Mistras Group Inc

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.

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.

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.