Good morning ladies and gentlemen. My name is Brian and I'll be your event manager today. We'll be accepting questions after management's prepared remarks. I'll now pass the call to Mistras Group Director of Marketing Communications. Please proceed..

Welcome to the Mistras Group conference call for its third quarter of 2019. My name is Nestor Makarigakis. Participating on the call for Mistras will be Dennis Bertolotti the company's President and Chief Executive Officer; Ed Prajzner Senior Vice President Chief Financial Officer and Treasurer; Dr.

Sotirios Vahaviolos Founder and Executive Chairman; and Jon Wolk Senior Executive Vice President and Chief Operating Officer. I want to remind everyone that remarks made during this conference call will include forward-looking statements. The company's actual results could differ materially from those projected.

Some of those factors that can cause actual results to differ are discussed in the company's most recent annual report on Form 10-K and other reports filed with the SEC. The discussion in this conference call will also include certain financial measures that were not prepared in accordance with U.S. GAAP. Reconciliation of these non-U.S.

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

I will now turn the conference over to Dennis Bertolotti.

Dennis?.

Thank you Nestor. Good morning everyone. During today's call we will provide an update on Mistras' business performance. Our financial results for the third quarter and first nine months of 2019 as well as discuss our lower outlook for the remainder of the year.

Third quarter results continue to reflect the progress being achieved toward our long-term strategic initiatives. Revenues were up margins expanded and earnings increased on a year-over-year basis. We also generated strong cash flow a hallmark of Mistras. Let me note some key highlights for the quarter. Gross margin increased across all 3 segments.

SG&A decreased by 100 basis points as a percentage of revenue generated strong cash from operations of $19.4 million and free cash flow of $13.4 million. On a per share basis free cash flow was $0.46 for the third quarter. Additional highlights for the first nine months of the year. Consolidated gross margin increased 160 basis points.

Cash from operations of $40.5 million with free cash flow of $22.5 million. Debt paydown of $23.3 million exclusive of the $4.8 million paid for New Century Software our latest acquisition. Revenue and operating earnings were ahead of fiscal 2018 on a year-to-date basis through the first nine months indicators of a robust business.

However our strong momentum developed over the past 2 quarters encountered some headwinds coming into the fourth quarter of 2019. In particular a note of caution unexpectedly rose among our oil and gas customers attributable primarily to increased macroeconomic uncertainty. Although our long-term outlook remains intact.

These factors are clearly influencing current activity in the oil and gas market with pushouts in demand. Most of our oil and gas exposure is predominantly in the up and downstream sectors. The downstream being driven by capital spend including turnarounds and modestly in the run and maintain OpEx spend.

Consequently we feel well positioned with our strategy focused on growing our run and maintain revenue a sector of the market that we dominate.

I feel very good about where we are in our look for the long term of this unexpected pause and the oil gas in markets has created some immediate challenges that will affect our performance through the end of 2019 and may drag into the first quarter of next year.

Consequently, you can understand why our full year with is not lower than originally anticipated. And why we are accordingly lowering our guidance for 2019. We view this as a timing issue. As we expect most of the work will return to the market over the next couple quarters. And we'll walk you through a detailed update in a few minutes.

But looking out into 2020 and beyond, our underlying oil and gas business remains strong. And our plans and strategies to grow profitably over a long term are unaffected.

Based on what we are seeing and hearing underground we believe we are gaining market share and except for a few locations we have retained a vast majority of the customers served by our close to 90 labs across the U.S. Canada and Europe.

Each of these locations remain staffed with our experienced professionals so that we are well positioned to serve customers and capitalize on current opportunities as well as to continue to grow our market share in 2020 and beyond.

Even by conservative estimates we serve a $14 billion industry within the NDT spend of the business not counting the greater spend generated in the data and mechanical sectors in which we participate. These markets are growing at healthy rates and support our growth aspirations.

Our product line expansions into adjacent markets such as mechanical and pipeline inspection that increase that opportunity. And are quickly evolving MISTRAS Digital platform is providing us even greater opportunity. Though quite large it is a highly fragmented industry.

And many of our smaller competitors simply can't match the depth of our resources or the breadth of our services and valuable experience. This builds strong relationships with our customers because we save them unnecessary spend.

We are also utilizing our resources to create new products and services, and to make strategic acquisitions, all of which help diversify or in markets provide additional stability to our results in further distance ourselves from the competition.

Before turning the call over to Ed let me offer a few comments on some of the key developments in the quarter. Performance at Onstream continues to reflect a strong U.S. growth but a relatively weak Canadian market.

The recent commercialization of their 20-inch tool and the impending introduction of their larger 24-inch tool slowly increased their contribution.

And with the geospatial technology from the New Century acquisition providing an excellent complement to Onstream's Stream data view analytics we believe there are strong synergies that will open up new possibilities in the future as well as benefit our complementary PCMS software.

We see this acquisition as a strong strategic fit in one of our stated pillars for growth that being the midstream sector of the energy market. We view this as a growth market driven by increased regulatory oversight and rising customer demand due to more vigilant mechanical integrity programs all needs Mistras is uniquely qualified to deliver.

West Penn has good momentum and should outperform the fourth quarter as of last year. We expect them to continue to ramp up utilization at a second facility. In aerospace we also continue to benefit from the strength of our French operations.

Overall aerospace remains a key corporate growth pillar where the outlook for the industry over the next few years continues to be strong. Data management is also one of our strategic objectives and MISTRAS Digital is a discrete way to integrate our vast data capabilities.

Onstream Streamview PCMS software our ruggedized MISTRAS Digital field tablets sensing and monitoring capabilities and now the New Century Software are just some of the various ways that are weaving - that we are weaving together our data management capabilities to establish a leading position as the asset-protection market enters the age of the industrial Internet of Things.

As the market gets more sophisticated we want to be the leader in the market for more data and predictive analytics which we think are the industry big growth drivers. An exciting endorsement of our strategy has been the rapid adoption of our MISTRAS Digital tablet rollout that we've been piloting at a growing number of refineries.

These customers value this technology so much so that they are asking us to open up the app to let other on-site vendors piggyback on the software hence we are reviewing the monetization of this application to other third parties.

We expect to continue to roll out our MISTRAS Digital tablet to other customers in an accelerating rate to more of our locations throughout the fourth quarter and especially in 2020. This quarter we acquired New Century Software which forms another element of MISTRAS Digital.

More importantly this acquisition is another example of forward thinking about the direction of the midstream sector and the opportunity to leverage technology to grow. New Century is a leading provider of pipeline integrity management software and services to energy transportation companies.

New Century provides software solutions data management expertise and extensive pipeline experience to enable a global network of customers in the oil and gas industry to manage pipeline integrity meet regulatory compliance requirements and maximize safety and reliability.

This acquisition aligns with MISTRAS' mission of delivering value-added integrated smart data solutions to its customers. I will now turn the call over to Ed for a detailed review of the financials for the quarter..

total revenues are expected to be between $740 million to $750 million; adjusted EBITDA is expected to be between $70 million to $75 million; capital expenditures are expected to be under $25 million; and free cash flow is expected to be between $28 million to $32 million.

We are still developing our full year 2020 budget but preliminarily we anticipate modest single-digit top line growth while maintaining year-to-date 2019 gross profit operating margins and cash flow levels. There are also a number of additional growth opportunities all of which will be incremental to our current expectations.

We will provide our outlook for full year 2020 on our next scheduled call. We are confident in our sustainable business model which has proven to be nimble in responding to sudden and severe cyclical changes in the oil and gas sector.

We remain firmly committed to diversifying our end markets over the long term while at the same time embracing our current end markets with an evolving differentiated solution. With that I'll now turn the call back over to Dennis..

Thank you, Ed. As we implement our long-term strategy we recognize there may be some bumps along the road. However these distractions are not a hindrance to achieving our ultimate objective of becoming the partner of choice in the NDT market and its adjacencies.

We continue to steadily transform Mistras with our basic principles always at the forefront that being delivering value meeting our promises innovating to drive productivity for our customers and developing industry-leading productivity tools.

I am confident and continue to see signs that our customers' operations see value in the span with us as a true ROI. The enthusiastic reception of our MISTRAS Digital tablet initiative further illustrates the partnerships we are forming with our clients.

I also believe that we do this better than our competition and this will be evidenced by our relatively stronger performance than our market as we exit 2019 and head into 2020.

We are keenly focused on differentiating ourselves in the market particularly through our expanding service lines which solve for customers' needs of reduced overall labor to accomplish a given project involving digital solutions as I mentioned earlier.

We also remain firmly committed to maintaining our position at the forefront of leading the development of advanced inspection tools utilizing proprietary technology. We add value and this enables us to price at market and generate solid operating profit with predictable attractive cash flow.

In the process we serve our customers with an exceptional return on their investment by delivering top-quality results with superior economic value. I am confident that we are on the right path executing on our strategy and creating value over the short mid and long-term for Mistras shareholders. We will now take your questions.

Brian please open up the phone line..

[Operator Instructions] And our first question will come from the line of Edward Marshall with Sidoti & Company. Your line is open..

So I'm looking at the gross margin here and it's easy I guess to attribute to acquisitions made over the last couple of years and maybe the returns you're seeing on that. But you've done considerable work on the cost and that's good to see.

Can you kind of break down the gross margin improvement for us and kind of how much of that's generated by these higher-margin acquisitions versus what you're doing from a cost basis?.

So I'll take the first have a crack at that for you Ed. The truth is Onstream and West Penn have not been performing as strong as we wanted to. So while they are very good cash generators and very good gross margin attributed to our gross margin profile they haven't been pushing it as far as we were looking for.

So a lot of the gross margin improvement is simply coming from our sales mix. Our focus on our utilization in Europe our maintenance of making sure that the kind of sales that we get are the type of sales we want. The oil and gas market while it can be competitive you can find the right customers to align yourself.

And if you add value we believe we've been doing a good job of getting the gross margins up.

I don't know if Ed want to add anything?.

Yes. I agree Dennis. It's definitely - I mean acquisition is an absolute part of it in sales mix. Some of this is that we exited such as staff leasing had lower-than-average margins. But we are also driving utilization and efficiency across the board. International being one that has showed very good improvement there.

So it's really across the board on lots of levels improving that gross margin..

Yes I was surprised to see it actually go up on a down revenue basis.

Is this something that you could potentially sustain as we move forward even a difficult revenue environment?.

Yes we believe so even if revenue were to dip off a little bit we still - we are very comfortable and confident that the gross margins would hold off. Absolutely..

Yes we are very proud of the fact that our margins are holding even a little bit less than what we wanted for revenue for sure in Q3..

I heard the comments about 6% to revenue I guess from Onstream.

I'm curious what's the investment been for the new tooling - larger-diameter tooling in that business? And then maybe ultimately the contribution to earning - the earnings profile in Q3?.

Ed it's Jon. Thanks for the question. The investment is relatively modest. It's in the high 6 digits to low 7-figure number. The contribution is almost instantaneous and it's very impressive because the high-technology content and effort to design and roll out these kind of tools the margins that could be earned on them are very good.

The question is just utilization. So we are in the early stages of getting qualified with customers on the 20-inch tool and the 24-inch tool will be ready in about a month. So a lot of rollout a lot of activity that we are excited by and upside to come..

And I guess it's easier to measure the actual capital outlay but you mentioned trials just a moment ago. I'm assuming there's an investment period of that trial at relatively lower noncontributing margins.

Is there any way to quantify that as you kind of expand into the U.S?.

There is Ed but I'd say that's more of a rounding difference in terms of - Onstream is certainly a profit contributor even with those investments. So it's just really a matter of when the uptake comes from them..

And our next question will come from the line of Sean Eastman with KeyBanc Markets. Your line is now open..

Thanks for taking my question. This is Alex on for Sean.

Just given the single-digit growth guide for 2020 I'm kind of just wondering what the drivers are to think about that can help achieve the higher end of the range versus the lower end of the range the low single-digit range? And then I was kind of wondering if the near-term headwinds you're seeing right now are going to carry into 2020 at all?.

Yes good question. So at this point we are still forming it together but we don't see a huge January and February. We believe the spring although is going to be a strong spring. In fact it might be one where we have constraints on just trying to make sure we have all the labor. So we are trying to beef up for that.

As far as the things that we have going on it's actually most recently even inside the aerospace. There's a lot of potential for investment. We've consistently had a lot of work in the LNG market with the new construction and inside renewables with wind generators. Our Canadian and European markets have a lot in renewable power and aerospace.

There's a lot of oil and gas potential. There's a lot of customers who were two years ago buying on the hourly rate and now are trying to look at this more on the value. And we see there's a lot of potential on those kind of changes. So we feel real good truthfully in our oil and gas market even in the up and downstream.

Once we get past this little cost trough that we have ourselves in Q4 and we see aerospace and renewables also pushing it. So there's really no one driver. But fortunately it's a little bit more across the board for us..

No that's helpful.

And I was just also wondering if you could comment on the M&A pipeline for I guess tuck-ins versus larger acquisitions you're seeing nowadays? And maybe how that compares to what you were seeing over the past couple of quarters?.

Sure. That's a good question. I mean right now we've been kind of quiet since we had our 2 larger acquisitions and we are watching our leverage. But we did a New Century one and it was one that actually came up as a very, very good strategic fit. And right now we are doing smaller tuck-ins because most of our money is going down to pay our debt service.

But we do believe it's a very strong market out there for looking for acquisitions. We do believe there's a lot of opportunities. We still have folks dedicated to it full time and looking to make sure nothing very strategic is biased while we are watching our spend.

But there is no lack of things going on out there and that just might be because people are seeing it as a good time with the market being up. But yes there's a very rich pipeline out there..

And our next question will come from the line of Andrew Obin with Bank of America. Your line is now open..

This is David Ridley-Lane on for Andrew.

Can you talk about New Century Software help us with the rough revenue and margins? And maybe talk about the client overlap? Or if this is - opens up opportunities for cross-sell?.

So roughly speaking PCMS is a very good established software for pipeline integrity management assets such as stationary and primary a lot of pipeline above ground. We weren't very well-known or very good on the buried pipes and there's different codes and measurements that you have to go by.

So New Century was actually that portion of it they had the buried pipeline market very strong. We have a lot of crossover customers. In fact prior to us doing the acquisition by pure coincidence we had 4 different customers asking us in - 2 in U.S.

one in Canada and one in Europe asking us to look at New Century specifically by name we had already gone there and been reaching out to. But just by coincidence they were talking to us about that because a lot of customers own their own pipeline.

They also have to have stations where the pipeline comes from belowground to aboveground and then you treat the chemical or fluid or gas that's in there. You pressurize it you dry it out whatever they have to do. So these pumping stations were where we were with PCMS we just didn't get to follow the pipeline below grade. Now that we do.

We have very good connection on that. So our crossover our customers hooking up PCMS to New Century back and forth is actually a very, very strong profile.

But truthfully we actually originally looked at New Century for the Onstream acquisition because Onstream puts out the data where the pipes are they put out the GPS they locate it but they don't show that to a customer. People like New Century actually geolocated put it on maps and do the consequential damage that Onstream didn't have.

So between Onstream PCMS and New Century it's a real great fit for us. And there was one other part of the question I didn't get to writedown I think that I may not have answered..

Just rough revenue and margins?.

We haven't disclosed the purchase price or much of the transaction details. Again as Dennis said this is more strategic how it helps the other Onstream and PCMS's software components. So we haven't - it's fairly - it's not the size it has it's the impact it has on our other businesses..

And then how does the current environment compare with late 2016 which I believe had some similarities in oil and gas weakness. You had a very strong bounce back in the second half of 2017.

So are you sort of anticipating a similar trajectory here?.

So that's a good question but I don't believe at this point that we are seeing it's going to be last as long. So I don't think the bounce will be as prominent because last time it went from '16 into '17 and to your point it caused a pretty big change in the first half of '18 because a lot was pent-up.

I believe there will be some of that but I think the amount of pushed off or deferred work will be minimized only because it's going to be mostly Q4 and maybe a smaller amount for Q1 as well..

And our next question will come from the line of Tate Sullivan with Maxim Group. Your line is now open.

You mentioned a couple of times the digital tablet rollout.

Can you update - I mean is it already - I mean what phase are you? Is it already with customers? And are you already seeing higher margins with where the tablet has been for a bit? Or where are you in the stage of that rollout please?.

Tate this is Jon. So 2019 is the year that we officially started to roll out the tablet. Right now we are just in a handful of sites. We've got about 4 or 5 sites that we are looking to roll out on a pilot basis in the fourth quarter. There's a lot of upfront demonstration and show and tell and we are getting a lot of enthusiastic thumbs up.

Now it's a question of just getting through the day-to-day of implementation and getting out into active production. So far all the feedback is terrific we are hearing incredibly positive support.

Even though we are not necessarily the first to the market in our industry what we are hearing is from people who've seen other's attempts at this by other competitors of ours that we seem to have the best solution available. So it's relatively early. And the focus right now is for our existing customers doing NDT first.

The next focus will be our existing customers and expanding to mechanical services that are adjacent to NDT you heard Dennis speak of that think of insulators and scaffolders as an example but there could be others.

And then the next phase will be going to new customers that are not existing customers doing both sets of NDT and related mechanical sets of services. So we've got a road map mapped out. We've got the product built at this point. And now we are in active rollout on a number of pilots.

And as Dennis said in his commentary that's really the activity for 2019 looking to get very busy on this in 2020..

Tate, it's Dennis. First welcome to the call. And to build on that what Jon said it's a productivity tool that we really believe will be something that customers are looking for. I mean virtually as Jon said no one's finding this by surprise everyone is trying to find a secret sauce and creating it.

But I think us being first to market with the ideas we have and the ability to lean on what we've done with PCMS and other digital projects already and years of working on that I think gives us an edge as to what the customers are looking for.

So we are really pushing that strong and do think it'll get good favorable results in the market as we roll it out like Jon said..

Second one for me. You mentioned that fully staffing your 90 labs in anticipation of meeting future client demand.

I mean is part of your implied guidance for 4Q related to not - the lower refining work not absorbing as much as the overhead from those labs? Or is a meaningful portion of that lab work tied to the oil and gas customers as well?.

We're fully staffed up for the volume level. Our labor force kind of flexes to the volume at hand. So that was kind of the comment there that we are - we ratchet down overheads where we can but we are fully ready to go in the ebbs and the flows of the business..

But to be fair Tate the work is in the capital side of it. And that's always something that is our overage on our labor. I mean we are sized very well for our run and maintain portion of the business. And then when it comes to the additional work people go from 40 hours to 60 70 or 80 and we bring in other folks and all that.

So we feel like our staffing for what we have is going to be fine. That's why we believe we can do well on the margin as well even in this down cycle..

And Ed on the free cash flow in the quarter receivables declined from $155 million to $148 million.

Was that a onetime faster collection on those receivables? Or what - is there something more fundamental that you can extend going on there please?.

Yes no that was just a good fundamental quarter. We continue to work hard at working capital. I'm still not happy where DSO is we can drive that down further. So yes we see continued increases and improvements in cash flow from driving down the working capital and it's a team sport.

We're all very heavily involved in that the operations in the finance side. And I think there's still more gains we can have on working capital..

And last one just based on your comments from me on oil and gas exposure.

And I think you covered I mean how quickly it can turn in some previous comments as well too but can you clarify what you meant by the IMO 2020 prep? I mean does - are refineries shifting their CapEx to preparing for more output related to that IMO 2020 could more inspection work follow that?.

Sure Tate it's Dennis. I mean typically we don't get a lot of the reasons why they're doing turnarounds it could be capital it could be safety debottlenecking things like IMO and all that.

But lately a few of our customers have told us that their budget spend while being curtailed earlier than usual was partly driven by IMO 2020 and them having to buy different slates or different more expensive feedstock.

So while we don't truly understand what that's about as far as how it affects them and why we do have customers telling us that their budget for 2019 got cut off abruptly because of what's going on with IMO 2020. As you know that's a 1/1/2020 thing for them supplying the higher grade fuel. So we do believe for some reason this does have some effect.

But we are not close enough to understand if it's going to go much into January or February we do believe it might have part of the softening there as well..

We have follow-up questions coming from the line of Edward Marshall with Sidoti & Company. Your line is now open..

You caught my attention when you said not a huge January and February but you see March trending better. Is that what you're hearing from customers? I mean jobs are lined up.

What - can you maybe elaborate on what you are - what you were talking to there please?.

Sure. Typically years past spring and fall was just that it was just in the spring and then in this time of year. And a few years ago customers started in the areas where they had the weather to support it they started doing January and February turnaround. Early '18 was a very good indication of that.

All the pent-up demand that was being asked about earlier got pushed back into early '18 and people were doing January and February. We didn't see that in 2019 we don't see that in 2020 but we absolutely aren't speaking about turnarounds that are booked. Customers are talking to us about skill sets needed and work requirements that will be happening.

Again I don't know if that's all March or April when that starts but it's all spring related. So there is what we consider to be at least a normal if not above-normal spring facing us in 2020. It's just it may not be a January or February start..

And you also mentioned labor? And is - I guess first question would be is labor an issue now or is it aligned with price? And then you talked about it specifically toward margin being somewhat constrained can you kind of talk about how you're going to manage through that cost scenario?.

Sure. It's Dennis again. So the customers that are talking to us about these busy areas are a lot of times inside the more dense industrial areas in the Gulf. In the West - Western Canada Western U.S. and they know that they are competing with other competitors of theirs for that same type of labor skills.

So they are very open to talking to us about payroll increases not so much about margin increases but to pay all the way through to the taxes and everything else that go with that. So there's a lot of talk going on now about what does the colo look like for next year.

Predominantly in the busier areas but truthfully in most areas customers are willing to talk about pay increases for skill sets it may not be across the board. It might be in the ones where they believe the biggest impingement on the labor is coming from in the higher skill sets.

But yes there's really been no pushback on customers talking about increases. It's just really about holding the margins and letting their payroll flow through..

And typically you're a - you're kind of flexible with your - with employment.

Is this more permanent labor adds for potentially future growth? Or how will you manage the operations surrounding the additional labor?.

So the spring turnaround itself is typically more of just flexing up and down. But the things that we were talking about earlier in the oil and gas market the things that we see in construction and renewables and all that. Those certainly are going to be organic and they will be permanent jobs added to wherever the markets are.

So we do see a lot of growth out of that.

But again the spring time is typically for the most part you're just moving bodies out of areas where they're weak and moving them to the strong us having a lot of run-and-maintain contracts where we have a lot of people in the same families allows us to move people from one refinery family type to another helping them out during their turnarounds and giving them people who are familiar with their operations and way of taking in data as well..

Thank you. Ladies and gentlemen this concludes our question-and-answer session for today. It is now my pleasure to hand the conference back over to Dennis Bertolotti, Chief Executive Officer for any closing comments and remarks..

Okay thank you. We appreciate your interest in Mistras. We look forward to updating you on next scheduled call. But before I leave I'd like to thank all Mistras employees for their continued hard work and dedication to making our company one that's safely and effectively delivers reliable and increasingly more predictive data for all our customers.

Thank you for listening to today's call and wishing everyone a safe and productive day..

Ladies and gentlemen, thank you for your participation on today’s conference. This does conclude your program and we may all disconnect. Everybody have a wonderful day..