Mistras Group Inc

Good day and thank you for standing by. Welcome to the MISTERS group conference call. At this time, all participants are in the listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dennis Bertolotti, CEO. Please go ahead.

Okay. Thank you, Brittany. And good morning, everyone. Thank you for joining us today. During the second quarter of 2023, Ms. Progressive further towards our strategic efforts to streamline the organization and fine tune our strategy to unlock the inherent value of our business. Although we continue to generate revenue growth in many of our key markets, the impact of decreased activity with one of our defense contracts offset these gains at a consolidated level. Consequently, total revenue was down marginally adjusted for the effect of FX exchange. There were several bright spots related to revenue growth drivers in the second quarter of 23, including certain key markets which achieved record revenue performance. In particular, our West Penn acquisition, a key shop facility which specializes in aerospace projects, reported a record revenue quarter. Additionally, OnStream achieved its second best quarter revenue in its history. which performs inline inspection testing of pipelines. The on-stream growth was driven by a record quarter for its US segment, which has achieved revenue by over, revenue growth by over 75% for the first half of 2023 compared to that prior year period. Within data solutions, our PCMS new century business also experienced growth in the quarter driven by continued customer adoption of its predictive analytics. There was also progress achieved in strengthening our financial position, with cash, strong cash flow and a significant reduction in day sales outstanding, contributing to a further reduction in our outstanding debt. Selling general administrative expenses also declined sequentially, reflecting our ongoing cost controls. and our objective to improve operating leverage. In the second half of this year, we will seek additional cost savings opportunities expanding upon what we have already implemented during the first half of 23. As we continue to improve operating efficiency, it will contribute to improved bottom line results. Ed will provide more details on these initiatives later. We also anticipate that the second half revenue will be stable with modest growth over the comparable prior year period, but with an expanded improvement in adjusted EBITDA due to a favorable sales mix shift and continuing reductions in overhead, particularly SG&A spending. Our cash flow remains strong, and I'm very pleased with the investment that we have made in 23 related to our higher growth businesses via increased capital expenditures, which will further our expansion in key growth markets. First, just a few comments on performance in our end markets during Q2. In our growth areas, we achieved outstanding performance in the second quarter, which we expect will continue through 23. As I previously said, Westport, West Penn, which reported its all-time highest quarterly revenue, had growth fueled by adding complimentary offerings to our capabilities to help alleviate some of our customer supply chain constraints by taking on additional steps in the standard process of finishing the components for our customers. This growth is a byproduct of investments in the business, such as prior announcement of the opening of a new facility adjacent to our Heath, Ohio operations to accommodate the increased demand for our solutions there, as well as the installation of additional customer finance CNC machines to expand machining capabilities to increase the throughput of our Georgia facility. These are growth in markets where we anticipate continued success. We also anticipate that our fence-related revenue will improve from the first half of the year as our customer ramps back up our workload associated with this work later in the year. Longer term, we are focused on finding new ways to participate in servicing the overall backlog currently experienced in this industry. Because of these actions, we expect to see continued growth in the aggregate aerospace and defense sector. As mentioned, OnStream achieved the second best quarter in their history and their second highest all-time revenue quarter driven by record results in their U.S. portion of the business. That business is up over 75% from the first half of 23 compared to last year, where it is well positioned in the midstream IOI market sector and provides optimism about our future growth. And last, but certainly not least, our portfolio of data solutions offerings centered around our PCMS new century and on-stream business lines continues to expand, as evidenced by their year-over-year growth of 22% and comprising now over 10% of our total revenue. We are working to stay in this level of growth and performance. Each of these initiatives are in growth markets, and are expanding faster than our other end markets. Our strategy is to continue to foster investments in these capabilities to expand our solutions and penetrate new markets. The second half of the year to see even more progress across the various initiatives implemented, which should enable us to achieve greater margins and a significant improvement in bottom line. I would now like to turn the call over to Ed to give you more information on our financial position and further detail on our cost savings initiatives.

Thank you, Dennis, and good morning, everyone. Before I start, just a quick rewind here. We omitted a safe harbor statement up front. I'll just quickly go over that. Just simply reminding everyone that remarks made during this conference call will include forward-looking statements. Our actual results could materially differ from those projected. Some of those factors that can cause the results are discussed in our most recent Form 10-K. and other reports filed with the SEC. The conversation discussion in this conference call will also include certain measures which were not prepared in accordance with US GAAP. A reconciliation of such measures to the most directly comparable US GAAP measures can be found in the tables contained in yesterday's press release and in our related current report on Form 8K. These reports are all available at our website as well as at the investor section at the SEC website. With that, It was truly another meaningful progress quarter for Mistras. Our legacy end markets are very stable, and our key growth markets are expanding per plan, as Dennis elaborated. We are making steady progress preparing Mistras to improve productivity and efficiency and better leveraging our inherent strengths to capitalize on the sectors of our market, which are growing the fastest, wherein we can service customers on that needs. As announced in February 2023, We have been exploring ways to improve profitability and adjusted EBITDA and meaningful margin improvement and steps to achieve sustained cost savings. We have completed the initial phase of this project, which we refer to as Project Phoenix, wherein initial opportunities were identified. We are now undertaking the next phase of validating actionable initiatives, which can then be implemented prospectively. We will provide an update at the end of the third quarter of 2023 after further progress is made towards achievement of such opportunities. We have already taken certain actions in 2023 which are expected to yield annualized cost savings of approximately 6.2 million, of which approximately 5.1 million are expected to be realized during 2023. Most of these cost savings are related to our North American operations and are related to a reduction in overhead functions classified within the SG&A line. Approximately 4.5 million of the 5.1 million of savings anticipated to be achieved in 2023 were budgeted for, and hence were included in our original adjusted EBIT guidance for 2023. Second quarter SG&A was down sequentially from the first quarter of 2023 by 1.3 million, or 3.1%, as a result of the ongoing budgeted cost control initiatives. For the second quarter of 2023, we recorded 1.2 million of reorganization cost related to our ongoing efficiency and productivity initiatives, primarily related to the overhead cost savings initiatives. For the second quarter, these charges included professional fees and certain restructuring charges associated with changes made within our organizational structure. For the six months ended June 30, 2023, we recorded total reorganization costs of 3.3 million. Again, actions taken in the first half of this year are expected to contribute 5.1 million to adjusted EBITDA over the course of the full year 2023, of which 4.5 million was expected and budgeted for in our original outlook for the year. Interest expense was up for the second quarter, although down sequentially. Year-over-year, the year-over-year increase in benchmark rates Despite our continued commitment to reducing outstanding debt led to the quarterly and year-to-date increases over the respective prior year periods. With benchmark rates now expected to remain higher for a longer duration, we now believe full-year interest expense will be in the range of 15 to 16 million. Our net cash provided by operating activities was 18.3 million for the first six months of 2023 compared to 7.8 million in the prior year. an increase of nearly 135% year-over-year. Free cash flow was $7.7 million for the first six months of 2023, compared to $0.7 million in the prior year. Again, a significant improvement. Our improved cash flow performance was primarily attributable to an improved day sales outstanding during the year. Capital expenditures increased by $3.5 million versus the first six months of 2022, as we are increasing investments to foster growth. Our gross debt was 183.7 million as of June 30, 2023 compared to 191.3 million as of December 31, 2022. Gross debt decreased by 5.6 million during the quarter ended June 30, 2023 from 189.3 million as of March 31, 2023 to 187.7 million as of June 30, 2023. Our net debt was 165.7 million as of June 30, 2023. There was, in fact, a significant improvement in working capital during the quarter, as I said, especially due to the day sales outstanding improvement, wherein we reduced to about 60 days outstanding through aggressive, proactive actions, keeping that cash flow as strong as we can make it. This contributed to free cash flow of $8 million for the quarter, which did in turn lead to further debt reduction levels to under $184 million, as of June 30. We continue to prioritize debt reduction as our primary use of free cash flow, and we continue to expect to reduce our debt leverage ratio to below three times by the end of 2023. Once that level is achieved, we intend to evaluate our capital allocation strategy and investigate other uses of cash flow as a means to accelerate growth and build shareholder value. Capital expenditures were $5.9 million for the quarter, up 2.1 million compared to the year-ago quarter, and up 3.5 million for the year, again, reflecting our ongoing investments in our growth initiatives. As noted in yesterday's press release, we are updating our guidance ranges to reflect current market conditions and our focus on profitable growth and cost savings. Revenue for the full year, 2023, is now expected to be between 700 and 720 million, due primarily to reductions in legacy oil and gas revenues, particularly downstream. Adjusted EBITDA is now expected to be between 68 to 71 million. And as I stated earlier, we have already taken certain actions in 2023, which are expected to yield annual cost savings of approximately 6.2 million, of which 5.1 million is expected to be realized in 2023. And it had been budgeted for, and hence was included in our original guidance for the year. Operating cash flow, will be adversely impacted by certain cash expenses required to achieve the cost savings. The company's free cash flow guidance is being adjusted to between $23 to $25 million due to the reduction in the adjusted EBITDA guidance in addition to the higher anticipated capital expenditures of being over $20 million for the year now. Free cash flow guidance excludes the aforementioned impact of certain cash expenses to achieve the cost savings. Despite the reduction in our EBITDA outlook, the midpoint of revised guidance represents a nearly 20% increase versus the prior year, or an anticipated revenue increase of 3.5%, displaying our continued focus on cost controls and illustrating the effectiveness of our operating leverage. One editorial note, you will notice that included in the supplemental unaudited revenue by category tables, that you will see in the press release, we have retrospectively reclassified certain oil and gas subcategory revenues for each quarterly period in 2022. Specifically, we looked at certain integrated providers, further analyzed them in the current year, and their classifications within oil and gas subcategories were reclassified between up, mid, and downstream, respectively, for comparability year over year. So, we adjusted all the quarters within 2022 in order to conform with the classification being presented in the current year. The SRAS is committed to creating value for our shareholders by improving productivity and efficiency and achieving return for our services commensurate with the value that we provide, unlocking and aggressively investing in our growth initiatives and leveraging these key actions to significantly drive better bottom line performance. The results of these actions are expected to lead to second half performance that is appreciably improved from the first half. without the benefit of meaningful consolidated revenue growth. I will now turn the call back over to Dennis for his wrap up as we move on to take your questions.