Thank you for joining MISTRAS Group's Conference Call for the Third Quarter Ended September 30, 2021. My name is Victor and I'll be your event manager today. We'll be accepting questions after the management's prepared remarks.

Participating on the call for 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. 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 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 on the SEC's website. I will now turn the conference over to Dennis Bertolotti..

Thank you, Victor. Good morning, everyone. The third quarter was a strong encore to our second quarter results, clearly illustrating that we've reached an inflection point in our projected growth 2021. Just like the second quarter, our performance exceeded expectations in the third in both our top and bottom-line financial results.

Despite the impact of Hurricane Ida, we achieved revenue at the top end of our outlook range, and we do expect a good point of those revenues - I'm sorry, a good portion of those revenues lost from Ida to be made up in the coming months. Looking at some highlights.

For the third quarter, consolidated revenue was up 18% with continued strength across all of our end markets with the sole exception of the industrials. With the aerospace and defense markets were both up nicely in the quarter.

Gross profit increased nearly $5 million from last year, and gross profit margin was approximately 30%, despite the higher proportion of revenue attributable to reimbursable travel costs this quarter.

We had discussed this expected scenario in our earlier calls this year, which creates lower anticipated gross profit margin, but higher gross profit dollars.

Nevertheless, gross profit margin in the third quarter was actually up from that of the first six months of this year by over 100 basis points as we continue to focus on efficiency and productivity improvements and have achieved a favorable sales mix. We expect the fourth quarter gross profit margin to be comparable to the third.

In our continuing efforts to improve operating leverage, SG&A expenses were reduced in the third quarter sequentially from the second, and this was despite the fact that the third quarter included the final reversal of costs that had been temporarily reduced last year. This is clear evidence that cost containment remains a top priority for us.

As a result of our efforts of our operating income of $9.2 million for the third quarter was an approximate 61% expansion over the same period last year, and the net income more than doubled back from a year ago, while our adjusted EBITDA margin was nearly 11%.

In summary, it was a very solid quarter, illustrating that we are sustaining the momentum that our robust and evolving business model has been developing. At the same time, we are continuing our investment in new technologies, including our data initiatives such as OneSuite and Sensoria, which will further differentiate us from our competition.

An example of an early adopter of such technology, a MISTRAS customer, which is a large midstream company wanted to ensure asset integrity for its equipment located in dozens of plants across seven Midwestern states.

The OneSuite ecosystem was selected by this company because it offered a secure cloud environment for centralized data management, a single access point for plant personnel and integrated apps that perform asset integrity calculations.

The company subscribed to data management and analytical apps that assist with the compliance and business initiatives offering additional insights and recommended actions. All of this was enabled via OneSuite. I will elaborate further on both of those two exciting initiatives later in my remarks.

Looking more closely at our various industries served, revenues in our energy markets were strong again in the third quarter in part due to the recent strength of crude oil prices and demand approaching pre-pandemic levels.

These conditions have motivated our energy industry customers to maximize their production levels, which potentially limits our ability to perform offline services, thus potentially decreasing our level of activity during maintenance outages.

Nevertheless, our run-and-maintain services do, however, provide us a window wherein we can remain onsite providing inspection services while our customer is running at peak production level. Our focus is to use technologies to learn more for our customers while they're online.

So while the markets have certainly improved relative to a year ago, the industry is balancing their inspection needs against an opportunistic time to benefit from favorable economic conditions.

Over the intermediate term, we continue to believe the energy markets will remain our largest opportunity in both traditional and especially in the growing renewable sector. We have a multipronged strategy to succeed in energy.

First, by continuing to take profitable market share; second, by expanding our scope of services; and finally, by introducing new products.

Keep in mind that on average, over time, about 70% of the revenue generated in our energy market is from ongoing run-and-maintain business, which does not experience the dramatic peaks and valleys of capital budgets nor is it overly dependent on periodic turnarounds.

This is particularly helpful in the current climate, wherein our customers are tending to operate longer, taking advantage of high market prices for their product.

As we continue to implement our strategy, we believe we will become an increasingly valuable partner, growing our share of this less volatile reoccurring revenue, improving our stickiness with customers, while expanding operating margins.

Keep in mind that we are largely agnostic with respect to the source of energy power, and we have and will continue to flex into serving renewable energy providers, particularly wind. In this regard, I am very pleased to announce the MISTRAS Sensoria Wind Blade Monitoring Technology platform.

Sensoria is an innovative blade technology management tool, helping to drive operational excellence through real-time monitoring and damage detection.

The industry norm of conducting periodic blade inspection leaves site operators in the dark on real-time blade integrity, raising operating and maintenance costs, while reducing generating capacity whereas Sensoria makes it easier than ever to maximize the uptime, performance and safety of wind turbine blade via real time monitoring.

Sensoria simplifies the blade management process, helping owners make more informed integrity and even inventory planning decisions. We are currently validating our testing in the field, and we are very excited about the enormous opportunity to address both an aging wind farm fleet and incremental OEM opportunities that could arise.

In the interim, we will continue to strengthen our position in this emerging and growing market by constantly improving our inspection, maintenance and repair capabilities in the process of building relationships that can move into new Sensoria opportunities. In our wind business - our wind business is growing from a solid foundation.

We have been generating in excess of $15 million per year in turbine blade repair and maintenance revenue. This provides us with established relationships and technical industry knowledge, which we are using to move into the lucrative sensor and monitoring market.

There, we are adding new customers and they in turn are adding new blades and hubs for those we already inspect in the wind turbine sector.

We are demonstrating how our proprietary acoustic emission technology, consisting of very sophisticated sensors and detection algorithms can provide better information faster than the inspection technologies currently used in the market today, which primarily rely on less sensitive vibration technology.

This is an exciting and rapidly evolving opportunity. I encourage you to learn more by visiting sensoriawind.com. In the aerospace market, we continue to grow both our defense and private space business, while the commercial aerospace sector recovers.

Our private space revenues are growing nicely, offsetting some commercial revenue that is soft and is the main reason our aerospace revenues are up 14% in the third quarter as compared to the prior year period. We anticipate further strengthening going forward, particularly as the commercial sector recovers as anticipated throughout 2022.

This was another quarter in which we continued to narrow the gap with pre-pandemic performance, especially in our energy markets. Our inline pipeline inspection business, led by Onstream, had a very strong third quarter and is on pace to have their best year ever in 2021.

The last few quarters are a sign that we are well-positioned to return to more normal economic conditions and strong bottom-line results. I would now like to turn the call over to Ed to give you more detail on our financial results for the third quarter of 2021..

Thank you, Dennis, and good morning, everyone. It truly was another outstanding quarter in which we achieved the high end of our revenue outlook and met our bottom-line goals as well with a significant expansion in operating profit and net income.

As Dennis said, coming sequentially on the heels of one of our most profitable quarters, our ability to follow-up that with the strong second quarter, with again another strong quarter, clearly suggests that we have reached an inflection point, and we are working very hard to sustain this positive momentum.

For the three months ended September 30, 2021, consolidated revenue increased 18% over the prior year to $174.6 million, which was down less than 2% on a sequential basis from our very strong second quarter.

Revenues were up in the third quarter due to organic growth as well as from the additional benefit of the low single-digit favorable impact of foreign exchange. Revenue in our largest end markets, energy and aerospace and defense, both increased significantly over the prior year.

We expect the energy markets to remain strong in the fourth quarter as well. Although, as Dennis mentioned, they are contending with an industry that is focused toward running their plants at high capacity because of strong crack spreads as well as building up inventory levels, not to mention the typical seasonality seen in the fourth quarter.

We expect aerospace and the defense market to continue to recover, albeit slower than the energy markets with the exception of private space sector, wherein revenues have grown robustly year-over-year.

We believe the traditional oil and gas market remains a large market opportunity over the next few years, where we can grow modestly by taking market share and adding additional services, while reducing volatility and improving returns.

Gross profit dollars increased by nearly $5 million in the third quarter over the prior year, over $18 million on a year-to-date basis, while gross profit margin contracted from a year ago as we had anticipated.

To reiterate, compared to a year ago, we had a much greater proportion of revenue attributable to reimbursable travel cost, which yield little, if any, gross profit dollars.

Nevertheless, gross profit margin in the quarter was up over 100 basis points compared to the first half of this year, a clear indication of the progress being achieved in improving productivity and efficiencies.

During our second quarter commentary, we had noted that we would be reversing the remaining temporary cost reductions from 2020 that were not already restored and that this would modestly increase overheads in the third and fourth quarter of 2021.

While we are proud to report that those cost are now fully restored, yet SG&A cost in the third quarter were actually down modestly sequentially from the third quarter. This was due to our continued focus on overheads as well as the benefit of a slightly favorable FX translation conversion rate.

Demonstrating our continued efforts to improve the operating leverage in our business model through both expanded gross margin dollars and tight overhead expense control, operating income was up nearly 61% in the third quarter.

Similarly, both net income and earnings per diluted share were up significantly from a year ago, both actually more than doubling, with net income of $3.4 million or $0.11 per diluted share. Turning to the income tax rate.

Our consolidated effective tax rate was just over 50% for the third quarter of 2021 due to an incremental discrete expense of $1.2 million. The EPS impact of this discrete item was about $0.04 per diluted share in the third quarter. We anticipate an effective tax rate of approximately 30% for the fourth quarter of 2021.

Cash flow from operations in the third quarter was $4.2 million, and free cash flow was just under $1 million net outflow. Our significant increase in revenue this year has required us to fund the corresponding increase in working capital, particularly a buildup in accounts receivable.

Nevertheless, we expect to be free cash flow positive for the fourth quarter and certainly for the full year, although the free cash conversion rate for the full year '21 will be below our historical average of approximately 50% of adjusted EBITDA.

This is attributable to higher CapEx in the current year and to the effect of one-time items, such as the repayment of the CARES Act payroll tax deferral, which is due in the fourth quarter this year.

Our free cash flow conversion rate of approximately 13% for the first 9 months of 2021 is lower than what we expect for the full year as we anticipate that the fourth quarter will be a strong free cash flow period. On a year-to-date basis for the first 9 months of 2021, operating cash flow was $22.5 million and free cash flow was $6.5 million.

Capital expenditures are running modestly ahead of last year as expected, given the higher revenue volume, but we still anticipate total capital expenditures for the year to be in the $20 million to $22 million range. The need to fund working capital has also temporarily slowed our debt reduction efforts.

Nevertheless, at the end of September, net debt was below our $200 million goal at just $193.3 million. As previously noted, we expect free cash flow to rebound in the fourth quarter and debt reduction remains our #1 priority use of cash.

More importantly, since we remain below a 3.75 leverage level as of September 30, '21, our effective interest rate for the third quarter was just about 2.6%, and this will carry over into the fourth quarter as well.

Actually, our consolidated debt leverage ratio, as defined by our credit agreement, has returned to pre-pandemic levels, wherein, at the end of the third quarter, this metric was the lowest level it has been since December 31, 2019 measurement period.

The result of this improvement and corresponding reduction in borrowing rate was a decrease in interest expense this quarter from $3.6 million in the prior year down to $2.3 million in the current quarter, which was a $1.3 million cash savings.

It truly was another outstanding quarter where we sustained our momentum through the business, improved profitability and met our financial expectations. Our business has been recovering from the low level of demand experienced in the second quarter of 2020 when the effect of COVID-19 peaked.

Although energy prices and demand have improved throughout 2021, the ongoing COVID-19 pandemic continues to impact us. This effect is most pronounced on our second largest market, aerospace and defense, especially in the commercial sector.

Accordingly, for the fourth quarter of 2021, we expect revenue to be flat with the prior year quarter, primarily due to energy market's immediate focus on peak uptime and a lagging commercial aerospace recovery.

Adjusted EBITDA is expected to contract modestly in the fourth quarter of 2021 due to substantially all of the remaining temporary cost reductions initiated in 2020 having been fully reversed during the third quarter of '21 and a lower level of Canadian wage subsidies in 2021 versus 2020.

Our outlook for the remainder of '21 is contingent on continuing macroeconomic stability, including continuing stabilization in the crude oil markets, ongoing effectiveness of COVID-19 vaccination and booster rollout and no significant global supply chain disruptions or labor shortages, which would impact our ability to work as a critical service provider.

Throughout the pandemic, and now as we rebound and recover, we have demonstrated MISTRAS' ability to quickly adapt to a challenging market and not just for immediate results, but also to set the stage to capitalize on emerging opportunities.

As we look forward to the end of 2021 and into '22, we are confident that our business model is robust and sustainable, and we remain firmly committed to executing our plans by maintaining our intense focus on cost containment while continuing to prudently invest in the business.

That is our strategy, both today and over the long term, and it will continue to be a very exciting journey. Although the energy markets, both oil and gas and power generation are cyclical, they are currently stable and continuing to rebound further back to pre-pandemic levels.

With this rebound, we are focused on continuing to gain market share by winning new contracts and expanding our services in complementary mechanical and data services, particularly via OneSuite. We are largely agnostic about the industries we support.

We have and will continue to flex into alternative sectors such as renewable energy, particularly wind, as demonstrated by our recently announced Sensoria offering, which leverages our core competencies, including acoustic emission monitoring.

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

Thanks, Ed. So to recap as we recover from both the pandemic and the falloff in the energy market experienced in 2020, we are planning for our next stages of growth. The first 9 months of the year have us back on a more solid footing, and we believe markets will continue the gradual recovery into 2022.

Let me conclude by offering an update on OneSuite, which is perhaps our most exciting initiative, serving as a significant step forward in the digital transformation of asset protection.

We aim to meet the growing demand for solutions and technologies that can ensure the safety, reliability and regulatory compliance of the world's most valuable and critical assets.

Whether a natural gas turbine, a wind blade, a public bridge or private space satellite or rocket, one of these exciting technologies is our new software ecosystem, MISTRAS OneSuite, which provides our customers with MISTRAS' popular software and services brands with integrated apps in a secure cloud environment.

OneSuite serves as a single access customer portal for cross-functional data activities with access to 50-plus applications soon to be 75, all being offered on one centralized and interconnected platform.

The pandemic has accelerated the transition to digitally-connected and integrated technologies such as OneSuite, which provide users with data-driven insights that make their operations leaner and more intelligent. This represents an evolution of asset protection and MISTRAS is uniquely qualified to leverage our proven capabilities.

And know-how, including acoustic emission monitoring while innovating to meet the needs of our changing global landscape. Just like any thriving ecosystem, apps within the OneSuite platform interact with each other, sharing critical information in real time.

Put simply, MISTRAS' OneSuite makes asset protection smarter and more digitally connected than ever before. Right now, we have over two dozen customers using OneSuite, and we anticipate adding dozens more in the near future. With the number of discrete users growing from a few hundred to nearly 1,000 in the near future as well.

These early adopters cover many diverse end markets beyond our core energy sector. OneSuite is an illustration of how we continue to enhance the value of our legacy investments, while increasing the ROI for our customers today and into the future.

In many ways, MISTRAS has always and certainly will continue to focus our investments on ways to enhance customers' ESG compliance, particularly the E for environmental and especially S, which we use for safety, which is our primary value proposition.

In fact, safety is paramount to our operations, wherein we utilize an ESS Board level committee, standing for environmental, social and safety, recognizing the G is covered by our separate Governance committee. For MISTRAS, safety is paramount to what we do for our customers.

And speaking of safety, before taking your questions, I would like to thank all the MISTRAS employees once again for your understanding and your leadership shown in helping us through this crisis.

You have shown an unwavering focus on building on our solid reputation for safety, quality and innovation, all while providing outstanding customer service and dedication during these extremely trying times.

By understanding our customers' pain points, we will continue to innovate using complementary services and leading-edge technologies to deliver greater customer value, allowing us to always stay relevant in an ever-changing market.

As we stick to the tenets of our Caring Connects initiative, we can provide a better workplace, not only for the MISTRAS family, but for all of those whom we work with in a positive and safe manner. With that, Victor, please open up the phone lines..

[Operator Instructions] Our first question will come from the line of Sean Eastman from KeyBanc Capital. You may begin..

This is Alex on for Sean. So regarding the fourth quarter revenue guide, I'm just trying to think about the moving parts here and if we should view a sequential downtick as conservative.

Like on one hand, we have COVID lingering that's focused on peak uptime and then commercial aerospace weakness, though we have the strong energy demand, and we'll have some Hurricane Ida works spilling into next quarter that we lost in the third quarter. Any color here would be helpful..

So I'll take that first, and let Jon add if he wants to. Certainly, we're a little conservative because you never know what happens at the end of the year with customers falling off their budget with additional processors and empowers of Ida and all the kind of weathers and things that you can get.

Commercial aerospace has been soft, but within the last probably week or 2, we're seeing a lot of anecdotal signs that it's actually coming up faster, both internationally and domestically than we anticipated.

We still believe commercial will get a better boost in '22, but you've seen a lot more of engine parts for the single engine commercial planes out there than we had expected.

The idea of customers falling off their budget on the energy side and shortening their anticipated fall turnaround activity is always real and with the higher cost that they have for crack spreads and everything else that's going on, you never know if they want to take advantage of that.

Right now, there's anticipated strong work because of what happened from September and the weather and all that pushing into October, November. But we are trying to just make sure that we don't overstep what we know is real as of today..

And how would you characterize your visibility at this point in the year into next year maybe compared to a normal year? I'm just wondering how discussions with customers have been around planning for the 2022 budget season..

I'll do a quick one, and I'll throw it to Jon because he's been working closer with all the apps folks. But we do have what we believe is the - is a strong visibility of the first half, let's say. First quarter looks to have a good level of activity.

Right now, there seems to be a bunch of piling up of customers calling up in the same timing, and we don't know if they'll eventually look at that and try to reduce their labor, but we have a what we consider to be a good forecast so far, while we haven't finished any budgeting for the upcoming year.

We do think we have a good idea of the first half, I think the second might be a little cloudier. Jon, I don't know if you have any additional comments..

Yes, Dennis, thanks. I think you characterized it exactly right. We've got good visibility in the first half. We feel good about working with customers and scheduling.

Labor availability is going to be a little bit of a challenge in Q2, I think because, as Dennis said, right now, there's a bunch of turnarounds that seem to be kind of clustered in a similar time frame for similar disciplines in terms of labor requirements. But we're working hard to be able to be in a strong position to serve that and we feel good.

The other thing, as Dennis alluded to in his prepared comments is that we're just starting to see it determining commercial aerospace. It's early. We're seeing it actually in Europe, a little bit in advance of where we're seeing it in North America, but we're starting to see it in North America as well. So I think those trends bode well..

Our next question will come from the line of Andrew Obin from Bank of America. You may begin..

This is David Ridley-Lane on for Andrew Obin.

Is there any reason why the second half '21 gross margin levels would not be a good proxy for the run rate into '22, just sort of said differently, is kind of the reimbursable travel wage subsidies in the back half of this year, are those all kind of normalized?.

So David, it's Dennis. I'll throw it to Ed in one sec. But I would say, you do have a lot of your cost back in there. We've reinstated all the things that were pandemic-ly brought on to us. So all the costs are back. To your point, the bulk of the travel is kind of getting normal.

I would think spring of '22 might be a little bit busier travel that we've seen in the fall of '21. But I think a lot of that's back. The thing I could offset that, as Jon and I were saying, if we do see the aerospace coming back up, that could help us on the margins as well. But I'll let Ed throw a little more color to that..

Right. Mix will be the differentiator. Favorable sales mix, aerospace and defense being higher than average, certainly, data services and whatnot being higher-than-average going to next year. That's where your upside would come from.

But this year's differential was oil and gas snapping back quicker because it had fallen more last year, it's what's serving to lower the weighted average this year. But no, that should actually be pretty well normalized now going into next year. Mix will be the only variable going forward.

And again, we've always said we had the goal of increasing gross profit every year over time. Every single period doesn't follow suit due to the relative mix, but we are confident that longer term, there's still efficiencies to be gained.

And we study overheads, we are looking at things like some selected price increases going into next year with customers as well to help prevent any erosion in margin as we're all dealing with cost pressures. So that will help as well. But we do focus on gross margin.

And the rate they're at now, 30-ish percent would be a pretty good approximation going forward. Hopefully, some uplift with a little bit of favorable sales mix would help that..

It's good to hear. And then, on the free cash flow, so I understand you're rebuilding some of the working capital balances now in 2021.

I'm just wondering, do you think it'd be at pretty close to normal levels by the end of this year, i.e., free cash flow conversion as a percentage of EBITDA coming back to those - closer to those historical levels in '22?.

Yes. '22 should be pretty typical for us. This year had some unusual things, CapEx being higher, cash taxes being a little higher. But certainly, the AR build was the largest single item this year. So it is simply timing.

We will run the DSO back down, and that cash will kind of normalize once we catch back up to putting the higher hours out and payroll out. It takes you 60, 75 days to collect out sometimes. That will get back one cycle next year, so I do think we'll get back to our average.

Don't forget as well, we had that significant CARES Act payroll deferral of about 9 point something million dollars. So $4.5 million gets paid back this December, $4.5 million next December. That's a significant one-time item there that's the final remaining kind of headwind we have to work through.

But yes, we should be more or less back to our 50-ish percent conversion of EBITDA into free cash flow in '22..

Our next question will come from the line of Tate Sullivan from Maxim Group. You may begin..

With the focusing on Sensoria, please, and you've certainly mentioned more wind opportunities in previous calls. And I think you mentioned, Dennis, it's already out in the field testing, and you have about $15 million, if I heard it correctly, of revenue from wind customers already.

What is the usual ramp process? I mean, are you testing this product in the field before generating revenue? Or is that already gone through the testing phase? Or can you just give an overview of that usual process of these..

Thanks. So we're actually pipe on the - we've got a lot of revenue, as you quoted, from services and normal things that we do. But we're a little pre-revenue on the testing. We're getting some money for it, but we're just - and now if we're just kind of pricing on breakeven and proof of concept.

To be fair, what's going on is as we've used this type of monitoring for many, many other applications, other turbines, the gas turbines, that's been at 3,600, 1,800 RPMs versus for our windows and bridges that hopefully don't spin it all and all kinds of things, pipes and everything else.

And what we're trying to do is just finish off our characterization and making sure that we can characterize and monitor properly and identify how critical it is to the operating future of it so they can have an understanding of the ROI customers, not only who want to know how fast is the damage occurring and leading-edge cracking, whatever it is.

And also what the ROI could be based on the type of unit it is and the productivity you're getting out of it. So we're working on all that. We really believe for the main things that we were challenging ourselves defined. We've been planning them and characterizing and we're just trying to prove it out.

Right now, it's kind of a hunt and peck because we don't really have one that we can damage at will. So you kind of got to wait for things to happen and improve that. You knew what it was when it occurred, and we're doing that. So it's a little bit slower process than you want.

We're hoping to maybe get someone to help us accelerate that process by having one that are on monitoring that are unknown damage or things like that. But yes, it's actually been working well. We're proving it out. So our technology isn't new to us. Our ability to automate it and all that is part of what we're working on. But none of that is new to us.

It's just trying to get these new types of defects and making sure we've actually used the same kind of technology on helicopter blades many years ago to pick up damage. So we know we can do it whether it's spending fast, like I said, gas turbines are revolving at 3,600 RPMs, and we can pick up cracks and all that, too.

So it's just a matter of nailing down all the parameters to make sure what we have is consistently the right thing..

Great. And with Sensoria and with the growing opportunity for the wind market, is it starting for you, mostly in the U.S.? Or is it a Europe and U.S.

opportunity at the same time? Or how do you see that?.

That's a good question. I would say for the services we currently perform, we're doing quite a bit in Europe throughout our European operations, Western Europe, all the way into some eastern countries.

Monitoring inspection, there are some unique things going out there that we're helping our customers to identify and figure out what's happening on some of their damage. But on the online monitoring, it's primarily, but not exclusively in North America. We do have some monitoring we do in Europe as well.

But I would say the bulk of it is here in the U.S. But I don't think once this thing gets up and proven, I don't think there's going to be any geographic boundaries because the ability to just take the sensors and a little bit of technology and put it into the inside of the blades and inside in the hub and all that is very simple and easy to do.

So we can deploy people to wherever we need to be, whether it's domestically here and we have a location right by it or we got to fly to get to it or fly a little further we get into a different location, right? So I don't see boundaries being too much other than just the normal getting in and out and all that.

But I think it will be something that's going to get traction in many locations once we get all this proved out..

Great. It's great to see the release. Go ahead, Jon..

Yes. Just to add to what Dennis is saying, we absolutely see this as a global opportunity. And we see it as an opportunity, not only for onshore, but also for offshore wind turbines as well. And that's a particular growth area in the industry. We may have to adapt the product a little bit because the turbine blades are longer, et cetera.

But we're very excited. And more importantly, our customers are excited. As Dennis said, we're primarily not quite pre-revenue, but early revenue because we're gaining revenues for trials and test and pilots that our large customers are doing.

And it's a mix of both existing customers that today we're servicing by repairing their wind turbine blades as well as new customers that we aren't necessarily doing the service for, but they're really intrigued and excited about the potential to have remote 24/7 monitoring done to maintain their uptime.

So we are just starting to get in good-sized purchase orders now. The backlog is starting to build, and we're excited about where this is going..

A follow-up to it.

Is most of the work now in onshore and offshore wind performed by in-person inspections? Or is it already a competitive remote monitoring field, please?.

There's no excellent alternative to remote monitoring right now. As Dennis alluded to in his prepared remarks, there - some of the competition might be like vibration, but that is not as accurate, not as indicative and doesn't pinpoint the damage the way that our technology does, our patented technology does.

So today, you're doing inspections typically via drones on some kind of a time interval. It's not based on damage intervals, but it's on time. It might be every 12, 18, 24 months that you're inspecting your flying drones up on a schedule. And that's when you're learning that there's damage.

If you can see it, they can't always see the damage, but it might actually be there. The beautiful thing about our technology is you're seeing it and you're hearing it every day, you're getting a visualization of what that damage is, even if it's not yet visible to the human eye.

So the great thing is that we can understand damage that exists real-time, give an early heads up to our customers so that they then can take appropriate measures and prevent them from having to do catastrophic repairs later on..

Great. It sounds like an exciting remote monitoring opportunity with a lot of customer engagement. So thank you for those additional details..

From the line of Mitch Pinheiro from Sturdivant. You may begin..

Just sort of following up on the wind side.

I mean, does - is - Sensoria, is that going to be OEM equipment, I mean, a canopy? Or - and should it be? Or is it all going to be monitored just applied as you - as customers want you to monitor their equipment? Is it - how is the breakout of the revenue work there?.

Yes, Mitch, I'll answer it and throw it to Jon. So I think right now, we're looking more on the existing to prove out the technology, obviously. But I think the potential, the way we see it, and we would anticipate customers seeing it the way is that you'd want to put these things in early on.

Some customers believe that the first three to five years is the warranty period, and they're not worried about that, but we're trying to work with the manufacturers of the blades in turbine to try to get them to catch an early on aspect. So in our mind, this could be either.

But right now, it's obviously just the existing just to prove out the technology and once approved, then you can always embed it early on..

And you mentioned that you're doing about $15 million a year.

I mean, what type of growth rate does that have?.

So it's a good question. I guess we didn't prepare for that. But we have something like 700-plus of our employees who have rope access technology training. Of that, there are different skill sets from mechanical to NDT, to visual and other things.

Many of them are applied on the rope side because rope is a very strong user of - wind is a very strong user of any kind of rope technology. A lot of it came from offshore in North Sea and everything else. So we have a lot of people doing anything from blade inspections to blade repair.

A lot of our techs are trained on the various manufacturers, fiberglass repair techniques. We're putting overlays on leading edges. We're putting repairs in for the holes, cracks and leading-edge damage. We find, in some cases, there's some problems and hubs and doing proprietary inspections and hubs of turbines and everything else.

So right now, it's something that's kind of a robust market. We've even done some painting, blasting and work on the towers themselves with our former acquisition of nature. There is work that we're doing there, you can do work on the foundation and everything else..

So with rope access capabilities, I mean, is that - and that's not something that you're just going to - that takes some training? I mean how fast can you ramp up sort of - I mean, I know you're trying to do remote access, but the rope access is needed for repair. I know we're in a later shortage.

I would think that there's going to be - will you be able to find rope access technicians to keep up with the demand?.

To - Mitch, you do it the other way around. You find people who have the ability to do, the skills and whatever you need in the field, and then you get them rope access training. We do it the other way where we get rope access and train them as well.

A lot of times, you're taking people who are mechanically adept on the ground and getting them to like what they're doing up in here. A lot of times you're getting spectators that can do it up in here, especially you're talking about a higher-skilled mechanical or inspector or something like that.

The curve on that - many years, you're talking 4, 5 years or more to get somebody to that. To get someone where they are with confident, capable, there's different levels. And obviously, the level 3 is where there are people setting up and making sure that everything is done safely and properly.

You have lesser of those, but to get to be a level 1 where a person is confident on doing those activities via rope, but their higher skill comes from what they're doing once they're up on the rope, you kind of work it that way.

So the idea of growing it is taking the people that you have that are mechanically your inspection capability and being able to look down and see the ground quite away and often be comfortable with that. To that point, it wouldn't be me, but there's a lot of people who are comfortable taking it on that way..

Yes. Just to augment what Dennis is saying. We feel that there's pretty good growth potential in this because there's great synergies, right? As I said earlier, some of our customers that we're working with on this new offering are existing customers and some are new.

And we've already seen, for instance, in one company that we've begun a trial with that we're really excited about. We've already got some work booked for - to repair their wind turbine blades next year that we haven't been doing the work before.

So we think that there's going to be a very good cross-sell within our existing customer base and also to expand our existing customer base to perform the repair activities that we do today..

Okay. Well, the other question I have for you is when it comes to the aerospace - the commercial aerospace market and studying how it moves through 2022. What are you seeing in - specifically that's going to - that gives you some confidence at least that things are getting back to normal.

You mentioned single engine blades and things like engines and things like that.

But what's the bigger picture that's relaxing? Is it just the COVID restrictions? Is there - are there any other factors that are allowing that market to return to normal?.

So I guess there's two parts, Mitch. One is what our customers are telling us foundries and casting houses and manufacturers. There's a lot of talk now about being ramping up and being ready for different periods of time based on who they are in 2022. And we're seeing a lot more bidding activity on that.

I mean, certainly, it's in single-aisle planes, the engines that we see for the single-aisle versus the double-wide, and that's pretty much - everyone sees those same notes.

It's not even so much are they buying new planes, but some of the decisions can be for replacements and parts of ones that have been sitting for - has been parked for how many months due to COVID and everything else.

So as the public gets back to flying and doing more, it's not just that you need more brand-new ones, you got to maintain the ones that are out there, and there's just probably a larger anecdotal for sure, but very - a lot of activity that we're hearing back.

Jon is hearing it from international, from domestic, we're hearing it all over the place that our customers are talking to us about their ramp up. Jon, I don't know if you want anything else on that..

Yes. Dennis, you're exactly right.

We first started hearing about this more in Europe from several countries where aerospace business was picking up because of - and again, as the phenomenon we talk about that as the smaller planes that seem to be - what's returning back into production more quickly as travel normalizes post-COVID, and it seems to be travel-driven as planes are flying again and schedules are filling when they can.

There's still labor shortages that are impacting the airlines too as we've all been hearing about. But certainly, the expectation is they resolve those labor shortages and air traffic resumes at a pretty normal level. We're seeing the increase, as we said, it started in Europe a few months ahead of North America.

And now, we're finally just starting to see it in North America in a good way. So yes, if that trend persists, if that continues, that will be a real good setup for next year..

Okay. Just one more question, and it relates to the private space revenue growth that you're seeing.

I mean, is this revenue growth, is it steady quarter-to-quarter, year-over-year? Is it lumpy? Is it visible? And what type of growth rate when you talk about - you had some nice growth in the quarter - what are we talking about? Is that double digit or is it 50%? I'd be curious to get some sort of color around that..

Jon, why don't you take that?.

Yes. If we're talking aerospace, on the commercial side, any growth is good growth right now because we've had - the whole industry has had negative comps really that started in the beginning of 2020 once COVID first hit and accelerated throughout 2020. And certainly, the first half of '21 was even down further versus the first half of '20 for us.

But we're finally starting to see the comps turn positive. And so as I said, any positive is great compared to the declines that we had. So we did see a small positive in Q3 versus prior year. And it's....

I think the question was more on the private side, all right.

Jon?.

Private space..

Private space. Oh, I'm sorry, besides commercial. Sorry for that. On the private space, we've seen very good growth that - throughout 2021. It's been certainly double digit - strong double-digit over 20.

And the great thing there is that it's a marriage of a variety of services, mechanical and inspection that we're providing, which are proving to be strong value to customers. So the private space is picking up.

It's still, for us, not as big as the commercial aerospace, but at this rate, it could certainly rival commercial aerospace in size in a year or 2..

The one thing to keep in mind, Mitch, is what we're doing is we keep talking about listening to our customer. And people think that's just cliche or something that - in this market, it's really important. Customers are trying to find a way to find innovations that make savings. And you can only do so much when you talk early rates or things like that.

You got to find a new way to do things. And in the aerospace market, both private and commercial has a very difficult, long and tedious supply chain.

And the more that you can do to pick that supply - you're not eliminating steps, but the more you can do to consolidate steps and get them done locally and get them done in one place and speed up to - look, I mean, you're taking raw materials and you're getting it to a finished product, the faster, quicker and more effective you're doing that.

And we've got cases where the customers were getting less than 50% of the original product through because of the supply chain and the timing and the cost, and we're up into the 90%, 95%. So it's really a function of just listening to the pain points like we're doing on data and everything else, find out where they have issues and answering that.

And so far, that's become very, very good offset to what Jon is describing and what's going on in the commercial side. So once the commercial starts to chime in with what we're doing in the private, we really see a good future for them out there..

[Operator Instructions] Our next question will come from the line of Brian Russo from Sidoti. You may begin..

Just a follow-up on the wind blade sensor market opportunities.

You referenced OEMs, do you see the customer base evolving over time from OEMs? I guess maybe when warranties run off to developers and/or to utilities that you won't own and operate it for the next 25, 30 years?.

Yes, you're exactly right, Brian. I mean, right now, we're starting with the owners that have a fleet agent to the point that they're trying to figure out what to do with it because that's kind of where the questions and opportunities came to us from.

But to the earlier questions being asked, we think eventually that could evolve to a Orion type of placement and save the time enough or the money of getting it up there and just having it there for maybe a lighter review in the first couple of years and then get heavy and heavier.

But there's some things such as leading-edge damage and lightning strikes and things like that. You can't equate that to the length of years of service on blade is involved and that's just happens - things that can happen at any time to any age. So I think, obviously, the more aged ones that are falling off of warranty right now make sense.

But eventually, I do think we would be looking to try to see how the OEMs would want to try to get this technology and also they want to get it in there and having another way to do it. Like we've talked about the vibrations out there, and it's always been there.

But by the time you got a vibration on a shaft, you could have any one of the three blades, having various levels of damage that's been occurring that could have been found at a much earlier state..

And are you currently beta testing on offshore wind? Or - I mean, there's a lot of growth potential there. But I'm just curious where you are with that, given all the federal support for offshore..

Yes. Due to the complexity of the - getting to the offshore and just the size, we're starting more of onshore applications. But like Jon said, once we find it and know what's going on, we know we have the day to find it.

And offshore is just you've got that much longer of a link to figure out can you still find the types of defects in the size and quantify it at the tip. But we - there's no reason we can't get into the offshore and do that.

We just want to start off a little bit easier and smaller and make sure that everything is nailed down and automated onshore first..

Okay. And just a follow-up on commercial aerospace.

Is there any way you could break down - and you mentioned revenue mix was favorable in the third quarter, but I would suppose that energy was a bigger percentage of the overall revenue reported in the third quarter of this year relative to historical levels, given that commercial aerospace is lagging.

So I'm just trying to get a sense of where are we in the recovery in commercial aerospace in terms of top-line growth as we move through '22..

Ed, you're probably closest to those percentages..

Yes. I mean the aerospace did have a nice third quarter. For 9 months, it's still lagging, but in third quarter, it picked up nice momentum. So that's where you got a little more margin uplift where Q3 gross profit is higher than the first six months.

So what's really happening is you've got the space piece, whether it's satellite parts or rocket parts, et cetera. That private space piece is bolstering aerospace and defense, wherein the commercial piece is lagging, there's other - that other sector of aerospace and defense is picking it up a little bit now.

That's the piece - the commercial piece that we expect to be fully recovering next year, if not in the front half, certainly in the back half of the year. But that's the mix benefit that aerospace did have a very strong Q3. It does have nice margins attached to it.

So that's what gave us kind of a little bit of an uplift in third quarter gross profit versus the first six months of this year..

And then just on energy, maximizing - customers maximizing uptime.

Does it - are we seeing - are you seeing a shift from major maintenance or business opportunities for MISTRAS shifting from spring of '22 into the fall of 2022 now, assuming market dynamics stay where they are in terms of the oil prices and utilization rates, et cetera?.

Yes. I'll start there, Brian, and throw it to Jon. Again, I - we do see a robust potential for the spring. We see it being a little bit chaotic and a little bit difficult if all the refiners keep their overlap going. So it's possible they could move that out, start sooner or later than many of their peers in geographic area.

But I got to tell you, the fall's lately for our customers has been a time for them to try to look at their budget and see where they spend it. So typically, '20 and '21 haven't been a typical year. We believe there's a lot of maintenance that's being pushed into '22.

So there is a real potential for things to be made up, but we're not guaranteeing that they're going to stay on their capital budgets that they have right now. Jon, I don't know if you have any more color there..

No, I think you said it just right, Dennis..

I'm not showing any further questions in the queue. I'd like to turn the call back over to Dennis for any final remarks..

Okay. I'd like to thank everyone for your interest in MISTRAS and for joining our call today. Please have a safe and productive day, and we look forward to updating you the next time..

And this concludes today's conference call. Thank you for participating. You may now disconnect..