Sotirios Vahaviolos - Chairman, President and Chief Executive Officer Jonathan Wolk - Senior Executive Vice President and Chief Financial Officer Dennis Bertolotti - President and Chief Operating Officer.

Andy Wittmann - Baird Edward Marshall - Sidoti & Company Bobby Burleson - Canaccord Tahira Afzal - KeyBanc Capital Markets.

Good morning, ladies and gentlemen, and welcome to Mistras Group's earnings conference call for its third quarter ended September 30, 2017. My name is Carina, and I will be your event manager today.

[Operator Instructions] Participating on the call from Mistras Group will be Dennis Bertolotti, the Company's President and Chief Executive Officer; Jon Wolk, Senior Executive Vice President, COO and acting CFO; and Dr. Sotirios Vahaviolos, Executive Chairman, who will be available for questions. I will now hand the conference over to Mr. Bertolotti.

Please proceed..

one, from a corporate perspective I assumed the CEO role in August, and Jon assumed the COO role at the same time. Simultaneously, we launched searches for two important positions, our new CFO and new sales and marketing leader. Two, in our Services segment, we elevated four key regional executives that now report directly to Jon.

We have closed a handful of smaller lab locations and changed several lab general managers. We continue to broaden the set of services we provide differentiating the value that we provide to our customers, and this shift is also reflected in our acquisition pipeline.

As our third quarter Services results demonstrate, we're already starting to see benefits from these moves, and we expect this momentum to continue.

Third, in our International segment we have strong leadership in France, and we are very encouraged about our recent leadership transition in Germany, where our new leadership team is focused on gaining market share.

In the U.K., we are working with our recently appointed leader to reduce costs in that business, which has had the wrong sales mix and poor utilization of technicians in 2017. We will likely be closing at least one location there, terminating some leaders and shifting emphasis of the type of work we perform.

We expect these actions will improve results at both Germany and the U.K. in 2018. Fourth and finally, in our Products and Systems segment, we determined that our subsidiary that we acquired six years ago offers Mistras limited potential for future growth and no longer fits with this segment's direction.

In connection with this determination, we took a nearly $16 million non-cash intangible asset write-off and will likely place this business for sale. We expect that the improvement in focus will be important to restoring the profitability of our Products and Systems segment.

I'll let Jon take us through the financials, and then I will summarize and update our expectations going forward..

Thank you, Dennis. 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 transition 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 U.S. GAAP. Reconciliations of those non-U.S.

GAAP financial measures to the most directly comparable U.S. GAAP financial measures can be found in the tables contained in yesterday's press release and in our current -- related current report on Form 8-K. These reports are available in the company's website in the Investors section and on the SEC website.

Before my financial update, I will provide an update on our CFO succession process. We have engaged a national search firm and are identifying a number of promising candidates. Fortunately, we have strong teams in both finance and operations, which is enabling me to perform both roles on a temporary basis. Now for the update.

Revenues for the third quarter of 2017 were $179.6 million, 6% higher than the prior year's Q3. Services' Q3 revenues grew 8% over prior year, including low single-digit positive organic growth for the first time in more than a year.

This growth was achieved despite a negative headwind of $1 million to $2 million from the 2017 hurricanes and continued weakness in a challenged region that includes a fairly large customer contract. Revenues for the remaining regions in Services improved at a double-digit rate in Q3 with mid-single-digit organic growth.

After a strong Q1, International segment revenues fell 7% in Q2 and were up slightly in Q3 compared with prior year. The Q2 decline was driven by the two countries Dennis discussed, Germany and the U.K. Revenues continued down in Germany in Q3 compared with an extremely strong 2016 comp due to Aerospace production-driven factors.

In one case the relocation of a customer outside of our service area and in another case, a reduction due to airframe production volumes. The good news here is that airframe production volumes are expected to rise in 2018.

In the U.K., revenues rebounded in Q3, but we experienced difficulty with one large project, which caused revenues and especially profits to be less than expected as well as adverse timing, where some profitable work was delayed. The repositioning actions that Dennis described will deal directly with these issues.

Products and Systems revenues had an organic contraction in Q3 driven by lower sales volume. However, the Products backlog is growing, and operational changes are being made, which should improve results soon. In terms of operating income.

Services segment operating income excluding special items was down only slightly compared with the prior year's Q3 despite adverse impact from the summer 2017 hurricanes and the continued adverse impact of the one challenged region. Operating income for the other services regions increased by more than 10% over prior year.

The International segment generated a relatively small operating profit in Q3 following the Q2 operating loss, as we saw modest sequential improvement in Germany and France but continued to experience an operating loss in the U.K., driven by the factors previously mentioned.

Products and Systems operating income declined compared with the prior year's Q3, although results from the core business were in line with prior year. Operating cash flows for the first 9 months of 2017 were $35 million, while free cash flows were approximately $20 million.

Both amounts included a reduction for the $6.3 million legal settlement, which was accrued in 2016 and paid in 2017. In addition, free cash flows included the impact of a $5 million increase in 2017 capital expenditures related to the Safran contract build out, which has commenced operations in Q4.

We added to our net debt slightly as our $20 million of free cash flows were used to repurchase $15.9 million of our common stock and fund two acquisitions with $8.5 million of upfront cash. At this time, we are not planning additional stock repurchases. Total debt and capital lease obligations net of cash was $92 million at September 30, 2017.

I will conclude with a brief discussion on our expectations of market performance and company-specific guidance. Despite the hurricanes, we are experiencing a relatively normal fall. This is compared against an unusually weak prior year comp in the late summer and fall of 2016.

Accordingly, Services managed a low single digit percentage organic revenue gain in Q3 despite the hurricane impact and should achieve more than that in Q4. Operating income for Services for the full calendar year will be comparable to that of prior year, excluding the impact of the hurricanes and the nuclear customer bankruptcy write-off.

Regarding the International segment. We expect results will improve sequentially in France with the commencement of our operations to serve Safran and to a lesser extent, in Germany On the other hand, we expect that results in our U.K. subsidiary will continue to experience a loss as the Q4 cost reduction activities are carried out.

Because of this reason, we believe our 2017 EBITDA will be at the lower end of our $66 million to $70 million range. With that, I turn it back over to Dennis..

investing in our capabilities to grow. Our view of the economy and its future direction shapes both our strategy and our acquisition focus. Predicting oil prices is above our pay grade, so our base case is that oil and gas prices remain in the relevant range they have traded in for nearly the last three years.

Although recent headlines predict electric vehicles may eventually become the way of the future, we believe the Oil and Gas market will be large and vibrant for decades to come, and we are committed to serving our customers with excellence and growing this part of our business.

We believe the best way forward within Oil and Gas is to provide the most compelling bundle of services, combining our industry-leading PCMS software and inspection services with a suite of mechanical services, which help our customers to expertly manage their operation and their spend.

This belief drove our third quarter acquisition of a Canadian company that employs technicians who perform electrical, insulation, coating and other mechanical services at height, primarily suspended from ropes in the Fort McMurray market.

We are excited to combine the talents of this new acquisition with those of our existing Mistras inspection team to present a wider array of services to our existing customers and our prospects. We view the talented managers who joined us as people who can help lead our growth in America as well.

Our future acquisitions within Oil and Gas will be focused along these lines. At the same time we see strong growth for the aerospace sector, driven by a nearly decade-long backlog of next generation aircraft and also by next generation aircraft engines and related advances in composites.

The acquisition we made earlier in 2017 performs mechanical services for the aerospace sector. At present we have signed letters of intent to acquire two more exciting companies, who primarily provide inspection and/or mechanical services to aerospace customers from their in-house facilities.

Finally, there's a growing sense that proposed FENSA regulations for pipeline integrity and maintenance will become more prominent in the not too distant future, which will present further opportunities for Mistras to be helpful. Our third initiative concerns cost reduction.

One of the benefits of our Services reorganization is that we are now better able to follow local General Manager performance, utilization of personnel and a host of other important operational metrics even more closely.

Our repositioning efforts have already resulted in the 2017 closure of some labs and service lines, which did not earn an acceptable return. Overall, we have targeted $5 million of annual costs to take out of our cost structure, and I'm confident we'll exceed this target. I will conclude by providing some early thoughts on our 2018 budgeting process.

For our Services segment, our cost reductions, expected organic growth from both an improving market and planned acquisitions, will improve our year-over-year growth rates and grow profits at a faster rate than revenues.

For our International segment, we expect organic growth in France, driven primarily by our Safran contract; revenue and profit growth in Germany; and cost and profit margin improvement in the U.K.

Finally in the Products and Systems segment, we expect lower absolute revenue levels from the likely disposition of their subsidiary, but also improved profit margins and growth from research and development efforts in our ongoing Products and Systems business.

In closing, we believe the Mistras brand is as strong as ever, and we are very optimistic about its future. Our reputation for delivering value-added service is growing as we capably add service lines to our offerings. Our acquisition pipeline is robust and provides avenues for both healthy diversification and growth within our Services segment.

I'm confident in our three point strategy for improvement and have strong conviction in the path we are on and our ability to manage in both weaker and stronger economic environments. For the first time in quite a while, it feels like the economy may be finally headed in a stronger direction. We'll now open up the floor to questions..

[Operator Instructions] Your first question is from Andy Wittmann from Baird. Please go ahead. Your line is open..

Great, good morning, guys..

Morning, Andy.

Morning, Andy..

I guess the question that I had to start out with was relative to the turnaround season. I guess you guys said it feels kind of more normal.

Maybe if you looked at the areas where you do turnaround type services outside hurricane affected zones, can you tell us what the performance -- the revenue performance was and the kind of the conversations that you've had from clients on those sites.

So maybe give us a little bit more texture behind what this more normal fall turnaround looks -- feels like?.

Yes, sure, Andy. This is Jon. I think that for us within the Gulf, which is the affected region certainly we had interruption for a week to two weeks, principally in the really affected sites. And as the units came back on, our guys were unable to go to the office. We paid them because it wasn't their fault that they weren't able to go to work.

We set up things within the company to help our affected employees and so forth. So it was really a great effort by the company. In terms of the customers, pretty much about everybody got back online within a couple of weeks, and we're not hearing of any curtailment.

Certainly things got pushed out a bit, but we haven't heard of any significant diminishments in expected work scope. Outside of the affected area, it's pretty much been business as planned. We've seen, if anything a slight organic pickup in several of those areas.

It's not -- again, we call it a relatively normal fall so far compared to a weaker fall last year..

Andy, its Dennis. I'd say the refineries that had planned activities outside of the hurricane affected, we did see some of them pushed by a few weeks just because there was so much of a percentage off line during the cleanup right immediately after the hurricane. But they didn't generally push it too long.

They just wanted to make sure there was enough gas and oil products in the market, and then they started back up. So outside of that, like Jon said, it seems to be getting more and more normal. The customers are used to this kind of oil pricing and getting back to operation and business as usual..

Got it. I guess, I wanted to just build on that last question by getting -- trying to get a little bit more detail on your 2018 comments. It sounds like -- you guys made the comment that revenue is going to be growing faster. I guess on an organic basis, I wanted to kind of get your thoughts on that.

Would you expect that the mid single digit that you're seeing kind of underlying the parts of the business here in fall is the way to think about the -- the overall revenue trend as you move into 2018? Is that the more normal pace that you're looking at?.

Yes. This is Dennis. Yes, I believe you're right on that. The last couple years it's been suppressed and it was harder to find someone who was optimistic about their budget. The customers have now got budget cycles that reflected the more normal spend, and we believe that 2018 should be kind of a good quarter for us compared to what we had been seeing..

Yes, the first quarter in particular. As we look out to the rest of 2018, I think client budgets are still being put together, Andy. So I think particularly we're optimistic in Q1. But I think as Dennis says, in general it feels like things are loosening up just a little bit..

All right, that's helpful. And then just kind of a cleanup question here, In the U.K. the job that hurt you in the quarter, is that job essentially done? I heard that you're making some adjustments to what you're doing there. I just don't know if that's like some sort of job that could come up and get you again here in the fourth quarter.

But maybe just a little detail on that project..

Yes. It's Jon, Andy. I think as we end 2017 we'll be substantially complete on that. There might be a little bit of carryover for 2018, but we don't expect that we'll have an issue with that little bit of work that does carry over into 2018.

And I think that's probably a line of business that we'll look to, if not exit, then certainly substantially modify going forward..

Great. That’s all I had, have a nice day guys..

Thank you..

Your next question is from the line of Edward Marshall from Sidoti & Company. Please go ahead, your line is open..

Hey guys, good morning..

Good morning, Ed..

So I wanted to ask in the press release you talked about one challenged region within Services.

Where and what's the scope of the revenue associated with that business line?.

Yes. Ed, for competitive reasons, we'd rather not disclose that..

Okay. And I guess switching gears, a competitor reported last night. It looks like you had organic growth in the comparable segments. It looks like you performed better.

What do you think is driving that? Is that a regional thing? Or do you think that's something to do with Mistras specifically that you're doing that's adding a little bit of a competitive advantage for you? Maybe you can talk about that..

Yes. This is Dennis. I mean it's harder for us to speak to their issues. But I would say from what Mistras is seeing and what we're doing, we have a really good feel for where we're at. We have a really good feel for the reorganization and being able to look at actions we need to take.

I mean, all markets are challenged and you only can do so much within your bandwidth. But I still think there's some room to improve within any market. And I think we're at a point we're doing better at it now than we had been in the past. So if I compare Mistras to Mistras a year ago, we're much stronger.

Compared to a competitor, it's hard for me to have that inside visibility..

Let me ask it directly.

Do you think you're taking share?.

I believe we're going to keep up with the market growth, if not maybe, once in a while, gain on it. So the only way to gain on the market growth would be -- where it's coming is taking some share from whomever. I mean, we can't point to where it's at.

We believe the consolidation of this kind of market goes towards the bigger companies with more and more services that customers want to bundle up so....

I see. And then, talking about the acquisition for a second of Rope Access. It looks very similar to other deals that's been done in the space.

I'm curious, what drives your focus on acquisitions? Is it the lack of technology you want to add to the group? Or is it geographic? Or what drives the motivation behind the deals?.

Good question. It's Dennis. Years ago, it used to be geographic. We believe, we have a good footprint now. So there -- while there might be a market here and there that at we place, I would say the bulk of our acquisitions is to -- right now, it's about that diversification and service line adding on getting value.

This last one you spoke of, yes, it's Rope Access. And yes, we have Rope Access in other locations. Specifically, this one had two key points. It wasn't a geographic area focus of ours. We're there already, but we consider the market for a lot of growth.

And it also not only to put people at height, but it was doing things that we weren't doing in a lot of locations. All this mechanical services at height is quite a bit different from what we had been doing. Most of our at-height work was NDT-related types of projects. This is more of getting the equipment ready to and post-NDT inspection.

So that mechanical all plays into this value-added, where one customer can use us for more than just the NDT itself. They can -- we can prep and put back. And that, we believe, is a big difference. So that was why we -- that, and the geographic made it a home run for us..

And how do you see that kind of, I hate the word, revenue synergies across the business as they take certain product lines that this business does and that was absent from Mistras in the past and kind of spread it across the business?.

We believe that's a part of why we're excited about the future. We believe we can take advantage of looking at these things.

Look, every customer out there is still trying to find a way to get the job done cheaper, and we think we can do it by having these integrated teams, which may not be as large as if you were separate companies but larger than what we had when we're just doing one service or one type of service. So we're going to win and the customer is going to win.

So we think we can do well in this kind of market..

Got it. Thanks very much guys..

Thanks, Ed..

Your next question is from Bobby Burleson from Canaccord. Please go ahead, your line is open..

Hey good morning..

Morning, Bobby..

I guess just with the oil rebounding a little bit here at one point a few months ago, we were kind of wondering making sure there wasn't going to be another leg down maybe in activity now. It's a little bit better as a market.

Wondering if you can just kind of run through your energy exposure upstream, midstream, refinery and just kind of characterize what the demand trends look like now..

Okay. Bobby, its Jon. I'll try and take that. So our biggest concentration within oil and gas would be downstream. That's roughly 2:1 compared to midstream and upstream, so as in order of magnitude. In downstream, I think Dennis spoke to some of the competitive opportunities. It's still a challenged market.

I mean, the entire market is still a challenge to me. We're all glad to see the oil price on the rise right now. Never quite sure how much is going to stick or increase or what have you. As Dennis said in his comments, it's tough for us to predict and we don't really try to. So we're really focused at the customer level.

Downstream feels like it's spending a bit more, so the fall turnaround season seems like it's healthier than last year's. And the same thing, outlook for the spring of 2018 feels the same way. In upstream, I'm not sure we've really seen much of a change although upstream we're doing well.

We're feeling good about our growth there because of some of the acquisition activity that Dennis described. And in midstream, that's probably the part of the market that's maybe poised to grow the most. Those FENSA regulations are kind of looming out there. When they do get enacted, I think that will drive something.

But in the meantime, there's a decent amount of pipeline construction going on, and we're fairly busy in that part of the market..

Okay. And then in terms of aerospace it sounds like Safran's positive for you guys.

But as we kind of look out going forward for potentially broadening the opportunity, can you give us kind of an update on the time line in terms of broadening out, maybe, the customers that you're working with, some of the services you're deploying in aerospace? And kind of how do you see that long-term growth rate?.

Well, it's Dennis. The Safran contract we think will start coming online in 2018. And by mid-2018 it will be closer to being what we expect for the full run rate annually. So we think that's good for France. But we have a lot of focus on it here in domestic North American market as well.

A lot of the acquisition focus we're looking at is looking at the aerospace market. And the same type of value added that we speak of in mechanical, services and NDT in the field applications of oil, gas and chemical customers really plays the same way in aerospace. So we believe those same kind of opportunities exist.

There's many, many stops in aerospace or a forge house or whatever that takes -- to get their product to get it sold. And the more that we can help them and take those steps and put them under one house, one roof and not have to truck things back and forth, the more the customers win, and the same thing for us.

So I mean, we think we have a very realistic chance of increasing our aerospace market and percentages as well going forward. And we believe it's a healthy market that while all have ups and downs this one's had a longer up than normal recently. And we believe there's still some legs to it..

Okay, great. And then just one last quick one, with mechanical I'm assuming you're still looking for operating margins kind of in line with your overall Services margins there.

Have you talked about maybe what the mix of Services revenue could be for mechanical looking out a couple years from now?.

Bobby, its Jon. On the first part of your statement, yes, we do see the operating margins so far for mechanical services to be at least as good as the NDT operating margins, certainly in line. And I don't know that we've got a stated goal for sort of what the blend or mix of Services will be.

I think that will be kind of a moving target, depending upon where the market is going and where our customers take us. But certainly, we see an increasing proportion of mechanical services to the total, just not quite sure if I'd be ready to throw a percentage out right now..

I mean, is it sort of slow and steady progress there? Is it kind of a step function as that comes online more meaningfully?.

It's a really good question. Certainly with this acquisition in Canada, that was a step function for us because that kind of put us to a much higher trajectory than we would've been on absent that acquisition. And we're very excited about this team and its interaction within the market and the possibilities there.

And we think we feel very good about that. So I think if we make similar acquisitions in that space, certainly, that will be more of a step function. Absent that, I think it will be more of [Indiscernible] build out..

Okay, thanks a lot..

Sure. Thank you..

[Operator Instructions] Your next question is from Tahira Afzal from KeyBanc Capital Markets. Please go ahead, your line is open..

Thank you. Hi, Dennis and Jon and congrats, a pretty decent quarter..

Thank you..

Thank you Tahira..

So this is probably the most positive I've heard you guys talk about the general macro environment. I know you have some moving parts and you've been proactive about being positioned for an improvement.

But is -- are we at a point where if the spring momentum continues that you could return to organic mid-to-high revenue growth?.

Well, Tahira, it's Jon. We'd sure love to be able to say yes to that question, but I think it's probably too early to tell. For the next six months, we feel pretty positive about the market. And as we get a little bit deeper into that six month period of time, we'll have a better feeling for it..

Okay. And then I guess the next question for me is -- and Dennis, I know you've we've talked about this in the past as being about some of the technologies that are coming and sort of sometimes complementing your space and sometimes pairing back some of the work. Your folks seem to be fairly advanced on the cutting edge of a lot of these technologies.

So as maintenance work moves or integrates more technology into its mix, do you, over the longer term, see yourselves gaining market share?.

Good question. I think we do. I mean, there's a lot of things in an inspections space that are changing from the way it used to be, the speed of data and getting it from the field to the customer and things like that. There's a lot of chances for us to do things differently.

And I think that it starts to differentiate yourself -- of the bigger players from all the smaller players when I started my career so many years ago about trying to do one thing very well and not integrate all the services and capabilities.

It's going to be a lot harder for all those folks to try to keep up with what's going on and going to a customer who wants all these things done as well as cleaning up the area before and after and all that. It's just becoming a chance for those who have the capability integrated to really stand out from the crowd..

Yes. Tahira, its Jon. I guess what I'd add to Dennis' statement is that our mission is to be a one source provider..

Right..

And I think as a one source provider, integrating the kinds of services is part of the secret sauce of doing that. Certainly as you alluded to, we do combine products and services and software together.

So I think that combination adding the mechanical services to it, I think playing that convergence theme is going to really be part of the growth story..

Okay. And yes I guess last question, which is thematic as well. I know you folks have already gained quite a bit of expertise and experience now in the aerospace industry. From my research, it seems like space exploration is going to be one of the fastest growing areas going forward over the next decade.

Any thoughts about how you want to look at that as an opportunity as well?.

I think right now our focus is on just doing the things that we know. But we're also looking at -- they're getting into exotic materials, composites and new metals and stuff for additional strength and weight reduction and design and 3D printing, and there's just a lot of different things that are out there.

And I think it's really our job to keep an eye on what's going on and find out how we can add value. So I absolutely agree with you.

I may not have all the ideas that we will have a year from now because I think as we go and grow into this, I think we're going to learn more and find other areas where customers will actually even ask us to join them and help them out.

That's been part of the fun of this, is they're looking for other ideas, and they bring us into things that we didn't even think of..

Got it. Thank you folks and congrats again..

Thank you, thank you Tahira..

There are no further questions on the phone at this time. I now turn the call back over to Mr. Dennis Bertolotti..

Okay. Well, I'd like to thank everyone for joining us today, and we wish everyone a great and safe day..

This concludes today’s call. You may now disconnect.