Mistras Group Inc

Thank you for joining MISTROS Group's conference call for its fourth quarter and fiscal year ending December 31st, 2024. My name is Tanya, and I'll be your event manager today. We'll be accepting questions after management's prepared remarks. I would now like to turn the call over to Thomas Tobolsky. Treasurer, your line is open.

Thank you, Tanya. Good morning, everyone, and welcome to MISTROS Group's fourth quarter and full year 2024 earnings conference call. I'm joined today by Manny Stamatakis, the company's executive chairman of the board, Natalia Schumann, President and Chief Executive Officer, and Ed Prisner, Senior Executive Vice President and Chief Financial Officer. Our press release and the accompanying slides that we'll be referring to today can be found within the investor relations section of our website. As shown on slide number two, I want to remind everyone that remarks made during this conference call, as well as supplemental information provided on our website, contain certain forward-looking statements and involve risks and uncertainties as described in Ms. Strauss' SEC filings. The company's actual 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 non-GAAP financial measures that we believe are useful to investors evaluating the company's performance, but that were not prepared in accordance with 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 the company's related current report on Form 8K. These reports are available at the company's website in the investor section, as well as on the SEC's website. I will now turn the call over to Manny Stamatakis.

Thanks, Tommy. Good morning, everyone. Thank you for joining us today. Before we commence today's conference call, I want to take a minute to reflect on the life of Dr. Soterios Vahavioulis, the company's founder, Chairman Emeritus, and Board Director. Soterios passed away nearly one month ago on February 6, 2025. On behalf of the Board of Directors and the entire Mistros family, I want to express our profound appreciation for the immeasurable contributions Dr. Vahavadioulas made to the company, our shareholders, and the communities we serve. a visionary leader and pioneer in the field of non-destructive testing and acoustic emission. Dr. Vahaviolis founded Mistrust, originally Physical Acoustics Corporation, in 1978 and dedicated over four decades to building it into a global leader in testing, inspection, and asset protection solutions. His expertise, leadership, and commitment to excellence were instrumental in shaping the company's strategic direction and fostering a culture of innovation that remains at the core of Mr. Ross today. His legacy will endure and live on as we move Mr. Ross forward in his memory. Our products and systems segment along with our NDT and AE services will remain as essential competencies at the core of Mistros' capabilities, enabling the company to deliver on its overall mission and purpose. On a personal note, on behalf of the entire company, I want to express our deepest sympathies to the entire Vahaviolis family. In remembrance of Dr. Soterios Vahaviolis, I ask for a brief moment of silence. Thank you. I am sure Soterios is looking down and smiling about our improved 2024 Q4 and full year results. Our consolidated fourth quarter results allowed us to exceed our revised annual guidance, with the bottom line expanding significantly, demonstrating the margin accreted actions that we have instituted into our business model. On a full year basis, revenue was up in all reported segments, products and systems included, and across all of our industries served, illustrating the increasing diversity of our growing end markets. Adjusted EBITDA was up over 25% versus the prior year, reflecting significant improvement in our operating leverage. and our adjusted EBITDA margin expanded by 200 basis points over the period and was our highest EBITDA margin since 2016. Our operating income of $39.8 million for the full year 2024 was also the highest level since 2016. I am also pleased with our fourth consecutive quarter generating net income growth, which was a function of our continued annual revenue growth, gross profit expansion, and selling general and administrative expense reductions. Year over year, 2024 was a very good year for MISDROPS. I believe 2025 will be even better as the company will continue to build momentum and energy around the profitable growth and to ensure that our leadership team consists of the best and the brightest. I am extremely confident in the course forward for Mistros. As Executive Chair, I will remain involved in overseeing the strategic path forward to maximize shareholder value and to support the new invigorated senior leadership team led by our new president and chief executive officer, Natalia Schumann. In our effort to select a new CEO, NISTROS undertook its most expansive search in the company's history by reviewing over 20 candidates. Our board of directors was thrilled with the selection of Natalia Schumann, and I can share firsthand that she has hit the ground running in her first two months as CEO. And I am extremely confident in her ability to lead this company forward. Under her leadership, you will see a new and more invigorated Mistros in 2025. Natalia brings more than 20 years of executive leadership experience, including over eight years in the testing, inspection, and certification industry, making her uniquely positioned to lead MISTROS into its next phase of growth and success. She drove growth at Eurofin Scientific as Group Executive Vice President and Group Operating Council Member from 2021 to 2024. Prior to this, she transformed Bureau Veritas as its North American CEO from 2017 to 2021. And before that, she was innovating at Kelly Services in her role as head of international business. Natalia is a proven leader with a track record of success and has driven transformative growth, developed high performing teams, and led organizations through pivotal periods of change. I would now like to hand the call over to Natalia so that you can hear directly from her before she turns the call over to Ed to give a more detailed overview of our recent financial results. Natalia, the call, the gavel, and the legacy are now in your hands. And we are all excited for the future of MISTRAS. But I'm not putting any pressure on you.

Good morning, everyone. Thank you. Thank you very much, Manny. I sincerely appreciate the warm welcome from you, the entire board of directors, and my team. I am deeply honored to be leading MISTRAS group into its next phase of growth. building on the strong foundation established by Dr. Vahaviello with the goal of driving meaningful value to all our customers and, in turn, for all our shareholders. I have spent my first 60 days on the job actively talking to customers, being in the field at our in-house laboratories, meeting with the team, as well as discussing operational strategies with Manny, the board of directors, and other stakeholders. Our strong partnership with our valuable customers, leading technologists, and committed management teams create a solid foundation that aligns well with our long-term vision. I am very excited for the prospect of continued profitable growth heading in 2025 and beyond. 2024 was a truly pivotal year for Mitras under Manny's leadership as interim CEO. wherein the roadmap for success was built and the company achieved a number of significant milestones, including the second highest level of adjusted EBITDA in the company's history. Additionally, via the successful execution of Project Phoenix, the company's SG&A level in dollars and as a percentage of revenue was at the lowest level it has been in over five years. The company's more efficient business model and cost discipline provide a significant level of operating leverage given our organic growth aspirations. As shown on slide number seven, the diversification across our end market and the revenue growth in all of our segments and industries that we serve in full year 2024 over 2023 are creating strong momentum for us. I look forward to updating you throughout this year as we make additional progress, and I'm very excited for the journey. I would now like to turn the call over to Ed for more details on the fourth quarter and full year 2024 results.

Thank you, Natalia, and good morning, everyone. Due to our improved results in operating leverage, as shown on slide eight, we generated $25.7 million of operating cash flow and $20.8 million of free cash flow during the fourth quarter. We used this cash flow to pay down $20.1 million of bank debt during the fourth quarter, and our bank defined leverage level dropped to below 2.5 times as of December 31, 2024. This is the lowest level this ratio has been since the third quarter of 2018. We continue to fund our organic growth initiatives including our investment in capital managers with cash flow, strengthening our capabilities and footprint to better support our customers. As you might recall, our net cash flow generation lagged our expectations in the earlier part of 2024. We are pleased with the gains made in the fourth quarter, and we plan to maintain that momentum as we head into 2025, as we believe self-funded growth represents an attractive and durable option to drive shareholder returns. Turning to our full year results, as shown on slide nine, 2024 consolidated revenue was $729.6 million, a 3.4% increase over 2023. As Natalia said, revenue increased in all reported segments and across all industries served in 2024. This was led by strong performance in the aerospace and defense industry, which experienced a substantial revenue increase of 13% on a full year basis to $87 million. Our core energy industries and infrastructure industry revenue were also up in 2024 over 23. Full year gross profit increased to $213.1 million, up 4.6% as compared to the prior year, with gross profit margin expanding 30 basis points. The increase in gross profit margin to 29.2% was primarily due to the strong growth in our aerospace and defense industry business, which offers a higher than average margin. SG&A for the full year 2024 was 156.4 million, down 6.2% or 10.4 million compared to 166.8 million in 2023, as a result of ongoing cost calibration and discipline spending. SG&A for the 12 months ended December 31, 2024, was 21.4% of revenue, a 220 basis point reduction from the prior year and the lowest level it has been since 2017. Reorganization and other costs were 5.5 million for the full year 2024 compared with 12.3 million in the prior year. These costs were incurred to facilitate the company's expense containment as well as the recalibration of our initiatives. Income from operations was $39.8 million for the full year 2024 compared to an operating loss of $1.9 million in 2023. On a non-GAAP basis, operating income was $46.2 million for the full year 2024 compared to $25.2 million in the prior year, an increase of 83.3%. This eight-year high was due in large part to our Project Phoenix initiative strong growth in our aerospace and defense business, and improved performance in our international segment. Interest expense was $3.9 million for the fourth quarter, down from $4.7 million in the prior year quarter. We anticipate lower annual interest expense in 2025 through direct debt pay downs with free cash flow, as well as with continued deleveraging as our adjusted EBITDA grows. both of which would serve to improve our overall cost of debt via a lower credit margin spread. We anticipate interest expense being approximately $2 million lower in 2025 versus 2024 to be about $15 million next year, assuming no changes in the underlying SOFR rate and our anticipated TTM leverage level of less than 2.5 times. Our effective income tax rate was 21.8% for the full year 2024, and lower than our statutory rate due to several discrete benefits recognized throughout the year. This effective rate in 2024 was a significant improvement over the 6.5% income tax benefit rate in 2024 due to a non-deductible goodwill impairment in 2023. We anticipate that our effective income tax rate would be approximately 25% in 2025. Our net income was $19 million, or $0.60 per diluted share, for the year ended December 31, 2024. Full year 2024 net income, excluding special non-GAAP items, was $22.7 million, or $0.72 per diluted share, excluding these same special non-GAAP items. This EPS performance is the highest level we've generated since 2016. Adjusted EBITDA was 82.5 million for the full year 2024 compared to 65.8 million in the prior year, an increase of 16.7 million or 25.3%. This increase in adjusted EBITDA was primarily attributable to a favorable business mix and overhead cost containment initiatives. And this adjusted EBITDA improvement represents a nearly 70% operating leverage conversion of the incremental revenue increase in 2024 into adjusted EBITDA. With respect to our consolidated results during the fourth quarter, our overall revenue level was down 5.1% as expected due to the anticipated decline in oil and gas revenue. However, given the strong operating leverage built into our business model, our income from operations increased by 9.8 million as compared to the fourth quarter of 2023, despite this lower level of revenue. And our cash conversion was equally strong in the fourth quarter of 2024, with free cash flow increasing 12.1 million over the fourth quarter of 2023. With respect to our segments, as shown on slide 10, the North America segment revenue in the fourth quarter was 136.9 million, down 7.5 percent from 148 million in the prior year. This revenue decrease was primarily due to the anticipated decrease in North American midstream industry, as well as a relatively moderate fall turnaround season in 2024, which had been anticipated. This segment's fourth quarter 24 gross profit was $38.9 million compared to $42.9 million in the prior year. Gross profit margin was 28.4% for the fourth quarter of 24, a 60 basis point decrease from the prior year period. This decrease in gross profit margin was primarily due to sales mix. The international segment fourth quarter of 2024 revenue was $35 million, up 3.6% from $33.8 million in the prior year. International segment revenue increased in each quarter of 2024 compared to the prior year periods and increased 9.3% on a full year basis. This was primarily attributable to double-digit revenue growth experienced in our international energy and aerospace and defense industries. International segment fourth quarter 2024 gross profit was 10.1 million with a gross profit margin of 29% compared to 27.7% in the prior year period. On a full year basis, 2024 international segment gross profit was 39.8 million an increase of 6.2 million or 18.5% over a full year 23, with gross profit margin increasing 29.3% to 29.3% from 27% in 23. This 230 basis point increase was primarily attributable to improved operating leverage and a favorable business mix. The products and system segment experienced strong growth in profitability with a 5.2% increase in revenue from $13 million in 2023 to $13.7 million in 2024, yet experienced a 840% increase in income from operations from $0.3 million in 2023 to $2.5 million in 2024. This success was driven by cost reductions and efficiency improvements, which we expect to continue. We are pleased with the performance of this segment and its offerings including acoustic emission competencies and online monitoring capabilities, which provide us with a competitive advantage that differentiates Mistrage from competitors. On a full year basis, our net cash provided by operating activities was $50.1 million for 2024, compared to $26.7 million in the prior year. Free cash flow, a non-GAAP financial measure, was $27.1 million for full year 2024 compared to $3.1 million in the prior year. This increase was primarily attributable to significantly improved financial results in 2024 and improvements in working capital management, particularly in accounts receivable reduction despite the higher level of annual revenue. Capital expenditures were fairly consistent year over year, at $23 million for full year 2024 compared to $23.6 million in the prior year. The company continues to invest in efficiency improvement opportunities, including internal workflow automation and productivity enhancements. Our gross debt was $169.6 million as of December 31, 2024, compared to $190.4 million as of December 31, 2023, a decrease of 20.8 million. This decrease in gross debt year over year was attributable to a significant pay down resulting from our favorable cash flow generation in 2024. The company's net debt, a non-GAAP measure, was 151.3 million as of December 31, 2024, compared to 172.8 million as of December 31, 2023. All in all, our efforts throughout 2024 are driving improved performance. I am optimistic about 2025 and beyond as we continue to implement initiatives that leverage the unparalleled talent, experience, capabilities, and knowledge that have made Ms. Ross a leader in the industry for over 40 years, thanks to the vision of Dr. Soterios Fabiolos. We sincerely appreciate your continued support as stakeholders, and we expect to reward your patients with improved results in full year 2025 and beyond. At this time, I would like to turn the call back over to Natalia for her closing remarks before we move on to take your questions.

Thank you. Thank you, Ed. Given my recent appointment as CEO, effective January 1 of this year, the senior leadership team and I have been and we will continue to review our entire business portfolio with the focus on continuing to grow, adjusted EBITDA and earnings per share, as well as continuing to improve our margins. Additionally, the US dollar-to-euro exchange rate strengthened since we set our budget, and this unanticipated foreign currency exchange risk could unfavor 65 actual revenue translation in 25. We believe this FX risk will be essentially neutral on our adjusted EBITDA margins and other profitability metrics. Nevertheless, we will be assessing this FX risk as well as potential impact of the recently announced US foreign tariffs on our business and financial results for fiscal 2025. And once this assessment is complete, we anticipate releasing guidance for fiscal 2025 with our goal to continue driving profitable growth, margin expansion, and increasing EPS. There are a few segments and end markets that I am most excited about. our suite of industrial IoT connected digital software and data analytics being one of them. The data evaluation journey with our customers dates back to our founding as a company, and we will further leveraging this competency for growth in the future. Our PCMS software and service offering remains at the core of our one source application. We will also continue with our long-term strategy of increased investments in solutions for aerospace and defense industries at our in-laboratory testing locations, and we will further expand our service offerings to include more additive manufacturing and mechanical work beyond quality inspection and testing. We will also continue to expand our scope of work in private space industry as a result of robust demand for our non-destructive and destructive testing services in this area. As such, we expect continued strong performance in this industry over the long term. While we acknowledge that there are some challenging market conditions that many of our customers within the oil and gas industry are experiencing, we are encouraged by our current level of bid activity and optimistic that we will continue to gain market share by offering a complete suite of integrity services to provide a meaningful ROI to our customers. And we will also plan to further diversify our operations into other end markets. Additionally, we'll keep expanding our field inspection business by investing in newer technologies, such as the ART crawler, as well as building advanced logistical capabilities using drones, robotics, and road access. Our strong fourth quarter results provide evidence and confidence for our future performance, given our newly found discipline approach and newly established processes. Our continued robust cost management, strategic partnership with our valuable portfolio of clients, and our skillful workforce have us excited for the prospect of continued profitable growth for Mistra. I am very pleased to lead nearly 5,000 employees who believe in our vision and are working hard every day to achieve our goals and objectives. I also can feel the high level of energy throughout the organization. And our customers are responding in kind as well, with increasing level of ROI recognition for the value that Mistrust employees bring to the equation in delivering on our mission to maximize safety and operational uptime for our customers' critical assets. At this time, I would like to ask the operator to open the call to your questions.

Certainly. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile our Q&A roster. Our first question will be coming from John Frensreb. of Sidoti & Company. Your line is open, John.

Good morning, everyone, and thanks for taking the questions. Natalia, welcome aboard. I'd like to start the first question directly to you. You mentioned in your prepared remarks that you not only were touring facilities, but you met with major customers. I'm curious what kind of feedback you got from customers about their perception of mistrust and what they can do better.

Super encouraged with the positive feedback that we're hearing from the customers. And in fact, they are really excited about the complete suite of our offerings. You know, when we are talking about the entire solution for integrity and asset performance management, you know, and I'm starting with the software, analytics, engineering services, testing, inspection. So there's so much that we can do to unlock the value of our offerings. So the customers are really excited about that.

Good to hear. And I guess, Ed, this might be more directed towards you. The receivable issue that you had in the past, is that fully behind you, or is there still repricing of some contracts that need to be done?

No, we believe that's behind us. Over the course of the years, yes, we believe that's well at hand, and that's become a very top priority for management. So we feel good about that heading into 2025.

Fair enough. I've got to admit, everybody, that was – That didn't come through entirely clear on my end, but that might be my issue only. The next question I got is, what are your thoughts about the upcoming turnaround season relative to last year's first half strong one? Is it a tough comp still, or are you, you know, any kind of qualitative, you know, impact or review of the turnaround season would be helpful?

Please remain on your line.

I'm sorry, are we still hearing us okay? That is much, much better. Oh, sorry, John.

Are you hearing us okay?

Sorry, the operator interrupted us there. You hear me okay? Yes, but I got the last two responses were fairly broken up. Oh, sorry. I'm not sure what.

Sorry, hopefully you're hearing me okay clearly now?

Much, much better. Yes, sir.

Okay. Sorry about that. Yeah, so we expect 25 to be a normalized year in the turnaround period. oil and gas and turnarounds in particular. As you just pointed out, 24 was sort of lopsided. The front end was very strong. The spring turnaround season was rather robust. The fall turnaround season we just completed was not. Expected inverse of that in 25. We see that, you know, the spring will be weaker, the fall will be more robust. So year over year, it's normalized. The volume is relatively similar, but it does fall into those two halves. So 25 will be essentially the opposite effect as we saw in 24.

That makes perfect sense. Thanks for the call. And one last question, I'll get back into queue. Can you talk a little bit about data analytics? From what I recall, there were some delays in the second half of last year that were pushing jobs into 2025 that would have implied double-digit growth. Is that still the case, or there are additional delays that we should be cognizant of?

Data analytical solution business, Revenue was indeed down in 24, and this is due to the timing of certain projects and implementation delays. But we will have investments going into this business, and we do anticipate growth in 25. In particular, you know, PCMS continues to be in demand due to the heavier focus on production efficiencies and the capital discipline that is in this oil and gas segment. So this, you know, Jim Radman, who leads our data analysis business, is very optimistic about growth prospects. And at this point, you know, PCMS software has been implemented. It's more than 50% of oil of the U.S.-based refineries, and market share continues to grow. So we are very optimistic.

Okay. Thanks for taking my questions. I'll get back into Q. Thank you.

And one moment for our next question. Our next question will be coming from Mitchell Pinheiro of Sturdivant & Company. Your line is open, Mitchell.

Yeah, hi. Good morning. So a question, just curious, how do tariffs affect your businesses? Excuse me, we're having trouble hearing you on our end. If you could, something is wrong with the communication here.

I'm sorry about that, Mitch. We're on the same exact line. We were just speaking in the prepared remarks. We apologize for that. Any better right now?

Right now is better, yes. That's better right now.

Okay, sorry about that.

I didn't get much.

Okay, sorry, sorry. I'll re-answer that. Sorry, the microphone may have switched in the room here. We apologize for that. Yeah, on the tariff question, too early to tell. We are assessing that. But, no, no impact at the moment. We're studying, however, what the tariffs might mean to our business.

So, okay. I mean, like, so not putting out guidance – Because there is some uncertainty here, I get it, but it's like if it's not going to have that much of an impact, I don't really understand the connection.

Mitch, I'll jump in on that. As Natalia said, she and her team are evaluating all our lines of business, and we're We felt it was appropriate for her to take a little time to do that. And once she has had time to look over everything, we will be releasing guidance. It's not predicated solely on the tariffs. Okay. Okay. Got it. Understood.

And that, you know, just in the oil and gas business, Midstream's been down for three straight quarters. And I always kind of thought midstream was going to be a more steadier type of revenue line for you guys. Can you talk a little bit about what's going on on the midstream?

So the midstream stock category did experience some approach of delays in 2024, but we do expect growth in 2025. There are some regulatory changes that are pending, driving strict pipeline integrity requirements and increased demand for the advanced in-line inspection technologies that we offer. So that's what leads us to believe that we will have improved performance in midstream.

Okay. Thank you for that. And then I'd love a little – learn a little bit more about the data analytical solution segment. I mean, it's obviously a big growth focus, but sales were down last year. They were down in the fourth quarter. I'm curious as to why and what type of strategic changes or if there's any strategy changes being made.

There is no strategic changes per se in data analytics. We continue investments in that. As I mentioned before, there are some delays in implementation, but we continue to invest in this sector of our business. What is interesting is really that we now have very collaborative sales efforts, you know, offering the entire suite of our solutions. you know, starting with their software, digital software, and offering engineering services, the implementation, and then going into the inspection, testing, and also followed by some of our products, like monitoring technology. So that's what I think differentiates us. And as I mentioned, we're already in the 50% of U.S. refinery, so we're certainly not changing our strategy. The idea is to really extend it beyond oil and gas industry, as well as the extent our market share within oil and gas industry.

Okay. And then just one more question, and I'll get back in the queue, but on the SG&A side, is

is like the fourth quarter level the sustainable level in dollars you know uh or is was there some one-time help you had in the fourth quarter can you talk about that please uh no that's just a good question no that's a relatively normal level to annualize going forward so yeah we we have internalized this project phoenix discipline into our cost control cost recalibration so yeah that that's a relatively good base to start for modeling forward. We intend to keep very tight controls on overhead, up in cost of goods sold, as well as down in SG&A. So, yeah, that's a good one rate actually in the year with SG&A. Okay.

All right. Well, thank you. I appreciate the answers.

Thank you, Mitch.

Okay. And I'm showing no further questions at this time. I would now like to turn the call back to Manny for closing remarks.

Thank you, Operator. And thank you everyone for joining this important call today and also for your continued interest in MISTROS. With the baton now officially passed to Natalia, she will be providing you with an update on our business and progress achieved towards our ongoing initiatives on our next earnings call. As I stated, I am very confident in her abilities to succeed me as Chief Executive Officer, leading Mistros going forward. And I will continue to do my best to honor the legacy that Dr. Soterios Vahavioulis built by being a steward of Mistros going forward with a focus on continuing to improve shareholder value. I believe we have an extremely bright future ahead of us with our invigorated executive team who will lead mistress for years to come, delivering improved results and generating enhanced value for our shareholders. Safety and asset integrity will remain our core mission and purpose.

And this concludes today's conference call. Thank you for participating. You may now disconnect.