Mistras Group Inc (MG) 2018 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Mistras Group's Earnings Conference Call for the First Quarter ended March 31, 2018. My name is Shannon, and I'll be your event manager today. (Operator Instructions) Participating on the call from Mistras Group will be Dennis Bertolotti, the company's President and Chief Executive Officer; and Ed Prajzner, Senior Vice President, Chief Financial Officer and Treasurer; as well as Jon Wolk, Senior Executive Vice President and Chief Operating Officer, who will be available for questions.

I will now hand the conference over to Mr. Bertolotti. Please proceed.

Thank you, Shannon, and good morning, everyone. On today's call, we will review Mistras Group's financial results for the first quarter ended March 31, 2018.

It was a very solid performance for the quarter, with consolidated revenues up 15% over prior year and adjusted EBITDA up 15% as well. Income from operations and net income increased 97% and 72%, respectively, over prior year, and we generated approximately $6 million of cash from operations.

Our operating margin improved by 140 basis points, driven by a 220 basis point improvement in our operating expense ratio.

Services, our largest segment, led the overall revenue improvement with a 15% increase over prior year. This was an all-time Q1 revenue record for the Services segment even after excluding the positive impact of all 2017 acquisitions. Services operating income increased by $4.9 million or 66%, reflecting strong operating leverage and efficiencies. The Services segment operating income margin before special items increased by 100 basis points.

International segment revenues increased 12% due to favorable foreign exchange translation rates. As expected, the segment's operating income had a year-on-year decline but improved sequentially from an operating loss in Q4 of 2017. Although Q1 was a difficult comparison for the International segment, we have turned the corner, and we will benefit from the many improvement actions that we undertook during 2017.

Our Products and Systems segment revenues increased 11% over prior year, and operating profit improved by 700k over the prior year's operating loss. The backlog and outlook are both improving for this segment.

Mistras has demonstrated its ability to manage through the dynamic oil and gas market and operate profitably despite the cyclical challenges. Our business is sound and gaining momentum, as demonstrated by our Q1 results. Our focus is on delivering value, and this will help us gain market share as the market improves.

Ed will now take us through the financials for Q1 in detail as well as reiterating and expanding our outlook for 2018. Afterwards, I will summarize our initiatives and update our expectations going forward.

Thank you, Dennis. I'll remind everyone that our remarks made during this conference call will include some forward-looking statements. The company's actual results could differ materially from those projected. Some of the factors that could cause actual results to differ are discussed in the company's most recent annual report on Form 10-K and in other reports filed with the SEC.

The discussion in this conference call will include certain financial measures that were not prepared in accordance with U.S. GAAP. Reconciliations of those 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 our related current report on Form 8-K. Those reports are available on the company's website in the Investors section and on the SEC's website.

Consolidated revenues for Q1 of 2018 were $187.6 million, 15% higher than prior year quarter. Services segment Q1 revenues grew to $145.6 million, up from $126.3 million for a 15% increase year-over-year, attributable to mid-single-digit organic growth, coupled with high single-digit acquisition expansion. This was a Q1 record for this segment, as Dennis mentioned earlier.

International segment Q1 revenues were $38.5 million compared to $34.3 million, an increase of 12% year-over-year. This increase was attributable to favorable foreign exchange translation rates. We expect further gains throughout 2018, driven by organic increases in France and Germany as well as from foreign exchange translation rates.

Products and segment's (sic) [Systems] revenues increased 11% in Q1 over prior year. Backlog has improved in this segment, and recent operational changes should improve results further in 2018.

In terms of operating income, the Services segment increased its Q1 operating income margin to 8.4% from 5.8% as operating income increased by 66% to $12.3 million compared to $7.4 million in the prior year, inclusive of approximately $2 million of year-on-year favorability from non-GAAP items. Excluding such items, Services segment operating income margin before special items increased by 100 basis points.

The International segment generated approximately $1 million of operating income in Q1 compared to $3 million in the prior period. As Dennis mentioned earlier, we expect this segment will realize favorable comparisons for the remainder of 2018.

Products and Systems operating income was $300,000 compared with a $400,000 loss in the prior year period. This was a significant improvement, and we are likewise optimistic for this segment.

On a consolidated basis for Q1, income from operations increased by 97% to $6.4 million compared to $3.3 million in the prior year. Operating income margin improved 140 basis points year-over-year. Q1 net income was $2.9 million or $0.10 per fully diluted share compared with $1.7 million or $0.06 per fully diluted share in the prior year. Adjusted EBITDA for the first quarter was $15.3 million compared to $13.3 million for the prior year period, an increase of 15%.

Q1 cash flows from operations were $5.8 million compared to $13.4 million in the prior year. This decline was primarily attributable to the timing of collections on accounts receivable. We anticipate cash flows improving in subsequent quarters of 2018.

Total debt and capital lease obligations net of cash and cash equivalents, which we refer to as net debt, was approximately $188 million at March 31, 2018. Our net borrowings did increase by approximately $7 million during Q1, but our cash on hand increased by nearly the same amount, approximately $6 million. Again, Q1 was an anomaly in our cash flow, and we fully expect to pay down debt during 2018.

I will conclude with an update on our guidance, reiterating our previously established guidance and expanding for items that we had not specified earlier. We continue to expect that the present range for petroleum prices will persist for the foreseeable future, causing oil and gas customer spend for inspection services to be relatively stable. Information obtained from our North American oil and gas customers suggest that their spending in 2018 will increase somewhat over 2017, and our results are expected to reflect this dynamic. However, as previously disclosed, we will realize an offsetting impact from a large customer that chose to discontinue using the company's services within our Services segment commencing in the beginning of Q2.

Total revenues for 2018 are expected to be between $715 million to $730 million. The company's EBITDA is expected to be between $78 million and $83 million. The company expects that its operating cash flow will be approximately $70 million. Capital expenditures are expected to be between $15 million and $20 million.

The company completed its initial assessment of the 2017 Tax Reform Act using best estimates and available guidance and expects -- the expected tax rate will be approximately 30% to 32% for 2018, exclusive of any discrete items. Accordingly, net income is expected to be between $24 million and $28 million, and earnings per diluted share is expected to be between $0.83 to $0.95.

And with that, I will turn the call back over to Dennis.

Thank you, Ed. I'll wrap up by providing a brief update on our ongoing initiatives and summarize our positive market outlook. During the first quarter, we were particularly strong in the Services segment and oil and gas, mechanical services and aerospace. Compared with 1 year ago, the level of market activity for projects and turnarounds that we are experiencing feels much healthier.

As we thought at that time, there was definitely a level of pent-up demand from a deferred work, and what we seem to be experiencing this spring is a catch-up on some of those deferrals. Early indications suggest that we should see a relatively normal fall 2018 turnaround season compared with the prior year fall season, which was starting to come back to normal. So our expectations for the North American oil and gas market for the entire calendar year are positive, with first half comparables being quite strong compared with the weak prior year spring and second half comparables that are favorable, but perhaps not quite as robust in the year-on-year comparison in relation to a prior year fall that had already started to return to normal levels.

Our Products and Systems segment is progressing well under our new leader, which we installed last summer. The backlog of unfilled sales orders has increased, along with Q1 revenues, and we have some exciting research and development activities ongoing and planned with some important customers. We also have several promising sales cycles underway on the infrastructure side. We are actively marketing a subsidiary within the Products and Systems segment and hope to have an update on this progress on our next earnings call.

Our International segment had sequential improvement compared with the prior year's fourth quarter, but more importantly, is poised for strong growth against an admittedly weak prior year comparables from Q2 through Q4. We have been doing extremely well in France, gaining market share in the oil and gas and power generation markets. Our aerospace lab that was built primarily to support Safran commenced operations late last year and is starting to gain real traction, serving not only Safran but also some of their other suppliers as well. Our continued ramp-up will be very noticeable in the quarters to come.

Our German business is picking up with spring turnaround activity and in our U.K. business, has rebounded and will have significant improvement compared with the prior year.

We recently launched our corporate-wide vision, which is to be the integrated solutions provider who solves society's unmet asset protection needs. Every day, we seek to continually improve on the value we deliver by developing, integrating and executing asset protection solutions that maximize our customers' uptimes. To this end, we are actively working on 2 initiatives to improve our productivity at customer sites and will be piloting in the field during Q2. Both initiatives involve using digital technology creatively to better meet customer needs in an economical way. I look forward to updating you on these exciting initiatives on our next call.

In summary, we will continue to expect our Services segment will grow revenue in 2018 despite the loss of a large contract. And we will grow profits at a faster rate, driven by cost reductions, expected organic growth from the improving market and the favorable impact from our 2017 acquisitions. We expect our International segment will achieve double-digit top line growth starting in Q2, driven by organic growth in France and Germany, coupled with favorable foreign exchange translation. And our profit margins will improve significantly commencing in Q2.

And in our Products and Systems segment, we expect improved profit margins and growth from our core business.

In closing, we believe we are expanding the Mistras brand, and we are very optimistic about its future. Our reputation for delivering evolving value-added services is growing as we capably add service lines and broaden our offerings. Our acquisition pipeline is active and provides avenues for both healthy diversification and growth. I'm confident in our new vision and strategy for improvement and have strong conviction in the path we are on and our ability to manage in both up and down economic cycles. We believe macro-level economic drivers will be positive through 2018, and we are confident in maintaining the forward momentum that we've built up over the past few successive quarters.

We will now take your questions. Operator, please open the phone lines.

(Operator Instructions)

Thank you, operator. Hello. This is Ed Prajzner again. Before we go on to your questions, I wanted to point out an error in our press release and the comments that I just stated. Specifically, certain figures in our guidance for 2018 are incorrect. We made a mathematical error by inadvertently not deducting stock compensation expense from adjusted EBITDA in arriving at net income and fully diluted EPS.

Adjusted EBITDA is correct in our guidance as stated at $78 million to $83 million, but our 2018 net income range should be $21 million to $24 million. And our fully diluted EPS range should be $0.71 to $0.83. We will file a Form 8-K very shortly with the corrected guidance amounts.

Operator, please proceed to our first question.

Our first question comes from Edward Marshall with Sidoti & Company.

Ed, the update makes a lot more sense to me and the math. I just wanted to kind of talk about the cadence for the year. I mean, you did a good job finding leverage on the operating expense line. I'm curious, on the Services, with the seasonality in Q1, I understand the gross margin is lower. But with the higher revenue on the adjusted basis, gross margin went down. I'm just trying get a sense as to maybe what West Penn has to do -- how West Penn affects the margin there. I know it was -- it looks like between $9 million and $11 million of revenue from that business in the quarter. Just trying to get a sense as to kind of how you anticipate that ramps up through the remainder of the year.

Ed, this is Jon. I'll take that one to start. I won't comment specifically on the West Penn revenues. That's your estimate. But what I would say is that, as you alluded to, there's a seasonality in the sales mix. And in the first quarter, we had stronger sales a little bit than we expected in the Services segment. But some of those sales were just lower gross margin type work, as it turned out, given the rate schedules and so forth in place. And generally speaking, we tend to earn -- we tend to benefit from activity in the first half of the year that has a little bit lower margin, just the way that some of those -- the geographical and service mix of the business. So we don't feel adversely at all about the margin profile going forward, and it's not outside of our expectation.

Got it. And now was it revenue that was captured previously at lower margins? And then on new incoming orders, you see them looking back to kind of historic trend margin. Is that kind of the thought process? Or is it more to do with the seasonality?

More seasonality and just the mix of which contracts we did more work on. That's it.

Got it. And I guess, as you look at the spring, which for all intents and purposes, we're almost entirely through the spring turnaround season. Is there any specifically that you -- anything specific that you'd like to provide for the 2Q guide maybe from a top line perspective as we kind of get a sense as to how strong that might have been for you guys?

We feel -- it's Jon again. We feel good about -- really good about -- as Dennis said in his comments, about Q2 and the spring in general. For Q2, April is a really good month. We feel like the entire quarter is going to be strong, and it's really going to be strong across all of our segments. So we feel very good about it.

Got it. And you had a pretty bullish commentary about the revenue outlook. And I'm curious, I've heard from a lot of industrial companies this earnings season about labor cost. And I'm curious about how you guys -- first, are you fully staffed for what you see coming in the fall? And then more importantly, are -- if you're looking for labor, are you finding that wage inflation is kind of creeping into the model?

It's Jon again, and I'm sure Dennis will want to chime in. We're starting to see a little bit of labor inflation in certain geographies. But in general, it's manageable. And in terms of staffing, there's an ebb and flow to staffing. We tend to staff up a little bit seasonally. We tend to supplement our steady crew with some additional folks, so it's not like you've got people sitting on the bench in the summertime waiting for fall. So I think we feel pretty good about how we're staffed at the present time.

Yes. Ed, it's Dennis. We have heard some of the heavy industrials talking about their labor getting tighter. We're not at that point in this industry where we see it's overly tight, at least not inside our business at all. The seasonality always miss a little bit at the top because you want to have a balance, not to have too many for the low troughs. But for the fall, we feel like we know what's coming at us. Unless there are some surprises, we feel like we're going to be able to capture the bulk of the work like we did in the spring. Like I said, there's always a couple dollars you miss just because you want to balance your workload. But no, our labor is actually pretty good right now.

(Operator Instructions) Our next question comes from Tahira Afzal with KeyBanc.

I guess the first question is in regards to some of the margin guidance that you gave before, and sorry if I missed them earlier on the call. But you did point to a pretty notable improvement in International margins for the full year and the Services margin as well. Are those still intact at around 150 basis points and 400?

Tahira, it's Jon. We do feel they are definitely intact. We feel, again, good about all the segments and margin accretion that we'll have in each segment for different reasons. But we -- yes, it's intact.

Got it, okay. And then I know you guys always appropriately remain conservative as you look out. But is there any reason why this momentum should not continue into your fiscal '19 as well? And given that and the fact that your initiative should have taken full traction by then, it does seem like fiscal year '19 is also setting up pretty well for yourselves.

Tahira, it's Dennis. Our budget is only set through the full year. At this point, we don't see any reason for any concern. I mean, the volatility and the oil prices are gone. The energy customers on the power side are good. We believe we've got a good aerospace market. We're trying to predict everything going on that far out. I'd say at this point, unless something out of the normal came at us, I would think that '18 should look better than '17, and '19 would probably keep growing and going from there. So we feel good about it, but we're still trying to get our hands on the fall, let alone pass into 2019 yet.

And I'm currently showing no further questions at this time. I would like to turn the call back over to Dennis Bertolotti for closing remarks.

Okay. Well, I'd like to thank everybody, and I'd like to thank them for listening to the call today. We'd like to wish everyone a safe and productive day. Thank you for the interest and look forward to talking to everyone on our next quarterly call.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day.