Mistras Group, Inc. (MG) on Q1 2021 Results - Earnings Call Transcript
Operator: Thank you for joining Mistras Group’s Conference Call for its First Quarter ended March 31, 2021. My name is Mattie and I will be your event manager today. Participating on the call for Mistras will be Dennis Bertolotti, the company’s President and Chief Executive Officer; Ed Prajzner, Executive Vice President, Chief Financial Officer and Treasurer; and Jon Wolk, Senior Executive Vice President and Chief Operating 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. Reconciliations 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 8-K. These reports are available at the company’s website in the Investors section and on the SEC’s website.
Dennis Bertolotti: Thank you, Mattie. Good morning, everyone. We delivered a solid first quarter and the New Year is off to the start we anticipated, which keeps us on track for a significant improvement in our full year results. Energy market revenues were solid, essentially unchanged from last year despite the COVID-19-related headwinds for the entire first quarter this year versus only a partial month impact last year. Additionally, the first quarter was impacted by a disruption caused by severe weather in the Gulf region this year as previously disclosed. This stability in energy was offset by weakness in commercial aerospace as well as industrial/manufacturing markets, the latter including the impact of the global semiconductor shortage. Lastly, the spring turnaround season started later than normal this year. While a drag on first quarter, this likely means its duration will run longer into the second quarter. Our meaningful increase in the weekly total hours billed during the month of April supports these expectations and should drive year-over-year growth in our energy revenue for the balance of ‘21. For context, our hours in the month of April ‘21 were only off by approximately 10% from our actual pre-pandemic hours in the month of April of 2019. Due to ongoing productivity improvements, gross profit margin improved 50 basis points over last year, and we anticipate further expansion over the remainder of ‘21. Our cost reduction and efficiency improvement programs are working. Overhead expense continues to be well controlled, with costs decreasing nearly 5% over the same period last year. We will continue to calibrate our overall cost structure to our revenue level throughout ‘21 and only fully restore last year’s cost-out reductions once we believe we are returning to conditions that support the increased level of spending. The net result of our gross profit margin expansion and overhead cost control was a 30% increase in adjusted EBITDA this quarter on a slightly lower revenue base. This illustrates our continued emphasis on building value for our shareholders as we improve the operating margin to grow the bottom line faster than the top. We feel very good about generating over $3 million of operating cash flow, considering the first quarter is seasonally our weakest period of the year and therefore not typically cash flow positive as we ramp up volume and mobilize in the field with the spring turnaround season. We also met our goal of keeping net debt below $200 million as of March 31, 2021. As cash flow improves over the balance of the year, one of our top priorities remains debt reduction. Consequently, we expect to reduce debt over the remainder of the year.
Ed Prajzner: Thank you, Dennis. We grew several key performance measures in the first quarter, once again illustrating how our asset-light strategy works during all market cycles, preserving resources during the most challenging times as well as providing for significant operating leverage in periods of volume growth. Gross profit margin improved 50 basis points due to operational efficiencies and favorable sales mix. We anticipate additional expansion in gross profit dollars and gross profit margin over the course of 2021. We continued our focus on controlling overhead costs by reducing SG&A by nearly $2 million or approximately 5% over the prior year quarter. We will continue to calibrate our overhead cost to our current revenue level. Net loss was $5.4 million for the first quarter while adjusted EBITDA was $7 million, which was an increase of over 30% as compared to the prior year. Operating cash flow was $3.1 million for the first quarter, and free cash flow was negative $1.2 million, resulting in a modest borrowing for the first quarter, which is typical for us in the first quarter of any given year, as Dennis mentioned previously. Given our expectations for 2021 to be a growth year, operating cash flow are likely to be lower than the prior year as we invest in working capital to support our growth. Also keep in mind that last year benefited from items such as the CARES Act payroll tax deferral, which we will be remitting later this year and next year. Regardless, we do expect to generate sufficient free cash flow to further reduce debt over the remainder of this year. We were in compliance with all of our debt covenants as of March 31, 2021. Specifically, the funded debt leverage ratio at quarter end was 4.7x versus an allowable 4.75x of our step-downs in the maximum funded debt leverage ratio during 2021. And we expect to remain in full compliance with this covenant and all covenants throughout the remainder of 2021 and beyond. Our goal is to achieve a funded debt leverage ratio of under 3x by no later than the end of 2022. Our consolidated effective tax rate was 32.7% for the first quarter of 2021. With respect to our segments, all three maintained or improved their respective gross profit margin over the prior year quarter. The Services segment grew operating income to $4.5 million for the first quarter. On a non-GAAP basis, the services segment operating income was $6.5 million in the first quarter compared to $4.2 million last year, which was an increase of 55.6%.
Dennis Bertolotti: Thank you. Let me conclude today’s prepared remarks with our outlook for ‘21. Our business has been recovering over the past 3 quarters from the low experience in the second quarter of 2020 and the effect of COVID-19 was most impactful to our financial results. Although energy prices and demand are currently stable, the ongoing COVID-19 pandemic continues to impact our two largest markets. Despite this adverse and ongoing impact, we expect annual revenue for ‘21 to be higher than in ‘20. In addition to the restoration of top line growth, we anticipate that our ongoing disciplined expense management will enable us to leverage this revenue growth and to significantly improve bottom line performance over the remainder of 2021. We anticipate that our quarterly revenue will reflect year-on-year improvement commencing in the second quarter of ‘21, with revenue expected to increase as much as in the low to mid-30% range over the second quarter of 2020. We also anticipate that adjusted EBITDA will expand at a much greater rate in the second quarter of ‘21 than it had in the first quarter of ‘21 and given the significantly higher level of operating leverage that would accompany the expected revenue growth. The global pandemic has highlighted our ability to quickly adapt to a very dynamic environment, and the attractive cash-generating nature of our asset-light business model has proven resilient. We have accelerated our development of new data tools by providing a more focused technology-driven strategy, developing a road map to capitalize on the rapid growth of the alternative energy markets and customers looking for a more complex vendor base, has provided an expansion of our aerospace operations into the adjacent defense and private space flight market. Each of these new markets represents tremendous growth potential in which we can offer high-value services that generate attractive returns.
Operator: Thank you. And our first question comes from Sean Eastman.
Unidentified Analyst: This is Alex on for Sean. Nice quarter.
Dennis Bertolotti: Thank you.
Unidentified Analyst: So it seems like the severe weather in the Gulf didn’t really impact you guys as much as we would have thought. I’m just wondering if you can give us some detail around how you guys were able to combat this and if there is anything you learned this time around that you can use for future storms.
Dennis Bertolotti: So I wouldn’t say it didn’t affect us. I mean we operate 365 a year, so we expect weather to happen. I mean it did – truthfully, I was surprised it affected us even in our European operation. So a lot of those had some of the same freeze-outs and issues that we had in the Gulf. So we – some of the revenue was lost, but a lot of it really just got pushed. Our biggest problem was it was hitting just before the turnaround season. So in some places, we didn’t have power to open up or come back online as expected. Some weren’t right into the turnaround but were waiting to clear the facilities. And the lessons learned, we’re still doing things like using drones and other things that can do aerial surveys to help them out and other ways to help them understand what the extent of the damage, especially in those areas that are up high that you’d normally need scaffolding. And rain and wind events like that or cold weather, something like that, it’s always going to affect your ability to get up high. So we do have other tools and ideas that we’re having, but we’re not immune to it. We just – it’s just part of what you got to deal with. I mean, Ed, I don’t know if we have a number, but it did affect us to a tune of a few million dollars of lost push revenue. There is no doubt there.
Ed Prajzner: Right. That’s fairly modest. Yes. Kind of like a large hurricane impact, it’s kind of the same analogy you could draw to what the ice storms were that were – again, as Dennis said, it happens all the time. It’s kind of in our business plan. We don’t really call it out it. It does tend to defer some work. Some work does get canceled, but it happens. So it’s kind of a normal piece of the business. So we don’t generally call it out, but it was fairly inconsequential in the greater scheme.
Unidentified Analyst: Got it. Very helpful. And then my second question, it’s nice to see year-on-year growth in oil and gas even despite the severe weather and delayed spring turnaround season. But you guys still call out weakness in the commercial aerospace market as well as industrial and manufacturing. I’m just wondering when we should expect a recovery for these two markets. And what do we have to see happen in the broader economy for there to be an inflection point?
Dennis Bertolotti: I’ll take that, and I’ll throw it to Jon. I think my initial thought is we’re more – we’re recovering faster domestically or U.S. and Canada because of our ability to pivot into defense and private space flight where inside Europe, they don’t have those opportunities. Plus, I think Airbus and Boeing just handled the COVID in the market and who they are protecting and how they work with it differently. So I think it was more impactful to the European operations. I’ve seen reports about mid-‘22 things being up and running as opposed to ‘23 from trade associations and others. And I could believe Europe will still lag a little bit. I would think by mid-‘22, I would think we’re going to be a lot more comfortable with where we are in the market here domestically because of everything else going on, not just commercial but defense and private, whereas internationally, I could see it going later into ‘22. Jon, I don’t know if you got any your thoughts on it?
Jon Wolk: Yes. I’d go along, Sean, with what Dennis said. The recent reports we’ve received from our customers initially suggested that we could not see a meaningful recovery in commercial aerospace until 2023. And I think as the world is starting to reopen and people are getting more optimistic, that’s been updated in a favorable way. And now we’re – they are telling us that we should start to see an uptick in 2022, the amount of which right now we’re not too sure about. But certainly, it’s trending more positive. The other good news there is that as a key supplier, we are picking up market share. We’re in active discussions with some additional customers as part of their becoming an increasing part of their supply chains to get more share of their business because we’ve been operating well.
Dennis Bertolotti: It’s a great point. There is going to be a lot of consolidation in those markets, and we’re going to be looking for vendors that have a lot more complexity and capabilities. And that’s really leaned into our favor.
Unidentified Analyst: Thanks. I will back in the queue.
Dennis Bertolotti: Thank you.
Operator: Thank you. And our next question comes from Brian Russo.
Brian Russo: Hi, good morning.
Dennis Bertolotti: Good morning.
Brian Russo: Just if I recall, to follow-up on your alt energy and specifically the wind market opportunities, if I recall, you’re involved in sensor beta testing for wind blades. Just curious how that’s progressing and when might we see any sort of material update there in terms of customer acceptance?
Dennis Bertolotti: Go ahead, Jon. I’ll do a follow-up.
Jon Wolk: Yes, sure. Thanks for the question. Yes, we’re super excited about this area. We’ve got a team of people, and we work together across segments, which is the terrific thing about this initiative because every segment has got something to bring, to offer to customers on this. But the trials are working really well. So far, every single wind turbine we’ve deployed on, we’ve been able to come up with meaningful observations that clients are very appreciative of. And we’re now in commercial discussions with several to look for deployments in the second half of this year.
Dennis Bertolotti: Brian, one thing I would say is – one thing quickly I’ll add is it’s not any diminishing of any one thing that we do, but we’re manufacturing equipment, we’re installing the equipment, it’s proprietary equipment to us. We’re interpreting it. We’re putting it onto a real-time website. We have the ability to do the repairs. And the full suite of services is really what I think makes us strong. I’m sure there is people who can compete in any one of these various steps to create a sensor, put a sensor on or try to understand the data or do the repairs. But having the ability to do all that and keep them up and running in a much more deliberate way, I think, is really where we differ from the rest of the market.
Jon Wolk: And in addition to that, sorry to go long on this, but also we’ve got intellectual property around the receiving of the signals, the interpretation and the reporting of the – of what we’re hearing. So it’s a terrific solution, I agree.
Brian Russo: Right. So that intellectual property creates a barrier to entry for competition, is that accurate?
Dennis Bertolotti: Yes. It’s that and having everything up and running because other people are going to have to – even if they could duplicate any one segment of it, they are going to have to create the rest of it, too.
Brian Russo: Okay. And just curious, we hear about – especially with the ice storms down south and in the Gulf, we’re hearing about winterization efforts or strategies on various wind farms that were impacted by the storms. Do these sensors fall into that category or is it more just about as turbines and blades age they need
Jon Wolk: to start, it’s actually both. So the great thing about this solution that we are developing a decline as continuous monitoring. So you are continually aware of what – the condition of your wind turbine blades or other that are connected at the top of the wind turbine. So, everything as you are aware, 24/7 plus 365 of the condition of what is going on under wind turbine. And for instance, during the ice storms we actually winter that were affected and we adhered . So there is often technology that is sometimes a little bit of a pleasant surprise to us because you start with to determine the impact or cracking and deploying in the way we have and with the data scientists that we have, the software that we have, we’re hearing things that our customers are very appreciative of learning.
Brian Russo: Okay, great.
Dennis Bertolotti: And Brian, we can always add additional sensors for temperature pressures or things like that if they were looking at other ways of monitoring it real time as well if need be.
Brian Russo: Right. And in terms of gross margin, as a percent of sales, long-term targets, obviously, you expanded margins again in a shelter quarter or, I guess, you could say. Any targets there or EBITDA margins or operating margins you could share with us?
Ed Prajzner: I mean I’ll take that one, Brian. This is Ed. I mean we’ve been showing a very strong improvement year over year over year now, up 100 basis points 3 years in a row. This year, it might be challenging to get to that level. We’re not done yet, though, but it’s not a linear improvement every single quarter. But we do believe that overheads are locked down very well. We think mix is helping us. Operating leverage will clearly, as volume comes back, significantly bounce it up from where it is now as revenue volume comes back up. 30s, where we ended last year, we’d like to stay there and hopefully add a little more this year. But our goal is to keep looking for productivity, efficiency gains, and sales mix helps as well. And we look to keep improving that each year year-over-year, maybe not by that same exact magnitude every year, but 30 is a good goal we’re going after for this year.
Brian Russo: Okay, great. And then just lastly and real quickly, just what services are you providing in the private space sub-sector of aerospace? And how does that differ from what you do in traditional parks inspection or supply chain work in the other sub-sectors I am curious?
Dennis Bertolotti: I’ll jump to that quick and throw it to Jon. So it’s really about this consolidating all the different steps of a supply chain and helping them out. So we started out with duty inspection. Like anything, Brian, you’re talking about a lab casting or some type of stamp part or something that’s coming out, and then they need it heat-treated. And when you do an inspection, you’re going to find some defect. You got to remove some of the defect, then you may have to do – well, build back up things like that and/or measurement on deflection from the heat and all the different things that are going into it. There is a lot of steps just to get the pre- and post-inspection. And we are taking on more of those steps because it’s really just a very cumbersome supply chain when you got to ship from one part of the country to another or in Europe – from one country to another to get the different steps done. So by taking on more and more of that, we even got to the point we’re taking on – for some of our customers, we’re taking on project management of some of the parts. And it’s really just – it’s not only we do that in shops, but we do in field, but it really plays a big dividend and a meaningful difference in how many parts are accepted and how fast they get through. Jon, if you want to add on that?
Jon Wolk: Yes. No, I think Dennis captured it really well. The only thing I think I would add to that is that we’re also layering on top of this Mistras Digital. So we’ve got a terrific Mistras Digital team, so shout-out to them because they are very innovative and very responsive to customers’ needs. And so we’ve – we are creating – have created a data portal which allows our key customers to observe the status of their parts at various stages of the process, as Dennis just described, between mechanical modifications that we may be doing on behalf of customers or repeated steps of inspection as needed.
Brian Russo: Okay, great. Thanks very much.
Dennis Bertolotti: Thanks, Brian.
Operator: And I’m not seeing any other questions in queue.
Dennis Bertolotti: Okay. Mattie, thank you. I’ll close it up. I’d like to thank – the whole Mistras team would like to thank you for joining our call today, and we wish everyone a safe, prosperous and healthy future. Thank you for joining and have a great day.
Operator: And thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.
