Mistras Group Inc (MG) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second quarter 2011 Mistras Group, Inc. earnings conference call. My name is Ann and I will be your coordinator for today's call. As a reminder, this conference is being recorded for replay purposes. At this time, all participants are in listen-only mode. (Operator Instructions) We will be facilitating a question-and-answer session following the presentation. I would now like to turn the presentation over to Mr. Sotirios Vahaviolos, Chairman and CEO. Please proceed, sir.

Ann, thank you very much and good morning. May I wish all of you a healthy and prosperous new year. Welcome to the Mistras Group earnings conference call to discuss our recent Company performance. Again, my name is Sotirios Vahaviolos. I'm the founder, Chairman and Chief Executive Officer of Mistras. Also joining me today is Frank Joyce, our Company's Chief Financial Officer. The purpose of today's conference call is to discuss our recently released financial results for the Company's second fiscal quarter ended November 30, 2010. Our primary objective of this call is to provide you with a clear understanding of our performance and prospects.

This discussion is intended to supplement our quarterly earnings release and our filings with the Securities and Exchange Commission. Frank will begin with a brief disclaimer about the information we are providing today, and a summary review of our financial results. I will then follow Frank with a few remarks and observations about our Company's performance, marketing activity and prospects. We will then answer any questions you may have. With that, Frank, let me turn it over to you.

Thank you, Sotirios. First, I want to remind everyone that our discussions during this conference call will include forward-looking statements. Actual results could differ materially from those projected and factors that could cause actual results to differ are discussed in our Annual Report on Form 10-K filed for the period ending May 31, 2010. Also, the discussions during this call will include certain financial measures that were not prepared in accordance with US Generally Accepted Accounting Principles. Reconciliations of those non-US GAAP financial measures to the most directly comparable US GAAP financial measures can be find in Mistras Group's current Report on Form 8-K, dated January 11, 2011.

These reports are available on our website at www.mistrasgroup.com, in the Investors Section under Financial Information and Reports and on the website of the Securities and Exchange Commission.

Now I would like to present a summary of the financial results for the second fiscal quarter of 2011. Revenues for the second quarter of fiscal 2011 increased 24% to $88.8 million versus $71.9 million in the second quarter of fiscal 2010. Each of our operating segments contributed to the increase, with Services generating a 25% increase in revenues for the quarter, followed by International and Products & Systems which produced revenue gains of 25% and 10%, respectively.

Gross profit grew by 21% to $27.8 million in the second quarter of fiscal 2011, versus $23.0 million in Q2 of 2010. Gross margins of 31.3% in Q2 2011 were down slightly compared to the 32% reported in Q2 2010. What's important to note is that the gross margin drop occurred entirely in the Products & Systems and International segments where margins tend to fluctuate from quarter to quarter due to the mix of products shipped. Gross margins for the Services segment, however, remained unchanged in the quarter from the prior year at 28.6%, despite an increase in evergreen revenues of more than 20%.

An increase in evergreen revenues will typically put pressure on gross margins, especially at the outset of the contract. Operating income increased by 33% to $10.2 million in Q2 2011, versus $7.7 million in Q2 2010. Operating income margin in the quarter increased to 11.5% versus 10.7% in Q2 2010. For the second quarter of fiscal 2011, SG&A was $15.6 million or 17.6% of revenues, as compared to $13.7 million or 19% of revenues in the second quarter of fiscal 2010. As a percentage of revenues, the SG&A decrease in Q2 of 2011 came despite an increase in stock comp expense of 0.3%.

Net income attributable to Mistras Group increased by 59% to $5.7 million in Q2 2011, versus $3.6 million in Q2 2010. Diluted earnings per share were $0.21 versus $0.14 per share for last year's second quarter, representing an increase of 51%. Adjusted EBITDA increased by 30% to $15.9 million in Q2 2011, versus $12.3 million in the second quarter of fiscal 2010. Adjusted EBITDA margins in the current quarter increased to 17.9% versus 17.1% in Q2 2010. In addition, the Company demonstrated operating leverage in the quarter as a $17 million increase in revenues increased operating income by a little bit more than $2.5 million.

For the second quarter of fiscal 2011, the top ten customers represented 42% of revenues versus 43% in Q2 of fiscal 2010. Our largest customer represented approximately 15% of total revenues in Q2 2011 versus 19% in the second quarter of fiscal 2010. The Company's six month performance was quite impressive as well, generating gains in revenue, adjusted EBITDA, and EPS of 23%, 27%, and 42% respectively. Cash from operations grew by 29% in the first six months of fiscal 2011, and net debt as of November 30, 2010 remained low at $26.4 million.

The Company spent $6.5 million in total CapEx for the six months ended November 30, 2010 and that includes both cash and leased. Of this amount, however, $1.5 million was spent toward the construction of a facility in Houston, leaving the non-real estate portion of CapEx at $5 million in the first six months of November 30, 2010 versus $4 million in the prior year. Company had cash and cash equivalents of $6.8 million at the end of the quarter, as well as an undrawn revolver balance of more than $48 million. And with that Sotirios, I'd like to turn it back over to you.

Thank you very much, Frank. I now want to build on some of the points that Frank made. We're particularly pleased with Mistras Group's results of this quarter for many reasons. As Frank mentioned, our revenues grew by 24% in the current quarter. It was especially impressive, given our very strong second quarter performance of last year when revenues grew by 21% over the prior year. In addition, we're very pleased with the continuing levels of organic growth we're seeing from our business. Our 18% organic growth rate in second quarter of 2011 provided the bulk of our revenue gains as we continue to increase market share during this quarter.

Our current quarter organic growth rate compares favorably to a 9% organic growth rate achieved in the second quarter of fiscal 2010. I'm also very pleased with the 30% increase we achieved in adjusted EBITDA during the quarter. Adjusted EBITDA is one of the most important tools we use to judge the operating performance of our business and in the second quarter of fiscal 2011, our adjusted EBITDA margin exceeded our expectations, increasing to 18%, the highest since we became a public company. I'm also pleased that we achieved a more than 15% level of operating leverage in the quarter and are focused on improving that as the business continues to grow.

During the fiscal second quarter of 2011, revenues from the Oil & Gas industries represented 60% of revenues, versus 61% in the prior year. I think it's important to note that while Oil & Gas revenues grew by a healthy 22% in the second quarter, revenues for [industry] segments outside of Oil & Gas taken as a whole grew by an even greater 26%, reflecting our increased service offering and marketing efforts in these segments. Also, within Oil & Gas, the bulk of the revenue growth for the second quarter of fiscal 2011 came from customers in the midstream, upstream and petrochemical segments of the market.

We're very pleased with our efforts to expand our business in these other markets and especially with our success capturing new customers in Chemicals, Power Generation, Aerospace, Infrastructure, and midstream sector of the Oil & Gas. Our centers of excellence as unique technology incubators continue to provide solutions to our customers on current industry regulations and trends, such as Cap-and-Trade, as well as Smart Grid Reliability Solutions, thus opening new growth markets for Mistras and capturing market share.

Within the Services segment, evergreen revenues continue to represent a significant portion of Services' business and in the second quarter of fiscal 2011 were 47% of Services revenues. As we have mentioned in the past, we view evergreen accounts as an opportunity and a platform of secular growth for introducing more advanced solutions to our customers, advanced solutions which save the customer time and money and also result in higher margins for Mistras. Our resident status in evergreen accounts allow our people to identify pre-turnaround issues that our customers can incorporate into their turnaround schedule, resulting in expanded work for Mistras. I think it's worth highlighting that Services' gross margins for the second quarter of fiscal 2011 were unchanged versus the prior year, thus overcoming the downward pressures that a more than 20% increase in second Q evergreen revenues can cause. This was achieved through better utilization available during the quarter.

The international segment and the Projects and Systems segment also performed well in the quarter with revenue gains of 25% and 10% over the second quarter of fiscal 2010.

And now I would like to spend a minute on the Company's outlook for fiscal 2011. As mentioned in our earnings release, the Company is raising its fiscal 2011 revenue and EBITDA guidance. We now project fiscal 2011 revenues to be in the range of $310 million to $340 million, up from the previous range of $300 million to $330 million, and adjusted EBITDA to be in the range $45 million to $50 million, up from the previous range of $44 million to $49 million. However, unlike our previous guidance, these projections do not include any amounts for future acquisitions that have not yet been closed.

In concluding my remarks, let me remind you that our unique One Source Asset Protection Solutions business model continues to deliver consecutive revenue growth, resulting in a compound annual growth rate of 27% over the last five years, including the recession years, I might add. Like others in the industry, we continue to see growth in future turnarounds, but emphasize that these are required maintenance turnarounds and substantially smaller and fewer in numbers than those prior to 2008. As an important refinery market services company, we view positively small and intermediate turnarounds in terms of profitability and better customer value.

In other business highlights, during the quarter we were awarded and performed a Canadian 50-kilometer pipeline project utilizing as an inspection tool, Advanced Automated Ultrasonics. We see this as a positive indication of a recovery for our Canadian business and its promising future growth potential. We also see growth in downstream inspection business from massive unit upgrades that many refiners will be making to be able to process their incoming Canadian heavy crude. Major contracts and customers were also won in the nuclear industry with one significant customer awarded Mistras work for their entire fleet of plants. A major chemical evergreen account added predictive maintenance services to their contract with Mistras. We will be taking over their rotating machinery maintenance service activities at multiple plants.

These wins and others show that our business model allows us to participate in the planning of the customer, the customer's asset protection programs, which in turn allows us to develop the exact products, software, engineering and asset protection solutions to meet our customer needs. Our unique and proven one source model continues to deliver value to our customers and we remain committed to continuing to provide the highest quality products and inspection services that will allow us to participate in the growth environment that we see ahead. That concludes my remarks and I would like to open the floor for questions. Ann, please take over.

Thank you. (Operator Instructions). And our first question comes from the line of Scott Levine with JPMorgan. Please proceed.

Hi. Good morning, guys. Actually Rodney Clayton here for Scott. Happy new year to you.

Hi, Rodney.

First question, you talked a little bit about the gross margins I guess in your products and in your international division. Can you just go into a little bit more detail about exactly what mix changes are taking place there? Obviously this is the second quarter where we saw a bit of a margin degradation year-over-year, so if you could just talk a little bit more about that?

Sure. As you probably know, the margins in products and international are not uniform from quarter to quarter and they vary based on the mix of products shipped. And in this particular quarter there was a different mix but largely less international shipments than in the prior year quarter, and generally speaking international are of higher margin.

We (multiple speakers) International on all the business, that these are sales not directly to our subsidiaries but directly to the customer.

Okay. All right. That makes sense. Did you give the mix of advanced services this quarter? I think it was 14% last quarter. What was it this time?

It was 15% this quarter.

15%. Okay. So it went up a little bit. Good. All right. Did you sign up any new evergreens or 24/7 monitoring contracts this quarter?

We've changed our approach a little bit to the guidance we give on evergreens. Pretty much it's proprietary information and we've come to realize that the number of evergreens is pretty close to a meaningless statistic. So we're going to try to give you folks color in a different way by saying pretty much the percentage growth that we're seeing in evergreens which was well over 20%. And we're going to stay away from, like the exact number of evergreens because we found that it leads to questions like what's the average evergreen and things like that which we don't think has a lot of relevance.

Okay. That's fair. That's fair. One more if I may. Obviously your SG&A, again, another quarter of year-over-year improvement. You talked in the past about labor utilization trends, trying to get that reduced -- reduction of unbillable hours. Is that the primary driver of the improvement or is there something else going on there that we should know about?

There's a couple of trends. In SG&A as we mentioned in last quarter's call, we see the growth in that moderating as we do our transition from a private company to a public company. And upper management at all levels is focused on keeping that from growing. In terms of labor utilization, that is pretty much in the margin area and we've been very successful in this quarter versus last year in reducing not only the percentage of non-billable time, but the absolute dollar of non-billable time at a time as you know when revenues are growing well in the 20s. So we're focused on that and that's an area that we continue to be focused on.

Okay. Sounds good. Thanks for that. Nice quarter.

Thank you.

And our next question comes from the line of Matt Duncan with Stephens Inc. Please proceed.

Good morning Sotirios and Frank and congrats on a very nice quarter.

Thanks, Matt.

I want to piggyback on that last question for a moment. Looking again at the SG&A costs, I know -- I guess your revenues were up about $20 million sequentially but your SG&A costs were basically flat. Were there any actions that you guys took to manage those costs, to keep them under control, any specific things you can point to there?

It's really a constant and evolving type of a thing. We're focused on it. We're focused at all levels, at all segment levels and we've just been successful at containing it and we said in the last call that we thought in the next few quarters it would be in the 15.5%, 15.6% range. It continues to be our expectation.

Thank you, Frank. Sotirios, you mentioned pipeline as being one market that's pretty strong for you. You mentioned a 50-kilometer pipeline inspection up in Canada. That seems to be a market that's getting a lot more attention right now after a few high profile incidents over the past year. Can you talk a little bit more specifically about what type of growth you are seeing with those customers and is that an area that you're looking to increase your capabilities?

First of all, Matt, this is really on new construction of pipelines. This was really a new construction of pipeline where they must inspect the wells made on these pipelines. We see that a growth market because as you probably have heard announced that oil will come from Canada. The Marcellus project will grow more and more. So there's a lot of pipeline activity that we see in the next five years and so, therefore, we prepare ourselves not only by using methodology like radiography but also utilizing Automated Ultrasonics and be a key player in that market.

Sotirios, do you know off the top of your head what percentage of revenues today pipeline customers represent?

It's really -- it's not meaningless right now. I don't think it's really in the 5% range. It's way below that.

But it sounds like that's a market you definitely expect to be a bigger piece of your sales going forward.

Matt, we have identified that and we thought that this was really a very big -- the 50-kilometers was a big win for us. Especially utilizing Automated Ultrasonics.

Absolutely. Last question I've got on the acquisition landscape. It's been a little while since we've seen you guys make an acquisition. I know that's a key part of your growth strategy. Can you give us some update on what you're seeing on the acquisition landscape right now?

Before I pass it to Frank to answer that, Matt, as you know I'm very sensitive to this issue. Just don't forget that 18% was organic. So the biggest part of our more than two-thirds percent, more than two-thirds of our growth is always organic. So, Frank, go ahead.

Just to add to what Sotirios said, we're constantly looking at acquisition candidates. We're disciplined in the approach. There seems to be a lot out there. And it's part of our model going forward.

Okay. Thanks, guys.

Thanks, Matt.

Our next question comes from the line of Matthew Tucker with KeyBanc. Please proceed.

Good morning, guys, and congrats on a strong quarter.

Good morning, Matt.

Just staying on that acquisition topic for a moment, did you guys make any small acquisitions during the quarter that you may not have announced publicly?

We did. We made one. What I do have is I have some six month stats. We paid about $16.8 million in the six months for acquisitions in total. And that's approximately three. I believe one of those was in the last quarter.

Okay. Thanks. That's helpful. And there's been some activity on the M&A side within your space, some I think larger companies than those that you've bought getting taken out, so have you seen any significant change in sellers' expectations and the multiples that you're seeing?

Well, in our case we have a model of the acquisition and if that doesn't fit in our model we will really pass as we did on this large acquisition. This large acquisition, we believed that it was really on levels that we cannot really afford to pay.

Thanks. That's helpful. And then did I hear you correctly that the revenue guidance that you're now providing does not include an assumption of any revenues from incremental acquisitions this year?

Let me be exact. I said however, unlike our previous guidance, these projections do not include any amounts for future acquisitions that have not yet been closed.

Thanks. That's -- thanks for clarifying. So your initial guidance at the start of the year I believe assumed something like $15 million in revenues for the year from incremental acquisitions. Has there been any change in your thinking around that?

Matt, just for a little bit of clarification, initial guidance in hindsight indicated that there would be some future acquisitions and a lot of people asked that -- what percentage that would be. We didn't have a specific dollar amount in there for future acquisitions. So I think the good news is we're moving the range up and the rest of the year that range includes no more acquisitions than what we already have in-house. So we're trying to be a little bit clearer as to what's in there so hopefully that will be a positive.

No, I do think that helps. Thanks for clarifying, guys. I'll jump back in the queue.

Thanks, Matt.

Thank you very much, Matt.

(Operator Instructions) And our next question comes from the line of Richard Eastman with Robert W. Baird. Please proceed.

Yes, good morning.

Good morning.

Sotirios or Frank, could you just walk us through for one second the acquisition revenue contribution in the quarter? Is the four -- it's a little over $4 million, but is that a seasonal bump or was a small acquisition that you completed in the second quarter, was that meaningful?

We've done about three acquisitions in the year. Two were -- none of which are meaningful. Two probably are bigger than the others. You're right, revenues in the quarter were about $4 million. We think EBITDA was about a $0.5 million in that. For the balance of the year, with the acquisitions that we have in-house, we think revenues from those acquisitions will be $10 million to $12 million with EBITDA from let's say $1.5 million to $2 million and there is some seasonality in that.

Okay. So the run rate we talked about at the end of the first quarter, the -- collectively the two that you did in July were about $8 million or $9 million of revenue annually?

No, no.

No, I'd say the ones that we have in-house, the three, we probably did about close to $8 million in revenues for the six months.

Okay. Okay. And then just a question on the services. On the services gross margin, if you look at that gross margin sequentially from Q1 to Q2, it's up about 150 basis points. And I'm going to -- if we hold the evergreen revenue, can you just break down, is that all seasonal and utilization or is there some better pricing in there? I'm just trying to look at it sequentially and get a sense of what price did versus some of the other variables.

Well, I think that -- I think when you look at our second and fourth quarter, those are our highest quarters and you're going to see better utilizations in those quarters. That's not to say that we won't continue to improve that. Our second quarter of this year had much better utilization than our second quarter of last year.

Okay.

I think we've mentioned in the past that we think that the majority of the price issues have subsided but if you're looking at margin to margin first to second quarter, a good part of that is in better utilizations.

Was the evergreen portion of revenue in both quarters similar?

It's generally -- it's generally stable from quarter to quarter, but it was up.

It was up. Okay. All right. And then Sotirios, one of the things in the quarter, let me just make the assumption that revenue surprised you a bit or at least was maybe on the high end of plan since we did raise the guidance. Was that caused by number of projects or did the scope of the projects that you were performing positively surprise you?

Rick, a lot of those things are not by coincidence, okay. A lot of those things came about were very hard marketing over the years, introduction of new technologies that we brought to the customer that we didn't have, let's say even a year ago. I just mentioned the Automated Ultrasonics as one example. So it came really a contribution of many things. There was really -- it didn't come out from a extending of a turnaround or something like that. It came from hard-fought business and a gain in market share.

Okay. So is there any message in the scope of the work that suggests that customers, whether it be in the Oil & Gas side or other areas are doing more preventive maintenance versus just deferred maintenance? Are the budgets any looser?

I don't think the budgets are any looser but I think really the scope of our activities continues to increase month by month. I mentioned on my text here before that we obtained from a chemical company a predictive maintenance. In the industry they call it PTM programs which is really vibration for rotating machinery programs which really deals to maintenance. We obtain a contract on having evergreen kind of people there. Our people now will be there every day and really it's really more into maintenance versus capital. We saw very little that came from capital.

Yes, so it's really your efforts to drive penetration into those accounts versus more dollars spent on projects?

Well, Richard, also no one wants to have one industry to dominate our sales. So therefore, we're trying to expand our business. That's why we're very proud that the growth in the non-Oil & Gas was higher than Oil & Gas and that's what we're driving our salesmen to really gain new contracts and new business. We like to expand the (multiple speakers) --

Last question. Frank, just two data points here. Stock comp for the year still running at about 4% to 4.2%? I don't know if there's any seasonal accrual or anything in there?

Actually, we are -- we have it in a range of about 3.6% to 4%, Rick.

Okay. And then just D&A at this point, given the acquisitions, is that running at that $18 million range?

Yes, we're saying like $17 million to $19 million, it's about right.

Yes. Okay. Very good. Thank you again. Nice quarter.

Thank you, Rich.

And our next question comes from the line of Matthew Tucker with KeyBanc. Please proceed.

Hey, guys, just a couple more questions here. When you look at your -- I guess non-refinery end markets, could you comment a little bit on where you're seeing the most growth?

Okay. The most growth, Matt, in the last quarter was in the Processing, which is really mostly Chemical, that was the highest growth. Then was basically Industrials, Power Generation, and Transmission.

Got it. Thanks. And you mentioned a significant win on the nuclear side. Could you provide a little more detail in terms of the services you'll be providing under that contract?

Matt, it's really a contribution. It's not a one service. There's many tools that we have in the industry. In this particular case, really is a win, not only basically in doing let's say heat exchanges but also doing FAC work, Flow Accelerated Corrosion work, and others. It really shows that it's a balance of plan. We're now doing more and more because of the Nuclear Regulatory Commission requesting that a lot of the plants inspect the underground pipes that they have in refineries and we play a very important role there, as a matter of fact, I might say the leading role in that area.

Great. Thank you. And then finally, just on the gross margins, specifically for the Services segment, could you talk a little bit about your outlook going forward over there? Have competitive pressures started to bottom out? And based on the evergreen contracts that you currently have, how do you see gross margins trending from here?

We think the pricing pressures, we think we're at the end of that cycle. As we've achieved in this quarter versus the same quarter of last year, we have higher utilization rates so that will be something that will tend to push margins up. But our growth in evergreen is something we're very proud of and as that continues to grow, and that growth rate of evergreens will have at least initially a negative impact on margins. But going the other way, we see growth in industries outside of Oil & Gas and generally speaking, they tend to have higher margins. So it's a mix of things.

Actually, in our situation, Matt, overall, we don't want to sit here and tell you that the refineries and everybody else now start opening their purses and they will do a lot of turnarounds, et cetera, et cetera, et cetera. We do not know that yet. We do not know that yet. As a matter of fact it was last year at the same time that we were also optimistic and I don't know if you remember what happened in the third quarter, basically, is where a lot of these turnarounds, they stopped them. They did very limited activity. They have contacted our people, contracted our people for 40 to 45 days and they only did work for about seven days and ten days. So we're very cautiously optimistic that things are changing but we need at least another quarter or two before we can really be very positive on this particular issue.

Okay. Thanks again, guys, and congrats once again.

Thanks, Matt.

Ladies and gentlemen, there being no further questions, I would now like to turn the call back to Mr. Sotirios Vahaviolos for closing remarks. Please proceed, sir.

Thanks very much, Ann. I would like to thank everyone for listening to our call and hope that you have a good rest of the day, especially in the northeast with the snow and have a great new year for the rest of -- in the rest of the country.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation. And you may now disconnect. Have a good day.