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spk01: Thank you for joining Mistress Group's conference call for its first quarter, ended March 31st, 2021. My name is Maddie, and I will 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 Preissner, executive vice president, chief financial officer and treasurer, and John Wolk, 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 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 USGAAP. Reconciliation of these non-USGAAP financial measures to the most directly comparable USGAAP 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 Investors section and on the SEC's website. I will now turn the call over to Dennis Bertolotti.
spk02: Thank you, Maddie. Good morning, everyone. We delivered a solid first quarter, and the new year is off to the start we anticipated, which keeps us on track for significant improvement in our full year results. Energy market revenues were solid, essentially unchanged from last year, despite the COVID-19-related headwinds. for the entire first quarter this year versus only a partial month impact last year. Additionally, the first quarter was impacted by a disruption caused by severe weather in the Gulf region this year, as previously disclosed. This stability in energy was offset by weakness in commercial aerospace as well as industrial manufacturing markets, the latter including the impact of the global semiconductor shortage. Lastly, the spring turnaround season started later than normal this year, while a drag first quarter, this likely means its duration will run longer into the second quarter. Our meaningful increase in the weekly total hours billed during the month of April supports these expectations and should drive year-over-year growth in our energy revenue for the balance of 21. For context, our hours in the month of April 21 were only off by approximately 10% from our actual pre-pandemic hours in the month of April of 2019. Due to ongoing productivity improvements, gross profit margin improved 50 basis points over last year, and we anticipate further expansion over the remainder of 21. Our cost reduction and efficiency improvement programs are working. Overhead expense continues to be well controlled, with costs decreasing nearly 5% over the same period last year. We will continue to calibrate our overall cost structure to our revenue level throughout and only fully restore last year's cost-out reductions once we believe we are returning to conditions that support the increased level of spending. The net result of our gross profit margin expansion and overhead cost control was a 30% increase in adjusted EBIT of this quarter on a slightly lower revenue base. This illustrates our continued emphasis on building value for our shareholders as we improve the operating margin and grow the bottom line faster than the top. We feel very good about generating over $3 million of operating cash flow, considering the first quarter is seasonally our weakest period of the year and therefore not typically cash flow positive as we ramp up volume and mobilize in the field for the spring turnaround season. We also met our goal of keeping net debt below $200 million as of March 31st, 2021. As cash flow improves over the balance of the year, one of our top priorities remains debt reduction. Consequently, we expect to reduce debt over the remainder of the year. So reflecting on our performance, first quarter results were as expected, and the year is shaping up as previously envisioned. Looking more closely at the business, the energy sector continues to offer attractive opportunities, not just simply by the virtue of the enormity of the opportunities for us within this market, but also because our customers are looking for more complex and evaluated partners. values MISRAS has been building and focused on for decades. And as renewable energy sources such as wind continue to make inroads against traditional sources such as fossil fuels, we are able to flex with and support our customers' needs as they evolve. This year's turnaround activity started later than usual, and the severe weather that virtually shut down Texas and the surrounding Gulf area in mid-February push some of the work expected in the first quarter into the second. Furthermore, the maintenance of COVID-19 protocols across the industry continues to limit site access, especially within Europe. Regardless, with oil prices hovering around $60 per barrel for the last couple of months, the industry seems to be stabilizing and the spending expectations being reported seem to support the balance of fiscal 21 as being much better than the first quarter. For instance, technicians' billable hours in North America for the first three months of the year were down less than 4% from a year ago. Yet these hours have significantly increased in the month of April of 21, and we're only down 10% from the pre-pandemic hours in the month of April 2019, like we mentioned earlier. We anticipate further strengthening during the remainder of Q2. Our revenue from the energy markets, both gas and oil and power generation, were modestly up in the first quarter compared to last year's first quarter, and that is remarkable since last year only had a partial month of COVID-19 impact. In aerospace, the commercial market remains constrained, although we are encouraged from recent reports that air miles traveled is rapidly increasing. In the U.S., we've offset a majority of commercial aerospace declines with increases in both new defense and private spaceflight contracts. particular our private space flight opportunity looks very promising with some of our customers increased spending activities the european aerospace market continues to lag the overall marketing recovery as most of its aerospace revenues are still from the commercial market we are excited by the alternative energy market which continues to represent one of our best growth opportunities as an example We are beginning to inspect many new customer wind blades and turbine hubs, providing these customers with valuable information on the service life of these assets. While still in the early stages, we are showing the ability to monitor and working on analyzing defects with our proprietary acoustic emission technology. This will enable the asset owner to evaluate safety real time and avoid potentially catastrophic failures in the future. We are quite excited about the forthcoming introduction of our insights-driven asset protection software ecosystem, referred to internally as Project Kappa. Project Kappa is a cloud-based subscription suite of applications and services. The new platform marks an important evolution from standalone applications to an integrated, comprehensive toolset designed to help our customers achieve more from their asset integrity data through our innovative apps and data services. Project Kappa incorporates our company's familiar software, service, and solution offerings, such as monitoring, predictive analytics, data warehousing, sensors, and field operation tools, technologies, and services built on the extensive knowledges and resources developed over the past several decades. We've explained to you how MISRES Digital is achieving acceptance of our mobile technology at several major customers in the energy market, but MISRES Digital has numerous other applications which we believe will further the acceptance and demand for MISRES Digital. For instance, our labs will be able to track and trace the status of parts we are modifying as they move through our shops. That's a new application which is being added to this ever-growing tool. To summarize, I am proud of our team's progress. We continue building the foundational elements necessary to execute on our strategic initiatives. This is a huge opportunity. Today, our software, sensors, remote monitoring, and other digital applications may only account for about 5% of our revenue, but we believe there is significant upside opportunity beyond this. We expect 2021 is going to be a very exciting time as we formally introduce Project CAPA. Here at Mistrust, we continue to implement all the basic infrastructure improvements and organizational strengthening initiatives we have previously mentioned. This includes investing in sales and marketing, expanding our scope of services, developing innovative new products and services while improving efficiencies, all of which support our long-term goals to diversify our end markets and supply better value for the services we deliver. Results have been steadily improving since hitting bottom in last year's second quarter due to the impact of COVID-19, as we were able to quickly adjust to a rapidly changing environment. Now, it's encouraging to see many of our end markets recovering, especially our largest markets in energy. At the same time, we are establishing a robust foundation in emerging markets that are expected to experience rapid growth, such as private spaceflight, alternative energy, and digital technologies. These markets offer the opportunity to generate above corporate average margins. With a solid foundation in large markets, a leading position in emerging markets, and a solid financial position, we are well prepared for the inevitable transitions that will shape our industry in the coming years. Consequently, we remain confident that we are in a position to achieve, by the end of 2021, a quarter revenue run rate approaching that seen at the end of 2019. I would now like to turn the call over to Ed, giving more detail on our financial results for the first quarter of 2021. Thank you, Dennis.
spk03: We grew several key performance measures in the first quarter, once again illustrating how our asset-light strategy works during all market cycles, preserving resources during the most challenging times, as well as providing for significant operating leverage in periods of volume growth. Gross profit margin improved 50 basis points due to operational efficiencies and favorable sales mix. We anticipate additional expansion in gross profit dollars and gross profit margin over the course of 2021. We continued our focus on controlling overhead costs by reducing SG&A by nearly $2 million or approximately 5% over the prior year quarter. We will continue to calibrate our overhead costs to our current revenue level. Net loss was $5.4 million for the first quarter, while adjusted EBITDA was $7 million, which was an increase of over 30% as compared to the prior year. Operating cash flow was $3.1 million for the first quarter, and free cash flow was negative $1.2 million, resulting in a modest borrowing for the first quarter, which is typical for us in the first quarter of any given year, as Dennis mentioned previously. Given our expectations for 2021 to be a growth year, operating cash flow are likely to be lower than the prior year as we invest in working capital to support our growth. Also keep in mind that last year benefited from items such as the CARES Act payable tax referral, which we will be remitting later this year and next year. Regardless, we do expect to generate sufficient free cash flow to further reduce debt over the remainder of this year. We were in compliance with all of our debt covenants as of March 31, 2021, Specifically, the funded debt leverage ratio at quarter end was 4.7 versus an allowable 4.75. There are step-downs in the maximum funded debt leverage ratio during 2021, and we expect to remain in full compliance with this covenant and all covenants throughout the remainder of 2021 and beyond. Our goal is to achieve a funded debt leverage ratio of under three times by no later than the end of 2022. Our consolidated effective tax rate was 32.7% for the first quarter of 2021. With respect to our segments, all three maintained or improved their respective gross profit margin over the prior year quarter. The services segment grew operating income to $4.5 million for the first quarter. On a non-GAAP basis, the services segment operating income was $6.5 million in the first quarter compared to $4.2 million last year, which was an increase of 55.6%. Regarding revenue on our end markets, Although aerospace and industrials manufacturing were down, energy markets, both oil and gas and power gen, were up modestly, as were other process industries and infrastructure. As Dennis mentioned, Q1 did get off to a very slow start, but it ended very strong in March, and this is carried over into the month of April, with hours approaching those of the pre-pandemic month of April 2019. Additionally, note that Q2 of 2019 has been an extremely strong revenue quarter, But that is the benchmark we are holding ourselves to. That is recovering to the 2019 pre-COVID volume levels as quickly as possible, starting with a strong rebound during the remainder of 2021. So our revenue diversification strategy is taking hold as we further strengthen our evolving digitization as well as ongoing deleveraging. We are highly confident that our business model is sustainable and we remain firmly committed to carrying this out That is our strategy for today and over the long term. And with that, I will now turn the call back over to Dennis.
spk02: Thank you. Let me conclude today's prepared remarks with our outlook for 21. Our business has been recovering over the past three quarters from the low experience in the second quarter of 2020. And the effect of COVID-19 was most impactful to our financial results. Although energy prices and demand are currently stable, The ongoing COVID-19 pandemic continues to impact our two largest markets. Despite this adverse and ongoing impact, we expect annual revenue for 21 to be higher than in 20. In addition to the restoration of top-line growth, we anticipate that our ongoing disciplined expense management will enable us to leverage this revenue growth and to significantly improve bottom-line performance over the remainder of 2021. We anticipate that our quarterly revenue will reflect year-on-year improvement commencing in the second quarter of 21 with revenue expected to increase as much as in the low to mid 30% range over the second quarter of 2020. We also anticipate that adjusted EBITDA will expand at a much greater rate in the second quarter of 21 than it had in the first quarter of 21. And given the significantly higher level of operating leverage that would accompany the expected revenue growth. The global pandemic has highlighted our ability to quickly adapt to a very dynamic environment, and the attractive cash-generating nature of our Acid Light business model has proven resilient. We have accelerated our development of new data tools by providing a more focused, technology-driven strategy, developing a roadmap to capitalize on the rapid growth of the alternative energy markets and customers looking for a more complex vendor base, has provided an expansion of our aerospace operations into the adjacent defense and private spaceflight markets. Each of these new markets represents tremendous growth potential in which we can offer high-value services that generate attractive returns. I believe the second quarter will reflect our progress in each of these areas, as well as an expanding recovery in the energy market. Our customers in both the aerospace and energy markets are looking for more nimble and integrated providers who can adapt to the new market, something Mistrust is uniquely qualified to achieve. We remain very optimistic that all the plans we have in place will provide us with a very strong rebound throughout 21, while acknowledging that the COVID-19 pandemic continues to impact our markets and operations. As always, Mistrust's goal is to remain at the forefront of the industry. We are not complacent in the wait for change, but are striving to become a disruptive force in our largest markets, and by doing so, will drive value for our shareholders. Before taking your questions, I would like to thank all the MISRES employees once again for your understanding and the leadership shown in helping us through this crisis. You have shown an unwavering focus of building on our solid reputation for safety, quality, and innovation all while providing outstanding customer service and dedication during these extremely trying times. Please continue to show the same concern for your profession and performance while providing the leadership you have shown to all our stakeholders in the future. By sticking to the tenets of Caring Connects, we can provide a better workplace, not only for the mistrust family, but for all those we work with. Maddie, please open up the phone line.
spk01: Thank you. We will now begin the question and answer session. If you have a question, please press star, then 1 on your touchtone phone. If you wish to be removed from the queue, you can press the pound sign or the hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, for any questions, that is star, then 1. And our first question comes from Sean Eastman.
spk04: Hi guys, this is Alex on Sean. Nice quarter. Thank you so. It seems like the severe weather in the Gulf didn't really impact you guys as much as we would have thought. I'm just wondering if you can give us some detail around how you guys were able to combat this and if there is anything you learned this time around that you can use for future storms.
spk02: So I wouldn't say it didn't affect us. I mean, you know we operate 365 a year, so we expect weather to happen. I mean, it did, you know, truthfully, I was surprised it affected us even in our European operations. A lot of those had some of the same freeze-outs and issues that we had in the Gulf. So we, you know, some of the revenue was lost, but a lot of it really just got pushed. Our biggest problem was it was hitting just before the turnaround season, so some places didn't have power to open up or come back online as expected. Some went right into the turnaround, but we were waiting to clear the facilities. On the lessons learned, we're still doing things like using drones and other things that can do aerial surveys to help them out and other ways to help them understand what the extent of the damage, especially in those areas that are up high that you'd normally need scaffolding. Rain and wind events like that or cold weather or something like that is always going to affect your ability to get up high. So we do have other tools and ideas that we have in, but we're not immune to it. It's just part of what you've got to deal with. I mean, Ed, I don't know if We have a number, but it did affect us to a tune of a few million dollars of lost push revenue. There's no doubt there.
spk03: Right. That's fairly modest. Yeah, kind of like a large hurricane impact. It's kind of the same analogy you could draw to what the ice storms were that were, again, as Dennis said, it happens all the time. It's kind of in our business plan. We don't really call it out. It does tend to defer some work. Some work does get canceled, but it happens. So It's kind of a normal piece of the business, so we don't generally call it out, but it was, you know, fairly inconsequential in the greater scheme.
spk04: Got it. Very helpful. And then my second question, it's nice to see year-on-year growth in oil and gas, even despite the severe weather and delayed spring turnaround season, but you guys still call out weakness in the commercial aerospace market as well as industrial and manufacturing. I'm just wondering when we should expect a recovery for these two markets, and And what do we have to see happen in the broader economy for there to be an inflection point?
spk02: I'll take that and I'll throw it to John. I think my initial thought is we're more recovering faster domestically or U.S. and Canada because of our ability to pivot into defense and private space flight. We're inside Europe. you know, they don't have those opportunities. Plus, I think Airbus and Boeing just handled the COVID in the market and who they're protecting and how they work with it, definitely. So I think it was more impactful to the European operations. You know, I've seen reports about mid-22 things being up and running as opposed to 23 from trade associations and others. And I could believe, you know, Europe will still lag a little bit. I would think By mid-22, I would think we're going to be a lot more comfortable with where we are in the market here domestically because of everything else going on, not just commercial, but defense and private. Whereas internationally, I could see it going later into 22. John, I don't know if you have any other thoughts on that.
spk06: Yeah, I'd go along, Sean, with what Dennis said. The recent reports we've received from our customers initially suggested that we could not see a meaningful recovery in commercial aerospace until 2023. And I think as the world is starting to reopen and people are getting more optimistic, that's been updated in a favorable way. And now they're telling us that we should start to see an uptick in 2022, the amount of which right now we're not too sure about. But certainly it's trending more positive. The other good news there is that as a key supplier, you know, we are picking up market share. We're in active discussions with companies. with some additional customers as part of their becoming an increasing part of their supply chains to get more share of their business because we've been operating well.
spk02: That's a great point. There's going to be a lot of consolidation in those markets, and they're going to be looking for vendors that have a lot more complexity and capabilities. That's really leaned into our favor.
spk04: Thanks, Bob. Back in the queue.
spk02: Thank you.
spk01: Thank you. And our next question comes from Brian Russo.
spk05: Hi, good morning.
spk02: Good morning. Hi, Brian.
spk05: Hey, just if I recall, to follow up on your alt energy and specifically the wind market opportunities, if I recall, you're involved in sensor beta testing for wind blades. Just curious how that's progressing and, you know, when might we, you know, see any sort of, you know, material update there in terms of customer, you know, acceptance.
spk02: Go ahead, John. I'll do a follow-up. Yeah, sure.
spk06: Thanks for the question. Yeah, we're super excited about this area. We've got a team of people, and we work together across segments, which is the terrific thing about this initiative because every segment has got something to bring to offer to customers on this. But the trials are working really well. So far, every single wind turbine we've deployed on, we've been able to come up with meaningful observations that clients are very appreciative of, and we're now in commercial discussions with several to look for deployments in the second half of this year.
spk02: Brian, one thing I would say is that one thing quickly I'll add is it's not any diminish of any one thing that we do, but we're manufacturing equipment. We're installing the equipment. It's proprietary equipment to us. We're interpreting it. We're putting it onto a real-time website. We have the ability to Do the repairs. The full suite of services is really what I think makes us strong. I'm sure there's people who can compete in any one of the various steps to create a sensor, put a sensor on, or try to understand the data or do the repairs. But having the ability to do all that and keep them up and running in a much more deliberate way I think is really where we differ from the rest of the market.
spk06: In addition, Dennis, sorry to go long on this, but also we've got intellectual property around the receiving of the signals, the interpretation, and the reporting of what we're hearing. So it's a terrific solution. I agree.
spk05: Right. So that intellectual property creates a barrier to entry for competition. Is that accurate?
spk02: Yes. It's that and having everything up and running because other people are going to have to, even if they could duplicate any one segment of it, they're going to have to create the rest of it too.
spk05: Okay, and just curious, you know, we hear about, especially with the ice storms down in the Gulf, you know, we're hearing about winterization efforts or strategies on various, you know, farms that were impacted by the storms. Do these sensors fall into that category? Or is it more just about as, you know, turbines and blades age, they need more?
spk00: I guess I'll take that to start.
spk06: It's actually both. So the great thing about the solution that we're developing and deploying is that it's continuous monitoring. So you're continually aware of what condition of your wind turbine blades or other parts of the turbine, like the tubes that connect to the top of the wind turbine. So as you're aware, 24-7, 365, the condition of what's going on under winter. And for instance, during the ice storms, we actually were deployed on some winter ice that were affected. And we could hear ice warming and ice hitting the east. So there's an awful lot of technology that is sometimes a little bit of a pleasant surprise to us because you start with trying to determine the impact events of life. Things were cracking. And, you know, deploying in the way we have and with the data scientists that we have, the software that we have, we're hearing things that, you know, our customers are very appreciative of learning.
spk02: And, Brian, we can always add additional sensors for temperatures, pressures, or things like that if they were looking at other ways of monitoring it in real time as well that may be.
spk05: Right. And in terms of, you know, gross margin, you know, You know, as a percent of sales, you know, long-term targets, obviously you expanded margins again in the shoulder quarter, I guess you could say. Any targets there or, you know, EBITDA margins or operating margins you could share with us?
spk03: I'll take that one, Brian, instead. I mean, you know, we've been showing a very strong improvement year over year over year now of 100 basis points three years in a row. This year might be challenging to get to that level, You know, we're not done yet, though, but it's not a linear improvement every single quarter. But we do believe that overheads are locked down very well. We think MIX is helping us. Operating leverage will clearly, as volume comes back, you know, significantly bounce it up, you know, from where it is now as revenue volume comes back up. You know, 30 is where we ended last year. We'd like to stay there and hopefully add a little more this year. You know, but our goal is to keep looking for, you know, productivity, efficiency gains, And sales mix helps as well. And, you know, we look to keep improving that each year, year over year. Maybe not by that same exact magnitude every year, but, you know, 30 is a good goal we're going after for this year.
spk05: Okay, great. And then just lastly and real quickly, just what services are you providing in the private space subsector of aerospace? And, you know, how does that?
spk02: uh differ from from what you do in traditional you know uh parts inspection or supply chain work in the other sub sectors curious i'll i'll jump that quick and throw it to john so it's really about this consolidating all the different uh steps of a supply chain and helping them out so we started out with duty inspection like anything brian you're talking about a raw casting or you know some type of stamp part or something that's coming out and then they needed uh heat treated and when you do an inspection you're going to find some defects and you've got to remove some of the defects and you may have to do well build back up to things like that and or measurement on deflection from the heat and all the different things that are going into it. There's a lot of steps just to get the pre and post inspection and we're taking on more of those steps because it's really just a very cumbersome supply chain when you've got to ship from one part of the country to another or in Europe, you know, from one country to another to get the different steps done. So by taking on more and more of that, we even got to the point where we're taking on, for some of our customers, we're taking on project management of some of the parts. And it's really just, it's not only we do that in shops or we do it in the field, but it really plays a big dividend and a meaningful difference in how many parts are accepted and how fast they get through. John, if you want to add on that.
spk06: Yeah, no, I think Dennis captured it really well. The only thing I think I would add to that is that we're also layering on top of this Mistras Digital. So we've got a terrific Mistras Digital team, so shout out to them, because they are very innovative and very responsive to customers' needs. And so we are creating, have created, a data portal, which allows our key customers to observe the status of their parts at various stages of the processes Dennis just described between mechanical modifications that we may be doing on behalf of customers or repeated steps of inspection as needed.
spk05: Okay, great. Thank you very much. Thanks, Brian. Thank you.
spk01: And once again, for any questions, you can press star then 1 on your phone. And I'm not seeing any other questions in queue.
spk02: Okay, Maddie, thank you. I'll close it up. I'd like to say that the whole MISRUST team would like to thank you for joining our call today, and we wish everyone a safe, prosperous, and healthy future. Thank you for joining, and have a great day.
spk01: And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
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