Mistras Group, Inc. (NYSE:MG) Q1 2024 Earnings Call Transcript

Mistras Group, Inc. (NYSE:MG) Q1 2024 Earnings Call Transcript May 4, 2024

Mistras Group, Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for joining our Mistras Group’s conference call for its first quarter ended March 31st, 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 from Mistras will be Manny Stamatakis, the Company’s Chairman of the Board and Interim President and Chief Executive Officer, and Ed Prajzner, 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 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 Form 8-K. These reports are available at the Company’s website in the Investors section and on the SEC’s website. I will now turn the conference over to Manny Stamatakis.

Manny Stamatakis: Good morning, everyone. Thank you for joining us today. The first quarter was a strong start to the year as we continued to execute on our key financial, operational, and strategic initiatives. In particular, we achieved outstanding success in our Project Phoenix program, with adjusted EBITDA up 55% compared to the prior year. Revenue was up nearly 10%, primarily due to the strong spring turnaround activity in the Oil & Gas industry, and continued expansion in our Aerospace & Defense industry. Additionally, our improved commercial focus provided the benefit from the successful implementation of strategic price increases, which consequently contributed to improved gross margin. Selling, general, and administrative expenses were reduced on both a sequential and year-over-year basis, and we announced the hiring of a Chief Transformation Officer whose primary focus will be on sustaining the momentum generated by Project Phoenix to further improve operating leverage.

Consequently, I’m once again reiterating our expectation that fiscal 2024 adjusted EBITDA will be one of our all-time high-performance years. While still early in the process, this is our second consecutive quarter of a strong top and bottom-line growth. with each successive quarter, we are gaining increasing confidence that the strategy and direction that emerged from our refocus in 2023, has put us on a trajectory to achieve record results this year and to maintain steady growth into 2025 and beyond. Let me first share some of my thoughts on the quarter, focusing on the objectives I have been outlining for you, and the progress that we are making against those initiatives. I am very pleased with our top-line up, nearly 10%, with our two largest end markets, Oil & Gas, and Aerospace & Defense, all up double-digits year-over-year.

This success thus far can be attributed to our new commercial focus, which we expected to drive organic growth this year, and which has, in fact, materialized. In the Oil & Gas market, which was up 14.7%, we benefited from strong turnaround activity in the quarter, both domestically and internationally. This included growth in all three subsidiaries – sub-industries within Oil & Gas, as – of up mid and downstream. Last quarter, I mentioned how we have been working closely with our customers in obtaining needed price increases to offset cost increases we are seeing. And I can say that this initiative clearly contributed to our first quarter growth in both revenue and gross profit. I want to thank our customers for working with us to obtain these necessary increases.

Oil & Gas will remain an important market for Mistras, and it is our intention to improve performance by making sure we are getting appropriate returns for the value we provide, through both price increases and project selectivity. Aerospace & Defense revenue was up nearly 19%, reflecting strong end market demand. In particular, I would note that our Commercial Aerospace business continues to expand is back to pre-COVID levels within North America. And our private space business is also growing. As we expand our breadth of services provided to our customers in this market, we plan to continue to make strategic capital expenditures in these higher-margin and most important businesses to accelerate their growth. Our Data Analytical Solutions businesses experienced some project delays.

It pushed back some revenue out into later in the year. All of the underlying fundamentals are on track, and we expect Data Analytical Solutions to generate strong, high-margin growth over the balance of the year, in line with their 2024 targets. We will also continue to invest capital to grow this strategic area. As part of our goal to better leverage our growth, our first quarter bottom-line grew significantly faster than the top-line. Profitability benefited from a reduction in both direct costs and overhead expenses, mostly attributed to our Project Phoenix activities, therefore, causing operating costs to fall and margins to rise. The net result was a significant improvement in operating leverage, leading to the Company’s best ever first quarter adjusted EBITDA.

And while free cash flow lagged somewhat due to an increase in working capital related to timing of customer invoicing, we still expect at least $34 million of free cash flow in fiscal 2024. There have been other significant actions taken and progress made in the first quarter. First, we have brought on Hani Hammad as Executive Vice President and Chief Transformation Officer. Hani managed our Project Phoenix initiative when he worked at AlixPartners, and he previously worked for PWC Consulting, Baker Hughes, and GE. Hani will report directly to the CEO, and is responsible for completing and improving upon the transformation plan arising from Project Phoenix, which initially identified a projected gross annual run rate of $47 million adjusted EBITDA benefit, to be achieved by the end of 2025.

With a seasoned executive of Hani’s experience and accomplishments now dedicated full-time to this program, along with an invigorated senior leadership team, we are confident that we will achieve our Project Phoenix expectations and more. The search for a permanent CEO remains on track, and we are working with a preeminent leadership advisory firm to identify the best individual to lead the company into its next phase. Our goal is to have our next CEO in place by the end of our third quarter. And finally, we continue to make significant progress with the organizational and cultural changes that I had previously noted, and which are important to our success. These changes have not only energized and motivated everyone throughout the organization, but have also led to the unprecedented collaboration and creativity, enabling us to deliver even greater value to both our customers and shareholders.

I believe we are now more fully aligned and committed to our mission than at any time over the company’s history. My focus and that of our next CEO for the Company will be profitable growth. Now, I’d like to turn this call over to our CFO, Ed Prajzner, for his update on our recent results.

Ed Prajzner: Thank you, Manny, and good morning, everyone. I share Manny’s enthusiasm for Mistras’s immediate outlook and longer-range future. Our focus on transformative discipline will allow us to leverage our footprint, and coupled with our new commercial focus, will lead to improved results and profitable growth. First quarter results continue to demonstrate our commitment to unlocking significant value through the ongoing implementation of Project Phoenix. While we have already made significant progress, there is more work to do as we plan to achieve our target of an incremental SG&A reduction of $12 million in 2024 versus the prior year. This will not only generate an improved bottom-line return, but will also provide funds to reinvest in our high margin growth initiatives such as Data Analytical Solutions and the Aerospace & Defense industry.

This is an exciting time for Mistras, and the entire organization is focused on capitalizing on the unique growth opportunities in our markets. And our first quarter performance demonstrated this, with a great start to what we anticipate will be one of our all-time high adjusted EBITDA performance years in 2024. For the second consecutive quarter, we exceeded financial expectations ,while making significant organizational progress. The first quarter marked the second consecutive quarter where we generated significant organic revenue growth, actually increasing from 8.2% in the fourth quarter of last year, to 9.8% this quarter. As Manny noted, we were up in our two largest end markets, in part due to contributions from our improved commercial focus, which has provided a benefit from the successful implementation of strategic price increases.

The Oil & Gas industry was up nearly 15% on a strong spring turnaround season. Although turnaround activity remained robust as stated last quarter, we are anticipating this sector’s growth to level out in the second half of the year due to a more moderate fall turnaround season, compared to the robust spring turnaround, which continued into April 2024. Aerospace & Defense continued its expansion, continuing its bounce-back from the fourth quarter with another quarter of solid growth, up nearly 19%. Our North American Aerospace & Defense business has recovered to pre-pandemic levels in the first quarter of 2024. The Aerospace & Defense market remains robust, and was once again led by the strong performance in our West Penn business. For the third consecutive quarter, they had record results, primarily as a result of kind of the continued ramp up of our new Georgia facility, as well as increased demand for our services, which are helping to de-bottleneck the industry supply chain.

The international Aerospace business revenues were also up significantly in the quarter. Private space was also strong in the first quarter, and we expect this business to hold up well over the immediate term as the pace of space launches has not let up. As one of our primary growth initiatives, we are investing in our Aerospace & Defense business to accelerate growth. So, we expect strong results from the Aerospace & Defense segments throughout the year. As Manny noted, Data Analytical Solutions had a slower start than anticipated due to project delays and implementation pushouts. However, we saw momentum build later in the quarter, which we believe will lead to continued growth during the second quarter and remainder of the year. Again, this is a focus growth area, and we are investing in our capabilities by adding highly skilled data analysts and expanding our predictive solutions.

Both gross profit and margin were up in the first quarter, despite the slow start for Data Analytical Solutions, driven by overall revenue growth, the cost reduction benefit from Project Phoenix, and the previously mentioned positive pricing actions. This was somewhat offset by higher healthcare claims expense experienced in the quarter. Selling, general, and administrative expenses were down $1.6 million or nearly 4% from a year ago, primarily reflecting the effect of Project Phoenix on headcount. We remain committed to our goals of reducing SG&A to approximately 21% of full-year 2024 revenue, with $12 million of the expected savings being the product of Project Phoenix. As we have mentioned, we are still working our way through full implementation.

For the quarter, we reported GAAP net income of $1 million or $0.03 per share. Excluding reorganization and other non-recurring costs, net of tax, non-GAAP net income was $2.2 million or $0.07 per share for the quarter. Adjusted EBITDA was up 55% to $16.2 million, which was our best ever first quarter adjusted EBITDA performance. This follows the record fourth-quarter adjusted EBITDA reported just last quarter. As a result of an increase in working capital and incremental strategic capital expenditures, we generated negative free cash flow in the first quarter, which is not unusual for the first quarter of the year. As it relates to 2024, this negative cash flow was related to an increase in working capital related to timing of customer invoicing, which we are intently focused on improving in the second quarter and remainder of 2024.

We still believe that we will generate at least $34 million in free cash flow for the year despite an increase in growth capital expenditures. Interest expense was $4.4 million for the quarter, increasing by $0.3 million from the prior year due to the higher interest rate environment and an increase in the average debt balance outstanding. Our trailing 12-month bank-defined leverage ratio was 3.06x as of March 31, 2024, which is the lowest this ratio has been since the third quarter of 2028. Based on our current 2024 projections, we expect to be able to achieve a targeted 3x or lower ratio by mid-year, primarily due to the anticipated increase in our trailing 12-month EBITDA, even if only a modest reduction in outstanding debt. We have articulated a strategy and continue to emphasize debt reduction as our primary use of free cash flow.

However, based on current financial projections, we believe investments in capital expenditures and other resources that support our organic growth strategy, while providing superior returns, also represent an excellent use of free cash flow. Longer term, we believe a 2.5x leverage ratio is achievable, and at that point, we would gain additional optionality as it relates to free cash flows. Actually, we believe a 2.5x leverage ratio can be achieved by the end of 2024 and maintained over the longer term. So, we will be balancing these two priorities to maximize shareholder value. While these are still early days, our results have been very encouraging, and we are confident in our outlook, but there is more work to be done, and additional objectives to be achieved.

2024 is shaping up to be both a transformative and record year. Most importantly, we expect to set a new foundation on which to grow profitably, given our new commercial focus and its ability to drive profitable growth. we sincerely appreciate your continued support and expect to reward your patience with significantly improved results in 2024. At this time, I would like to turn the call back over to Manny for his closing remarks, before we move on to take your questions.

Manny Stamatakis: Thanks, Ed. NDT is a large market that can reward innovative companies who can cost-effectively and expeditiously help their customers keep their assets safe, compliant, and efficiently operating. For 40 years, Mistras has been an industry leader, with solutions that solve these increasingly complex challenges. Today, we are recommitted to those values. Mechanical integrity programs have been transitioning from a time-based to a risk-based methodology. Mistras has been a leader in this risk-based approach trend, with our industry-leading asset integrity management software via our Data Analytical Solutions (businesses). We are also further – we are also excited about furthering the development of the digitization of the field inspection process.

This will help boost productivity by automating today’s manual processes, reducing rework and standardizing reporting with our cloud-based platform. All of this will reduce customers’ downtime, saving millions of dollars. We will continue to invest in this growing part of our business, and it will become an ever increasing focus for us in the future. After a year of intense analysis and introspection, we developed this strategy to capitalize on the trends shaping our markets. This includes a keen focus on growing our high-margin businesses to provide a meaningful profitability improvement, while also enhancing our sales and commercial functions. We will continue to put the right people in place that will execute on this strategy, and we are developing the systems and processes to assure that we remain on track.

Everyone is engaged and committed to these strategic improvements. Consequently, for 2024, we are reaffirming our previously announced guidance of full-year revenue between $725 million and $750 million, adjusted EBITDA between $84 million and $89 million, and we additionally expect to generate a free cash flow of between $34 million and $38 million. This is an exciting time to be leading Mistras. I’m very proud of our nearly 5,000 employees that believe in our plan, and are working hard every day to achieve our goals and objectives. You can feel that level of motivation throughout the organization. We are rebuilding a company that can deliver steady, stable growth over the long term, with a bottom-line that can increase significantly faster than the top.

Much has been done, but much remains to be done. We appreciate you joining us for this journey. At this time, I would like to ask the operator to open call to your question in queue.

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Q&A Session

Operator: [Operator instructions] Our first question comes from the line of Chris Sakai of Singular Research. Your line is now open.

Chris Sakai: Hi, good morning. I just wanted to ask about, you’re saying Oil & Gas, you’re expecting it to moderate in the second half of the year. Wanted to get your sense of that, if you could provide any more color there.

Ed Prajzner: Sure, Chris, this is Ed. I can take that question. Thanks for the question. Yes. So, this first quarter was extremely strong. It was an early start spring turnaround that has had a long duration running into April. So, we were very strong across the board, Gulf of Mexico, Alaska, international, you name it. For the fall turnaround season, we’re expecting just a normal cycle, back down, a little moderation back to a more routine regular cycle versus you had a little extra time and run time here in the spring turnaround season. So, we don’t expect to exactly repeat that, but that’s what we’re feeling, ordinary normal fall turnaround season versus an extra bit of time in this spring turnaround season, which is coming up to a wrap here shortly.

Chris Sakai: Okay, thanks. And then can you help me understand, the capital expenditures, were they mainly for Aerospace, and how is that going to improve margins going forward?

Ed Prajzner: Yes, good question, Chris. Yes, that is – our CapEx is largely in our Shop Labs, Aerospace in particular. That is a key focus there. So, that will take a little time for that revenue to be started obviously, and impact margins, but you’ll have a modest uplift. The shop margins are stronger than the field, not quite as strong as the data side. So, yes, our CapEx is largely geared towards the shop piece of our business, although the field business certainly takes some CapEx as well. But yes, we – a small modest gross profit margin improvement this quarter of bps that we saw. That’s a good indicator for really what we’re expecting going forward, some modest growth there. But yes, that’s a smaller piece of our business, the shops right now, but that should be incrementally helping margins. The CapEx is in our higher growth, higher margin type of business. So, it will be improving margins over time from the CapEx.

Chris Sakai: Okay. Thanks. And then last one for me. Can you talk about SG&A improvements? What are you seeing there and how much more can they improve?

Manny Stamatakis: Ed, do you want to …

Ed Prajzner: Sorry, Manny. You want to answer, or I can have first?

Manny Stamatakis: Yes, go ahead and answer that. I’ll jump in.

Ed Prajzner: Okay, yes. So, we committed, Chris, to – due to our Project Phoenix initiatives, that we would drop SG&A, $12 million year-over-year. We have every intention of doing that. We got partially there, more than halfway there in the first quarter. We intend to keep dropping that down. Our full-year expectation is to be at 21% of revenue, our SG&A. We have every anticipation, expectation of getting there. Project Phoenix has done the hard work already. So, we have a little more savings to achieve as the year goes along, but we’re very confident that we’re at that level now, and we’ll continue to perform towards that objective.

Chris Sakai: Okay, thank you.

Operator: Thank you, and one moment our next question. Our next question comes from Tim Moore of E.F. Hutton. Your line is now open.

Tim Moore: Thanks, and was nice to see the strong sales recovery in field services and Shop Labs growth in North America, and the SG&A cost saving shining through. Good work. I know it was a lot of time and effort and certainly paying off. I think I would just start with Aerospace & Defense. It’s nice it’s bouncing back. I know you mentioned kind of only back to pre-pandemic levels, which leads me to believe there’s ample upside here. And I know you’re working on the Georgia facility. So, was wondering maybe if you can talk a little bit more about the Shop Labs and facilities expansion, if Georgia is all going to be Aerospace & Defense? And are there any other kind of Shop Labs and facilities that you’re expanding where you’re going to put in other types of customers besides Aerospace & Defense?

Manny Stamatakis: I can start that off, Tim. Great question. Yes, we love that sector, Aerospace & Defense. So, the Georgia facility is primarily Commercial Aerospace focused, and that’s an area that is growing nicely, is expanding. That supply chain is an area that we will continue to extend our service offerings for our customer. Private space is very similar. We’re doing more and more for that sector as well. Defense is the third leg of that stool in Aerospace & Defense. But yes, we will continue to expand add product line extensions for our customer, more additive manufacturing steps, more mechanical steps beyond the testing. It is the technology. The faster we can get those parts back to our customers’ supply chain, the faster that piece of extruded or stent metal can become a fan blade on a turbine motor.

That’s what we’re there for. We’re speeding up that supply chain, helping our customer work through the glitches that they would be dealing with supplying their end markets. So, we will continue to expand there. It is a very good margin business. You’re dealing with the principal customer directly. It’s a great value-add. It’s ROI. It’s per part per linear foot per piece as we test and send it back to them. So, it’s a very good sector of our business. So, we will keep doing more there. And there’s other Shop Labs that focus on other than Commercial Aerospace and private space. We like that business as well, and very compelling there to do more for your customer and satisfy their needs and really help them serve their customers well. So, we will keep doing more of that.

I would say that this Aerospace piece, Commercial Aerospace, is a very important hub there for us, very important, second-largest end market in and of itself. So, we will keep doing more there. It’s very attractive to us. There’s more and more that we can do there. It’s a large market with lots of opportunities. So, we will keep investing in that, but prudently, judiciously, for things that have quick turnaround and quick paybacks and where the customer is partnering with us, where they’re guaranteeing that volume coming into our Shop Labs. It’s is our criteria. We want to assure that it’s a nice, healthy, robust, growing business, with lots of interconnectivity with the customer. So, we do a rather intensive review before we take on new work for the customer, but it’s very rewarding.

It’s very engaging, and I do believe that will continue to be a very strong sector of our business. North America, as we said, is back to pre-pandemic levels. Internationally, we’ll get there soon as well. They’re lagging just a little bit behind that recovery, but they are on a growth trajectory as well. So, it’s a global business for us across the board, these Aerospace labs, and the more they think as a unit and grow together, all the better. But it’s a real key area of focus for us in a very large market of opportunity.