Participants

Manuel Stamatakis; Chairman of the Board, Interim Chief Executive Officer; Mistras Group Inc

Edward Prajzner; Chief Financial Officer, Senior Executive Vice President; Mistras Group Inc

Presentation

Operator

Thank you for joining the Mistras 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 Mros will be Manny Stako, the company's Chairman of the board and interim President and Chief Executive Officer, Ed Preisner, 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 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.
We 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 eight K. These reports are available at the company's website in the investors section and on the S ECs website, I would now like to turn the conference call over to Manny Diis.

Manuel Stamatakis

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 of creative 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 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 EBITA 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 lag 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 anti unanticipated delays with new customer implementations.
We expect revenue growth for this category to be a mid 10s growth rate. In 2025.
Our global consolidated aerospace and defense revenue grew 9.1% in the third quarter.
In spite of unanticipated project push outs 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 me mid 10s revenue growth in 2025.
We will continue with our longer term strategy of increased investment in this industry and we 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.

Edward Prajzner

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 used 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 pay downs 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 $18million to$ 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 even to 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 push outs 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 said 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 10s revenue growth in 2025.
Consolidated industrial 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 S DNA of approximately 22% of revenue which is down 160 basis points from full year. 2023 SGN A change of 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 GAAP net income of $6.4 million or 20¢ per diluted share on a year-to-date basis for nine months. Our GAAP in income was $13.8 million or 44¢ 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 on 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 on a trailing 12 month bank defined leverage ratio on our credit rating on our credit facility rather was approximately 2.6 as of September 30. This is the lowest ratio 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 as of year end due to increasing our trailing ebita 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 re reorganization 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 that income and no impact to dilute an 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 that have made Mros a leader in this industry for over 40 years.
We sincerely appreciate your continued support and expect to reward your patients 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.

Manuel Stamatakis

Thanks, Ed, the third quarter represented another sequential strong top and bottom line quarter for mistress providing evidence and confidence for our future performance. Given our newfound discipline processes and approach.
While we are optimistic of our outlook, we know that there is nevertheless still work to be done to achieve our long term aspirations and goals, as I mentioned earlier, due to the short run under performance in certain sectors due to current market conditions and project pushouts.
We are revising our 2024 guidance of full year revenue to between$ 7 25 million and $730 million from 725 to $750 million previously and adjusted Evita to between $80 $82 million from $84 million to $89 million previously.
And as ed mentioned earlier, we are lowering our free cash flow guidance to between $18 and $22 million primarily related to an unanticipated build up of accounts receivable.
Despite the short term guidance impacts to our 2024 results. We are confident in our long term strategy and business model heading into 2025 as to our preliminary outlook for 2025 given the expected growth in our higher margin businesses and continued operating leverage improvements.
We anticipate a meaningful improvement in our net income with low double digit expansion in adjusted ebita and low single digit organic revenue growth.
I am encouraged with the process progress being achieved by the collaboration between our commercial and operations functions which is resulting in the successful renewal of long term agreements with a number of our largest customers.
Our continued cost discipline, strategic partnerships with our valuable portfolio of clients and the company's long term vision have excited us for the prospect of continued profitable growth. For Mistress, I am extremely proud of our nearly 5,000 employees who believe in our plan and are working hard every day to achieve our goals and objectives.
You can feel that level of energy throughout the organization and our customers are responding in kind as well with increasing levels of ro I recognition for the value that Mistress employees bring to the equation in delivering on our mission to maximize safety and operational uptime for our customers vital assets.
At this time, I would like to ask the operator to open the call to your questions.

Question and Answer Session

Operator

Thank you. We will now conduct the question and answer session.(Operator Instructions)
Our first question comes from John Franzreb at Sidoti and company. Your line is now open.

Good morning, everyone and thanks for taking the questions.
I'd like to start out with the reduction in the cash flow projections. Could you just talk us through what changed today versus three months ago when you had the higher projections for the full year?

Manuel Stamatakis

Oh, hey, John. Thanks . Yeah, great question. We we, we had a very good, a very good progress in Q3 and we'll continue that in Q4. It's just very simply our AR balance it, it's billed and unbilled AR is still higher than we'd like. It. It is elevated year over year. So we're still working to bring that back down.
There's just not enough time to do that in the remainder, 60 days of the here to get back to the original aspirations. But it's really a function of just pulling the AR balance back down is how we get there. So again, we are making progress now, but we just didn't get on it quickly enough in the year. So we're not digging out at this point from the shortfall earlier in the year during the first half. But otherwise we're on course here and we'll have further improvements in Q4 as we saw in Q3.

Are you making systematic changes so that this doesn't occur again?

Manuel Stamatakis

We are yeah, it's a focus on, it's an intensity, it's staying on whip. It's the frequency of us meeting as a management team to, to get on top of the process, the schedule, having more frequent meetings, more intensity. We are making system changes. We are upgrading our p next year, a little more automation, a little more workflow to get, you know, late invoices out the door a little more rapidly, but it, more of a process of just making it the top priority for management is how we improve this. So we, lost a little bit of our focus here more than anything else, but we are making some system improvements and we've intensified some of the, you know, that the timing and the process of how we're following up and pushing the envelope here.
I, think with higher interest rates now, some of our customers are probably a little less inclined to part with their money. So maybe it's got a little more challenging recently as well. I think that could be a part of it, but we are making it a top priority for management to, to lean in hard here. Get the whip down, get invoice quickly and then preemptively call the customer and work hard to get the cash in the door. So we are working on this as a process and I do expect it to get back on track here in 25 and, and not make it. The challenge that it's become here for 24 for us.

Okay. And, and looking back at the third quarter, I didn't catch this if you mentioned it, but was there any revenue impact from price increases? And on the other flip side, was there any revenue impact from exiting unprofitable business lines.

Manuel Stamatakis

On your second question? No, definitely, no,exiting of work. On the pricing side. Yes, ever. Same as we've seen throughout the year, there's been modest increase of pricing that same couple of percent we're seeing. I I would probably attribute much of the increase this quarter to pure pricing volume would have been flatter.
But yeah, our pricing strategies are still in place and, and very proactive and leading to improvement. But volume is what was off this quarter if you look at the you know, the sequential comparison. But yeah, there was some, some pricing benefits during the, third quarter.

Edward Prajzner

just to add to that. We are constantly evaluating the mix of the business we have and the profitability of the business. Our commercial team has done a really good job in working with our customers to take unprofitable accounts and bring them back to some degree of profitability as long as we will continue to do that. Then we will not be walking away from any business. But if accounts are not profitable, we just can't continue to be in that, in that space with that, with that customer.

That makes sense to me. One last question, I'll get back into Q you highlighted that health care hit the gross margins. Can you kind of quantify how much that was of an, of an impact in the quarter?

Manuel Stamatakis

I mean it's we don't exactly quantify the amount but it was, you know, not hundreds of thousands but more like, you know, millions plus enough to impact, you know, that, that gross margin dollar, you know, period over period. So again, just more of a claims experience impact there. Not nothing more structural than that.

Okay. Fair enough. Thanks. I'll get back in here. Thank you for taking my questions.

Manuel Stamatakis

Thank you.

Operator

Thank you one moment for our next question.
Our next question comes from Christopher Sakai at Singular Research. Your line is now open.

Hi, good morning and to get back to that, the higher health care claims expense was this more of a one time thing? You know what, what happened there to, to really increase that.

Manuel Stamatakis

We had, we had a couple of very high cost claimants. Today, high cost claimants are much more likely than they've been in the past. We had a couple of very high cost claimants and that and that did impact the overall claim activity. But when you remove those high cost claimants out of the equation, things are relatively normal.

Okay, great. Can you talk about the the.
Power generation and transmission revenue increase? Same with other process industries that seems to do pretty well this quarter? What do we expect the next quarter? And in, in 2025.

Manuel Stamatakis

Yeah, good question, Chris, there, that's a two of our smaller sectors across the board of industries we serve. But as we've seen all year, all of our sectors have been up, you know, nicely with good robust growth. I mean, a lot of that's just due to the general manufacturing level of activity out there across multiple industries. So yeah, we should, we expect to see, you know, you know, decent growth, GDP plus kind of growth in, in some of those less pronounced sectors for us.
So yeah, we don't, we don't forecast necessarily at that level in our, in our outlook. But yeah, we do expect to see growth across a lot of those basic industrial and process oriented industries are all showing, you know, nice healthy level of activity. And we do expect that those kind of growth rates we've seen in 24 to continue in 25 for those for those sectors.

Okay, great. And then so as far as the down downstream is concerned, do you anticipate an uptake in that next year?

Manuel Stamatakis

Yeah, good question, Chris. As we said, our, our spring was rather robust. Our fall down, you know, downstream was a little more moderate net net for the two combined, you know, a pretty good year overall for that sector. We see the same thing next year. We're looking at now with our longer range planning on when turnarounds happen. And yeah, we would expect to see a very similar year, like could be the inverse next year. We can't quite control the timing of when our customers want, you know, turnarounds to happen. But you may see a little bit of a flip flop.
But right now it looks like the, the fall might be a little stronger than the spring. So you may have sort of the opposite effect next year. But we are still looking at, at that and locking that down for next year. But over overall, we still, we do expect to see a good year again in downstream next year. Just a question of which half ends up being a little stronger than the other. You know, and we're still working through that, but it should be a good year again for that sector next year.

Okay, great, thanks.

Manuel Stamatakis

Thank you.

Operator

One moment for our next question.
Our next question comes from Mitchell Pinheiro from Sturdivant & Co., your line is now open.

Hey, good morning.
Couple questions for you first on in the oil and gas segment. You know, the midstream been up and down and up and down. Any reason for the decline this particular quarter?

Manuel Stamatakis

Oh, hey, that you said yeah, that it wasn't much of a decline this quarter. There was a large recurring piece of work turnaround work that does fall in midstream sometimes that occurred last year. So this year, by comparison looked off, but it was really last year was a little higher than normal due to some work that work that did not repeat in the current year. Is what led to that differential in the midstream.

Okay. And then, you know, with oil prices kind of falling, I'm curious, you know, it is that, that didn't have any effect or did that have any effect in the court for the quarter's results? And, you know, with like Brent at 70 or below, do you think that would have any sort of impact on the, you know, the early next year's turnaround season?

Manuel Stamatakis

We don't think so much. No, that still in the, in what we would deem to be a fairly ordinary band of pricing for, you know, future crude prices. No supply and demand matters more to them. Capacitization matters more. And crude prices, future prices do do generally affect probably the downstream more than anybody. The midstream and upstream are not very sensitive to crude prices.
So, net net the current price where it is and where it's expected to be pricing wise. No, we do not see that impacting you know, any anything in 25 that's within the normal range of what's you know, our customers were anticipating the planning force. So, no, we do not expect the current prices to have any impact on a on the short term here now.

Okay. And then, you know, you had two separate areas that, that, that sort of had delays or push out on, on, on revenue. One being in the data analytics, I think Manny talked about that. And then also aerospace I guess international aerospace there were projects pushed out or you mentioned market conditions. Can you just give a little more color about what's happening in both data analytics and the aerospace project? Push out?

Manuel Stamatakis

I'll address the second one and maybe Edwar you might address the data on the aerospace side. That that's just a function of that, that is our shop work where parts are coming to us. So we are at the mercy of you know, the supply chain there. Again, that that growth moderated, you know, slightly international is a little flatter. So the you know, the Airbus flat Airbus platform is a little more distended maybe than the Boeing platform is in North America, North America was up nicely in the quarter and has been all year. The European platform is is catching up a little bit but that's just some of the ongoings in that sector. There is a lot of supply chain, you know, glitches.
We're in a good one. Engine parts are still in short supply. That's a primary area where we do testing. So we, we believe the sector in which that we serve is a little more robust, but there is you know announcements and some, some strikes going on in the sector there on the final assembly side which you know could be affecting us and may have slightly in the quarter even impacted us.
But again, we're looking at longer term, it is a high growth sector for us. So, you know, we do expect to continue, you know, mid mid teen kind of revenue growth in that sector globally. Again, North America got back to COVID levels faster than international, international, still catching back up and lagging a little bit. But, but again, we're agnostic to the platforms there, we can equally serve, serve them in the US versus Europe. You know, so we, believe that we'll continue to grow that again, the pace may might slow temporarily, but we feel very good about the the long term prospects in aerospace and defense and it's not just commercial aerospace.
Yes, they may have a little more of the volatility at the moment. But that same sector also includes private space which is very strong right now and defense in there as well and other, you know, very stable sector and, and we can balance the load amongst the three to a certain extent as well. Do you want to address the data side Edwar or, I can explain that one too.

Edward Prajzner

The date of business is a little bit flat this year, primarily schedule primarily due to unanticipated delays with some implementations, but primarily due to push outs by our customers extending when they want to start the various projects. But we're very confident and comfortable that next year, we'll be back into the mid teen growth rates in 2025 in this high margin business. So, this is a temporary situation. It's a more of a timing issue. And we're comfortable that next year we'll be back on track.

So, you know, just hearing push outs and then seeing the account receivable, you know, stay stubbornly high. This isn't a function of your customers having having any, you know, I don't say financial difficulties but just starting to see some pressure on their own cash flows. Is there any, any of that happening or is it, is it very just some, some random and audit and, you know, push outs that just sort of all come together here over the last quarter or two?

Manuel Stamatakis

Yeah, I, I would not connect those. My, no, our customers are all blue chip good payers. We've had virtually no write offs, knock on wood for quite some time. So it's not their ability to pay. It's just their desire to pay, which we have to get better at, at pushing and driving. As I said on the, I think you know, speaking of interest rates, I do think that's relevant the last you know, a couple of years you get a real yield on overnight money.
That was not the case a couple of years before that. So I think that's a factor. But that's on us, we have to work harder to pull, to pull that money in. But no, there's no cause and effect there, there's no issues on our customer side. It's just their desire to pay. It's not their ability to pay. That's not a credit concern that, that, that you should be implying there whatsoever. That's, not the issue.

Okay, fantastic. And then a couple other questions. So as you looked at the the the 2024 outlook, the bottom end of your revenue range remains at$ 725 million, but you did lower the bottom end of the adjust beda range by $4 million down to the$ 80 million mark. Is that a is that a function of maybe higher margin just, you know, is that a function of a higher margin, aerospace revenue being delayed? Why would the bottom end of that adjusted even do fall at the same revenue level?

Manuel Stamatakis

It it it's exactly that niche. And as Manny said, the data, the data business is also, you know, a little more flat year over year, you two high flyers with higher margin profiles attached to them are lighter in the mix there. So you have an unfavorable sales mix affecting you affecting you there on the EBITA side where the EBITA GAAP opened up a little more than the revenue side because you, you lost the, you know, the the more attractive piece of the portfolio they underperformed. So that's why that even a number is a little lower in impact there when we lowered the scale of revenue.

Okay. That's helpful. And then I guess like, I, I guess final question here for man and, or, you know, so I, you know, your reorganizational costs, you know, continue to be there. You know, I think it's I can't remember $55 million year-to-date and you did about $12 million last year when the, when do we see the reward costs?
So, and and, and what has the current reward costs been centered around?
And where, where are we, you know, in your know, in the, in the reorganization efforts are we in the eighth inning? Ninth inning? If you could talk about that, that would be helpful.

Edward Prajzner

I can tell you that we are constantly evaluating where we are and where we should be and we'll continue to make changes that are necessary. I wouldn't say we're in the ninth inning, but maybe the sixth or seventh inning because we have plans for 25 and beyond to continue to improve, where we are, how we operate and how efficient we are. We have areas that we've identified for 25 that we're going to be looking at to improve profitability. And in some of those cases, we will have to make some investments and there will be some costs associated to them. But the return on those investments will be more than adequate to justify the cost expense.

Okay? Alright, well, that's all I have.
Thanks for the time.

Manuel Stamatakis

Thanks

Operator

Thank you. I am now showing no further questions at this time. I would like to turn the conference back to Manny Stamatakis for closing remarks.

Manuel Stamatakis

Thank you operator and thank you everyone for joining this important call today and also for your continued interest in mistrust.
We look forward to providing you with an update on our business and progress achieved towards our ongoing initiatives on our next call. Everyone. Please have a safe and prosperous day.

Operator

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