Q2 2022 Mistras Group Inc Earnings Call

August 4, 2022

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

Okay.

Good morning, ladies and gentlemen.

And thank you for joining Mistras group's conference call for the second quarter of physical.

2022 my name is Kurt right that will be your event manager today, we'll be accepting questions. After management's prepared remarks.

Please press star one one on your phone to join the Q&A roster.

Participating on the call for Mistras will be Dennis Bertolotti, the company's President and Chief Executive Officer, Ed price there.

<unk>, 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's actual results could differ materially from those projected some of.

Those factors can result can cause actual results to differ are discussed in the company's most recent annual report on Form 10-K.

And the other reports filed with the SEC. The discussion in this conference call will also include certain financial measures that were not prepared in accordance with U S. GAAP reconciliation of these non U S. GAAP financial measures to the most directly comparable U S GAAP financial measure.

<unk> can be found in the tables contained in yesterday's press release and in the company's related current report on form 8-K. These reports are available at the company's website in the investors section on the SEC website I will now turn over the conference to Dennis Bertolotti.

Thank you Kurt good morning, everyone and thank you for joining us today.

I am continually excited about the future of Mistras and I want to thank our employees for their efforts as they continue to serve our customers and exceed their expectations.

This quarter was extremely busy.

We closed a new credit agreement, we experienced continued recovery in our end markets and expanded the growth of our strategic initiatives and data and digital solutions.

Revenue this quarter was up year over year for the eighth consecutive quarter.

We have continued to see strong demand in our key end markets and we are optimistic for the second half of this year.

Our aerospace and defense business was up nearly 33% in the second quarter as the commercial aerospace market search forward as we had anticipated.

This rebound in commercial aerospace coupled with strong growth in both the private space and defense markets gives me confidence of this industry's ongoing recovery and expansion in.

And validates our ability to meet and exceed customers' needs I am also optimistic for a strong third quarter results, which would keep us in line with our full year expectations.

Adjusted EBIT for the second quarter was $18 3 million down from a year ago, where a favorable sales mix was more than offset by gross margin pressure due to inflation.

We expect gross margin to improve as we move through the remainder of the year, primarily by maintaining a favorable sales mix.

And taking proactive measures such as selective pricing adjustments in line with the inflationary cost pressures, we have mostly been absorbing.

Consequently, with the expectation of continued growth in the third quarter and confident in strong fourth quarter results, we reaffirm our 22 full year guidance.

While we are showing progress with our diversification initiatives energy remains our dominant market.

Second quarter got off to a good start with strong April results, but as we move through the quarter, we began to experience delays and deferrals.

Oncentration once again in the downstream business.

We're near records crack spreads have refineries targeting high utilization rates.

In our midstream business.

We had record revenues in the second quarter and we see this trend continuing into the later half of 'twenty, two given market demand projections.

In contrast to our downstream business high production levels, and the corresponding transportation and distribution activities.

Creasing demand for pipeline inspections.

Consequently, we expect a strong recovery in our energy business in the third quarter and a return to historical patterns in the fourth.

As I mentioned earlier and as we had anticipated our aerospace and defense business.

Has strengthened in the first half of 'twenty, two and in fact, it's up over 28%.

And we expect this positive momentum to continue through the remainder of the year.

Private space remains strong and we believe our focus on reducing the production cycle time for parts will continue to drive faster growth in that market while.

While the supply chain remains a challenge to this industry. It has created an opportunity for <unk> to leverage our solutions business, we developed by alleviating supply chain issues as we had done previously for our customer safran in France.

We are quite excited that the expansion and installation of a new machining equipment and capabilities at our Georgia Aerospace facility is nearly complete.

Now we can perform adjacent value added services, such as machining for inspection procedures, saving cycle time, and reducing transportation, which reduce production time and cost for our customers.

We are excited to get this operation running so that we can further leverage our capabilities in private space.

Aerospace and defense industries.

As part of our aerospace and defense growth strategy.

Pleased to announce that the honorable J M. Cohen has joined the <unk> team as an advanced technical solutions consultant.

Retired Admiral Colin will help <unk> expand its footprint in the military and defense.

Marathon and marine sectors.

Leveraging his extensive knowledge of the naval industry catalog of high level contracts and.

An experienced navigating government procurement procedures.

In our renewables business since sorry, I continues to grow.

Many of our ongoing pilots and demonstrations are quickly scaling up to full commercialization with approximately 50 wind turbines now being monetary.

This puts us.

Well underway to achieving our goal of monitoring up to 100 wind turbines by end of 'twenty, two with the prospect of greater growth in 'twenty three as we rapidly expand our capacity.

Our continued focus on renewables includes penetrating the wind farm market and building relationships with OEM manufacturers.

Our attention remains on both large and small wind farms, including market for massive offshore turbines.

Okay.

Finally, our data solutions business, especially <unk> and new century software had a strong quarter. One suite adoption continues to increase as an integrated applications now standing over 90.

Have been installed at nearly 40 unique customers spanning over 150 sites with close to 900 individual subscriptions.

That has considerable growth in the last 90 days.

<unk> remains on track to double its revenue this year and enter 2023 strong momentum for continued growth and expansion.

The other process industries markets also had strong growth in the second quarter.

Which further illustrates the benefits being realized in our non energy business and our push for greater diversification in our end markets.

Continuing to increase revenue diversity should also benefit gross margin going forward.

As virtually all of these industries carrying above corporate average gross margin.

We will go through the details in a minute, but gross margin in our energy business should also begin to benefit from pricing actions were taken due to rising labor costs.

Recently, we have seen more acceptance from a market that has been historically resistant to price increases.

As we continue to implement our pricing strategy, we expect to see this gradually increase our gross margin over the next few quarters.

Also I would note that overhead today is little changed from what it was three years ago in a pre pandemic 2019.

Despite current inflationary pressures, we believe we have a great opportunity to improve operating leverage and grow the bottom line faster than revenues.

Additionally, I am pleased to announce a new credit facility, which provides us with much greater flexibility and liquidity to fund our growth initiatives.

Particularly our strategic initiatives and data solutions and renewable energy.

It will enable us to both enhance our organic growth initiatives as well as accelerate the pace at which we consummate strategic acquisitions, thereby creating value for our shareholders, while investing in our employees and infrastructure.

It also demonstrates the strong confidence and mistrust exhibited by a supportive consortium of.

Southern strong financial institutions.

Led by the two largest financial institutions in the U S and will provide additional details shortly.

I'm looking forward to the second half of the year.

We could have our strongest ever quarterly services segment revenue in the third quarter.

Achieve a full year doubling of one suite revenues monitor up to 100 wind turbines.

From an expected rapid recovery in the commercial aerospace market.

The launch our new supply chain service for the aerospace defense and private space industries.

Secondly, transcending the lingering effects of the pandemic and energy market volatility.

Inflation remains an ongoing challenge, but we are making progress on that front, our improved financial flexibility and will discussed during his comments the cost reduction initiatives, we are initiating and our pricing actions will help partially offset these impacts.

As the year progresses.

Our new credit facility provides flexibility to increase our investment in both organic growth initiatives and more closely evaluate acquisitions that meet our strategic objectives.

I'm optimistic about the prospects for growth in both our existing and new markets in 'twenty two and beyond.

I would now like to turn the call over to Ed to give you more detail on our financial results for the second quarter.

Thank you Dennis and good morning, everyone.

Revenue in the second quarter was up year over year for the eighth consecutive quarter as we continued to extend our record of consistent growth.

Results were once again, a mix of strength in key markets that continue to recover from the pandemic offset by the continuing challenges in the energy market, which is operating at peak capacity utilization.

Our efforts to diversify away from the energy concentration has been progressing.

And as Dennis just mentioned many of our new growth initiatives are meeting expectations.

Turning to results for the second quarter consolidated revenue increased approximately 3% on a constant currency basis to $179 million now.

Nominally revenue was up approximately 1% with growth driven primarily by strong performance in oil and gas aerospace and defense and other process industries.

Oil and gas was up overall and the strength of up and midstream.

However, as the quarter progressed, we experienced push outs and deferrals in our downstream business.

It's clear these are mostly deferrals as you have already seen a rebound early in the third quarter in our services segment.

As Dennis said, we anticipate a strong third quarter and we expect to be on pace to achieve our original 2022 revenue growth projections.

Gross profit for the quarter was approximately 54 million with gross margin 29, 9% compared to 31, 1% a year ago.

Gross margin continues to reflect higher health care cost in North America, and the lag in price increases in response to inflationary cost increases.

In addition, gross margin in the year ago quarter benefitted from pandemic triggered Canadian wage subsidies, which has since expired.

Beginning in the third quarter, we will be comparing against the year ago quarter in which almost all of the pandemic related benefits had expired. So we will have a true we're cleaner apples to apples comparison for all future periods.

This will more clearly demonstrate the progress being achieved on gross margin, which we expect to trend significantly higher over the balance of the year from increased volumes improved sales mix and efficiency improvements and pricing increases.

Selling general and administrative expenses in the second quarter were $40 7 million, which is down sequentially from $42 million in the first quarter, although up two 4% from a year ago much of which relates to inflationary pressures.

Despite these ongoing pressures, we expect to maintain overhead at the current level over the remaining quarters of this year.

And it's also one of our keys to increasing operating leverage.

Interest expense for the quarter was $2 1 million down from $3 2 million in the same quarter of last year as we have reduced both our operating debt our outstanding debt balances as well as the associated interest rate via improved leverage and strong free cash flow generation.

Under our new credit agreement, we expect quarterly interest expense to remain in the same range.

For the quarter, we reported net income of $4 7 million or <unk> 15 per diluted share.

Adjusted EBIT for the quarter was $18 3 million.

For modeling purposes, we would anticipate an effective income tax rate of approximately 30% for the remainder of 2022 exclusive of any discrete items.

Free cash flow for the quarter was $9 3 million up from $8 5 million a year ago and in line with our typical free cash flow conversion of approximately 50% of adjusted EBITDA.

We expect free cash flow for the year to approximate 50% of our adjusted EBITDA, except for the payment by the end of the year of $4 5 million in payroll taxes that had been deferred earlier under the cares Act.

This payment will be the second and final installment associated with the cares Act benefit.

Capital expenditures were $3 9 million for the quarter and $7 1 million for the first half of this year.

We expect capital expenditures to be in line with our expectations and to be under $20 million for the full year.

As of June 30, 22, when we had gross debt of approximately $200 million down from just under $203 million at the end of the year.

Net debt of $181 8 million compared to $178 5 million of net debt as of year end.

Given that our primary use of cash flow continues to be the reduction of outstanding debt. We believe our forecasted full year free cash flows will enable us at the end of the year to be at or below our targeted leverage ratio of being equal or less than three times, which remains our even though our new credit facility provides quite a bit more flexibility.

Once that level is achieved we intend to evaluate our use of cash flow as the means to accelerate growth and build shareholder value.

Let me quickly recap the highlights of our new credit facility that was announced under a separate release earlier this week.

The new credit facility consists of a 315 million of aggregate credit, including including a funded $125 million five year term loan a and a committed $190 million five year revolving facility.

The new credit agreement matures July 32027.

This facility significantly expands the unused get available revolving credit by almost $100 million at closing.

The arrangement also include significant reductions in required term loan amortization, specifically decreasing their required payments to $1 6 million.

PERC water for your 1% to replacing a facility that had been requiring 5 million per quarter, improving available cash by nearly $15 million per year. The amortization schedule does increase in years three through five but remains well below the level of the prior facility.

The new facility also provides leverage flexibility by increasing the maximum allowable total funded debt to four times adjusted EBITDA from the third quarter of 2002 through the second quarter of 2023 measurement periods with a step down to 375 times for the Q2, 'twenty three metric period and for all period.

Thereafter.

This compares to the prior allowable fund that level of up to three five times for the June 'twenty two period measured periods going forward.

Per the previous agreement. The company has also retained a $75 million uncommitted accordion.

This indication of the facility was oversubscribed by $100 million and includes seven banks all of which are included within the totaled 35 financial institutions in the United States.

Since upsizing, our credit facility in December 2018 to finance the Onstream acquisition, we have repaid nearly $80 million of debt over a period of unprecedented weakness in two of our largest markets.

This new credit agreement provides us with ample liquidity to fund our growth initiatives as well as the flexibility to more immediately consider strategic.

Acquisition possibilities, despite rising rates and overall credit concerns. This facility clearly illustrates the confidence of the financial markets and our strategy recovery plans any management.

As Dennis mentioned earlier, we expect a strong recovery in our energy business in the third quarter and a return to historical patterns in the fourth quarter.

Consequently, with the expectation of continued growth in the third quarter and confidence and strong fourth quarter results. We reaffirm our previously announced outlook for the full year 2022 that being revenue between 695 and $715 million adjusted EBIT between 65, and $69 million and free cash.

Hello between $27 million and $30 million, while the second quarter results were below our expectations. We are confident in the level of work expected for the second half of 2022, given strong energy markets, improving commercial aerospace demand robust industrial manufacturing and a rapidly developing data solutions offering.

And with that I will now turn the call back over to Dennis for his wrap up before we move on to take your questions.

Thanks, Ed.

As we move into the second half of the year I'm optimistic that we will improve our gross and operating margins by implementing higher prices in partnership with our customers to offset the increased cost of our business. This recovery of labor cost increases has been dragging on our results due to the lagging impact of increasing our prices.

We will also continue to look at all overheads and constantly calibrate our cost footprint with our current revenue level to help ensure that we can maximize our returns as revenue continues to rebound.

We are focused on optimizing our efficiency improving operating leverage in our business and generating increased shareholder returns.

As our newer growth areas, such as win private space and digital take hold we will improve our results and gained market share.

Our core legacy markets are certainly recovering most notably the commercial aerospace market and we believe this is a transformative year for all our growth initiatives.

We expect to exit the year with a strong foundation of renewable energy growth via some soria, which will create monitoring as well as inspection and repair opportunities.

Along with our continued commercial aerospace recovery, our private space.

Space growth and last but certainly not least with data solutions expansion via one suite.

Government entities continued imposed new EMR district of compliance and safety standards in both North America and Europe .

There has been significant public interest and investment in much of today's critical industrial infrastructure to ensure they operate at peak efficiency.

When coupled with global supply chain issues that demand new innovative thinking.

Our strong market offers many opportunities that will support long term growth.

Our crossover mechanical offerings are very well positioned to serve this niche.

Our focus remains on developing new and innovative solutions that help our customers meet these challenges and improving their productivity.

We're finding success in serving more customers with what we believe is the best digital offering available.

Before taking your questions.

To thank all <unk> employees for their continuing dedication to constantly evolving customer needs I am proud of the team and the way we've executed on our strategic plans for the future.

While continuing to focus on serving our customers and the present.

Your focus on carrying toward a safety and well being of everyone that we interact with is at the core of <unk> vision.

Secondly to the tenants of our carrying connect initiative, we provide a better workplace.

Not only for the current restaurants family, but for all those who will join us in the future to add to our legacy.

Kurt Please open up the phone lines.

Thank you Dennis at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press the star one on your telephone and wait for your name to be announced please stand by while we complete.

Piling the roster.

Yes.

Our first question comes.

From Brian Russo of Sidoti.

Please.

Okay.

You are line is open.

Hi, good morning.

Good morning, Brian .

Hey, just on the project delays.

And the Johns common stream end markets of energy.

Clearly that kind of.

Triangulates with some of the relatively historically high utilization rates, but.

What types of projects are being delayed and what gives you the confidence that that's.

The third quarter could be your highest quarter.

Historically in that sector.

Even though the third quarter tends to be a period, where refineries run at the highest utilization rates.

Given that it's a heavy.

Air and ground travel season and demand for the byproducts.

Sure good point of summer driving season pushes utilization right.

So to answer the first part of your question the delays were inside the capital turnarounds of the spring.

Going back to late 'twenty, one when you're when we're putting together our budget, we had forecast and extremely aggressive spring, which to your point is in line with spring lately has been the stronger of the two seasons.

And what happened to us.

As the year started getting into January and February you start hearing a bottle ahead of time, where.

A couple of them pushed out into later in the year I think only one or two actually pushed out in 'twenty, two but most of them pushed out and a lot of them shorten so the site would be reduced by a couple of days and then what you thought was the peak would be sooner in the end will also reduce and basically that was driven by the historic crack spreads right I mean, 50% higher than <unk> seen in <unk>.

Last 40 years.

So the customers would even tell us.

If there is really no mechanical problems, sometimes you hear about now not materialize side or something else going on it's like look we're just we're just trying to reap a little bit of what's going on plus they are under hard pressure to keep up with demand that the gas prices are going up.

Suddenly refineries further manage it sprung back so they are under pressure to keep it out there. So a mostly got pushed into the third quarter and to the second part of your question, we would and its not that something could happen in hurricane come through or something that could be unexpected, but we haven't been hearing about the pushes yet it's still only.

Early August it will be.

By end of August and into September October that is when it's peaking.

But typically if youre going to start moving things around or pushing out you'd be hearing about it pretty soon so while we can't foretell who's going to do what and where we haven't been hearing about it plans are still going on its still just a lot of the turnarounds that we're expecting again, maybe a couple of pushed into 'twenty three but it was a small number in <unk>.

On that that we've seen.

Okay got it great and then switching to aerospace and defense to just summarize your comments you're starting to see.

True evidence of the commercial aerospace recovery.

The defense side has been strong.

All along and so the <unk> revenue of 2220 $2 million.

That gets you pretty close to that 90 plus million pre pandemic run rate in 2019.

I'm just curious how how.

How soon do you think youll get there given.

The latest developments in the space.

The $90 million, you mean for the aerospace run rate.

Correct.

Correct, yes.

Annual from what we see Brian is the demand is there the supply chain is a little bit of a hindrance for them and it's not so much on our part we're doing we can work out the middle but a lot of it is coming from the.

Our castings and forgings in the state of things are being delivered we're still seeing some problems there.

They are experiencing higher than normal quality issues with that sort of things that we're doing about trying to keep those those moderate steps between the initial.

Material going out and then being finalized as we finished products, we're trying to take on more and more of those steps. So that you don't have as much trucking in queue time, all around the country and that saves them time and money. So I think we're doing better on that and to your point will 'twenty to be.

At that same run rate no. It won't we're catching up we would expect 'twenty three to be looking like that as long as everything the raw materials and all of that can keep up with it so.

Outside of the only place where we're seeing issues truthfully.

And one of our facilities has a lot of composite work and that composite work is focused more on the wide bodies, where those are using more of the composites for trying to keep it lighter so that part of the business Hasnt, we havent seen in demand coming back there yet, but the loans that are on the normal structures and especially on the engine components.

We see that as trying to get back to normal in 'twenty three.

Okay, Great and then on the.

So are you how is that is that rollout meeting expectations or exceeding expectations.

And I assume just.

Renewable type meeting.

Monitoring or maintenance and repair work is still.

Less than 5% of the overall revenue mix when do you think we might.

See an acceleration.

Of that.

Relates to to your 100 turbines.

Capacity to monitor it going into 2020, sorry.

I'll answer I'll give you one comment on throw it to Jon I would say that the important thing for us to think about is the monitoring is important but it's also given us that ability to go out there and do the inspection and repair. So the revenue we're going to see isn't just a monitoring increase it's really just a function of we.

I want to be more of the folks that are helping them keep their.

Like we're doing for the assets in power and energy and everything else trying to help them plan. When you do turnaround in that find out there is something that a critical junction I'll throw it to John to give you more color on that though.

Yes, Hi, Brian .

Yes.

I think Dennis is right, we routinely inspect and repair several thousand wind turbines per year.

So monitoring 50 to 100, obviously it doesn't sound very much a comparison.

But the exciting thing is is that we're in a lot of.

Scott can put customers and trialing with a number of customers and receiving.

We're very enthused about the results of those trials and I think our customers are enthused as well so the volume of conversations is increasing.

We're looking for.

A higher certainly a higher.

The range of turbines that will.

Are we talking about in 2023, then we are in 2022.

To your question about when will it be when will that sector would be 5% of revenues Thats a great question.

I think we've got.

We've got a bit of a ways to go until we hit that but we're very excited about the progress of of where the winter by monitoring in the winter by business in general for US is heading.

So I will move on.

On that day, but we but we expect that to get to 5% for sure.

Okay, Great and then just bigger picture you guys are generating a lot of cash.

You've got more financial flexibility with the new credit facility.

And leverage.

Seems to be declining quicker.

Quicker than originally anticipated.

You said under three times.

By the end of this year I believe so.

Spite the Max that you have under the new credit facility I mean, how how comfortable are you with increasing leverage.

For acquisitions.

And how do you balance that with maybe utilizing cash.

To buy back stock.

At this point, we think our best use of cash is to keep personnel into our growth. So what we'd like to see is first like you said in 'twenty to get ourselves two or below the three point al.

That means we've been outlook in the market right now to see what's out there, but we won't pull the trigger on anything until 'twenty three of them were below I would like to stay below $3, even with the acquisitions perspective.

Or just straight up otherwise so we're not going to get too crazy on how big they are in the beginning.

They can play into diversity and they can play into strengthening like our last few have been a strengthen our offerings across all of the labs with it.

And other solutions that help us in all of our channels. So we do believe that acquisition.

And funneling more things like paying for expanding into machining in places, where we do the aerospace and machining ahead of time and all of that we do believe we're going to do a lot more of that because.

There is nothing wrong with paying down our bank and getting below <unk>, but after that point, we want to start doing things are going to be more accretive to the whole business. So.

To your question I would like to keep it below three as a general rule because theres just so many investors out there that think of small cap.

Above three as being a higher risk than what they want on their appetite is.

Okay, great. Thank you very much.

Alright, Thanks, Brian .

Okay.

Thank you very much Brian .

Our next speaker will be Christopher Sakai with singular research.

Hi, good morning.

Good morning, Chris.

I just had a question I know.

You're saying gross margins will improve in the second half can you give us an idea.

As to the level the level of improvement.

So I'll, let Ed answer that but what I will say on that is we've always been targeting to get to a 30 and above and when you look at it we're close and even the second quarter. We were just at 29, 9% or something like that so we are just under we believe we will be over 30%.

As a quarter's goal for at least the third and we'll see how the fourth goes but for the full year, we won't we won't make that 30%, but that's our goal is to get their full year.

Go on this point out and I'll throw to you yes.

Yes, that's about right Dennis will be the first half was 27% of half the second half could be.

Yes.

200 bps higher than that.

It's significant with mixed benefit with offsetting some of the inflationary pressures definitely helps.

Q3 would be higher than Q4, but yes, we see it significantly higher in the second half.

Okay. Thanks, and then can you shed some light on.

Revenue in from your downstream section.

It looks like it's a little decline, but can you shed some light on how that is.

Why.

John If you want you can.

Yes. This is John so so that's exactly where the.

Turnarounds that Dennis was referencing earlier.

We are getting pushed out so we expect it to be busier in the first half of the in particular, the second quarter based on the original schedules that were that were our customers made us aware of.

And.

Because the work got pushed because refineries had more uptime.

With it with the record crack spreads I think they were we feel that we're reluctant too.

Actually undertake the turnaround and forego operating in that very profitable environment for our customers. They seem to have moved to more of a second half in particular Q3, there is still a turnaround or two that may be out of the bubble in terms of are there Q3 or Q4, but that's really what's going on there.

Okay. Thanks, and then lastly.

Are you seeing any signs of.

Recession on your own I don't know what are you seeing there.

I can tell you that right now are bigger fight Chris is just keeping up with the inflation on some of those skill sets.

Certain areas, there's a high amount of pressure on some of the skills and the people are.

Cable to get increases so right now our fight as we're going back after that just like US. Our issue is is we're going back to the customers and getting increases from them.

Maybe a little delay from the time, we got to pass out.

The difference for the hourly rates to the folks, but we haven't seen anything in a recession. Our markets were strong in aerospace we're strong in gas and oil and <unk> comments that everyone's still out there driving everyone's flying so as long as those things are happening I think we're going to be outside of some of the things that youre seeing.

<unk>.

Some of the other sectors I mean, if it got really bad it's definitely going to affect us at some point, but right now the simple answer to your question is no. We havent seen anything thats early yet.

Yes, okay.

This is John just to add onto what Dennis is saying.

We are in.

<unk> with several customers on pricing and the focus is not so much gosh, we are trying to keep gross margin at some certain level. Our focus is really on making sure that our technician pool.

It has.

It feels like.

We and our customers have their back from an inflationary perspective, because they have.

So many people.

Including all of a sudden upon are experiencing the effects of the inflationary environment. So we're really just trying to make sure that these technicians.

A hole and silver and with our customers trying to work together to have that ability to provide increases to them to make them feel that way. So that's really the effect of that in terms of <unk>, but I agree with what Dennis said in terms of demand.

Demand is not waning for our services at all if anything if we had more employees that were.

On the roles right now we'd be able to come to work.

Yeah.

Okay, great. Thanks for the answers.

Thanks, Chris.

Thank you Chris.

Our next caller is Michael Pinheiro from stood avant.

Company.

Okay.

Go ahead, Michael you're live.

Yes can you hear me.

Hi can you hear me, yes, okay.

Yes.

I jumped on late juggling, a bunch of calls today.

I was curious.

You can obviously see I was curious.

And your oil and gas segment.

Can you talk about.

Any any nuances between upstream midstream downstream for.

For the second half I, just heard you answer about it.

Obviously.

Youre going to have a stronger demand.

Some turnarounds.

In the second half, but whats.

Anything unusual going on positive negative and the upstream or midstream in terms of.

Second half revenue generation.

So I guess and I'll throw it to John My comment would be for us when we say upstream. It's a lot more of the land base larger facilities, we have a little bit of money in the fracking, but not a lot. So we're seeing an uptick in that but we're not as volatile by his barrel price of 140 or 100 or what have you on that.

So our land base.

Upstream side has been pretty good at Canada, Alaska.

There is some certainly some golf and.

Gulf of Mexico, and our T, but it's a lot more land base in California places in that part hasn't been bad the midstream space pretty.

Insulated from the volatility and its really people ask what's the right dollar amount per barrel price and crack spread when it small they are watching our costs and when it's really really high they're watching their profit right. So.

For us that is really where the volatility comes in but I think as the prices are going down and what is it 50 straight days of gas prices decreases and things like that.

Think.

I think what we're going to see is our downstream sector is getting closer to a normal I can say that in tomorrow things could push but we haven't seen anything like that so I think what we're expecting is all three running closer to normal in the second half where it was really two out of three China I will say if you can any other thoughts on that.

Dennis I agree with everything you just said.

In terms of the downstream is where we'll be busier in the second half compared to the first half.

Upstream and midstream I think it'll be.

Essentially what we saw in the first half.

In fact mid might even get a little bit better for us can.

Can you remind me, but can you remind I am sorry to interrupt but could you remind me about.

Blake.

The size of downstream relative to up and midstream.

Yes.

It was it's a great question, we always talked about the segments as being 54% most recently and I'm not sure. If we have the numbers for Q2, but as of Q1 were 1918th 2017.

<unk>, so theyre very close right to create that 54% and 19 was was.

The downstream the largest segment in <unk>.

I believe it was up and then midstream for 18 and 17. So when you look at it as a whole they're big numbers, but when you when you break them out we're starting to break them out because people might think we're all of one and nothing of the others were pretty well balanced between the three.

Right.

As downstream I mean, how far.

Doing a $29 million.

Run rate in this quarter.

Yes.

Where did that stand three or four years ago, what type of.

Sort of average quarterly revenue would you.

In the second quarter would you expect to have a downstream like what kind of revenue.

Opportunity are.

Are we missing.

Yes, I'll, let John give exact but I can tell you spring typically in the last how many years five six years has turned out to be the stronger quarter because of the fall. They decided that they are already outspent their budgets and thats when the corporate cost savings.

So it was untypical for us to see this type of cost saving drive in the spring John or Ed I don't know if you guys got a percentage of your numbers that.

Mike and Mitch little bit more on that.

Yes, I don't have the numbers at my fingertips, but I would say that it's not yes.

As spring has been less number of years has been the busier time I think that.

I think to the point I mentioned his question the spend levels have not returned to pre COVID-19 levels yet for us generally.

But it feels at least this year like we might be starting to be on the way back.

Yes, we believe that.

Because you know because of the push go ahead sorry.

Sorry, Jeff just to add to that Mitch.

We've only started disclosing up down and midstream.

Yes.

Bifurcation. This this year, we've only done it annually up to up to the end of 'twenty. One. This year is a quarterly new thing we're doing but if you look for the third quarter as in the press release page 11. The downstream is the smallest of the three this quarter in most other periods in the past it would have been the larger of the three in this given quarter. So yes, it's significantly.

<unk> off the pace right now and that upside is what we feel good about why we have confidence in Q3 coming up but they.

They've been they're all balanced all three are solid but downstream is definitely off the pace and it would've been again I don't have the numbers either handy, we can pull that together, but it would have been significantly higher in Q2s in prior periods bigger than the other two sectors.

Well I'm not sure.

It helps me understand anything more but I do appreciate the quarterly breakdown.

Of the three sub segments there so much.

Much appreciated disclosure.

I can confuse things sometimes but.

I have a question.

Dennis also.

You talked about.

Confidence sort of in the second half and at the same time, you mentioned digital solutions service offerings, which.

Quarterly breakdown.

Of the three sub segments there so much.

Much appreciated disclosure.

Probably can confuse things sometimes but.

I have a question.

Dennis also.

Can you talk about your.

Confidence sort of in the second half.

At the same time, you mentioned digital solutions service offerings, which will be a driver can you explain that.

Yes, I'll tell you.

I think we may not have been messaging always great I think people were thinking this digital as some new segment.

And some industry, we don't have a lot of we talked about the 90 different applications that we have now and in every quarter, you'll you'll notice been gone up and.

And we're not creating new ones as much as we're just taking one and bringing them up to the forefront and get them turned on more and more and a lot of them started from our legacy businesses and peanuts digital as some new segment.

And some industry, we don't have a lot of we talked about the 90 different applications that we have now and in every quarter, you'll you'll notice been gone up.

And we're not creating new ones as much as we're just taken ones and bringing them up to the forefront and get them turned on more and more and a lot of them started from our legacy businesses and PCM Madison acquisition of new century that are a lot more gas and oil and all three of those sectors right. So a lot of what we're doing is delivered.

Being a stronger data.

Message to our customers that comes back quicker instead of just a piece of paper and it comes back slow we give them a digital solution that tells him. The readings that same day. We are turning these things into actionable items, we're giving them is red Amber Green reports of tell them the conditions of their assets as all of these readings combined because a lot of times, you're looking at $100.

<unk> been on one asset looking at them individually you don't you don't get any trending idea of information. So we're putting that altogether and then we're also starting to incorporate a lot of the engineering calculations and capabilities, we've always had using the API.

Other codes and standards that are out there and as we bring that in there. We're now also given them an actionable thing that they can or should do to get that yellow or red back to a green condition. So a lot of the data solutions. We're doing Mitch is really strengthening the core things that we've already got in our industry, but at the same time this data as part.

Really what's been driving it and sorry to write the monitoring and the renewable on the wind blade. It's technology that we've used on bridges and other assets for years. We're just now deploying that technology with the same acoustic sensors and a different way of monitoring of turbine blade right and thats driving a new market for us So a lot of.

The data apps that we have now are going to make us stickier smarter and better for the customer inside the.

The core business as we have up mid and downstream side gas and oil is helping and power, it's even helping in aerospace in the especially the space market.

So they are really trying to show the differentiation of <unk>.

How we can add value to a customer that we've already got certainly theyre going to help us grow into new customers, but initially they're going to help us really grow and where we already are so.

Does that help you.

Yes. It does I mean I was I was just looking at so as it relates to the third quarter and you called out the digital solutions being a <unk>.

Part of your.

What's driving your rapid growth.

For the third quarter.

I was just curious whether that you were you.

You were like signaling.

You're getting either new.

<unk> through these digital solutions that will be online in the third quarter or why why our digital solutions going to be a driver of the third quarter is it.

Been a driver of your business.

But I was just curious whether there was something specific.

When you call that out.

It's a good question because the things that we're doing site PCM asking so it's one of the things we're seeing we're seeing a lot more growth in the chemical industry because a lot of those customers are under pressure to put in what they call. These mechanical integrity programs, which is a more formal way of.

Understanding your assets and how the agents and what to do to to look at it everyone's had a program out there, but these mechanical integrity programs and risk based inspection programs and all of that are the next step up in there and you're starting to see a lot more chemical customers jumping into that methodology.

And everything we're doing inside the one suite, which starts with a lot of what the PC. Most applications have but not every customer has or wants to go into <unk> or has something else.

And we used to get stop there if they had something else that we at <unk> now we take all of the attributes of <unk> put.

Put it into one suite and we still give them better data, even with whatever systems homegrown or competitive or through wherever theyre getting it we're giving them more actionable items. All the time. So we are signaling that once week revenue, which is starting at lower miles will be doubling and getting bigger and bigger we are saying that the data will be.

Breaking out as a now it's in the mid single digit kind of range and we expect to really be driving that.

But to your point, it's really going to help us.

Differentiate inside a market that's just looking for the lowest rate what theyre really looking for is the best value and by showing the customer the data quicker and showing them. How we can help them get less spend and get more done and do more things for them and that's why we don't mind less spend in NTT. If we're doing all of these crossover services and everything because we are getting.

A bigger share of the total what theyre doing in their project, but yet we're saving more money. It's a win win so we are signaling that the data.

Is driving is going to be driving how we grow into our markets.

Okay. Good thank you and then.

Last question just relates to acquisitions.

I heard your answer.

Down below three leverage in.

Certainly understand why that's important.

But from an acquisition point of view why.

Given what you have your infrastructure digital solutions.

And.

What appears to be a growing youll get a growing share of your customer.

<unk> way.

Can't you just couldn't you just grow through.

Hiring more technicians as demand merits.

There is there some need is it capabilities that you'd be acquiring.

Because I would think where you stand in the industry you certainly would be a.

An attractive employer, because you're growing and you're gaining share amongst these very large.

Quality accounts, so as a technician you feel like you'd have.

Stability.

Of income.

And.

And working for a company that knows how to manage their cash in difficult times et cetera.

I would just think that you can grow because you're.

Slowly becoming <unk>.

The leader in the industry thought leader.

Innovation leader why do you have to buy your gross.

That's really what the question would be because yes, such a great free cash flow.

Capital Light model.

I guess, you and actually thank you for.

Some other comments about helping us where we're at and what we're looking at so thank you for that I don't think we have to buy our growth, but I think to your earlier points.

We wanted to.

Faster increase our diversification of industries.

And right now we have a bunch bigger contract potentials in gas and oil than we have in other ones. So.

Trying to get below 50% another thing that.

Some investors say gas and oil too high as it can be.

An issue as well so we're looking at our diversification and the whole thing we've got companies that we've been on and <unk> been doing.

<unk> and all that there's other things that we could be looking at that would be <unk> centric that could help us in our core markets as well as maybe moving up faster in some of these other markets like when we bought new century to give you a quick idea of we not to say that what new century didn't do was very good but we know it was good and we knew we could replicate it but the one thing we couldnt rough.

Kate is they've had 25 years in that market that we weren't yet and they had 25 years of folks go into them as a leader to take their data and make it actionable.

So sometimes if youre getting into a new market you got to look to see how can you increase that so we don't believe we need to buy growth and where we are but if we want to make ourselves smarter in this evolving it what you thought was great today may not be as good tomorrow and all of that we got to be out there looking to keep pushing that innovation edge, because thats really where were going to do.

<unk> all the way through so I think thats our answer.

And for joining our conference call today I will thank you. Thank you for the questions.

Thanks Mitch.

Thank you very much Michael.

Will be our last question I am turning it back over to.

Dennis Bertolotti for closing.

Great. Thanks, Kurt.

Thank you to everyone for your continued interest in Mistras and for joining our conference call today.

Have a safe productive day, and we look forward to updating you on your our next earnings call have a good day.

Thank you all for your participation in today's conference. This concludes the program you may now disconnect. Thank you.

The conference will begin shortly to raise Johan during Q&A you can dial one one.

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Good morning, ladies and gentlemen, and thank you for joining Mistras group's conference call for the second quarter of physical.

2022, My name is Kurt right there will be your event manager today, we will be accepting questions. After management's prepared remarks. Please press star one one on your phone to join the Q&A roster.

Participating on the call for Mistras will be Dennis Bertolotti praised the company's President and Chief Executive Officer, Ed Prize there.

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's actual results could differ materially from those projected some.

Those factors can result.

Can cause actual results to differ are discussed in the company's most recent annual report on Form 10-K, and other reports filed with the SEC. The discussion in this conference call will also include certain financial measures that were not prepared in accordance with U S. GAAP rep.

Conciliation of these non U S GAAP financial measures to the most directly comparable U S. GAAP financial measures can be found in the tables contained in yesterday's press release and in the company's related current report on form 8-K. These reports are available at the company's website and the.

Investors section on the SEC's website, I will now turn over the conference to Dennis Bertolotti.

Thank you Kurt and good morning, everyone and thank you for joining us today.

I am continually excited about the future of Mistras and I want to thank our employees for their efforts as they continue to serve our customers and exceed their expectations.

This quarter was extremely busy as we closed a new credit agreement, we experienced continued recovery in our end markets and expand into growth of our strategic initiatives and data and digital solutions.

Revenue this quarter was up year over year for the eighth consecutive quarter.

We have continued to see strong demand in our key end markets and we are optimistic for the second half of this year.

Our aerospace and defense business was up nearly 33% in the second quarter as the commercial aerospace market surged forward as we had anticipated.

This rebound in commercial aerospace coupled with strong growth in both the private space and defense markets gives me confidence of this industry's ongoing recovery and expansion and.

And validates our ability to meet and exceed customers' needs I am also optimistic for a strong third quarter results, which would keep us in line with our full year expectations.

Okay.

Adjusted EBIT for the second quarter was $18 3 million down from a year ago, where a favorable sales mix was more than offset by gross margin pressure due to inflation.

We expect gross margin to improve as we move through the remainder of the year, primarily by maintaining a favorable sales mix.

And taking proactive measures such as selective pricing adjustments in line with the inflationary cost pressures, we have mostly been absorbing.

Consequently, with the expectation of continued growth in the third quarter and confident in strong fourth quarter results, we reaffirm our 22 full year guidance.

While we are showing progress with our diversification initiatives and.

<unk> remains our dominant market.

The second quarter got off to a good start with strong April results, but as we move through the quarter, we began to experience delays and deferrals concentrated once again in the downstream business.

We're near records crack spreads have refineries targeting high utilization rates.

In our midstream business.

<unk> had record revenues in the second quarter and we see this trend continuing into the later half of 'twenty, two given market demand projections.

In contrast to our downstream business high production levels, and the corresponding transportation and distribution activities.

Increasing demand for pipeline inspections.

Consequently, we expect a strong recovery in our energy business in the third quarter and a return to historical patterns in the fourth.

As I mentioned earlier and as we had anticipated.

Aerospace and defense business has strengthened in the first half of 'twenty, two and in fact, it's up over 28%.

And we expect this positive momentum to continue through the remainder of the year.

Private space remains strong and we believe our focus on reducing the production cycle time for parts will continue to drive faster growth in that market while.

We are quite excited that the expansion and installation of a new machining equipment and capabilities at our Georgia Aerospace facility is nearly complete.

Now we can perform adjacent value added services, such as machining for inspection procedures savings cycle time, and reducing transportation, which reduce production time and cost for our customers.

We are excited to get this operation running so that we can further leverage our capabilities in private space.

Aerospace and defense industries.

As part of our aerospace and defense growth strategy.

I am very pleased to announce that the honorable J M. Cohen has joined the <unk> team as an advanced technical solutions consultant.

Retired Admiral Colin will help <unk> expand its footprint in the military and defense.

Maritimes and marine sectors.

Leveraging his extensive knowledge of the naval industry catalog of high level contracts and.

An experienced navigating government procurement procedures.

In our renewables business since Soria continues to grow.

Many of our ongoing pilots and demonstrations are quickly scaling up to full commercialization with approximately 50 wind turbines now being monitored.

This puts us.

Well on the way to achieving our goal of monitoring up to 100 wind turbines by end of 'twenty, two with the prospect of greater growth in 'twenty three as we rapidly expand our capacity.

Our continued focus on renewables includes penetrating the wind farm market and building relationships with OEM manufacturers.

Our attention remains on both large and small wind farms, including market for massive offshore turbines.

Okay.

Finally, our data solutions business, especially <unk> and new century software had a strong quarter. One suite adoption continues to increase as an integrated applications now standing over 90.

It had been installed at nearly 40 unique customers spanning over 150 sites with close to 900 individual subscriptions.

That has considerable growth in the last 90 days.

<unk> remains on track to double its revenue this year and enter 2023 strong momentum for continued growth and expansion.

The other process industries markets also had strong growth in the second quarter.

Which further illustrates the benefits being realized in our non energy business and our push for greater diversification in our end markets.

Continuing to increase revenue diversity should also benefit gross margin going forward.

As virtually all of these industries carrying above corporate average gross margin.

We will go through the details in a minute, but gross margin in our energy business should also begin to benefit from pricing actions were taken due to rising labor costs.

Recently, we have seen more acceptance from a market that has been historically resistant to price increases.

As we continue to implement our pricing strategy, we expect to see those gradually increase our gross margin over the next few quarters.

Also I would note that overhead today is little changed from what it was three years ago in a pre pandemic 2019.

Despite current inflationary pressures, we believe we have a great opportunity to improve operating leverage and grow the bottom line faster than revenues.

Additionally, I am pleased to announce a new credit facility, which provides us with much greater flexibility and liquidity to fund our growth initiatives.

Particularly our strategic initiatives and data solutions and renewable energy.

It also demonstrates the strong confidence and mistrust exhibited by a supportive consortium of.

Southern strong financial institutions.

Led by the two largest financial institutions in the U S and will provide additional details shortly.

I'm looking forward to the second half of the year, where we could have our strongest ever quarterly services segment revenue in the third quarter.

Achieve a full year doubling of one suite revenues monitor up to 100 wind turbines.

Benefit from an expected rapid recovery in the commercial aerospace market.

<unk> launched our new supply chain service for the aerospace defense and private space industries, effectively transcending the lingering effects of the pandemic and energy market volatility.

Inflation remains an ongoing challenge, but we are making progress on that front.

Improved financial flexibility as Ed will discuss during his comments.

Cost reduction initiatives, we are initiating and our pricing actions will help partially offset these impacts.

As the year progresses.

Our new credit facility provides flexibility to increase our investment in both organic growth initiatives and more closely evaluate acquisitions that meet our strategic objectives.

I'm optimistic about the prospects for growth in both our existing and new markets in 'twenty two and beyond.

I would now like to turn the call over to Ed to give you more detail on our financial results for the second quarter.

Thank you Dennis and good morning, everyone.

Revenue in the second quarter was up year over year for the eighth consecutive quarter as we continued to extend our record of consistent growth.

Our efforts to diversify away from the energy concentration has been progressing.

And as Dennis just mentioned many of our new growth initiatives are meeting expectations.

Turning to results for the second quarter consolidated revenue increased approximately 3% on a constant currency basis to $179 billion now.

Nominally revenue was up approximately 1% with growth driven primarily by strong performance in oil and gas aerospace and defense and other process industries.

Oil and gas was up overall and the strength of up and midstream.

However, as the quarter progressed, we experienced push outs and deferrals in our downstream business.

It's clear these are mostly deferrals as we've already seen a rebound early in the third quarter in our services segment.

As Dennis said, we anticipate a strong third quarter and we expect to be on pace to achieve our original 2022 revenue growth projections.

Yes.

Gross profit for the quarter was approximately 54 million with gross margin 29, 9% compared to 31, 1% a year ago.

Gross margin continues to reflect higher health care cost in North America, and the lag in price increases in response to inflationary cost increases.

In addition, gross margin in the year ago quarter benefitted from pandemic triggered Canadian wage subsidies, which has since expired.

Beginning in the third quarter, we will be comparing against the year ago quarter in which almost all of the pandemic related benefits had expired.

We will have a true we're cleaner apples to apples comparison for all future periods.

Selling general and administrative expenses in the second quarter were $47 million, which is down sequentially from $42 million in the first quarter, although up two 4% from a year ago much of which relates to inflationary pressures.

Despite these ongoing pressures, we expect to maintain overhead at the current level over the remaining quarters of this year.

And it's also one of our keys to increasing operating leverage.

Under our new credit agreement, we expect quarterly interest expense to remain in the same range.

For the quarter, we reported net income of $4 7 million or <unk> 15 per diluted share adjusted EBIT for the quarter was $18 3 billion.

For modeling purposes, we would anticipate an effective income tax rate of approximately 30% for the remainder of 2022 exclusive of any discrete items.

Free cash flow for the quarter was $9 3 million up from $8 5 million a year ago and in line with our typical free cash flow conversion of approximately 50% of adjusted EBITDA.

This payment will be the second and final installment associated with this cares Act benefit.

Capital expenditures were $3 9 million for the quarter and $7 1 million for the first half of this year.

We expect capital expenditures to be in line with our expectations and to be under $20 million for the full year.

As of June 30, 'twenty, two we had gross debt of approximately $200 million down from just under $203 million at the end of the year and net debt of $181 8 million compared to $178 5 million of net debt as of year end.

Once that level is achieved we intend to evaluate our use of cash flow as the means to accelerate growth and build shareholder value.

Let me quickly recap the highlights of our new credit facility that was announced under a separate release earlier this week.

The new credit facility consists of a $315 million of aggregate credit, including including a funded $125 million five year term loan a and a committed $190 million five year revolving facility.

The new credit agreement matures July 32027.

This facility significantly expands the unused yet available revolving credit by almost $100 million at closing.

The arrangement also include significant reductions in required term loan amortization, specifically decreasing their required payments to $1 6 million.

Per quarter through year wanted to replacing a facility that had been requiring 5 million per quarter, improving available cash by nearly $15 million per year. The amortization schedule does increase in years three through five but remains well below the level of the prior facility.

The new facility also provides leverage flexibility by increasing the maximum allowable total funded debt to four times adjusted EBITDA in the third quarter of 2002 through the second quarter of 2023 metric periods with a step down to 375 times for the Q2, 'twenty three measured period and for all periods.

Thereafter.

This compares to the prior allowable fund that level of up to three five times for the June 'twenty two period in all measured periods going forward.

Per the previous agreement. The company has also retained a $75 million uncommitted accordion.

The syndication of the facility was oversubscribed by $100 million and includes 70 banks all of which are included within the top 35 financial institutions in the United States.

Since upsizing, our credit facility in December 2018 to finance the <unk> acquisition, we have repaid nearly $80 million of debt over a period of unprecedented weakness in two of our largest markets.

This new credit agreement provides us with ample liquidity to fund our growth initiatives as well as the flexibility to more immediately consider strategic.

Acquisition possibilities, despite rising rates and overall credit concerns. This facility clearly illustrates the confidence of the financial markets and our strategy recovery plans and management.

As Dennis mentioned earlier, we expect a strong recovery in our energy business in the third quarter and a return to historical patterns in the fourth quarter.

Consequently, with the expectation of continued growth in the third quarter and confidence and strong fourth quarter results. We reaffirm our previously announced outlook for the full year 2022 that being revenue between $695 $715 million adjusted EBIT between 65, and $69 million and free cash.

And with that I will now turn the call back over to Dennis for his wrap up before we move on to take your questions.

Thanks, Ed.

We are focused on optimizing our efficiency improving the operating leverage in our business and generating increased shareholder returns.

As our newer growth areas, such as win private space and digital take hold we will improve our results and gained market share.

Our core legacy markets are certainly recovering most notably the commercial aerospace market and we believe this is a transformative year for all our growth initiatives.

We expect to exit the year with a strong foundation of renewable energy growth via sensorial, which will create monitoring as well as inspection and repair opportunity.

Along with our continued commercial aerospace recovery, our private space.

Space growth and last but certainly not least with data solutions expansion via one suite.

Government entities continued imposed new and more restrictive compliance and safety standards in both North America and Europe .

There has been significant public interest and investment in much of today's critical industrial infrastructure to ensure they operate at peak efficiency.

When coupled with global supply chain issues that demand new innovative thinking.

Our strong market offers many opportunities that will support long term growth.

Our crossover mechanical offerings are very well positioned to serve this niche.

Our focus remains on developing new and innovative solutions that help our customers meet these challenges and improving their productivity.

We're finding success in serving more customers with what we believe is the best digital offering available.

Before taking your questions I'd like to thank all <unk> employees for their continuing dedication to constantly evolving customer needs.

I'm proud of the team and the way we've executed on our strategic plans for the future.

While continuing to focus on serving our customers and the present.

We are focused on carrying toward a safety and well being of everyone that we interact with.

At the core of <unk> vision.

By sticking to the tenants of our carrying connect initiative, we provide a better workplace not only for the current restaurants family, but for all those who will join us in the future to add to our legacy.

Kurt Please open up the phone lines.

Complete.

Piling the roster.

Our first question comes.

From Brian Russo of Sidoti.

Thank you.

<unk>.

Okay.

You are line is open.

Hi, good morning.

Good morning, Brian .

Hey, just on the.

The project delays.

And the <unk> stream and marketer of energy.

Clearly that kind of.

Triangulates with some of the relatively historically high utilization rates, but.

What types of projects are being delayed and what gives you the confidence that that's the third quarter could be your highest quarter.

Historically in that sector.

Even though the third quarter tends to be a period, where refineries run at the highest utilization rates.

Given that it's a heavy.

Air and ground travel season and demand for the byproducts.

Sure good point of summer driving season pushes utilization right.

So to answer the first part of your question the delays were inside the capital turnarounds of the spring.

Going back to late 'twenty, one when you're when we're putting together our budget, we had forecast and extremely aggressive spring, which to your point as in line. The spring lately has been the.

The stronger of the two seasons.

And what happened is as <unk>.

As the year started getting into January and February you start hearing a bottle of ahead of time.

A couple of them pushed out into later in the year I think only one or two actually pushed out in 'twenty, two but most of them pushed out in a lot of them shorten. So this would be reduced by a couple of days and then what you thought was the peak would be sooner in the end will also reduce and basically that was driven by the historic crack spreads right I mean, 50% higher than <unk> seen.

In the last 40 years.

So the customers would even tell us.

If theres really no mechanical problems, sometimes you hear about not enough material side or something else going on it's like look we're just we're just trying to reap a little bit of what's going on plus they are under hard pressure too.

Demand in the gas prices are going up and Theres only so many refineries for to manage that sprung back. So they are under pressure to keep it out there.

They mostly got pushed into the third quarter and to the second part of your question, we would and its not that something could happen a hurricane come through or something that could be unexpected, but we haven't been hearing about the pushes yet.

Still only early August it'll be by end of August and into September October that is when it's peaking.

But typically if youre going to start moving things around or pushing out you'll be hearing about it pretty soon so while we can't foretell who's going to do what and where we haven't been hearing about it plenty of there is still going on its still.

A lot of the turnarounds that we're expecting again, maybe a couple of pushed into 'twenty three but it was a small number and dollars on that that we've seen.

Okay got it great and then switching to aerospace and defense.

Just summarize your comments you're starting to see.

True evidence of the commercial aerospace recovery.

The defense side has been strong.

All along and so the <unk> revenue of 2220 $2 million.

That gets you pretty close to that 90 plus million pre.

Pre pandemic run rate in 2019.

Just curious how.

How soon do you think youll get there given.

Latest developments in the space.

The $90 million, you mean for the aerospace run rate.

Correct.

Correct, yes.

Annual from what we see Brian is the demand is there the supply chain is a little bit of a hindrance for them and it's not so much on our part we're doing what we can to work out the middle but a lot of it's coming from the.

Our castings and forgings and the speed of things are being delivered we're still seeing some problems there.

They are experiencing higher than normal quality issues with that so the things that we're doing about trying to keep those those moderate stuff in between the initial.

Material gone out and had being finalized as we finished products, we're trying to take on more and more of those steps. So that you don't have as much trucking in queue time, all around the country and that saves them time and money. So I think we're doing better on that and to your point will 'twenty to be.

At that same run rate no Walt we're catching up we would expect 'twenty three to be looking like that as long as everything in the raw materials and all that can keep up with it so outside of the only place where we're seeing issues truthfully is like in one of our facilities has a lot of composite work and that composite work is focused more on the wide bodies.

Whether those are using more of the composites for trying to give you a lighter so that part of the business Hasnt, we havent seen the demand coming back there yet, but the loans that are on the normal structures and especially on the engine components, we see that as trying to get back to normal in 'twenty three.

Okay, Great and then on the <unk>.

So are you how is that is that rollout meeting expectations or exceeding expectations.

I assume just.

Renewable type meeting.

Honoring our maintenance and repair work is still.

Less than 5%.

Of the overall revenue mix, where when do you think we might.

See an acceleration.

Of that.

Relates to to your hundred turbines.

Of capacity to monitor it going into 2020.

I'll answer I'll give you won't comment on throw it to Jon I would say that the important thing for us to think about it. It's been monitoring is important but it's also given us that ability to go out there and do the inspection and repair. So the revenue we're going to see isn't just a monitoring increase thats really just a function of we.

Wanted to be more of the folks that are helping them keep their like.

Yeah, Hi, Brian Thanks, Dennis.

I think Dennis is right, we routinely inspect and repair several thousand wind turbines per year.

So monitoring 50 to 100, obviously doesn't sound very much in comparison.

<unk>.

Citing thing is is that we're in a lot of.

Scott can put customers.

And trialing with a number of customers and receiving.

We're very enthused about the results of those trials and I think our customers are enthused as well so the volume of conversations is increasing.

We're looking for.

Higher certainly a higher.

The range of turbines that we'll be talking about in 'twenty two 'twenty three than we are in 2022.

To your question about when will it be when will that sector would be 5% of revenues. That's a great question.

I think we've got.

We've got a bit of a ways to go until we hit that but we're very excited about the progress of of where the winter by monitoring in the wind turbine business in general for Us is heading.

Paul will go on.

On that day, but we but we expect it to get to 5% for sure.

Okay, Great and then just bigger picture you guys are generating a lot of cash.

You've got more financial flexibility with the new credit facility.

And leverage.

To be declining quicker.

Quicker than originally anticipated.

You said under three times.

By the end of this year I believe so.

Spite the Max that you have under the new credit facility I mean, how how comfortable are you with increasing leverage.

For acquisitions.

And how do you balance that with maybe utilizing cash.

To buy back stock.

At this point, we think our best use of cash is to keep pushing on into our growth. So what we'd like to see is first like you said in 'twenty to get ourselves two or below the three point al.

That means we've been outlook in the market right now to see what's out there, but we won't pull the trigger on anything until 'twenty three we're below I would like to stay below three point, all even with the acquisitions perspective.

Or just straight up otherwise so we're not going to get too crazy on how big they are in the beginning.

They can play into diversity and they can play into strengthening like our last few have been a strengthened our offerings across all of the labs with it.

And other solutions that help us in all of our channels. So we do believe that acquisition.

And funneling more things like paying for expanding into machining in places, where we do the aerospace machining ahead of time and all of that we do believe we're going to do a lot more of that because.

There's nothing wrong with paying down our bank and getting below <unk>, but after that point, we want to start doing things are going to be more accretive to the whole business. So.

To your question I would like to keep it below three as a general rule because theres just so many investors out there that think of small cap.

Above three as being a higher risk than what they want on their appetite is.

Okay, great. Thank you very much.

Alright, Thanks, Brian .

Yeah.

Thank you very much Brian our next speaker will be Christopher Sakai with singular research.

Hi, good morning.

Good morning, Chris.

I just had a question I know.

You're saying gross margins will improve in the second half can you give us an idea.

As to the level the level of improvement.

So I'll, let Ed answer that but what I will say on that is we've always been targeting to get to a 30 and above and when you look at it we're close and even the second quarter. We were just 29, 9% or something like that so we are just under we believe we will be over 30%.

As a quarter's goal for at least the third and we will see how the fourth goes but for the full year, we won't we won't make that 30%, but that's our goal is to get their full year.

Go on this point out I'll throw to you.

Yes, that's about right dentist to be the first half was 27 and a half the second half could be.

<unk>.

200 bps higher than that.

It's significant with mixed benefits with offsetting.

Offsetting some of the inflationary pressures definitely helps so.

Yes.

Q3 would be higher than Q4, but yes, we see it significantly higher than the second half.

Okay. Thanks, and then can you shed some light on revs.

Revenue in from your downstream section.

It looks like it's a little decline, but can you shed some light on how that is and why.

John If you want you could.

Yes, yes. This is John so so that's exactly where the turnarounds that Dennis was referencing earlier.

We're getting pushed out so we expect it to be busier in the first half of the year and particularly the second quarter based on the original schedules that were that were our customers made us aware of.

And.

Because the work got pushed because refineries had more uptime and they were with it with a record crack spreads I think they were we feel that we're reluctant to ask.

Actually undertake the turnaround and forego operating in that very profitable environment for our customers.

Seem to have moved to more of a second half in particular Q3, there is still a turnaround or two that may be out of the bubble in terms of are there Q3 or Q4, but that's really what's going on there.

Okay. Thanks, and then lastly.

Are you seeing any signs of.

Recession.

On your end what are you seeing there.

I can tell you that right now are bigger fight Chris is just keeping up with the inflation on some of those skill sets.

Certain areas, there's a high amount of pressure on some of the skills and people are.

Able to get increases so right now our fight as we're going back after that just like it. Our issue is is we're going back to the customers and getting increases from them.

Maybe a little delay from the time, we got to pass out.

The difference for the hourly rates to the folks, but we haven't seen anything in a recession. Our markets were strong in aerospace we're strong in gas and oil in <unk> comments everyone's still out there driving everyone's flying so as long as those things are happening I think we're going to be outside of some of the things that youre seeing.

<unk>.

Some of the other sectors.

If it got really bad it's definitely going to affect us at some point, but right now the simple answer to your question is no we haven't seen anything necessarily yet.

Yes, okay.

This is John just to add onto what Dennis is saying.

We are in discussions with several customers on pricing and the focus is not so much gosh. We are trying to keep gross margin at some certain level. Our focus is really on making sure that our technician pool.

It has.

It feels like.

We and our customers have their back from an inflationary perspective, because they have.

So many people.

Including all of us on the phone are experiencing the effects of the inflationary environment. So we're really just trying to make sure that these technicians.

As a whole and so and with our customers trying to work together to have that ability to provide increases to them to make them feel that way. So that's really the effect of that in terms of but I, but I agree with what Dennis said in terms of demand.

Demand is not waning for our services at all if anything if we had more employees that were.

On the roles right now we'd be able to come to work.

Yeah.

Okay, great. Thanks for the answers.

Thanks, Chris.

Thank you Chris.

Our next caller is Michael Pinheiro from <unk>.

Company.

Okay.

Go ahead, Michael you're live.

You hear me.

Hi can you hear me, yes, okay, yes, we are.

I jumped on late juggling, a bunch of calls today.

I was curious.

You can obviously see I was curious.

And your oil and gas segment.

Can you talk about any dip any nuances between upstream midstream downstream.

Second half I, just heard you answer about <unk>.

Obviously you.

Do you think youre going to have a stronger demand.

With some some turnarounds.

In the second half, but what.

Anything unusual going on positive negative and the upstream or midstream in terms of you know.

Second half revenue generation.

Upstream side has been pretty good at Canada, Alaska, There is some certainly some golf and.

Gulf of Mexico, and our T, but it's a lot more land base in California places in that part hasn't been bad to midstream stays pretty.

Insulated from the volatility and it's really you know people ask what's the right dollar amount per barrel price and crack spreads when it's small they are watching our costs and when it's really really high they're watching their profit right. So.

For us that is really where the volatility comes in but I think as the prices are going down and what is it 50 straight days of gas prices decreases and things like that.

Think.

Dennis I agree with everything you just said.

Yeah. The downstream is where we'll be busier in the second half compared to the first half, but upstream and midstream I think it'll be.

Really what we saw in the first half.

It's like mid might even get a little bit better for us.

You remind me, but yes it could.

I'm, sorry to interrupt but could you remind me about.

Mike.

The size of downstream relative to up and midstream.

Yeah.

That was it's a great question, we always talked about the segments as being 54% most recently and I'm not sure. If we have the numbers for Q2, but as of Q1, we were at $19 18, 17 downstream. So theyre very close right to create that 54% 19 was was.

The downstream the largest segment and.

I believe it was up and then midstream for 2018 to 2017. So when you look at it as a whole they are big numbers, but when you when you break them out we're starting to break them out because people might think we're all of one and nothing of the others were pretty well balanced between the three.

Is that is downstream I mean, how far.

Doing a $29 million run.

Run rate in this quarter.

Yes.

Where did that stand three or four years ago, what type of sort.

Average quarterly revenue would you expect in the.

Second quarter would you expect out of downstream like what kind of revenue.

You know opportunity.

Are we missing.

Yes, I'll, let John give exact but I can tell you spring typically in the last how many years five six years has turned out to be the stronger quarter because of the fall they decide that they've already outspent their budgets and that's when a bump from the cost savings.

So it was untypical for us to see this type of cost saving drive in the spring John or Ed I don't know if you guys got a percentage of your numbers that.

It might give mitch little bit more on that.

Yes, I don't have the numbers at my fingertips, but I would say that it's not yeah.

Spring has been less number of years has been the busier time I think that.

I think to the point I mentioned his question the spend levels have not returned to pre COVID-19 levels yet for us generally.

But it feels at least this year like we might be starting to be on the way back.

Yes, we believe that.

Because you know because of the push go ahead right.

Sorry, John just to add to that Mitch, we've only started disclosing up down and midstream.

Bifurcation. This this year, we've only done it annually upped it up to the end of 'twenty. One this year is a quarterly new thing we're doing but if you look for the third quarter as in the press release page 11. The downstream is the smallest of the three this quarter in most other periods in the past it would have been the larger of the three in this given quarter. So.

Yes, it's significantly off the pace right now and then upside is what we feel good about why we have confidence in Q3 coming up but it's they've been they're all balanced all three are solid but downstream is definitely off the pace and it would've been again I don't have the numbers in either handy, we can pull that together, but it would have been significantly higher in Q2s in prior year.

It's bigger than the other two sectors.

Well I'm not sure.

It helps me understand anything more but I do appreciate the quarterly breakdown of.

Of the three sub segments there so.

Much appreciated disclosure.

Probably can confuse things sometimes but.

I have a question.

Dennis also.

You talked about.

Your confidence sort of in the in the second half and at the same time, you mentioned digital solution service offerings, which.

Quarterly breakdown of.

Of the three sub segments there so.

Much appreciated disclosure.

Probably can confuse things sometimes but.

I have a question.

Dennis also.

You talked about.

Confidence sort of in the in the second half and at the same time, you mentioned digital solutions service offerings, which will be a driver can you explain that.

Yes, I'll tell you.

I think we may not have been messaging always great I think people were thinking this digital as some new segment.

And some industry, we don't have a lot.

Lot of we talked about the 90 different applications that we have now in every quarter, you'll you'll notice been gone up.

We're not creating new ones as much as we're just taking ones and bringing them up to the forefront and get him turned add more and more and a lot of them started from our legacy businesses and penis digital as some new segment.

Some industry, we don't have a lot of we talked about the 90 different applications that we have now in every quarter, you'll you'll notice been gone up.

And if we're not creating new ones as much as we're just taking one and bringing them up to the forefront and get them turned on more and more and a lot of them started from our legacy businesses and PCM Edison acquisitions of new century that are a lot more gas and oil and all three of those sectors right. So a lot of what we're doing is deliver.

During a stronger data.

The message to our customers that comes back quicker instead of just a piece of paper and it comes back slow we give them a digital solution that tells him. The readings that same day, we're turning these things into actionable items, we're giving them. These red Amber Green reports of tell them the conditions of their assets. So all of these readings combined because a lot of times youre looking at Huntington.

Things on one asset looking at them individually you don't you don't get any trending idea information. So we're putting that altogether and then we're also starting to incorporate a lot of the engineering calculations and capabilities, we've always had using the API.

Really what's been driving it and sorry to write the monitoring and the renewable on the wind blade. It's technology that we've used on bridges and other assets for years. We're just now deploying that technology with the same acoustic sensors in a different way of monitoring of turbine blade right and thats driving a new market for us So a lot of.

The data apps that we have now are going to make us stickier smarter and better for the customer inside the.

The core business as we have up mid and downstream inside gas and oil is helping empower its even helping in aerospace in the especially the space market.

So they are really trying to show the differentiator.

How we can add value to a customer that we've already got certainly theyre going to help us grow into new customers, but initially they're going to help us really grow and where we already are does.

Does that help you.

It does I mean I was I was just looking at so as it relates to the third quarter and you called out the digital solutions being a.

Part of your.

What's driving your rapid growth.

For the third quarter.

I was just curious whether that you were.

You were like signaling.

You're getting either new customers through these digital solutions that will be online in the third quarter worldwide why our digital solutions going to be a driver of the third quarter is it.

It's been a driver of your business.

But I was just curious whether there was something specific.

When you call that out.

It's the it's a good question because the things that we're doing site PCM asking so it's one of the things we're seeing we're seeing a lot more growth in the chemical industry because a lot of those customers are under pressure to put in what they call. These mechanical integrity programs, which is a more formal way of.

Understanding your assets and how they age and what to do to to look at it everyone's had a program out there, but these mechanical integrity programs and risk based inspection programs and all of that are the next step up in there and you're starting to see a lot more chemical customers jumping into that methodology.

And everything we're doing inside the one sleep, which starts with a lot of what the PC. Most applications have but not every customer has or wants to go into <unk> or has something else.

And we used to get stopped there if they had something else that we at <unk> now we take all of the attributes of <unk> put.

Put it into once we still get them better data, even with whatever systems homegrown or competitive or through wherever theyre getting it we're giving them more actionable items. All the time. So we are signaling that once week revenue, which is starting at lower miles will be doubling and getting to be bigger and bigger we are saying that the data will be.

Breaking out as a <unk>.

It's in the mid single digit kind of range and we expect to really be driving that but to your point, it's really going to help us.

Differentiate inside a market that's just looking for the lowest rate what theyre really looking for is the best value and by showing the customer the data quicker and showing them. How we can help them get less spend and get more done and do more things for them Thats why we don't mind less spend in NTT. If we're doing all of these crossover services and everything because we are getting.

The bigger share of the total what theyre doing in their project, but yet we're saving more money. It's a win win so we are signaling that the data.

Is driving is going to be driving how we grow into our markets.

Okay. Good thank you and then.

Last question just relates to acquisitions and.

I heard your answer.

Down below three leverage in <unk>.

Certainly understand why that's important.

But from an acquisition point of view why.

Given what you have your infrastructure digital solutions and <unk>.

And.

Appears to be a growing you'll get a growing share of your customer.

Opportunities.

Kent you wouldn't you just couldn't you just grow through.

Hiring more technicians as demand merits.

Is there some need is it capabilities that you'd be acquiring.

Because I would think where you stand in the industry you certainly would be a a an attractive employer, because you're growing and you're gaining share amongst these very large and you know.

Quality accounts, so as a technician you feel like you'd have stability.

<unk>.

Other income.

And and working for a company that knows how to manage their cash in difficult times et cetera. So why I would just think that you can grow because you're it's.

Slowly becoming.

The leader in the industry thought leader.

Innovation leader why do you have to buy your growth.

That's really what the question would be because you have such a great free cash flow cap.

Capital Light model.

I guess, you and actually thank you for.

Some of the comments about helping us where we're at and what we're looking at so thank you for that I don't think we have to buy our growth, but I think to your earlier points.

We wanted to.

Faster increase our diversification of industries.

And right now we have bunch bigger contract potentials in gas and oil than we have in other ones. So.

Trying to get below 50% another thing that.

Some investors say gas and oil too high as it can be.

An issue as well so we're looking at our diversification and the whole thing we've got companies that we've been on a PC mouse that's been doing.

Data management for refineries for I don't know, we bought them at 91 and they are running like 10 years before that so we've been doing that for a long time, but the I T skills and all that there's other things that we could be looking at that would be <unk> centric that could help us in our core markets as well as maybe moving faster in some of these other markets like when we bought new century.

To give you a quick idea of we not to say that what new century didn't do was very good but we know it was good and we knew we could replicate it but the one thing we couldn't replicate as they've had 25 years in that market that we werent, yet and they had 25 years of folks go into them as a leader to take their data and make it actionable.

So sometimes if you're getting into a new market you got to look to say how can you increase that so we don't believe we need to buy growth and where we are but if we want to make ourselves smarter in this evolving it what you thought was great today. It may not be as good tomorrow and all of that we got to be out there looking to keep pushing that innovation edge, because that's really where we're going to do.

French it all the way through so I think thats our answer.

And for joining our conference call today I will thank you. Thank you for the questions.

Thanks, so much.

Thank you very much Michael that will be our last question I am turning it back over to.

Dennis Bertolotti for closing.

Great. Thanks, Kurt.

Thank you to everyone for your continued interest in restaurants and for joining our conference call today.

Have a safe productive day, and we look forward to updating you on your next earnings call have a good day.

Thank you all for your participation in today's conference. This concludes the program you may now disconnect. Thank you.

Q2 2022 Mistras Group Inc Earnings Call

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