Thank you for joining Mistras Group's Conference Call for its Fourth Quarter and Fiscal Year ended December 31, 2022. My name is Michelle, and I will be your event manager today. Participating on the call from Mistras Group will be Dennis Bertolotti, the company's President and Chief Executive Officer; and Ed Prajzner, Executive Vice President and Chief Financial Officer. I wanted to remind everyone that, remarks made during this conference call, will include forward-looking statements. The company's actual results could differ materially from those projected. Some of those factors that can cause actual results to differ are discussed in the company's most recent annual report on Form 10-K, and other reports filed, with the SEC. The discussion on this conference call will also include certain financial measures that were not prepared in accordance with US GAAP. Reconciliation of these non-US GAAP financial measures to the most directly compared US GAAP financial measures can be found in the tables contained in yesterday's press release, and the company's related current report on Form 8-K. The reports are available at the company's website and in the Investors section of the SEC's website. I will now turn the conference over to Dennis Bertolotti.

Okay. Thank you, Michelle. Good morning, everyone. Thank you for joining us. As a result of the solid fourth quarter, we met our most recent top line and exceeded our bottom line guidance for the year. We continue to organically grow revenue despite the adverse effect of foreign currency exchange, while significantly improving profitability. Up, mid and downstream revenue were all up in 2022, driven by the continued improvement at our customers and strong demand for our services. Aerospace and defense revenue was also up, led by strength in commercial aerospace, offset by project delays in defense revenue during the fourth quarter. Gross margin improved to over 30% for the second consecutive quarter, in part due to pricing actions taken earlier in the year, helping to offset the wage inflation that we have been absorbing in addition [ph] to lower employee benefit expenses. With these customer pricing actions now in place, we expect some benefit to both reoccurring revenue and gross margin for 2023. In the fourth quarter of 2022, we were able to leverage our gross profit margin expansion into a 152% increase in operating income, through continued cost discipline with selling, general and administrative expenses down from the year ago quarter despite the impact of inflationary costs. Our financial strength was also significantly improved over the prior year, with net debt reduced to $170.8 million from $178.5 million at the end of last year. Over the past four years, gross debt has decreased by almost $100 million and our leverage ratio is at the lowest level it has been since immediately prior to the acquisition of Onstream in December of 2018. Additionally, our bank refinancing completed in August of 2022, added incremental capacity to our total available credit, while also providing more favorable credit terms and further improving…

Thank you, Dennis, and good morning, everyone. It was another strong quarter for Mistras, in which we met or exceeded our guidance expectations. Consolidated revenue for the quarter was $168.2 million, meeting the midpoint of our most recent outlook range of approximately 0.8% compared to the prior year, excluding the impact of unfavorable foreign exchange of $4.4 million in the fourth quarter, attributable to primarily the weaker euro to US dollar conversion. For the full year, revenue was $687.4 million, up 1.5% on a GAAP basis, but up approximately 3.7% when adjusting for $15.2 million of unfavorable foreign currency exchange impacts for the full year 2022, again, primarily due to the weaker euro to US dollar conversion. More importantly, in the fourth quarter, the profitability of our two primary segments, Services and International, both improved from a year ago. Gross margin increased 200 basis points in the Services segment and expanded 50 basis points in the International segment from the year ago quarter. This drove a 3% increase in consolidated gross profit dollars and a 130 basis point expansion in gross margin. From an overall industry perspective, our oil and gas business was strong, up 4% as reported for the quarter, primarily on the continued strength of both upstream and downstream markets. Upstream continues to benefit from healthy drilling activity, particularly in the offshore Gulf and onshore Alaska markets, while downstream was also up, as the refinery market was particularly strong in the fourth quarter. Although Onstream continues to contribute strong growth, midstream was down in the quarter. However, midstream was up for the year, as were downstream and upstream. Our aerospace and defense business is also doing very well, up nearly 18% for the full year. We saw steady growth in both commercial aerospace and private space throughout 2022,…

Hey. Thanks, Ed. Let me quickly wrap-up with a few final thoughts. After several years of severe headwinds, we believe the hard work we have done to strengthen the business has enabled us to reach an inflection point as markets normalize to perhaps a new normal. In addition, in combination with the ongoing operational review via Project Phoenix, we believe we can lever our operations to increase margin, which will improve overall profitability and growth. As part of our 2023 plan, I am taking over the operational oversight previously held by our Chief Operating Officer. I am excited to return to a more hands-on oversight role, in day-to-day operations of our business. As CEO, I understand the importance of staying connected to our team and ensuring our operations, run smoothly for our customers. This additional scope to my role could be an extended interim period or could potentially become a permanent part of my responsibilities. I remain fully committed to driving our business forward and leading the company towards even greater success. I'm very optimistic for the future based on our initiatives that we are pursuing. There are still challenges that Mistras must overcome regardless, having overcome the challenges of the past few years we feel well positioned to capitalize on the growth opportunities in our market to create value for our shareholders. Before taking your questions, I would like to sincerely thank all mistrust employees for their continued dedication to delivering a safe and superior service offering, in this ever-changing market. We have always been a strong and profitable company and all the actions that we are focusing on today, will further strengthen our company for tomorrow, allowing us to continue as the market leader in Asset Integrity. Caring Connects does work for us. As I stated last quarter, much has been accomplished, but there is still more to be achieved. I'm extremely honored to be leading Mistras, at this critical and exciting time in history. And with that, Michelle, please open up the lines for questions.

Thank you. [Operator Instructions] One moment while we compile our Q&A roster. Our first question comes from the line of Chris Sakai with Singular Research. Your line is open. Please go ahead.

Good morning, Dennis and Ed.

Good morning Chris.

Hi Chris.

First question I had was on, what was the main driver for the gross profit improvement in the Services segment?

Let me take that Dennis.

Sure.

Yeah. Well, Services had good utilization, good mix. Aerospace growth continues to help them. They had solid growth across their core markets, but just really good operating leverage, the higher volume they have certainly helps. And I think we also leveled out, as we mentioned some of the pay rate increases that were in advance of the bill rate, that kind of leveled out a little bit and flattened out, so that certainly helped profitability year-over-year where we got -- we caught that equation back up that had been lagging for much of the year, certainly helped their gross profit improved in Q4.

Yeah, Chris, I'll add that we were chasing inflation in the first half of the year. We caught off to it. Our data onstream and some of the other businesses are really doing good and we feel like we've got some of this behind us. So hopefully, this looks more normal to us than what we've seen in the past.

Okay, great. And then as far as debt levels are concerned, do you have a target level for 2023?

I think, we will still, as we said, we'll still keep applying all of our residual free cash flow to debt service at this time. So, we should be able to pay back a significant piece of that in 2023. Our goal is to get to below a three leverage handle by the end of the year. So if you take our EBITDA divide that in half as our conversion to free cash flow, we can take a meaningful percent of that and pay down debt. So we're not targeting a dollar amount per se. We're really targeting that 3.0 leverage handle, we may need to invest a little in working capital as we grow the year in 2023 with higher top line, but we'll still keep taking every nickel of free cash flow and paying debt back down in 2023.

Okay. Thanks. And then on for Sensoria, do you have -- can you provide any color as far as how many new blades that you expect to install it on in 2023?

Yeah, Chris, we do have high hopes for that, but it's really based on customers and in purchase orders and it gets lumpy. I mean, right now, you could have nothing and tomorrow, you got a large order. So we haven't gotten to forecasting that yet, but we believe we can keep continue growing at the system is still for some customers and a proved up stage in our minds, we've got enough data to show people that we are viable and the only thing out there that really monitors the blade directly. But there's still a lot of customers that have us on various trial basis and waiting for those things to expire and you got to go through not only finding the defects but then doing the repair and verifying it was what we called it. So we haven't gotten to that point yet, but we do believe there is still good growth in what we're doing with that. Absolutely.

All right. Great. Thanks for the answers.

You got it. Thank you.

Thank you. And one moment for our next question. Our next question comes from the line of Mitch Pinheiro with Sturdivant. Your line is open. Please go ahead.

Hey, good morning.

Morning, Mitch.

So I just want to look at our guidance for a second. So revenue looks like it's a growth of between 3% and 8% low-end to the high-end. And I was just – wonder if you could color that a little more? You talked about stable energy markets. So that should certainly help and you have strength in the aerospace and defense business. Is there any area that we should be concerned about? And at the low end of the range, -- that seems to be all pricing. You've gotten pricing. So I'd imagine at the low end of the range, it's like pricing growth, not volume growth. And I was wondering if you could provide a little more detail around the bottom end of the range.

I'll answer the best I can. I'm not sure if I understand the part about the bottom, but let me try to start here. I think to your point, the gas and oil sector, which drove last year, we'll do it again this year. We believe the upstream has got a lot of opportunities for us. So for us, we think the upstream is, for sure, going to be part of what leads the way. We think that downstream is the one that's a little bit more fickle and right now, it looks like a larger, stronger turnaround activity year than in previous. But you know how it goes, you get a hurricane or storm happens and then everyone's forced to try to do more work and pump more out and put up their utilization. So that's always one that we get a little bit cautious about trying to predict. Midstream, we think is going to push up as well. Onstream, like we say, it's really been growing doing things in the rest of the market. So we feel good about gas and oil, probably most about up across the board. Aerospace and defense, to your point, we really feel strong on that. There's not only a lot of demand continuing to come online, depending on who you talk to and what type of aircraft a lot of these units and body counts are back close to pre-pandemic except for the larger twin aisles and all that type of issue. So we're good there, not only from the market, but we also are doing a lot of innovative things to help process components much faster for not only the end user, but for the casting, forging houses and everyone else – try that supply chain. Let's face it, the faster…

Okay. How about -- as far as just the first quarter to make sure that expectations are proper. What is -- in oil and gas, I mean, is there -- what's going to happen with the turnaround season in your estimation? And how do we think about maybe the sequential revenue picture for the year?

So if you're talking about for the full year, we see the turnaround schedules being proposed by the customers as being more aggressive. It's still early in the year to tell if for sure they're going to hold their schedules. This time of the year, last year, we were still waiting for customers trying to get off their start at this time. And this year, we're starting to see things already being manned up and having the start that we would expect. But as I say, there's really -- it's uncertain if they're going to go the full length and do everything that they expect to do this early in the season. But the early indications are that everyone is planning for more work. It's just a matter of how much do they execute on that.

So is there -- is the -- so on a year-over-year basis, the first quarter, it should be a fairly -- nothing -- you're not seeing any delays. The spring turnaround might be more second quarter, but things in the near term look like you fit into your normal kind of growth range?

Yes. I mean as of the 9th of March, it looks like they are planning to do what they had intended. How that plays out -- to your point, a lot of times, the spring season can play more of a second quarter than first. There's been years when they really started a lot of our customers, whether that was the whole marketing up, but a lot of our customers started in January and February. Certainly, last year wasn't that year. Everything started late for us. This year, it's more of a moderate. It's not all starting in January, February, but it doesn't seem to be waiting until April either. So at this point, that's what they had planned and hopefully, they'll continue going all the way through as forecasted.

Okay. And then can you talk a little bit more about Project Phoenix? I mean, you gave some detail, but is this -- so where does this from an expense point of view, how meaningful is it in 2023, how quickly could some of their -- some of the changes be affected? And what sort of is the longer-term -- what are we looking to get out of Project Phoenix? Is it a cost side, or is there also like sort of a revenue component to it at all?

So I'll start with…

Go ahead, Ed, if you want.

Yes, sure. I mean we're early on niche. I mean, we're 30 days into the review. So at this point in time, we're not making any forecast or estimates we will update you as we get to that point. This is an EBITDA improvement opportunity, EBITDA improvement. Yes, we're looking at top to bottom. But we're early on, and we will update you when we get there. But it's really just accelerating our actions that we've been looking at on maintaining cost, sustaining cost levels and the savings. It's early on, and we'll update you out the year as we have measures that come to the forefront that we act on. But yeah, we're still really early on with our review.

I'll say this, Mitch. As far as to your question of scope, I mean we're looking at everything we're doing to see how we can do it better. We've always talked about trying to have goals to where we want to get our SG&A to and how we want to grow our business and all that. And I think they're intertwined as we figure out how to do a better job on the cost side. We'll figure out how to move more of that towards the markets we want to go towards too. So it's a holistic as far as the scopes.

I mean the real aim year Mitch is to improve results, make the company more efficient. We want to increase our competitiveness in the market, no doubt. And we will hopefully implement these cost savings to really support our organic growth areas as well. That's something that's important to us. We talked a lot on just worrying about technology, and we really want to help drive that as well with this process. So as Dennis said, it's a very holistic process we're going through.

And just last question, and it was -- you had mentioned in the prepared remarks, you've seen a surge in demand in your recently launched digital products and things like that. How is that -- when we say surge, how is that impacting your revenue outlook? I mean is that -- does it tie -- can you see direct impact? And can you talk about that just a little bit more?

Yeah, I'll take that Mitch. We're going to give more as the year goes on, on our data solutions group. To be fair, our Data Solutions is the smallest of the groups when we look at how we do our work. You do it in the field, you do it and shop environment, but it's all tied to data. But data solutions is across all of our core markets. It's heavily used in the gas and oil. We're finding ways to make it more beneficial to customers in aerospace and everything else in between. So the data solutions will be a holistic overview of how our customers understand, treat and view their data. They're going to be saving it archaic ways of things of data getting handled now your dust is full of papers and you show them from one side to the other, you try to find it. What we're going to try to do is make everyone's data always readily available for them as quick as possible up to the following day and have actionable items. So in that respect, it's going to help all of the groups. And part of it, you'll see in data solutions under application sales and things like that. And part of it, you'll see is us getting more and more strength inside the groups that we serve. So we won't count that as data solution benefits, but we will be perceiving benefits from just having a stronger offering and offering more actionable things that a customer can do to the data that they normally get and just look at and try to scratch their head. So to your question, it's going to be a little bit of both. You'll see some in the data side, and we'll be talking more about that through 2023, and that will be growing, but you're also going to see tangible benefits to the customer across the markets we serve.

Okay. That's all for me. Thanks for taking the questions.

Got it. Thanks, Mitch.

Thank you. And one moment for our next question. Our next question comes from the line of Brian Russo with Sidoti. Your line is open. Please go ahead.

Hi. Good morning.

Hey, Brian.

Hey, Brian.

Hey. Just a follow-up on the data question. Is it fair to say that, these offerings give you a higher retention rate for existing customers, but also the ability to gain profitable market share and expand your customer base? And if so, maybe you could cite some sort of generic example to help us understand that better?

You're absolutely on where our focus is. I mean, there's no doubt it's going to drive revenue for us in just data solutions and applications and use of that. But it is a differentiator, it is something that we've seen customers flip over because our services are better than what a competitor were using on the data portion of it, I'm sorry, the data business intelligence, I'd say, right? So we've seen – it's smaller and it's starting, but we have seen customers slip to say this is what we have been looking for and haven't been able to get in anything from offshore to on-land applications. The idea of what we're trying to do is our folks touch, inspect and look at very critical assets throughout a customer's profile of all the of all the equipment they have, and it's very meaningful to get that data as fast as possible and give the customer some benefits. But what we're seeing is, we're getting information back to it much quicker, and we're showing them where there is something significant much faster because folks in the field, the old way they just know they're taking a reading, don't always know how much that relates to what it was previously in the short or the long term, and how much difference that was, and these short-term rates can be very critical to an operation of a particular vessel or anything under pressure or temperature. So what we've got is the ability to start showing customers quicker what they need to look at and focus on kind of return on – on their spend that's much better. So the goal in the beginning was to make sure we emphasize how our services holistically are a better offering to any customer than anything else that's out there, and that's where we started. But to both yours and Mitch's point, it will drive additional services, it will drive additional applications and data solutions and things like that, but it's a differentiator for sure, retention as well.

Okay. Great. And then – on Sensoria, what are the milestones that we should be looking for in 2023? And how soon can you actually move from testing to actual commercialization and start generating revenue from that? Because 130 turbines, I mean, according to my calculation, it's just sliver [ph] or a small fraction of the overall number of turbines currently in operation in the US as well as those in the pipeline to come up -- to become operational in 2023?

You know, the quick answer to your question is probably 2023 is still going to be proven out the concept to more customers than not because they have a lot of technology out there that is saying that they can do something for a turbine blade. And the truth is, we haven't seen anything that really competes directly like this. There's other people who put things on parts of the turbine and directly associated that with turbine blade damage, but we haven't really seen anyone effectively compete with us. But we're still in the prove-up stage. All of those 130 are scattered between a lot of different customers. There's no real strong one or two that have more than others, obviously, but not like it's all dominated by one or two customers, and they're all really trying it for a while. So what we're trying to do is focus on getting more and more of these trials out there this year and getting customers to understand the benefits of it and help us demonstrate that to the market. But for 2023, we're still going to be in this prove-up mode. That's why it's going to be lumpy as to how fast we're going to be deploying. But I really -- the reason we speak to it is we really believe it demonstrates the online capability of using AE and some of the other technologies that we have and showing people, let's face it 10, 15 years ago, real-time capability wasn't there. You're downloading from server and then getting the data and talking back in weekly or monthly pieces of information. Now this data is coming in to ourselves and to our customers in a real-time basis, and we're doing something with it. So it's something that's really meaningful and we're using only to talk about all the turbines and everything we can do, but just what it means to the market. So the answer is that we're still going to be more prove up than we would wanted to in 2023 because customers have a very tight profitability window on these things, and they want to make sure what they're spending is things that are beneficial to them. But there's still a lot of necessary [ph] wait and see improvement to me kind of thing out there. But we'll be giving more data on -- sorry, through 2023 as well that give you our ideas with targets. But you're right, the $130 million is nothing compared to what's out there.

Okay. Great. So it looks like Power Gen and transmission, which I think that's where your renewables services falling is about 6% of 2022 total revenue. I mean how meaningful do you think that can grow relative to the overall pre-pandemic top-line that you kind of referenced earlier?

So our Power Gen this year saw a bit of a decline only, because we are on a very long-term project that is just starting to eventually go through its paces in getting to commissioning and running through. We're looking at other projects that could help replace that. So that one is outside of Sensoria and things like that. That one's a lot more capital or project related, right? You get big projects, you hold on to it and then you try to put a couple more on while others are falling off. So on that one, there's not as much evergreen or run and maintain kind of things. So that can go up and down in a given year. We think the Sensoria as far as is coming online, we'll start adding some base load to it. But that's going to -- like I say, that's going to take a little bit of time yet.

Keep in mind as well, Brian, that Sensoria is not just the hardware that we sell, install and then monitor on the sensor. It's also this life cycle of the blade, the maintenance we do on the blades, repairs of the blades that we do now at a fair level that will also be driven forward with Sensoria as an equally compelling part of the equation of the economics for the customer. So, that's a big piece of what's in that Power Gen now is the fact we have been out there doing a significant amount of work or maintenance and repair blades, we believe Sensoria is going to feed that piece as well, especially as the customer sees more about flat conditions and acts upon that to prevent more damage, we believe that's been a propel along this nice existing business we have on the maintenance side of Wind Blade. So, they've kind of been reclined and both are compelling to us, but there's more than just Sensoria, it's driving this other piece of the business on the maintenance side that we have already.

Okay. Great. And then just a clarification, the $13 million of 2023 annual interest expense, is that based on your year-end gross debt number, or will that number of $13 million fluctuate with the level of debt, meaning if you're paying down debt throughout the year, your interest expense ultimately will be lower than $13 million?

I hope we can under-run that a little bit. That's kind of the assumed interest rate we baked in for 2023 at kind of a year-end debt level. So maybe we can outrun that a little bit, but I think that number will -- it depends where the Fed goes in 2023, but I think that's a pretty fair number, but I'm hoping I can under-run it by just a little bit.

Okay. Great. Thank you very much.

Thank you. And I'm showing no further questions at this time. And I would like to turn the conference back over to Dennis Bertolotti for any further remarks.

Okay. Thank you, Michelle. So I'd like to thank everyone today for joining the call, and also for your continued interest in Mistras. I look forward to providing you with an update on our business and progress achieved towards our ongoing initiatives. Everyone, have a safe and prosperous day.

This concludes the conference call. Thank you for participating. You may now disconnect.