Q2 2021 Mistras Group Inc Earnings Call
[music].
Ladies and gentlemen, thank you for joining Mistras Group conference call for its second quarter ended June 30 of 2021.
My name is Livia and all of the event manager today.
We'll be accepting questions after management's prepared remarks.
Participating on the call from Mistras will.
It will be of Dennis Bertolotti, the company's president and Chief Executive Officer.
The price net 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 the conference call will include forward looking statements.
The company actual results could differ materially from those projected.
Some of the factors that can cause actual results to differ on discussing 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.
No were not prepared in accordance with the U S GAAP.
Reconciliation of the non U S GAAP financial measures for 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 investors section and on the S. E C website.
I will now open the conference over to Dennis with the Aladdin.
Thank you Olivia good morning, everyone.
Results in the second quarter were outstanding consistent with our expectation that this quarter would mark an inflection point in our growth trajectory for 2021.
Consolidated revenue was up nearly 43% in the quarter.
We saw strength in our energy markets, both domestically, including Onstream and in Europe.
Actually all of our end markets were up year over year in the second quarter.
The sole exception on the aerospace and defense, although that market was up internationally.
Consequently, we believe end markets are rebounding and we will continue to do so over the balance of 2021.
Together with a solid first quarter results to date have us excited about the momentum achieved over the first half this year and leading into what we believe will be continued strength over the remainder of 2021.
For the second quarter gross profit margin increased over $14 million from last year, which.
Which is an increase of over 34%.
Gross profit margin did decrease to 31, 1%.
From $33.1 per cent in last year, which was anticipated as 2020 ahead of lower relative level of pass through costs.
Such as travel and per diem due to Covid Lockdowns last year.
On the year to date basis gross profit margin is consistent with the first 6 months of 'twenty 'twenty, both periods being of 28, 8%.
We remain very focused on improving gross profit dollars and gross profit margin through efficiency enhancements and better product mix.
Selling general and administrative expenses were up in the second quarter over prior year quarter by $2.1 million.
Due primarily to restoring substantially all of the interim cost reduction measures.
That had been in place last year.
Most of which I am pleased to report has now been restored.
Compared sequentially for the first quarter of 2021 SG&A is essentially flat.
SG&A is also essentially flat on a 6 month basis with prior year, which is remarkable given the significant year over year revenue increase.
But this is clear evidence of our keen focus on cost containment.
Given our consistent gross profit margin and strong overhead controls we had a strong improvement in operating income, which was 11.4 million for the second quarter of 2021.
This drove an impressive $5.9 million of net income this quarter or 20 cents per diluted share.
Adjusted EBITDA was $22.5 million this quarter, an increase of nearly 100% over the prior year period also being a 5 year high as a percentage of revenue of $12.7 per cent and.
In addition, adjusted EBIT of dollars were only 6% lower than our all time high adjusted EBITDA as reported in the second quarter of 2019.
This demonstrates the steady improvement in our productivity and efficiency.
As well as the increased operating leverage we are creating with higher volume levels of volume.
We also generated very strong cash flow of this quarter, which enabled us to further reduce debt by 11.4 million in the second quarter.
I am also very pleased with our revised credit agreement entered into this quarter, which significantly reduces our borrowing costs and enables increased investments in our growth initiatives.
While also allow us to continue to focus on reducing debt levels.
I'll walk you through the finer details, but I want to emphasize that we would of been compliant with all financial covenants this quarter on.
On the previous credit agreements requirements.
I'm extremely.
We are pleased with the confidence our lending syndicate as shown in Mistras and the support they are providing to fuel our growth.
From virtually all perspectives.
The second quarter of 2021 was a clear sign that we are well positioned to capitalize on a return to more normal economic conditions.
The results demonstrate that we have implemented of solid growth strategy and increase operating leverage debt is bringing more to the bottom line and.
And we substantially improved our financial condition, increasing our ability to further invest in our growth initiatives.
Looking more closely at our various markets last quarter, we mentioned how of slow seasonal start.
On the Gulf storms looked like it was going to delay of the turnarounds later into the spring.
This ended up being exactly the case and as a result revenues in energy was strong again in the second quarter.
As we capture the late the late spring start turnarounds for revenue as well as the incremental revenue.
Rising of turnarounds ran longer than usual in the June.
While the turnarounds may be periodic and difficult to predict.
They are indicative of the overall condition of energy market.
And right now we see the energy market is rebounding.
For instance, oil prices that were in the mid sixties per barrel for the time of our last call I had more recently been hovering closer to 70 per barrel range.
Energy remains our largest market for traditional.
Fossil and renewable consequently over the near to intermediate term, we believe energy will continue to represent an attractive market for us.
We have a multi pronged strategy to succeed in energy first.
By continuing to take profitable market share. We believe we are growing share because owners are increasingly choosing partners that offer them, an attractive value proposition, which reduces their all in cost.
With our Ruggedized tablets running Mistras digital P CMS and other technological innovations we are no longer competing exclusively on price.
We are also expanding our scope of services by operating rope access adjacent mechanical and other capabilities to complement more traditional NTT services, which makes it easier to control our project cost.
And finally, we can grow by introducing new products, such as data services via 1 suite, which we will be rolling out in the second half of 'twenty 'twenty 1.
And which represents a growing revenue stream from restaurants.
We also believe each of the strategy provides the point of differentiation.
Allowing mistras to become stickier with owners, which in turn should improve margins.
As the energy market recovers our on stream business, which also serves the less volatile segment of the market being midstream is growing.
Both domestically and in Canada for <unk>.
Incidence of termination of the Keystone pipeline as producers of relying on your volume through older existing pipeline.
The aging infrastructure is creating demand to have these other pipelines inspected.
So not only determinant they can accommodate any increased demands, but also to ensure the comply with new more stringent safety regulations, including tons of.
Onstream has also introduced new tools that can inspect larger diameter pipes, which is also opening up new larger markets bolt, the United States and Canada.
Today about 70% on average of the revenue generated in our energy markets is from ongoing run and maintain business.
Which does not experience a dramatic peaks.
And valleys of capital budgets for periodic turnarounds.
As we continue to implement our strategies, we believe we will become an increasingly valuable partner.
Growing the proportion of this less volatile reoccurring revenue stream.
And the aerospace there is anecdotal evidence, suggesting that the commercial aerospace industry.
Bounce back sooner than previously thought even in Europe.
Which has been particularly hard hit all of the full recovery in aerospace is probably still not going to occur there until mid to later this next year.
In fact, this quarter aerospace was up in our international segment.
Elsewhere continued softness in the U S commercial aerospace sector is being offset by growth from the domestic defense and especially in the private space sectors, where revenue run rates are barriers are basically double.
That'll be year ago.
While it is still early on as we penetrate this market.
Growing both the materials, we inspect and the operators for whom we work private space flight could become a very interesting sector.
Could the closer to Earth business of privately of maintaining satellites.
Our renewable energy assets are also continuing to make significant progress custom.
Customers keep adding new blades and hubs for those we already are inspecting in the wind turbine sector.
We are demonstrating how our proprietary acoustic emission technology.
Testing of very sophisticated sensors and detection algorithms can provide better information faster than the inspection technologies currently used in the market today.
While most of our active programs are on existing properties.
We are also working with manufacturers, who we believe could increase the value of their products by directly embedding our sensors into their new assets.
But perhaps our most exciting initiatives serving as a significant step in the digital transformation of asset protection is the introduction of the Mistras 1 suite.
Our innovative proprietary an all new asset protection software ecosystem.
Which we previously referred to as project cap line.
The software platform offers functions of Mistras is popular software and services brands.
The integrated apps on the cloud environment.
Once we will ultimately serve as the single access portal for customers data activities.
While also providing opportunities for customers to discover mistras has breadth and depth and software and data insights from our current 50 plus applications being offered on 1 centralized platform.
Just like any thriving ecosystem apps within the 1 suite platform interact with each other sharing critical information in real time.
Put simply Mistras, 1 sleep makes asset protection, the smarter and more digitally connected than ever before.
Now we have nearly 2 dozen customers participating in the system soft launch.
Later in the U and the year, we will have the official 1 suite launch where upon we will commence a more aggressive campaign.
I am very enthusiastic about this very exciting area, which we will be speaking about in much greater depth in the future.
I would now like to turn the call over to Ed to give you more detail on our financial results for the second quarter of 2021.
Thank you Dan and good morning, everyone.
It was truly an outstanding quarter and it could be an inflection point.
And while some of the improvements over a year ago are attributable to the extreme effects on the year ago quarter from the COVID-19 pandemic and other related macroeconomic factors. We Nevertheless, established new all time records or near records in several key metrics.
A 5 year high adjusted EBIT margin and the second best all time quarter of adjusted EBITDA puts the quarter's accomplishments and a more appropriate overall historical perspective.
For the 3 months ended June 32021, total revenue increased 42% versus the prior year comparable period due predominantly to organic group as well as the low single digits favorable impact of foreign exchange all of the end markets include again with the sole exception of aerospace and defense market, which was down only modestly.
For the quarter and actually up in the international segment.
The oil and gas market was 57, 2% of revenue for the quarter and is now $58.6 per cent for the first half of 2021, which is up 140 basis points from last year.
Denis mentioned, while we continue to invest in our gross initiatives such as digital private space and renewable energy the.
For the traditional oil and gas market will remain a large market for us where we are having tremendous success gaining share while expanding our service offerings and thus growing revenue and earnings.
Gross profit in the quarter increased over $14 million for just over 34%.
Gross profit margin was down from the year ago at 31, 1% compared to <unk> 33 per cent, but was consistent at 28, 8% on a year to date basis for both the current prior year keeping.
Keep in mind as conditions normalize our travel and related expense increases in the costs and these costs are reimbursed by our customers as incurred as the.
Fact of reducing gross margin percentages, although absolute gross profit dollars are up due to volume.
We continue to constantly calibrate and then the day recalibration of that cost with the current revenue bucket.
Compared to the first quarter overhead was essentially flat, even though revenues were significantly higher and we restored some of the cost of had been suspended last year.
We are additionally, the story of a meeting suspended temporary cost reductions suggest the company's wound matching and certain employee merit increases in the second half of 2021, which will modestly increase quarterly overhead in the third and fourth quarters of 2021.
With the majority of pandemic induced customer price concessions now be stored and hence the contribution margin and gross margin dollars. He covered we felt it was the right time to bring back of the remaining temporary cost reductions that we instituted on the business back in April of 2020.
Much of these reductions were imposed on employees, allowing the company to insurance recovery.
We are confident this recovery is underway and now was the right time to bring these things back to normal and we are very appreciative of our employees contribution to the chance of success.
Our operating income improved dramatically to $11.4 million for the second quarter compared to a small operating loss from the prior year period.
Why is the bottom line.
The reported a tremendous increase in net income to $5.9 million or <unk> 20 per diluted share compared to a $2.7 million net loss were negative <unk> <unk> per diluted share in the same period last year.
As a result of the significant increase in gross profit and careful calibration of Libre head. We had the second best adjusted EBIT quarter in the company's history, only $1.4 million of 6% below our best ever quarter in Q2 of 2019.
Net sales of more than $22 million higher.
And it was the 5 year records for the highest quarterly adjusted EBITDA as a percentage of revenue of 12, 7%.
This demonstrates our continued efforts to improve the operating leverage in our business model through both the expanded gross margin and tight overhead expense.
Cash flow from operations in the quarter, the $15 million and free cash flow was $8.5 million.
In contrast to last year, where the was the drop in revenue from the first words in the second quarter, we generated nation of the increase in second quarter revenue this year.
This required us to fund the corresponding increase in working capital, particularly accounts receivable.
As of year ago, wheat harvest of accounts receivable from the second quarter.
Last quarter, we signaled that our gross is going to have the temporary dragging the effect on cash flow.
Accordingly for the full year, we expect continuing positive free cash flow. However, the conversion rate as a percentage of adjusted EBITDA will be below our historical average of 50% adjusted EBITDA.
This is attributable to the effect of onetime items, such as the repayment of the cares Act Piedmont passed the Bill which is due later this year.
Hence our free cash flow conversion rate of approximately 25 per cent for the first half of 2021 is a good estimate of what you expect for the full year of 2020 of them.
Capital expenditures on running a little ahead of last year as expected, but we still anticipate total capital expenditures for the year to be in the $20 million to $22 million range.
Nevertheless, despite these increased uses of cash we have reduced long term debt by $11.4 million through the first 6 months of this year.
At the end of June net debt was down to $191.2 million won't be low water targeted $200 million.
Let me take a minute to further expand upon what Dennis mentioned earlier, what we consider to be of strong endorsement from our bank group that is our revised credit agreement executed in May 2021.
This amendment included several significant improvements for us.
First the revised agreement removes the minimum 1% LIBOR floor.
It said actual LIBOR will be used to catch the interest and with the 30 day rate at 0.9% as of today is from.
It presents a more than 90 basis point reduction in our bottom line relative to the previous 1% for us.
Secondly, the LIBOR margin of the base rate margins in the existing pricing grid more unchanged, but are now based on total consolidated debt leverage ratio to include junior debt rather than the previous funded debt leverage ratio, which exclude the junior debt.
This is somewhat academic because we don't currently have and improve your debt.
We anticipate such.
But more importantly, since we were below 375 leverage as of June 30, 'twenty..1 we moved the lowering the pricing grid and therefore are only an interest rate drops from LIBOR, plus 4.5% of LIBOR plus 2.5% respectively commencing in the third quarter, which is an additional 165 basis point reduction.
And our effective interest rate.
Coupled with the removal of the LIBOR floor, which actually commenced back in May of this lowers our all in cost of borrowings from approximately 5.2% to 2.6%.
On our current outstanding debt level. This represents a nearly $6 million of annualized savings on interest expense.
And thirdly, our level of the debt consolidated debt leverage ratio is now 4 times as of the end of each quarter through March 31 of 2022 dropping to 3.5 thereafter.
At June 30, 'twenty, 1 not only do we comply of adjusted leverage ratio.
We would've been income points under the old metrics test. So we have not and do not foreseeing any covenant compliance issues, nor do we perceive such as being a hindrance to executing on our business line.
Again, we estimate that the revised agreement coupled with our continued deleveraging will reduce interest expense by approximately $6 million for the next 4 quarters on an after tax basis at an assumed 30% tax rate. This will be approximately <unk> <unk> per diluted share on an annualized basis.
Consequently, this positive development frees up additional resources to invest on our growth initiatives.
The reduced interest burden and more flexible terms.
However, as Dennis stated earlier and I reiterate the.
These more favorable terms do not change our commitment to reducing debt actually the revised agreement does require a slightly higher level of term loan amortization. Although it is consistent with what our acquired debt repayment plans would have otherwise day.
Lastly, we did reduce the size of the revolver, while maintaining required liquidity. Mr. Additionally, saves us unused commitment fees.
Turning to the tax rate on a consolidated effective tax rate was 27, 7% for the second quarter of 2021.
There were discrete benefits favorably impacting the rate thus far this year. So we anticipate an effective rate of closer to 30% for the second half of 2021.
As Dennis mentioned growth in our 2 largest segments services of international actually outpaced our consolidated gross.
In services this generated a 69% increase in operating income while return on year ago operating losses in those international and the products and systems segments into the operating income this quarter red.
Revenues were also up in each of our end markets, except aerospace with revenue from oil and gas up 52% of now comprising 57 per cent of total revenues in the quarter.
We expect energy to remain strong throughout the balance of the year with aerospace recovering somewhat more slowly except for the space sector, where revenues are growing robustly.
From all perspectives exclude wasn't outstanding for us.
In addition, we are in a much stronger financial position with our revised credit agreement, which will provide additional resources to fund our growth initiatives.
Regarding our outlook for the third quarter of 2021, our business has been recovering over the past 4 quarters from the low we experienced in the second quarter of 2020, when the effect of COVID-19 was most impactful to our financial results.
Although energy prices and demand are currently stable. The on building COVID-19 pandemic continues to significantly impact our largest or second largest non fit that being aerospace.
We expect revenue to increase in the low to mid teens percentage in the third quarter of 2021 over the prior year quarter of.
Adjusted EBITDA is expected to be higher in the third quarter of 2021 in the prior year period, but lower sequentially than the second quarter of 2021 due to substantially all of the remaining temporary cost reduction measures from 2021, sorry from 2020 being restored during the third quarter of 2021.
This outlook of course is contingent on continuing macroeconomic stability, including stabilization in crude oil markets, a timely and effective COVID-19 vaccine rollout throughout the remainder of 'twenty, 1 as well as new means of increase stay at home mandates, resulting from an increased spread of the COVID-19 variance all of which could impact of our ability to.
Work is of critical service provider.
Throughout the pandemic analysis cautiously rebound and recover we have demonstrated <unk> ability to quickly adapt to the challenging market.
And not just for immediate results, but also to set the stage to capitalize on emerging opportunities.
As we look forward to the second half of 2021, we are highly confident that our business model is robust and sustainable and we remain firmly committed to executing on our plans by maintaining our intense focus on cost containment, while continuing to prudently invest in the business that.
That is our strategy both today and over the long term and it will continue to be of very expenditure.
And with that I will now turn.
From call back turn the call back over to Dennis for his wrap up before we move on to take your questions.
Thanks, Ed.
So to recap as we recover from both the pandemic and the fall in the oil market experienced from 2020.
We are planning for our next stages of growth for <unk>.
First half of the year has us back on a more solid footing and we believe markets will continue the gradual recovery.
Our goal has been to end this year with revenues that approximate the exiting quarterly run rate of 2019.
And in the second quarter of 2021, we have already attained that level of revenue from here. We can focus on returning to the steady growth trajectory for Mistras has generated over the years, while also improving our operating leverage and reducing debt.
Although the energy markets, both oil gas oil and gas and power generation are cyclical and beyond our direct control. There are currently stable and rebounding and.
And we are focused on continuing to gain market share with winning new contracts and expanding our services and mechanical and data services, particularly via 1 suite.
We're largely agnostic about the industries, we support.
And we have and will continue to flex into alternative sectors, such as renewable energy, particularly wood.
This is an area that we can control by focusing our efforts and to adjacent markets utilizing current core competencies, such as acoustic emission and complimentary of mechanical offerings.
This is very similar to how our net cash certified aerospace labs are flexing into support of space for it.
Again, realigning, our core capabilities into higher growth sectors of our existing markets.
Once wheat is yet another illustration of how we continue to enhance the value of our legacy investments.
The increasing the ROI for our customers today and into the future.
In many ways.
<unk> has always and certainly we'll continue to focus on customers' ESG compliance.
Typically the aim for environmental and especially the as for safety, which is our primary value proposition.
For Mistras.
Safety of so Paramount to what we do for our customers that our recently implemented initiatives was chartered.
Charter on a new board level of function known as the SCS Committee, which stands for social environmental and safety.
And speaking of safety before taking your questions I would like to thank all of the Mistras employees. Once again for your understanding and the leadership shown on helping us through this crisis.
You have shown an unwavering focus on building on our solid reputation for safety quality and innovation all.
All while providing outstanding customer service and dedication during these extremely trying time.
By sticking to the tenants of our carrying connect initiative.
We can provide a better workplace not only for the Mistras family.
For all of those who we work with on a positive and safe manner.
Olivia of please open up the phone lines.
Thank you ladies and gentlemen of reminder to ask the question. When you took on the Star then the 1 key on your touched on the telephone to withdraw. Your question you May press the pound key.
Please standby, while the compile the Kenny roster.
Now first question coming from the line of Andrew <unk> with Bank of America. Your line is open.
Good morning. This is David Ridley Lane on for Andrew Open can.
Can you talk a little bit about the headwinds and tailwind to gross margins as you think about the second half I understand you'll have some lower pass through costs are you assuming higher pass through costs in the second half.
I'm just trying to understand is that kind of offsets the underlying improvement that youre seeing.
So I'll start with David on what the.
At her John back now you are right about the pass through I mean that was the big part of the savings while we increased quite a bit in 2020, probably about a third of what happened some quarters, where because of the will reduce pass through but customers really right now are still being a little bit cautious about how much travel on how much extra the expense they're doing so I don't really perceive the.
Second half of 'twenty 1 day.
2019, as far as for travel and all of that goes so I still think there's some savings there and we are being much more cautious on what worked for picking up in our on our sales mix sales mix of an easy way to say that for watching how we how we work with customers and how our expenses on our cost of goods are flowing so.
We're going to be able to keep some of that it'll be a little bit different but I don't I don't see it going back to go on below where we've been I think we can hold it and grow from there.
Yes, Hi, David It's John <unk>.
What doses comments.
I'd say the.
Sequentially.
For the Q3 versus Q2.
I think revenue should be.
Similar.
Margins may be a little bit lower Q2 tends to be of a strong margin quarter for us it tends to rebound again in Q4.
So you have some seasonality in there compared to prior year I think what Dennis highlighted in terms of the pass through costs.
More of that this year as businesses more typical levels. So we may not quite reach prior year gross margin levels, but still we feel good about the margin profile, we feel good about.
The volumes at this point and so therefore, I think margins should be healthy.
Thank you for that.
And then 1 of the topics that's come up.
And many of the other earnings reports has been on.
The labor availability.
And also some wage pressures so what have you seen on those fronts. Thank you.
David I'll take as much on the jump in so we did a strong focus during the COVID-19 should not.
Do anything to reduce our technician base more than what the customers were doing if they would take off from work we would try to find low places for them. During the peak of it we're trying to do what we could to keep them there.
Sequentially, we were working on the less hours, but we are still trying to keep the bulk of our employees most of our employees stayed with us through COVID-19.
And have returned so we don't have any overall.
Problem as far as labor to handle the work there is always going to be some type of.
Skill sets or things.
Things needed for a certain area, where you use more of 1 type of technology than the other so theres always some individual.
Needs that may be exceeded our capabilities, but overall, we really believe we're in good shape, there and as far as total bodies. We just haven't worked on as many hours as we have pre COVID-19 as we have post <unk>.
As far as increases again, those certain skill sets.
On.
After the firing some ways in certain areas and customers realize that for us on other labor, they're going to have to adjust accordingly, and so far we found on them will.
To do so.
Perfect. Thank you very much and congratulations on the strong results.
Great. Thank you David Thank you.
And our next question coming from the line of Sean Eastman with Keybanc capital. Your line is open.
Hi, guys. This is Alex on for Sean Congrats on the strong quarter.
Thank you.
Yes.
First 1 for me.
It's clear that the oil and gas segment has recovered nicely revenue growth of 50% this quarter and with the spring turnaround season that started later, but ran longer than historical norms.
What is your expectation for the fall turnaround season, and what's your visibility like I'm. Just wondering if there's still uncertainty around pushout in activity levels into next year or turnaround season, that's just doesn't run as long as the spring.
So that's of Great question, it's done its I don't think theres any doubt customers trying to save some money in the first half of 2021, where they could they.
For the most part of every turnaround that was scheduled to happen.
But if there was a way to make a couple of dollar savings either on travel and per diem or maybe not as many hours.
During the Covid you'd worked 40 hour week, starting to turnaround which was on hurdles. We will work on over time, but maybe not at the same amount of hours I don't think in the fall Youll, probably get back to the 700 <unk> like we had seen pre COVID-19 I don't think customers are spending that they might try to harvest some savings on the back half but.
It wasn't as aggressive or.
You know like you've seen anything in the Covid days. It was just a little bit more logical theyre, putting some back so I could see some savings both for the most parts of not pushing.
Too much work out of this current year 2 of 22, I think what they're trying to do is make up for what happened in 'twenty. So they don't have that much room to keep pushing things out right. There just trying to say where they can but.
I think the second half will probably look the same.
Traditionally the spring turnaround season in the last few years has been stronger than the fall.
I wouldn't doubt they would probably happen this year, but you never know what could happen with 1 off customers or something like that.
That's very helpful and second 1 if we break out of your oil and gas business between downstream midstream upstream and maybe Pat can which is the smaller how did.
All of this stuff just performed during the quarter, maybe compared to last quarter.
Just wondering which of these are driving the strength in energy and maybe which of these have been weaker.
John If you wanted to get sort of the details of it.
For sure it does thank you.
Good question I think for us.
Echoing Dennis was comments, we've seen you know of.
Resumption to more normalized patterns, but for us the biggest gain in oil and oil and gas in Q2.
Was really more market share driven as we picked up some new business. We were awarded some contracts that we stepped up.
And.
For us downstream has not really recovered to the extent yet that we expect it to recover I think that I'll Echo Dennis his comments that there is still a cautiousness on the market spending levels haven't.
Zoom to what we would've seen in 2019.
Yet.
There is always uncertainty in turnarounds because they run long there on short in the hard to predict but I would say that in Q2, mostly it was market share gains secondly, it was the resumption to to activity levels that we're starting to approach normal.
I think certainly we're strong offshore.
But downstream.
You know, it's a bit cautious yet and it's on the way back.
I guess, the 1 thing I'll add Alex the John Glass comment on offshore Australia. In total is still worry about close camps and still worry about COVID-19 right. So you can close camps, where you're on a rig or in a remote area of whatever it is.
There is still.
The Covid is still there however, you want to argue with.
There has been some breakouts on things like that so there's still a little bit of concern there 2 of them all.
Safety of personnel and just Covid safety of mill operations.
Yes, that's right.
Thanks, guys I'll turn it over.
Okay. Thank you.
And our next question coming from the line of Brian Russo with Sidoti. Your line is now open.
Yes, hi, good morning.
Good morning, Brian I reported.
Good thanks.
There's a lot of discussion on on your SG&A run rate.
Should we assume going forward that the.
SG&A run rate with the.
Something like the first quarter of.
Of.
2020, pre pandemic or are there.
Change.
Cost savings outside of what's what's variable and but you commented that youre, adding back.
Do you want to cover it on.
Yeah, I'll address that there'll be there'll be some cost outs that will that will be sustained so we won't exactly rebound revenue is good rebound, but not for the 2020 level. If you look at the current quarter SG&A of protein 40 million exclusive of R&D in.
The DNA that 40 million is going to creep up.
The cost outs came back this quarter as we said, but we fully back in fourth quarter. So the current 40 million maybe is going to grow in other of millions of millions of half going forward to its peak levels. So you could think of it maybe capping out around there.
Sustaining itself at that point some of the cost measures will stay sustained so yes, the $2 million increase you saw this quarter versus same quarter last year, we don't intend to go back up to that level, we can hopefully go up.
Half of that maybe a little bit more going forward, but yes, we will stay under the 2020.
The run rate going forward.
Okay. Good and you know, what's your commitment to debt reduction.
Are you still targeting 3 times or less leverage by the end of 2022 or <unk>.
Given the solid first half results do you think that could be accelerated.
By the end of the 22, certainly we'd be out of 3 of hopefully sooner than the end of the year.
We're on a definitely keep our focus on reducing debt. So you're on that that target is absolutely still.
Still our goal yes.
Okay, and then at the correct me, if I'm wrong, but I think there was some commentary in the press release debt.
You may have mentioned this earlier, but by the yen.
Of 2021, you'll be on a run rate of 2019.
At the top line run rate or is that.
The.
The margin run rate just wanted to be clear on that.
We will refer each of the revenue run rate. So the exit revenue run rate in the fourth quarter of 2019, Coincidentally, it's the same revenue run rate this quarter.
Is where we said we would we would end the year you're exiting this year at <unk>.
How we exited of 19 at the revenue run rate level, hopefully margins or anything else holds up as well if not being a little bit better, but we were referring to the revenue run rate exiting this year would be feeling very much like how we exited <unk> 19.
Right, so to summarize sort of characterize youre going to be out of 2019 top line run rates, but meaningfully higher.
EBITDA and operating income type margins correct.
You should be similar yes. By then you will have cost outs werent in 19 cost outs or won't be covered here in 'twenty..1 so yes, your overhead dynamics should be similar hopefully a little more efficient this year.
Then everywhere in the 19.
The mix plays a part of that obviously on the gross margin site overheads will be controlled very well, but you know more.
Margins are all relative to the mix of at that time.
So that that's a bit of of variable, but should be very very comparable hopefully and a little a little stronger for lucky.
Okay, and then the high to mid to high achieved in sorry, low to mid teens percentage top line increase in <unk> 'twenty 1.
Versus the year ago period is that all driven by energy.
Given your comments debt aerospace isn't really.
For recovering yet.
I'll take that Scott.
John the desk.
As John Thank you.
Say, it's not all driven by energy I mean energy is still slightly of the majority of revenues and it's been.
A good portion of the growth so far of the first half of the year, we look for energy to continue to be strong in the second half third quarter on second half, but also as Dennis alluded to in his comments.
Aerospace and the debt.
This emphasis on space commercial is starting to edge back in but but it's a slow slow burn at this point, we anticipate the commercial aero really starting to tick up on the middle of next year and beyond to much higher levels, but for the second half of this year is energy.
The mid space.
There's other sectors, which are doing well too.
Okay, and then just on renewables and private space.
You've mentioned emerging markets contributing very little currently.
The revenue and margin, where do you see that headed over the next several years in terms of percentage of both of your overall mix of business.
So Brian it's Dennis I mean, our goal is to.
When we look out of 4 to 5 years, we'd like to be below 50, 50 on the oil and gas portion of our business and debt. It's not at all by saying, we're reducing of letting our foot off the gas pedal in oil and gas, we believe theres a lot of room for growth there.
But we wanted to start focusing.
On on alternatives, such as wind alternatives, such as the infrastructure and all these other things that we can do.
I mean over the next year or so it's going to be organic growth and we'll follow that path, but eventually we can get back to the more purposeful and looking at diversification on the third.
Third and fourth and fifth tier out net.
The next couple of years, we're gonna be probably still over 50%, but we see them 5 years to be below just by focusing on those things that are not oil and gas, while keeping oil and gas strongly on our.
In our portfolio.
Okay, and then just lastly on <unk>.
The wind.
Sensors and monitoring of detection.
Alex the true services that Youre working on.
Offshore wind is becoming.
Is gaining momentum I can say that the federal support utilities of pursuing especially.
And the on the East coast.
I would imagine that that market would be of big opportunity for you given the.
That job.
These wind turbines or nearly 4% to 5 times higher in the air as the ones on land and then just given the climate, there's got to be a lot more.
Erosion and wear and tear.
Thoughts on that.
So Brian I'll, let I'll, let John answer that for the 1 thing you want to think about is we're promoting of remote sensor capability, we're better but in the middle of the north sea or how many miles off the coast of Jersey or wherever else. They put to the new places on did you Wanna remote capability right.
Is absolutely winning until the kind of thinking we're doing but I'll, let John answer what we think we can do on wind.
Yeah, Yeah. Thanks, guys. Good question Bryan.
As Denis just said I mean, our remote sensing capability works wherever of wind turbine is located.
And so.
The great thing is if you're in the middle of the country in the wind farm in Texas or in Iowa, or especially if your offshore.
Thing is is that access to these wind turbines is difficult and it doesn't happen very frequently.
So the great thing about our remote sensing capability as it is.
On all the time.
So you're not beholden to time intervals, where youre inspecting whenever you can get to it on some kind of.
Rotational basis, all the time the condition of your of your wind turbine blades or even your winter by the hubs for that matter of other parts of the wind turbine. So offshore of the value proposition is even stronger if you can imagine because access is sort of difficult and and to your point damage occurs on a more frequent base.
So yes, it's a definite yes, because the the answer to your question.
Alright, great. Thank you very much.
And our next question coming from the line of Mitch <unk> with <unk> <unk> Company. Your line is open.
Hey, good morning.
Good morning, Mitch.
The depth step back debt.
It's been such a disrupted.
Environment for the last 12 months.
It's really hard for the.
For me the like.
Sort of understand the moving parts sort of from a longer term growth base.
Basis and for instance.
And the way he sort of report your revenue.
It's not as helpful for me to sort of understand what's really driving everything I understand now there's pent up demand in energy.
Understand the aerospace part as we look 6 months out brand new year in 2022.
Can you can.
Can you talk about like the composition of revenue not from the from a growth rate point of view for.
Interesting.
Talk about maintenance of mechanical how's that how stacked on the is that is that all incremental business for us next year.
On the online monitoring and Youre 1 suite.
Yeah.
How do we build 2 of revenue growth 3 net.
Next year that the light can sort of understand it.
On a normal environment I'm not sure if I answered the question properly, but I don't really understand how it is going to build we're going to see it's going to be you know.
On alternative energy markets and monitoring is going to be the.
A big incremental boost next year or can you talk a little bit of about <unk>.
Some of the.
Tangible things that we will see next year in terms of.
Our.
And markets and initiatives.
Sure Mitch let me throw out the Jamba before I do.
Couple of quick commentary the.
The segments that you are saying, we're looking at different ways of maybe representing our segments. Mike maybe you can make it easier for folks on.
Going forward, but 1 of the things I'd like to say is big.
Because of Covid.
Owners and our customers in aerospace and oil and gas all segments are going to be looking for vendors that are more reliable.
Our strong that came out of this you know you don't want to give a 5 year contract is 2 of a vendor who may or may not be able to either be there or the handicapped on their funding for growth and technology and when we talk about these crossover services. All we're doing is really talking about every project. We work on has a lot of PREPA.
<unk> before and after the taken it to prepare it and put it back after our inspection and.
And all of these steps can be.
Can be time consuming and very very dysfunctional for other customers and the more we take on some of these simple steps.
The more we can control the costs on total cost containment someone who's using technology <unk> crossover of services to get the job done.
More efficiently is going to be.
A better partner for them and having 12 different people trying to run the hourly cost.
You know, Kansas that you see so many times on Athena market I'll throw out the jobs for some of the longer term things that he sees but we really see all of our segments growing because of COVID-19 recovery and because of the things that we're doing we're not we're not sitting and waiting on any 1 channel that you're moving.
I'll take a shot on it yes, it's going to finish.
The Tennessee the thanks, that's a perfect setup Mitch it's of Great question and it's 1 we ask ourselves all the time.
And Dennis just indicated.
And the thing is you know to an owner <unk>.
Sometimes you know of purchasing department can can really start thinking along the lines of if I just got the lowest rates.
I've done my job and a reduced cost for for my employer and of course part that's partly true.
But the thing is that we're emphasizing the dentist keyed on is this convergence of services. This convergence of different disciplines that we bring to bear.
Be it multi certified technicians the at accessing.
Access Inc.
Inspection of our mechanical service points in a different way not just on the ground and not just be of scaffolding for instance.
With a rope access personnel.
The convergence of of mechanical services on golf access to create greater value to customers in ways that they have available for realized before its remote monitoring in the in the renewable sector, where we're essentially displacing or replacing other forms that are not as effective at sort of bear.
Really doing the job and we can do it for.
For a very compelling business proposition of a business model that gives them a great return on any investment they make with US it's in the convergence of mechanical.
With inspection.
For aerospace for for both commercial and per space, which we do today and what we're doing on increasing amounts of as were alluding to.
And essentially it's again by the crossover of combining discipline combining different activities that the owner needs on their parts.
And doing it under 1 roof and doing it in an innovative way to reduce cycles to reduce time to reduce cost and to produce.
Recovery recovery rates to reduce scrap rates for them in ways that they they just don't have other alternatives to get the same kinds of results that we do so.
I sympathize, because it's hard to model that.
What we're saying.
And it's up to us I think over time to increasingly provide more visibility into those kind of activities and as they mature in the big really start to grow even more.
As Dennis said, we're going to increasingly try to do that.
Okay. That's helpful.
So.
Having the take I mean, how do you even know.
If you're capturing.
Your fair share of our customers.
But overall needs I mean is there.
I.
Obviously, you just can't sit back and hope that they come the youre going out and selling them.
Emphasizing is there for sure.
Is there a growth rate among the services that are growing faster than the others. So is it absolutely we've seen gross in the in the digital solution. The tablets I mean theres there gross rates. We can you can talk about so we can help if you could help us understand how the build.
The revenue model I mean, that's that's also part of my question is it's hard to see.
Stan turnarounds and the rest of turnarounds and things like that but it's just hard to see clearly how the revenue builds next year I mean, I'm sure it will but I just.
I just need a little help in the in like more whether we can talk about contracts.
New contracts.
Wins and things like that is there is there. Some is the visibility that you have or is it literally just wanted to ask 1 sales call. After another SaaS toll on hope they built the higher revenue.
It's a little bit of both to be honest.
In terms of how we measure how we're doing with the customer we're working with them day in and day out I mean as you can imagine we've got technicians working with customers at their sites at our size of et cetera, We're working with the operational folks at our customers and understand how we're performing we regularly great.
Great ourselves with key performance indicators that we're reporting out to our customers and getting their feedback all the time. So that's how we're gauging that and that's helpful.
The kind of measuring how we're doing with the customers to answer that part of the question.
In terms of the growth and where it comes from.
Absolutely some of the areas that we've already called out in our prepared remarks and in some of these Q&A questions.
We're talking about sort of the areas of emphasis Denis Denis mentioned many of them in terms of the digital aspects.
If we were to show you the the the adoption chart right now of Mistras digital tablets that looks as you would hope like of a great hockey stick going up into the right.
The base is.
<unk> was relatively small where we started from of course, but where it is right now.
Where it goes by the end of the year and importantly, where it goes next year, we're really excited about and that's why we're talking about these on our comments.
Kind of said, we're not quite ready on the Resubmission patient basis, as we're exploring but.
To share that data as we're going through that analysis, but we're really emphasizing these parts of the market.
The renewable sector on the monitoring and so forth space in the commercial aerospace.
Additionally, the oil and gas I mean these are all levers that were the my team is actively calling.
Great effect right now so we're really in line.
I'm sorry go on.
That's it thank you.
And without getting into the re segmentation later to share much of to make it easier for you guys. We are we've already been internally working on some of the data metrics. So we have that running and we will start bringing that out later in the year just to show you, where we were like the adoption of the of the tablets in all of the.
Mistras digital and once we and all of that so we are going to be doing that the.
The other point that we do do it on when Youre asking how we do the selling we actually sell for the customers by showing them our key performance indicators, which shows them on the productivity. Our total cost of savings, obviously on safety and things like that on our own.
The first but we are always showing them what we're doing for them in on this.
Savings were using their metrics of cost per well.
Whatever it is they're trying to measure and showing them. How we're on time on tools, we're improving that all of these things time on tools can be a huge waste of time for a.
A recliner or any type of oil and gas customer power out there in the field, where they have these turnarounds on there is just so many people.
Just stepping over each other trying to get the job done so anything that we can do to improve that mistras digital all of these things are huge improvements in there we're absolutely going to be running metrics for the show them the savings and that's that's 1 of the ways, we're going to be showing them. How we are growing well we got to do for you and show you guys from measurement to understand how that translate.
On the revenue for us right.
Well. Thank you very much for the color I appreciate it.
Thanks, so much.
And I'm showing no further questions at this time I would now like to turn the conference call back over to Mr.
Much of lighting for any closing remarks.
Alright.
Thank you Michael.
Thank everyone for your interest today in most of those and for joining our call. Please have a safe and productive day and we look forward to updating you next time.
Thanks Luke.
Thank you, ladies and gentlemen that does conclude the conference for today. Thank you for your participation you may now disconnect.
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