Mistras Group Inc

Thank you for joining the Ms. Strass Group's conference call for its third quarter ended September 30th, 2024. My name is Amber and I will be your event manager today. We will be accepting questions after management's prepared remarks. Participating on the call for Ms. Strass will be Manny Stamakis, the company's chairman of the board and interim president and chief executive officer, 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 booking statements. The company's actual results could differ materially from those projected. Some of those factors that cause actual results to differ are discussed in the company's most recent annual report on Form 10-K and the other reports filed within the SEC. The discussion in the 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 the Form 8K. These reports are available at the company's website, in the investor section, and on the SEC's website. I would now like to turn the conference call over to Manny Stimatakis.

Thank you, Amber. Good morning, everyone, and thank you for joining us today. The company's third quarter results were in line with our expectations. with the bottom line growing significantly faster than the top line, once again demonstrating the margin accretive actions and significant operating leverage improvements that we have instituted into our business model. Revenue was up nearly 2% during the quarter, led by continuing growth in the international segment for the eighth consecutive quarter. along with double-digit revenue growth within the North American segments aerospace and defense and industrial industries. Our consolidated oil and gas industry revenue decreased during the third quarter, driven by a decrease in downstream sub-industry revenue as we had anticipated. Due to a relatively moderate fall turnaround season, compared to a more robust spring turnaround season earlier this year. Our midstream sub-industry revenue also decreased in the third quarter due to timing of customer projects, whereas upstream sub-industry revenue increased in the third quarter due to strong customer demand. Adjusted EBITDA was up over 11% compared to the prior year quarter, and up over 32% compared to the year-to-date period, reflecting significant improvements in our operating leverage. I'm also pleased with our third consecutive quarter generating GAAP net income, which is a function of continued revenue growth, gross profit expansion, and selling general and administrative expense reductions. Selling general and administrative expenses were down compared to both the year-ago quarter and year-to-date periods. For the third quarter of 2024, SG&A was down 1.7% year-over-year to 38.9 million. SG&A was also down 5.1% sequentially from the second quarter of this year. I noted last quarter that both cash from operations and free cash flow performance along with debt level through mid-year June 30th significantly lagged that of prior year and the company's expectations. I mentioned that management would be intently focused on improving this performance via prioritization and focus during the second half of 2024. I am pleased to report that we made significant progress on this front during the third quarter, which Ed will cover later. A few additional comments on the third quarter are as follows. Revenue generated by our data analytical solutions category in the quarter was 17.9 million, which is essentially flat with the prior year. As some scheduled jobs pushed out beyond the third quarter, and there were some unanticipated delays with new customer implementations. We expect revenue growth for this category to be a mid-teens growth rate in 2025. Our global consolidated aerospace and defense revenue grew 9.1% in the third quarter, in spite of unanticipated project pushouts due to current market conditions. Nevertheless, assuming current market conditions don't materially change, we expect to finish up nearly 15% for the full year 2024. We additionally expect this key growth industry to continue with mid-teens revenue growth in 2025. We will continue with our longer-term strategy of increased investment in this industry and will continue to extend our service offerings to include more additive manufacturing and mechanical work beyond inspection testing. We will also continue to expand our scope of work in the private space industry as a result of robust demand for our services in this area. As such, we expect continued strong performance in this industry over the longer term. The search for a permanent CEO is on track and progressing well. And my goal is to announce our next CEO before the end of this year. Once in place, I will remain active as the chairman of the board and expect to work closely with the CEO, not just during a transitionary period, but on a recurring basis going forward to continue on the momentum and progress developed in 2024. And lastly, I once again want to note the renewed sense of commitment and dedication being demonstrated throughout the entire organization via an invigorated senior leadership team. 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. As Manny mentioned, I am pleased to report that we did achieve significant progress in improving our cash from operations and free cash flow performance. We generated $19.4 million of operating cash flow and $13.2 million of free cash flow during the third quarter attributable to our improved results and operating leverage. We use this cash flow to pay down over 10 million of borrowings during the third quarter. Our gross debt as of September 30, 2024 is the lowest level it has been since our acquisition of Onstream in December 2018. And we have paid down over 100 million of outstanding borrowings since that time. We are funding our organic growth initiatives with operating cash flow. which significantly improved in the third quarter of 2024. Although our second half of 2024 free cash flow and debt paydowns are expected to achieve our original ambitions for the year, we will not make up the shortfall from the first half of 2024, attributable to the earlier buildup of accounts receivable. Accordingly, we will revise our full year free cash flow outlook to a range of between 18 to 22 million. We will continue to fund our organic growth initiatives internally and the company's bottom line is growing significantly faster than the top line. Once again, demonstrating the margin of creative actions and significant operating leverage improvements that we have instituted into our business model. The third quarter of 2024 was our fifth consecutive quarter of both revenue and adjusted EBITDA growth versus the prior year comparable periods. Revenue in the third quarter was up only 2% year over year, given the expected slowdown in the oil and gas industry, particularly in the downstream subcategory, which we had anticipated for the second half of this year. Our international segment revenue was up 8.7% in the quarter, continuing the strong trend they've experienced throughout 2024. Although overall North American segment revenue was essentially flat in the third quarter, The aerospace and defense and industrial industry revenues were each up over double digits in the third quarter as compared to the prior year. Our global consolidated aerospace and defense business revenue grew 9.1% in the third quarter in spite of unanticipated project pushouts due to current market conditions, on the heels of having been up 17.5% in the second quarter and 18.9% in the first quarter of 24. Nevertheless, as Manny stated earlier, assuming current market conditions don't materially change, we expect to finish up nearly 15% growth for the full year of 2024 in this industry. And we additionally expect this key growth industry to continue with mid-teens revenue growth in 2025. Consolidated industrials industry revenue was up 17.2%. and power generation and transmission industry revenue was up 19.7% respectively in the third quarter versus the prior year on the strength of demand in these industries. Although downstream revenue moderated in the third quarter, as we had anticipated, upstream revenue continued to be strong in the third quarter and was up 15.2% compared to the prior year third quarter. Midstream revenue was down 17.8% in the quarter compared to the prior year, primarily due to a non-recurring turnaround project which occurred in the prior year quarter. Oil and gas industry revenue as a whole has been very resilient for the year to date in 2024, up 4.5% over the prior year for the first nine months of the year. Gross profit dollars were up on a year-to-date basis for the first nine months of 2024 across all segments, as was operating income up for the same period. On a consolidated basis, operating income was $11.9 million for the third quarter of 2024, a significant increase over the prior year period. As Manny mentioned, selling general and administrative expenses were down both sequentially and year over year. For the third quarter, our SG&A was 21.3% of revenue and was 21.7% of revenue for the nine months ended September 30. On a full year basis, we anticipate 2024 SG&A of approximately 22% of revenue, which is down 160 basis points from full year 2023 SG&A potential revenue of 23.6%. The company's primary objective is to create shareholder value by improving our bottom line profitability. And in the third quarter of 2024, we continue to make significant progress on that front, with gap net income of 6.4 million or 20 cents per diluted share. On a year-to-date basis for nine months, our gap net income was 13.8 million or 44 cents per diluted share. Interest expense was 4.3 million for the third quarter, up slightly from a year ago, but down sequentially from the second quarter. We expect interest expense to reduce further in the fourth quarter and go to an annual run rate basis in fiscal 25 by first reducing leverage, which will lead to a lower credit margin spread, and second, by decreasing the amount of our average outstanding borrowings. When a trailing 12-month bank-defined leverage ratio on our credit facility was approximately 2.6 as of September 30. 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 lower as of year end due to increasing our trailing EBITDA and reducing debt further. Our effective income tax rate was 29% in the third quarter and was 22% for the nine months ended September 30. We expect our effective income tax rate to be in the mid 20% range for the full year of 2024. Note that there were several special items recorded during the third quarter including a $2.1 million rewardization and other cost charge, a $900,000 favorable legal settlement, and a $1.5 million non-recurring other income benefit, which in aggregate essentially offset with only a very minimal impact in net income and no impact to diluted EPS. All in all, our efforts are resulting in improved performance. I am optimistic not only about this year, but about 2025 and beyond, as we continue to implement initiatives that leverage the unparalleled excellence, talent, experience, capabilities, and knowledge that have made Mishra a leader in this industry for over 40 years. We sincerely appreciate your continued support and expect to reward your patience with significantly improved results over full year 2024 and for the longer term future. At this time, I would like to turn the call back over to Manny for his closing remarks before we move on to answer your questions.