Mistras Group Inc

Thank you for joining MISTRESS Group's conference call for its second quarter, ended June 30, 2024. My name is Brianna, and I'll be your event manager today. We'll be accepting questions after management's prepared remarks. Participating on the call for MISTRESS will be Manny Stamatakis, the company's Chairman of the Board and Interim President and Chief Executive Officer, and Ed Prisner, Senior Executive Vice President and Chief Financial 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 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 the conference over to Manny Stamatakis.

Good morning, everyone. Thank you for joining us today. Mistrust reported strong top and bottom line growth for the third consecutive quarter and remains on pace for fiscal 2024 adjusted EBITDA that will be one of our all-time high performances years. This coincides with the formal implementation of the initiatives identified by Project Phoenix which continues to guide us forward. Results continue to reflect the improved discipline and the overall benefits of our key financial, operational, and strategic initiatives with the goal of continuing to improve overall profitability. Consequently, you can understand why I am very pleased with the significant improvement in our operating leverage which enabled us to increase the adjusted EBITDA by nearly 45% on revenue that was up nearly 8% in the second quarter. Adjusted EBITDA growth this quarter is sequentially in line with the first quarter and demonstrates the consistency and predictability of our performance, which we believe is a key to creating shareholder value. Revenue in the second quarter reflected growth across all industries, with a double-digit increase in aerospace and defense of 17.5%, and oil and gas up 3% on the strength of an anticipated robust spring turnaround cycle. We grew in revenue in each of our segments, North America, international, and products, for the first time since Q1 of 23. I am particularly enthused with the continued progress achieved by our enhanced commercial function led by our chief commercial officer, Jerry Delterio, which was implemented late in 2023. Our enhanced commercial function has helped refine our go-to market approach, pricing strategies, contract management, and other key initiatives which have provided a meaningful benefit to our operations and will continue to do so. On the top line, our focus on enhancing our commercial function is contributing to our success. We are achieving better sales cycle conversion and efficiency. Pricing discipline in particular is gaining significant traction and is making a meaningful contribution to the improvement in our gross profit margin. about one quarter of the revenue increase in the second quarter of 2024 was attributable to price increases realized as an outcome of successful negotiations with our customers. Gross profit dollars and gross profit margin was also up in the second quarter across all segments, as was operating income. On a consolidated basis, Operating income was $12 million for the second quarter of 2024, which was an increase of over 200%. Selling general and administrative expenses were down compared to both the year-ago quarter and year-to-date periods. For the second quarter, SG&A was 21.6% of revenue, which is down sequentially from the first quarter and directionally oriented to our overall 21% of revenue goal for the year. However, I will note we have not yet achieved the total reduction in overhead, which I anticipate for the full year. I am excited for the renewed level of cost discipline under the direction of our Chief Transformation Officer, Haney Hammond, who was hired late in the first quarter of 2024 and who is creating strategies for an ongoing cost monitoring to further improve our operating leverage. Despite the significant achievements in most financial measures during the quarter, I would like to note that cash from operations and free cash flow performance for the quarter and year-to-date period significantly lags that of prior year and the company's expectation. Management is intently focused on improving this performance during the remainder of the year through various actions, which Ed will cover later. A few additional comments on the second quarter are as follows. Our aerospace and defense business returned double-digit revenue growth with North America back to pre-pandemic levels and international quickly headed in that direction. For that reason, we will continue to increase our investment in this industry where we are extending our service offerings to include more additive manufacturing and mechanical work beyond just inspection testing. We are also expanding our scope of work in the private space industry. We expect continued strong performance in this industry over the balance of the year. Data analytical solutions revenue for the quarter was 18.3 million. While this is a slight increase over the prior year quarter, it did not meet our growth expectations as some scheduled jobs pushed out beyond the second quarter, and there were some unanticipated delays due to new customer implementations. we anticipate the second half to be much stronger than the first half. As support for this, PCMS was just awarded a significant new contract of nearly $7 million, scheduled to kick off in the fourth quarter of this year and to run through 2025. The PCMS contract awarded was bundled with inspection services as well. The most exciting part of this award is that PCMS acted as the architect of this customer's mechanical integrity program, and the MISTROS services not only include a full data service component hosted in our SAAS environment, but also include consulting, engineering, field baseline inspections, and most importantly, MISTROS will be collecting all test and inspection data electronically through our PCMS mobile solution. This bundled software and service solution is something that none of our competitors can offer as a complete package. In addition, we were recently awarded multiple PCMS contracts with international customers in geographic regions in which we previously had little presence. In addition to PCMS, we are expanding our global footprint with a series of new contract awards which utilize our state-of-the-art automatic RT crawlers to inspect pipelines around the world outside of North America. We expect this geographic expansion to continue. The search for a permanent CEO remains on track, and my goal is to have our next CEO identified by the end of the third quarter. Once in place, I will remain active as the chairman of the board and look forward to working closely with the CEO, not just during a transition period, but also on a recurring basis going forward. Last quarter, I noted we were still early in the Project Phoenix process and that there was still work to do. Although we have taken great strides, I still see tremendous opportunity for additional growth and profitability. And lastly, once again, I want to note the renewed sense of commitment and dedication being demonstrated throughout the entire organization. Now I would like to turn the call over to Ed for a more detailed update on our recent results.

Thank you, Manny, and good morning, everyone. The second quarter of 2024 was our third consecutive quarter of strong top and bottom line results, coinciding with the formal institution of the various Project Phoenix initiatives as our new standard operating procedure. Given this new focus and enhanced processes, we once again met or exceeded our outlook in the second quarter. And as such, we remain on target to achieve one of our all-time high performance adjusted EBITDA years. This was the ultimate objective of Project Phoenix, leveraging our core competencies to unlock our inherent value. Revenue in the second quarter was up meaningfully for the third consecutive quarter, increasing nearly 8%. Consistent with the first quarter, about one quarter of our overall growth was attributable to price increases, where we have taken pricing actions starting primarily with smaller or mid-sized customers. In addition, Growth was met of certain work that we vacated because it did not meet the new profitability benchmarks established by our commercial function. Aerospace and Defense continued its strong growth trajectory with revenue being up 17.5% in the second quarter on the heels of having been up 18.9% in the first quarter, making this its third consecutive quarter of favorable results. Commercial aerospace continues to be extremely strong We are also generating significant growth in the private space industry as well as a result of the increase in number of launches. We are channeling incremental capital into our aerospace and defense business in order to capitalize on what we see as a unique window in the market to accelerate growth. Capital funds are going primarily to our shop laboratories where we are expanding the services that we offer to help de-bottleneck our customer supply chain constraints. As Manny indicated, we expect strong performance from the higher margin aerospace and defense industry throughout the year. Our oil and gas industry revenue has also continued to be very resilient in the second quarter of 2024, up 3% over the prior year quarter, after having been up 14.7% in the first quarter, on the strength of a robust spring turnaround season. Actually, all of our end markets were up in the second quarter compared to the prior year quarter, demonstrating the diversity of the industries that we serve. Both gross profit and margin expanded again in the second quarter, primarily attributable to a favorable sales exchange and lower healthcare claims expense, as well as due to the favorable impact of Project Phoenix actions realized in 2024, including pricing increases achieved. Selling general and administrative expenses were down both sequentially and year over year, Although admittedly, somewhat modestly and less than expected in light of our cost reduction plan. For the quarter, our SG&A was 21.6% of revenue and was 22% of revenue for the six months ended June 30. As Manny mentioned earlier, we remain committed to achieving our goal of reducing SG&A to approximately 21% of full year 2024 revenue. Note that our original EBIT outlook for 2024 anticipated an incremental year-over-year gross profit benefit of $3 million and SG&A benefit of $12 million due to Project Phoenix initiatives. Based upon our implementation of Project Phoenix, we have validated this cost savings of $15 million in aggregate. However, this benefit is now revised to be $7 million of cost of revenue reduction and $8 million of SG&A reduction savings in fiscal 24. Therefore, although we will still realize a $15 million aggregate improvement to adjusted EBITDA in 2024 attributable to these items, there will be a change in the distribution of savings between the cost of revenue and SG&A line, respectively. However, this change has no net impact on our outlook for adjusted EBITDA for fiscal 24. Nevertheless, the company's primary objective is to create shareholder value by improving our bottom line profitability. And in the second quarter, we made significant progress on this front with gap net income of $6.4 million or $0.20 per diluted share, up from $0.3 million or $0.01 per share a year ago. And after rising 55% in the first quarter, adjusted EBITDA was up 44% to $22 million in the second quarter and stands at $38.3 million for the first half of 2024. With regard to cash flows, net cash provided by operating activities was 5.2 million, and free cash flow was negative 6.9 million for the first half of 24. Each of these metrics were well below the prior year comparable metric. And both were adversely impacted by an increase in receivables and unbilled receivables in progress. This was primarily due to a lack of prioritization and focus by management, along with the timing of invoicing associated with customer projects, and the nature of some of the work that was completed in the second quarter. As Manny mentioned earlier, cash from operations and free cash flow performance for the year and year-to-date periods did not meet the company's expectations. The company is intently focused on improving this performance over the remainder of the year. Specifically, we will work with operations management via additional oversight and attention by senior management to drive down both accounts receivable and unbilled work in process. Our goal is that together with earnings over the second half of the year to generate over $40 million in free cash flow, which will enable us to meet our reaffirmed free cash flow outlook of $34 to $38 million for the whole year. Interest expense was $4.4 million for the quarter up from a year ago, but essentially from the first quarter. We expect to reduce interest expense for the remaining quarters of 2024 in two ways. First, by reducing leverage, which will lead to a lower interest rate, and second, by decreasing the amount of outstanding borrowings. This should lead to a gradual decrease in interest expense over the second half of 2024. Our trailing 12-month bank-defined leverage ratio on our credit facility dropped to below three times during the second quarter of 24, and it was 2.78 as of June 30th. This is the lowest this ratio has been since the third quarter of 2018. Based on our current projections, we anticipate further reductions to our leverage ratio throughout 2024 due to the anticipated increase in our trailing 12-month EBITDA and debt reductions. Over the past few years, we have primarily used our free cash flow to pay down over $90 million of outstanding borrowings. As we approach our year-end 2.5 times leverage ratio goal, We now believe that capital expenditures that support our organic growth and supply returns at times may be a superior use of our free cash flow. Again, each of these uses will be considered as we move forward. Our overall effective income tax rate was 15.5% in the second quarter, which benefited from a discrete benefit recognized during the second quarter. We expect our full year effective income tax rate to be in the low 20% range for the full year. There is a true sense of pride at Mishra like never before, and it has led to the vigor with which teams have attacked the various project Phoenix initiatives and market opportunities. These efforts are being rewarded with tremendous results. I'm extremely optimistic, not only about this year, but about 2025 and beyond, as we continue to implement initiatives that leverage the unparalleled talent, experience and capabilities and knowledge that has made Mishra a leader in the industry for over 40 years. We sincerely appreciate your continued support and expect to reward your patients with significantly improved results over a remainder of 2024 and for the longer term. At this time, I'd like to turn the call back over to Manny for his closing remarks before we move on to take your questions.