Sotirios Vahaviolos - Chairman, President and Chief Executive Officer Jonathan Wolk - Executive Vice President, Chief Financial Officer and Treasurer Dennis Bertolotti - Executive Vice President, Services Americas.

Andrew Obin - Bank of America Merrill Lynch Matt Duncan - Stephens, Inc. Andy Wittmann - Robert W. Baird & Company, Inc. Jeff Balstein - JP Morgan.

Good morning ladies and gentlemen, and welcome to the Mistras Group’s Earnings Conference Call for its Second Quarter Ended November 30, 2015. My name is Kat and I’ll be your event manager today. We will be accepting questions after management’s prepared remarks. Participating on the call for Mistras Group will be Dr.

Sotirios Vahaviolos, Chairman and CEO; Jon Wolk, Executive Vice President and CFO; and Dennis Bertolotti, EVP and President of the company’s Service segment. As a reminder, this conference is being recorded. I would now hand the conference over to Dr. Vahaviolos. Please proceed..

Thank you very much and good morning to all. In today’s call, we will review Mistras Group’s financial results for the second quarter of fiscal year 2016 that ended on November 30, 2015 and discuss our prospects going forward.

I’m very pleased that Mistras followed up its record first quarter with a new earnings call record in the second quarter even though revenues were $12 million lower than in the prior year’s second quarter, driven by a $9 million decline from foreign currency and dispositions.

Our improved profitability reflects the actions that we took to reduce our cost and improve accountability across all of our business locations as in our first quarter, profit margins were substantially improving the Products and Systems and International segments and in every country in which we operate.

Services profit margin were in line with prior year’s, despite revenues being down as expected by more than $10 million. As in Q1, we gained strong bottom line leverage. Mistras’ adjusted EBITDA was in line with our previous year’s second quarter, despite a 6% revenue decline.

Our adjusted EBITDA margin was nearly 15%, an improvement of 80 basis points over the prior year. For the first six months year to date, our adjusted EBITDA reached a new record of $51 million, an increase of nearly $9 million. Approximately half of the business is in the oil and gas sector.

That market has been significantly impacted by the oil price decline and by last winter’s refinery labor strike. The oil price decline has affected organic growth as oil and gas customers seek to reduce their spending.

Overall, turnaround volume has been similar to prior year, but with different seasonality because of last year’s refinery strike, and therefore different comparisons to prior-year results. For Mistras, Q1 was stronger; Q2 lighter; and Q3 looks to be somewhat stronger than prior year.

Our results for the first half [are strong validation] of our focus on delivering profit and grow faster than revenues and result of actions that we have taken for several quarters. But rest assured, Mistras is still a growth company. We’re actively working on organic market share gains that will provide profitable growth.

The Mistras value proposition is now stronger than ever in an environment that is focusing companies to realize more value from their spending. For example, we have previously described our Plan A and Plan B focus in the Canadian oil sands region.

I’m pleased to advice that we are making good progress on both fronts and have been awarded both ongoing work and turnaround work, both of which will enable us to operate profitably with a sustainable platform in the region for years to come. Jon will now explain our results in more detail and then Dennis will provide more color on our operations.

Afterwards, we will take your questions.

Jon?.

Thank you, Sotirios. I remind everyone that remarks made during this conference call will include some forward-looking statements. The company’s actual results could differ materially from those projected.

Some of the factors that could cause actual results to differ are discussed in the company’s most recent annual report on Form 10-K and in other reports filed with the SEC. The discussion in this conference call will include certain financial measures that were not prepared in accordance with US GAAP.

Reconciliations of those non-US GAAP financial measures to the most directly comparable US GAAP financial measures can be found in the company’s current report on Form 8-K filed yesterday. These reports are available on the company’s website in the Investors section and on the SEC website.

First, I will summarize our financial results and then I will comment on our initiatives to improve profit margins. Revenues for the second quarter of fiscal year 2016 were $194.8 million, 6% lower than the prior year’s record second quarter.

On a constant dollar basis, that 6% revenue decline would have been 2% had FX rates been unchanged from the prior year. Services revenues declined by 6.5% from the prior year’s record second quarter, driven by a mid single-digit organic contraction and the weaker Canadian dollar, offset in part by a small amount of acquisition growth.

International segment revenues declined by 6%, as high single digit organic growth was more than offset by double digit FX declines and the impact of dispositions. Product and Systems revenues had modest organic growth. Despite the challenging revenue picture, the profit picture was much better.

The company’s second quarter gross profit margin improved to 29.2% compared with the prior year’s 28.5% despite the $12 million revenue decline. Decremental margins on revenue declines are generally higher than incremental margins on revenue growth, so an improvement of this magnitude was notable.

Company-wide SG&A costs were over $3 million lower than the prior year second quarter, resulting in a 120 basis point increase in the company’s operating margin to 10.0% and a $1.4 million improvement in operating income.

Breaking this down by segment, Services gross and operating margins were in line with the prior year’s second quarter, despite the expected 6.5% decline in revenues.

Year to date, Services gross margin improved by 80 basis points and operating margin by 170 basis points, driven by sound execution in managing contracts, improved staff utilization and better matching of changes in labor rates with changes in pricing.

International gross and operating margins improved by approximately 400 basis points in both the second quarter and for the six months year to date, driven by improved utilization of personnel, organic growth and cost reductions made in the latter part of the prior fiscal year.

However, International operating margins were 7.7% for the first six months of fiscal year 2016 compared with 11.9% for Services. So there is still plenty of room for improvement. Products and Systems gross margins improved by over 400 basis points in both Q2 and for the six months year to date.

Operating profits were 13.5% of revenues compared with breakeven in last year’s first half and operating income improvement of $2.2 million. Company-wide operating expenses reflected significant improvement for the third consecutive quarter.

Total operating expenses were $3.5 million lower than the prior year’s second quarter, driven by headcount and other cost reductions that have continued into the current fiscal year. Operating expenses were favorable to prior year as a percentage of sales by approximately 50 basis points in the second quarter and by 100 basis points year to date.

The company’s adjusted EBITDA margin was 14.9% in the second quarter compared with 14.1% in the prior year. Year to date adjusted EBITDA margins were 13.7% compared with 11.4% in the prior year. Cash flow was yet another strong positive. Operating cash flow was $26.5 million year to date compared with only $3.2 million in the prior year’s first half.

Free cash flow improved to positive $18.8 million compared with negative $4.7 million in the prior year. Drivers of the approximately $23 million first half improvement were the improved earnings as well as a five day reduction in days sales outstanding that reduced working capital outlays.

Total capital expenditures including non-cash capital lease outlays were $9.3 million or 2.5% of revenue compared with 3.1% in the prior year’s first half. Total debt and capital lease obligations net of cash was $108 million at November 30, 2015 compared with $155 million one year ago.

Net debt to adjusted EBITDA was 1.3 times at November 30, down from over 2 times last year. We did not buy back shares during the second quarter. Our improved results have been driven by decisive actions and terrific execution by our entire team in every country and in every line of business and have delivered despite the difficult market conditions.

I have previously mentioned our key initiatives which have been our game plan to achieve these improvements. These include contract operational reviews, focus on SG&A costs, reducing unbillable time, improving in the Canadian oil sands region and pricing discussions with customers.

The first three actions have measurably improved results to date and we’re on the cusp of seeing an improvement in the Canadian oil sands as Sotirios mentioned in his remarks. And now I’ll briefly update the company’s financial guidance.

We continue to expect revenues will be similar to those of prior year in a range from $710 million to $725 million, inclusive of a combined $20 million plus reduction due to foreign currency and dispositions. Our adjusted EBITDA for the first half of fiscal year 2016 has exceeded prior year levels by nearly $9 million or 21%.

Although market conditions remain unfavorable, we are increasing our adjusted EBITDA guidance from our previously stated $72 million to $78 million range to a new range from $79 million to $83 million. And with that, I’d turn this over to Dennis Bertolotti, our EVP and President of the Services segment..

Thank you, Jon. I’ll now provide updates on each of our business segments. I’m proud of our team and its resilience in a tough market. Our plan is working in North America and in all of our key countries as reflected in the performance numbers that Jon just shared with you. I’ll provide some color on key developments in our business.

In our Services segment, the oil and gas market remains subdued. My team regularly meets and speaks with our customers, exploring ways to improve their productivity and gain even more value from our wide-ranging inspection services.

Our partnership with existing customers is built upon the solid foundation of terrific value and flexibility that we provide to their operations. Because of the value that we deliver is obvious when compared to our competition, we’re finding more and more companies open to learning more about Mistras and how we can help them.

Sotirios already mentioned the important new customer that we recently gained in the Canadian oil sands. This new win is a multi-year evergreen on-site that will provide Mistras with both day to day inspection and enable additional turnaround and project work.

As Sotirios also mentioned, the timing of turnaround work caused services revenues to decline year over year in Q2, but margins held firm with last year’s record Q2 because of improved operating disciplines that we have been installing.

Q3 revenues should exceed those of the prior year as increased turnaround work maybe offset by weaker revenues from upstream customers. Our International business has had terrific improvement, driven by an aggressive plan and strong execution to eliminate inefficiencies.

Increasingly our international subsidiaries are sharing technician resources and working together on business development opportunities to gain additional evergreen sales from flagship customers even if they are located in different countries.

Our new CEO in France has driven both cost reductions and organic growth which has greatly improved our utilization of service technicians and led to improved profits. Our UK subsidiary experienced organic growth primarily from its wind business, providing services and products to both offshore and onshore customers.

Our Brazilian subsidiary has made remarkable improvement despite the continuing challenges presented by that economy. Our GM there has done a good job in changing our mix of work performed for Petrobras to be more mandatory and less discretionary, improving our utilization of people and reducing the risk of work stoppages.

And in Germany, we have begun to receive more work from Airbus and other key customers, improving our sales mix and positioning us well for future growth. During the second quarter, we successfully performed our first turnaround locally for a large multinational customer.

As Jon mentioned, our Products and Systems business also made a nice year-over-year improvement, earning over $2 million in operating income compared with last year’s breakeven results. Contributors to this success have been a double-digit rise in sales combined with cost reductions to become more efficient. And now for Sotirios’ closing remarks..

Thank you, Dennis. In closing, we are running our business assuming that the present oil price range will be the new normal for the foreseeable future. In this environment, we’re focusing on operating as efficiently as possible, maximizing our staff utilization and minimizing our capital outlays.

Our top priorities remain finding incremental value for both our existing consumers and potential new customers and driving our profitability initiatives. Even though market conditions remain challenging, we’re having a number of productive conversations with both existing and prospective customers.

These efforts would enable the resumption of organic growth as early as in the fourth quarter and into next fiscal year. We have taken actions to reduce our cost base and we will continue to be vigilant in doing what the market demands of us.

In fiscal year 2016, we [may have some] opportunities to grow our business and we have an even bigger opportunity to improve our overall profitability. We are very focused on achieving these goals.

In concluding our prepared remarks, we thank our loyal employees for their commitment to safety and quality and our loyal and valued customers and shareholders. We’ll now open the floor to questions..

[Operator Instructions] Our first question comes from the line of Andrew Obin with Bank of America Merrill Lynch..

Just couple of macro questions.

How do you think the current pricing environment changing the broader landscape, in particular, A, the willingness of your customer base to outsource versus insource and the competitive environment versus your competitors?.

I think the price is something that our customers have recognized is going to be in this range for a while. And like anybody else, they’re going to wash their costs. So we’re watching their cost, we’re watching their expenses which is their internal people as well, so it’s actually a good market for companies like us for outsourcing.

So while we know the [investor] total capital and total spend, we don’t see them building up internally, so they’re going to still have to get those jobs done and companies like ourselves would be the one to provide them..

And in terms of competitive landscape, what’s your competition doing in terms of pricing and trying to gain market share in this environment?.

I can’t really speak for our competition. I know what we’re doing and we’re trying to work with the customers in making sure that we provide value and still give them the service. So I think that’s the right thing. I would expect the competitors would do something similar, but I can’t speak to that..

Just a follow-up question, your cash flow has been pretty good, but I understand a lot of your customers are strained in terms of free cash flow.

Are you seeing any change in customer behavior in terms of payment terms and how do you make sure that you get paid on time in this environment?.

We’re not really seeing any differences in payment terms. If anything, our DSO has gone down by several days and that’s based on process enhancements that we’re working on to continue to drive that and we expect that to continue to improve. So I don’t expect any degradation there..

Our next question comes from the line of Matt Duncan with Stephens..

First question I’ve got is on the margin performance that you’re seeing in both the International and the Products and Systems segments, those were up substantially both sequentially and year over year. Obviously, you’ve been doing a lot of work to try and increase profitability across the business.

I’m curious though is there anything that benefited either of those segments from a one-time type nature? I know the Products and Systems especially can have some lumpiness to it.

Are we really just seeing the fruits of your hard labor to get the margins up in those businesses?.

From an International perspective, I think that really these results are the result of the planning and execution that our team has done that we’ve helped them with. And there is nothing special in the second quarter. Seasonally, we get a little bit more work in the second quarter internationally as we do domestically.

So that did help, but nothing unusual there. From a Products and Systems perspective, our Products team has done a very nice job reducing cost, taking appropriate steps to be in alignment with today’s market and we did get a little bit of a lift from sales in the first half of this year versus the first half of last year.

And as you alluded, it can be a lumpy business, but we do believe we’ve made some good structural changes there that have improved margins..

So let me follow that up then with a question about the guidance.

So you had a really good first half and it sounds like you think a lot of the work you’ve done to improve profitability is going to stick, but it looks like we have to assume that the margins are going to come down in all three segments for your EBITDA guidance to happen? If you keep up at the levels you’ve been, you would beat that EBITDA guidance.

So I’m trying to get a sense are you just trying to layer in some conservatism here given the uncertainty in the market that you see reasons to believe that the margins will be lower, just help us think about how you mentally put this guidance together, given that it appears as though you’re tracking to do better than that?.

We’re definitely tracking to do better. From a revenue perspective, we’re seeing it’s going to be roughly flat. The guidance range is maybe a 0% to 2% increase over prior year. So we’re not really looking for a revenue lift per se, although one could come.

If one doesn’t come, I think that certainly the guidance range that we’ve got on the bottom line, we’re effectively guiding for similar profitability as we had in last year’s second half.

And I think that there is a layer of conservatism built in there, really based upon market conditions and uncertainties on turnarounds and customer timing and that sort of thing.

If there are no disruptions, if there’s no crazy weather event or some kind of big cancellation of work, I think we would expect that there is a level of conservatism built into the bottom line guidance..

It happened in the last two or three years in the fourth quarter [indiscernible] and that’s really what we’re trying to base our opinion to..

The last thing for me, the stock buyback plan you guys put in place, did you buy any stock under that plan in the quarter?.

No, we did not..

Our next question comes from the line of Tahira Afzal with KeyBanc Capital Markets..

This is [Shaun] on for Tahira today. So you guys touched on this a tiny bit in your last response, but just anymore clarity you have on the spring turnaround outlook and what you’re building into your guidance over there? Do you continue to be cautious for the outlook? Any update there would be very helpful..

What we see is pretty much a normal year coming out as we worry about the differences in the market, so that’s why we’re not sure if things could change. But from what we see forecasted now, we see it to be similar to last year’s Q3..

And you guys have talked about the abnormal seasonality we’re going to see in the second half of the year.

Could you just give us an update on that? And secondly – just how we are supposed to be thinking about the seasonal pattern for this year? And then secondly, do you have any more visibility on the offshore business for the second half of the year?.

As far as seasonality goes, I think the year should look the same. There’s probably going to be a little bit less capital work going out there as customers would be [returning] back in the sands and other areas. But the maintenance and everything else, we don’t expect to be anything significantly different from where it was.

The offshore could be challenged a little bit more by the price of $32 a barrel right now. So we know that part of the play, the actual upstream could be challenged more than the mid or downstream for sure..

I’d agree with what Dennis said, Shaun, but in addition, I’d say that Q3 might be a little bit bigger than last year because we did have that turnaround that moved into Q3. Q4 is a little bit more of an open book at this point because things do move around in Q4 more than they do in the fall. But we’re optimistic there at this point.

And in terms of the offshore, at least at this point in time, we’re not aware of any material deferments and that sort of thing..

Just one last quick one from me, you guys have done really well in Europe, but it seems like a lot of that is from some of the internal initiatives and some key new leadership you have in place, so could you just comment on business in Europe just on a more macro perspective?.

I think one of the things that we are concentrated is in getting new evergreens and [we already] did a turnaround in Germany for the first time on a very important customer that we have it in other countries. So basically I think in Europe we’re implementing our USA model and that’s what you see the improvement..

Shaun, Europe, there is still lot of room for growth for us there. I know the market share [indiscernible] others, but there is still a lot of room for growth for us. So we’re still optimistic..

Our next question comes from the line of Andy Wittmann with Robert W. Baird..

The first question I had was about this large contract that you referenced at least three times in the script. That’s telling me that it must be large.

Can you give us any detail about the relative size, the potential of what that one could be [indiscernible] start up?.

I don’t want to get into exact numbers. I can tell you though as far as magnitude it’s much larger than anything we have experienced in Canada, in that particular area of Canada. So it’s really what we see as one of our first base load contracts that can really keep us on a steady state.

So we put a lot of emphasis on that because we believe it’s the type of work that we’ve been looking for for a while here..

Is that going to help you in the second half of this year? Is this more of a 2017 plan when that one phases in?.

It’s really a late Q3, into Q4..

And then I guess maybe my other question is something on the competitive environment.

And Sotirios we’ve seen from your competitors some fairly large scale M&A where they’re becoming large NDT inspection players as well as maintenance players, can you talk about the impact as you see the environment seeing some level of consolidation what that means for you if you feel compelled to offer some of those mechanical services or if you feel like the NDT inspection is still the right strategy for your company?.

We still believe that the NDT is the right strategy for our company. That’s really what we believe and we believe that the other one it can be competitive. And basically testing – inspecting the valve and then repair it yourself give some confidence in our opinion..

You’re not seeing bundling of services or deeper customer into the sea from the competition who might be offering broader?.

I do see that our business, we have a lot of room for service line growth, be that in additional NDT inspections or even getting into other things. So it’s not like we feel hampered at all, but yet even though there is competitors and other things that doesn’t make us one half of a jump and it’s something we’re not sure.

But we do see a lot of room for growth. I mean, our customers are very sound and behind us and we think we could get into other markets with them..

It should be something similar, Andy, to nature where we really show some new market and we show that we’ll have also NDT. If we find something like this mechanical in a smaller scale, I think we will be interested..

It was a good question because you got all three of us to chime in. I’d add my two sense and that would be that to the concern about are we getting crowded out in the market maybe because the other guys are bulking up or combining services, we’re not seeing that at all. If anything, we are so focused on providing superior value for our customers.

We’re having a greater number of conversations in this environment than we would have been at this time last year, because there is more openness I think to the value proposition that we’re providing. So we’re not concerned about that..

I’ll probably continue to take the temperature on that one as time evolves.

I guess my last question, Jon, in the last two quarters we’ve seen very good margin progression after maybe what was a bit of a slow start on some of the initiatives that’s coming through in full force, what’s the runway look like? Maybe the best way to ask this is where are we on the trajectory, where do you think as we look at adjusted EBITDA margins, where we’d be in a couple of years, I think some of your commentary on that would be helpful for context..

Year to date, we’re up about 230 basis points for the first six months and that’s a nice improvement. It’s certainly improvement that is, as you alluded to, we’ve been out in the works now for a number of quarters and we’re grateful that we’re starting to see it come through.

I think in terms of magnitude of improvement, that’s probably about halfway of what we can realistically expect for us to achieve. So I think there is probably another couple of hundred basis points out there to get. We’re, at this point, really starting to lay the foundation to make what we’ve got sustainable and to grow it from here.

We’re adding to our organization and increasing the level of administrative oversight, process discipline improvement, system upgrades, payroll, financial, what have you. Nothing whole scale, nothing large and really impactful in that way, but incremental improvements that make it easier to do and let us focus on the value that we add.

So I think we all, to a management team member, feel very confident that there is at least a couple of hundred more basis points to get..

Exactly, we agree..

[Operator Instructions] Our next question comes from the line of Jeff Balstein with JP Morgan..

Jon, just following up on your last comment, so the additional 200 basis points of margin, what would you say the timeline for that is?.

I guess that one had to come. It’s a great question, Jeff. As always, with the question I’ve had, it’s a little bit hard to predict. And I think some of it will be interdependent with market conditions.

The improvements we’ve made so far have really been based on internal initiatives and strong execution, a good plan well executed, and commitment by our team, our entire team to get it done. I think we still have more runway to go in terms of those initiatives irrespective of the environment.

So maybe half of it would be improvement we can drive assuming the market doesn’t deteriorate from here and maybe the other half of that would come about as market conditions improve..

Similar question in line of the breakdown of your work, from the type of work that you do, and so ongoing work that is more operations and maintenance versus project work, what I’m trying to understand is whether project work has increased and maybe the types of projects that you’ve been working on in the last couple of quarters have changed either in scope or in size, it doesn’t move a needle on the project side?.

Our project work never has been a huge percentage of our business. I mean, it’s opportunistic, when we get it, we can benefit from it. But we do really concentrate on the run and maintain and the things that those sites need to do to keep up day to day.

In this environment, with the prices of oil and all that, project is going to be the one, it’s going to be the most challenged for return on investment and for customers who want to put their money down there. So we’re seeing that we’re in a good spot because for us the project work we have won’t impact us that much either way.

We do see some projects for us in certain areas that will benefit us going forward, that’s what we’re talking about possibly for the fourth quarter and such..

Last question from me, housekeeping, you mentioned improvement on the accounts receivable side, is there any other moving parts that are important than the working capital that we should look out for in the second and third quarter?.

I think accounts receivable is by far the biggest component of the working capital movement. And that’s the one I’d really look out for. Typically in Q3, because sales are lower, we get a cash inflow of a net reduction in receivables after a strong Q2 and I expect we’ll have the same again. Q4 tends to be a little bit more neutral.

So I expect very good cash flow in the second half of the year following up on a very strong first half..

I’m showing no further questions at this time. I’d like to turn the call back over to Dr. Vahaviolos for any closing remarks..

I would like to thank everyone for listening and we wish you a great day in this difficult market environment today..

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a great day..