Ladies and gentlemen, thank you for joining Mistras Group’s Conference Call for its Fourth Quarter and Year End 2020. My name is Towanda, and I’ll be your event manager today. We will be accepting questions after management’s prepared remarks.

Participating on the call from Mistras will be Dennis Bertolotti, the company’s President and Chief Executive Officer; Ed Prajzner, Executive Vice President, Chief Financial Officer and Treasurer; 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 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 measures 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 in the SEC’s website. I’ll now turn the conference over to Dennis Bertolotti. Sir, you may begin..

Thank you, Towanda. Good morning, everyone. We ended the year on a high note with strong performance across virtually every key performance metric, as well as with significant strengthening of our core financial condition.

On the top line, it was our strongest revenue quarter of the year and a quarter that is not historically high on a relative basis due to seasonality revenues benefited from offshore mechanical, longer running turnarounds and growth in data services, particularly within PCMS and New Century Software.

Gross profit margin was also up in the quarter to 30.7%, compared to 28.3% in the same quarter last year, continuing to favorable trend over the past several quarters. Most importantly, we have now expanded gross profit margin by 100 basis points or more on a full year basis for the third consecutive year.

We also continue to drive down costs, which contributed to improvements broadly across our key profitability metrics with operating income in the quarter, nearly doubling over the year-year-over period and adjusted EBITDA up nearly 22%.

And once again, we generated very strong cash flow with both operating and free cash flow exceeding adjusted EBITDA in the quarter, as well as on a full year basis. As a result, we actually generated more operating and free cash flow in 2020 than we did in 2019. This was quite an accomplishment given a significantly lower level of revenue in 2020.

This was in part attributable to an improvement in working capital with more detail on later. The first priority remains using the free cash flow we generate the pay down debt and by the end of 2020, we have reduced our net debt position for nearly 19%, $200 million.

This was all accomplished while continuing to assure the health and safety of our employees, customers, and vendors. In addition to paying down our debt, we also continued to invest in our sales and marketing infrastructure, as we felt it was important to be prepared for the markets return to a more normal level of activity.

We have also been making great strides in our expanding Mistras proprietary IP, which will position us to have one of, if not the most comprehensive asset integrity service offering in the market for our customers.

It was a very strong finish to an extremely challenging year and it puts us in an excellent position to build upon our success and the upcoming year and beyond.

Fourth quarter represents the culmination of the steady progress achieved over the course of the year, excuse me – adapting to a slowdown in economic activity, volatility in the energy markets and a quickening pace of change across nearly all of our end markets.

The demand for services that assure safety, reliability and regulatory compliance of our customer’s valuable assets is on the rise and it’s being modified and enhanced by lessons learned during the remote working conditions in post during the pandemic of 2020. The energy market will remain core for us.

It is an extremely large market where we have ample opportunity to grow. We believe the changes in the energy market precipitated by the pandemic impact on supply and demand are working to our advantage, as they are accelerating changes to which few competitors in our industry will be able to respond.

We have been anticipating these changes by expanding vertically beyond NDT into mechanical and other services as vendor consolidation trends continue. We are also addressing rapid shift to new sources of energy by accelerating our horizontal expansion into renewables and especially wind.

We are also accelerating development of new product offerings, such as a suite of data services that include much sought after predictive capabilities, which significantly improved efficiency.

According to the Deloitte Analytics Institute, the ability to predict failures can increase equipment uptime by 20% and productivity by 25%, while lowering breakdowns by 70% and maintenance costs by 25%. Consequently, we are quite excited about the poor coming introduction of our insights based asset protection software ecosystem.

The new platform is an engraved suite although in our existing data services together with improved connectivity to our customers. The changes we are making are key to profitably growing our energy revenues, expanding market share, enhancing our service offering and delivering unique Mistras capabilities that meet industries emerging needs.

The sequential revenue growth experienced since the onset of the pandemic in the second quarter of 2020, just clear evidence that this strategy has been successful. We are adapting and changing our offerings and respond to customer demands. Our strong relationships and diversified service capabilities helped us win work and a receding market.

Renewable energy revenues are picking up. And the promise of more data services, a full line of required services, not just inspection is attracting a lot of attention. Gross margins are likewise benefiting from our ability to demonstrate how Mistras offers customers more value that has been generally available to the market.

The goal over the long-term is to diversify both our end market and our proprietary products and services in order to reduce volatility, generate more stable growth and improve gross margins.

As part of that strategy, we believe revenues from oil and gas will grow, but slower than consolidated revenues, ultimately representing less than half our total revenues in the future years along with improved profitability.

And the near-term, a continued strengthening of energy prices seem to have stimulated the market with demand increasing there is more talk of a traditional spring turnaround maintenance season, which could materialize for us late in the first and into the second quarter of 2021, probably delayed by the severe weather stain in the Gulf this year.

We should also provide the opportunity to exit the later part of 2021 at a revenue run rate approaching that of fiscal 2019. In aerospace, we continue to have success penetrating the private space flight operator and military market, while the commercial market works through its near-term challenges.

Aerospace is a strategic market where we believe we can generate strong growth through horizontal expansion and increase penetration to adjacent markets and through the introduction of bundled services that are in strong demand.

It is a large market where we can achieve better than corporate average margin in which we are confident has an excellent long-term growth prospects. We see a generating a larger portion of our revenues over the next several years. On-stream our midstream inline integrity testing business at a very good year in 2020.

This was due to its introduction of tools for larger diameter pipes, which is increasing its addressable market as well as continued penetration on the U.S. market as we first design into our acquisition plan. Margins at on-stream also remain above the corporate average.

On-stream is strategic, not only because it serves a large and less volatile segment of the energy market, but also because it is another vertical in which we are able to grow by adding value through specialized data services.

And Mistras Digital, our mobile platform continues to evolve into more than an inspection tool, while prevailing economic conditions may have slowed new adoptions, there are also accelerating the pace of change across industries and creating more robust users of our digital platform.

We are confident that owners in all of our end markets are anxious to adopt our new technology, which has already demonstrated the ability to improve both the productivity and efficiency of its users, for not only inspection, but also for related services.

Over the next few years, we believe we can significantly grow our digital revenues, which will represent an increasing proportion of our total revenues as well.

Consequently by staying focused on what customers will need in this changing market, we are confident that the hard work put in this year as positioned Mistras for a strong rebound in fiscal 2021.

For instance, we have created the right mix of resources to offer turnkey solutions to problems, which many markets with significant assets never envisioned. For instance, in the wind turbine market, we can offer services to monitor, inspect, and repair the blade, housing and hubs of those turbines.

Probably most exciting the beta test that we are developing using more remote – using remote sensing technology that identifies potential damage and real time are demonstrating value with our customers. This will provide dramatic improvements compared to the slow cumbersome and expensive inspection and outdated monitoring methods currently in use.

A new era for Mistras is now beginning. Over the longer-term, we believe we can grow and diversify Mistras to generate more stable financial performance. All of our efforts today are positioning us for the markets of tomorrow.

While fiscal 2020 may have been a pause in our growth, which was driven by the COVID-19 pandemic, it did not stop us from making great progress, strengthening our organization to capitalize on existing and emerging opportunities. At the same time, we strengthen our financial condition.

Another competitive advantage and an industry where owners are consolidating their vendors and the financial viability of their partners is becoming more and more important.

Fiscal 2021 is setting up to be a strong rebound year and newer, faster growing markets, such as space and alternative energy and data, we have already established a market presence and are building awareness around our brand and our offerings.

We are essentially on the ground floor in these industries, building relationships and using our experience as a springboard to keep our products and services ahead of the competition. In addition, it is important to note that our existing markets remain very large and offer plenty of growth potential by growing share and introducing new solutions.

We are confident in achieving steady improvement over the course of this year, especially in the second half of 2021. Although, we expect first quarter revenues could be relatively flat to slightly down in the fourth quarter of 2020 due to lingering COVID effects, weather and usual seasonality.

This optimism is not only due to an anticipated recovery in our end markets, but also due to our strategic initiatives to grow in adjacent and new markets, introduced new products and grow of share, particularly in the oil and gas market.

Because of the various efficiency and productivity improvements achieved, we further believe our model will enable us to maintain our strong gross margins, keep costs under control and grow the bottom line faster than ever.

I would now like to turn the call over to Ed to give you more detail on our financial results for the fourth quarter and full year 2020..

Thank you, Dennis. We grew our key performance measures significantly in the fourth quarter. Once again, illustrating how our asset-light strategy consistently generates strong cash flows even in the most challenging times. Adjusted EBITDA was up nearly 22% to $17.6 million.

Operating cash flow of $26 million was up approximately 40%, and free cash flow was up and even more impressive 55% to $21.2 million for the quarter. We converted over 100% of our adjusted EBITDA into free cash flow in the quarter and that’s quite a feat. For the year to date, we also converted over 100% of our adjusted EBITDA into free cash flow.

Again, that’s rather remarkable and attributable in part to a reduction in trade receivables and benefit from the CARES Act, which allowed us to differ certain payroll taxes and a reduction in capital expenditures.

Given our expectations for 2021 to be a growth year, we expect the cash conversion from adjusted EBITDA to trend back down to our historical norms of averaging about 50%, mostly due to working capital considerations as we invest in growth.

In fact at the top line, the fourth quarter was our strongest revenue quarter of the year, with nearly 9% sequential growth from the third quarter of 2020. It was also the third consecutive quarter in which we met or exceeded our revenue guidance. As Dennis noted earlier, energy markets have been recovering and are currently stable.

Longer running turnarounds supplemented our steady run-and-maintain business in the fourth quarter of 2020. While hours worked remain below the year ago levels, they did reflect sequential improvement over the third quarter.

Revenues in the quarter also benefits from growth in alternative energy, such as wind turbines, in addition to gaining momentum in the private space market. Offsetting these improvements, where continued weakness in commercial aerospace, especially in Europe.

However, international revenues in the quarter included improved turnaround volume in Germany, as well as favorable foreign currency translation.

Products and systems also turned in a solid quarter as increased infrastructure spending is leading to growing demand for our sensors and related technology, primarily in the transportation infrastructure market.

And as Dennis mentioned, but it’s worth repeating, gross profit margin increased 240 basis points in the quarter after expanding 200 basis points of last quarter. As a result, we have recorded a 100 basis point or greater improvement in gross margins for the third consecutive year on a full year basis.

Gross profit margin improvement is attributable to productivity improvements and a favorable sales mix. Some of the gross margin benefit can be attributed to lower 2020 portion of revenues, which comprises pass-through costs. That is expenses we incur and deal at essentially costs such as travel and per diems.

As COVID restrictions loosen and revenue grows in 2021, gross profits should follow suit, but gross profit margin improvement may be somewhat muted as the increased pass through costs as the year progresses due to the increased turnaround activity expected in 2021.

Selling, general and administrative expenses were down nearly 5% compared to the year ago quarter. These costs decreased on a relative basis, less than in prior quarters of 2020 as certain cost reductions taken at the inception of the pandemic, such as temporary salary reductions had been restored effective at the beginning of Q4 2020.

We constantly calibrate our overhead cost to be in line with our expected revenue level. Given our exceptional control of overhead throughout 2020, operating income was $4.7 million in the fourth quarter of 2020, an increase of nearly 100% over the prior year period.

And non-GAAP operating income more than doubled to $6 million for the fourth quarter from $2.9 million in the same quarter last year.

Looking back for full year 2020, it is important to keep in mind that although revenues were down nearly 20%, gross margins expanded by 110 basis points to 30.1% for 2020, and cash flow was up significantly for fiscal 2019 as well with operating cash flow of 15% to $68 million and free cash flow up 44% to $52 million.

And debt reduction remaining the priority use of our residual cash flow in 2020, as well as continuing into 2021. We were able to reduce debt by $36 million in fiscal 2020.

Given the significant cash and cash equivalents built up during 2020 in our international locations, we reduced net debt by $45 million in 2020 to $200 million at December 31, 2020, nearly 20% reduction. We were in compliance with all of our bank debt covenants at year end.

Specifically, the funded debt leverage ratio at 12/31/2020 was approximately 4.8 times versus an allowable 5.25 times. There are step downs in the maximum funded debt leverage during 2021. And we expect to remain in full compliance with this covenant and all covenants throughout 2021.

Our goal is to achieve a funded debt leverage ratio of three times by the end of 2021. We are highly confident in our sustainable business model and remain firmly committed to carrying out our strategy both today and over the long term. And with that, I will now turn the call back over to Dennis..

Thanks, Ed. Let me conclude today’s prepared remarks with our outlook for 2021. Our business has been recovering over the past two quarters, from the low experienced in the second quarter of 2020, when the effect of COVID-19 was most impactful to our financial results.

Although energy prices and demand are currently stable, the ongoing COVID-19 pandemic continues to impact our two largest markets.

We expect annual revenue for this year to be higher than in 2020, however, first quarter 2021 revenues will decline modestly compared with those of the prior year, due to a full quarter’s impact of COVID-19 in 2021 as compared to a partial month in 2020.

Moreover, first quarter 2021 revenue will be lower sequentially compared with the fourth quarter of 2020, due to typical seasonality patterns in the first quarter of any given year, not to mention the recent severe weather impacts of the Gulf region.

We are optimistic that the revenue will continue to rebound once we reached the second quarter of fiscal 2021 and therefore we expect that revenue will commence year-on-year improvements beginning in the second quarter of 2021. Although, we expect that year-on-year adjusted EBITDA improvements will commence beginning in the first quarter of 2021.

This outlook is contingent on continuing macroeconomic stability, including continuing stabilization in crude oil markets, timely and effective implementation of COVID-19 vaccinations in 2021 and no new or increased stay-in-place mandates resulting from an increased spread of COVID-19, which would impact our ability to work as a critical service provider.

We believe that as we move deeper into 2021 market conditions will improve particularly in the oil and gas sector. But these are remaining as challenging times.

Mistras continues to play offense by growing share and investing in our sales, marketing, and new technology initiatives, which provide the innovation that will drive Mistras and our industry forward.

Our goal is to bring value to our customers, knowing their challenges, we will evolve – as safety and compliance standards continue to change with an evolving world view.

And for new and emerging industries, such as alternative energy is a brand new world where they are relying on the experience and combined skills of trusted advisors, such as Mistras.

The large layoffs seen in many of our customers and made them more dependent than ever on complex vendors, such as Mistras to operate efficiently, as always, Mistras’s goal is to remain at the forefront of the industry and to drive value for our shareholders.

Before taking your questions, I like to thank all the Mistras’ employees, once again, for your understanding and leadership shown and helping us through this crisis, by continuing our solid reputation for safety, quality, and innovation all while providing outstanding customer service and dedication during these extremely trying times of this past year.

Please continue to show the same concern for others and leadership you have shown to all of our stakeholders in the future. Caring Connects works. Towanda, please open up the phone line..

Thank you. [Operator Instructions] Our first question comes from the line of Sean Eastman with KeyBanc Capital Markets. Your line is open..

Hi guys. Congrats on a really strong finish in the fourth quarter. It’s great work.

I guess, first one for me, I’m just curious with the dialogue with customers is like, right now, I mean, are they mostly focused on making sure you guys are going to have the capacity to support them as these facilities start to run harder or is the dialogue more so focused on trying to do things differently in terms of driving efficiencies through sort of new technologies and data.

That’d be an interesting dialogue..

Okay, Sean, I’ll take it and Jon will probably jump in. On capacity, the one thing that we didn’t do is, we didn’t cut into our business when 2020 first popped up with COVID. We didn’t cut back on our sales or marketing. We pushed in on that and we didn’t do anything on the technicians. We just modified the hours.

Everyone worked according to the work that was out there and we took all appropriate cost cuts. So for the most part, we have all the bodies we had before this started, we just have a lot less work for them. We trend our hours every week, both in un-billable and billable hours. And we trend how many people we had out.

We peak, Sean, at about 22% of our technicians that were billable in North America during the hike of the COVID late March and April. We’re down now to sub 2% or something like that. It’s minor. But the hours were always more than double whatever we were out in billable post.

So what happened is our customers really try to get people back on as fast as possible. They didn’t want to lose as much as they could from the vendor base ourselves and any other vendors, but they really needed the amount of hours.

So we have the ability to come back and handle whatever hours that we see coming at us even as we’re growing here into the spring. Our bodies are there. You always need some supplemental. Some people are specialty folks, but we do a good job of every week. We call every general manager. We get everyone on both the international and a domestic call.

And we talk about resources and where we are short and where we’re long. And we have our internal recruiting folks doing nothing really, but moving bodies internally. So we feel very good about our capacity.

To get to your second question on efficiency and technology, absolutely, they’re starting to think more and more about how do we do more? How do we predict more before the turnaround? How do we do online monitoring before the turnaround everything? How do we minimize everything? Especially in 2020, the turnarounds are really minimized by the hours, but there’s a lot customers are thinking about now about gaining efficiencies with our mobile solutions and just all the online capabilities.

That’s why things like the wind turbines and there are new people still would go and look at a term and every five years or whatever their schedule was, the day after you inspected, something could happen and it needs repair again.

With the new things that we’re working on, we can tell them when it happens immediately and go do the inspections on what is most in need of a repair. I don’t know.

Jon, if you want to add anything to that?.

Yes, Dennis, I would, I think – I agree with everything you said, but in addition, I think, as you said in your prepared comments, we spend an awful lot of time during 2020 enhancing the capabilities that we have and being able to be in a position with customers to produce value that we’re being told by them. They’re not seeing from others.

So things like the digital, the mobile solution, it’s a differentiator, the fact that you get the visibility, the productivity from our solution and our workforce does, in fact, we’ve even got other trades which customers have asked the other trades to use the Mistras digital mobile solutions, and they’re using it with good success to drive additional productivity.

That’s just an example of the innovation that we’ve been bringing out to bear. So I think that that it’s really resonating with customers..

Okay, interesting. And I’m just curious on the margin trajectory in the business. I mean, if we’re back at that 2019 revenue run rate in 2022, I mean, do you anticipate the margin profile to be similar as what you guys did in 2019 or better or worse? I’m just kind of curious how to think about that..

Yes, Sean, I will – Ed follow me up, but I’ll tell you, with the improvements we’re seeing on gross margin, maybe not all of them in 2020, because some of them are just the differences of pass-through and per diems and things like that. But we believe a good part of everything we’ve been doing in gross margin is sticky.

It’s a reflection of what parts of the business we’re growing up and where we’re focusing and the customers and everything else. So we believe we’re not going to be slipping back to gross margins of the past. We’re going to get growing from where we are.

Ed, is there anything else you want to add?.

Yes. No, definitely. That’s true, absolutely. And again, the mix is very important. Again, the relative level of pass-through activity happening in a given period can absolutely start to affect your margins a little bit. Certainly, we’re going to keep the overhead cost control and calibrate cost of revenue going forward.

Sean, we do believe the EBITDA rebounds a little quicker than the revenue does here in 2021. But yes, we definitely have aspirations to keep improving, but again, it’s not always linear.

Every quarter is not going to move exactly in lock steps with the quarter before it, but no – but yes, we definitely feel that those margins are certainly attainable back in 91 and 90 rather than in going forward..

Okay, great. And one last quick one from me.

I mean, if we’re exiting 2021 at the 2019 revenue run rate, what does that assume around commercial aero?.

Go ahead, Jon..

I’ll start off there. Yes. So what we’re saying is, if you were to sort of annualize the fourth quarter of 2021, it’ll look a lot like 2019 levels. We have in all of our budgeting and forecasting and planning, we have aero lagging the oil and gas recovery and most people do. Commercial in particular might be lagging.

We believe the defense and then the space might be moving a lot quicker and buffering some of the weakness in commercial, but we have aerospace lagging a little further along before it gets back to 90. We’re not suggesting that aerospace gets there in 2021, but versus oil and gas gets close.

But aero will definitely lag a little bit into 2022 before it gets back to 2019 levels..

Okay. Very helpful. Thanks for the time gentlemen..

Thank you. Our next question comes from the line of Brian Russo with Sidoti. Your line is open..

Good morning. Ed, you mentioned your leverage ratio targets of three times by 2021.

Could you just discuss the step downs in your interest expense and borrowing costs as leverage falls?.

Sure, absolutely, Brian. So yes, so the biggest break in the pricing grid would be once we’re below a 3.75 leverage, which is two quarters from now, there’s a huge step down in interest from the current 5.15 down to a 3.5. So there’s a huge reduction.

We won’t get there until the effectively that the fourth quarter of this year, the pricing grid goes into effect prospectively. After that the new leverage is achieved. So you’ll have fairly similar interests, slightly less debt, but similar interest rate for the next for three quarters of 2021, it’ll drop down in the fourth quarter.

So you’ll have a modest reduction happening, but then from that point forward, you have a huge reduction going forward once you’re down to that next pricing grid. So there’s a big drop from 5.15 down to 3.5 later this year as we get below the 3.75 leverage..

Got it. Great. And then just your comments on the SG&A.

Do you have any SG&A as percent of revenue targets, as revenue increases with the understanding that you’ve retained a lot of your sales and marketing, I think it’s in the mid 20% at year end 2020, is that – should the SG&A track revenues or should revenue growth exceed the SG&A growth?.

It’s definitely the latter there. I mean, when we’re budgeting and forecasting, obviously, we want SG&A to grow at only a fraction of revenue in some periods it’s even – it should be growing a fraction a half or only a quarter of the revenue increase.

See, right now, I think we ended Q4 SG&A is around 25% of revenue, approximately revenue will be scaling up next year. SG&A will not scale that much higher. I will look at it where that SG&A may stay flattish to creeping up slightly next year. Revenue will be outpacing that.

So hopefully, as the year goes along, that number gets into a mid-20-ish percent. Our aspiration, as we’d love to see that get to a 20% or lower, but it’s going to take some – multiple cycles to get to that level. But the run rate is that now is a pretty good number. There’ll be some slight creep in that number as 2021 goes along.

But again, as we’ve been saying for really all of 2020, we’ll continue to calibrate the cost footprint to the revenue level at hand.

So as the contribution margin dollars come back and as the gross profit dollars come back in, and then we’ll continue to let some of the costs come back and grow, as we said on the call where we’ll invest in things, marketing and sales and whatnot. So we need to fuel that investment. And that’s going to come from top line.

That’s why we’re pushing gross profit so much that allows us to invest in the business. But right now, it’s a pretty good indicator going forward. It’ll creep a little bit up, but it’s a pretty good range right now..

Okay, great. And the other comments on O&G to be below 50% of the sales mix over time, I think at year end 2020, it was at 57%, aerospace and defense was at about 12% and power and renewables somewhere in the mid-single-digit.

How fast do you think that sales mix can evolve?.

So Brian, it’s Dennis. As you know, that for us as our aspirational goals, that’s more of a three to five-year, I’m believing three to four years, we’ll have the balance of gas and oil under 50%. This is without acquisitions or anything else. It’s strictly organically and it’s by still growing gas and oil.

But we believe the other markets in space, aerospace, renewables and energy and other things that we’re already in and can grow into like infrastructure. We believe that’ll start taking more and more of it. Those three primarily we’ll take more and more and chip away at that 50 some percent lead..

Okay, great. And then just lastly on the renewable, and the remote sensors on wind blades, have you been involved in the Texas market yet, or is that a market opportunity along with the Gulf and the South? And then if you could comment on what type of work you’re doing on the turbines as well..

Sure. I’ll throw it out to Jon. He’s more involved in it..

Yes. Hi Brian, this is Jon. So absolutely, so we’ve been installed on a number of wind turbines primarily in the Southwest, including Texas during 2020 and through today.

And so we were there as the – during the big freeze and we incidentally could hear what was happening on the blades during the big freeze and able to impart this information to customers. So absolutely it’s part of a global market that we’re looking to really serve.

And in terms of what we’re doing is we’re monitoring primarily, but not exclusively wind turbine blades to really hear the effect of impact, damages, could be lightning strikes, it could be ice falling, it could be some other impact to the blades. And those impacts tend to cause damages almost immediately upon impact.

And oftentimes, as Dennis said, those impacts of the resulting damage are undetected until the next inspection occurs.

But the great thing about our technology is we can hear the impacts immediately, and we can hear the follow on effect of the impacts in terms of what’s happened to the blades in terms of what type of damage has occurred immediately and how that’s evolving over time.

And we’re able to impart that knowledge to our customers so that they can use that data to determine if they can continue to run safely that certainly don’t want to run to failure, because that could be catastrophic in terms of cost and damage. And they can avoid those catastrophic costs by use of our technology and our know-how..

Got it, great. Very interesting. Thank you very much..

Thank you..

Thank you, Brian..

Thank you. [Operator Instructions] Our next question comes from the line of Mitch Pinheiro with Sturdivant & Company. Your line is open..

Hi, good morning, so….

Good morning, Mitch..

I had a question, couple of questions here.

Why wouldn’t the revenues start annualizing at 2019 levels earlier than the fourth quarter?.

So the answer is, we believe it could happen as far as in the third. We don’t think it will – we know it won’t be at that rate in the first quarter and probably not in the second for 2019, but it’s – we believe it’s going to keep creeping up.

It’s a function of vaccinations and people getting out and jumping back in their cars and demand on the inventory going down and power and everything else starting to get back to a normal. So it’s not so much us.

It’s really just waiting for the energy and power in all those markets, just to get back to a normal consumption rate, which we don’t think is going to happen until sometime, I don’t know that’s June 1, July 1 or what the particular date is, but sometime by the time you’re getting to be mid or third quarter, we think we’ll be getting back to a more normal..

Okay. That was helpful.

But this now how does – so how does the mix – revenue mix factor in, I mean aerospace particularly your international segments been weak? Is that – I mean are we going to see sort of a recovery across all segments equally? Or is this going to be fueled more by your – sort of your energy and customers and less so by aerospace as we get into the fourth quarter.

Is there going to be an even sort of contribution or will there be less?.

So I think – yes, I think you’re right in the second half.

I think you’re going to see probably gas and oil getting back faster in aerospace, but like we say, we’re doing some things in aerospace where we believe on the non-commercial side on the military and in the space side, we believe there we’ve got a lot of great traction and that can help us offset what you see.

Aerospace is going to be slowest internationally to catch up domestically.

We’re seeing that we have some signs of the getting back to a normal, but it won’t be back there yet in 2021, one way or the other, but we’re – we also see that the things such as the wind and all the other parts of gas and oil and everything else catching up a little bit faster.

So it won’t be a 2019 as far as the percentages go, but we’re going to hopefully have our revenue back to where it was in 2019 with just different percentages from the different industries as they come back online..

Yes. And just to add to that on the international side, I mean we still have Europe in the midst of lockdowns, in fact, lockdowns are increasing in some countries right now. So it’s really hard to kind of model out when that’s going to relax. Vaccine rollout pace has been much slower in Europe than it has in America, for example.

So I think those are some of the variables we’re trying to understand as well..

Okay, thank you.

And then when it comes to digital, it’s right now, I mean can you talk a little bit about what percentage of your customers are using your digital services, and by what sort of end market they’re currently at and where you think it’ll head to?.

So I’ll let Jon answer that one..

Yes. So in terms of mobile deployment, really where we’re focused right now is oil and gas primarily, but we are looking to expand that. Within oil and gas, we’ve got some initially very good penetration across several major customers. And typically, it’s one or two sites within their fleet and looking to roll out beyond that as we get into 2021.

I think 2020 was really a year of proving the technology works.

I think 2021 will continue to be that with some of the customers that were going into their first sites, and demonstrating the strong productivity enhancement that we bring the strong visibility that we bring as well as, as I said earlier bringing the other trades on, so that visibility and productivity is multiplied not only across the NDT trade, but across those other trades as well.

So I think the 2021 is really going to be a very exciting time in terms of a substantial rollout compared to where we have historically been. And then for Mistras Digital, we use that term kind of broadly, because it’s not just the mobile app, even though that’s substantial.

You’ve also got yes, other applications for our in-house labs where we can track and trace parts status completion. And as we work multiple stages of different activities, different mechanical activities and help to achieve modification of those parts to customer specifications, we’ll be able to track that as well.

That’s a new application that’s coming on soon..

Yes, Mitch, the only thing I’ll add is benefits. 2020 it was really tough to get onsite. Go see customers prove out the solution, or even just add any extra bodies to the site to be the SME subject matter experts to stand it up and get it running.

So it kind of put a pause on it, but the funny thing was everyone wanted more data from where they were working. They just didn’t really want to spend the time effort or bring extra bodies on to do that. So we see 2021 as a good impetus to get that those kinds of things going..

And finally Mitch, just to add, you asked about relative size of this. I mean this is a huge opportunity that we’re all really excited about.

If you add it together all of our current Mistras Digital, our software, our sensors, remote monitoring, you would probably barely get 10% of our current revenue, but it’s got an incredible upside to us and growth as you’re hearing, we’re really just getting started with it, incredible upside, its a very small piece of our business and we believe it will grow rather rapidly become a much bigger part going forward now that we’re past proof of concept and testing and demos and into real commercialization.

It’s going to grow, it’s currently coming from a very small base, but we’re very excited about it..

Okay. Thank you.

And then actually just one more question Dennis for you, where do you think CapEx is going to fall and is there going to be any seasonality to the CapEx?.

So it’s a good question, because a lot of people wonder if we starve the business in any way, CapEx or somewhat that to get our cash flow. We really didn’t. I mean we moved CapEx along to parts of our business where we needed it. We were careful about buying new things, but we didn’t starve anything. So we don’t think there’s going to be a huge rebound.

In fact, it’ll come off with its still going to be sub $20 million. I think that is what we’ve got planned for 2021. So it’s not going to be where we have this pent up demand for CapEx whatsoever in 2021..

Okay. Thank you for your time. Appreciate it..

You got it. Thanks, Mitch..

Thank you..

Thank you. I’m showing no further questions in the queue. I will now like to turn the call back over to Dennis for closing remarks..

All right, everybody. Look, I appreciate the time everyone took to spend with us today. The whole Mistras team would like to thank you for joining our call today and wish everyone a safe, prosperous, and healthy future. Thank you again folks..

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect..