourth quarter of 2020. While hours worked remained below the year-ago levels, they did reflect sequential improvement over the third quarter. Revenues in the quarter also benefited from growth in alternative energy, such as wind turbines, in addition to gaining momentum in the private space market. Offsetting these improvements were continued weakness in commercial aerospace, especially in Europe. However, international revenues in the quarter included improved turnaround volume in Germany, as well as favorable foreign currency translation. Products and systems also turned in a solid quarter, as increased infrastructure spending is leading to growing demand for our sensors and related technology, primarily in the transportation infrastructure market. And as Dennis mentioned, but it's worth repeating, Gross profit margin increased 240 basis points in the quarter after expanding 200 basis points the last quarter. As a result, we have recorded a 100 basis point or greater improvement in gross margins for the third consecutive year on a four-year basis. Gross profit margin improvement is attributable to productivity improvements and a favorable sales mix. Some of the gross margin benefit can be attributed to lower 2020 portion of revenues which comprises pass-through costs, that is, expenses we incur and bill at essentially costs, such as travel and per diems. As COVID restrictions loosen and revenue grows in 2021, gross profits should follow suit, but gross profit margin improvement may be somewhat muted as the increased pass-through cost as the year progresses due to the increased turnaround activity expected in 21. Selling general and administrative expenses were down nearly 5% compared to the year-ago quarter, These costs decreased on a relative basis less than in prior quarters of 2020, as certain cost reductions taken at the inception of the pandemic, such as temporary salary reductions, have been restored, effective at the beginning of Q4 2020. We constantly calibrate our overhead costs to be in line with our expected revenue level. Given our exceptional control of overhead throughout 2020, Operating income was $4.7 million in the fourth quarter of 2020, an increase of nearly 100% over the prior year period. And non-GAAP operating income more than doubled to $6 million for the fourth quarter from $2.9 million in the same quarter last year. Looking back on full year 2020, it is important to keep in mind that although revenues were down nearly 20%, gross margins expanded by 110 basis points to 30.1% for 2020. And cash flow was up significantly from fiscal 2019 as well, with operating cash flow up 15% to $68 million and free cash flow up 44% to $52 million. And with that reduction remaining the priority use of our residual cash flow in 2020, as well as continuing into 2021, we were able to reduce debt by $36 million in fiscal 2020. Given the significant cash and cash equivalents buildup, During 2020 in our international locations, we reduced net debt by $45 million in 2020 to under $200 million at December 31, 2020, a nearly 20% reduction. We were in compliance with all of our bank debt covenants at year-end. Specifically, the funded debt leverage ratio at 12-31-2020 was approximately 4.8 times versus an allowable 5.25 times. There are step-downs in the maximum funded debt leverage during 2021, and we expect to remain in full compliance with this covenant and all covenants throughout 2021. Our goal is to achieve a funded debt leverage ratio of three times by the end of 2021. We are highly confident in our sustainable business model and remain firmly committed to carrying out our strategy both today and over the long term. And with that, I will now turn the call back over to Dennis.