Q3 2023 Mistras Group Inc Earnings Call
[music].
Okay.
Thank you for joining Mr. Group's conference call for its third quarter ended September 32000, and twenty-three my name is Michelle and I will be your event manager today, we will be accepting questions. After management's prepared remarks participating on the call from Mistras will be managed down the tacos.
The company's chairman of the board and interim President and Chief Executive Officer at prisoner Senior Executive Vice President and Chief Financial Officer.
I want to remind everyone that remarks made during this conference call will include forward looking statements. The company's actual results could differ materially from those projected in some.
Some of those factors can cause actual results to differ.
Different 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 are not prepared in accordance with U S. GAAP reconciliation of these non U S GAAP financial measures.
The most directly comparable U S. GAAP financial measures can be found in the tables contained in yesterday's press release and the company's related current report on form 8-K. These reports are available on the company's website in the investors section and on the Sec's website I will now turn the conference over to Manny stay Amato.
Yes.
Good morning, everyone and thank you for joining us today.
And my October call I provided a broad overview of the board's strategic vision for Mistras.
Today in addition to sharing more about our financial performance.
I want to talk about the future of Mistras as it relates to the status of project Fenix.
Our results for the third quarter were in line with our expectations for revenue and adjusted EBITDA.
Revenues were up.
And I am, particularly pleased with another quarter of growth.
In our commercial aerospace and data analytical solutions businesses.
Which we believe are only beginning to blossom.
Gross margin expanded while selling general and administrative expenses contracted to hedge.
Help us achieve our adjusted EBITDA expectations for the quarter.
The improvements in gross margin and reduction in SG&A reflects.
It reflects the initial impact.
Project Phoenix.
Which would you expect to continue in 2024 and beyond.
As also announced yesterday in a separate press release accompanying the earnings announcement.
Subsequent to September 30th.
We completed additional actions associated with project Fenix.
That will further reduce overhead and improve sales efficiency.
Ed will provide more details on that later.
But first.
I would like to take a moment to reflect on the year to date results and the company.
Which reflect low single digit revenue growth.
A slight gross profit margin increase.
And nearly 10% EBITDA growth.
That the EBITDA growth was driven by savings associated with project Fenix.
In 2023, the company decided to make changes to key senior management positions.
These changes were instituted by the board in conjunction with project Fenix.
To strengthen the organization and to enable us to better execute our project Phoenix initiatives.
To help accelerate profitable growth.
By identifying meaningful margin improvement opportunities.
And steps to achieve sustained cost savings.
The meaningful and timely contribution of project Fenix related actions.
Helped to offset softness in revenue and profitability experienced in 2023.
And we will also contribute a material sustained benefit to the company into 2024 and going forward.
Project Phoenix is overall target is to eliminate waste and redundancy.
And to improve efficiency.
With the goal to reduce SG&A to approximately 21% of total revenues by the end of 2024.
Primarily through a rationalization of the overhead workforce.
Including a targeted 15% reduction in administrative head count.
Without adversely impacting the company's technician base.
Our ability to support operations and services to its customers.
Together.
With the other initiatives implemented.
We expect total project Fenix savings and other benefits of approximately $30 million in fiscal 2024.
These income from operations improvements initiatives.
It should not be viewed as a reactive measure.
As we are just as committed.
And plan to make more proactive strategic and robust investments into growth initiatives moving forward.
While we plan to reinvest some of our project Phoenix savings.
We still expect fiscal 2024 adjusted EBITDA.
Will be greater than our previous all time high.
Of $88 million.
I am confident that these initiatives will accelerate profitable growth.
As well as sustained cost controls and result in margin expansion going forward.
Equally as important to the profitability of project Fenix.
Is the behavioral discipline accountability.
And energy that this project has brought to the reshape senior leadership team of the company.
I am pleased to be leading to be leading the company at this crucial juncture.
Supported by a highly skilled motivated and invigorated senior leadership team.
Speaking on behalf of the board.
I am optimistic for the future of the company.
And believe that the implementation of these initiatives.
We'll create real value for our shareholders.
Now I'd like to turn the call over to Ed for.
Or his update on our recent results and a little more detail on project Fenix.
Yeah.
Okay.
Thank you Danny and good morning, everyone.
It was another quarter of meaningful progress and significant change for restaurants.
And project Phoenix will fundamentally change our company and significantly increase shareholder value.
But before highlighting these changes let me provide some highlights for the quarter.
Yeah.
For the third quarter of 2023 consolidated revenue was up slightly primarily reflecting growth in oil and gas. In addition to continued strength in several of our key growth initiatives, particularly commercial aerospace and data analytical solutions.
I would also note that revenue in our international segment was up 21% in the quarter, driven primarily by a strong turnaround market and increased aerospace and defense volume.
Gross profit margin expanded 20 basis points as compared to the prior year quarter.
And was also up 210 basis points on a sequential basis, driven primarily by a favorable sales mix and lower health care expenses.
What offset by inflationary pressures, including rising energy costs and incremental subcontractor cost.
Selling general and administrative expenses were down 3% compared to the third quarter of 2022 blocks.
But were also down four 7% sequentially from the second quarter of 2023.
As Manny mentioned earlier this decrease largely reflects the impact of project Phoenix and ongoing cost controls to achieve sustained overhead savings.
Yeah.
Loss from operations was $4 7 million for the third quarter net income from operations before special items of $11 8 million on a non-GAAP basis, when excluding the goodwill impairment charge and reorganization and other related costs associated with project Felix.
The non-GAAP income from operations represents a 19% increase as compared to the prior year period.
Net loss for the third quarter was $10 3 million or 34 cents per diluted share before adjusting for these same aforementioned items, while the adjusted EBITDA in the quarter was up four 5% to $20 9 million meeting our expectation.
The net loss for the quarter was largely attributable to the noncash impairment charge of $13 8 million related to our international segment.
Related to macro economic factors in Europe.
For consideration of the impact of any perspective project pretax benefits.
I will provide more detail on this side have been a few minutes.
Net income on a non-GAAP basis, excluding the aforementioned special items was $5 6 million or eight cents per diluted share for the quarter.
Yeah.
Our net cash provided by operating activities was $10 7 million for the first nine months of 2023 compared to $10 5 million in the prior year period.
Free cash flow was negative $5 6 million for the first nine months of 'twenty three compared to positive <unk> 9 million in the prior year period.
This decrease in cash flow free cash flow was primarily attributable to an increase in capital expenditures during the current year and higher than normal accounts receivable balances as of September 30, due to the timing of projects in the third quarter.
The $6 $6 million increase in capital expenditures during the current year reflects investments in our shop laboratories, any beta analytical solutions offerings to foster future revenue growth.
Gross debt increased by $10 2 million during the quarter ended September 30.
From $183 7 million units.
June $30 23.
Two $193 9 million as of September 30, primarily due to the acronym and factors impacting cash flow.
Our trailing 12 month bank defined leverage was just under $3 five to one as of September 30. Accordingly, we are pushing back our timetable to achieve a leverage ratio of three to one or lower from our previous December 31, 23 target do you have an expectation of that we've achieved in early fiscal 'twenty four.
As I referenced earlier, we incurred a non cash impairment charge of $13 8 million in the quarter.
Due to decreased gross margin in the current period as a result of inflationary pressures and rising energy costs impacting our international reporting unit operations.
As a result, we performed an interim quantitative goodwill impairment test during the third quarter of 2003.
The decreased gross margin in addition to higher interest rates in the current period contributed to an unfavorable decrease in this reporting unit value, which caused this impairment charge of $13 8 million, which was recorded within the international segment.
Of our business, excluding this noncash impairment charge the international segment achieved positive non-GAAP.
Operating income as well as positive EBITDA for both the three months and nine months ended September 32023.
And they've also experienced strong growth over the prior year comparable period.
We're optimistic for continued growth.
This business in 'twenty, four and beyond despite the economic headwinds caused by this noncash impairment. We will also benefit from pricing and cost improvements as part of project Fenix initiatives, which will be implemented during Q4 for international.
The <unk> reorganization cost of $2 $7 million recorded during the quarter related to professional fees and certain restructuring charges associated with the changes made to what organizational structure of third quarter.
Of 2023. These charges included severance costs associated with the transformation of our products and segments segment has announced back on October 2nd.
Before providing additional data and details on our project Phoenix I would like to highlight that our analytical our data analytical solutions revenue, which has experienced growth of nearly 60% for the year.
Is experiencing strong growth throughout all of 'twenty three and we believe this provides customers with a significant benefit being achieved through data analytical procedures, which in turn turns the data into actionable information rich our facility operators that our customer can use to maximize safety and enhance their productivity and optimize their budgets.
But now let me provide a little more detail more project fenix.
A brief overview of the actions taken thus far are as follows.
First is strategic pricing worried we have developed and will further enhance a proactive structural price strategy to address inflationary costs.
Variance within our business. This is the commercial function of a project Phoenix, which we've mentioned earlier.
Secondly, this reduction to overhead our goal is to reduce overhead as Monty said you approximately 21% of total revenue by the end of 'twenty four primarily through a rationalization of the overhead workforce, including a targeted 15% reduction in administrative head count without impacting the company's technician workforce base or our ability to support.
Operations and service our customers.
And finally, the new leadership as part of our transformation plan to improve shareholder value by lowering SG&A overheads, improving free cash flow and accelerating growth. The board made recent changes to senior leadership within the company to further strengthen the organization and enhance the execution of the various initiatives comprising project fenix.
We anticipate the new commercial focus which emerged toward project Phoenix will help drive organic revenue growth in 2024, leading to a record adjusted EBITDA of greater than $88 million, primarily attributable to a significant increase in operating leverage arising from a meaningful production and overhead combined with profitable growth.
More immediately however, we are lowering our guidance ranges for fiscal 2023 with full year revenue now expected to be between $695 million to $705 million from a previous $710 million to $740 million range and adjusted EBIT is now expected to be between 65 and $68 million from <unk>.
<unk> 68 to 71 billion.
The reduction in revenue and EBITDA are due to lower than previously forecasted fourth quarter results.
Free cash flow guidance is also being lowered to between 7% to $10 billion from previously $23 million to $25 million range, which had excluded certain cash expenses being incurred to achieve the cost savings our project Phoenix. This reduction in free cash flow guidance was due to an adverse days sales outstanding and buildup of they are <unk>.
Of these cash expenses to achieve the project Phoenix cost savings and to a lesser extent increased capital expenditures to faster revenue growth.
We anticipate a modest single digit revenue growth in 2020 for yet a significant expansion in adjusted EBITDA EBITDA attributable to operating leverage and the ongoing benefits of project Phoenix.
Accordingly, we expect to generate an all time adjusted EBITDA in fiscal 'twenty. Four this outlook includes approximately $20 million of incremental benefit from project Phoenix in 2024, and this detailed work them radiated in a separate press release issued yesterday, which accompanied the earnings release as Randy alluded to.
Project Phoenix provides a roadmap for sustained cost savings and increased profitable growth.
Ultimate goal of driving bottom line improvement and increasing shareholder value. After several planning we are now implementing or have implemented many of its initiatives, which are yielding immediate benefits. We appreciate your continued support and expect to reward your paces with significantly improved results in 2024.
Yes.
Alright, I would like to turn the call back over to Marty for his closing remarks before we move on to take your questions.
Thanks, Ed.
The successful implementation of project Phoenix will stabilize our core business.
And allow us to expand and achieve further successes in our growth areas.
And I am confident the management will achieve these objectives.
Specifically I anticipate the project Phoenix will lead to the following results.
Stabilization of our legacy oil and gas business.
Wherein we can maintain if not gain market share.
Another wise mature market.
While yielding better economics returns through a combination of strategic pricing actions.
A lower cost footprint.
And the comprehensive productivity and efficiency improvement plan.
In addition in 2024.
The company will be making increased investments in our key growth initiatives.
We will be targeting investments in our data analytical solutions and.
And in line pipeline inspection offerings.
As well as our aerospace and defense.
We already have a significant presence and are rapidly expanding and all of these markets.
Through organic growth strategies.
We intend to invest in each of these markets to capitalize on the growing demand.
Or better and more efficient technology.
Our data analytical proprietary software <unk>.
Currently analyzing over 1 million assets.
And over 500 plants.
Our target is to increase our revenue in this sector of higher margin business.
By 15% to 20% CAGR.
Over the next three years.
These solutions will enable our customers to better pinpoint when and what action should be taken to protect and preserve their assets.
Resulting in meaningful cost savings.
I'm very pleased to be serving nest dress.
At one of the most pivotal junctures in the company's history.
And I am confident in the decisions. The board has made and the actions the management will execute on.
I believe this will lead to significantly improved results.
We hope this in turn.
We'll restore investors' confidence in Mr. <unk> proven ability.
To create shareholder value.
Finally.
As I indicated previously.
One of my key focuses for 'twenty four.
We will be to identify and engage the right individual.
The right leadership and skill sets to Lee.
<unk>, a reinvigorated company forward.
We plan to engage a leading executive search firm in the near future to assist us with this most important objectives.
At this time I would like to ask the operator to open the call up to your questions.
Thank you to ask a question at this time. Please press star one on your telephone and wait for your name to be announced.
Your question. Please press star one again, please standby, while we compile our Q&A roster.
And our first question is going to come from the line of Chris <unk> with singular research. Your line is open. Please go ahead.
Hi, good morning.
Wanted to just wanted to ask about.
Power power generation and transmission and other process industries that looks like.
There was there was the decline there.
And both of those.
Segments.
<unk> for the quarter.
One year ago I wanted to ask what was going on there and why why was there.
The decline there.
Sure I'll take that one Chris that's a drop off of our long term recurring contracts.
New construction build happening that's dropping off so that was expected we've been envisioning that that was actually delayed delayed exit, but yes, we will be replacing that with new contract work, we're going after but that's that's a sunsetting of a long term project in that in those particular sectors actually.
Okay.
There was the increase in accounts receivable.
Well what was going on there.
A little bit of that timing as Chris at the end of the quarter. We built up the third month of the quarter was heavier on the invoicing side. So a lot of that is timing of projects that when the invoicing took place with the customer.
We maybe took our eye a little bit off the working capital. So we will tighten that up in the fourth quarter to improve that no no real issues there other than we need to tighten back up on the working capital to bring that back down in the fourth quarter and I anticipate that we will do that but that was largely the timing of when the invoicing happened late in the quarter, but that will tie.
That back down during during Q4.
Okay sounds good and then.
Last one from me it looks like.
<unk>.
Well.
Was there can you comment on oil and gas.
What were your what was the major improvement for upstream.
Yes, all three sectors actually Chris had a good quarter.
Its just that Theres, a good flow of product I mean theres good demand.
That upstream is probably the least volatile of the three for us, but just good level of business. There are across the board North America and Europe.
Just steady state business there are a lot of volume flowing so the upstream.
<unk> is not as nearly cyclical as the other sectors, but that's a strong one I mean, thats largely where our onstream business place. They had another record quarter. So they would fall into that sector. There in the quarter the transit.
Connecting capillary lines off of the drilling.
Back to the midstream so on street would've helped that sector of the upstream for us, but it's just a nice solid piece of the business for US all three were actually very solid, but we do like that upstream piece in particular.
Okay, great. Thanks for your answer.
Thank you.
Thank you one moment as we move on to our next question.
And our next question is going to come from the line of Mitchell Pinheiro with sort of event and co. Your line is open. Please go ahead.
Yeah, Hey.
Good morning.
Good morning, Mitch.
So.
This is a question I guess for you.
<unk> been on the board now for 20 years.
And.
Im sort of curious on.
Obviously I mean.
The results at Mistras has been.
Little bumpy over the last several years for a lot of obvious reasons, including Covid and I'm curious.
Why.
Now as project Fenix.
Happening and maybe why wasn't it five years ago.
What's happened is it just there's a little more sense of urgency for.
Because it's because of the stock price or.
Is there.
Changes in the business that May project, Phoenix more relevant now than than five years ago say.
That's a good question Mitch.
The board felt it was time.
To reassess where we were.
Probably should have done it five years ago, but we didn't.
And as.
When Covid came.
I think the whole world changed.
We had hoped that we would come out of Covid better.
We always had some.
Concerns about.
<unk> expenses.
Our SG&A wasn't performing at the level, we had hoped it would.
And we just felt that we were now at a point.
Well 22 was not a good year for this company.
And had it been a better year, we might have a tax things differently, but I think the combination of our of our coming out of Covid. The results in 2022.
We decided that it was time.
It was time to bring in some.
Some people to look at what we were doing it was time to identify opportunities that we could save money in.
It had not been done on an ongoing basis.
And so we decided that 23 was going to be a rebuilding year.
And that's exactly what we've done in 2023.
We're examining a lot of things, we're making changes.
We're very optimistic about 2024.
So.
So youre going to get a new CEO.
And you talked about finding the right person with the right skill set so.
I am curious to know like what are the skill sets.
It's sort of so here is this person that'll be coming in and project Phoenix is well underway.
Sometimes you would think that the new CEO would have been the one embarking on project Phoenix, but now the new CEO is going to be the one.
I guess executing project Phoenix, so what what kind of skill sets do you want and the skill sets for the new CEO.
Does it involve different things beyond what we've seen in the project Phoenix initiatives.
We are looking for someone that has leadership skills.
And experience.
Somebody that knows how to delegate.
Understands accountability.
Knows how to build a cohesive strong management team.
And to profitably grow the company.
We want our next CEO to be responsive.
A good listener.
A strategic thinker.
That has the experience to navigate the public company arena.
And importantly, a passion to get things done.
And it's simpler terms.
Our next CEO must have applicability.
Availability.
And ability.
We're confident we're going to find that person were going to work hard to do that.
We think that <unk>.
Bringing that when we bring the right person and it will not matter, whether we started project Phoenix before he got here or she got here or after so.
That's our thinking that's our plan that's what we're looking for and we're going to invest a lot of time and effort to try to identify that individual and engaging.
Okay, and then just a couple of other things.
Related to project Fenix.
One you talk about pricing strategy.
Okay.
Generally pricing is sort of dictated by the market.
So what is it I mean.
Are you going to be raising prices I don't say across the board, but where you can.
And I guess are you willing to lose business that does not.
Opt for.
Higher pricing.
Love to hear your answer on that.
Sure you would.
Look.
The past year.
Two year and a half.
The World has changed again.
Inflation is up.
Interest rates are up.
Our labor shortages have not changed any cost us more for for good talent.
We need to make sure.
That as we develop our pricing.
We are accounting for all of that.
It does us no good to have business that were losing money on.
We just nobody can operate.
And at margins, where you're losing money.
We believe our customers are fair and reasonable.
And we hope that we can work with them.
At a minimum make sure that we're covering our costs the incurred costs that we have.
And we do so in a strategic way.
And we believe that because we have now undertaken an initiative to lower our SG&A.
We can still be competitive.
So okay.
And then also related to project Fenix.
And maybe this is for Ed.
<unk>.
SG&A when I was looking at.
The separate press release, where you are you updating project Phoenix you talk about.
$21 million of cost savings estimated cost savings for <unk>.
SG&A.
Which would be I guess a relative.
Maybe what is that it looks like $12 million of incremental SG&A savings.
What.
Did I read that correctly number one and number two.
What are what are the investment what are the dollars that are going to be spent.
Relative to free cash flow basis, what are the dollars that will offset a lot of these improvements do you have a cash.
Investment.
Figure that you.
You can share.
Yes, certainly as you read those numbers correctly, the $21 million is the run rate in 2004 of which we have nine achieved in 'twenty. Three so that is incremental $12 million benefit SG&A year over year, that's before Cogs benefits and revenue uplift.
I think the effort to do this is largely behind us the actions have been taken here in 'twenty three.
The cost has been incurred so incrementally in 'twenty four there is not additional investment needed to do that.
This 15% back office overhead reduction we alluded to on the call that's largely behind us now so.
That there is there is cost to achieve that taking place in 'twenty, three but theyre really will not be a whole lot of incremental cost in 2000 and for it to achieve this we're otherwise automating things looking for workflow and automation, we do that all the time to be more efficient, but there is there is not any forward spend necessary to effectuate. These savings in Phoenix that we're giving you here today.
That effort is behind us.
There is not an incremental investment to do that mainly was talking about investing in the business going forward, that's an entirely different thing.
Redeploy some overhead in our higher growth areas, that's a whole different topic, but that's reinvestment, but no theres not any incremental effort needed to achieve the savings that we're laying out today that we're very confident we've spent a lot of diligence going through that and feel very confident that will be a true savings and a benefit in fiscal 'twenty four.
Okay.
Thank you for taking the questions.
Ill pass it on.
Okay. Thank you Mitch.
Thank you and one moment, while we move to our next question.
And our next question is going to come from the line of Kenmore with Es Heighten. Your line is open. Please go ahead.
Thanks, I just wanted to follow up on your updated free cash flow guidance for this year.
And what are what are the exact total cash cost spent already or will be spent by the end of this year by December for the year to implement project Phoenix, including the lease break costs and severance.
The other part I had was just reconciling the free cash flow guidance, but one account receivable.
Do you expect that maybe the convert more like in January I know you said you can work on working capital towards the end of this year, but.
Free cash flow guidance came down.
You think that might be more of a January collection.
Yes, Hi, Tim Great question, Yeah on the first part of your question.
The outflows relative to project Fenix real cost to make that happen, that's probably about an order of magnitude, maybe maybe $6 million this year or probably cash out the door to effectuate that savings. So that's about the number that's baked in that was not in our guidance earlier, but we have pretty good line of sight now to that number so $6 million came off their free cash.
Hello of that from that region.
The <unk> yeah, the whip build that we've seen in some of the delay in a R.
We're working hard to pull that down here in in 'twenty, three I hope to be able to achieve if not slightly exceed that new revised free cash flow worst case, it might trickle into January.
But we work we are working very hard to bring that back down here in the fourth quarter I will mention is the third piece. There. There is some incremental capex year over year, that's a little bit higher now.
Where we are investing in some of the new higher growth areas. That's also bringing down that free cash flow a little bit again thats. Good investment in the future that will lead to some growth there, but it's primarily the <unk>.
That is.
Is adversely hurting me now that made us bring down the free cash flow and we're going to work that back down as hard as we can by 12 31, but yes to your point some of that may slip into into Q1.
Great that was really helpful, giving that bridge of the components I think that really helps investors definitely all adds up to the.
The free cash flow guidance to brings that clearly makes sense.
What about that one defense project and I know it was pushed out stop and go from the first half of the year I don't know it could be maybe seven or $8 million in sales does that did that start up again or is it about to start up.
Unfortunately, no Chris that tends to I'm, sorry that still.
Sure.
Don't lag a little bit so thats not appreciably picking up here in the second half.
Back half second half of 'twenty three we had hope that that's kind of maybe a reason why our revenue guidance came off a little bit we do see that getting back online next year.
The job did it go.
Go away it just got pushed out or delayed but no. We did not have that appreciably helped through the third quarter. It is slowly coming back up and the staffing is occurring and it'll get back online, but you can think of that more of a 'twenty four event at this point, that's not going to appreciably get back online in 'twenty three.
That's helpful. And then my last question is.
Around data analytical solutions.
You mentioned I think in the prepared remarks, maybe.
15% to 20% CAGR. If you look at the first half of this year stripping out the September quarter.
Growing I think at 22%.
And then decelerated one I don't know.
Math is right maybe 5% in the September quarter was there any lumpiness and then data solutions was it just because it was lapping a really good growth period. The year before was there anything with the onstream or something that went on in the September quarter that might have caused the sales growth rate.
Be below kind of the target goal.
Well I'll, let Danny expand on that what it is 16% through the nine months. So it will ebb and flow in any given quarter that very nature of data and software. There is a big piece of implementation that happens there. It's not just pure software licenses. There is work to implement along the way so that that number may not climb in a linear manner, but that CAGR growth.
At May Andy alluded to Israel were right in that range now at 60%, but.
It's a high growth area for us and we wanted to do more of it as Manny said I'll defer to any any any other color he wants to add on data analytics.
Yes, I'd like to just add is this.
This is a very.
It's a profitable and important sector in our business.
And.
We are now going to be focusing on scaling that.
To a greater level.
We want to be able to put to get into more plants quicker.
And we think that the.
Proprietary software that exists there.
We will be very helpful to our customers.
It has been helpful to the customers we're in now.
But there is a huge market for this type of service.
And we need to be able to get into all those markets, including our own markets.
Which where a lot of these clients that we have our plants that we identified and brought in outside of our of our customer base and so part of our plan is to scale to bring those solutions to our own customers.
We think theres a lot of opportunity there.
Think theres a lot of room for growth.
But we don't want to do it unless we're prepared so our 24, we're going to be focusing.
On getting ready to scale.
That we can do multiple installations.
At the same time, and so that we can get into more and more plants with this solution.
I don't know if that answers your question.
A big believer in the data solutions drivers for your topline. So thanks, Manny and Ed and I will turn my turn it back over to the operator.
Thank you Tim.
Thank you and one moment as we move on to our next question.
And our next question is going to come from the line of Brian Russo with Sidoti. Your line is open. Please go ahead.
Yes, hi, good morning.
Good morning, Brian just a couple of just a few follow ups I guess from previous questions. The first one on the pricing or just project Phoenix in general clear.
Clearly the SG&A appear.
Appears to be completely within your control.
So visibility there is pretty good but just on the price increases to follow up on a previous question I think in 2023. The majority of that was focused in your North American.
Operations, and specifically in oil and gas which is.
A very competitive market.
Feel free to disagree but.
Okay.
In terms of aerospace and defense it seems that that's where.
You might have higher barriers to entry.
A lot of <unk>.
<unk> needed where price increases might be.
More palatable for customers given.
The unique expertise that mistras brings to the table just trying to get a better.
Sense for.
The price increases, which I assume falls in your gross profit <unk> revenue benefit.
<unk> for project Phoenix in 2024.
Yeah.
Yeah, So I'll start with that.
Okay, Yeah, so, yes, so youre right there.
There is not one size fits all here necessarily for all of our customers on all of our sectors, but what we're really going after here is a more of a proactive approach versus reactive.
Obviously, you have great partnerships with our customers and we do have price increases in any given year, that's not new for us, but it's more about a policy a structure a routine matter of business here, where we're getting fair value from the customer a lot of this ties into our commercial efforts to get more kpis get more connectivity to really understand the value to.
And the customer to demonstrate that to illustrate that data solutions is all about that.
That that true value to the customer and making sure theres a kpis that fully.
Recognizes that obviously many of our price increases go right to the technicians as they should but it can't just.
Must be a push here there that we are investing in <unk> capabilities for our customers, whether it's robotic callers software and many other capabilities. So we're doing that.
To be more efficient to help the customer more effectively safely efficiently use their asset base. So all that's all that's about getting a fair return and making sure that it's all connected there. So that's really what we're going after it in a more holistic discussion and dialogue in partnership with the customer we're in it's where we're both winning there they're getting more effective.
This more efficiency more productivity from the offering to give them that requires investment and a fair return. So that's really what we're going after there where it is proactive and a dialogue and a discussion not a reactive thing as it's been kind of routinely for us in more recent times make it more of a process of policy with transparency of dialogue, that's what we're going after.
That's where again, where it's meaningful and we wanted to make it part of a routine thing that we do each year and I think Thats fair and I think that's the conversations we're having are discussions we're having with customers and I think that's important because it is there is growth here there is investment needed and there is a huge payback to what we do so that's why we're really focusing in on this.
Accretive aspect of pricing and it's more holistic sense.
And just to add to that.
Just to add to that the.
Strategically we want to make sure.
That we are taking full advantage.
Of the price increases that we've already agreed that have already been agreed to.
So.
Our many of our arrangements allow us to pass through.
Certain costs as they increase we want to make sure that we have a standardized comprehensive approach to.
Making sure we're taking full advantage of all of the increases that we've already.
I've already been agreed to.
And then secondly, we want to make sure we have a clear understanding of what our costs are.
As we sit down and talk to our customers.
Renew the business. It is a competitive business. There is no question about it.
But we do provide value.
And all we want to do is be paid fairly.
So a lot of it is making sure we're taking advantage of whats already been agreed to.
And I don't think thats going to be.
The magic.
So it's not I don't want to give anybody the impression we're just going to.
Raise our prices across the board that isn't the intention here.
Key word here is strategic.
And our first and initial focus is to make sure we're getting taking advantage of all the price increases we've already been.
Have already been agreed to and then take it beyond that.
Got it okay.
And then maybe for Ed.
The.
Reduced free cash flow outlook for 2023.
R R.
Are you unable to reach that three times leverage target that.
The market has been focused on this year.
Yes that was as we said that in the prepared remarks, yes. We are right. We are below a three five now we had hoped to get below with three.
By 12, 31, that's going to slip out may be just one quarter due to that little relatively weaker free cash flow, but it's all of it got pushed out we will achieve that in the early part of 'twenty four we will still get we will still get below three yes.
Okay, Great and historically your cash conversion has been.
Nearly 50% is that kind of.
Reasonable assumption in 2024.
Yes, so I believe that it is our capex for good reasons has been growing a little higher this year than a couple of past years, but no I think that 50% not in every given quarter, but over the long logging roller term, yes, we do believe a 50% conversion of EBITDA is still a fair number to use going forward yes.
Okay, Great and then I apologize if I missed this earlier, but what is the new capex run rate.
I mean this year, we're going to end up it probably two.
<unk> 122, which has been a little hot.
Which has been a little higher than the mid to high teens. We've operated at the last couple of years, it's to be determined it is really a function of how much more investment in our shop labs do we want to do going forward, we will have a little if it's value add theres. Good ROI with quick paybacks meeting our hurdles.
We will expand up a little bit so the the two 2.25% of revenue might drift up to two and a half to two and three quarters percent of revenue.
So, we're leaving a little flexibility to bring that up next year, we have not yet locked in our capex plans for next year, but we'll have a little more tolerance to invest in the business for the high growth prospects again. This year was a little higher than that last year. It may level rate out at the same number next year, but we've yet to lock down our capital plans, but it may be modestly higher in next year for good reasons finished.
Expansion capital to grow some of our shop labs in particular and to invest a little bit of data solutions.
We might be willing to give just a little bit higher here.
<unk> 2004.
Okay, Great and you mentioned.
The delays in the <unk>.
<unk> contract.
As a driver of the <unk>.
Reduced revenue guidance for 2023, I also noticed the power and industrials.
Were weak and I know you had that large nuclear contract that rolled off are you still looking to backfill that and.
Is that also contributing to the reduced top line.
Yes that was expected on the power Gen side that was a known project roll off as you said so that was expected that was not that was not affecting our guidance that was anticipated to be rolling off and we are looking at this area of that project work. Although it is not it's not the biggest piece of our business, it's mostly run and maintain and call out work and whatnot that the new projects.
Capex brand new projects is a nice.
Five 5% to 10% of our business any given year.
Excluding that we're not ignoring that that's the piece we are looking at Theres a lot of new construction going on throughout the U S and beyond.
Battery plants EV plants chip manufacturing you name it where we can do work and we are taking a hard look at that because that's nice long just like defense work. That's nice long five to seven year kind of projects that are a nice core to add to your base. So we are taking a hard look at that to replace some of that longer term work.
That that sticks around that repeats year after year, one on long cycle. There. So yes, we are looking at that there are some good opportunities there. So we do.
Plans are to replace that that longer term contract work that's dropping off yes, we are looking to replace that in our in our mix of business.
Okay and then just.
Take that one step forward to 2024.
What exactly does modest single digit revenue growth.
Does that mean less than 5%.
That's how you should probably interpret that yes, if you were thinking maybe of that.
<unk>.
Three to five but somewhere in that range, yet we're looking hard at that now we're well underway with the budget thinking hard about next year, but that's the takeaway we would want you to have there thats kind of what we're thinking at this point for next year.
Okay, and then lastly, maybe for Manny.
Might even be a question for the permanent.
But where do you envision Mr. Josh and maybe two two.
Three years, I mean is it increasing scale or is it diversifying the mix of business.
Maybe adding some other subset.
Subsectors that you can leverage data solutions and even <unk>.
Sorry.
Technology.
And is there.
An inorganic growth component.
I think right now our focus is organic growth.
We think we have a lot of opportunity.
Within that.
Area to grow the company.
And.
If there are inorganic growth opportunities that makes sense.
We'll look at those but our focus is going to be organic growth.
We talked about.
We talked about our strategic pricing initiative.
But we're also looking very closely.
At.
How our entire sales process is working.
We think we should be doing more organic growth and so.
But a big component of our future is going to be data analytics solutions.
What do you think that's the future.
We have millions and millions of assets we have tested.
And we think.
The analytics component of that frame.
<unk> framework is going to be key to our future, it's still going to be in oil and gas as well as chemical as well as other areas.
Look we can analyze data in a lot of different industries.
But we have a wealth of data and oil and gas and we should take advantage of that to the X.
<unk> that we can so I think our focus is right now going to be organic rather than inorganic.
We're not going to walk away from anything that makes a lot of sense.
Every single initiative, we undertake moving forward, we'll go through a vigorous return on investment analogy.
When it makes sense, we're going to invest.
And we're going to just continue to work that way and improve our efficiency improve our sales.
Our strategy.
Improve the pipeline of business.
Would want to bring in.
And that's all organic.
I don't know if that answers your question, but.
I hope it does.
Yes, it does very much I appreciate it thank you.
Thank you and I would like to turn the conference back over to Manny <unk> for any further remarks.
Well first of all thank you operator.
I do want to thank everyone for joining this call today I want to thank you for your continued interest in Mistras.
There is more to come.
And I look forward to providing you with an update on our business and progress achieved.
Towards our initiatives on the next call. So everyone. Please have a safe and prosperous day. Thank you very much.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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