Mistras Group Inc

Good day, ladies and gentlemen, and thank you for joining Ms. Russ Group's conference call for the first quarter of fiscal 2022. My name is Daniel, and I will be your event manager today. We'll be accepting questions after management's prepared remarks. Participating on the call from Ms. Russ will be Dennis Bertolotti, the company's president and chief executive officer, Ed Preissner, executive vice president, chief financial officer, and treasurer, and John Wolfe. 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 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 containing 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 Investors section, and on the SEC's website. I will now turn the conference over to Dennis Bertolotti.

Thank you, Daniel. Good morning, everyone, and thank you for joining us today. In the first quarter, revenues were up year over year for the seventh consecutive quarter since the death of the pandemic, even as our end markets continue to recover. This is a strong signal that our strategy to expand our value-added services across all of our business lines has been successful, especially considering our growth has been accomplished despite several of our end markets remaining below pre-pandemic levels. Adjusted EBITDA for the first quarter was also essentially in line with our expectations. Consequently, we are confident that we are well positioned to achieve revenue growth with expanding adjusted EBITDA margin for the full year. Ed will provide details on a full year outlook later. We expect to achieve these improved results based on stable performance in our core operations and increasing contribution from our growth initiatives in renewable energy, private space, and data solutions. Our growth initiatives related to data solutions are very promising, and we continue to see our offerings winning over new customers and enhancing value to our existing customers. So not only is OneSuite winning new customers, it is also currently leveraging enhanced functionality of its applications firmly across our core oil and gas customers. The software will differentiate us in three different ways. First, customer retention. we will become an even stickier component of our customers' daily activities as they continue to utilize our more than 85 unique applications. Second, by unlocking unique insights and direct benefits, we will create value for our customers from our applications, which they cannot achieve with other vendors. And third, by ultimately monetizing the overall digital platform through greater use of the underlining applications, along with related licensing and consulting fees as customers increasingly integrate our applications and seek our analysis of their data. We will leverage our applications and automate analysis where possible. More importantly, subject matter experts who make the most of the data generated for the benefit of our customers on a daily basis will remain a pivotal piece of our value-added services. Revenue for the quarter was up 5.2% and was achieved despite a slow start to the downstream sector of an otherwise strong spring turnaround season. The slow start primarily reflects delays and other deferrals caused by both supply chain issues at customer sites as well as continued effort by customers to capitalize on high barrel prices. Consequently, ramp-ups that usually take place earlier in the quarter did not fully start until mid-March. April activity is in line with historic norms, and we expect it to continue through the balance of the spring season. Our upstream business was largely unaffected by recent volatility in oil prices or supply chain issues, with strength in offshore drilling and land-based projects in Canada and Alaska. The midstream sector results were as expected, with a solid increase for inline inspections up over 10%. Downstream and petrochemical sectors were, however, a little slow in the first quarter due to the overlapping schedules and slight profit-taking. We expect activity to be consistent with historic norms for the full year. These different recovery levels reflect the independent nature of the distinct market of the overall energy space which we participate in. We are very optimistic about our aerospace and defense business, which includes commercial, defense, and private space. Revenue was up significantly in this sector in the first quarter at 24%, and we believe this will be a long-term growth market for us. Our experience helping our customers manage their global supply chains, created and executed for Safran in Europe, is prompting new opportunities which are materializing in North America. As an illustration, a customer recently partnered with us on purchasing and qualifying equipment in order to create machining capability for them. which alleviated a major bottleneck in their supply chain. We are optimistic that our growing experience helping to manage our customer supply chains will continue to expand this new value-added MISRA service offering. And we are growing increasingly confident the commercial aerospace market, which has been in a severe slump for two years, is finally on the verge of a recovery. Foundries, casting houses, and others are telling us to be prepared for significant volumes of material they expect to be shipping to us for testing in the second half of 2022. With our private space business already going strong, we expect this high margin sector of our business to resume its overall growth later in the year and continue to the second half success in 22. The industrial and other process industry sectors also had very strong growth in the first quarter, which further illustrate the benefits being realized in our push for greater diversification in our end markets. So with the growth experience in the first quarter, we have a clear path to our full-year revenue expectations and we'll give full-year guidance later in this call. We also expect gross margin to expand significantly over the balance of the year based on an improvement in sales mix and further efficiency gains. Gross profit dollars in the quarter were flat with a year ago. Although gross profit margin was down, however, excluding almost $3 million differential of items, which are one time in nature and not expected to reoccur, particularly in the services segment, both gross profit dollars and margin would have been up from a year ago. International gross margin increased from a year ago. So it's clear to see why we believe gross margin will be up for this year. Ed will walk you through those details. Overhead costs remain under control. consistent with the level we operated in at the first quarter of 2019's pre-pandemic period, as we intently focus on improving our operating leverage. Given that the first quarter is always our seasonally slowest, we believe our performance continues to reflect progress across our strategic initiatives. As noted earlier, our private spaceflight business is not only growing, but it is creating new opportunities. Both aerospace and private space customers are asking us about solutions to their supply chain challenges. We are finding initial success in private space, an industry that is less impacted by historic norms and that is open to new ideas. They are even willing to help us fund the procurement of dedicated equipment with our assurance to assist them with the additional parts for their supply chain. For instance, our facility in Georgia We are preparing and partnering with a customer to emulate our Le Creusot France facility, undertaking a multitude of value-added operations from testing to machining. This saves cycle time and reduces costs for our customer. This is great business for Mistrust as it leverages our existing physical assets at very little incremental cost and presents a new solution to many companies experiencing global supply chain challenges. As our aerospace business resumes its growth, it will need incremental growth. It will add incremental growth to our results and is another reason why we are confident gross profit dollars and gross profit margin for the full year will significantly improve for the first quarter. I'm also very pleased with the progress being achieved with our Sensoria wind blade monitoring and insights web portal. In the first quarter, we began monitoring a new customer's entire wind turbine farm. expanded our data analytics team, and began to finalize the automation of our monitoring capability. Since Sawyer represents a unique growth opportunity that leverages our existing sensor and acoustic emission technology at minimal incremental cost, it offers the potential for three revenue streams, sensor sales, 24-7 monitoring, and turbine and blade repair, which align nicely to our current business model and existing revenue streams. Compared to current testing and maintenance practices, Sensoria represents a quantum leap forward in our safety, efficiency, and cost for owners and operators of wind farms, both large and small, both onshore and off. As we expand capacity, we expect to see Sensoria contribute to the growth of our power generation revenues. We still expect to be monitoring 60 to 100 turbines by the end of this year, along with the capacity to be monitoring up to 1,000. by the end of 2023. We continue to see the benefit and application of Sensoria to monitor many different OEM and megawatt capacity turbines, and I am excited for the future of this unique growth opportunity for Mistrust. Finally, one fleet which we have previously described is our version of an industrial app store, as well as our complementary data solutions are gaining traction. We've already implemented OneSuite in 36 separate installations, spanning 110 unique customer sites with over 800 individual subscriptions since its inception, starting at zero users in January of 2021. And we are seeing a steep ramp up in a number of customers and users accessing the OneSuite platform. This is demonstrating that customers are becoming increasingly dependent on the data and tools available in OneSuite. It enables them to turn data into actionable insights using AI, predictive analytics, and the other advanced technology hosted in OneSuite to help them better manage their assets. Because the MISRA's data solution strategy has three primary objectives, improving customer retention, improving the value added, and ultimately monetizing our digital capabilities, we anticipate further expansion of OneSuite utilization throughout this year, with revenue doubling in the second half into OneSuite applications. Both OneSuite and Sensoria represent an evolution in asset protection through which Mistrust is uniquely qualified to leverage our proven capabilities and expertise. These interrelated data solutions combine to create a robust predictive analytical platform delivering an enhanced ROI for our core and new customers. I am very excited about our prospects for growth in these new areas of opportunity in 22 and beyond. I would now like to turn the call over to Ed to give you more detail on our financial results for the first quarter.

Thank you, Dennis, and good morning, everyone. We met or exceeded our top-line expectations for the fourth consecutive quarter with the bottom line near expectations as well. We continue to string together a record of consistent growth despite operating in markets that have not fully returned to pre-pandemic levels. This reflects the ongoing strengthening of our business, the increasing leverage in our business model, and the success of our growth strategy. Turning to results for the quarter, consolidated revenue increased 5.2% over the prior year to $161.7 million. Revenue growth in the quarter was driven primarily by strong performance in upstream, aerospace, and industrials. Our growing data solutions business, which includes existing software licenses and monitoring, plus the rapid adoption of OneSuite, as well as Sensoria's sensor monitoring and data analysis business and other software, is growing nicely. We expect OneSuite revenue to double in 2022 over 2021 as we begin to monetize our digital strategy. Gross profit for the quarter was approximately $40 million, with a gross margin of 24.7%. Gross margin was lower in the first quarter compared to the prior year, primarily due to higher health care costs in North America and other non-recurring items in the first quarter compared to the year-ago period, amounting to almost a $3 million differential year over year. That was $2 million more in the current year, $1 million less in the prior year. Normalizing for these items, as Dana said, gross profit margin was comparable year-over-year. Furthermore, factoring in the prior year 401 match and wage subsidies which expired, gross margins would have actually improved year-over-year. Note that the 401 match resumed in August of 21 and the Canadian wage subsidies expired in October of 21, so these headwinds will continue to impact comparability in the second and third quarter. Despite these headwinds, and as Dennis mentioned, we do expect gross margin over the balance of the year to trend significantly higher than Q1 from an improved sales mix and efficiency improvements. Selling general and administrative expenses in the first quarter were $42 million, which is down sequentially from the fourth quarter by 1.7%. Cost containment remains a focus, and among the main reasons we are confident we can increase the leverage in our business model. We expect overhead to remain at about the current level over the remaining quarters of this year. For the quarter, we reported a gap net loss of $5.4 million, or 18 cents per polluted share, which was consistent with the prior year. Adjusted EBITDA for the quarter was $5.5 million compared to $7 million a year ago. Relatively consistent with our most recent expectation, especially given the non-recurring items which impacted gross profit, which I mentioned earlier. Our effective income tax rate, actually a benefit this quarter, was 19%. For modeling purposes, we would anticipate an effective income tax rate of approximately 30% for the full year of 22. As is typical for us, we consumed cash in the first quarter as we built up net working capital. In particular, accounts receivable extended out seven days on average, which adversely impacted our free cash flow. This was primarily a function of March being the biggest billing month of the quarter, so the increase in AR is a function of heavy quarter-man billings. We expect free cash flow for the year to approximate 50 percent of our adjusted EBITDA, which is in line with our historical conversion ratio. The only exception is a discreet $4.5 million CARES Act-related payment of deferred payable taxes due by December 22, which will be a reduction in this year's cash flow, as well as in the EBITDA conversion ratio. we expect capital expenditures for the year to approximate $20 million. The company's net debt increased by $10.4 million in the first quarter to $188.9 million, compared to $178.5 million as of year-end, as a result of the aforementioned increase in net working capital. Given that our priority use of cash flow continues to be the reduction of outstanding debt, we believe our anticipated full-year free cash flow expectations will enable us to end the year at or below our targeted leverage ratio of equal to or less than three times. At that level, we intend to evaluate our use of cash flow as a means to accelerate growth. 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. Energy prices and demand have improved since that time. Our end markets are rebounding to pre-pandemic levels. Our second largest market, aerospace and defense, particularly the commercial sector, has been lagging other than market recoveries, although an accelerated improvement is anticipated in commercial aerospace in the second half of 2022. Accordingly, for the full year 2022, we expect to grow revenue to between $695 to $715 million, which should generate adjusted EBITDA of between $65 to $69 million. Our free cash flow is expected to be between $27 and $30 million after the previously mentioned CARES Act payroll tax payment of $4.5 million by December of this year. Given strong energy markets, improving commercial aerospace demand, robust industrial manufacturing, and a rapidly developing data solutions, we are confident in achieving our outlook projections. Our business model is robust and sustainable through extremes of economic cycles. And we remain firmly committed to executing our plans while 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.