Mistras Group Inc

Good morning, ladies and gentlemen, and thank you for joining Ms. Stross Group's conference call for the second quarter of Physical 2022. My name is Kurt Wright, and I will be your event manager today. We'll be accepting questions after management's prepared remarks. Please press star 11 on your phone to join the Q&A roster. Participating on the call for Ms. Stross will be Dennis Bertolotti, 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 the conference call will include forward-looking statements. The company's actual results could differ materially from those projected. Some of those factors can result 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 US GAAP. Reconciliation of these non-US GAAP financial measures to the most directly comparable US 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 Investors section on the SEC's website. I will now turn over the conference to Dennis Berlotti.

Thank you, Kurt. Good morning, everyone, and thank you for joining us today. I am continually excited about the future of Mistress and I want to thank our employees for their efforts as they continue to serve our customers and exceed their expectations. This quarter was extremely busy as we closed a new credit agreement, we experienced continued recovery in our end markets, and expanded the growth of our strategic initiatives in data and digital solutions. Revenue this quarter was up year over year for the eighth consecutive quarter. We have continued to see strong demand in our key end market, and we are optimistic for the second half of this year. Our aerospace and defense business was up nearly 33% in the second quarter as the commercial aerospace market surged forward as we had anticipated. This rebound in commercial aerospace, coupled with strong growth in both the private space and defense markets, gives me confidence of this industry's ongoing recovery and expansion. and validates our ability to meet and exceed customers' needs. I am also optimistic for strong third quarter results, which would keep us in line with our full year expectations. Adjusted EBITDA for the second quarter was $18.3 million, down from a year ago, where a favorable sales mix was more than offset by gross margin pressure due to inflation. We expect gross margin to improve as we move through the remainder of the year, primarily by maintaining a favorable sales mix and taking proactive measures such as selective pricing adjustments in line with the inflationary cost pressures we have mostly been absorbing. Consequently, with the expectation of continued growth in the third quarter and confident and strong fourth quarter results, we reaffirm our 22 full-year guidance. While we are showing progress with our diversification initiatives, Energy remains our dominant market. The second quarter got off to a good start with strong April results, but as we move through the quarter, we began to experience delays and deferrals concentrated once again in the downstream business where near records crack spreads have refineries targeting high utilization rates. In our midstream business, on stream had record revenues in the second quarter and we see this trend continuing into the later half of 22 given market demand projections. In contrast to our downstream business, high production levels and the corresponding transportation and distribution activities are increasing demand for pipeline inspections. Consequently, we expect a strong recovery in our energy business in the third quarter and a return to historical patterns in the fourth. As I mentioned earlier, and as we had anticipated, our aerospace and defense business has strengthened in the first half of 22, and in fact is up over 28%. And we expect this positive momentum to continue through the remainder of the year. Private space remains strong, and we believe our focus on reducing the production cycle time for parts will continue to drive faster growth in that market. While the supply chain remains a challenge to this industry, it has created an opportunity for Mistrust to leverage a solutions business we developed by alleviating supply chain issues as we had done previously for our customer SACFRAN in France. We are quite excited that the expansion and installation of a new machining equipment and capabilities at our Georgia Aerospace facility is nearly complete. Now we can perform adjacent value-added services, such as machining for inspection procedures, saving cycle time, and reducing transportation, which reduce production time and cost for our customers. We are excited to get this operation running so that we can further leverage our capabilities in private space, aerospace, and defense industries. As part of our Aerospace and Defense Growth Strategy, I'm very pleased to announce that the Honorable J.M. Cohen has joined the MISRUS team as an Advanced Technical Solutions Consultant. Retired Admiral Cohen will help MISRUS expand its footprint in the military and defense, maritime, and marine sectors leveraging his extensive knowledge of the naval industry, catalog of high-level contracts, and experience navigating government procurement procedures. In our renewables business, Sensoria continues to grow. Many of our ongoing pilots and demonstrations are quickly scaling up to full commercialization, with approximately 50 wind turbines now being monitored. This puts us while on the way to achieving our goal of monitoring up to 100 wind turbines by the end of 2022, with the prospect of greater growth in 2023 as we rapidly expand our capacity. Our continued focus on renewables includes penetrating the wind farm market and building relationships with OEM manufacturers. Our attention remains on both large and small wind farms, including the market for massive offshore turbines. Finally, our data solutions business, especially PCMS and new century software had a strong quarter. OneSuite adoption continues to increase as it integrated applications now standing over 90 have been installed at nearly 40 unique customers spanning over 150 sites with close to 900 individual subscriptions. That is considerable growth in the last 90 days. OneSuite remains on track to double its revenue this year and enter 2023 with strong momentum for continued growth and expansion. The other process industries markets also had strong growth in the second quarter, which further illustrates the benefits being realized in our non-energy business and our push for greater diversification in our end markets. Continuing to increase revenue diversity should also benefit gross margin going forward. as virtually all these industries carry an above corporate average gross margin. I will go through the details in a minute, but gross margin in our energy business should also begin to benefit from pricing actions we are taking due to rising labor costs. Recently, we have seen more acceptance from a market that has been historically resistant to price increases. As we continue to implement our pricing strategy, we expect to see this gradually increase our gross margin over the next few quarters. Also, I would note that overhead today is little changed from what it was three years ago in the pre-pandemic 2019. Despite current inflationary pressures, we believe we have a great opportunity to improve operating leverage and grow the bottom line faster than revenues. Additionally, I am pleased to announce a new credit facility which provides us with much greater flexibility and liquidity to fund our growth initiatives, particularly our strategic initiatives and data solutions and renewable energy. It will enable us to both enhance our organic growth initiatives as well as accelerate the pace at which we consummate strategic acquisitions, thereby creating value for our shareholders while investing in our employees and infrastructure. It also demonstrates the strong confidence in MISROS exhibited by a supportive consortium of seven strong financial institutions led by the two largest financial institutions in the U.S. Ed will provide additional details shortly. I'm looking forward to the second half of the year, where we could have our strongest ever quarterly services segment revenue in the third quarter, achieve a full year doubling of one suite revenues, monitor up to 100 wind turbines, benefit from an expected rapid recovery in the commercial aerospace market, and launch our new supply chain service for the aerospace, defense, and private space industries. effectively transcending the lingering effects of the pandemic and energy market volatility. Inflation remains an ongoing challenge, but we are making progress on that front. Our improved financial flexibility, as Ed will discuss during his comments, the cost reduction initiatives we are initiating, and our pricing actions will help partially offset these impacts. As the year progresses, Our new credit facility provides flexibility to increase our investment in both organic growth initiatives and more closely evaluate acquisitions that meet our strategic objectives. I'm optimistic about the prospects for growth in both our existing and new markets 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 second quarter.

Thank you, Dennis. And good morning, everyone. Revenue in the second quarter was up year over year for the eighth consecutive quarter as we continue to extend our record of consistent growth. Results were once again a mix of strength in key markets that continue to recover from the pandemic, offset by the continuing challenges in the energy market, which is operating at peak capacity utilization. Our efforts to diversify away from an energy concentration have been progressing. And as Dennis just mentioned, many of our new growth initiatives are meeting expectations. Turning to results for the second quarter, consolidated revenue increased approximately 3% on a constant currency basis to $179 million. Nominally, revenue was up approximately 1%, with growth driven primarily by strong performance in oil and gas, aerospace and defense, and other process industries. Oil and gas was up overall on the strength of up and midstream. However, as the quarter progressed, we experienced pushouts and deferrals in our downstream business. It's clear these were mostly deferrals as we've already seen a rebound early in the third quarter in our services segment. Hence, as Dennis said, we anticipate a strong third quarter and we expect to be on pace to achieve our original 2022 revenue growth projections. Gross profit for the quarter was approximately $54 million with gross margin 29.9% compared to 31.1% a year ago. Gross margin continues to reflect higher healthcare costs in North America and the lag in price increases in response to inflationary cost increases. In addition, gross margin in the year-ago quarter benefited from pandemic-triggered Canadian wage subsidies, which have since expired. Beginning in the third quarter, we will be comparing against the year-ago quarter in which almost all of the pandemic-related benefits had expired. So, we will have a truer, cleaner apples-to-apples comparison for all future periods. This will more clearly demonstrate the progress being achieved on gross margin, which we expect to trend significantly higher over the balance of the year from increased volumes, improved sales mix, efficiency improvements, and pricing increases. Selling general and administrative expenses in the second quarter were $40.7 million, which is down sequentially from $42 million in the first quarter, although up 2.4% from a year ago, much of which relates to inflationary pressures. Despite these ongoing pressures, we expect to maintain overhead at the current level over the remaining quarters of this year, and it's also one of our keys to increasing operating leverage. Interest expense for the quarter was $2.1 million, down from $3.2 million in the same quarter of last year, as we have reduced both our outstanding debt balances as well as the associated interest rate via improved leverage and strong free cash flow generation. Under our new credit agreement, we expect quarterly interest expense to remain in this same range. For the quarter, we reported net income of $4.7 million, or 15 cents per diluted share. Adjusted EBIT for the quarter was $18.3 million. For modeling purposes, we would anticipate an effective income tax rate of approximately 30% for the remainder of 2022, exclusive of any discreet items. Free cash flow for the quarter was $9.3 million, up from $8.5 million a year ago, and in line with our typical free cash flow conversion of approximately 50% of adjusted dividend. We expect free cash flow for the year to approximate 50% of our adjusted dividend, except for the payment by the end of the year of $4.5 million in payroll taxes that had been deferred earlier under the CARES Act. This payment will be the second and final installment associated with this CARES Act benefit. Capital expenditures were $3.9 million for the quarter and $7.1 million for the first half of this year. We expect capital expenditures to be in line with our expectations and to be under $20 million for the full year. As of June 30, 2022, we had gross debt of approximately $200 million down from just under $203 million at the end of the year and net debt of $181.8 million compared to $178.5 million of net debt as of year-end. Given that our primary use of cash flow continues to be the reduction of outstanding debt, we believe our forecasted full-year pre-cash flows will enable us at the end of the year to be at or below our targeted leverage ratio of being equal or less than three times, which remains our goal, even though our new credit facility provides quite a bit more flexibility. Once that level is achieved, we intend to evaluate our use of cash flow as a means to accelerate growth and build shareholder value. Let me quickly recap the highlights of our new credit facility that was announced under a separate release earlier this week. The new credit facility consists of a $315 million of aggregate credit, including a funded $125 million five-year term loan A and a committed $190 million five-year revolving facility. The new credit agreement matures July 30, 2027. This facility significantly expands the unused yet available revolving credit by almost $100 million at closing. The arrangement also includes significant reductions in required term loan amortization, specifically decreasing the required payments to $1.6 million per quarter for year one and two, replacing a facility that had been requiring $5 million per quarter, improving available cash by nearly $15 million per year. The amortization schedule does increase in years three through five, but remains well below the level of the prior facility. The new facility also provides leverage flexibility by increasing the maximum allowable total funded debt to four times adjusted EBITDA from the third quarter of 22 through the second quarter of 2023 measurement periods with a step down to 3.75 times for the Q2 23 measurement period and for all periods thereafter. This compares to the prior allowable fund debt level of up to 3.5 times for the June 22 period and all measure periods going forward. per the previous agreement. The company has also retained a $75 million uncommitted accordion. This syndication of the facility was oversubscribed by $100 million and includes seven banks, all of which are included within the top 35 financial institutions in the United States. Since upsizing our credit facility in December 2018 to finance the on-stream acquisition, we have repaid nearly $80 million of debt. over a period of unprecedented weakness in two of our largest markets. This new credit agreement provides us with ample liquidity to fund our growth initiatives as well as the flexibility to more immediately consider strategic acquisition possibilities. Despite rising rates and overall credit concerns, this facility clearly illustrates the confidence of the financial markets in our strategy, recovery plans, and in management. As Dennis mentioned earlier, we expect a strong recovery in our energy business in the third quarter and a return to historical patterns in the fourth quarter. Consequently, with the expectation of continued growth in the third quarter and confidence in strong fourth quarter results, we reaffirm our previously announced outlook for the full year 2022, that being revenue between $695 and $715 million, adjusted EBITDA between $65 and $69 million, and free cash flow between $27 million and $30 million. While the second quarter results were below our expectations, we are confident in the level of work expected for the second half of 2022, given strong energy markets, improving commercial aerospace demand, robust industrial manufacturing, and a rapidly developing data solutions offering. 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.