Mistras Group Inc

Good day, ladies and gentlemen, and thank you for joining Mistress Group's conference call for its fourth quarter and year-end 2021. My name is Howard, 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 Bertolatti, the company's President and Chief Executive Officer, Ed Prisner, 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 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 Investors section, and on the SEC's website. I will now turn the conference over to Dennis Bertolotti.

Thank you, Howard. Good morning, everyone. Thank you for joining us today. In the fourth quarter, revenues exceeded expectations for the third consecutive quarter, reinforcing our confidence in our strategic initiatives and addressing the COVID-19 market challenges. Adjusted EBITDA for the fourth quarter was in line with our expectations. It was truly a great finish to a year of strong top and bottom line growth. Revenues for the full year increased over 14%, and gross profit dollars were up over 10%. Selling, general, and administrative expenses were up only a small fraction relative to the revenue increase due to our continuing focus on overhead. As a result, both operating income and net income improved substantially year over year, with adjusted EBITDA up over 21%, significantly more than our increase in revenue. illustrating the operating leverage built into our business model. These results were achieved while also continuing to invest in our growth initiatives throughout 21, including OneSuite, Sensoria, and Mistrust Digital, which I'll elaborate on more in a few minutes. A very crucial aspect of our recovery is the significant free cash flow we generated. In fact, we generated over $16 million in the fourth quarter alone, which we use to pay down our outstanding debt a year end. And we will continue to focus on rapidly reducing our debt. We have now paid down just over 90 million of debt over the last three years, significantly strengthening our financial condition. By staying focused on paying down debt through the rest of 22, we anticipate that we will gain flexibility in our capital allocation strategy and be in a position to potentially restart acquisitions by 2023. in order to enhance and accelerate our growth initiatives, our in-market diversity, and add increasingly smart and predictive data-centric solutions to our existing portfolio. MISRIS maintains a very strong financial foundation as we head into the new year. Jumping into our various in-markets, energy remains our largest, and our revenue in this industry was up nearly 17% in 21. We expect to maintain our growth in the energy market as it continues to rebound back to pre-pandemic levels of activity and expect continued growth within our petrochemical market, which we continue to expand our offering to this underserved market. Our success is built on our ability to respond to the market's demand to get more for less. This has been a major driver behind our investment in ruggedized tablets and digital data capabilities, as well as complementary mechanical offerings for all of our sectors. These efforts are making our total offering sticky as buyers look for partners that offer a smarter data solution and greater overall project value. We believe our digital offerings are a true differentiator, led by OneSuite, which is a unique offering within the industry. Essentially, it's our industrial version of the App Store. Users can access over 85 applications helping them to better understand and monitor the condition of their plant and equipment assets from a variety of perspectives. These applications also help them predict when they'll need to conduct needed maintenance, which ideally would minimize repairs and downtime. It's already been widely adopted at nearly 100 customers with over 1,000 individual subscriptions since the start of 21, and we anticipate further growth in 22. These inaugural users are currently executing several million processes and calculations monthly within their related applications, and we anticipate further expansion of OneSuite utilization throughout 2022. Crude oil prices now significantly exceed pre-pandemic levels, and this is certainly a positive for our energy industry customers. But at the same time, this has caused many refineries to run longer cycle times. as they capture the additional income resulting in the postponement or scaling back of planned inspections. And this more-for-less paradigm is also putting pressure on the industry. Consequently, this may and most likely will impact the spring turnaround timing, as customers who initially had heavy overlap of projects in certain sectors of the country are now making small timing adjustments with some deferrals until later this year and other case curtailments of the work itself. Regardless, we believe conditions will improve as we move through 2022. And on the strength of our digital strategy, led by MISROS Digital and OneSuite, our broad product offering and complementary mechanical services, we believe we can achieve our objective to grow our energy business. MISROS has a longer-term strategy to succeed in the energy market, first by continuing to take profitable market share, second by expanding our scope of services, and following by introducing new proprietary solutions. For instance, our OnStream acquisition, completed in December of 2018, gave us entry into the inline integrity testing market by utilizing internal pipeline inspection gauges to inspect the underground pipe. OnStream had a record revenue year in 21, and with our expanding diameter toolset service offerings, we expect additional growth from OnStream in 22. Our deep breadth of data services and product and service offerings are easily adaptable for us to expand into growing infrastructure and renewable energy sectors as well. One of our most exciting growth initiatives is the Mistrust Sensoria Wind Blade Monitoring and Insights Web Portal, our wind blade monitoring technology platform. Sensoria provides real-time detection and visualization of turbine blade damage utilizing our recently patented wind turbine blade monitoring systems based on our tried and true acoustic emission capability. Sensoria is currently in proof of concept on dozens of turbines with a variety of owners. Ultimately, we see Sensoria as the key to expanding what is already an approximate 17 million wind turbine blade repair and maintenance global business. We envision a service offering that includes the sale and installation of the sensors on the turbine, providing 24-7 monitoring service, and ongoing repair and maintenance of any damage detected. We are finalizing our proof of concept for this initiative, have generated some positive momentum, and we anticipate being in commercial operation in the later part of 22, monitoring up to 100 turbines. In addition, our goal is to expand our monitoring capacity for up to 1000 wind turbines by the end of 2023. I encourage you to learn more about this exciting new offering by visiting sensoriawin.com. Both OneSuite and Sessoria represent an evolution in asset protection, and MISRIS is uniquely qualified to leverage our proven capabilities and expertise to meet the needs of the changing global landscape. These newer data-centric tools complement our more established MISRIS digital mobile cloud-based field inspection. It's an execute and reporting platform which digitizes the field inspection process via a powerful end-to-end workflow solution. All of these interrelated data solution initiatives, when combined together, create a robust predictive analytical platform delivering an enhanced customer ROI. We are very excited about our prospects for growth in these new markets. In the aerospace market, we continue to experience outstanding growth in our private space business. Consequently, despite a weak commercial aerospace market, revenues in this overall vertical were down less than 3% for the full year, although we still lag significantly behind our 2018 market peak. While commercial aerospace revenues remain soft, we believe the waning pandemic and resultant resumption of air travel to be positive signs of an impending recovery in the industry, which we believe for us could begin as soon as the second half of 2022. Gross margin in the aerospace sector is very attractive, and growth in this vertical will provide a nice boost to our consolidated performance. I also want to note that we generated significant growth in our other process industry segment, which includes pharmaceutical and agricultural industries, as well as in our industrial segment, especially in this fourth quarter. It is great to see the growth being achieved in these other verticals, which is a result of the success of our strategy to find new sales outside of the energy sector. While the ongoing Ukrainian conflict has certainly caused an extreme volatility in the world oil and gas market, it has not, at this time, had a significant impact on Misra's current business. The U.S. and certain EU countries have imposed immediate restrictions on various Russian oil and gas activity, and we are in the process of assessing the specific impact this could have on our customers and on us. We are also addressing the overall potential risk this situation might have on our business going forward. But at this time, there are still many unknowns and uncertainties. In summary, it was a strong finish to a year in which we organically grew the business, we increased profitability and strengthened our financial condition while rapidly approaching pre-pandemic performance. At the same time, we made significant investments in the business to bring innovation and new products to the market that will fuel the next leg of our growth. 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 pull year 21.

Thank you, Dennis, and good morning, everyone. We are certainly pleased to report another strong quarter reflecting an ongoing gradual recovery wherein our financial performance is steadily approaching pre-pandemic levels. MISTRS keeps getting stronger each quarter, and this quarter we exceeded our top-line guidance and generated adjusted EBITDA that was in line with our expectations. We exited 2021 with strong momentum, and we expect this will be maintained throughout 2022, particularly in the second half of this year. Turning to the results, for the quarter, consolidated revenue increased 6.5% over the prior year to just over $171 million. Revenue growth in the fourth quarter was driven primarily by industrials, aerospace and defense, and other process industries. As Dennis mentioned earlier, we are pleased to see the success of our strategy to diversify our revenue based beyond our core in the energy market. Gross profit for the quarter was $49.6 million, a very nominal increase as compared to the year-ago period. Gross profit margin was 29%, down from 30.7% a year ago. primarily due to higher benefit costs in the U.S. and lower Canadian wage subsidies in the current year quarter compared to a year ago. Selling general and administrative expenses in the fourth quarter of 2021 were 42.8 million, up from 40.5 million in the fourth quarter of 2020. This increase was due primarily to the removal of temporary COVID-19 cost reductions in August of 2021, which had been initially implemented in 2020. Despite these added costs, we were able to limit our full-year overhead increase to just 2.7 percent, which was significantly below our annual revenue growth rate, again, improving the operating leverage in our model. On a full-year basis, operating income was up substantially to just over 18 million, and on a non-GAAP basis, it was 22.3 million. This was an improvement of over 200 percent for the full year. For the quarter, we reported a gap net loss of just under $100,000 compared to net income of just under $200,000 in the same quarter a year ago. Adjusted EBITDA for the quarter was $14.6 million and was in line with our expectations. As anticipated, operating and free cash flow rebounded quite significantly in the fourth quarter. Cash flow from operations in the fourth quarter was $19.8 million and free cash flow was $16.5 million. Free cash flow was net of a $4.5 million cash repayment made in December 2021 related to employer payroll taxes deferred under the CARES Act from fiscal 2020. Our free cash flow conversion of adjusted EBITDA was over 100% in the fourth quarter, 114% to be more exact. We anticipate being back to our approximate 50% average conversion of adjusted EBITDA into free cash flow during 2022. Our annual effective income tax rate was approximately 47 percent, including discrete items recorded earlier in the year. That added approximately 17 percent to the overall rate. We anticipate an effective income tax rate of approximately 30 percent for full year 2022. Looking back at results for the full year, revenue was up over 14 percent, with all of our end markets growing, with the exception of aerospace and defense, for all the reasons Dennis mentioned earlier, and infrastructure, which had a large bridge project benefiting the prior year results. Gross profit for the year was $197 million, which is an increase of over 10%. Gross profit margin of 29.1% was a contraction of 100 basis points attributable to higher benefit costs in the U.S. in the current year period and lower relative Canadian wage subsidies in the current year, as I had mentioned earlier. Selling general and administrative expenses were held to just a 2.7% increase on a full-year basis, despite the reversal of remaining COVID-19 temporary cost reductions in August of 2021, as originally implemented in April of 2020. Thus, by controlling overhead, we expanded the operating leverage in our model, with non-GAAP operating income up over 200% for the year, while adjusted EBITDA grew by 21% to $63 million. CapEx for the year was just over $19 million, up modestly from a year ago due to the significant revenue increase, and this was in line with our expectations. Because of our asset-like model, you can expect a typical capital expenditures budget of approximately 3% of annual revenue for the upcoming year. As Dennis said, debt reduction remains our number one priority use of cash, and this year we used cash to pay down gross debt by $16.3 million. Over the past three years, we have now reduced our total debt by just over $90 million. As of December 31, 2021, our consolidated debt leverage ratio at just over 3.5 times as defined by our credit agreement is the lowest level it's been since the third quarter of 2018, which was prior to the on-stream acquisition, and it remains well within the limits of our current covenant requirements. Our goal is to lower our leverage level to less than three times by the end of 2022, and we are well on our way to doing so. This will facilitate a more flexible capital allocation strategy by 2023, as Dennis mentioned earlier. Our business has been recovering since the low level of demand experienced beginning in the second quarter of 2020 when the initial effect of COVID-19 peaked. Although energy prices and demand improved during 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, where a rebound to pre-pandemic levels is lagging other end markets. More recently, with crude oil prices now significantly exceeding pre-pandemic levels, this has caused many refineries to run longer cycle times, resulting in the postponement or scaling back of planned inspections. Consequently, this may impact the timing of the spring turnaround as customers who had initially had a heavy overlap of projects in certain regions are either curtailing or deferring work to later in the year. Regardless, we believe conditions will improve throughout 2022. For the first quarter of 2022, we expect revenue to be a low single-digit increase as compared to the first quarter of 2021. and we expect adjusted EBITDA to be essentially flat in the first quarter of 2022 compared to the first quarter of 2021. Keep in mind that the first quarter of 2021 benefited from a significant level of Canadian wage subsidies and the temporary cost reductions that had remained fully in place through August of 2021, thus also benefiting the first quarter of last year. Overcoming these significant headwinds to achieve a flat first quarter on adjusted EBITDA as compared to the prior year shows our continued focus on cost containment and expanding our operating leverage. This outlook is contingent on continuing geopolitical and macroeconomic stability, including stabilization in the crude oil future market, ongoing effectiveness of the international COVID-19 vaccination rollout, no additional global supply chain disruptions or labor shortages, which would impact our ability to work as a critical service provider, and no significant additive inflationary pressures on our business model. Again, the ongoing conflict in the Ukraine is certainly an extremely volatile situation with unknown impacts to world energy markets. We are reviewing the potential impact this might have on our business in the immediate term, including US and EU sanctions on Russia. This will certainly have an adverse impact on the world's oil and gas market in the short term, although this will be partially mitigated to this risk by the fact that our business is geographically more concentrated in North America and Western Europe than the regions more directly involved in the ongoing conflict. Currently, we do not maintain any operations within Russia and our exports to Russia are very limited. Over the long term, it is too early to tell yet as to what impact the current crisis and related sanctions will have on our business. We are highly confident that our business model is robust and sustainable through the extremes of economic cycles, and we remain firmly committed to executing our plans by maintaining our intense focus on cost containment while continuing to prudently invest in our business. That is our strategy both today and over the long term. 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.