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Text: 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; Dr. Sotirios Vahaviolos Founder and Executive Chairman; and Jon Wolk Senior Executive Vice President and Chief Operating Officer.
The company's actual results could differ materially from those projected.
The discussion in this conference call will also include certain financial measures that were not prepared in accordance with U.S. GAAP.
I will now turn the conference over to Dennis Bertolotti.
During today's call we will provide an update on Mistras' business performance.
Our financial results for the third quarter and first nine months of 2019 as well as discuss our lower outlook for the remainder of the year.
Third quarter results continue to reflect the progress being achieved toward our long-term strategic initiatives.
Revenues were up margins expanded and earnings increased on a year-over-year basis.
We also generated strong cash flow a hallmark of Mistras.
Let me note some key highlights for the quarter.
Gross margin increased across all 3 segments.
SG&A decreased by 100 basis points as a percentage of revenue generated strong cash from operations of $19.4 million and free cash flow of $13.4 million.
On a per share basis free cash flow was $0.46 for the third quarter.
Additional highlights for the first nine months of the year.
Consolidated gross margin increased 160 basis points.
Cash from operations of $40.5 million with free cash flow of $22.5 million.
Debt paydown of $23.3 million exclusive of the $4.8 million paid for New Century Software our latest acquisition.
Revenue and operating earnings were ahead of fiscal 2018 on a year-to-date basis through the first nine months indicators of a robust business.
However our strong momentum developed over the past 2 quarters encountered some headwinds coming into the fourth quarter of 2019.
In particular a note of caution unexpectedly rose among our oil and gas customers attributable primarily to increased macroeconomic uncertainty.
Although our long-term outlook remains intact.
These factors are clearly influencing current activity in the oil and gas market with pushouts in demand.
Most of our oil and gas exposure is predominantly in the up and downstream sectors.
The downstream being driven by capital spend including turnarounds and modestly in the run and maintain opex spend.
Consequently we feel well positioned with our strategy focused on growing our run and maintain revenue a sector of the market that we dominate.
I feel very good about where we are in our look for the long term of this unexpected pause and the oil gas in markets has created some immediate challenges that will affect our performance through the end of 2019 and may drag into the first quarter of next year.
Consequently, you can understand why our full year with is not lower than originally anticipated.
And why we are accordingly lowering our guidance for 2019.
We view this as a timing issue.
As we expect most of the work will return to the market over the next couple quarters.
And we'll walk you through a detailed update in a few minutes.
But looking out into 2020 and beyond, our underlying oil and gas business remains strong.
And our plans and strategies to grow profitably over a long term are unaffected.
Based on what we are seeing and hearing underground we believe we are gaining market share and except for a few locations we have retained a vast majority of the customers served by our close to 90 labs across the U.S. Canada and Europe.
Each of these locations remain staffed with our experienced professionals so that we are well positioned to serve customers and capitalize on current opportunities as well as to continue to grow our market share in 2020 and beyond.
Even by conservative estimates we serve a $14 billion industry within the NDT spend of the business not counting the greater spend generated in the data and mechanical sectors in which we participate.
These markets are growing at healthy rates and support our growth aspirations.
Our product line expansions into adjacent markets such as mechanical and pipeline inspection that increase that opportunity.
And are quickly evolving MISTRAS Digital platform is providing us even greater opportunity.
Though quite large it is a highly fragmented industry.
And many of our smaller competitors simply can't match the depth of our resources or the breadth of our services and valuable experience.
This builds strong relationships with our customers because we save them unnecessary spend.
We are also utilizing our resources to create new products and services, and to make strategic acquisitions, all of which help diversify or in markets provide additional stability to our results in further distance ourselves from the competition.
Before turning the call over to Ed let me offer a few comments on some of the key developments in the quarter.
Performance at Onstream continues to reflect a strong U.S. growth but a relatively weak Canadian market.
The recent commercialization of their 20-inch tool and the impending introduction of their larger 24-inch tool slowly increased their contribution.
And with the geospatial technology from the New Century acquisition providing an excellent complement to Onstream's Stream data view analytics we believe there are strong synergies that will open up new possibilities in the future as well as benefit our complementary PCMS software.
We see this acquisition as a strong strategic fit in one of our stated pillars for growth that being the midstream sector of the energy market.
We view this as a growth market driven by increased regulatory oversight and rising customer demand due to more vigilant mechanical integrity programs all needs Mistras is uniquely qualified to deliver.
West Penn has good momentum and should outperform the fourth quarter as of last year.
We expect them to continue to ramp up utilization at a second facility.
In aerospace we also continue to benefit from the strength of our French operations.
Overall aerospace remains a key corporate growth pillar where the outlook for the industry over the next few years continues to be strong.
Data management is also one of our strategic objectives and MISTRAS Digital is a discrete way to integrate our vast data capabilities.
Onstream Streamview PCMS software our ruggedized MISTRAS Digital field tablets sensing and monitoring capabilities and now the New Century Software are just some of the various ways that are weaving -- that we are weaving together our data management capabilities to establish a leading position as the asset-protection market enters the age of the industrial Internet of Things.
As the market gets more sophisticated we want to be the leader in the market for more data and predictive analytics which we think are the industry big growth drivers.
An exciting endorsement of our strategy has been the rapid adoption of our MISTRAS Digital tablet rollout that we've been piloting at a growing number of refineries.
These customers value this technology so much so that they are asking us to open up the app to let other on-site vendors piggyback on the software hence we are reviewing the monetization of this application to other third parties.
We expect to continue to roll out our MISTRAS Digital tablet to other customers in an accelerating rate to more of our locations throughout the fourth quarter and especially in 2020.
This quarter we acquired New Century Software which forms another element of MISTRAS Digital.
More importantly this acquisition is another example of forward thinking about the direction of the midstream sector and the opportunity to leverage technology to grow.
New Century is a leading provider of pipeline integrity management software and services to energy transportation companies.
New Century provides software solutions data management expertise and extensive pipeline experience to enable a global network of customers in the oil and gas industry to manage pipeline integrity meet regulatory compliance requirements and maximize safety and reliability.
This acquisition aligns with MISTRAS' mission of delivering value-added integrated smart data solutions to its customers.
Looking at results for the third quarter consolidated revenues were up 5.5% to $192 million.
Organic growth was 2.1% with acquisitions contributing 4.4% offset by a 1% decline due to unfavorable currency translation.
Consolidated gross profit for the quarter was $57.8 million a 10% increase over the year ago quarter.
Consolidated gross profit margins improved significantly to 30.1% for the third quarter compared with 28.7% in the prior year quarter an increase of 140 basis points.
The ongoing expansion of our gross profit margin is indicative of the success of our underlying strategy focusing on more profitable opportunities in our core operations shedding less profitable businesses and making strategic acquisitions that help to improve margins.
We believe that our year-to-date gross margin in 2019 can be maintained into 2020 even with short-term volatility in revenue volumes.
Operating income improved for the third quarter to $10.8 million compared with $3 million in the comparable period last year.
On a non-GAAP basis adjusted operating income was $11.2 million compared to $10.1 million last year an increase of 10%.
Net income for the third quarter was $3.1 million compared with a net loss of $1 million for the same period last year.
Adjusted EBITDA was up 7% to $22.4 million for the third quarter of 2019.
As a percentage of revenue adjusted EBITDA improved to 11.6% for the third quarter compared to 11.4% in the same period last year.
The improvement in adjusted EBITDA is reflective of the success being achieved by focusing on higher-value operations and better leveraging our global infrastructure.
As Dennis mentioned earlier the company is a strong cash generator.
We stated last quarter that we had anticipated a continued strengthening of our cash flow generation coming into the back half of the year and we achieved that with third quarter cash from operations of $19.4 million and free cash flow of $13.4 million.
On a per share basis free cash flow was $0.46 for the third quarter this was consistently strong on a sequential basis over the second quarter and a significant improvement over the prior period last year.
Strong cash flow this year has benefited in part from our commitment to improved working capital management.
Now looking more closely at our segments.
Services revenue increased by almost 8% in the third quarter.
Organic revenue grew a little over 2%.
And acquisitions primarily Onstream incrementally added nearly 6% to revenue growth.
The Services segment generated a gross profit margin of 28.4% for the quarter an improvement of 90 basis points compared to the year ago period of 27.5%.
Margin expansion is a key corporate strategy and we are pleased to see our margins continue to expand in our largest segment driven by pruning low-margin operations and growing higher margin operations including acquisitions such as West Penn and Onstream.
We have a strong operating leverage in this segment with significant contribution margins on incremental revenue.
International revenues in the third quarter were up 5.4% organically offset by 4.4% unfavorable currency rates for a 1% nominal increase.
The growth organically is noteworthy in that it was achieved despite the previously disclosed run-off of the low-margin German staff leasing business.
For the third quarter International reported a 31.6% gross profit margin compared to 29.7% a year ago which represents a 190 basis point improvement.
We attribute that improvement largely to higher labor utilization which is a result of increased visibility and visibility that was a key focus in this past year.
Products and Systems revenue decreased slightly in the third quarter to $5.5 million due to the sale of a subsidiary that was divested in 2018.
Gross profit margin increased for this segment to 49.6% compared with 45.6% in the prior year due to a favorable product sales mix.
We had another prudent quarter in maintaining strong cost control with a below inflation increase of 1% in SG&A year-over-year.
As a percentage of revenue SG&A was down 22% from 23% in the same period last year a decrease of 1 full percentage point once again reflecting our focus on improving operating leverage.
Considering expenses this year contain those assumed in the inclusion of the Onstream acquisition the ongoing investment we are making in sales and marketing as well as with developing and launching MISTRAS Digital we believe our efforts are beginning to reflect the many efficiency initiatives under way at MISTRAS.
Spending in the quarter was consistent with our expectation that the first half 2019 levels represented what we felt would be the run rate for the full year.
We continually review and rationalize our companywide overheads for savings to make sure we maintain a flexible and efficient footprint to support and invest in our growing business.
The company's net debt defined as total debt less cash and cash equivalents was $252.9 million as of September 30 2019 compared to $265.1 million at December 31 2018.
The company has paid down over $23 million of total debt during the first nine months of this year.
The company additionally paid a total of $7.7 million for acquisitions and income taxes related to the net settlement of share-based awards during the nine months ended September 30 2019.
As defined in our credit agreement our leverage ratio was approximately 3.6x as of September 30 2019.
Our goal is to reduce this ratio to below 3x by no later than the end of fiscal 2020.
Given our cash flow annual interest expense and net debt we believe our balance sheet is strong and will support the funding of both our organic growth objectives as well as any selective tuck-in acquisitions such as New Century Software.
Our effective tax rate was approximately 61% for the third quarter of 2019 including a $1.4 million or $0.05 per share write-off of certain deferred tax assets.
As Dennis mentioned earlier we are seeing a weak oil and gas market coming into the fourth quarter and we experienced an overall fall season that ended much sooner than anticipated.
In particular the oil and gas turnaround sector slowed attributed to factors such as supply buildups early in the year as well as refinery shifting resources to prepare for IMO 2020.
The note of caution that unexpectedly arose among oil and gas customers toward the middle of September 2019 into October 2019 is attributable primarily to increased macroeconomic uncertainty.
It is the same note of caution that is being heard in various sectors stemming from many factors including trade tensions negative European interest rates and the slowdown of domestic GDP growth.
Although the long-term outlook remains intact these factors are clearly influencing current activity in the oil and gas market resulting pushouts of demand.
Consequently the company's full year outlook is now lower than originally anticipated for the fourth quarter and accordingly the company is lowering its guidance for full year 2019 as follows: total revenues are expected to be between $740 million to $750 million; adjusted EBITDA is expected to be between $70 million to $75 million; capital expenditures are expected to be under $25 million; and free cash flow is expected to be between $28 million to $32 million.
We are still developing our full year 2020 budget but preliminarily we anticipate modest single-digit top line growth while maintaining year-to-date 2019 gross profit operating margins and cash flow levels.
There are also a number of additional growth opportunities all of which will be incremental to our current expectations.
We will provide our outlook for full year 2020 on our next scheduled call.
We are confident in our sustainable business model which has proven to be nimble in responding to sudden and severe cyclical changes in the oil and gas sector.
We remain firmly committed to diversifying our end markets over the long term while at the same time embracing our current end markets with an evolving differentiated solution.
As we implement our long-term strategy we recognize there may be some bumps along the road.
However these distractions are not a hindrance to achieving our ultimate objective of becoming the partner of choice in the NDT market and its adjacencies.
We continue to steadily transform Mistras with our basic principles always at the forefront that being delivering value meeting our promises innovating to drive productivity for our customers and developing industry-leading productivity tools.
I am confident and continue to see signs that our customers' operations see value in the span with us as a true ROI.
The enthusiastic reception of our MISTRAS Digital tablet initiative further illustrates the partnerships we are forming with our clients.
I also believe that we do this better than our competition and this will be evidenced by our relatively stronger performance than our market as we exit 2019 and head into 2020.
We are keenly focused on differentiating ourselves in the market particularly through our expanding service lines which solve for customers' needs of reduced overall labor to accomplish a given project involving digital solutions as I mentioned earlier.
We also remain firmly committed to maintaining our position at the forefront of leading the development of advanced inspection tools utilizing proprietary technology.
We add value and this enables us to price at market and generate solid operating profit with predictable attractive cash flow.
In the process we serve our customers with an exceptional return on their investment by delivering top-quality results with superior economic value.
I am confident that we are on the right path executing on our strategy and creating value over the short mid and long-term for Mistras shareholders.
Brian please open up the phone line.

user
sees fy 2019 revenue $740 million to $750 million.
compname says fy 2019 adjusted ebitda is expected to be between $70 million and $75 million.

assistant