Q4 2021 Mistras Group Inc Earnings Call
Ladies and gentlemen, please standby your conference call will begin momentarily once again, ladies and gentlemen, thank you for calling please remain on your lines. Your conference call will begin momentarily. Thank you for your patience.
[music].
Okay.
Good day, ladies and gentlemen, and thank you for joining Mistras group's conference call for its fourth quarter and year end 2021. My name is Howard and I will be your event manager today, we'll be accepting questions. After management's prepared remarks.
Participating on the call for Mistras will be Dennis Bertolotti, the company's President and Chief Executive Officer, Ed Preisler, 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 S.
E C.
The discussion in this conference call will also include certain financial measures that were not prepared in accordance with U S. GAAP.
Reconciliation of these non U S GAAP financial measures to the most directly comparable U S. GAAP financial measures can be found in the tables contained in yesterday's press release and in the company's related current report on form 8-K. These.
These reports are available at the company's website in the investors section and on the S. E C website.
I would now turn the conference over to Dennis Bertolotti.
Thank you Howard and good morning, everyone. Thank you for joining us today.
In the fourth quarter revenues exceeded expectations for the third consecutive quarter reinforcing our confidence in our strategic initiatives and addressing the COVID-19 market challenges.
Adjusted EBIT for the fourth quarter was in line with our expectations.
He was truly a great finish to a year of strong top and bottom line growth.
Revenues for the full year increased over 14% and gross profit dollars were up over 10%.
Selling general and administrative expenses were up only a small fraction relative to the revenue increase due to our continuing focus on overhead.
As a result of operating income and net income improved substantially year over year with adjusted EBITDA up over 21% significantly more than our increase in revenue illustrating the operating leverage built into our business model.
These results were achieved while also continuing to invest in our growth initiatives throughout 'twenty, one, including one suite consortia and Mistras digital.
Which I'll elaborate on more in a few minutes.
A very crucial aspect of our recovery is the significant free cash flow we generated.
In fact, we generated over $16 million in the fourth quarter alone.
Which we use to pay down our outstanding debt at year end, and we will continue to focus on rapidly reducing our debt.
We have now paid down just over $90 million of debt over the last three years significantly strengthening our financial condition.
By staying focused on paying down debt through the rest of 'twenty. Two we anticipate that we will gain flexibility in our capital allocation strategy and be in a position to potentially restart acquisitions by 2023.
In order to enhance and accelerate our growth initiatives.
Our end market diversity.
And increasingly smart and predictive data centric solutions to our existing portfolio.
Mitch just maintains a very strong financial foundation as we head into the new year.
Jumping into our various end markets energy remains our largest and our revenue in this industry was up nearly 17% in 'twenty one.
We expect to maintain our growth in the energy market as it continues to rebound back to pre pandemic levels of activity and expect continued growth within our petrochemical market, which we continue to expand our offering to this underserved market.
Our success is built on our ability to respond to the market's demand to get more for less.
This has been a major driver behind our investment in Ruggedized tablets, and digital and data capabilities as.
As well as complementary mechanical offerings for all of our sectors.
These efforts are making our total offerings sticky as buyers look for partners that offer smarter data solutions and greater overall project value.
We believe our digital offerings are a true differentiator.
Led by one suite, which is a unique offering within the industry.
Essentially it's our industrial version of the App store users can access over 85 applications, helping them to better understand and monitor the condition of their plant and equipment assets from a variety of perspectives.
These applications also help them predict when they'll need to conduct needed maintenance, which ideally would minimize repairs and downtime.
It's already been widely adopted at nearly 100 customers with over 1000 individual subscriptions since the start of 'twenty one.
And we anticipate further growth in 'twenty two.
These inaugural users are currently executing several million processes and calculations monthly.
Within our related applications and we anticipate further expansion of one suite utilization.
Throughout 2022.
Crude oil prices now significantly exceed pre pandemic levels and this is certainly a positive for our energy industry customers.
At the same time this has caused many refineries to run longer cycle times.
We captured the additional income, resulting in the postponement or scaling back of plant inspections.
And this is more for less paradigm is also putting pressure on the industry.
Consequently, this may and most likely will impact the spring turnaround timing as customers, who initially had heavy overlap of projects in certain sectors of the country.
Now, making small timing adjustments with some of the pearls until later this year.
And in other case curtailments or the work itself.
Regardless, we believe conditions will improve as we move through 2022 and on the strength of our digital strategy led by Mistras digital and one suite.
Our broad product offerings and complementary mechanical services, we believe we can achieve our objective to grow our energy business.
Mistras has a longer term strategy to succeed in the energy market first by continuing to take profitable market share second by expanding our scope of services and filing by introducing new proprietary solutions.
For instance, our Onstream acquisition completed in December of 2018 gave us entry into the in line integrity testing market by utilizing internal pipeline inspection gauge as to inspect the underground pipe.
Onstream had a record revenue year in 'twenty, one and with our expanding diameter toolset service offerings, we expect additional growth from Onstream in 'twenty two.
Our deep breath of data services and product and service offerings are easily adaptable for us to expand into growing infrastructure and renewable energy sectors as well.
One of our most exciting growth initiatives is the MS Trust and so are you wind blade monitoring and insights web portal.
Our wind blade monitoring technology platform.
Sorry, It provides real time detection and visualization of turbine blade damage utilizing our recently patented wind turbine blade monitoring systems based on our tried and true acoustic emission capability.
<unk> is currently in proof of concept on dozens of turbines with a variety of owners ultimately we see some soria is the key to expanding what is already an approximate $17 million wind turbine blade repair and maintenance global business.
We envision a service offering that includes the sale and installation of the sensors on the turbine providing 24, seven monitoring service and ongoing repair and maintenance of any damage detected.
We are finalizing our proof of concept for this initiative have generated some positive momentum and we anticipate being in commercial operation in the later part of 'twenty two.
Honoring up to 100 turbines in addition.
Our goal is to expand our monitoring capacity for up to 1000 wind turbines.
The end of 2023.
I encourage you to learn more about this exciting new offering by visiting sensorial when dot com.
Both once we enter soria represent an evolution and asset protection.
And misread is uniquely qualified to leverage our proven capabilities and expertise to meet the needs of the changing global landscape.
These newer data centric tools complement our more established Mistras digital mobile cloud based field inspection.
And exit <unk> and reporting platform, which digitizes the field inspection process.
A powerful end to end workflow solution.
All of these interrelated data solution initiatives when combined together create a robust predictive analytical platform delivering an enhanced customer ROI. We are very excited about our prospects for growth in these new markets.
In the aerospace market, we continue to experience outstanding growth in our private space business.
Sequentially, despite a weak commercial aerospace market revenues in this overall vertical were down less than 3% for the full year.
Although we still like significantly behind our 2018 market peak.
While commercial aerospace revenues remained soft we believe the weighting pandemic and resultant resumption of air travel to be positive signs of an impending recovery in the industry.
Which we believe for us could begin as soon as the second half of 2022.
Gross margin in the aerospace sector is very attractive and growth in this vertical will provide a nice boost to our consolidated performance.
I also want to note that we generate we generated significant growth in our other process industries segment, which includes pharmaceutical and agricultural industries as well as in our industrial segment, especially in this fourth quarter.
It is great to see the growth being achieved in these other verticals, which is a result of the success of our strategy to find new sales outside of the energy sector.
While the ongoing Ukrainian conflict, certainly cause and extreme volatility in the world oil and gas market.
It is not at this time had a significant impact on misra <unk> current business.
U S in certain EU countries have imposed immediate restrictions on various Russian oil and gas activity and we are in the process of assessing the specific impact this could have on our customers and on us.
We are also addressing the overall potential risk this situation might have on our business going forward.
But at this time, there are still many unknowns and uncertainties.
In summary, it was a strong finish to a year in which we organically grew the business.
We increased profitability and strengthen our financial condition, while rapidly approaching pre pandemic performance.
At the same time, we made significant investments in the business to bring innovation and new products that a market that will fuel the next leg of our growth.
I would now like to turn the call over to Ed to give you more detail on our financial results for the fourth quarter and full year 'twenty one.
Okay.
Thank you Dennis good morning, everyone.
We are certainly pleased to report another strong quarter, reflecting an ongoing gradual recovery where in our financial performance is steadily approaching pre pandemic levels.
Mr <unk> keeps getting stronger each quarter.
And this quarter, we exceeded our top line guidance and generated adjusted EBIT that was in line with our expectations.
We exited 2021 with strong momentum and we expect we will be it will be maintained throughout 'twenty two particularly in the second half of this year.
Turning to the results for the quarter consolidated revenue increased six 5% over the prior year to just over $171 million.
Revenue rooms in the fourth quarter was driven primarily by industrial aerospace and defense and other process industries as Dennis mentioned earlier, we are pleased to see the success of our strategy to diversify our revenue base beyond our core in the energy market.
Gross profit for the quarter was $49 6 million, a very nominal increase as compared to the year ago period.
Gross profit margin was 29% down from 37% a year ago, primarily due to higher benefit cost in the U S and lower Canadian wage subsidies in the current year quarter compared to a year ago.
Selling general and administrative expenses in the fourth quarter of 2021 were $42 8 million up from $40 5 million in the fourth quarter of 2020.
This increase was due primarily to the removal of temporary COVID-19 cost reductions in August of 2021, which had been initially implemented in 2020.
Despite these added costs, we were able to limit our full year overhead increased to just two 7%, which was significantly below our annual revenue growth rate.
Again, improving the operating leverage in our model.
On a full year basis operating income was up substantially to just over $18 million.
And on a non-GAAP basis, it was $22 $3 million. This was an improvement of over 200% for the full year.
For the quarter, we reported a GAAP net loss of just under $100000 compared to net income of just under 200000 in the same quarter a year ago.
Adjusted EBIT for the quarter was $14 6 million and was in line with our expectations.
As anticipated operating and free cash flow rebounded quite significantly in the fourth quarter.
Cash flow from operations in the fourth quarter was $19 8 million and free cash flow was $16 5 million.
Free cash flow was net of a $4 $5 million cash repayment made in December 2021 related to employer payroll taxes deferred under the cares act from fiscal 2020.
Our free cash flow conversion of adjusted EBITDA was over 100% in the fourth quarter, 114% to be more exact we anticipate being back to our approximate 50% average conversion of adjusted EBITDA into free cash flow during 2022.
Our annual effective income tax rate was approximately 47%, including discrete against this recorded earlier in the year that added approximately 17% to the overall rate.
We anticipate an effective income tax rate of approximately 30% for full year 2022.
Looking back at results for the full year revenue was up over 14% with all of our end markets growing with the exception of aerospace and defense for all dimensions of reasons density as Dennis mentioned earlier and infrastructure, which had a large bridge project benefiting the prior year results.
Gross profit for the year was $197 million, which is an increase of over 10%.
Gross profit margin of 29, 1% was a contraction of 100 basis points attributable to higher benefit cost in the U S. In the current year period, and lower relative Canadian wage subsidies in the current year as I had mentioned earlier.
Selling general and administrative expenses were held to just a two 7% increase on a full year basis. Despite different vessel of remaining COVID-19 temporary cost reductions in August of 2021 as originally implemented in April 2020.
Thus by controlling overhead we expanded the operating leverage in our model with non-GAAP operating income up over 200% for the year, while adjusted EBIT grew by 21% to $63 million.
Capex for the year, which just over $19 million up modestly from a year ago due to the significant revenue increase and this was in line with our expectations.
Because of our asset like model you can expect a typical capital expenditures budget of approximately 3% of annual revenue for the upcoming year.
And as Dennis said debt reduction remains our number one priority use of cash and this year, we used cash to pay down gross debt by $16 3 million.
Over the past three years, we have now reduced our total debt by just over $90 million as of December 31, 2021, our consolidated net leverage ratio at just over three five times as defined by our credit agreement.
The lowest level, it's been since the third quarter of 2018, which was prior to the Onstream acquisition and it remains well within the limits of our current covenant requirement.
Our goal is to lower our leverage level to less than three times by the end of 2022.
We're well on our way to doing so.
This will facilitate a more flexible capital allocation strategy by 2023, as Dennis mentioned earlier.
Our business has been recovering since the low level of demand experienced beginning in the second quarter of 2020, when the initial effects of COVID-19.
Although energy prices and demand improved during 2021, the ongoing COVID-19 pandemic continues to impact us.
This effect is most pronounced on our second largest market aerospace and defense, especially in the commercial sector, where a rebound to pre pandemic levels is lagging other mid market.
More recently with crude oil prices now significantly exceeding pre pandemic levels. This has caused many refineries to run longer cycle times, resulting in the postponement or scaling back of plant inspections. Consequently, this may impact the timing of the spring turnaround and as customers who had initially had a heavy overlap of projects in certain regions.
Are either curtailing or deferring work till later in the year.
Or at least we believe conditions will improve throughout 2022.
The first quarter of 2022, we expect revenue to be a low single digit increase as compared to the first quarter of 2021.
And we expect adjusted EBIT to be essentially flat in the first quarter of 2022 compared to the first quarter of 2021.
Keep in mind that the first quarter of 2021 benefited from a significant level of Canadian reach subsidies and the temporary cost reductions.
It had remained fully in place through August of 2021, Thus also benefiting the first quarter of last year.
Overcoming these significant headwinds to achieve a flat first quarter when adjusted EBITDA as compared to the prior year shows our continued focus on cost containment and expanding our operating leverage.
This outlook is contingent on continuing geopolitical and macroeconomic stability, including stabilization in the crude oil futures market ongoing effectiveness of the international COVID-19, vaccination rollout no additional global supply chain disruptions or label short labor shortages, which would impact our ability to work as a critical.
Service provider and no significant attitude and inflationary pressures on our business model.
Again, the ongoing conflict in the Ukraine is certainly an extremely volatile situation with unknown impacts to world energy markets. We are.
Reviewing the potential impact this might have on our business in the immediate term, including U S and EU sanctions on Russia. This will certainly have an adverse impact on the world's oil and gas market in the short term. Although this will be partially mitigated to mistras by the fact that our businesses geographically more concentrated in North America and Western Europe .
Then the regions more directly involved in the ongoing cockpit currently we do not maintain any operations in Russia, and our exports to Russia are very limited.
Over the long term it is too early to tell yet as to what impact the current crisis and related sanctions will have on our business.
Nevertheless, we are highly confident that our business model is robust and sustainable through the extremes of economic cycles, and we remain firmly committed to executing our plans by maintaining our intense focus on cost containment, while continuing to prudently invest in our business that is our strategy both today and over the long term.
And with that I'll now turn the call back over to Dennis for his wrap up before we move on to take your questions.
Alright, Thanks, Ed.
Fiscal 'twenty, one was a year of rapid recovery from the twin challenges of COVID-19, and the collapse of the energy market. In 2020, we grew the business improve profitability and we strengthen our financial condition.
Now we are preparing for even greater opportunity.
First we're transitioning the business to a more data centric organization.
Delivering an enhanced ROI for customers, who are demanding more be done for less.
Once we add some soria are the most visible changes in an organization that is increasingly increasingly looking different today than it did just a few short years ago.
We strongly believe the expanding acceptance of Mistras digital can add value to all our evergreen projects.
Making us more firmly to choice of owners for their industrial assets.
This growing portfolio should expand our growth opportunities and deliver better margins.
Second we are looking at alternative markets, such as renewable energy private space and many others, where the need for our services are emerging.
Kris regulation compliance requirement and the drive to optimize the performance of valuable assets.
It's driving industries to increase the market for NTT.
And our other related services.
Third we are dedicated to reducing outstanding debt I am proud that we have paid down just over $90 million of total debt over the past 36 months.
Which equates to roughly $3 per share. Although this has not been reflected in our equity valuation over this period.
Once we pay down to historic metrics, we intend to consider strategic acquisitions to potentially enhance and accelerate our growth.
Finally, we are focused on optimizing our own efficiency.
Proving the operating leverage in our business and generating increased shareholder returns with adjusted EBITDA expected to grow faster than revenues over the course of 'twenty two.
Can clearly see our commitment to this objective.
The first step is to return operations to pre pandemic levels and we are rapidly approaching this objective.
Some of our metrics such as gross profit margin, we are ready there as our gross profit margin in 'twenty one.
Was slightly higher than that of 2019.
And our SG&A dollars were 4% lower in 'twenty, one than they were in 2019.
Both once we <unk>, sorry, I represent an evolution and asset protection and Mr. US is uniquely qualified to leverage our proven capabilities.
And expertise such as Nekoosa Commission monitoring while innovating to meet the needs of the challenging and changing global landscape.
These newer data centric tools complement our more establish mistras digital.
Which is our cloud based field inspection execution and reporting platform, which digitizes the field inspection process.
Via a powerful end to end workflow solution.
All of these inter related data solutions interact and combines which will differentiate our offerings by creating a robust predictive analytical platform.
I am very excited about our prospects for growth in these new areas of opportunity in 2022.
We believe that our new project specific mechanical and data services will help us to accelerate our growth objectives.
Before taking your questions I would like to thank all the Mistras employees once again for your understanding and leadership.
It has been almost two years to the day since we started creating strategic goals that address the market disruptions from the pandemic.
Both strategic investments we have made.
In the digital space will help to drive growth in our future targeted end market.
<unk> the extreme consequences.
But our customers and competitors have experienced during this worldwide crisis.
Your focus on carrying for everyone that we interact with has made Mr us more resilient than ever as a valued partner.
We have shown unwavering focus for building on our solid reputation of safety quality and innovation.
All while providing outstanding customer service and dedication during these extremely trying times.
By sticking to the tenants of our carrying connect initiative.
We can provide a better workplace not only for the <unk> family, but for all of whom that we work with on a positive and safe manner.
Howard Please open up the phone lines for questions.
Ladies and gentlemen, if you have a question or comment at this time. Please press Star then one on your telephone keypad.
If your question has been answered or you wish to remove yourself from the queue simply press the pound key.
Again, if you have a question or comment at this time. Please press Star then one on your telephone keypad.
Okay.
Our first question or comment comes from the line of Brian Russo from Sidoti. Your line is open.
Hi, good morning.
Good morning, Brian .
Just first on the first quarter 2022 guidance.
Of.
Low single digit revenue growth could you just kind of compare contrast.
What you saw in the ports and the fourth quarter in the services segment I believe it's 11% overall growth could you kind of drill a little bit deeper.
How that growth might have been dispersed.
Between energy versus aerospace and defense versus industrials and then.
What youre seeing in the first quarter of 2022.
And it triangulates with low single digit guidance.
Yes, I'll take it off throw to Joe I'll take a quick comment on that so in the fourth quarter, it's always a little bit volatile with our customers sometimes in the energy market, having their budgets exceeded or spend will come off of the year quicker than normal.
Didn't happen in 2021, we've seen the signs of that.
In previous years, such as 2019 were late November early December you had started having customers pulling back people are ours or capital.
Quite a bit later almost into the holiday season. So that was one of the things that helped us and we did have a lot of activity inside private space and some of the other sectors.
Coming back into this year, what we're seeing is that a lot of customers from six months ago. When we were looking at our budgeted in our planning and all of that there was a lot of activity in the spring, but there was a lot of piling on in certain areas and certain times.
I think that just exceeded the capacity on the local workforce not only in <unk>, but all the sectors that support it and I think theres been a lot of corrections to that that made some of it move around a little bit.
John if you want to give a little bit more.
Yes sure. Thanks.
Dennis.
Yes, I think as Dennis said in his in his comments, we had some projects that ran a little bit.
Longer and stronger in Q4 and from a seasonal perspective versus the prior year's Q4, we had a nice uptick so the industry is there in particular.
We're probably energy related.
Just with that activity.
So you have some seasonality, there, which kind of worked in our favor and some projects which were <unk> in the first quarter I think we're looking for a similar industry mix.
But as Dennis said in his prepared comments I think from a seasonality perspective, but also just given a little bit what's happening in the macro energy markets right now.
The turnaround activity that we're expecting for.
For Q1.
Kind of in line with what it would have been in last year's Q1, originally we might've thought it might've been a little bit.
Advanced versus last year's Q1 from a seasonality perspective, but as Dennis said things seem like they may have moved a little bit out of little bit later in the year. So that's why our first quarter increase.
While still good low to low single digits.
We might have thought it might've been a little bit higher when we entered the year.
Still thinking thats going to be good.
Okay, Great and then just on the sensor area.
And your comments on the global market opportunity.
Clearly going from 100.
Kind of turbine capacity or.
Service.
Market specific to mistrust 2000.
Kind of supports considerable amount of growth, but if you just if you just kind of look at the number of wins.
Wind facilities in operation in terms of megawatts and the number of turbines in operation and then also just.
The nearly 29% or 30000 megawatts of new wind capacity forecasted by the EIA.
It even seems that.
1000.
Turbines is only a small fraction of kind of the U S market potential.
If you could just kind of add some.
Right there whether it quantitatively.
Or qualitatively.
That would be appreciative.
Okay.
Yes, John I can give that one a shot.
Perhaps not a threat.
But yes, I think we are as Dennis said in his prepared comments.
We are in a number of.
Ongoing trials with some name brand customers these are going very well.
But we're in the early stages of proving ourselves.
And I think that as we continue to prove ourselves the commercial orders are starting to come.
But we're not trying to rush that process as much as we are trying to make sure that with every step we take.
Our ability to perform.
Our ability to never over promise.
As sacrosanct.
The credibility that we need to have in this very important market is just really key.
So we're taking a step by step.
We're not rushing these processes with customers.
We did have a great commercial installation in Q1.
That just just finished.
So activities are ongoing and we're really excited about it.
I think that the numbers, we presented probably with regards to capacity may prove to be somewhat conservative, but again, we're trying to under promise and over deliver.
With our customers and with you folks on this call.
Yes, Brian one more comment it's Dennis.
Kian on the word capacity right now we know the technology works and we can prove it out and we're doing that with Tucson.
Pass up or projects that we have but what's going to happen is as we nail that software and automated a lot more capacity will go up so what we're really looking at is making sure that we got probably to detection nail we want to make sure that we have automation of signal enhancement and bringing that to the website right. Now there is a mix of automation and <unk>.
Annual verification. So once we get past all that and get the proof of concept more in the rearview mirror, that's where our capacity to grow in.
And to your point.
<unk> is much better than most of the quantified quota capacity and Piedmont Bill if theres a lot out there. So we're not worried about how much growth potential. We have we just wanted to make sure like John said that the.
The system was recognized the probability to touch on is high enough that we're going to capture them.
And right now were still really focusing strictly on the land base, we haven't even gotten into the offshore where they're bigger and we believe that the same technology will work, which they have to prove that it can reach a little further out on the blade, but.
We don't see at this point any reason that it should be that much different.
Right got it got it understood and then just on aerospace and Defense group.
Clearly.
Commercial aerospace is lagging.
You guys have been.
Mentioning that for a couple of quarters, but when you look at the aerospace and defense revenues in 2019 of about $94 million I mean do you think.
Recovery gains momentum in the second half of 2022.
Do you think you can reach that level for the full Europe 2023.
Dennis you want to jump out.
Yes, I'll start.
Art.
Yes, Great question, Great question I mean, we are.
As Dennis said, we're very strong right now in private space. The other area that we're doing very well is defense.
<unk>.
Within the aerospace and defense it used to be when we talk about this two or three years ago, we were almost exclusively talking about commercial air and nowadays commercial Aero is certainly still the biggest portion of this of this category for us, but it's lagging as you say.
With the growth in defense and proud with Arrow I think.
Absolutely we can approach that level in the latter part of 'twenty, three and we're trying real hard to get there sooner.
Brian .
Our customers from casting foundry houses OEM manufacturer and everything else that they believe that by mid year pick a month June July that range that the.
The volume of production will be at a point outside of the wide bodies will be at a point that it's going to be getting back to some normalization. So theres been a lot of.
Activities and discussions with our customers about what can you do to ramp up not only us, but we hear from machining and everything else out there is starting to become stressed in the industry. So there is there is an expectation that that volume will get back to a much stronger on the commercial side by midyear and start to carry through through 'twenty two into 'twenty three.
Okay, great. Thank you very much.
Thank you thanks, Brian .
Thank you. Our next question or comment comes from the line of Mitch Pinheiro from startup and company. Your line is open.
Good morning.
Good morning, just a follow up.
On the wind turbine business.
I mean, what does.
Revenue look like when you have 1000 turbines.
Under monitor monitoring.
Let's say I mean is it is it meaningful is it.
So Mitchell I'll give it to you. This way we're going to have different types of revenue coming in from those turbines youre going to have the installation.
Which youre talking the installation per turbine less.
Less and less than five digits. So it was going to be some thousands of dollars per turbine to do the hardware and do the actual boots on the ground and get them installed and put them into the Blake, we're getting quicker and quicker on that and we can do a couple of turbine today. If we're in a farm or we could have access to more than one at one time. So there is some money there.
There's going to be.
The monitoring of the annual isn't going to be that high of money because those homes run fairly.
Right economics.
We will be making some money on that as well, but when you multiply it times a policy and obviously there is good money there because of the automation and such but we will have.
Subject matter experts working with the customers to understand the data and all of that so it wont be free money coming in but it will be good margin and then you're also going to have the third tranche of money coming at us when we're looking at this stuff and working with the customers and when the data is representative of something with the asset not what the equipment itself out with the SEC.
Or that then we could be going out there.
Finding the damage and repairing.
<unk>.
Sensor farmer, John was just talking about that we're finishing up we actually had found some damage on blades with data know about so there's a lot. We can do some of it was actually even originally that Greg I mean, you're seeing some of it from repair as previously didn't weren't done right. So a lot of the money is going to come probably the bulk of the money will come from being hands on in doing those repairs and things that.
Our present business already Hasnt does and then the other part will come from those other two streams. So I mean.
I don't know if I want to get into the exact dollar per but youre going to have those three different levels and then obviously the installation will be a onetime the reoccurring will be the monitoring and then the maintenance.
No. That's helpful. And then you had mentioned that listen.
You still have a lot yes lots approved here in the you know to your wind customers.
What are you being compared to.
I mean, what do you have to prove that.
You know that you show up on time or you know to install things or do you have or is there some more significant proof that needs to happen.
So yeah, I'll catch that and John wants to leverage that's a good question. There's two things when you say compare to <unk>.
Isn't really technology comparable for the monitoring that we have seen theres people that can put video cameras on there and pointed at a 24 seven if you want or some kind of microphones and things like that but nothing really directly attached at a place that makes sense you can do things on the.
Where the blades attached at a hub into the actuals and all of that and do vibration alignment and all that but that's an indirect idea of what's happening with the blade. So comparable we don't really see much out there, especially when you bring in the fact that we will do the manufacturing installation monitoring and maintenance.
True.
The one that we're trying to ensure to customers that our technology. When he sees the signals that not only sees it signals on a.
Basis from the base down to the tip or down far enough down the tip.
High enough sensitivity that it picks up anything that is significant to the blade if its a small pinhole or something that is a very different it's not cause any damage are growing are we worried about that versus something as you get closer and closer to the blade obviously, the the leverage on the defect is greater and greater and it's more important.
So we're trying to prove that out we're trying to prove that we can find all the different types of damaged perforations laminations delamination.
<unk> falling lightning strikes anything that occurs to it that does it and be able to tell them what that different damages just not that there is a signal that looks wrong.
Identify that characteristics and most importantly is that damage growing and is it becoming significant to the blade. So all those three things in.
Anticipation of where you'd be thinking we're proven all those signals. We're proving that we can see them now we just got to prove that we can see them consecutively. We can we can nail and with the software that's where I talk about the probability of collection to make sure that we can see them on a high probability that regardless of where the deepak and orientation as we can see it.
It grows most importantly can we monitor and give them data that said.
Not only is there something there, but it should be coming to a point, where you need to start thinking about your planned maintenance and that's what's important we can tell them that.
I do have a problem, but how rapidly do you have to work on it and do something with it that's when it becomes valuable to the customer because they can plan their outage timing.
They are like anything else they want to keep their assets running and keep the utilization as high of a percentage as they can so that's where it is.
<unk> really comes in.
Okay. That's helpful. Dennis Thank you and then.
Yes.
Back to the sort of the energy market.
<unk>.
When energy prices are low.
Budgets are tight.
Energy prices are high no one wants to stop.
You know shorter turnarounds.
Where is there a sweet spot is there ever a sweet spot where things just sort of run normally as part.
Part one part two.
Is.
Over the last several years I mean, there's got to be pent up demand for you know.
All sorts of Reno.
Maintenance and even new.
New equipment.
Can you.
Give us a little color on on.
The extent to which there is pent up demand or pent up demand just get pushed off forever.
So great questions.
Quick way of looking at from a customer point of view I don't know if they'll ever tell you theres, a sweet spot, but I think to their point of view.
Volatility is not great for them high low because it's hard to plan capital allocations. You know many people have asked well. It's at 130, a couple of days ago with $160 a barrel now how does that affect.
When youre looking at the upstream and.
And down, especially.
Let's just take the down and midstream really when you look at those two their capital budgets or put out a year or so in advance right six months in advance. So they are pretty much locked into what theyre getting spent certainly when you get extreme high crack spreads and things like that they're going to take a little bit of advantage of it like we're talking about possibly in the spring turnarounds you could see in China's snip off little upfront in the.
Back in and Pare it down to just those essentials again, so they can do something like that but they really can't change too much through the year. They are planning and all that.
<unk> price changes in a week or two wouldnt.
Wouldn't make up for the differences in moving contractors and the timing of turnarounds around.
Yes, it really could make a major difference so they don't reacted that way when you look at upstream in trackers and things like that certainly those are drilling the wells, that's where we see the largest amount of change probably happening from these higher prices if they see it happening for a long while.
It's $1 13, or $1 16, or 100, if they see it in triple digits that the prices are going up.
Drilling holes for.
Are those facilities that are in the cold areas in the desert, where their land base and locked in.
They're not going to change too much so it doesn't really affect really two thirds of our.
Net it could affect that next year, if they believe the prices will stay extremely higher extremely well.
Certainly that's where it comes into it so for them, it's more about sustainability and an idea of what it's going to look like.
Regulations from government everything else about leases and all of that and I think everything thats going on in Europe .
Make the focus on making sure that we have the same amount of supply to match demand as you can have because you could you can curtail supply, but if you don't.
If you don't do anything about demand the price is just going to go in one direction.
And the.
Mount of deferrals.
There I can tell you right now from what we've seen in the spring some of that was <unk> 2020 , one deferrals of maintenance. So what theyre going to have to do is still get that done they may be able to try to play with like you are saying and maybe some of the things that we needed to do in 'twenty to 2020 , one items like that youre going to have to pick it up so theres always going to be a drag behind the owners.
But they have to start making some of the swap to they have to make it up in any one quarter or a year, possibly not but they can't move it out five to 10 years, certainly can't live without two cycles for them.
So although I have to pick it up in a mini or a major at some point, so youre going to youre going to see a bleeding out but they can always continue to play with Watson manner.
Mandatory for today versus what they do have to make up from last year and year before.
That makes sense.
Yes.
So.
So.
I don't I haven't seen the breakdown for the fourth quarter, you haven't released your K yet but.
As you look at the energy market or in your energy business for 2022.
Is that.
On a global basis is that expected to be up year over year.
Yes.
Yeah, Yeah, absolutely Yeah. This is John Thanks for the question Mitch.
Absolutely we're expecting.
Actually all of our sectors to be up to some degree in 2022 versus 2021.
In the in the energy sector.
Certainly.
Commodity prices are good for budgets they are good for encouraging customers to.
As Dennis said they were thinking about capex.
Assuming that they've got operating window to implement it certainly the cash flow is going to be there.
So our expectation is is that we're going to be positive.
Energy revenues in 2022.
Okay, and then just last question for Ed.
And when you're looking at gross profit.
I realized you had mentioned about the first quarter from last year some of the.
One offs what.
Should we is.
Obviously, there's going to be maybe some labor or higher cost pass throughs, how do we how do we expect how do we look at gross margin for the full year.
2022.
I mean, we would certainly expect to hold serve.
Yes.
With 2021, when the gross margins overall, if not hopefully get a little incremental benefit there is the seasonality that would mean Q1 in any year gross profit is lower than the other three quarters, that's without bail and has been for the last three years running a mix of business. There Q2 is.
Generally a much stronger gross profit period in Q3's, a little dips a little from their Q4.
<unk> is a little weaker than two or three so you do its not linear you do see that trajectory changing throughout the year and you've seen that number of years seasonality affecting that but we are we are pushing for gross profit expansion were not showing the basis point improvement. This year that we've shown for a number of years running.
And then there was some attitude cost this year and there was some subsidies last year. So when you normalize that you do actually see that we were able to actually improve gross profit ever so slightly on a true pro forma apples to apples basis, 2021 versus 'twenty. So yes, we are going to lean into it for 'twenty two but obviously inflation is here there is.
Cost pressures.
We're trying to make.
Maintain and push through any any higher cost.
Through as best we can so thats real pressure, we can't deny that but we do expect to hold margins. This year, if not maybe have a little incremental benefit if we possibly can but.
We're earning back last year's tailwind incentives and.
It became a headwind this year as well as the higher cost that we restore to the business.
In August of 'twenty, one all of that has to be earned back. This year. So don't lose sight of that that's work in the opposite direction this year, becoming a.
A headwind what had been last year's tailwind.
Okay. Thank you very much I appreciate it that's all the questions I have okay. Thanks Mitch.
Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press Star then one on your telephone keypad.
Our next question or comment comes from the line of Chris Takahe from singular research. Your line is open.
Hi, Hi, good morning.
I just had a question for censorious once we what are the profit margins on them.
Alright, Chris I'll take it and I'd like to thank you and welcome you to on the call and for picking up coverage for us I appreciate it.
So any time you start talking about I'm, sorry, a one suite and things like that.
Because this data centric and that's why we will be bringing out more of some data metrics for you guys in any year of up to 22 numbers data has always got the richest.
Margins for us.
Youre doing a lot of things with automation, you're doing a lot of things of high value for the customer. So it does have a much better blend for that so anything and some soria anything and all the Mistras digital all of those those will definitely help our margins and Clos through much better.
Multiples above what you would see in field.
Okay.
Great and for Soraya.
How did you did.
From your your you say 100, you're going from 100 to 1000 by.
2023, how did you get to that number.
Okay.
So again, Chris what we're looking at there is our capacity to get to that number we believe that the.
Part of selling is a different issue. We believe there's enough volume out there there's enough customers that we're talking to that we can get there, but what we're talking about is right now we're limited to how many we can add on because we're still having a blend of automation and manual.
Once we get past all that and we automate the software and get the call proof of concept behind us we're going to have all of the signals being characterized automatically signals will give a discrete type of identifier to the customer based on their.
Return objective, sometimes it's purely just a detrimental to the blade sometimes makes the document with the.
The blade mechanics in our financials for it so they get an ROI before they want to look at shutting it off so we'll make sure we have all of that settled in and that's what our capacity to get into from three digit kind of monitoring the four digit by digit. So it's more of the capacity is not so much that we're saying we have a customer waiting on the line.
We believe there is enough.
Capacity out there that we can certainly add customers and grow it and do it. So we're just trying to basically saying we will be at a point, where we're going to be ready to bring online.
Not unlimited amount of customers, but a much greater volume than we can handle right now.
Okay, Great and one question on your inventory levels.
How is your supply chain have you how are you running into any problems. There and are you comfortable with your inventory levels.
It's John I'll take that one.
From an inventory levels perspective, I think there are adequate.
We have had some elongated lead times for chips and so forth.
Just as much as the world is experiencing right now across many different industries, but so far we're finding it manageable.
Okay, great well thanks.
Thank you thanks, Chris Thanks, Chris.
Thank you I'm showing no additional questions in the queue I'd like to turn the conference back over to management for any closing remarks.
Alright, Howard Thank you I'd like to thank everyone for your continued interest in <unk> and for joining our conference call today.
Have a safe and productive day, and we look forward to updating you during our next call in a few months.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.
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I understand.
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