Mistras Group, Inc.
Q1 2019 Earnings Call Transcript

Published: 11 May 2019

[Operator:]

Good morning, ladies and gentlemen. My name is Liz, and I’ll be your event manager today. We’ll be accepting questions after management’s prepared remarks. I’ll now pass the call over to MISTRAS Group Director of Marketing Communications. One moment, while we connect.

[Nestor Makarigakis:]

Welcome to the MISTRAS Group conference call for the first quarter ended March 31, 2019. My name is Nestor Makarigakis. Participating on the call for MISTRAS will be Dennis Bertolotti, the company’s President and Chief Executive Officer; Ed Prajzner, Senior Vice President, Chief Financial Officer and Treasurer; as well as Dr. Sotirios Vahaviolos, Executive Chairman; and Jon Wolk, Senior Executive Vice President and Chief Operating Officer.

[Dennis Bertolotti:]

Thank you, Nestor, and good morning, everyone. During today’s call, we will give you an update on MISTRAS’s business performance, financial results for the first quarter of 2019 as well as give you our outlook for the remainder of the year. First quarter results were relatively low as previously announced and marginally weaker than we had initially thought, which we will elaborate more on during this call. More importantly, with the strong momentum generated exiting the quarter, the pickup in the turnarounds and coupled with the recent organic wins, we continue to feel good about where we are and are consequently reiterating our guidance for the full year. Despite the softer-than-expected first quarter, our underlying business remains robust, both domestically and internationally, in oil and gas and in all other verticals. And despite a turnaround market that had got off to a considerably slower start than a year ago, we continue to expand gross margins, leverage our industry-leading reputation to gain share and build out our midstream and technology-oriented growth channels so that we remain bullish not just on the year but over the long term. As stated in our last call with you, first quarter 2019 revenues were down from a year ago. Exclusive of a 2% adverse effect from unfavorable foreign exchange and looking past the large contract non-renewal, comparable revenues were flat with last year. Acquisitions incrementally added 3.1% growth to the top line in the first quarter of 2019. Our gross margin performance was strong in the first quarter of 2019, improving 190 basis points to 27.6% from 25.7%. This has been a favorable trend over the past year and is a corporate initiative reflective of our strategy focused on achieving value for our customers.

[Ed Prajzner:]

Thank you, Dennis. To reiterate Dennis’ comments, the first quarter results coupled with our recent organic wins have us on pace to achieve our financial performance objectives for the full year as reflected in our original outlook for 2019. Looking at results for the quarter. Consolidated revenues were down 6% to $176.8 million but down only 4% on a constant-currency basis. The majority of the year-over-year difference is the $10 million of revenue from the contract vacated March 31 last year. So this is the last quarter that contract will distort our underlying performance. Again, after adjusting for this anomaly and using a constant foreign exchange rate, our revenues for the first quarter were essentially flat year-over-year. Consolidated gross profit for the quarter was $48.9 million, slightly higher than the year ago quarter despite the lower sales volume.

[Dennis Bertolotti:]

Thank you, Ed. Heading into this year, we had been anticipating a challenging first quarter, including a later-than-usual start to the turnaround season, so our results to date in 2019 have not altered our view for the year. And our recent organic wins and remaining opportunities only strengthen our conviction about the full year outlook. Macro-level economic drivers also remain positive, and we are confident in maintaining our forward momentum. So the company is reiterating its guidance for the full year 2019 that being

[Operator:]

Our first question comes from the line of Tahira Afzal with KeyBanc. Your line is now open.

[Tahira Afzal:]

Hi, good morning folks.

[Dennis Bertolotti:]

Good morning, Tahira,

[Ed Prajzner:]

Good morning,

[Tahira Afzal:]

Okay, I guess, the first question is we see these push-outs we have for a very long time on and off. What gives you confidence around the ones that had been pushed out that they will come back later on in the year? From my experience, sometimes, the length of time and duration on when some of these turnarounds come back can be much longer.

[Dennis Bertolotti:]

Tahira, it’s Dennis. Are you speaking to push-outs for revenue?

[Tahira Afzal:]

Yes.

[Dennis Bertolotti:]

Yes. I mean, the way we’ve seen it, it wasn’t so much surprise to us. On the first quarter, we’ve seen that in previous years, especially when they are trying to pick back up from a reduction of work due to the oil price, they had busier January and February. So we just didn’t see that in our customers and many others. So we’ve just seen a slower spring for us. March was good. It’s gone into a good April and May, but it wasn’t that projects got canceled or changed so much. They just didn’t really have as much planned for early January, February.

[Tahira Afzal:]

Got it. Is there a way you guys can track that better because it seems the disconnect was less about things getting pushed out than just the ability and the visibility around what’s going to move with certainty.

[Jon Wolk:]

Tahira, it’s Jon. I think really we’re trying to be as responsive as possible to our customer schedules. And as Dennis indicated, we originally guided lower for Q1 than prior year revenues because of our understanding of those schedules. Conversely, as Dennis just indicated, we feel good about Q2 and especially good about the second half of the year, again, with knowledge of those same schedules.

[Tahira Afzal:]

Okay. Great. And then just as a follow-up on the margin side. You guys are very good at giving us sort of an idea on the segment margins and how they will ramp up. Any update over there? Because it seems obviously things are a little more back-end loaded now.

[Dennis Bertolotti:]

I think we see some additional expansion this year, as we saw throughout last year, in the margins across the segments, not maybe quite the improvement you saw last year. But we are driving on the gross margin line, and with the volume recovery, that will trickle down to the OI line.

[Tahira Afzal:]

Okay, great. Thank you.

[Operator:]

Our next question comes from the line of Edward Marshall with Sidoti & Company. Your line is now open.

[Edward Marshall:]

Dennis, Ed, Jon, Sotirios, how are you guys doing this morning.

[Dennis Bertolotti:]

Good, Edward. Thanks.

[Jon Wolk:]

Doing good, thanks.

[Edward Marshall:]

Okay. So I wanted to ask about Onstream. First, correct my math if I’m wrong, but it looks like roughly $6 million of revenue in the quarter from that business. Is that what you kind of said with 4% growth in Services?

[Dennis Bertolotti:]

That’s about right, yes.

[Edward Marshall:]

Okay. So looking at last year’s – looking at the announcement of the release, it was around $27 million. And I just wanted to kind of parse out – that was an annualized run rate in 2017. Just wanted parse out that looks like a $7 million quarterly run rate. Is there a lot of seasonality in this business? I guess, considering their geography, I guess, there would be. Can we talk about maybe that and maybe the confidence that you have? Is this embedded in the growth rates in the revenue that you’re looking for, for the remainder of the year?

[Jon Wolk:]

Yes. Ed, this is Jon. It is quite a seasonal business. Q2 and Q3 tend to be the best seasons for Onstream given weather and accessibility to pipelines, et cetera. We feel very good about their forecast for the year, and it is definitely baked in Q1 will be a lowest quarter for them. They’ll pick up sequentially from here.

[Dennis Bertolotti:]

And typically on that – it’s Dennis – typically on that, as you get more work in the U.S., their seasonality will diminish a little bit. When you’re talking about still a Canadian-specific market, there’s going to be – just based on the weather, there is a little bit more seasonality there. And as you know that’s the growth plan for us is more in the Southern portion of the U.S. So that’s going to be helpful as well for that seasonality impact.

[Edward Marshall:]

Got it. I mean, that’s what got me a little confused because looking at that growth rate, talking about the growth that you’re now starting to see in The United States, and then not seeing the true-up to the growth rates of seven – or the revenue of 2017, it got me a little confused. So if we look at the investment that you’ve made, the wider-diameter systems and the focus on The United States, can you talk about – you mentioned a little bit of the penetration, but can you talk about the penetration that you’re seeing kind of in The United States and maybe some of the growth that you’re seeing, share this year versus share last year, et cetera, if you would like to elaborate?

[Jon Wolk:]

Yes. Thanks, Ed. This is Jon, again. We’re seeing quite a lot of exciting sales cycles in The United States. Canadian business is steady, but The United States is where we’re going to see the bulk of our growth with Onstream in 2019, and we feel very good about the uptake. It’s off of a low base. So almost everything is incremental in the U.S., but feeling very strong about it.

[Edward Marshall:]

Is that a similar margin to the Canadian business? And a follow-up to that. Are you still offering kind of trial runs? Or are these now kind of going to purchase orders and – or however you would quantify them?

[Jon Wolk:]

Well, the margin profile is similar, yes. The pricing profile is similar across North America. But what we’re finding is that we’re certainly getting purchase orders and revenue and paying runs. As you alluded to the wider dimension tools, the 20-inch, the 24-inch tools that Dennis spoke of in the prepared script, those are – tend to be – the initial runs tend to be on a trial basis. The initial results have been extremely favorable, and so purchase orders come pretty quickly on the heels of those initial runs.

[Dennis Bertolotti:]

And the 16-inch is already in field and getting revenue because that was being proved out actually just prior to our acquisition. The 20 and 24 are in the stages of one that’s been out there, proved out a lot more versus the 24 is. Still, like Jon is saying, that one is actually just getting its first runs.

[Edward Marshall:]

And I just wanted to ask one more on this if I could. When I think about trial runs and I think about your margin, is it meaningfully impacting the margin within your Services business, to do these trial runs? I mean, I’m assuming your offering them at almost free to cost. I know there’s purchase orders following it, but that seems to probably be on a lag. Is it material to the margin in that segment?

[Jon Wolk:]

I wouldn’t call it material for the Services segment margins, no. It is a little bit dilutive to Onstream’s results in the quarter that they occur but not to Services as a whole, no.

[Edward Marshall:]

Got it. We talk – looking at the revenue guide for the remainder of the year, if I just take the midpoint and do some simple math, it looks like there is a 13% increase from the first quarter on average for the balance of the year. That puts you at about $200 million almost a quarter. And I know that there is some seasonality in your numbers. But as I think that through, between Onstream, West Penn, the increase in the turnaround business, is there anything else that I’m kind of missing here? Or are you baking in some acquisitions into this target? So I can kind of get a sense. Or is this all organic?

[Jon Wolk:]

Ed, that’s all organic. Again, as Dennis said, we ended March strong, that’s continuing into April. So that’s organic. There is no acquisitions factored into that guidance for the year nor the new contracts we talked about on the prepared remarks. Neither is that factored in at this time.

[Edward Marshall:]

Are those contracts for Services this year? Or does that leak into next year?

[Jon Wolk:]

That was $15 million of annualized, Services. That will be incremental to the back end of this year.

[Dennis Bertolotti:]

By coincidence, there are some onetime ones that make it $15 million additional that we already got for 2019. So the numbers are $15 million both ways, but that’s just coincidence. We had a couple of large, onetime ones, but annualized is $15 million that we have in hand and with what we’re doing and working in the market or looking at there’s potential for more coming in. And so we feel really good about – you’re right about the math. It’s got to be close to $200 million for the next three quarters, but we feel good that we’ve got there.

[Edward Marshall:]

Got it. And the final one from me. I’m looking at the turnaround comments regarding picked up late in the quarter, and that’s what the data – the industry data would have suggested. What’s your impact into April? I think you mentioned that you saw that service – that turnaround continue. Wondering if you could potentially quantify that for me, say, April last year versus April this year on a percentage terms just to give us some confidence as we look at that pretty good ramp through the remainder of the year?

[Dennis Bertolotti:]

Yes. We feel confident that in Q2, three and four, we will beat the previous year’s numbers. Q1 was the only one that we thought we were going to have some problems with because of the falloff of a large customer and all that. I mean, you’re talking single digit, but probably mid-single-digit types of growth throughout the year. I mean, we’re anticipating roughly and to have mid-single digit for the full year even with the setback of what we got for Q1. So some quarters will be little bit harder than that to bring the average up.

[Edward Marshall:]

You refer to EPS or revenue when you say numbers?

[Dennis Bertolotti:]

Revenue, I’m sorry.

[Operator:]

I’m showing no further questions in queue at this time. I’d like to turn the call back to Dennis Bertolotti for closing remarks.

[Dennis Bertolotti:]

All right, folks. We appreciate your interest in MISTRAS, and we look forward to welcoming you and talking to you on our next call. Have a safe and productive day. Thank you.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Everyone, have a great day.