Mistras Group's CEO Hosts Fiscal 2013 Adjusted EBITDA and Revenues Update Conference (Transcript)

Jun.26.13 | About: MISTRAS Group, (MG)

MISTRAS Group, Inc. (NYSE:MG)

Fiscal 2013 Adjusted EBITDA and Revenues Update Conference

June 26, 2013 9:00 am ET

Executives

Sotirios J. Vahaviolos - Founder, Chairman, Chief Executive Officer and President

Francis T. Joyce - Chief Financial officer, Principal Accounting officer, Executive Vice President and Treasurer

Analysts

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

Richard Wesolowski - Sidoti & Company, LLC

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Thomas L. Hayes - Thompson Research Group, LLC

Tristan Richardson - D.A. Davidson & Co., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Mistras Group announces fiscal 2013 adjusted EBITDA and revenues grow conference call. My name is Alex, and I will be your operator today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And now I'd like to turn the call over to Sotirios Vahaviolos, Chairman and CEO. Please go ahead, sir.

Sotirios J. Vahaviolos

Alex, thank you very much, and good morning to all. I'm Sotirios Vahaviolos, the Founder, Chairman and Chief Executive Officer of Mistras Group. Also joining me today is Frank Joyce, our company's Chief Financial Officer. The purpose of this call is to discuss the company's preliminary adjusted EBITDA results for the fiscal year completed on May 31, 2013. We're not going to go into a lot of details just yet. We will do that during our normal year-end fourth quarter call, which will be around August 8. We're having this call because we came up short on our guidance for adjusted EBITDA and wanted to alert you about this and provide information about the reasons for the shortfall.

As stated in our release, we expect our fiscal 2013 adjusted EBITDA to be around $68 million. While this is an increase over fiscal 2012 adjusted EBITDA of $65 million, it is short of the range we communicated in April, that of $75 million to $80 million.

Let me now turn the call over to Frank, who will begin with a brief disclaimer about the information we're sharing today and provide some details regarding our fiscal 2013 adjusted EBITDA. I will then follow Frank with a few remarks and observations. We will then open the line for questions.

With that, Frank, let me turn it over to you.

Francis T. Joyce

Thank you, Sotirios. First, I want to remind everybody 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 reports on Form 10-K and on Form 10-Q. Also, the discussions during this conference call will include certain financial measures that were not prepared in accordance with U.S. generally accepted accounting principles. An explanation about these non-GAAP financial measures can be found in Mistras' report on Form 10-K and 10-Q. These reports are available on our website at www.mistrasgroup.com in the Investors section and on the SEC website.

Let me start off by addressing the primary reasons we fell short of our expectations for adjusted EBITDA. As highlighted in yesterday's release, the principal factors contributing to the shortfall in adjusted EBITDA were lower-than-anticipated gross margins of approximately 250 basis points, a nearly 7% organic decline in international revenues and higher-than-anticipated costs incurred in the International segment related to the transition of some of our recent acquisitions.

The gross margin decline occurred primarily in the Services and International segments where gross margins dropped by approximately 250 basis points and 300 basis points, respectively. In the Services, the margin decline was pretty much across the board, affecting most service lines of business. The decline in International segment was primarily from Europe and Brazil where economic conditions remain very challenging. International gross margins were further impacted by higher-than-anticipated transition costs of approximately $0.6 million incurred as a result of our recent acquisitions. We believe these costs to be nonrecurring.

Also during the fourth quarter, the company experienced a nearly 7% organic decline in International revenues, which contributed to the EBITDA shortfall. We will provide more detail on Mistras' fiscal 2013 year end and fourth quarter results at the time of our fourth quarter earnings release, which will be on or about August 8. I would like to remind everyone that although we have completed the fiscal year, the results we are announcing today are preliminary, and while we don't expect there will be any material changes, the final results will be announced on August 8.

And I would now like to turn it back to Sotirios.

Sotirios J. Vahaviolos

Thanks, Frank. Despite our adjusted EBITDA shortfall, we still had a decent year. We expect our final fiscal 2013 revenues to be approximately $529 million, an increase of 21% over fiscal 2012 revenues. We anticipate that our adjusted EBITDA margin for fiscal 2013 will be approximately 13%. However, we expect it to do better. As Frank mentioned, an overall decline in gross margin was the primary reason for adjusted EBITDA being lower than forecasted. We did anticipate some decline in the gross margin in the fourth quarter. However, for the reasons Frank stated, the decrease was more than we had expected. The economic environment in both Europe and Brazil has remained more challenging than we anticipated at the beginning of the fourth quarter. As a result, some of the new project work has been delayed, in some cases, indefinitely. It's important to note that in our International segment declines in organic revenues tend to produce gross margins, as direct labor staffing levels are difficult to reduce in the short term. During the year and continuing to the fourth quarter, we have made numerous adjustments to starting levels throughout our International segment. We will continue to make adjustments in International as business conditions dictate but with a focus on strengthening our overall competitive position during this difficult economic environment.

In addition, the traditional NDT services revenues, which is lower-margin business, are growing faster in these markets and becoming a larger portion of the business than the higher-margin advanced services and product sales, thus, contributing to the margin decline. Some of the fourth quarter organic revenue decline was also due to cash from the delays in higher-margin product sales. While Services segment, the gross margin decline was the result of several factors, as Frank noted. None of which by itself was significant but cumulatively, resulted in a larger decline than anticipated. Some of these factors were higher-than-normal pass-through revenue with little or no margin, lower advanced services margins due to market conditions and unfavorable service mix, including less advanced services in our evergreen contracts.

The Services segment launched several initiatives, which are focused on increasing gross margin. For example, in some instances, we have approached larger customers to renegotiate key elements of our contract and billing, allowing us to earn more for existing business. We're also targeting key industries with higher gross margin, selling them products and services and seek increased penetration. We have made some changes to our organizational structure that should enable us to take more advantage of synergies and become more efficient and to provide more oversight and accountability. At our August call, we will provide more details about these initiatives. For this call, we primarily want to address the adjusted EBITDA shortfall.

We're looking forward to fiscal 2014 and believe we will continue to have excellent business opportunities on new contracts, fulfilling some of the existing product contracts that were delayed online system installations and continue to expand our services offerings in the oil and gas industry for pent-up turnaround demand, as well as in the chemical, power generation and aerospace industries.

Now I would like to briefly discuss our expectations for fiscal 2014. Our initial estimates for fiscal 2014 are for revenues to be in the range of $570 million to $600 million and adjusted EBITDA to be in the range of $74 million to $80 million. Again, we will address this further during our August call.

With that, Alex, I would like to open up the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Tahira Afzal from KeyBanc.

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

Sotirios, Brazil clearly is a market that has a very good future. As you look at Europe and you know the headwinds look very pronounced, can you talk about whether at some point is these challenges, success you might actually just look at downsizing some of your European markets and maybe even potentially exiting Europe as a growth strategy?

Sotirios J. Vahaviolos

Well, Tahira, basically, we look at Europe today is we look -- as we look back in 2009 in America, okay? We see basically all of these risks that we're taking, but at the same time, we see opportunities to return, and we assess our outstanding business model. And that's what we're going to try to do because remember, once again, we're in the service sector, and we're really on run and maintain business rather than base it on new projects. New projects, as you know, they have been canceled all over Europe, but they still have to maintain their refineries, their fossil fuel plants and in Europe, of course, in the aerospace because we're doing a lot of work in the aerospace industry to really do more and more because aerospace continues to be brisk in Europe.

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

Got it, Sotirios. And I just got one other question, and then I'll get back in the queue. As you look at North American market and some of the deferrals you're seeing, at a recent trade show, I've got an impression that these deferrals could be sort of 6 months or 18 months at best. When you've talked to your customers, have you gotten a sense of when some of these deferred activity will come back?

Sotirios J. Vahaviolos

Yes. Let me just basically say so that -- for the call here that our U.S.A. services were really, for the whole year, were up by -- the growth was 9%, and they did 6% organic growth. Now one of the promise that we have and we announced before is that our customers basically were planning to do more turnaround in the spring. Then, it became the fall, and now basically, we hear that bigger turnaround, we'll be having on the beginning of the next year. So it's a little bit very difficult to predict, if all of these things are occurring , and that's really the problem. But at the same time, as I said, I wanted to really to reiterate again that we did more than 6% organic growth in the Services in America -- in the North America I should say. I'm sorry.

Operator

Our next question comes from Rich Wesolowski from Sidoti & Company.

Richard Wesolowski - Sidoti & Company, LLC

It sounds as though the decline in the U.S. Service margin is driven by direct margin rather than utilization. Do I understand correctly that the advanced services are becoming more highly competed within that mix?

Sotirios J. Vahaviolos

Well, first of all, you're 100%. Basically, the advanced services went down by 100 basis points if you look year-over-year, okay. And that really were attributed in competitive reasons, but at the same time, we attribute in the shorter turnarounds.

Richard Wesolowski - Sidoti & Company, LLC

Is the problem in the advanced services in the U.S. centered in oil and gas or in other markets as well?

Sotirios J. Vahaviolos

Well, the oil markets for us is very, very attractive. These -- basically on the oil and gas.

Francis T. Joyce

I would add some clarity to that. My view is that the pressure on advanced services tends to come with larger contracts, and our larger contracts are in oil and gas.

Sotirios J. Vahaviolos

Good point.

Francis T. Joyce

I don't know that the competition, in terms of services, is any stronger, but there's always continued pressure on pricing and we've sought -- we've seen it pretty much across the board in the services in the U.S.

Richard Wesolowski - Sidoti & Company, LLC

It just seems odd to me because Mistras offers advanced services that other companies don't and is one of the larger companies. And not every competitor can go into the larger contracts, so it would seem the pricing pressure exists in the very type of contract that you would have expected not to.

Sotirios J. Vahaviolos

And as I said, Rich, basically, I attribute that -- the turnarounds become shorter. Shorter turnarounds are also affecting directly the advanced services because remember, during the turnaround, you are finding a lot of mistakes and you find a lot of problems. How do you really inspect them better is only with advanced technologies. But if you shorten the turnaround, they are not going to happen. And they are going to only happen very -- in selected areas, and that's really what has happened.

Richard Wesolowski - Sidoti & Company, LLC

Right. So does the answer to this problem lie with time and the market improving? Or is there something the company can do to improve the position in the near term?

Sotirios J. Vahaviolos

Well, let me just make a comment. Actually, it would be general for everybody, okay? We looked at this 2013 as a year similar to 2009. If you remember, 2009 was a very terrible year, okay? But that also gave us the opportunity to retool and reassess our outstanding business model while avoiding panic and short-term solutions. We believe that our model can handle the 2013 disappointment. And as I told 90 manager executives in our last week's strategy conference in Princeton, New Jersey, I see 2013 as a transition year to take us to a better future and reignite our profitability, organic growth and acquisition engine. And that's the way I look at that. I will not go panic on that. I think there's -- it's a transition year, and that's what I'm going to say.

Operator

Our next question comes from the line of Andrew Wittmann from Robert Baird Company.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

A couple of questions here. Wanted to dig in a little bit on -- I guess, just kind of backing in some numbers here. I was looking at if your Services business was up 5% or 6%, International was down 5%, I think the math suggests that the products business, obviously, tough comp there, but Frank, can give us a view of how the product segment looked like? Was it -- how far down was that? And what were the margin levels in that business? Were those in line with your expectations? Or maybe were those a little bit softer?

Francis T. Joyce

Sure. Margin levels were a tick higher than we had anticipated. And in terms of organic growth, organic growth was down year-over-year significantly. That was not the reason why we had a miss in the quarter, though, however. As we, I think, signaled in the last call, we had a tough comp in the third and fourth quarter. In the fourth quarter -- the tough comp from both quarters was due to a military order that we shipped last year. And this year, it is about $3.6 million of a tough comp versus the prior year. So organic growth in this quarter for products was down substantially. So if you look at overall organic growth in the quarter, for the total company, it was down almost 2%. Services continued to be steady with about a 6% organic growth rate in the quarter and as Sotirios mentioned, about 6% for the year. We would have liked that to be higher but steady nonetheless. And in International, I think, from an organic growth point of view was the big surprise factor in the quarter and part of the reason why we missed the quarter. And that was down by about 7%.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

And the margins last year were about 41% for the products segment. Is that -- were they flat to that? I just don't -- I don't know your expectations were for the quarter.

Francis T. Joyce

We -- actually, they were up a bit. They came in somewhere around 51% in this quarter. So they were up a tick, yes.

Sotirios J. Vahaviolos

Yes. And Rich [ph], also, keep in mind that in the products, as I mentioned in my recent -- in my statement here is that we -- there were some delays on products, and really these delays were based on the customer, not on us. We had the products ready, but the customer was not ready to receive them for different reasons because they really -- okay, so that also was a substantial number that we expect in the next 2 to 3 quarters, it will happen.

Francis T. Joyce

The products margins last quarter were 41% or 42%, in that range, so -- and when we expected them to be up. So products was kind of in line for the quarter.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Got it. So -- and the visibility on some of the stuff that you built but didn't ship, it might not be first quarter, but it sounds like it's going to go in some time in the near future.

Sotirios J. Vahaviolos

No question about it, and we have the orders on hand.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Got it. And then just on the SG&A level, Frank, just can you give us a sense on how that compared on a year-over-year basis to? Was that significantly higher?

Francis T. Joyce

It's ticking a little higher. I've got to say, we don't have all the pieces tied down on that. I don't have the normal detail that I would on a call. But it's ticking a little bit higher, but the story with this quarter, without a doubt, is gross margins and lower organic sales in International. That's where the variance is.

Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division

Okay. So then, I guess, kind of a bigger picture question, as you've gone throughout the year, we've been hearing about kind of changes in, I don't know, restructuring or reductions that you've taken kind of some throughout the year, maybe a little bit more planned. Can you give us an idea -- so I think you just flowed that through if I'm not mistaken. I want to confirm that, that -- that those charges did go through the gross margin, not on the SG&A line but also get some idea about the magnitude of how those affected fiscal '13, so we have a better kind of basis to think about what a clean '14 to build off of would be.

Sotirios J. Vahaviolos

Okay, Frank.

Francis T. Joyce

Right. Just starting with the quarter, I mentioned about a $0.6 million in transition costs. They all hit gross margin. So they were all International. So we were down about 3% in margins for International, and about half of that is that onetime charge. We've captured a lot of cost in acquisition-related expenses, which are pulled out for adjusted EBITDA. But during the year, it's part of the normal course of business. We have had headcount reductions, and some of which came into the quarter. A good part has happened prior to the quarter, but some definitely drooped in.

Operator

Our next question comes from the lineup Tom Hayes from Thompson Research Group.

Thomas L. Hayes - Thompson Research Group, LLC

I guess a couple of questions, Frank. First on the transition costs you guys mentioned in Europe, could you maybe provide a little bit detail on there and why you think -- I think you implied that you expect most of the costs have been captured this quarter and not flowing over the next quarter.

Francis T. Joyce

Yes, I mean, I would characterize them as sort of conformity costs, conforming things like depreciation, vacation policy to our standards, onetime things. But since most of the labor is in cost of sales, the $600 was in cost of sales, so I don't expect that type of a cost, that onetime thing to reoccur.

Thomas L. Hayes - Thompson Research Group, LLC

Okay. And then maybe a little bit more on kind of the macro environment. It sounds like, obviously, there's delays globally, but maybe talking about maybe cancellation of projects, has that changed? And if so, kind of what's the environment kind of on a geographic basis where you're maybe seeing project cancellations either increasing or decreasing? Any color would be helpful.

Sotirios J. Vahaviolos

Actually, Tom, it's really delays. We never -- we didn't have any cancellation so far, strictly delays. And delays because, basically, they're building a huge polypropylene factory that we really do a lot of installations of acoustic emission technology. This way, we can avoid the accidents that you heard in Louisiana, okay? So basically, we try to -- the delays is not caused by us, caused by the people who are building the factory.

Operator

Our next question comes from the line of Tristan Richardson from D.A. Davidson.

Tristan Richardson - D.A. Davidson & Co., Research Division

Could you talk a little bit about, just within the segments, sort of your expectations as you pull together the initial outlook for 2014? Sort of where do you see Services going, as well as International and products?

Francis T. Joyce

I'll start off by just throwing a few things out there. I mean, Services is always a lumpy business, but it ended this year with pretty consistent organic growth both in the quarter and full year. So I would expect that to continue next year. Products had a year of tough comps based on rather significant military order last year. That's pretty much behind us, so I don't expect to see the organic growth challenges there going forward. Then, I've got to say, International is really the wildcard. I mean, we're very happy with, for instance, our operations in Brazil, our acquisition in Germany and the other investments we've made there. But it's very hard to say that in the next quarter or so that, that's going to come flying back. So that probably is the most difficult of them all to talk about.

Tristan Richardson - D.A. Davidson & Co., Research Division

And then the margins on Services, sort of next year, do you see opportunities for growth there? Or just given the difficulty with pushing through the advanced services, do you see that continuing into 2014?

Francis T. Joyce

We're not budgeting or guiding for any kind of huge margin increases. So I mean, roughly at the midpoint next year, we're probably talking up 50 to 60 basis points for the total company. So I think at this point in time, I mean, there's a number of developments in the North American market that haven't played out that could impact margins. We think if our advanced services are second to none, but we're not guiding in that direction.

Operator

[Operator Instructions] Our next question comes from the line of Rich Wesolowski from Sidoti & Company.

Richard Wesolowski - Sidoti & Company, LLC

Regarding Europe, you've known for several years even while you were making the acquisitions that the European economy is weak and I understand that you're following your customers specifically, which makes sense. But I'm wondering regarding the underutilization if there's something changing in that market within the last month or 2 that had surprised you.

Sotirios J. Vahaviolos

Actually, Rich, it has not really surprised us. As we said from the beginning, when we acquired those companies, it will take us 9 to 12 months. I think, really, we're in line in really fulfilling that goal, okay? So we're not seeing really worse. We're seeing better.

Richard Wesolowski - Sidoti & Company, LLC

Okay. So the European market wasn't a big factor in you changing your guidance?

Sotirios J. Vahaviolos

It was half of the factor as Frank did mention. On the fourth quarter, really half of the loss right from that. Right, Frank?

Francis T. Joyce

Yes. If you were looking at a $7 million drop in EBITDA from the lower end of the range, just about half of that came from International. And that is, to us, a bit surprising because probably about 25% of our revenues in the quarter are International. So it was an outsized contribution shortfall. And we like the businesses over there, but the projects are slow. Project work is slow to come, and the product sales and product orders are slow to come. There's a lot of facilities over there that need a lot of work from our many, many conversations and visits over there, but the environment is one that still is hard to diagnose.

Richard Wesolowski - Sidoti & Company, LLC

And that's really the harder question. Is that difficult environment merely a factor of a slow European? Or is there something customer specific?

Sotirios J. Vahaviolos

I think it will be basically on the full economy because for once, for reasons, for the first time, we have not really gotten any capital project. That's one we -- as a matter of fact, since we mentioned that, we already knew, for instance, that GMA, when they acquired the company in Germany, they had a very large capital project in Holland when we expected really to get other, basically, as we always do in America, all the capital projects and that everything died, okay? Everything died. A lot of construction had died, and it really is in a standstill mode. But again, as I point out, remember, our whole model is based on the services model. It's a run and maintain business. No matter what, I think that will continue to exist. That will continue because people still have factories. Still, they have still refineries. They still have fossil fuel plant. And as I mentioned in my previous call, for the first time in Europe now, we're allowed and we have the people to do a nuclear work in France. We have never been able to do that before in Europe, and we really were selected one of the companies by EDF, Electricite de France, to do work. So all of these things are really changing the picture, but it hasn't changed yet the profitability picture as we wanted to do, and we hope in the next 2 to 3 quarters to finalize that.

Richard Wesolowski - Sidoti & Company, LLC

Right. And then just broadly on that same topic, we talked a lot about oil and gas. Easy to lose sight of the other half of the business.

Sotirios J. Vahaviolos

Exactly.

Richard Wesolowski - Sidoti & Company, LLC

But I wonder if you highlight what management is doing in the U.S. and elsewhere to boost the revenue from what is really the best side of the business, the advanced stuff and power and aerospace and markets outside of energy.

Sotirios J. Vahaviolos

Okay, we're stealing some of the thunder for the August, but let me just mention only one. We're really have created a power generation group that we never had before, and I would like prefer not to discuss anything more, but it is a powerful group that we're going to go after the market. And then the next thing what is happening because we're learning more and more from our GMA Group in Europe that we acquired, we're going to do more and more in the aerospace industry.

Operator

We have no further questions in the queue at this time, so I'd now like to hand back to Sotirios for closing remarks.

Sotirios J. Vahaviolos

Okay. That ends our special call today. I wanted to thank all participants, and have a safe day, as we say, in our business.

Operator

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!