Thank you for joining Mistras Group’s Conference Call for its Fourth Quarter and Fiscal Year Ended December 31st, 2023. Participating on the call from Mistras Group will be Manny Stamatakis, the company’s Chairman of the Board and Interim President and Chief Executive Officer; and Ed Prajzner, Senior Executive Vice President and Chief Financial Officer. Before we begin today’s conference, I want 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 in the conference call will also include certain financial measures that are not prepared in accordance with US GAAP. Reconciliation of these non-US GAAP financial measures to the most directly comparable 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. These reports are available on the company’s website in the Investors section on the SEC’s website. I will now turn the conference over to Manny Stamatakis.

Good morning, everyone. Thank you for joining us today. We finished the year with fourth quarter results exceeding expectations, with revenues up 8% and adjusted EBITDA up nearly 22% from the same quarter a year ago. Although this is a small sample, this performance is evidence of the effectiveness of the transformative impact of Project Phoenix, our EBITDA improvement program. At the same time, we recognize that both revenue and EBITDA fell short of our initial full year 2023 goal, as 2023 was essentially a rebuilding year for the company in which we initiated several changes to unlock Mistras’s intrinsic value and to improve financial performance over the long-term. I believe we have set the groundwork for future success and we are making meaningful progress in implementing all of our Phoenix work streams and our various initiatives. But there is still work to be done as we will continue implementing and identifying new opportunities to improve EBITDA in 2024. Project Phoenix and our strong fourth quarter results are providing good momentum, heading into ‘24, where we expect to realize the majority of the financial benefits from the implementation of the many changes Project Phoenix drove across and throughout the organization in 2023. Consequently, we are reiterating our expectation that fiscal 2024 EBITDA will be one of our all-time high performances. Throughout 2023, we made a number of changes to the management team. I can tell you that the new management team is energized and implementing changes throughout the organization to capitalize on our competitive advantages, while also taking steps to further assess and eliminate, if necessary, activities that have not performed to expectations. We are revamping our marketing strategy with an energized commercial function driven by our new Chief Commercial Officer role, and instilling a new focus on efficiency within…

Thank you, Manny. And good morning, everyone. Fourth quarter results clearly demonstrate that we can drive significant bottom line growth by leveraging improved sales efficiency and enhanced operational productivity. This is inspiring change, which is expected to build on the various initiatives implemented under Project Phoenix. I’m excited by the depth and breadth of success we have achieved, but also recognize, as Manny said, this is only the beginning and our job is not yet complete. Again, as Manny noted earlier, there is a new discipline at Mistras. Everyone throughout the organization is re-energized and laser-focused on finding new opportunities to leverage our core competencies and evolving new capabilities and data in other areas to capitalize on growing demand for improved asset protection solutions. In addition to instituting Project Phoenix as a core discipline in 2024, we are also enhancing related processes, including a planned upgrade of our current ERP scheduled for Q3 this year. Improvements will include further automation of transactional areas related to [time collection] [ph] invoicing and related areas, allowing us to digitize activity and reduce manual entry and enable regionalization of the underlying functions. In turn, this will lead to consistency, efficiency and overall productivity, enabling us to achieve our 2024 and beyond targets and bottom line goals. Turning back to the fourth quarter, our results were a strong finish to a transformative year. While still early, I am becoming increasingly confident that the implementation of Project Phoenix is facilitating real change that will drive both top and bottom line growth, not just over 2024, but over the long-term. Revenues in the fourth quarter were up over 8%, with strong growth in our three largest markets, Oil & Gas, Aerospace & Defense, and Industrial. In Oil and Gas, we saw strength in all of our subcategories…

Thanks, Ed. We are now one year into the implementation of Project Phoenix, and as we expected, we will be completing our engagement with AlixPartners in the first quarter of this year. While we are certainly pleased with the initial success Mistras has had with Project Phoenix, we also recognize the need to continue to be vigilant in fully implementing and sustaining our Project Phoenix initiative. Every day we are identifying new opportunities to improve performance. We are fundamentally changing our business operations. I am pleased to report that our Project Phoenix initiative was more successful than initially expected, with achievements which include a projected gross annual run rate basis of $47 million of EBITDA benefit to be achieved by the end of 2025, including, amongst other benefits, a reduction of 245 overhead positions, seven locations closed, and 150 vehicles disposed of or are planned to be sold in 2024. In addition to enhanced commercial efforts driving a top line price increase and revenue growth strategy. I am also pleased to announce that moving forward, Project Phoenix will be a permanent, ongoing initiative as our Board has approved the creation of a new Chief Transformation Officer position, who will be reporting directly to the CEO. The new CTO position will help the company remain competitive moving forward. By ensuring our business leaders challenge the way they conduct operations and embracing change regularly. The CTO will help the company improve its operational efficiency and effectiveness, which in turn will lead to greater profits, an improved brand reputation and higher employee retention rates. You will hear more good news on this front in the near future. The new commercial focus which emerged from Project Phoenix will, amongst other things, help drive organic revenue growth in 2024, which we hope will enable us…

[Operator Instructions] Our first question comes from Mitchell Pinheiro with Sturdivant & Co. Your line is now open.

Yeah, hi. Good morning. I had a couple of questions for you on Project Phoenix, in particular. Could you talk of the $20 million of incremental sort of cost savings that you expect this year? What are the big buckets that you could perhaps describe for us?

Well, primarily it’s the overhead reduction of 245 positions. That’s a big component of what we’ve been able to achieve through our work in 2023. But in addition to that, we have revamped our entire revenue strategy. We have a new plan to move forward with a deal desk, and our CRM system has been improved. So I think the combination of the reduction of unneeded positions and the focus to grow revenue are the two prime drivers that we’ve achieved in 2023 through Project Phoenix. But I can tell you there is more out there. Project Phoenix kind of showed us the opportunities that still exist. We will be focusing on improving our revenue in our high-margin areas and revisiting those projects that are not profitable or are not working out the way we’d like them to. So I would say that’s the biggest plus of Project Phoenix. In addition to the fact that it has reenergized our leadership team to better understand we do have opportunities to improve and we now, in addition to recognizing that, have the mechanism and a structure in place to take advantage of those opportunities.

Okay, that helpful. Let me ask you this. Project Phoenix, it’s multifaceted. I’m curious on how – if you could talk about how it drives revenue? I would imagine that there’s some compelling of unprofitable contracts that you’ll either let pass or not pursue anymore. That would be an offset and negative, but it sounds like you’re talking about some positives in terms of growth. And then as it relates to revenue, what’s the – how should we think about the difference between the bottom end of your guidance range and the top? What either – what doesn’t happen for it to get to the bottom or what happens to get it to the top of the range?

Well, as it relates to revenue growth, our goal is to manage our sales mix so that we can end up with higher margins. And this includes revisiting our lower margin areas and business and determining what we need to do to get those margins in line. And I think we have a strategy to do that. It includes partnering with our customers. It doesn’t serve anyone’s best interest for Mistras not to be profitable. We have to continue to enhance our 3,500 technicians out there, so that our customers have the capacity to make the inspections and to do the data gathering they need to protect their assets. So there is going to be a focus on more clearly working with our customers to better understand our needs to make a profit. And that is to improve – and to improve our sales mix. As it relates to overall revenue, our performance organically has not been acceptable. You can see that by looking at where we’ve come and where we’ve been. This year, we hope to make a significant change in our overall performance. And, of course, look, we’re optimistic. We’d like to hit the high end of our guidance, but we want to be realistic. We want to give you a range of performance that we can achieve and to continue to maintain our credibility. But I am optimistic. I’m optimistic more than I’ve ever been that we can and will perform and meet our goals. That is everybody’s focus. In ‘24, our focus is to meet our goals. So I think that’s all I want to say about that now, but I think you’ve gotten the gist of where I’m coming from.

Okay. All right, well, thanks for the questions. Appreciate it.

Thanks, Mitch.

Thank you. One moment for our next question. Our next question comes from Chris Sakai with Singular Research. Your line is now open.

Hi, good morning. I wanted to ask about overhead reduction. You’ve talked about it. Are you planning on any more in 2024?

We’re always going to be focusing on improving our overhead costs. One of our goals is to improve our EBITDA margin to a level that I think is appropriate for a company like Mistras. I think our historical EBITDA margin performance hasn’t been adequate and our goal is to improve it. And in order to do that, we have to continue to chip away at our overhead costs. And so, even though we’ve concluded the consultant phase of Project Phoenix after a year, which, by the way, as I said in my remarks, worked out much better than we expected, and I have to give credit to AlixPartners, they did a good job in coming and working with us. But in 2024, we will continue to work on improving our overhead costs and our efficiency. So that is still on the table, and it will continue to be on the table and that is why we’ve created the Chief Transformation Officer position, who will get up every single day and focus on how we can continue to improve EBITDA beyond what we’ve identified thus far.

Okay, understood. And in that same light for restructuring expenses and capital expenditures, can you shed some light there? What will we be seeing in 2024?

Well, that’s a good question. Our focus in 2024 will be to invest in ourselves and in initiatives that will scale our high-margin business. And so therefore, we have allocated a reasonable amount of capital expenditures for 2024. But we are just as committed to paying down our debt. Ed’s comments about our leverage ratio are right on. Our plan is to continue to lower that leverage ratio and to keep it below 3 moving forward. So, we are going to be investing and we are going to be paying down debt, that is our two objectives in ‘24, and we hope that our EBITDA improvement programs will allow us the room to do that and continue to move forward.

Okay, thanks.

Thank you. One moment for our next question. Our next question comes from Tim Moore with EF Hutton. Your line is now open.

Thanks, Ed and Manny. Good job with the improvements, and it’s nice to see the stock up 50% since I initiated coverage in August. So I think there’s still a ways to go on the rerating for your stock clearly, but just picking on a theme that’s pretty important for your EBITDA growth guidance, that $20 million incremental cost savings for Project Phoenix. I know it’s already been asked about a couple of times, and Manny gave some examples. What I’m wondering, just to dive in a little bit more, what would you say, Manny you’re in as far as an inning in a baseball game, fifth or sixth inning for not renewing unprofitable projects, calling some of the customers the tail end, because that’s probably some good low-hanging fruit, but they probably also have roll off timing. Do you think it’d be through a lot of that by the summer?

I think by the summer of this year, we’ll be through a lot of what we’ve identified in ‘23. But as you correctly pointed out, there’s still more. And I would say as it relates to Project Phoenix, we might be in the fourth or fifth inning. We still have room to go. And it’s not just making cuts, it’s identifying those areas that we should be growing and identifying the right strategy to grow them. An organized strategy with a plan that can be executed on. So there’s more work to do. And – but where our management team is today, I have utmost confidence that they can get us there. There’s a new energy in the company and it’s infectious. So that’s what really motivates me the most, to see that, I think we can get to where we’re going.

That’s great, because I’m thinking of Project Phoenix as a two-pronged approach. And I mean, addition to EBITDA by subtraction of the low margin, unprofitable businesses, and then what is probably the later earnings is the revenue growth and that side. But actually, I want to ask you about your pricing strategy. I remember you mentioning it on the last call. Your company, I’m not going to put words in your mouth, but for a couple of years, pricing was hard to come by in a cost inflation environment. When do you think you might be caught up on cost inflation and taking pricing as contracts and projects get reassigned? Because that’s also a good EBITDA driver this year.

That’s another good question. Let me say this that working on the pricing is going to take a little bit of time. In some cases, we have multiple year contracts. As they come up for renewal, we will look at them somewhat differently than we might have in the past, because when we commit to something for three to five years, we have to make sure we price it correctly. And so, that is something that we’ll have to continue to work on over time. But I think the other approach is that, we will have a focus in our marketing efforts to be able to demonstrate to our clients that we can add value to their initiatives, that it’s not just going out and inspecting, it’s coming up with solutions that will ultimately allow them to have more uptime and more profitability by lowering their inspection costs. And for that, we will charge a fee. But I think the combination of allowing them to save money over what they’re doing now and our focus on using our software and technology to help them better understand their choices is where we believe we’re going to be able to drive higher-margin growth.

Great. I have one quick question for Ed. Any service company or project company always has delayed projects and things get shifted for weather and good reasons. That defense project that you commented on, it seemed like it started in the fourth quarter, if I remember from my estimates, and I could be completely off on this, I think that could have been worth almost $8 million in sales. I’m just wondering, Ed, did all that already get achieved in the fourth quarter? Are we going to see some good tailwind on that maybe in the March quarter?

Great question, Tim. Yeah, that has now lapsed, so there’s no – there’ll be no impact on that year-over-year going into ‘24 we’re past the 12 month anniversary of when that dropped off. So that would only be upside in that case. We won’t have to call that out. That will not be a lag anymore. That would be upside at this point. But we feel good about commercial space, private space and that defense this year, but that will not be causing any tailwinds at this point.

Good. I have one last question and I’ll turn over. For Data Analytics Solutions. I mean, that’s been a good growth driver. I know you’ve come out, I think, last call and guided maybe a 15% to 20% CAGR when I asked about it, it was nice to see those sales reaccelerate December quarter after they came down. They weren’t as robust growing in the September quarter. But how do you think about the gross margin contribution there? I mean, you’re getting to a point where there’s probably good inflection point when you get to a certain amount of revenue. Do you think that steps up later this year or do you have to kind of reinvest in that business and maybe the incremental contribution of the margin won’t be as big as maybe it could have been?

We are planning on growth in Data Analytical Solutions in ‘24, but we will, at the same time, be developing a strategy to scale that in ‘25 and ‘26 and ‘27, and we will be investing in that initiative in order to achieve that scale. It’s good margins and it’s good business. So you’ll still see growth in ‘24 because our Data Solutions team has that baked into their ‘24 numbers. As I indicated, they finished the year at 16%. They finished the fourth quarter at 18% growth, and their growth objectives for ‘24 and beyond are in that range and beyond. So we’re excited about that.

I love that growth driver. I remember sitting down with Ed about it 10 months ago in New York. But, thanks a lot. And that’s it for my questions. Congrats.

Thanks, Tim.

Thanks, Tim.

Thank you. One moment for our next question. Our next question comes from Brian Russo with Sidoti. Your line is now open.

Hi. Good morning. Just on the $20 million of incremental Project Phoenix savings in 2024, if I heard you correctly, I think $12 million of that is the overhead or i.e., SG&A savings. So that leaves about $8 million. Is that the commercialization – commercial initiatives and the pricing initiatives? And have any of that $8 million been achieved yet?

Ed, why don’t you –

Sure, Manny. Yes. Yeah, Brian, the amount – the breakdown components for Project Phoenix, as we cited back in our November press release, as an adjunct to the third quarter press release, that’s all still holding serve and we’re reiterating that. So as you pointed out, the $12 million – of the $20 million, $12 million is incremental SG&A savings in ‘24. That number is baked in and we feel good about that. Of the other $8 million, $5 million of that was revenue price increasing adders, and $3 million was gross profit margin reductions. So you’ve got $5 million coming on the revenue line, $3 million coming on the CoGS improvement line, and the other $12 million coming in SG&A. That’s the component composite of the $20 million incremental Project Phoenix Savings we’re projecting for ‘24.

Okay, understood. And out of the $5 million of pricing adders, is there any kind of, maybe a generic, but true example of where the pricing initiative has been successful to-date?

Absolutely. Pricing was one of our key work streams in – on this commercial function. The other one is called sales enablement, where we’re trying to drive some new business. But pricing by far, is the key one. As Manny said earlier, it’s a strategy, it’s a new structure. It’s this, let’s know in the bid what we’re going after. Let’s track it through the deal desk. Let’s really think about multiyear pricing impacts. Obviously hard to do as Manny said, you’ve got multiyear MSAs, you can’t magically change that. But you have a discussion. It’s all about the ROI as Manny said, it’s about the higher value-add. We have the ROI. We’re not just a cost-plus commodity. We don’t want to be seen that way. There has to be a bigger discussion there on the longer-term, the investments we’re talking about in our capabilities and our data, that’s value to the customer. And it’s about having a discussion. So we’ve had real examples now, our budget, internal budgets have baked in opportunities. We went to top tier customers, bottom tier customers thought of what works, there’s different strategies, different dialogues, different capabilities there. But there’s meaningful increases built in now to contracts as a structural thing going into ‘24 that we didn’t quite have the discipline on in the past. So, no, there’s real meaningful examples that that numbers is a part of our growth here in ‘24 having the pricing factor on top of a volume factor, growing that top line organically. So there’s real examples with customers on different facets of our work that has been accepted. We’ve had those discussions, and lo and behold, to a large extent, many of those increases were accepted by the customer. So, yeah, we feel very good that there’s a real pricing trajectory. It’s a meaningful part of Project Phoenix, and that’ll be kind of one of the ending phases here as we get to growth areas, leveraging our footprint. I do believe there’s more to be had there, but it’s more about having a pricing structure now, a pricing strategy, a philosophy about it going forward. That’s really what changed. But there’s lots of tangible examples where customers have accepted it going forward, and that impact will be there in ‘24.

Just to give you one example, as Ed said. Last year, I had asked for a list of contracts that were not – where the margins weren’t acceptable. It was just very low-margin business. And we’ve been tracking those contracts from July of last year through February of this year. And the latest report I got was that, we were able to, through – a series of pricing initiatives and price increases and cost reductions, we’ve been able to improve those margins by 3% to 5%, primarily because of what we’ve done in Project Phoenix. And it’s through a combination of improving our pricing and a combination of cutting back on our overheads. So it is working. We just need more time to develop that thinking and not the thinking, to develop that approach with our customers. It just takes time, but it is working. And I was really happy to see that, because that to me – that proved to me that it’s working. So I wanted to see evidence of that myself, and I’ve seen it. And so that’s an example of how the Project Phoenix mindset has already started to improve the margins in some of our low-margin contracts.

Okay, great. And then when I look at the 2024 midpoint of the revenue guidance, it looks like maybe slightly under 5% growth. Are there any one of your largest three end markets or even the submarkets within those three that are growing faster than others? You mentioned the three segments, O&G, but I’m curious, on the Aerospace & Defense side, are you seeing more interest for third-party raw material and parts inspections, given what’s been playing out in Commercial Aerospace over the last six to nine months?

We are. We are seeing improved interest in Aerospace, in our Industrials, I mentioned Data Analytics Solutions, and our team has come up with some very creative ways to partner with our customers, who have demand that they need to have met. So in the Aerospace area, there is demand, and we’ve been strategizing with them to meet that demand, by adding more equipment and moving forward in that direction. So, we think that in ‘24, we will have improved growth, as I said, in our Data Analytics, in our Aerospace, and we’ll continue to grow in our Industrials area.

Okay, great. And then what should we assume for 2024 capital expenditures?

Ed, what do we have?

We have it up a little bit from ‘23. We’ll probably be up another $3 million, $4 million, maybe $5 million. So we have an aggressive year plan for CapEx, again, in Shop Labs, in Aerospace, in Data Solutions, those type of areas where we want to put a little more growth, expanding capabilities, expanding service line offerings for current customers and new customers. So, yeah, we’ve got a high interest in doing that where we keep leaning into the CapEx. So we’ll do more of that, but we’re not going to double it. But it might be up 10% over this year, maybe 15% top end if the opportunity is there. If they’re right, we’re going to be very judicious in the ROIs and paybacks we look for. But yeah, we will see CapEx expand ever so modestly here in ‘24.

Okay and then –

The key to what Ed has said is, that our process in determining how to allocate that capital expenditures has been revived and revamped. When we invest, we will do so based on the return on – an acceptable return on investment. So our CapEx expenditures are going to be focused on initiatives that will drive and grow revenue.

Okay, great. Well, thank you very much. I appreciate it.

Thank you, Brian.

Thank you. At this time, I see no callers in the queue, so I’ll hand the call back over to Mr. Stamatakis for his closing remarks.

Thank you, operator. And thank you, everyone for joining this important call today and also for your continued interest in Mistras. I look forward to providing you with an update on our big business and progress achieved towards our ongoing initiatives on our next call. Everyone, please have a safe and a prosperous day.

This end today’s conference call. You may disconnect at this time.