Q3 2022 Mistras Group Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Thank you for joining Mistras group's conference call for its third quarter ended September 32022, My name is Andrea and I'll be your event manager today, we'll be accepting questions. After management's prepared remarks.
Participating on the call for Mistras group will be Dennis Bertolotti, the company's President and Chief Executive Officer, and prisoner Executive Vice President Chief Financial Officer, and Treasurer, and Jon Wolk, Senior Executive Vice President and Chief operating Officer.
Want to remind everyone that remarks made during this conference call will include forward looking statements. The company's actual results could differ materially from those projected some of those factors that can cause actual results to differ are discussed in the company's most recent annual report on Form 10-K and other.
Other reports filed with the SEC the.
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-GAAP non U S. GAAP financial measures to the most directly comparable U S. GAAP financial measures can be found in the tables contained in yesterday's press release and in the company's related current report on form 8-K.
These reports are available at the company's website in the investors section on the SEC's website.
I will now turn the conference over to Dennis Bertolotti.
Alright, Thank you Andrea.
Good morning, everyone and thank you for joining us today.
Reported its ninth consecutive quarter of revenue growth.
C operation can you continue to deliver improving performance, while the investments we are making in our strategic initiatives across renewable energy data and new markets are beginning to contribute to our overall success as well.
Sequentially, we believe the topline obscures the financial fundamental growth of the business with both foreign translation and the continued underutilization expectation in the downstream market masking what was otherwise a quarter of strong growth.
On the bottom line net income and earnings per share were up more than 28% from a year ago.
Whereas adjusted EBITDA for the third quarter.
Essentially unchanged as both gross margin and overhead are battling a rising cost environment.
We are addressing this by implementing price increases and we are making progress breaking through customer resistance, primarily in the energy markets where budgets remain tight.
It remains a significant lag between the time, we increase our labor rate and the recovery time for the higher billing rates.
We are also currently taking a hard look at all companywide overhead to identify efficiencies and productivity improvement.
That can better leverage our footprint, enabling us to focus more quickly on <unk>.
Moving to our long term goal of SG&A being 20% of revenue.
Reflecting some of the rebound that we anticipated from the delays experienced in the second quarter revenues were up 11% in upstream and 8% in the downstream year to date, our revenue across the overall oil and gas industry is up 6%.
But typically more stable midstream business was a bit soft in the third quarter other than our upstream business.
We expect that sector to show steady performance over the longer term driven.
Driven by higher production levels and the corresponding increase in demand for inspection services across the transportation and distribution infrastructure.
Extreme again had a record high revenue in the third quarter of 2022.
And we expect this growth to benefit all of our revenue top line as well as bottom line profitability.
Yeah.
Business in our aerospace and defense industry remained strong.
Recovery in commercial aerospace growth of private space and expansion into adjacent services continues to drive strong growth.
We are increasing investment in this business as we believe we are building a strong foundation in a market where the demand for AEP is large and growing.
For instance, inspections for defense sectors machining operations.
Cycle time reduction capabilities and other services integral to inspection.
Represent just some of the new markets. We are seeing is powering strong growth in this vertical.
All of these opportunities are in fast growing markets.
Which carry a prospective gross margin higher than our current consolidated gross margin and we look for significant contributions from these new verticals.
Our renewables business also hasn't provided that.
It now appears that we will outpace our previous objectives and end the year with more turbine systems being delivered for already monetary than our originally anticipated numbers.
This market is in the early stages for monitoring solutions.
There is a large and growing market.
Hundreds of thousands of wind turbines in operation globally, and more being added every year.
Everyday our installed technology is delivering further evidence of Safari is significant advantage relative to conventional inspection techniques were.
And we foresee an inflection point in the near future.
Resulting in faster market adoption and an acceleration in our growth trajectory importantly, once operators contact us for monitoring service, we expect to add incremental revenue for the repair and maintenance of any damage our centers identify.
Repair and maintenance services.
And revenues should be lucrative along with higher margins or multiples for monitoring adding to our already $30 million plus per year business in renewable wind.
Our data solutions business continues to grow with strong results at <unk> and <unk>.
We are constantly seeing new examples of how our data solutions are leading to stronger relationships and thus new opportunities with our customers.
Customers that are looking for the best value for their spend and represent an opportunity to rise above the competition and avoid commodity pricing.
This continues to be a point of emphasis as we integrate data solutions across our organization.
The new credit facility negotiated this quarter is not only added much greater liquidity, but is also freeing up financial resources that had previously been limited, allowing us to invest and build upon these strategic initiatives.
Now with additional financial flexibility, we are doubling down on their growth, which we expect to accelerate in 'twenty three and beyond.
Overall, it was a solid quarter administer us we're certainly confident in our future opportunities, but there are challenges.
Change rate, creating a $11 million revenue headwind for the first nine months of 2022.
With the related impact on margins.
Tight budgets in our largest market and the lag being experienced in passing on the impact of our cautionary costs are also pressuring margins.
Since the onset of the pandemic. Our primary focus has been on actions that will enable us to weather the storm and emerge stronger and better equipped for a more normalized world.
In 2020, when our two largest markets were virtually collapsing we had one of our best years of cash flow.
We have reduced debt by $80 million over the past three years.
And this year, we negotiated a new bank facility that created much greater flexibility to invest in both organic and nonorganic growth.
Although our largest markets are improving they are still below pre pandemic levels.
While undergoing your own structural changes. This has certainly been a challenge for us, especially on the cost side, where we're experiencing labor cost pressures that lag and can be difficult to pass along to customers.
While we see while we see this as transitory it as a near term factor.
But the worst of the pandemic behind US we can now focus more of our resources on our goal to grow our strategic initiatives, we are making great strides.
Building of new capabilities that will define our future.
As a greater mix of higher value products that are more technologically sophisticated.
Addictive nature and compatible with the directed energy market such as wound.
Much has been accomplished but there's more to do.
I am extremely honored to be leading <unk> at this important and exciting time in our evolution and I believe the future is very bright.
Now I'll turn the call over to Ed to give you more detail on our financial results for the third quarter and the first nine months of 2022.
Yes.
Thank you Dennis and good morning, everyone.
Revenue in the third quarter was up again led by a record third quarter revenue performance in our services segment.
<unk> revenue increased approximately two 2% to $179 million was up five 1%, excluding the impact of unfavorable foreign exchange.
Revenue in our services segment's top two markets were up year over year in the third quarter with overall oil and gas revenue exceeding that of the comparable pre pandemic level in 2019.
Our upstream sector was particularly strong benefiting from strength in offshore Gulf and in the Alaska region.
Downstream was also up from prior quarter as well, but it lagged our Q3 expectations and it lags behind the pre pandemic level of activity.
The midstream recovery took a pause in the third quarter, but is up year over year on a full year basis.
Within midstream on streams in line inspection testing business did have its best revenue and bottom line quarterly performance since inception.
Yes.
Aerospace and defense was also up significantly at 27% growth in the quarter year over year.
Consequently, we believe the top line belies the fundamental growth of the business with both unfavorable FX and the continued weakness in some of our secondary end markets offsetting what was otherwise a quarter of solid growth in our two primary end markets.
Gross profit for the quarter was approximately $54 million up 3% from a year ago with gross margin expanding 20 basis points to just over 30%.
Gross margin in the quarter is illustrative of the benefit of faster growth in our aerospace and defense end market.
In the near term gross margin will primarily depend on the rate at which we can pass along price increases in line with inflationary cost pressures that we are experiencing.
<unk>.
As we had noted during our second quarter earnings call. Beginning this quarter that is the third quarter, we are comparing against a year ago quarter period in which almost all of the pandemic related benefits had expired.
Going forward. This comparability will help highlight the process or sorry, the progress being achieved.
Gross margin, which trended higher from increased volumes improved sales mix and efficiency improvements.
Selling general and administrative expenses in the third quarter were $41 6 million up $2 4 million or 6% from a year ago.
CT due to expenses related to our bank refinancing of about 700000, and an additional 600000 of incremental cost down actions, which were restored in the third quarter versus same period last year for a total of $1 3 million or just over half of the overall increase.
So we're continually working to calibrate our overheads to match our level of revenue and we are intensifying our actions in this important area.
As Dennis stated earlier, despite ongoing inflationary cost pressures, we expect to reduce overhead from the current level as we exit 'twenty two heading into 2023 as it is one of the keys to leveraging our operating or increasing our operating leverage.
Interest expense for the quarter was $2 7 million compared to $2 3 million in the same quarter of last year.
This increase reflects the generally higher interest rate environment as well as some temporary interim borrowings have increased our average outstanding debt for the quarter.
For the third quarter, we reported net income of $4 4 million or <unk> 14 per diluted share, which is increases of 29% and 27% respectively.
Adjusted EBIT for the quarter was $18 6 million, which was in line with a year ago.
For modeling purposes, we would anticipate a perspective effective income tax rate of approximately 30% exclusive of any discrete items.
Free cash flow for the quarter.
Was <unk> 2 million compared to approximately <unk> 9 million negative a year ago.
Operating cash flow in the third quarter was affected by a significant buildup in working capital primarily attributable to September being our highest building months of the year.
We expect to see cash flow improve in the fourth quarter not only from continued positive operating results, but also by a decrease in working capital for.
The fourth quarter has historically been one of our best cash flow quarters.
In the fourth quarter, we do have a $4 $5 million payment due for payroll taxes that had been deferred and accrued earlier under the cares act that will satisfy all remaining shares back obligations. We Additionally made a $2 $4 million payment in early fourth quarter for final settlement of an accrued legal matter.
Okay.
Capital expenditures were $2 5 million for the quarter and $9 6 million for the first nine months of this year.
Now expect total capital expenditures for the year to be less than our original $20 million budget and to be more likely in the range of $12 million to $14 million.
Sure.
As of September 32022, we had gross debt of approximately $201 million down from just under $203 million at the end of the year and net debt of $183 1 million compared to $178 5 million as of year end.
Given that our primary use of residual free cash flow continues to be the reduction of outstanding debt. We believe our food our forecasted full year free cash flow will enable us to pay down debt in the fourth quarter of 2022.
Our goal remains to get below a three times leverage level, even though our new credit facility provides quite a bit more flexibility.
Once that level is achieved in 2023, we intend to evaluate our capital allocation strategy and use cash flow as a means to accelerate growth and build shareholder value.
Keep in mind that under our new credit facility maximum allowable total funded indebtedness to adjusted EBITDA is four times through the second quarter of 2020 threes measurement date with a step down to 375 times for Q3, 2023 measurement periods and then going forward for periods thereafter.
We feel very comfortable operating under these terms.
As noted in yesterday's release, we are updating our full year guidance to reflect our view on current market conditions.
We now anticipate revenue between $683 million to $693 million.
Adjusted EBITDA between 53, and $58 million and free cash flow between $15 million and $18 million.
Note that unfavorable foreign exchange is expected to lower revenue and adjusted EBITDA After translation into U S dollars by approximately $15 million and $2 million, respectively on a full year basis for 'twenty, two compared to our original outlook for the year.
We expect both operating and free cash flow to improve in the fourth quarter of 2022.
Not only from continued positive operating results, but also due to an anticipated decrease in working capital from September 32022.
I will now turn the call back over to Dennis for his wrap up before we move on to take your questions.
Alright, Thanks, Ed.
I am very optimistic about the potential for <unk> to capitalize on that technology development projects that we have been working on for the past few years.
And the heightened activities with some sorry, the customer acceptance of Mistras digital.
Additional service lines with our aerospace to our corrosion under installation crawlers.
Given the market, a new way to see and visualize.
Okay.
Visualized value sorry, there is certainly no lack of initiatives at <unk>, excuse me and creating differentiators for our offerings.
After having operated for the past two and a half years and borrowing disrupted end market.
And under an onerous financing facility, we now feel free to more aggressively implement the strategic growth initiatives that have been otherwise minimally resource.
We are seeing the early results with increasing contributions from data and renewable energy and.
And the ongoing expansion of our services and aerospace and defense industry with greater Freedom. We believe these initiatives will only further accelerate.
At the same time, we are intently working at expenses to make sure our cost profile calibrated with our revenue level.
The ultimate goal to get overhead to approximately 20% of revenues over time.
Should significantly improve the operating leverage in our model.
There are many macro factors that we believe provide a tailwind to our NTT market, including government compliance and safety standards and.
And aging infrastructure evolving industries need of new and innovative inspection solutions.
And the growing complexity of the supply chain.
These are all areas in which <unk> has an unmatched reputation.
This is the long term vision that is being strengthened every day.
Before taking your questions.
I would like to thank all <unk> employees for their continuing dedication to delivering safe and superior product.
In this ever changing environment, we face on a daily basis and.
I am proud of our team and know that the financial results. We are seeing is that reflective of the quality of our professionals.
Are there expectations.
Everyone that comes to work for Metro expects to deliver a safe and conscientious product for our customers.
By adopting our carrying connects tonnage we provide a better workplace for the entire <unk> family.
And add to our legacy.
Andrew with that please open up the lines for questions.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced please standby, while we compile the Q&A roster.
Okay.
Our first question comes from Christopher <unk> from singular research. Please go ahead.
Hi, good morning, Dennis and Ed.
Good morning, I had a question on.
Your price increases do you say are expected.
Help with inflation.
When are we supposed to expect these price increases to occur.
So what's happening Chris Thats a good question is that they are occurring but they are occurring behind the increase is being given to the employees. So as the market changes.
Two does the pricing to the local.
And place.
Youll start to go up at that customer and then we started negotiating.
We will probably start before we pay it out but what happens is you don't get the increases will be customer immediately. So there is always a lag between getting the.
Increase was paid to US first we will pay an amount to the employees.
So with the inflationary thing we're in right now this market is going to keep us trailing that a little bit. So we are getting increases.
But as as the inflation stays at this higher rate.
Normally you would do this on an annual basis. We have coal is built into our contracts are cost of lending allowance that allows for these discussions that happen every year now the timing is such a thing is just on wafer.
The anniversary of the of the MSA or in a contract right. So you've got to do them into once or twice in a year versus desktop.
One time at the MSA times Paul.
Causes a lot of continuous increases that you keep battling but for the most part that customers are giving us the skill set increases they don't do it across the board, but they do it for the sets that they see.
Being recognized and what's going on.
Because you've got to recognize that it's just not NTT folks that are looking at this all the customers gone into those refineries in plants and everything else are founded in the same problem.
Okay. Thanks.
And then with some sorry.
It's recent.
Recent deal with <unk>.
Ken.
Further quantify.
What will that do for the top line.
Yes, so I mean, we've already been representing Lucas at conferences that they hold and.
They are a major European in various markets.
<unk> and maintenance on blades and they are promoting us as a very good way to get in front of understanding what's happening with your blades before they become very difficult to repair types of damage.
So we've already been in conferences with them and talking to some of those customers as well as us using a bulk way. So it's already helped us getting revenue I wouldn't have the amount of dollars that it's still early on.
But it's just another way to add our exposure and giving some sort of credibility because you've got to remember we're new to the market. There is right now probably five or six competing technologies, none of which really measuring the blade David measuring the effects of the blade has on the whiteboard.
The story on the shaft and other components that you could interpret probably coming from our blade deep.
The fact or taken a picture and hoping that its at a surface level things like that so we're still being run.
Run against other technologies are being put on test beds currently with different owners and manufacturers see how we hold up these other technologies.
So having somebody with the reputation of blood Dana helping us saying that this is something they believe in which they've seen a lot of.
Other technologies and ideas as well.
Helps and that credibility part.
Okay, Great and then last one from me with the new credit facility are.
How okay, and it's supposed to help inorganic and organic growth can you provide any color there.
What type of growth.
How.
Alright. Thank.
Thank you.
Hey, guys, Hey, Chris Yeah. Thank you a couple of things Chris It's number one it gives us more liquidity number two it gives us more leverage flexibility.
So it just lets us and thirdly, theres less required term loan amortization. So it just kind of as much more.
Or less constructive on oil versus the prior credit agreement, we can flex into.
Putting more of that capital to work again job one is to still continue to pay down leverage and we are doing that but it gives us more upside again more flexibility.
Dropped the credit spread was lowered.
Availability was increased again required amortization went down it just gives us let alone. So affirmative negative covenants were all flex back to pre pandemic levels. So we're just kind of uncomfortable to really use that credit.
For for growth going forward.
The benefits it gives us.
And Chris specifically things like machining for aerospace and space customers, where we're getting new inspections, because we're bringing on machining.
The machining pre inspection and then we do the inspection so youre doing parts that we had done an inspection on previously because of machining was located somewhere else and geographically it was easier to get the inspections done somewhere else.
On more of these crawlers that we use for the corrosion under installation we call PRT for.
Automated RT crawlers, but things like that that we under the old facility, we got to be more careful on how much money, we're spending on things like that versus just keeping up the facility payments and all of us.
Constraints, so there's things that we're doing inside and Thats, what we mean by.
We are adding into the renewables and other sectors, even building out more of these buying more.
Sensors chips narrow than core all of these to absorb.
Components, we're trying to build up for that.
Get ahead of it not have component problems as customers are making orders for mark since ARIA Blayne as well.
Okay. Thanks for the answers.
Thank you one moment for our next question.
Okay.
Our next question comes from Mitch Pinheiro from sort of an <unk> company. Please go ahead.
Yeah, Hey, good morning.
Good morning, Mitch.
So.
I wanted to look at guidance.
For a second.
Sure.
How much of the guidance decline relates to foreign currency.
Is it specific piece of the on the revenue side, Mitch So full year <unk>.
Revenue impact of the.
FX is about $15 million in U S dollars was FX.
$2 million on the EBIT line, where due to pure FX translation different differentials.
Full year for the full year 2002.
The full year so.
So if I look just sort of a midpoint if I look at the midpoint of the fourth quarter.
It looks like it'll be somewhere around 100.
$70 million for fourth quarter revenue.
Which is.
Maybe flat, maybe slightly down from a year ago.
That.
Is that a.
I mean is that.
Is there anything beyond foreign currency that we need to understand.
So for what we see for the fourth quarter Mitch.
We expect the third to be a little bit stronger for some of the push off into the third quarter of third got started a little bit later, we're not sure how far and deep into the fourth quarter. All of these turnarounds and projects will go.
So are our guests on this is the low from what we're seeing and what we're hearing right now is getting maybe a little bit less than two.
2021, it was a strong quarter in Q4 for us in 2021.
So I think we'll be a little bit down I think certainly.
We got another $4 million to $5 million.
FX translation just in the quarter itself.
That can be part of it but yes, I think it's I think it's just as the customers are going to stay as long as they did in 'twenty one on the turnaround activities and how strong it will be into later this month.
You don't expect too much normally in December it's more of just highlight into November at all costs.
Okay. So.
Okay.
Midstream in the quarter.
The third quarter was down you had mentioned <unk>.
<unk> stream was okay, but what was the other what was the cause for the weakness in the other.
The other business.
I think some of it was just timing of larger projects that repeat from Q3 of 'twenty one to 'twenty two.
I didn't see anything there as far as loss of customers or major differences I think it was just activity levels.
Customer customer year to year on that.
Okay.
As you look at.
Your price increases and I understand the lag.
Yes.
Are we talking.
You may have missed this.
First it but is this.
A quarter lag or is it go beyond that.
<unk>.
Okay.
If you I mean.
How do you get pushback on price increases.
Or are you getting pushback on any price increases I mean, it's pretty evident.
The inflationary pressures.
So I would think that we would see say easy to get the price increases, but it's pretty much a foregone conclusion that youll get them.
A couple of months out.
Right. So I'll start with your second question.
Youre, absolutely right, everyone sees and recognizes that customers just don't have the same urgency to recover it to us this path as we have to pay out to the employees right. So we get it out as we see what's going on and then while we're talking to customers. They say, yes, we understand it but then they wanted to document test approving which one and why.
No question are all of these needed and you get into those kinds of.
Granular parts of looking at the increase.
Again, they don't generally by chew on it they just delay it and take their time to because I'm sure. We're not the only ones coming out of so it's probably a process that theyre getting swapped with.
And it just kind of makes it a slow reply and getting it back so the second half isn't so much that it's understandable.
It doesn't come with the same urgency that we have to pay it out.
And to your point on the increases.
Simply.
The increases can be the first day of the quarter or the last day of the quarter. So they don't really fall neatly into the quarters in the months what does happen though.
Continuously happening and it's still happening now you pick a region, sometimes one region is faster more aggressive than the other but in areas of high density of this kind of work. Its really there is a lot of pressure out there you get a lot of.
Price increases from other folks that theyre not controlling in and then the customers having to keep up with it. So what happens is we're constantly fighting this and the truth is what we're trying to say is as long as the inflation stays highlight to us we're going to always be dragging on a little bit of this behind us once the inflation falls out will catch up we will get back to normal.
And things will be there, but we had a better gross margin quarter. This quarter, while still trying to drag these out right. So it's always keeping probably anywhere from 50 to 90 to 100 basis point pressure on our gross margin.
Essentially we're not trying to be cute about it what it is it's going to be there until the inflation slows down a little bit. So we will be keeping up with it but always a little bit behind it right.
Okay.
Just a couple of other questions.
How.
So with your company why your overhead goal.
Yeah.
Sure.
You still got a little ways to go.
Kind of things that Youre working on.
Where do you see the opportunity to get that down to 20%.
Okay.
Yes, I'll, let you take that one.
Sure Dennis Yes, so it's more just focusing on our productivity or efficiency.
Making sure we're getting the best spend of our investment in <unk>. We're looking at how do we automate things how do we get more process throughput on the footprint, we have and leverage that so well be looking at all SG&A items.
Even some of the overheads up in the Cogs line, just making sure we're getting the best return there.
Being as efficient as we can.
Kind of looking internally at how we can maximize that so it's really just efficiency productivity review of all things. We are doing kind of zero base budget things that make sure that there is true value. What you do there does the customer appreciate it did they let us build them for that and pass this through his valuable activity, obviously all of that stays.
We're not trying to affect the top line growth, we want to keep doing those investments, but if it's not mission critical not value add it's.
Its fair game and Thats, the kind of things, we're looking at and we do it.
We always do it it just where do we get more urgently now where that top line is not where we wanted it to be we're obviously, taking a much harder look at this as we get deep into our budget cycle.
Where we are.
We're just taking a much much harder look at things as we kind of roll the budget together here shortly in the next couple of months here.
Do you expect to see I mean, I know, you're not giving guidance for next year, but do you expect to see.
Productivity.
<unk> improvement in 2023.
Yes. In fact, we said that just minutes ago with the script that yes, absolutely as we exit the year looking into next year, we absolutely see this being able to help productivity and profitability next year. Yes. We are looking at this at a very holistic level. So yes, we do expect some <unk>.
Media benefits here and its something we look at all the time, but yes, we are looking at it very.
The very immediate term absolutely.
Okay, and then what's driving what drives the capex lower this year.
Again, that's just one of those things we look at it intently.
Driven by volume a little bit, but it's really just challenging the need for that and he can you go a little longer on the existing asset to preserve that capital again, we do focus where we are.
Intently on it.
As a controllable level there, but it's it is scaling through revenue.
Certain extent, but just looking at every item there and just doubling down on that loan return, making sure. It's something we want to do now is what it is so we've just really clamp down and go into just the essentials their and letting the existing assets go a little longer as long as there is no risk there we do that but that's just kind of a whole bunch of them.
Little things there in the Capex bucket is what we controlled.
And.
That's just a part of the same studying the asset base here and we need to get our jobs done making sure we're being very efficient with it.
I mean, <unk> always clear.
<unk>.
I'll just say we are still feeding opportunities. So we haven't slowed down the growth of the business, we're making sure we're doing it.
Just looking at it and saying, okay, because we spent X.
Last couple of years does it still need to be but we.
Got it.
Things that we're doing for aerospace machining and crawlers and building into the software and all of that we're still feeding opportunities.
Still trying to plan for the future.
We want to make sure if we are putting some of the capex because it really David So we're not we're not slowing down any of the growth that way at all.
Okay I've seen the model.
Capex will be about 3% of revenue.
Is that still something fair to look at in the out years or is this.
Or maybe is it a little lower than that these days.
Yeah.
Three would be a high side, if we do as Dennis is describing investing more in our internal labs.
In any given period, it might drift up a little higher closer to 3%, but more historically its been averaging closer to two 5%, but yes in a high year could be slightly higher than that but two 5% of revenue is a pretty good approximation for our long term capex requirements for US again as Dennis said, we will be leading into our labs, a little bit trying to grow them.
I'm, a little faster than not organically, but two 5% is a good number for capex modeling.
Okay, and then just last question.
Dennis.
Or maybe what should I.
From an interest rate perspective, all your debt in the fourth quarter.
What do you think the rate I should model.
The interest rate I mean, we're going to be pushing.
Five and a fraction probably percent.
So yes, so you are.
All in with all of the uncommitted pieces, maybe closer to five five and three quarter. So yes in that in that range.
Okay.
Alright, thank you much.
Alright, Sir thank you thank.
Thank you one moment for the next question.
Our next question comes from Brian Russo with Sidoti. Please go ahead.
Hi, good morning.
Good morning, Brian Good morning.
So just looking at the revenue breakdown by.
By industry.
Third quarter, 'twenty, two versus the year ago quarter.
It looks like Youre seeing a nice recovery in oil and gas and aerospace and defense.
Clearly not showing up.
And the top line first of all do you attribute.
Tribute to all of that to the.
Negative sensitivity to the strong dollar.
Or is there something fundamental that might be going on in this third quarter <unk>, maybe this fourth quarter.
Hedge moderate the top line of the guidance.
I don't think so I'll throw it to John on one second.
Yes.
Yeah.
The sectors that we expect it to be growing aerospace and some of the other recovery are there.
I will say there is a little bit of a chunky as like an aerospace as far as the whole supply chain.
Customers are complaining that there are customers, who are complaining theyre trying to get more through and they just can't get to it. So I think theres a wanted to get more through in aerospace. The demand is there that you just haven't found a way to get it out yet so that's going to come up a little bit slower than you expect there are some things like that are just structural but I don't see anything else maybe.
John I don't know if you've got any thoughts on that.
Yes, Thank you Dennis and thanks for the question Brian .
I think supply chain believe it or not is still wreaking havoc.
We've got some customers for instance that we're testing raw materials for that they just can't get the material.
And that's been an ongoing challenge kind of as the year has rolled out they were good earlier in the year and as the years roll that they havent had material available to test. So I think thats one of these realities that it's hard to plan on and when you gave guidance you don't anticipate those kinds of things that are outside of your control, but the real factors too.
Okay got it and.
Remind me I apologize if you conveyed this earlier, but you mentioned.
The full year FX impact is on revenue what was it year to date and then go to <unk>.
Follow on a prior question that just backing into the fourth quarter relative to year to date and full year fourth quarters basically flat.
Versus a year ago and I'm curious if there is a headwind on FX.
That maybe masking.
Some of the overall improvement in your end markets and your business model.
Hi, Brian is that it is a little bit yes. The full year effect on revenue is expected to be about 15 million through nine months. It was about $11 million. So.
You have another $4 million or so headwind hitting a CRA expected in Q4 on the revenue line due to FX.
Okay got it and what was your leverage ratio what was the leverage ratio as of September 30th.
We were right just under a 370 $533 seven ish or so.
Okay, and thats, including what was a relatively weak.
Weak first quarter right. So it looks like Youre well on your way to under three times I'm just curious how much of that is going to be that.
Debt reduction absolute debt reduction.
Versus.
The improvement in EBITDA or a combination of pulse and maybe tie that into what are your debt amortization payments on a quarterly basis and are you looking to exceed that with your free cash flow.
Yes, good questions, Brian , Yes, so well two things a combination of higher trailing EBITDA and.
Lower funded debt will move both numerator denominator in our favour Q4 is routinely a very good strong free cash flow period for us. It was last year, we expect that the same thing this year. So that will certainly help in our in our favor there.
Driving that downward so amortization is very low right now the new credit agreement effective August pushed amortization down from 20% to two 5% so modest level of amortization now but.
We said on the call in the prepared remarks, we're not going to.
Do anything other than keep taking leverage down now so we will pay pay beyond the required amortization.
To get leverage down to below three I believe that happened sometime before next year is over so we'll keep doing that in the interim taken that residual free cash flow well beyond what you required term loan.
But again, Derek Dennis as earlier points, we have Optionality now we've got some flexibility if we see a great organic growth capability to grow our revenue stream, we can do that and we'll do that but it's not going to affect our otherwise step down in leverage.
That will continue again, we've got a little a little more a little more flexibility if we want to.
Do something in the interim.
On a little bit on the gross side, where theres a high ROI, but I know we're in a good place there, we'll keep knocking that down I think the combination of the leverage of the EBITDA going up.
Sure.
Bringing up.
Funded debt down both of those combined to continue to bring the leverage down as we go into next year and beyond.
Okay, and then just lastly, when we look forward to 2023 with the understanding that.
Not have guidance, but it seems as if oil and gas has normalized.
And we were still seeing an arrow does aerospace and defense recovery, but where does the growth in your core end markets.
Come from post 2022.
Is it gaining market share from.
The digital offerings or is it from.
Topline diversification through some of these emerging markets like.
Wind remote censoring et cetera.
Yes, I'll take that throw too.
John answered, thanks, Bryan so oil and gas.
Is recovering I wouldnt say its quite there in the downstream theres still a lot of hesitancy to spend some of the money that they had pre pandemic.
Customers all the time that are just amazed at how much lighter theyre running their run and maintain than they had been.
Something will probably of course doesn't change that over time, you would expect.
So I think part of 'twenty threes recovery is oil and gas flow has a way to go.
I think inside the aerospace and defense I put a little bit lighter than John that he is right I mean, some of our markets, we got customers waiting for material and.
Spend is much less than everyone anticipated because of material. This isn't there to to fabricate so.
So we have some of that that we believe is going to continue getting better things like that are out of our control. So we're not sure how fast and how much but we are doing things like you were talking about with consortia and doing that in with the Mistras digital.
We're starting with digital different way to try and get through faster.
Get our customers employees to understand where we're making initiatives there too so.
So there's a lot of things that we're doing with the crawler and everything else, we're not waiting for the market to come back to us, but I do think both of those.
<unk> aerospace and the oil and gas they are coming back.
Just probably never as fast as you want it, but but everything else that we're working on we feel good about getting some of these things in place and keeping ourselves stickier and showing value with the digital and all of that.
While it's small we've got signs in many many places that the digital that only.
Openness gets take care.
And working with our customers are talking about looking at.
Doing more and more locations with us because they really are starting to see the advantage of <unk>.
Getting this data centralize and getting it in one place.
Yes, my answer to a little bit of everything to what you asked.
Brian I don't know if it.
I wouldn't put my finger on any one of them as being the major contributor certainly the supply chain gets itself triggered olive oil and gas site spending more we still got a ways to go on a recovery.
We've got our shop businesses and Earl then are starting to head months that hasn't been seen before we anticipate that keep going but.
At the same time, we know there's been some additional demand that they just can't get through and get it to us right now.
It's just a function of all of these things getting back a little bit more normal, but we don't we don't really see anything is.
Too far out of our control that we don't we will come out later 'twenty three guidance.
But we don't we don't see anything out there that's really going to be structurally in our way right now even the inflation right now.
Definitely Andrew on the <unk>.
Margin, but we don't see it right now change in our customer habits are expanding unless something dramatic probably more on the healthcare side on the in place and really want what hurt us there.
Okay.
Okay got it and then one more on the free.
Free cash flow conversion.
Historically, you were averaging about 50% obviously.
Lot lower than that in 2022 due to some one time.
Payroll cares type repayments.
And another discrete item you mentioned, but when we look forward over the next several years does that historical 50%.
Cash conversion.
Still kind of achievable.
Sure.
Hey, Brian its absolutely in fact, its been trickling up ever so slightly that average as well. So yes, youre right couple of discrete items this year, knocking that down and our AUR, which is accounts receivable and with deferred cost on the balance sheet that number is up significantly almost a $132 million at the end of September that number will come back down so.
There is there is that just delay in the collection side. This year, that's a little bit slower, but no 50% plus a little aggressive.
Our goal and I believe very achievable.
Alright, great. Thank you very much.
Thanks, Brian Thank you.
Thank you I'm showing no further questions at this time I'd now like to turn it back to Dennis Bertolotti for closing remarks.
All right Andrew Thank you so I'd like to thank everyone for joining the call today and we look forward to updating you on our progress on our various initiatives.
Great day, Thank you folks.
Thank you for your participation in today's conference. This concludes the program you may now disconnect.
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As Johan during Q&A, you can dial star one one.
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