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spk00: Thank you for joining Ms. Ross Group's conference call for its third quarter ended September 30th, 2022. My name is Andrea and I'll be your event manager today. We'll be accepting questions after management's prepared remarks. Participating on the call for Ms. Ross Group 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 the 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-US 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 and in the investor section on the SEC's website. I will now turn the conference over to Dennis Bertolatti.
spk05: All right. Thank you, Andrea. Good morning, everyone, and thank you for joining us today. NISTROS reported its ninth consecutive quarter of revenue growth. Our legacy operations continue to deliver improving performance, while the investments we are making and our strategic initiatives across renewable energy, data, and new markets are beginning to contribute to our overall success as well. Consequently, we believe the top line obscures the financial and fundamental growth of the business with both foreign translation and the continued under-realization of expectation in the downstream market masking what was otherwise a quarter of strong growth. On the bottom line, both net income and earnings per share were up more than 28% from a year ago, whereas adjusted EBITDA for the third quarter was essentially unchanged as both gross margin and overhead are battling a rising cost environment. We are addressing this by implementing price increases, and we are making progress breaking through customer resistance, primarily in the energy markets, where budgets do remain tight. However, there remains a significant lag between the time we increase our labor rate and the recovery time for the higher billing rate. We are also currently taking a hard look at all company-wide overhead to identify efficiency and productivity improvement that can better leverage our footprint, enabling us to focus more quickly on moving to our long-term goal of SG&A being 20% of revenue. Reflecting some of the rebound that we anticipated from the delays experienced in the second quarter, revenues were up 11% in upstream and 8% in the downstream. Year to date, our revenue across the overall oil and gas industry is up 6%. The typically more stable midstream business was a bit soft in the third quarter, other than our on-stream business, but we expect that sector to show steady performance over the longer term, driven by higher production levels and the corresponding increase in demand for inspection services across the transportation and distribution infrastructure. On-stream, again, had a record high revenue in the third quarter of 2022. And we expect its growth to benefit both our revenue top line as well as bottom line profitability. Business in our aerospace and defense industry remains strong. Recovery in commercial aerospace, growth in private space, and expansion into adjacent services continues to drive strong growth. We are increasing investment in this business as we believe we're building a strong foundation and a market where the demand for NET is large and growing. For instance, inspections for defense sectors, machining operations, cycle time reduction capabilities, and other services integral to inspections represent just some of the new markets we are seeing as powering strong growth in this vertical. All of these opportunities are in fast-growing markets, which carry a prospective gross margin higher than our current consolidated gross margin, and we look for significant contributions from these new verticals. Our renewables business also has us excited. It now appears that we will outpace our previous objectives and end the year with more turbine systems being delivered or already monitored than our originally anticipated numbers. While this market is in the early stages for monitoring solutions, it is a large and growing market with hundreds of thousands of wind turbines in operation globally and more being added every year. Every day, our installed technology is delivering further evidence of Sensoria's significant advantage relative to conventional inspection techniques, wherein we foresee an inflection point in the near future, resulting in faster market adoption and an acceleration in our growth trajectory. Importantly, once operators contact us for monitoring service, we expect to add incremental revenue for the repair and maintenance of any damage our sensors identify. Repair and maintenance services and revenue should be lucrative, along with higher margins and multiples for monitoring, adding to our already $15 million plus per year business in renewable wind. Our data solutions business continues to grow, destroying results at PCMS and en suite. We are constantly seeing new examples of how our data solutions are leading to stronger relationships and thus new opportunities with our customers. Customers that are looking for the best value for their spend represent an opportunity to rise above the competition and avoid commodity pricing. This continues to be a point of emphasis as we integrate data solutions across our organization. The new credit facility negotiated this quarter has not only added much greater liquidity, but is also freeing up financial resources that had previously been limited, allowing us to invest and build upon these strategic initiatives. Now, with additional financial flexibility, we are doubling down on our growth, which we expect to accelerate in 23 and beyond. Overall, it was a solid quarter at Mistrust. We are certainly confident in our future opportunities, but there are challenges. Exchange rates created an $11 million revenue headwind for the first nine months of 2022 with the related impact on margins. Tight budgets in our largest market and the lag being experienced in passing on the impact of our collectionary costs are also pressuring margins. Since the onset of the pandemic, our primary focus has been on actions that will enable us to weather the storm and emerge stronger and better equipped for a more normalized world. In 2020, when our two largest markets were virtually collapsing, we had one of our best years of cash flow, and we have reduced debt by $80 million over the past three years. And this year we negotiated a new bank facility that created much greater flexibility to invest in both organic and non-organic growth. Although our largest markets are improving, they're still below pre-pandemic levels while undergoing your own structural changes. This has certainly been a challenge for us, especially on the cost side, where we're experiencing labor cost pressures that lag and can be difficult to pass along to customers. While we see this as transitory, It is a near-term factor. With the worst of the pandemic behind us, we can now focus more of our resources on our goal to grow our strategic initiatives. We are making great strides building the new capabilities that will define our future as a greater mix of higher-value products that are more technologically sophisticated, predictive in nature, and compatible with the directive of energy markets, such as wind. Much has been accomplished, but there is more to do. I'm extremely honored to be leading Mistrust at this important and exciting time in our evolution, and I believe the future is very bright. I'll now turn the call over to Ed to give you more detail on our financial results for the third quarter and the first nine months of 2022.
spk07: Thank you, Dennis, and good morning, everyone. Revenue in the third quarter was up again, led by a record third quarter revenue performance in our services segment. consolidated revenue increased approximately 2.2% to 179 million, but was up 5.1%, excluding the impact of unfavorable foreign exchange. Revenue in our services segments, top two markets were up year over year in the third quarter, with overall oil and gas revenue exceeding that of the comparable pre-pandemic level in 2019. Our upstream sector was particularly strong, benefiting from strength in offshore Gulf and in the Alaska region. Downstream was also up from prior quarter as well, but it lagged our Q3 expectations and it lags behind the pre-pandemic level of activity. The midstream recovery took a pause in the third quarter, but is up year over year on a full year basis. Within midstream, OnStream's inline inspection testing business did have its best revenue and bottom line quarterly performance since inception. Aerospace and defense was also up significantly at 27% growth in the quarter year over year. Consequently, we believe the top line belies the fundamental growth of the business with both unfavorable effects and the continued weakness in some of our secondary end markets offsetting what was otherwise a quarter of solid growth in our two primary end markets. Gross profit for the quarter was approximately $54 million, up 3% from a year ago, with gross margin expanding 20 basis points to just over 30%. Gross margin in the quarter is illustrative of the benefit of faster growth in our aerospace and defense end market. In the near term, gross margin will primarily depend on the rate at which we can pass along price increases in line with inflationary cost pressures that we are experiencing. As we had noted during our second quarter earnings call, beginning this quarter, that is the third quarter, we are comparing against a year-ago quarter period in which almost all of the pandemic-related benefits had expired. So going forward, this comparability will help highlight the progress being achieved on gross margin, which trended higher from increased volumes, improved sales mix, and efficiency improvements. Selling general and administrative expenses in the third quarter were $41.6 million, up $2.4 million, or 6% from a year ago, in part due to expenses related to our bank refinancing of about $700,000 and an additional $600,000 of incremental cost-down actions, which were restored in the third quarter versus the same period last year, for a total of $1.3 million, or just over half of the overall increase. We are continually working to calibrate our overheads to match our level of revenue, and we are intensifying our actions in this important area. As Dennis stated earlier, despite ongoing inflationary cost pressures, we expect to reduce overhead from the current level as we exit 2022 heading into 2023, as it is one of the keys to leveraging our operating or increasing our operating leverage. Interest expense for the quarter was $2.7 million compared to $2.3 million in the same quarter of last year. This increase reflects the generally higher interest rate environment, as well as some temporary interim borrowings that increased our average outstanding debt for the quarter. For the third quarter, we reported net income of $4.4 million, or 14 cents per diluted share, which is increases of 29% and 27% respectively. Adjusted EBITDA for the quarter was $18.6 million, which was in line with a year ago. For modeling purposes, we would anticipate a prospective effective income tax rate of approximately 30% exclusive to any discrete items. Free cash flow for the quarter was 0.2 million compared to approximately 0.9 million negative a year ago. Operating cash flow in the third quarter was affected by a significant buildup in working capital, primarily attributable to September being our highest billing month of the year. We expect to see cashflow improve in the fourth quarter, not only from continued positive operating results, but also by a decrease in working capital. The fourth quarter has historically been one of our best cashflow quarters. In the fourth quarter, we do have a $4.5 million payment due for payroll taxes that had been deferred and accrued earlier under the CARES Act. That will satisfy all remaining CARES Act obligations. We additionally made a $2.4 million payment and early fourth quarter for final settlement of an accrued legal matter. Capital expenditures were $2.5 million for the quarter and $9.6 million for the first nine months of this year. We now expect total capital expenditures for the year to be less than our original $20 million budget and to be more likely in the range of $12 to $14 million. As of September 30, 2022, we had gross debt of approximately $201 million down from just under $203 million at the end of the year and net debt of $183.1 million compared to $178.5 million as of year end. Given that our primary use of residual free cash flow continues to be the reduction of outstanding debt, we believe our forecasted four-year free cash flow will enable us to pay down debt in the fourth quarter of 2022. Our goal remains to get below a three times leverage level even though our new credit facility provides quite a bit more flexibility. Once that level is achieved in 2023, we intend to evaluate our capital allocation strategy and use cash flow as a means to accelerate growth and build shareholder value. Keep in mind that under our new credit facility, maximum allowable total funded indebtedness to adjusted EBITDA is four times to the second quarter of 2023's measurement date, with a step down to 3.75 times for Q3 2023 measurement period and going forward for periods thereafter. We feel very comfortable operating under these terms. As noted in yesterday's release, we are updating our full year guidance to reflect our view on current market conditions. We now anticipate revenue between 683 to 693 million, adjusted EBITDA between 53 and 58 million, and free cash flow between $15 million and $18 million. Note that unfavorable foreign exchange is expected to lower revenue and adjusted EBITDA after translation into U.S. dollars by approximately $15 million and $2 million respectively on a full year basis for 2022 compared to our original outlook for the year. We expect both operating and free cash flow to improve in the fourth quarter of 2022 not only from continued positive operating results, but also due to an anticipated decrease in working capital from September 30, 2022. I will now turn the call back over to Dennis for his wrap-up before we move on to take your questions.
spk05: All right, thanks. I am very optimistic about the potential for MISRO to capitalize on the technology development projects that we have been working on for the past few years. From the heightened activities with Sensorio, the customer acceptance of Mistrust Digital, additional service lines with our aerospace to our corrosion under insulation crawlers, we are giving the market a new way to see and visualize value. There is certainly no lack of initiatives at Mistrust in creating differentiators for our offerings. After having operated for the past two and a half years in violently disrupted in-market and under an onerous financing facility, we now feel free to more aggressively implement the strategic growth initiatives that have been otherwise minimally resourced. We are seeing the early results with increasing contributions from data and renewable energy and the ongoing expansion of our services in aerospace and defense industry. With greater freedom, we believe these initiatives will only further accelerate. At the same time, we are intently looking at expenses to make sure our cost profile calibrates with our revenue level. The ultimate goal is to get overhead to approximately 20% of revenues over time, which should significantly improve the operating leverage in our model. There are many macro factors that we believe provide a tailwind to our NDT market, including government compliance and safety standards, an aging infrastructure, evolving industries, the need of new and innovative inspection solutions, and the growing complexity of the supply chain. These are all areas in which MISRES has an unmatched reputation. This is the long-term vision that is being strengthened every day. But before taking your questions, I would like to thank all MISRES employees for their continuing dedication to delivering a safe and superior product in this ever-changing environment we face on a daily basis. I am proud of our team and know that the financial results we are seeing is not reflective of the quality of our professionals or their expectations. Everyone that comes to work for Mestros expects to deliver a safe and conscientious product for our customers. By adopting our Caring Connects tenets, we provide a better workplace for the entire Mestros family and add to our legacy. Andrea, with that, please open up the lines for questions.
spk00: Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A roster.
spk01: Our first question comes from Chris Sakai from Singular Research.
spk00: Please go ahead.
spk06: Hi. Good morning, Dennis and Ed. I have a question on your price increases you say are expected to help with inflation. When are we supposed to expect these price increases to occur?
spk05: So what's happening, Chris, it's a good question, is that they are occurring, but they're occurring behind the increases being given to the employees. So as the market changes, so too does the pricing to the local employees. the skill sets go up at that customer, and then we start negotiating. We'll probably start before we pay it out, but what happens is you don't get the increases with the customer immediately. So there's always a lag between getting the increases paid to us versus paying them out to the employees. So with the inflationary thing we're in right now, this market's going to keep us trailing that a little bit. So we are getting increases, but as the inflation stays at this higher rate. Normally you'd do this on an annual basis. We have COLAs built into our contracts, a cost of living allowance that allows for these discussions to happen every year. Now the timing is such that things just don't wait for the anniversary of the MSA or the contract, right? So you've got to do them into once or twice in a year versus just one time at the MSA time. So it It causes a lot of continuous increases that you keep battling. But for the most part, the customers are giving us the skill set increases. They don't do it across the board, but they do it for the sets that they see and recognize as what's going on. Because you've got to recognize that it's just not NDT folks that are looking at this.
spk04: All the customers going into those refineries and plants and everything else are battling the same problem.
spk06: Okay, thanks. And then With Sensoria and its recent deal with Bladena, can you sort of quantify what will that do for the top line?
spk05: Yeah. So, I mean, we've already been representing with them at conferences that they hold, and they are a major European and various markets of repair and maintenance on blades. and they're promoting us as a very good way to get in front of understanding what's happening with your blades before they become very difficult to repair types of damage. So we've already been in conferences with them and talking to some of their customers as well as us using it both ways. So it's already helped us getting revenue. I wouldn't have the amount of dollars at it so early on, but it's just another way to add our exposure and giving Sensoria credibility because You've got to remember we're new to the market. There's right now probably five or six competing technologies, none of which really measure the blade. They measure the effects the blade has on the wobble or the distortion on the shaft and other components that you could interpret are probably coming from a blade defect or taking a picture and hoping that it's at a surface level and things like that. So we're still being run against other technologies and we're being put on testbeds. currently with different owners and manufacturers to see how we hold up these other technologies. So having somebody with the reputation of Bledina helping us and saying that this is something they believe in, which they've seen a lot of other technologies and ideas as well, it really helps in that credibility part.
spk06: Okay, great. And then last one from me. With the new credit facility, how – And it's supposed to help inorganic and organic growth. Can you provide any color there as to what type of growth will this help? Hey, Chris.
spk07: It says you have a couple of things, Chris. It's number one, it gives us more liquidity. Number two, it gives us more leverage flexibility. And thirdly, there's less required term loan amortization. So it just kind of is much more, you know, or less constrictive on the versus the prior credit agreement. We can flex into, you know, putting more of that capital to work. Again, job one is to still continue to pay down leverage, and we are doing that, but it gives us more upside. Again, more flexibility. It dropped the credit spread was lowered. You know, the availability was increased. Again, required amortization went down. It just gives us, let alone some affirmative negative covenants, we're all flexed back to pre-pandemic levels. So it just kind of uncuffs us to really use that credit for growth going forward. That's the benefits it gives us.
spk05: And Chris, specifically things like machining for aerospace and space customers where we're getting new inspections because we're bringing on machining. We do the machining pre-inspection and then we do the inspection. So we're doing parts that we hadn't done the inspection on previously because the machining was located somewhere else and geographically it was easier to get the inspection done somewhere else. adding on more of these crawlers that we use for the corrosion under insulation. We call them ART for automated RT crawlers, but things like that that we, under the old facility, we had to be more careful on how much money we were spending on things like that versus just keeping up the facility payments and all those constraints. So there's things that we're doing inside, and that's what we mean by we're adding into the renewables and other sectors, even building on more of these, buying more sensors, chips, and everything for all these sensoria components. You know, we're trying to build up for that to get ahead of and not have component problems as customers are making orders for more sensoria blade as well.
spk06: Okay. Thanks for the answers, Dennis.
spk01: Thank you. One moment for our next question. Our next question comes from Mitch Pinero from Smart Event & Company.
spk00: Please go ahead.
spk05: Yeah. Hey, good morning.
spk03: Good morning, Mitch. So, Mia, I want to just look at guidance for a second. How much of the guidance decline relates to foreign currency?
spk07: It's a significant piece. So, on the revenue side, Mitch, so full year revenue impact of the FX is about $15 million in U.S. dollars was FX, $2 million on the EBITDA line were due to pure FX translation differentials for the full year 22. For the full year.
spk03: So, I mean, so if I look to sort of midpoint, if I look at the midpoint of the fourth quarter, You know, it looks like it'll be somewhere around $170 million for a fourth quarter revenue, which is maybe in a flat, maybe slightly down from a year ago. Is that a – I mean, is there anything beyond foreign currency that we need to understand here?
spk05: So for what we see for the fourth quarter, Mitch, we expect the third to be a little bit stronger for some of the push-offs into the third quarter. The third got started a little bit later. We're not sure how far and deep into the fourth quarter all these turnarounds and projects will go. So our guess on this is that from what we're seeing and what we're hearing right now is getting it maybe a little bit less than 2021. It was a strong quarter in Q4 for us in 2021. So I think we'll be a little bit down. I think, you know, certainly we probably got another $4 or $5 million in, you know, FX translation just in the quarter itself. And, you know, that's going to be part of it. But, yeah, I think it's just is the customer going to stay as long as they did in 21 on the turnaround activities and how strong it will be into later this month. Probably you don't expect too much normally in December.
spk04: It's more of just how late into November it all goes.
spk03: okay so um okay and and midstream in the quarter uh this the third quarter was down you had mentioned uh on stream was okay what what was the other what was the cause for the weakness in the other in the other um business you know i think some of it was just timing of larger projects that didn't repeat from q3 of 21 to 22.
spk05: I didn't see anything there as far as loss of customers or major differences. I think it was just activity levels, you know, customer-to-customer, year-to-year on that.
spk03: Okay. As you look at your price increases, and I understand the lag. Is the lag – are we talking – you may have mentioned this, and I might have missed it, but is this – you know, a quarter lag or does it go beyond that? And, you know, if you, I mean, how do you get pushback on price increases or are you getting pushback on any price increases? I mean, it's pretty evident the inflationary pressures. So I would think that we would see I don't say easy to get the price increases, but it's pretty much a foregone conclusion that you'll get them in, you know, a couple months out.
spk05: Right. So I'll start your second question. You're absolutely right. Everyone sees it and recognizes it. Customers just don't have the same urgency to recover it to us as fast as we have to pay it to the employees. Right. So we get it out as we see what's going on. And then while we're talking to the customers, They say, yes, we understand it, but then they want to see a document that's proving which one and why. And so a question, are all these needed? And, you know, you get into those kinds of granular parts of looking at the increase. Again, they don't generally fight you on it. They just delay it and take their time to, you know, because I'm sure we're not the only ones coming at them. So it's probably a process that they're getting swamped with. And it just kind of makes it a slow reply in getting it back. So The second half isn't so much that it's understandable. It's just it doesn't come with the same sense of urgency that we have to pay it out. And to your point on the increases, I mean, truthfully, you know how it is. The increases can be the first day of the quarter or the last day of the quarter. So they don't really fall neatly into the quarters in the month. What does happen, though, is it's continuously happening and it's still happening now. You pick a region. Sometimes one region is faster or more aggressive than the other, but in areas of high density of this kind of work. It's really, there's a lot of pressure out there. You get a lot of price increases from other folks that they're not controlling and then the customers having to keep up with it. So what happens is we're constantly fighting this. And the truth is what we're trying to say is as long as the inflation stays high like this, we're going to always be dragging a little bit of this behind us. Once the inflation falls down, we'll catch up. We'll get back to a normal and Things will be there, but we had a better gross margin quarter this quarter while still trying to drag these on, right? So it's always keeping probably anywhere from 50 to 90, 100 basis point pressure on our gross margin. And essentially, we're not trying to be cute about it. What it is, it's going to be there until the inflation slows down a little bit. So we'll be keeping up with it, but always a little bit behind it, right?
spk03: Okay. Just a couple other questions. How... So with your company-wide, your overhead goal, you've still got a little ways to go. What kind of things are you working on? Where do you see the opportunity to get that down to 20%?
spk04: Yeah, I'll let you take that if you want. Sure, Dennis. Yeah.
spk07: So, Mitch, it's more just focusing on our productivity, our efficiency, you know, making sure we're getting the best spend of our investment. I mean, we're looking at how do we automate things? How do we get more process throughput, you know, on the footprint we have and leverage that? So, you know, we're looking at all SG&A items, you know, even some of the overheads up in the COGS line, just making sure we're getting the best return there, you know, being as efficient as we can and, you know, kind of looking internally at how we can maximize that. So, it's really just an efficiency productivity review of all things we're doing, you know, kind of zero based budget things and make sure that there is true value in what you do there. Does the customer appreciate it? Do they let us build them for that and pass this through as valuable activity? Obviously all that stays, we're not trying to affect the top line growth. We want to keep doing those investments, but if it's not mission critical, not value add, you know, it's fair game. And that's the kind of things we're looking at. And we do it, you know, We always do it. It's just we're doing it more urgently now where that top line is not where we want it to be. We're obviously taking a much harder look at this as we, you know, get deep into our budget cycle. So, that's where we are, you know, and we're just taking a much harder look at things as, you know, as we kind of roll the budget together here shortly in the next couple months here.
spk03: Do you expect to see, I mean, I know you're not giving guidance for next year, but do you expect to see, you know, productivity improvement in 2023?
spk07: Yeah, in fact, we said that just minutes ago in the script, but yeah, absolutely. As we exit the year and look into next year, we absolutely see this being able to help productivity and profitability next year. Yeah, we're looking at this at a very holistic level. So yeah, we do expect some immediate benefits here, and it's something we look at all the time. But yeah, we are looking at it in a very immediate term, absolutely.
spk03: Okay.
spk07: And what's driving, what drives the CapEx lower this year? Again, that's just one of those things we look at intently. I mean, it's driven by volume a little bit, but it's really just challenging the need for that. And, hey, can you go a little longer on the existing asset to preserve that capital? Again, we do focus very intently on it. And, you know, there's a controllable level there. But it is scaling to revenue to a certain extent. But it's just looking at every item there and just, you know, doubling down on the return, making sure it's something we really want to do now is what it is. So we've just really clamped down and going to just the essentials there and, you know, letting the existing assets go a little longer. As long as there's no risk there, you know, we do that. But that's just kind of a whole bunch of little things there in the CapEx bucket is what we controlled, you know, and that's, you know, that's just a part of this thing, studying the asset base here we need to get our jobs done. making sure we're being very efficient with it.
spk05: To be clear, we're still feeding. I was going to say, we are still feeding opportunities. So we haven't slowed down the growth of the business. We're making sure we're doing it. You know, we're just looking at it and saying, okay, because we spent X last couple of years, does it still need to be? But we, you know, the things that we're doing for aerospace and machining and crawlers and, you know, building into the software and all that, we're still feeding opportunities and still trying to plan for the future. It's just, you know, we want to make sure if we are putting some in the CapEx that they really need it. So we're not slowing down any of the growth that way at all.
spk03: Okay. I mean, I've seen the model, like, you know, the CapEx would be about 3% of revenue. Is that still something fair to look at in the out years, or is this – or maybe is it a little lower than that these days?
spk07: So three would be a high side. If we do, as Dennis is describing, investing more in our internal labs, any given period, it might drift up a little higher, closer to a 3%. But more historically, it's been averaging closer to 2.5%. But yeah, in a high year, it could be slightly higher than that. But 2.5% of revenue is a pretty good approximation for long-term CapEx requirements for us. Again, as Dennis said, we will be leaning into our labs a little bit. trying to grow them a little faster than not organically, but 2.5% is a good number for CapEx modeling.
spk03: Okay. And then this last question, just, Dennis, what should I, or maybe Ed, what should I, from an interest rate perspective, or your debt in the fourth quarter, what do you think the rate I should model?
spk07: The interest rate? I mean, we're going to be pushing... you know, five in a fraction, probably percent. So, yeah, so you're, you know, all in with all the uncommitted pieces, maybe closer to five and three quarters. So, yeah, in that range.
spk03: Okay. All right. Thank you much. All right, sir. Thank you.
spk00: Thank you. One moment for the next question. Our next question comes from Brian Russo with Sedoti. Please go ahead.
spk08: Hi, good morning.
spk04: Morning, Brian. Morning.
spk08: Hey, you know, so just looking at, you know, the revenue breakdown by industry, third quarter 22 versus the Euroco quarter, you know, it looks like you're seeing a nice recovery in oil and gas and aerospace and defense, you know, but clearly not showing up, you know, in the top line, first of all. And do you attribute all of that to the negative sensitivity to the strong dollar? Or is there something fundamental that might be going on in this third quarter and or maybe this fourth quarter that, you know, had you moderate the top line of the guidance?
spk04: You know, I don't think so. I'll throw it to John in one second.
spk05: I mean, it's... The sectors that we expected to be growing aerospace and some of the other recovery are there. I will say there is a little bit of chunkiness like in aerospace as far as the whole supply chain. Customers are complaining that they're trying, our customers are complaining they're trying to get more through and they just can't get to it. So I think there's a want to get more through in aerospace. The demand is there. They just haven't found a way to get it out yet. So that's going to come up a little bit slower than you expect. There are some things like that are just, but I don't see anything else major. John, I don't know if you've got any other thoughts on that.
spk02: Yeah, thank you, Dennis, and thanks for the question, Brian. I think supply chain, believe it or not, is still wreaking havoc. So we've got some customers, for instance, that we're testing raw materials for that they just can't get the material. And that's been an ongoing challenge kind of as the years rolled on. They were good earlier in the year, and as the years rolled on, they haven't had material available to test. So I think that's one of these realities that it's hard to plan on. And when you give guidance, you don't anticipate those kinds of things that are outside of your control, but they're real factors too.
spk08: Okay, got it. And remind me, and I apologize if you conveyed this earlier, but you mentioned what the full year FX impact is on revenue. What was it year to date? And then, you know, to follow on a prior question that just backing into the fourth quarter relative to year to date and full year, fourth quarter is basically flat versus a year ago. And I'm curious if there is a headwind on FX, you know, that may be masking, you know, some of the overall improvement in your end markets and your business model.
spk07: Hey, Brian, it is a little bit, yeah, the full year effect on revenue is expected to be about $15 million. Through nine months, it was about $11 million. So, you know, you have another $4 million or so headwind hitting us here expected in Q4 on the revenue line due to FX.
spk08: Okay, got it. And what was your leverage ratio? What was the leverage ratio as of September 30th?
spk07: We were right just under a 3.75, 3.7-ish or so.
spk08: Okay, and that's including what was a relatively weak first quarter, right? So it looks like you're well on your way to under three times. I'm just curious how much of that's going to be, you know, debt reduction, absolute debt reduction versus improvement in EBITDA or a combination of both? Maybe tie that into what are your debt amortization payments on a quarterly basis, and are you looking to exceed that with your free cash flow?
spk07: Yeah, good question, Spine. Yeah, so, well, two things. A combination of higher trailing EBITDA and lower funded debt will move both numerator and denominator in our favor. Q4 is routinely a very good, strong free cash flow period for us. It was last year. expect that the same thing this year so that will certainly help in our in our favor there um you know driving that downward so our nation is very low right now the the new credit agreement effective august pushed amortization down from 20 to two and a half percent so modest level of amortization now but but as as we said on the call in the prepared remarks we're not gonna you know do anything other than keep paying leverage down now so we'll we'll pay beyond the required amortization to get leverage down to, you know, below a three. I believe that happens sometime before next year is over. So, we'll keep doing that in the interim, taking that residual free cash flow well beyond what the required term loan, you know, necessitates. But again, to Dennis's earlier point, we have optionality now. We've got some flexibility. If we see a great organic growth capability to grow a revenue stream, we can do that and we'll do that. But it's not going to affect our otherwise stepped down in leverage you know, to the 3.0. That will continue. Again, we've got a little more flexibility if we want to, you know, do something in the interim on a little bit on the growth side where there's a high ROI. But, no, we're in a good place there. We'll keep knocking that down. I think the combination of the leverage of the EBITDA going up and then bringing the funded debt down, both of those combined to continue to bring the leverage down, you know, as we go into next year and beyond.
spk08: Okay. And then just lastly, you know, when we look forward to 2023 with the understanding that you don't have guidance, but it seems as if oil and gas has normalized and, you know, maybe we're still seeing an aerospace and defense recovery. But, you know, where does the growth in your core end markets, you know, come from post 2022? You know, is it gaining market share from the digital offerings or is it from, you know, top line diversification through some of these emerging markets like wind remote censoring, et cetera?
spk04: Yeah, I'll take that and throw it to you.
spk05: John, thanks, Brian. So oil and gas is recovering. I wouldn't say it's quite there in the downstream. There's still a lot of hesitancy to spend some of the money that they had pre-pandemic. I talk to customers all the time that are just amazed at how much lighter they're running, they're running maintained than they had been. And I don't know, something will probably force them to change it over time, you would expect. So I think part of 23's recovery is oil and gas still has a way to go. I think inside the aerospace and the funds, I put a little bit lighter than John did. He's right. I mean, some of our markets, we got customers waiting for material and, you know, the spend is much less than everyone anticipated because the material just isn't there to fabricate. So we have some of that that we believe is going to continue getting better. Things like that are out of our control, so we're not so sure how fast and how much, but we are doing things like you were talking about with Sensoria and doing that. And with the Mistrust Digital, we're starting to push digital a different way to try to get through faster and get our customers and employees to understand it, so we're making initiatives there too. So there's a lot of things that we're doing with the crawler and everything else. We're not waiting for the market to come back to us, but I do think both of those, defense, aerospace, and on the oil and gas, They are coming back. It's just probably never as fast as you want it, but everything else that we're working on, we feel good about getting some of these things in place and keeping ourselves stickier and showing value with the digital and all that. While it's small, we've got signs in many, many places that the digital is not only helping us get stickier, but bringing work in where customers are talking about looking at doing more and more locations with this because they really are starting to see the advantage of of getting this data centralized and getting in one place. So, I guess my answer to it is a little bit of everything to what you asked, Brian. I don't know if it's – I wouldn't put my finger on any one of them as being the major contributor. Certainly, the supply chain gets itself triggered out of oil and gas sites spending more. We've still got a ways to go in our recovery. We've got our shop businesses in a row that are starting to hit months that haven't been seen before. We anticipate that keep going. But at the same time, we know there's some additional demand that they just can't get through and get it to us, right? So it's just a function of all these things getting back a little bit more normal. But we don't really see anything as too far out of our control that we don't, you know, we will come out later with a 23 guidance. But we don't see anything out there that's really going to be structurally in our way right now. Even the inflation right now is definitely a drag on the margins. but we don't see it right now changing our customer habits or spending with something dramatic, probably more in the healthcare side than the inflation really would hurt us there.
spk08: Okay, got it. And then one more on the free cash flow conversion. Historically, you were averaging about 50%, obviously a lot lower than that in 2022, you know, due to some, you know, one time, you know, payroll cares type repayments, uh, and another discrete item you mentioned. But, you know, when we look forward over the next several years, is that historical 50% cash conversion, you know, still kind of achievable?
spk07: Okay, Brian, absolutely. In fact, it's been trickling up ever so slightly, that average as well. So, yeah, you're right. A couple of discrete items this year knocking that down. And our AR, which is, you know, accounts receivable and with deferred costs on the balance sheet, You know, that number is up significantly, almost $132 million at the end of September. That number will come back down. So, you know, there is that just delay in the collection side this year. That's a little bit slower. But, no, 50% plus a little progress in our very goal, and I believe very achievable.
spk08: All right, great. Thank you very much.
spk04: Thanks, Brian. Thank you.
spk00: Thank you. I'm showing no further questions at this time. I'd now like to turn it back to Dennis Bertolotti for closing remarks.
spk05: All right, Andrea. Thank you. So I'd like to thank everyone for joining the call today. We look forward to updating you on our progress and our various initiatives. Have a great day. Thank you, folks.
spk00: Thank you for your participation in today's conference. This concludes the program. You may now disconnect.
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