Mistras Group Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 4, 2023

There are 5 speakers on the call.

Operator

You for joining MISTRAS Group's Conference Call for its Q1 Ended March 31, 2023. My name is Jada, and I'll be your event manager today. We'll be accepting questions after management's prepared remarks. Participating on the call for Ms. Strauss will be Dennis Bertolotti, the company's President and Chief Executive Officer and Ed Posner, Senior Executive Vice President and Chief Financial Officer.

Operator

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 ks and other reports filed with the SEC. This discussion is this conference call We'll also include certain financial measures that were not prepared in accordance with US GAAP. Reconciliation of these non USG AAP Financial Measures to the most directly comparable USG AAP Financial Measures can be found in the tables contained in yesterday's press release and in the company's related current report on Form 8 ks.

Operator

These reports are available at the company's website in the Investors section and on the SECC's website. I will now turn the conference over to Dennis Bertolotti. Thank you, Jada.

Speaker 1

Good morning, everyone, and thanks for joining us today. We continue to make significant progress capitalizing on our strong market position and innovative new technology to grow MISTRAS and improve profitability. As evidence of this, in the Q1, our revenue grew 5.5% in constant currency. Our gross margin expanded 270 basis And we drove SG and A as a percentage of revenue down by over 40 basis points resulting in adjusted EBITDA of 88 These financial results were in line with our most recent outlook for the full year, which we are reaffirming today. And our overall financial condition also continued to improve with our bank defined leverage ratio reduced to just under 3.25 As of quarter end and we're well on our way to achieving our goal of being below 3.0 by year end.

Speaker 1

We saw strength in our energy business in Q1, which is benefiting from the rapid growth of our data solution revenues. The organic growth in our business in addition to lower healthcare expenses in the quarter helped boost our gross profit margin by 2 70 basis While reported SG and A was up on an absolute basis Due to a few infrequent items during the quarter, we are working hard and making progress in fundamentally lowering our overhead Towards our longer term aspirational target of 20% of revenue. The Q1 represented a very solid start to a year in which We expect to drive growth, improve profitability and continue to invest across the organization to unlock the hidden value of our strong brand products, Service Lines capabilities and innovation. I'm particularly pleased with the growth of data solutions, Which you can now see in the supplemental schedules included in our earnings release. Data Solutions includes our flagship OneSuite, PCMS, New Century online monitoring and the majority of our on stream business along with various other data monitoring services including Sensoria.

Speaker 1

We were early to invest in this exciting area and data solutions permeates throughout all MISTRAS geographies and industries. Data Solutions revenue grew by over 35% in the quarter and now represents 10% of our total revenue as compared to about 7.7% Our total consolidated revenue for the Q1 of 2022. We believe that data solutions will grow We previously described it, which is due to the current inclusion of Onstream's customer reporting via its StreamView software within the data solutions roll up. Nevertheless, the growth level of data solutions add credence 2 and is a substantial reason why we are confident that we can achieve the significant bottom line increases we are expecting in our full year guidance. We are continuing to seeing customers recognize the need to integrate data more fully to optimize their performance.

Speaker 1

Whether that involves getting data quicker or benefiting from the insights of data analytics, the markets have continued to increase their need To better capture and utilize the data generated by our facilities in order for them to stay competitive, expect to see us continuing our investment in this area, Responding to market demand and creating new growth opportunities by expanding within customers as well as New and existing customers. Similarly, our strategy to take on more of the machining, grinding and other activities complementary Our testing and inspection services, particularly in aerospace is driving growth. As we address unmet customer needs, Supply chain issues continue to challenge the industry, forcing customers to seek new ways to move faster and to simplify their logistics. For instance, in the aerospace market, we are opening a new 20,000 square foot facility adjacent to our Heath Ohio operations to accommodate the increased demand for our solutions. In addition, other customers are supporting the installation of 4 new CNC machines In our Georgia location to expand capacity and increase the throughput for their products, We believe our continued ability to provide unique solutions will help alleviate some of the supply chain issues that our customers face, Enabling us to grow and expand our solutions in aerospace as well as other end markets.

Speaker 1

Note, there are still some isolated project delays in the defense sector, which offset the progress being achieved in our overall Space and Defense vertical. Nevertheless, we believe defense is a large and growing opportunity over the long term. And we are aggressively seeking market share gains in this industry via our established relationships utilizing our technical solutions consultants. Our Onstream in line inspection testing business has continued its record growth of 2022 into the Q1 of 2023. Onstream generates a considerable proportion of its revenues from data solutions and it serves both the upstream and midstream markets.

Speaker 1

This versatility is helping to generate robust growth and margins, which we expect to continue in 2023. There was also significant progress achieved during the quarter preparing for future growth towards improving operating leverage and profitability, Such as investing in technology to digitize and standardize our processes. Finally, I would like to emphasize that our financial condition Continues to improve with our leverage ratio at the lowest level since immediately prior to the Onstream acquisition in December of 2018. I would now like to turn the call over to Ed to give you more detail on our financial results for the Q1.

Speaker 2

Thank you, Dennis and good morning everyone. Results for the quarter met or exceeded our financial expectations. We continue to string together a record of consistent growth despite operating markets that continue to closely approach, but have not yet fully returned to pre pandemic levels, while also working through significant foreign currency headwinds. Revenue growth was 5.5% on a constant currency basis in the quarter. This is a result of a combination of a stable In Brazilian oil and gas market, improving demand in commercial aerospace and strong growth in private space.

Speaker 2

In addition to significant growth of data solutions, results have already resulted across all markets. We are also benefiting from pricing actions initiated last year, which are now balanced with employee wage rate increases, Whereas we had been lagging last year with a more pronounced inflationary pressure than we anticipate this year. Gross profit margin for the quarter increased 270 basis points compared to the prior year, primarily due to lower healthcare In the Q1, we're up $900,000 as compared to the prior year period due to a few infrequent items, But more importantly, down 40 basis points as a percentage of revenue. Cost containment remains a focus And it's one of the main reasons we are confident that we can increase the operating leverage in our business model. Our North American segment, which was formerly called Services, generated significant operating income in the Q1 of 9,400,000 Up from $3,800,000 a year ago, with the operating margin expanding 400 basis points.

Speaker 2

As Dennis mentioned earlier, in addition to the absolute revenue growth, North America's operating margin is also benefiting from the rapid growth in data solutions. Adjusted EBITDA for the quarter was $10,400,000 compared to $5,500,000 a year ago, An increase of 88% due to the aforementioned gross profit expansion and this was consistent with our most recent expectation. Our effective income tax rate, actually a benefit for the quarter was 15.6%. For modeling purposes, we would anticipate an effective income tax rate of approximately 30% for the full year 2023. In an encouraging change from our historical trends, we saw positive operating cash flow in the Q1, primarily due to an improvement in DSO.

Speaker 2

Free cash flow was essentially flat in Q1 compared to a negative $8,600,000 in the prior year Which was a significant improvement. Year over year, despite incremental CapEx spending of $1,500,000 for new projects commencing in the year. For the full year, we still expect CapEx of less than $20,000,000 We paid down almost $2,000,000 of debt during the Q1, Lowering gross debt to $189,300,000 with net debt of 172,600,000 As Dennis stated earlier, this is a milestone event as we haven't been operating cash flow positive or paid down debt in the Q1 Since pre pandemic levels, specifically back to Q1 of 2019. Keep in mind as well that our bank group consists of some of the largest Thanks. This provides us comfort regarding both availability and access to liquidity and we have ample access under our existing credit agreement, which is not mature until July of 2027.

Speaker 2

Despite the recent increase in reference rates, We still expect total interest expense of around $13,000,000 for the full year due to the recent step down in leverage And continuing deleveraging throughout the remainder of the year. Given the solid results in the Q1, We are reaffirming guidance for the full year 2023 that being revenue of between $710,000,000 $740,000,000 Adjusted EBITDA between $70,000,000 to $75,000,000 and free cash flow between $30,000,000 to 35,000,000 Given stable and resilient energy markets, improving aerospace demand and continued data solutions growth, We are confident in achieving our outlook projections. Our business model is robust and sustainable through extremes of economic cycles And we remain firmly committed to executing our plans, while maintaining our intense focus on cost containment, while continuing to prudently invest in our business. That is our strategy both today

Speaker 1

and over the long term.

Speaker 2

And with that, I will now turn the call back over to Dennis for his wrap up before we move on to take your questions.

Speaker 1

Okay. Thanks, Ed. To summarize, we had a strong Q1 to kick off the year and we continue to be optimistic about MISTRAS' Future in 'twenty three and beyond. Data Solutions now represents 10% of our business and this will continue to provide top and bottom line growth. We're making tremendous progress preparing this for us to improve productivity and efficiency to better leverage our inherent strengths Capitalize in the sectors of our markets that are the fastest growing, so we can serve our customers in this ever changing environment.

Speaker 1

Before taking your questions, I would like to sincerely thank all the talented, dedicated MISTRAS employees out there For their continued focus on delivering a safe and superior service offering, while meeting our customers' highest demands. And with that Jada, please open up the lines for questions.

Operator

Thank you. At this time, we will conduct a question and answer session. Please standby while we compile the Q and A roster. Our first question comes from Chris Sakai of Singular Research. Your line is now open.

Speaker 1

Yes. Hi, good morning. Good morning, Chris. Can you talk about The growth into 2023 of Onstream and Data Solutions, Will we see something similar to this quarter? So we believe that both Onstream itself specifically in the larger data solutions are going to have a good growth year.

Speaker 1

We would think both of those should be in the double digit range for the full year. Quarter to quarter things will change obviously, as projects move in and out. But there's a lot wrapped up in data solutions The PCMS and New Century and Onstream and all those other ones, the online monitoring. So we believe there's enough of Different service line offerings that as one goes up and down the other more than make up for it. So yes, we see a good year for Everything in there.

Speaker 1

Specific to Onstream, they had a great Q1. Our growth has planned since the acquisition. They were A Canadian based company and had a fairly strong representation in Canada before we acquired them. They're still doing well and growing in Canada, But the bulk of their growth has been in the U. S.

Speaker 1

And as we had anticipated by leveraging off of our customers and things that we have as far as connections that we just didn't have that service Okay. Sounds good. And can you talk about Sensoria this quarter? What was the adoption rate there? The adoption rate hasn't been where we But we've had as many, if not more inquiries and we're still doing tests.

Speaker 1

We still believe for the full year we'll be doing fine. It gets a little up and down on that quarter by quarter just because there's still some proof of concept out there. But we're not only doing much better on the proof of concept on the onshore facilities or a piece of equipment. We're also getting questions and inquiries about offshore as well. So we believe it's still on a very good trajectory.

Speaker 1

Full year for that should be good.

Speaker 2

And if I can add to that Chris, some of this just needs a little run time like we did as promised last year, we did the installations Well, Sensoria, it needs a little run time now. Some of the conditions that Sensoria can find on a blade, you need just some time to have that happen now in the field. Remember this was all installed on real working wind farms with real turbines where you have to just have the conditions happen. Mother Nature has to kind of just Cause the event that we can now see on the blade and help the customer through. So we need some of that time.

Speaker 2

So yes, so that will happen. Lots of quotes are happening out there. It's similar to OneSuite. We gave you last year lots of numbers on how many customers, how many sites, how many subscriptions, Same thing this year. We need some run time for all those eyeballs to see things and learn things and expand things and get user groups going and then we'll go on another Full court press on expanding further, but again, they're both Sensoria, once you've both rolled into data solutions now, the bigger envelope of the offering, Which is moving forward in aggregate and by its integral pieces here, but some of our it'll be a little as Dennis said ebb and flow there where you need to kind of Let the customer absorb what you just gave them, learn from it, work with them to figure out how they get to a higher use of that going forward.

Speaker 2

So we'll work through some of that this year. But As Dennis said, data solutions will be growing in double digit. Please don't model 35% all year. It may modulate a little bit, but it will definitely be in A nice solid double digit territory, low double digit.

Speaker 1

Okay. Thanks for your answers.

Speaker 2

Thank you.

Speaker 1

Thanks, Chris.

Operator

Thank you. One moment. We'll look for our next question. Our next question comes from Mitchell Panaro from Sturdevant and Company. Your line is now open.

Speaker 3

Hi, good morning.

Speaker 1

Good morning, Mitch.

Speaker 3

Just a clarification. So you talked about Onstream, I think having a good quarter, but I'm looking at the overall midstream revenue being down. How does that, Stuart? Yes. And the easy answer

Speaker 1

is, Mitch, is that it's 2 parts to that. One is that Onstream participates with its customers both in mid and upstream depending on the customer if it's coming from the gathering or going into larger diameter. It could be a mid or an upstream. So while their quarter was good, it doesn't always flow only into midstream. And the rest of midstream for us is a lot of project related things that just kind of vacillate with where to spend it.

Speaker 1

So for the rest of it, there's nothing really to be read there that Other than just capital projects coming in and out, but Onstream's revenue isn't just tied to 1 or the other of the 2 gas and oil, it's tied to the first two. We really don't see onstream and refining. It's only the other 2.

Speaker 3

Got it. And then so as you look throughout the year and midstream Has been, I guess, down for a couple of quarters here in a row, 3 quarters. What's the outlook for the year there? Is this do we see a return to growth in Q2 or is there Something else happening?

Speaker 1

So, no, I mean, there's nothing on a macro level, there's nothing major that's happening. On the micro level, it's just the capital projects. I'm not sure I don't have the Q2 from you from last year to see if we would See that or not, even where that's at, but I would say we're the projects that we have Our normal, there's a little bit less work in some areas and there's more in others. So on balance, we say that it's just one market that's just moving up and down. Inside that though, a lot of the growth from Onstream is going, like I say, to both.

Speaker 1

So you never know. If they get more customers In midstream next quarter, it could push a lot that way too.

Speaker 2

There's a little bit of timing that you do in Q1. We had some permitting delays in the U. S. In midstream and we actually had we exited some midstream in Canada at some lower margin in midstream. So there's a few other climbing matters there, but no, we feel confident

Speaker 3

Yes, it looks like you had a tough comp. I mean, the Q2 in midstream was last year was the highest Quarter and you're coming up against that. So I guess we could see another down quarter in midstream This is for Q2?

Speaker 2

Yes. It's the CapEx as Dennis mentioned. You've got some lumpy CapEx on the new stuff that happens over time That can distort any given quarter, but over the longer term, we like that midstream ILI, in line inspection testing in midstream. We like that niche and it's a good one.

Speaker 3

Okay. And then, as you know, we're maybe 5 weeks Into the quarter, what's the prognosis for The downstream turnarounds and things, what's The outlook for that for the upcoming quarter?

Speaker 1

I guess where I'd put it is, it's always the most volatile of the three segments of our gas and oil. But this year, we haven't seen any reason that they've really come off of anything planned that much. There's certainly people that are Moving around, there's a couple that had changes from 2 to 3 weeks on start times and things like that, but We haven't seen any major delays, nothing like if you go back to the years of 2021 or 2022 or because of high price in barrel or because they didn't have access to folks. We don't see anything of that. So I think they're into a more normal schedule and planning.

Speaker 1

You know the spend, we'll see how the full year goes, but we don't see any disruptions that we've seen in the past.

Speaker 3

Okay. And then another revenue question on aerospace and defense. I guess aerospace was up and defense was down. Is that what happened in the quarter?

Speaker 1

It is. Our aerospace is really It's seen a lot of growth for us in a lot of the individual labs that back in the COVID days and the year or 2 after that were still suppressed. I will say we're still seeing supply chain issues. We've got customers who have tens of 1,000,000 of dollars More of orders than they have of capacity to get it done through the supply chains and materials and all these other things The other customers that are always trying to get more through. So I think the demand, especially in the commercial and the space side of aerospace, I think the demand is really starting to climb.

Speaker 1

I think there's a lagging in what the industry can get out from forgings and castings through All the other processes that it takes to get you there, but I think as far as The need for things to get done? Yes, I think it's all there.

Speaker 3

Okay. And then I guess, final question is, as you look at Margins, the gross margin, I jumped on the call just a touch late. So I apologize if you, Dennis Or Ed, if you've talked about this, but in the gross margin side, You talked about your costs being or your pricing has now sort of matched your labor increases. And So should we see the gross margins start to kind of normalize in that Maybe 30% area for the rest of the year?

Speaker 2

I'll take that, Mitch. Yes, That's about right. Yes, it does vacillate a little bit with volume. I mean Q1 is normally a little lower than the other 3 quarters. Q2 and Q3 can be a little Higher and then it might level back out in Q4.

Speaker 2

But 30 for the full year, yes, feels about right. You've got mix helping us now, data solution strength of growth is certainly helping. We had some lower healthcare costs in the quarter, certainly helped as well. But yes, that bigger topic you just raised though, this Lagging effect last year we saw inflationary pressure of the pay rates going up faster than the bill rates. That did kind of normalize, did kind of level off.

Speaker 2

So Thankfully, thus far and for the remainder of the year, we're not sensing that inflationary pressure we dealt with all last year. We kind of caught up in that kind of crossed over. So Yes. It should be a very normal year and a solid year in gross profit margin. We might not go up 100 bps year over year as we have done A couple of years ago, but we should definitely hold solid and maybe ever so slightly bring it up.

Speaker 2

But yes, we feel very confident that there's not any real headwinds there hitting us and maybe a little bit Sales win helps us from balancing out pay rates and bill rates at this point. So we feel pretty good on gross profit and certainly sales mix is going to help us too.

Speaker 3

Is there anything I have one more question just on SG and A. Is there anything unusual going on SG and A for the full year?

Speaker 2

No, there should be pretty much again same as gross profit, normal year, no real headwinds, no tailwinds, all of our cost outs We recovered last year and replaced. So yes, you have a pretty comparable year, normal year over year, nothing unusually good or bad, should be very comparable. And again, as we said earlier in Q1 and Q4, we'll say it again, working very hard to keep overheads flat, if not lower. So we fully expect that for 2023.

Speaker 1

Mitch, there is a little noise like in Europe, our energy costs are up. We budgeted for it. It's exceeding a little bit over what we budgeted for. For instance, in some countries they went back to the previous year and charged an add or 2 what happened in 2022. So There is a little bit there, but it's not so much that we called it out per se.

Speaker 3

Okay. Thank you for taking the questions.

Speaker 1

You got it. Thank you.

Operator

One moment for our next question please. Our next question comes from Brian Russo of Sidoti. Your line is now open.

Speaker 4

Yes. Hi, good morning.

Speaker 1

Good morning, Brian.

Speaker 4

Sorry if I missed this because I got on the call A little late, but just on the oil and gas year over year revenue, downstream of refining You showed a nice about $3,000,000 pickup in revenue. I mean is that I'm trying to recall, I believe that sector was somewhat depressed in Q1 2022, but is that kind of A quarterly year over year revenue run rate increase we might expect, because I assume the turnaround season Probably didn't start until late in Q1 and doesn't pick up until didn't pick up until April and into May?

Speaker 1

So, Ed, you may want to talk a little bit about The restatement of some of the Yes,

Speaker 2

there was one just one quick note there, Brian. If you noticed on the press release, there's a footnote 1 on that table. We had a small a small reclass last year between up and downstream. We had an account that was misclassified there. So We did restate the prior year breakdown of those 3 subsectors.

Speaker 2

So downstream was not as down as we thought it was last year. The benefit went Into downstream from up, and you'll see that your comparison is right. It is up $3,000,000 quarter over quarter. We did restate the prior year number there just to be comparative. So it wasn't down as much as we thought, but yes, that rate it's at now is Ordinary that increase you're seeing there just under 10%, 9.3% is a good comparison and we're seeing a very kind of Solid stable market there in the downstream with some good growth to it.

Speaker 1

And to add a little color to that, Brian, there was More work in the January, February period of this year than there was last. Again, typically customers try to get a hold of A lot of the resources that are available in the market in the colder times because you don't have as many northern and colder facilities to Trying to take turnarounds then. So there was a little bit more work this year in January February, which also helped the quarter over quarter for year.

Speaker 4

Okay, great. And then on Aerospace and Defense, it's down year over year, Which you discussed, but if I recall there was one single defense project that was delayed in the Q4 Of 2022 and it was supposed to resume in the Q1 of 2023. Did that actually occur?

Speaker 1

No, that's still fascinating. It's still we're still there. We're still working, but there's been changes and such. And we're still working on that. I'm leaving today going to Some conferences and such for the defense sector.

Speaker 1

So there's still a lot of activity in there and we still believe It's right, but you know how it is with materials and government spending, sometimes things go up and down. But overall, we still see a huge Potential in there, but it's still kind of bouncing around lower than what we expected while we're although we're still there.

Speaker 4

Okay. So that might be a contributor And to later in the year, I guess.

Speaker 1

Yes, absolutely. It didn't do anything for us per se in this quarter, but we still believe it will come back up.

Speaker 4

Okay, great. And then we just trying to triangulate your top line revenue guidance right of Low end of 3% to maybe the high end of 7% plus, where do you see the kind of The end market mix, will it be comparable to where it was at the year end of 2022 or Are you expecting say high single digit growth in O and G, slower growth in aerospace and defense? Just trying to get A better feel for what that mix might look like and then as it compares to say pre pandemic levels to kind of Feel comfortable that things have normalized.

Speaker 1

Yes, I would say the oil and gas probably is more of a solid mid single digit, right? I would think the aerospace and the aerospace defense, we should be looking at from the aerospace side alone, we should be looking at double digit growth through most of the year. The Aerospace and Defense is getting bounced around a little bit by that one side and couple others, but for us the Aerospace itself is going to we believe that Segment of it will grow by double. A lot of times when we're working on aerospace components, we're not sure how much is military or not, so we throw it into that same bucket. But the aerospace itself will be double digit growth, the data solutions will be double digit growth, which is PCMS and onstream.

Speaker 1

So look for those Below the oil and gas ones, they all be in double digit in Aero and in Data. The 3 different segments, that's just customer dependent, you get a big project in up mid or down or something like that. I would say For us, while they're all going to have a chance of growing at different rates, you'll probably see maybe a little bit more growth in the upstream Besides any other 2 this year, just depending on a lot of the contracts we have out now that would be coming through. So of the 3, it's probably a little bit more in the upstream. And those are nice because the upstream is a lot more of a it's a less volatile revenue cycle.

Speaker 1

They really don't go up and down. The So these are larger and they try to keep them staffed at a rate that is constant, partly because of bed space and capabilities. They don't have Lot of rooms go up and down anyway. So growing it in that sector is good for us because it becomes a lot more base load type of sales.

Speaker 2

Another important feature Brian is the balance we have here this year. Yes, oil and gas is strong. Yes, aerospace We'll have another good year, not maybe not quite as good as last year, the growth it had. Data obviously is affecting all end markets, that's a solid thing. But the other good element here is that all the other end markets, putting aside a couple of larger ones, are all mostly up this year.

Speaker 2

They were all mostly down last year. So I think this better balance we have across the bigger end market portfolio is a real good A strong point for us this year, where all geographies are doing very well, all service lines are doing well, all land markets And all the non core markets are actually doing very well right now. That was not true last year. So that's where I think Mike Carey today this year is really the Strength and balance across all the end markets, all the service offerings, all the geographies, all are doing fairly well and that's a really good thing for Defense will pick back up. Commercial aerospace is very good right now as is private space.

Speaker 2

The defense is probably the only one little sub industry, subsector That's having some delays right now, but it will as Dennis said, it will get back in sync. But I think it's really a year of balance or costs. Anyway you want to sort of bifurcate our revenue We're giving you more ways to view it. I think they'll all be relatively balanced and robust this year and that's we like that.

Speaker 4

Great. And then one last question on SG and A. You said flat or down. I guess You mean flat or down on a full year basis relative to 2022, which was 166.5 1,000,000? Yes.

Speaker 2

Yes. We work pretty hard, but keep it flat. Yes.

Speaker 4

Okay. So it's basically a 42,000,000 Or less run rate, regardless what the percentage it is of revenue, is that how we should look at it? Or are you still targeting kind of low 20%?

Speaker 2

20% is a longer term aspiration. Yes, it's not particularly sensitive to revenue volume, the SG and A. But yes, it will level back out. Sensitive to revenue volume, the SG and A, but yes, it'll level back out. Q1 will be the high number for the year.

Speaker 2

It'll level back out Throughout the year, yes, we have every intention and I believe we will keep it flat to slightly down with last year's number, absolutely. And it'll be relatively flattish rest of the year. It's not particularly sensitive to revenue volumes.

Speaker 4

Got it. And one last question, I apologize, but you're at 3.25 times leverage now, Well on your way to 3, maybe can you just remind us what the priorities and use of Your sustainable excess cash might be once that 3 times leverage is comfortably intact?

Speaker 2

Sure. I'll start with that and Dennis can expand upon that. But obviously job 1 right now is continue To knock back down the leverage below a 3, so we'll do that. That's where residual free cash flow is going to go until then. At that point, as we've said the last couple of quarters, We'll have some optionality.

Speaker 2

We'll consider other investment options. 1, as Dennis mentioned in his Prepared remarks is investing in some of our shop labs on the aerospace side, additional additive mechanical things, expanded capabilities for customers. That's a place I'd like to put some more capital and invest on our own Shop Labs. Other direct returns to shareholders are clearly a capability as well. We can visit down the road.

Speaker 2

Maybe at some point, we would contemplate a tuck in acquisition on The data side perhaps, but yes, all that's in front of us and we'll have that optionality and consider that. But I like we want to keep driving organic growth. We're really leaning into Now keeping overheads calibrated and we can invest selectively in our own capabilities organically is really where we're focused right now. But At some point, not in 2023, but at some point out in the future acquisitions may become relevant again. But right now, we're really focusing internally What we're building and investing on for future growth?

Speaker 1

Yes, Brian, the things that we're doing in the data across all of our segments, We're adding another smaller facility. We're adding more machining and all these are. They are really Very good long term base flow kind of investments that we're making now and we'll continue to look at inside gas and oil. We have some very strong connections with some of our customers and some of the things we want to do there and growing. So we're being a little selective in making sure what we're doing Aren't things that we've seen others get themselves in trouble with and all that, but I don't see any reason I mean, we do want to get below 3 because we do believe There's a tranche of investors out there that believe that's a magic number we need to get back into the 2s.

Speaker 1

So until we get below that, we're going to pretty much stay focused on Paint it back down, but like you said, sometime this year we'll go below that 3 is our belief. And then we'll have a lot more optionality and it's And make it a little bit more fun to see where the market is at and what else we can do within there.

Speaker 4

Okay, great. Thank you very much.

Speaker 1

All right. Thanks, Brian.

Operator

I would now like to pass it back to Dennis Bertolotti for closing remarks.

Speaker 1

All right. Thanks, Jada. I'd like to thank everyone for joining the call today and for your continued interest in MISTRAS. Everyone, please have a safe and prosperous day. Thank you.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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Earnings Conference Call
Mistras Group Q1 2023
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