Mistras Group Inc

Thank you for joining Ms. Rose Group's first, sorry, conference call for this third quarter ended September 30th to 2021. My name is Victor and I'll be your event manager today. We'll be accepting questions after the management's prepared remarks. Participating on the call for Ms. Rose will be Dennis Bertolotti, the company's president and chief executive officer, Ed Prasner, 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. 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 include certain financial measures that were not prepared in accordance with 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 8K. These reports are available at the company's website in the investor section on the SEC's website. I will now turn the conference over to Dennis Bertolotti.

Thank you, Victor. Good morning, everyone. The third quarter was a strong encore to our second quarter results, clearly illustrating that we've reached an inflection point in our projected growth for 2021. Just like the second quarter, our performance exceeded expectations in the third in both our top and bottom line financial results. Despite the impact of Hurricane Ida, we achieved revenue at the top end of our outlook range. And we do expect a good point of those revenues, I'm sorry, a good portion of those revenues lost from IDA to be made up in the coming months. Looking at some highlights for the third quarter, consolidated revenue was up 18% with continued strength across all of our end markets, with the sole exception of the industrials. But the aerospace and defense markets were both up nicely in the quarters. Gross profit increased nearly $5 million from last year and gross profit margin was approximately 30% despite the higher proportion of revenue attributable to reimbursable travel costs this quarter. We had discussed this expected scenario in our earlier calls this year, which creates lower anticipated gross profit margin but higher gross profit dollars. Nevertheless, Gross profit margin in the third quarter was actually up from that of the first six months of this year by over 100 basis points as we continue to focus on efficiency and productivity improvements and have achieved a favorable sales mix. We expect the fourth quarter gross profit margin to be comparable to the third. In our continuing efforts to improve operating leverage, SG&A expenses were reduced in the third quarter sequentially from the second. And this was despite the fact that the third quarter included the final reversal of cost that had been temporarily reduced last year. This is clear evidence that cost containment remained the top priority for us. As a result of our efforts of our operating income of $9.2 million for the third quarter was an approximate 61% expansion over the same period last year. And the net income more than doubled that from a year ago, while our adjusted EBITDA margin was nearly 11%. In summary, this is a very solid quarter illustrating that we are sustaining the momentum that our robust and evolving business model has been developing. At the same time, we are continuing our investment in new technologies, including our data initiatives such as OneSuite and Sensoria, which will further differentiate us from our competition. An example of an early adopter of such technology, a MISROS customer, which is a large midstream company, wanted to ensure asset integrity for its equipment located in dozens of plants across seven Midwestern states. The OneSuite ecosystem was selected by this company because it offered a secure cloud environment for centralized data management, a single access point for plant personnel, and integrated apps that perform asset integrity calculations. The company subscribed to data management and analytical apps that assist with the compliance and business initiatives offering additional insights and recommended actions. All of this was enabled via OneSleep. I will elaborate further on both of those two exciting initiatives later in my remarks. Looking more closely at our various industries served, revenues in our energy markets were strong again in the third quarter. in part due to the recent strength of crude oil prices and demand approaching pre-pandemic levels. These conditions have motivated our energy industry customers to maximize their production levels, which potentially limits our ability to perform offline services, thus potentially decreasing our level of activity during maintenance outages. Nevertheless, our run and maintain services do, however, provide us a window wherein we can remain on-site, providing inspection services while our customer is running at peak production level. Our focus is to use technologies to learn more for our customers while they are online. So while the markets have certainly improved relative to a year ago, the industry is balancing their inspection needs against an opportunistic time to benefit from favorable economic conditions. Over the intermediate term, We continue to believe the energy markets will remain our largest opportunity in both traditional and especially in the growing renewable sector. We have a multi-pronged strategy to succeed in energy. First, by continuing to take profitable market share. Second, by expanding our scope of services. And finally, by introducing new products. Keep in mind that on average, over time, about 70% of the revenue generated in our energy markets is from ongoing run and maintain business, which does not experience the dramatic peaks and valleys of capital budgets, nor is it overly dependent on periodic turnarounds. This is particularly helpful in the current climate, wherein our customers are tending to operate longer, taking advantage of high market prices for their product. As we continue to implement our strategy, we believe we will become an increasingly valuable partner, growing our share of this less volatile, reoccurring revenue, improving our stickiness with customers while expanding operating margins. Keep in mind that we are largely agnostic with respect to the source of energy power, and we have and will continue to flex into serving renewable energy providers, particularly wind. In this regard, I am very pleased to announce the Mistrust Sensoria wind blade monitoring technology platform. Sensoria is an innovative blade technology management tool, helping to drive operational excellence through real-time monitoring and damage detection. The industry norm of conducting periodic blade inspection leaves site operators in the dark on real-time blade integrity, raising operating and maintenance costs while reducing generating capacity. whereas Sensoria makes it easier than ever to maximize the uptime, performance, and safety of wind turbine blades via real-time monitoring. Sensoria simplifies the blade management process, helping owners make more informed integrity and even inventory planning decisions. We are currently validating our testing in the field, and we are very excited about the enormous opportunity to address both an aging wind farm fleet and incremental OEM opportunities that could arise. In the interim, we will continue to strengthen our position in this emerging and growing market by constantly improving our inspection, maintenance, and repair capabilities in the process of building relationships that can move into new Sensoria opportunities. And our wind business is growing from a solid foundation. We have been generating in excess of $15 million per year in turbine blade repair and maintenance revenue. This provides us with established relationships and technical industry knowledge, which we are using to move into the lucrative sensor and monitoring market. There we are adding new customers, and they, in turn, are adding new blades and hubs to those we already inspect in the wind turbine sector. We are demonstrating how our proprietary acoustic emission technology consisting of very sophisticated sensors and detection algorithms can provide better information faster than the inspection technologies currently used in the market today, which primarily rely on less sensitive vibration technology. This is an exciting and rapidly evolving opportunity. I encourage you to learn more by visiting sensoriawind.com. In the aerospace market, we continue to grow both our defense and private space business while the commercial aerospace sector recovers. Our private space revenues are growing nicely, offsetting some commercial revenue that is soft and is the main reason our aerospace revenues are up 14% in the third quarter as compared to the prior year period. We anticipate further strengthening going forward, particularly as the commercial sector recovers as anticipated throughout 2022." This was another quarter in which we continued to narrow the gap with pre-pandemic performance, especially in our energy markets. Our inline pipeline inspection business, led by OnStream, had a very strong third quarter and is on pace to have their best year ever in 2021. The last few quarters are a sign that we are well positioned to return to more normal economic conditions and strong bottom line results. I would now like to turn the call over to Ed to give you more detail on our financial results for the third quarter of 2021.

Thank you, Dennis, and good morning, everyone. It truly was another outstanding quarter in which we achieved the high end of our revenue outlook and met our bottom line goals as well, with a significant expansion in operating profit and net income. As Dennis said, coming sequentially on the heels of one of our most profitable quarters, our ability to follow up that with the strong second quarter with yet another strong quarter clearly suggests that we have reached an inflection point. And we are working very hard to sustain this positive momentum. For the three months into September 30, 2021, consolidated revenue increased 18% over the prior year to $174.6 million, which was down less than 2% on a sequential basis from our very strong second quarter. Revenues were up in the third quarter due to organic growth, as well as from the additional benefit of a low single-digit favorable impact of foreign exchange. Revenue in our largest end markets, energy and aerospace and defense, both increased significantly over the prior year. We expect the energy markets to remain strong in the fourth quarter as well. Although, as Dennis mentioned, they are contending with an industry that is focused on running their plants at high capacity because of strong crack spreads, as well as building up inventory levels, not to mention the typical seasonality seen in the fourth quarter. We expect aerospace and the defense market to continue to recover, albeit slower than the energy markets, with the exception of private space sector, wherein revenues have grown robustly year over year. We believe the traditional oil and gas market remains a large market opportunity over the next few years, where we can grow modestly by taking market share and adding additional services while reducing volatility and improving returns. Gross profit dollars increased by nearly $5 million in the third quarter over the prior year, over $18 million on a year-to-date basis, while gross profit margin contracted from a year ago as we had anticipated. To reiterate, compared to a year ago, we had a much greater proportion of revenue attributable to reimbursable travel costs which yield little, if any, gross profit dollars. Nevertheless, gross profit margin in the quarter was up over 100 basis points compared to the first half of this year, a clear indication of the progress being achieved in improving productivity and efficiencies. During our second quarter commentary, we had noted that we would be reversing the remaining temporary cost reductions from 2020 that were not already restored, and that this would modestly increase overheads in the third and fourth quarter of 2021. Well, we are proud to report that those costs are now fully restored, yet SG&A costs in the third quarter were actually down modestly sequentially from the third quarter. This was due to our continued focus on overheads, as well as the benefit of a slightly favorable FX translation conversion rate. Demonstrating our continued efforts to improve the operating leverage in our business model through both expanded gross margin dollars and tight overhead expense control, operating income was up nearly 61% in the third quarter. Similarly, both net income and earnings per diluted share were up significantly from a year ago, both actually more than doubling, with net income of $3.4 million, or $0.11 per diluted share. Turning to the income tax rate, our consolidated effective tax rate was just over 50% for the third quarter of 2021. Due to an incremental discreet expense of $1.2 million, the EPS impact of this discreet item was about $0.04 per distributed share in the third quarter. We anticipate an effective tax rate of approximately 30% for the fourth quarter of 2021. Cash flow from operations in the third quarter was $4.2 million, and free cash flow was just under $1 million net outflow. Our significant increase in revenue this year has required us to fund the corresponding increase in working capital, particularly a build-up in accounts receivable. Nevertheless, we expect to be free cash flow positive for the fourth quarter and certainly for the full year, although the free cash conversion rate for the full year 21 will be below our historical average of approximately 50% of adjusted EBITDA. This is attributable to higher CapEx in the current year, and to the effect of one-time items, such as the repayment of the CARES Act payroll tax deferral, which is due in the fourth quarter this year. Our free cash flow conversion rate of approximately 13% for the first nine months of 2021 is lower than what we expect for the full year, as we anticipate that the fourth quarter will be a strong free cash flow period. On a year-to-date basis for the first nine months of 2021, operating cash flow was $22.5 million, and free cash flow was 6.5 million. Capital expenditures are running modestly ahead of last year, as expected, given the higher revenue volume, but we still anticipate total capital expenditures for the year to be in the 20 to $22 million range. The need to fund working capital has also temporarily slowed our debt reduction efforts. Nevertheless, at the end of September, net debt was below our $200 million goal at just 193.3 million. As previously noted, we spent pre-cash flow to rebound in the fourth quarter, and debt reduction remains our number one priority use of cash. More importantly, since we remain below a 3.75 leverage level as of September 30, 2021, our effective interest rate for the third quarter was just about 2.6%, and this will carry over into the fourth quarter as well. Actually, our consolidated debt leverage ratio, as defined by our credit agreement, has returned to pre-pandemic levels, wherein at the end of the third quarter, this metric was the lowest level it has been since December 31, 2019 measurement period. The result of this improvement and corresponding reduction in borrowing rate was a decrease in interest expense this quarter from 3.6 million in the prior year down to 2.3 million in the current quarter, which was a $1.3 million cash savings. It truly was another outstanding quarter where we sustained our momentum through the business, improved profitability, and met our financial expectations. Our business has been recovering from the low level of demand experienced in the second quarter of 2020 when the effect of COVID-19 peaked. Although energy prices and demand have improved throughout 2021, the ongoing COVID-19 pandemic continues to impact us. This effect is most pronounced on our second largest market, aerospace and defense, especially in the commercial sector. Accordingly, for the fourth quarter of 2021, we expect revenue to be flat with the prior year quarter, primarily due to energy markets' immediate focus on peak uptime and a lagging commercial aerospace recovery. Adjusted EBITDA is expected to contract modestly in the fourth quarter of 2021 due to substantially all of the remaining temporary cost reductions initiated in 2020 having been fully reversed during the third quarter of 2021, and a lower level of Canadian wage subsidies in 2021 versus 2020. Our outlook for the remainder of 2021 is contingent on continuing macroeconomic stability, including continuing stabilization in the crude oil markets, ongoing effectiveness of COVID-19 vaccination and booster rollout, and no significant global supply chain disruptions or labor shortages, which would impact our ability to work as a critical service provider. Throughout the pandemic, and now as we rebound and recover, we have demonstrated Mishra's ability to quickly adapt to a challenging market, and not just for immediate results, but also to set the stage to capitalize on emerging opportunities. As we look forward to the end of 2021 and into 22, we are confident that our business model is robust and sustainable, and we remain firmly committed to executing our plans by maintaining our intense focus on cost containment while continuing to prudently invest in the business. That is our strategy both today and over the long term, and it will continue to be a very exciting journey. Although the energy markets, both oil and gas and power generation, are cyclical, they are currently stable and continuing to rebound further back to pre-pandemic levels. With this rebound, we are focused on continuing to gain market share by winning new contracts and expanding our services in complementary mechanical and data services, particularly via OneSuite. We are largely agnostic about the industries we support. We have and will continue to flex into alternative sectors such as renewable energy, particularly wind, as demonstrated by our recently announced sensorial offering, which leverages our core competencies, including acoustic mission monitoring. And with that, I will now turn the call back over to Dennis for his wrap-up before we move on to take your questions.