Mistras Group, Inc. Q2 FY2024 earnings call

• Mistras reported strong top- and bottom-line growth for the 3rd consecutive quarter, with adjusted EBITDA up nearly 45% on 8% revenue growth in the second quarter. - The formal implementation of Project Phoenix initiatives is driving improved profitability and operating leverage. - The enhanced commercial function led by Jerry D’Alterio has refined go-to-market approach, pricing strategies, etc., contributing to revenue growth and margin improvement. - Aerospace and Defense continued its strong growth trajectory with a 17.5% revenue increase in Q2, and investment in shop labs is supporting growth. - Data Analytical Solutions revenue was $18.3 million in Q2, with a stronger second half expected, including a significant new PCMS contract and expansion into new geographic regions. - The search for a permanent CEO remains on track, aiming to identify by the end of the third quarter.

In the second quarter, Mistras saw strong revenue growth across segments. Aerospace and Defense had a 17.5% revenue increase, with North America back to pre-pandemic levels and International heading in that direction. Oil & Gas was up 3% on the strength of an anticipated robust spring turnaround cycle. All segments (North America, International, and Products) experienced revenue growth for the first time since Q1 of 2023. Absolute revenue figures for each segment were provided, but specific revenue contribution percentages were not explicitly stated in the transcript.

• Reaffirmed full year 2024 guidance: revenue between $725 million and $750 million, adjusted EBITDA between $84 million and $89 million, and free cash flow generation between $34 million and $38 million. - Oil & Gas turnaround activity in the second half is expected to moderate from the robust spring cycle. - Adjusted EBITDA benefit from Project Phoenix initiatives has been re-categorized, but there is no net impact on the overall outlook for adjusted EBITDA in fiscal 2024.

• Cash from operations and free cash flow performance for the quarter and year-to-date periods have lagged expectations due to an increase in receivables and unbilled receivables. This was primarily due to a lack of prioritization and focus by management along with the timing of invoicing associated with customer projects. The company is intently focused on refocusing to improve these cash flow metrics.

Q: On revenue and guidance, specifically about the second half decline in revenue, A: The fall turnaround season is expected to moderate from the robust spring cycle, as the downstream sector's fall turnaround will be more normal compared to the extremely high first quarter activity. Other sectors are growing, but the Oil & Gas sector's turnaround activity will moderate.

Q: On Oil & Gas midstream being down year-over-year, A: It was due to some smaller accounts, but on-stream is solid and the second half is expected to improve.

Q: On Aerospace and Defense growth, A: The growth is real, driven by helping customers with supply chain challenges via additive manufacturing and shop labs, and it is expected to continue double-digit growth.

Q: On CEO search, A: Confident of identifying the next CEO by the end of the third quarter, and will remain as Chairman.

Q: On gross margin and SG&A revisions, A: The $15 million EBITDA benefit from Project Phoenix is being re-categorized, with savings now expected to be $7 million in cost of revenue reduction and $8 million in SG&A reduction, but there is no net impact on the adjusted EBITDA outlook.

Q: On accounts receivable, A: The increase was due to lack of focus and invoicing timing issues, and the company is refocusing to reduce accounts receivable and unbilled receivables, expecting improvement in Q3 and Q4.

Q: On Data Analytics, A: The second half is expected to be stronger, with a new PCMS contract and digital data collection driving future growth.

Q: On pricing initiatives, A: The commercial function is methodically moving to larger customers, with some revenue growth from pricing already achieved and more upside expected.

Q: On deferred revenue in Data Analytics, A: Some work was pushed out, but growth is expected in the second half as projects are implemented.

Q: On accounts receivable details, A: It was due to documentation and invoicing delays, and the company is refocusing to improve the cycle time for invoicing.