Good morning, ladies and gentlemen, and thank you for joining Mistras Group's Conference Call for the Second Quarter of Fiscal 2022. My name is Kurt Wright, and I will be your event manager today. We'll be accepting questions after management's prepared remarks.

[Operator Instructions] 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 the conference call will include forward-looking statements. The Company's actual results could differ materially from those projected.

Some of those factors can result -- 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 on the SEC's website.

I will now turn over the conference to Dennis Bertolotti..

Thank you, Kurt. Good morning, everyone, and thank you for joining us today. I'm continually excited about the future of Mistras, and I want to thank our employees for their efforts as they continue to serve our customers and exceed their expectations. This quarter was extremely busy as we closed a new credit agreement.

We experienced continued recovery in our end markets and expanded the growth of our strategic initiatives in data and digital solutions. Revenue this quarter was up year-over-year for the eighth consecutive quarter. We have continued to see strong demand in our key end markets, and we are optimistic for the second half of this year.

Our aerospace and defense business was up nearly 33% in the second quarter as the commercial aerospace market surged forward as we had anticipated.

This rebound in commercial aerospace, coupled with strong growth in both the private space and defense markets gives me confidence of this industry's ongoing recovery and expansion and validates our ability to meet and exceed customers' needs.

I am also optimistic for strong third quarter results, which would keep us in line with our full year expectations. Adjusted EBITDA for the second quarter was $18.3 million, down from a year ago where a favorable sales mix was more than offset by gross margin pressure due to inflation.

We expect gross margin to improve as we move through the remainder of the year, primarily by maintaining a favorable sales mix. and taking proactive measures such as selective pricing adjustments in line with the inflationary cost pressures we have mostly been absorbing.

Consequently, with the expectation of continued growth in the third quarter and confident in strong fourth quarter results, we reaffirm our '22 full year guidance. While we are showing progress with our diversification initiatives, energy remains our dominant market.

The second quarter got off to a good start with strong April results, but as we move through the quarter, we began to experience delays in deferrals concentrated once again in the downstream business where near records crack spreads have refineries targeting high utilization rates.

In our midstream business, downstream had record revenues in the second quarter, and we see this trend continuing into the latter half of '22 given market demand projections. In contrast to our downstream business, high production levels and the corresponding transportation and distribution activities are increasing demand for pipeline inspections.

Consequently, we expect a strong recovery in our energy business in the third quarter and a return to historical patterns in the fourth.

As I mentioned earlier and as we had anticipated, our aerospace and defense business has strengthened in the first half of '22 and in fact, it's up over 28%, and we expect this positive momentum to continue through the remainder of the year.

Private space remains strong, and we believe our focus on reducing the production cycle time for parts will continue to drive faster growth in that market.

While the supply chain remains a challenge to this industry, it has created an opportunity for Mistras to lever the solutions business we developed by alleviating supply chain issues as we had done previously for our customer, Safran, in France.

We are quite excited that the expansion and installation of a new machining equipment and capabilities at our Georgia Aerospace facility is nearly complete.

Now we can perform adjacent value-added services, such as machining for inspection procedures, saving cycle time and reducing transportation, which reduced production time and cost for our customers. We are excited to get this operation running so that we can further leverage our capabilities in private space, aerospace and defense industries.

As part of our aerospace and Defense growth strategy, I'm very pleased to announce that the honorable Jay M. Cohen has joined the Mistras team as an advanced technical solutions consultant.

Retired Admiral Cohen will help Mistras expand its footprint in the military and defense, maritime and marine sectors, leveraging his extensive knowledge of the naval industry, catalog of high-level contracts and experienced navigating government procurement procedures. In our renewables business, Sensoria continues to grow.

Many of our ongoing pilots and demonstrations are quickly scaling up to full commercialization with approximately 50 wind turbines now being monitored. This puts us well on the way to achieving our goal of monitoring up to 100 wind turbines by the end of '22, with the prospect of greater growth in '23 as we rapidly expand our capacity.

Our continued focus on renewables includes penetrating the wind farm market and building relationships with OEM manufacturers. Our attention remains on both large and small wind farms, including the market for massive offshore turbines. Finally, our data solutions business, especially PCMS and New Century Software had a strong quarter.

OnSuite adoption continues to increase as the integrated applications now standing over 90 have been installed at nearly 40 unique customers spanning over 150 sites with close to 900 individual subscriptions. That is considerable growth in the last 90 days.

OneSuite remains on track to double its revenue this year and enter 2023 with strong momentum for continued growth and expansion. The other process industries markets also had strong growth in the second quarter. which further illustrates the benefits being realized in our nonenergy business and our push for greater diversification in our end markets.

Continuing to increase revenue diversity should also benefit gross margin going forward as virtually all these industries carry an above corporate average gross margin. Ed will go through the details in a minute. The gross margin in our energy business should also begin to benefit from pricing actions we are taking due to rising labor costs.

Recently, we have seen more acceptance from a market that has been historically resistant to price increases. As we continue to implement our pricing strategy, we expect to see this gradually increase our gross margin over the next few quarters.

Also, I would note that overhead today is little changed from what it was three years ago in the pre-pandemic 2019. Despite current inflationary pressures, we believe we have a great opportunity to improve operating leverage and grow the bottom line faster than revenues.

Additionally, I am pleased to announce a new credit facility, which provides us with much greater flexibility and liquidity to fund our growth initiatives, particularly our strategic initiatives and data solutions and renewable energy.

It will enable us to both enhance our organic growth initiatives as well as accelerate the pace in which we consummate strategic acquisitions, thereby creating value for our shareholders while investing in our employees and infrastructure.

It also demonstrates the strong confidence in Mistras exhibited by a supportive consortium of seven strong financial institutions led by the two largest financial institutions in the U.S. Ed will provide additional details shortly.

I'm looking forward to the second half of the year where we could have our strongest ever quarterly Services segment revenue in the third quarter achieve a full year doubling of OneSuite revenues, moderate up to 100 wind turbines, benefit from an expected rapid recovery in the commercial aerospace market and launched our new supply chain service for the aerospace, defense and private space industries, effectively transcending the lingering effects of the pandemic and energy market volatility.

Inflation remains an ongoing challenge, but we are making progress on that front. Our improved financial flexibility, as Ed will discuss during his comments, the cost reduction initiatives we are initiating and our pricing actions will help partially offset these impacts.

As the year progresses, our new credit facility provides flexibility to increase our investment in both organic growth initiatives and more closely evaluate acquisitions that meet our strategic objectives. I'm optimistic about the prospects for growth in both our existing and new markets in '22 and beyond.

I would now like to turn the call over to Ed to give you more detail on our financial results for the second quarter..

Thank you, Dennis, and good morning, everyone. Revenue in the second quarter was up year-over-year for the eighth consecutive quarter as we continue to extend our record of consistent growth.

Results were once again a mix of strength in key markets that continue to recover from the pandemic, offset by the continuing challenges in the energy market, which is operating at peak capacity utilization. Our efforts to diversify away from an energy concentration has been progressing.

And as Dennis just mentioned, many of our new growth initiatives are meeting expectations. Turning to results for the second quarter. Consolidated revenue increased approximately 3% on a constant currency basis to $179 million.

Normally, revenue was up approximately 1% with growth driven primarily by strong performance in oil and gas, aerospace and defense and other process industries. Oil and gas was up overall on the strength of up and midstream. However, as the quarter progressed, we experienced pushouts and deferrals in our downstream business.

It's clear these were mostly deferrals as we've already seen a rebound early in the third quarter in our Services segment. Hence, as Dennis said, we anticipate a strong third quarter, and we expect to be on pace to achieve our original 2022 revenue growth projections.

Gross profit for the quarter was approximately $54 million, with gross margin 29.9% compared to 31.1% a year ago. Gross margin continues to reflect higher health care costs in North America and the lag in price increases in response to inflationary cost increases.

In addition, gross margin in the year-ago quarter benefited from pandemic-triggered Canadian wage subsidies, which have since expired. Beginning in the third quarter, we will be comparing against the year-ago quarter in which almost all of the pandemic-related benefits had expired.

So we will have a truer cleaner apples-to-apples comparison for all future periods. This will more clearly demonstrate the progress being achieved on gross margin, which we expect to trend significantly higher over the balance of the year from increased volumes, improved sales mix, efficiency improvements and pricing increases.

Selling, general and administrative expenses in the second quarter were $40.7 million, which is down sequentially from $42 million in the first quarter, although up 2.4% from a year ago, much of which relates to inflationary pressures.

Despite these ongoing pressures, we expect to maintain overhead at the current level over the remaining quarters of this year, and it's also one of our keys to increasing operating leverage.

Interest expense for the quarter was $2.1 million, down from $3.2 million in the same quarter of last year as we have reduced both our operating debt -- or our outstanding debt balances as well as the associated interest rate via improved leverage and strong free cash flow generation.

Under our new credit agreement, we expect quarterly interest expense to remain in the same range. For the quarter, we reported net income of $4.7 million or $0.15 per diluted share. Adjusted EBIT for the quarter was $18.3 million.

For modeling purposes, we would anticipate an effective income tax rate of approximately 30% for the remainder of 2022, exclusive of any discrete items. Free cash flow for the quarter was $9.3 million, up from $8.5 million a year ago and in line with our typical free cash flow conversion of approximately 50% of adjusted EBITDA.

We expect free cash flow for the year to approximate 50% of our adjusted EBITDA, except for the payment by the end of the year of $4.5 million in payroll taxes that had been deferred earlier under the CARES Act. This payment will be the second and final installment associated with this CARES Act benefit.

Capital expenditures were $3.9 million for the quarter and $7.1 million for the first half of this year. We expect capital expenditures to be in line with our expectations and to be under $20 million for the full year.

As of June 30, '22, we had gross debt of approximately $200 million, down from just under $203 million at the end of the year and net debt of $181.8 million compared to $178.5 million of net debt as of year-end.

Given that our primary use of cash flow continues to be the reduction of outstanding debt, we believe our forecasted full year free cash flows will enable us at the end of the year to be at or below our targeted leverage ratio of being equal or less than 3x, which remains our goal, even though our new credit facility provides quite a bit more flexibility.

Once that level is achieved, we intend to evaluate our use of cash flow as a means to accelerate growth and build shareholder value. Let me quickly recap the highlights of our new credit facility that was announced under a separate release earlier this week.

The new credit facility consists of a $315 million of aggregate credit, including a funded $125 million five-year Term Loan A and a committed $190 million five-year revolving facility. The new credit agreement matures July 30, 2027. This facility significantly expands the unused yet available revolving credit by almost $100 million at closing.

The arrangement also includes significant reductions in required term loan amortization, specifically decreasing the required payments to $1.6 million per quarter for year one and two, replacing a facility that had been requiring $5 million per quarter, improving available cash by nearly $15 million per year.

The amortization schedule does increase in years three through five, but remains well below the level of the prior facility.

The new facility also provides leverage flexibility by increasing the maximum liable total funded debt to 4x adjusted EBITDA from the third quarter of '22 through the second quarter of 2023 measurement periods with a step down to 3.75x for the Q2 '23 measure period and for all periods thereafter.

This compares to the prior allowable fund debt level of up to 3.5x for the June '22 period and all measuring periods going forward [indiscernible] previous agreement. The Company has also retained a $75 million uncommitted accordion.

This indication of the facility was oversubscribed by $100 million and includes seven banks, all of which are included within the top 35 financial institutions in the United States.

Since upsizing our credit facility in December 2018 to finance the Onstream acquisition, we have repaid nearly $80 million of debt over a period of unprecedented weakness in two of our largest markets.

This new credit agreement provides us with ample liquidity to fund our growth initiatives as well as the flexibility to more immediately consider strategic acquisition possibilities.

Despite rising rates and overall credit concerns, this facility clearly illustrates the confidence of the financial markets in our strategy, recovery plans and in management. As Dennis mentioned earlier, we expect a strong recovery in our energy business in the third quarter and a return to historical patterns in the fourth quarter.

Consequently, with the expectation of continued growth in the third quarter and confidence in strong fourth quarter results, we reaffirm our previously announced outlook for the full year 2022, that being revenue between $695 million and $715 million, adjusted EBITDA between $65 million and $69 million and free cash flow between $27 million and $30 million.

While the second quarter results were below our expectations, we are confident in the level of work expected for the second half of 2022, given strong energy markets, improving commercial aerospace demand, robust industrial manufacturing and a rapidly developing data solutions offering.

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. As we move into the second half of the year, I'm optimistic that we will improve our gross and operating margins by implementing higher prices in partnership with our customers to offset the increased cost of our business.

This recovery of labor cost increases has been dragging on our results due to the lagging impact of increasing our prices. We will also continue to look at all overheads and constantly calibrate our cost footprint with our current revenue level to help ensure that we can maximize our returns as revenue continues to rebound.

We are focused on optimizing our efficiency, improving the operating leverage in our business and generating increased shareholder returns. As our newer growth areas such as wind, private space and digital take hold, we will improve our results and gain market share.

Our core legacy markets are certainly recovering, most notably, the commercial aerospace market, and we believe this is a transformative year for all our growth initiatives.

We expect to exit the year with a strong foundation of renewable energy growth via Sensoria, which will create monitoring as well as inspection and repair opportunity, along with our continued commercial aerospace recovery, our private space growth and last but certainly not least, with data solutions expansion via OnSuite.

Government entities continue to impose new and more restrictive compliance and safety standards in both North America and Europe. Thus, there has been significant public interest and investment in much of today's critical industrial infrastructure to ensure they operate at peak efficiency.

When coupled with global supply chain issues that demand new innovative thinking, a strong market offers many opportunities that will support long-term growth. Our crossover mechanical offerings are very well positioned to serve this niche.

Our focus remains on developing new and innovative solutions that help our customers meet these challenges and improving their productivity. We're finding success in serving more customers with what we believe is the best digital offering available.

Before taking your questions, I'd like to thank all Mistras employees for their continuing dedication to constantly involving customer needs. I'm proud of the team and the way we've executed on our strategic plans for the future while continuing to focus on serving our customers in the present.

Your focused on caring for the safety and well-being of everyone that we interact with is at the core of Mistras' vision. By sticking to the tenants of our Caring Connects initiative, we provide a better workplace not only for the current Mistras family, but for all those who will join us in the future to add to our legacy.

Kurt, please open up to phone lines..

[Operator Instructions] Our first question comes from Brian Russo of Sidoti..

Just on the project delays in the downstream end market of energy. Clearly, that kind of triangulates with some of the relatively historically high utilization rates.

But what types of projects are being delayed? And what gives you the confidence that, that's the third quarter could be your highest quarter historically in that sector, even though the third quarter tends to be a period where refineries run at the highest utilization rates given that it's a heavy air and ground travel season and demand for the byproducts?.

Sure. Good point. The summer driving season pushes utilization, right? So to answer the first part of your question, the delays were inside the capital turnarounds of the spring.

Going back to late '21 when we're putting together our budget, we had forecast an extremely aggressive spring, which, to your point, is in mind, the spring lately has been the stronger of the two seasons.

And what happened is as the year started getting into January and February, you started hearing about ahead of time where a couple of them pushed out into later in the year. I think only one or two actually pushed out of '22, but most of them pushed out and a lot of them shortened. So the start would be reduced by a couple of days.

And then what you thought was the peak would be sooner and the end was also reducing. And basically, that was driven by the historic crack spreads, right? I mean 50% higher than they've seen in the last 40 years. So the customers would even tell us there's really no mechanical problems.

Sometimes you hear about not enough material outside or something else going on. It's like what we're just trying to reap a little bit of what's going on. Plus they're under hard pressure to keep up demand that the gas prices are going up, and there's only so many refineries for the demand it's going back.

So they're under pressure to keeping out there. So they mostly got pushed into the third quarter. And to the second part of your question, we would -- and it's not that something could happen a hurricane come through or something could be unexpected. But we haven't been hearing about the pushes yet. It's still only early August.

It will be by end of August and into September, October, that is when it's peaking. But typically, if you're going to start moving things around or push them out, you'd be hearing about it pretty soon. So while we can't foretell who's going to do what and where, we haven't been hearing about it. Plans are still going on.

It's still just a lot of the turnarounds that we're expecting. Again, maybe a couple pushed into '23, but it was a small number and dollars on that, that we've seen..

Okay. Got it. Great. And then switching to aerospace and defense. To just summarize your comments, you're starting to see true evidence of the commercial aerospace recovery while the defense side has been strong all along. And so the 2Q revenue of $22 million, that gets you pretty close to that $90-plus million pre-pandemic run rate in 2019.

And I'm just curious how soon do you think you'll get there given the latest developments in the space?.

The $90 million you mean for the aerospace run rate..

Correct..

Is that what you're -- yes, from what we see, Brian, is the demand is there. The supply chain is a little bit of a hindrance to them. And it's not so much on our part, we're doing what we can to work out the middle, but a lot of it is coming from the castings and forgings and the speed of things are being delivered.

We're still seeing some problems there, and they're experiencing higher-than-normal quality issues with that.

So the things that we're doing about trying to keep those moderate steps in between initial material going out and then being finalized as a finished product, we're trying to take on more and more of those stuff so that you don't have as much trucking and queue time all around the country, and that saves them time and money.

So I think we're doing better on that. And to your point, will '22 be at that same run rate. No, it won't, we're catching up. We would expect '23 to be looking like that as long as everything can -- the raw materials and all that can keep up with it.

So outside of the only place where we're seeing issues, truthfully, it's like in one of our facilities has a lot of composite work, and that composite work is focused more on the wide-bodies, where those are using more of the composites for trying to keep it lighter.

So that part of the business hasn't -- we haven't seen the demand coming back there yet. But those that are on the normal structures and especially on the engine components, we see that as trying to get back to a normal '23..

Okay. Great. And then on the Sensoria, how is that -- is that rollout meeting expectations or exceeding expectations? And I assume just renewable type monitoring or maintenance and repair work is still less than 5% of the overall revenue mix.

When do you think we might see an acceleration of that as it relates to your 100 turbines of capacity to monitor going into 2023?.

I'll answer -- I'll give you one comment and throw it to Jon. I would say that the important thing for us to think about is it's been monitoring is important, but it's also given us that ability to go out there and do the inspection and the repair. So the revenue we're going to see isn't just a monitoring increase. It's really just a function of it.

We want to be more of the folks that are helping them keep their -- like we're doing for assets in power and energy and everything else, trying to help them plan when they do turnarounds and that find out as something that had a critical junction. I'll throw it to Jon to give you more color on that thought..

Yes. Brian. Thanks, Dennis. I think Dennis is right. We routinely inspect and repair several thousand wind turbines per year. And so monitoring 50 to 100, obviously, doesn't sound very much in comparison.

But the exciting thing is, is that we're in a lot of discussions with customers and trialing with a number of customers and receiving -- we're very enthused about the results of those trials, and I think our customers are enthused as well.

So the volume of conversations is increasing, and we're looking for a higher -- certainly a higher range of turbines that we'll be talking about in 2023 than we are in 2022. To your question about when will it be -- when will that sector be 5% of revenues. That's a great question. I think we've got a bit of ways to go until we hit that.

But we're very excited about the progress of where the wind turbine monitoring and the wind turbine business in general for us is heading..

But I will be a little cautious on that data but we expect it to get to 5% for sure..

Okay. Great. And then just a bigger picture, you guys are generating a lot of cash. You've got more financial flexibility with the new credit facility and leverage seems to be declining quicker than originally anticipated, like you said, under 3x by the end of this year, I believe.

So despite the MAX that you have under the new credit facility, I mean how comfortable are you with increasing leverage for acquisitions? And how do you balance that with maybe utilizing cash to buy back stock?.

At this point, we think our best use of cash is to keep pushing into our growth. So what we'd like to see is, first, like you said, in '22 get ourselves to or below the 3.0 -- and that means we've been out looking in the market right now to see what's out there, but we won't pull the trigger on anything until '23 when we were below.

I would like to stay below 3.0 even with acquisitions perspective or just straight up otherwise.

So we're not going to get too crazy on how big they are in the beginning, but they can play into diversity and they can play into strengthening like our last few have been, they strengthened our offerings across all the labs with IT and other solutions that help us in all of our channels.

So we do believe that acquisitions and funneling more things like paying for expanding into machining in places where we do the aerospace and machining ahead of time and all that.

We do believe we're going to do a lot more of that because there's nothing wrong with paying down the banks and getting below the 3.0 but after that point, we want to start doing things that are going to be more accretive to the whole business.

So to your question, I would like to keep it below three as a general rule because there's just so many investors out there that think of small cap above 3% as being a higher risk than what they want -- their appetite is..

Our next speaker will be Christopher Sakai with Singular Research..

I just had a question. I know you're saying gross margins will improve in the second half.

Can you give us an idea as to the level, the level of improvement?.

So I'll let Ed answer that. But what I will say on that is we've always been targeting to get to a 30% and above. And when you look at it, we're close and even in the second quarter, we were just at 29.9% or something like that.

So we're just under -- we believe we'll be over 30% as a quarter's goal for at least a third and we'll see how the fourth goes. But for the full year, we won't make that 30%. But that's our goal is to get their full year going this point out. Ed, I'll throw it to you..

Yes, that's about right, Dennis. I mean the first half was 27.5%. The second half could be 200 bps higher than that. I mean we -- it's significant with mix benefits with offsetting some of the inflationary pressures, definitely helps. So yes, we -- Q3 would be higher than Q4. But yes, we see it significantly higher in the second half..

Okay.

And then can you shed some light on revenue? And from your downstream section, it looks like it's in a little decline, but can you shed some light on how that is and why?.

Jon, if you want, you could add..

Yes, this is Jon. So that's exactly where the turnarounds that Dennis was referencing earlier were getting pushed out. So we expect it to be busier in the first half of the year but in particular, the second quarter based on the original schedules that were -- our customers made us aware of.

And because the work got pushed because refineries had more uptime than they were with the record crack spreads, I think, they were -- we feel that we're reluctant to actually undertake the turnaround and forgo operating in that very profitable environment for our customers.

They seem to have moved to more of a second half, in particular, Q3, there's still a turnaround or two that may be on the bubble in terms of are the Q3 or Q4, but that's really what's going on there..

Okay.

And then lastly, are you seeing any signs of recession on your end? What are you seeing there?.

I can tell you that right now, our bigger fight, Chris, is just keeping up with the inflation on some of the skill sets. It's certain areas, there's a high amount of pressure on some of the skills and people are able to get increases.

So right now, our fight is we're going back not so much a fight, but our issue is we're going back to the customers and getting increases from them maybe a little delayed from the time you got to pass out the difference for the hourly rates to the folks. But we haven't seen anything in recession. Our markets.

We're strong in aerospace, we're strong in gas and oil and to everyone's comments, everyone's still out there driving and everyone's flying. So as long as those things are happening, I think, we're going to be outside of some of the things that you're seeing in some of the other sectors.

I mean if it got really bad, it's definitely going to affect us at some point. But right now, the simple answer to your question is no, we haven't seen anything necessarily yet..

Yes. Just -- this is John, just to add on to what Dennis is saying, we are in discussions with several customers on pricing. And the focus is not so much, gosh, we are trying to keep gross margin at some certain level.

Our focus is really on making sure that our technician pool has -- feels like we and our customers have their back from an inflationary perspective because they've so many people, including all of us on the phone are experiencing the [techs] of the inflationary environment. So we're really just trying to make sure that these technicians are a whole.

And so -- and with our customers trying to work together to have that ability to provide increases to them to make them feel that way. So that's really the effect of that.

In terms of -- I agree with what Dennis said, in terms of demand, demand is not waiting for our services at all, if anything, if we had more employees that were on the rolls right now, we'd be able [form] the work..

Our next caller is Mitchell Pinheiro from Sturdivant Company..

Yes.

Can you hear me?.

I can hear you, Mitch. Yes. We can..

Okay, good. I jumped on late juggling a bunch of calls today.

I was curious, you can, obviously, see -- I was curious in your oil and gas segment, can you talk about any nuances between upstream, midstream, downstream for the second half? I just heard you answer about -- obviously, you think you're going to have some stronger demand with some turnarounds in the second half.

But what -- anything unusual going on, positive negative in upstream or midstream in terms of second half revenue generation?.

So I guess -- and I'll throw it to Jon. My comment would be, for us, when we say upstream, it's a lot more of the land-based larger facilities. We have a little bit of money in fraccing, but not a lot. So we're seeing an uptick in that, but we're not as volatile as barrel price $140 or $100 or what have you on that.

So our land-based upstream side has been pretty good. It's Canada, Alaska. There's some -- certainly some gulf in Gulf of Mexico with the North Sea. But it's a lot more land-based in California places. And that part hasn't been bad.

The midstream stays pretty insulated from the volatility and it's really people ask what's the right dollar amount for barrel price and crack spread when it's low, they're watching their cost. And when it's really, really high, they're watching their profit, right? So for us, that is really where the volatility comes in.

But I think as the prices are going down and what is it, 50 straight days of gas price decreases and things like that, I think, what we're going to see is our downstream sector is getting closer to a normal, I could say that and tomorrow, things could push, but we haven't seen anything like that.

So I think what we're expecting is all three running closer to normal in the second half where it was really two out of three. Jon, I'll see if you got any other thoughts on that..

Dennis, I agree with everything you just said in terms of -- yes, the downstream is where we'll be busier in the second half compared to the first half. But upstream and midstream, I think, will be essentially what we saw in the first half. In fact, mid might even get a little bit better for us..

Can you remind me -- can you remind -- I'm sorry to interrupt, but could you remind me about like the size of downstream relative to up and midstream in like a normal [indiscernible] and whatever that was..

It's a great question. We always talked about the segments as being 54% most recently. And I'm not sure if we have the numbers for Q2, but as of Q1, we were 19, 18, 17, downstream. So they're very close, right, to create that 54%. 19 was the downstream, the largest segment, and I believe it was up and then midstream for 18 and 17.

So when you look at it as a whole, they're big numbers, but when you break them out, we're starting to break them out because people might think we're all of one and nothing on the others. We're pretty well balanced between the 3..

And is downstream, I mean, how far doing a $29 million run rate in this quarter? How -- where did that stand three, four years ago? What type of sort of average quarterly revenue would you -- in the second quarter, would you expect that a downstream? Like what kind of revenue opportunity....

[indiscernible] But I can tell you, spring, typically in the last how many years, five, six years, have turned out to be the stronger quarter because in the fall, they decide that they've already outspent their budgets, and that's when they look for the cost savings. So it was untypical for us to see this type of cost saving drive in the spring.

Jon or Ed, I don't know if you guys got a percentage or numbers that might give Mitchell a little bit more on that..

I don't have the numbers at my fingertips, but I'd say that it's not -- yes, the spring has been -- the last number of years has been the busier time.

I think that -- I think, to the point of Mitch's question, the spend levels have not returned to pre-COVID levels yet for us generally, but it feels at least this year, like we might be starting to be on the way back. And we believe Q3 is that because of a push. Go ahead, Ed..

Sorry, Jon. So just to add to that, Mitch, we've only started disclosing up down and midstream bifurcation this year. We've only done it annually up to the end of '21. This year is a quarterly new thing we're doing. But if you look for the third quarter, as in the press release, Page 11, the downstream is the smallest of the three this quarter.

In most other periods in the past, that would have been the larger of the three in this given quarter. So yes, it's significantly off the pace right now, and that upside is what we feel good about why we have confidence in Q3 coming up.

But it's -- they've been -- they're all balanced, all three are solid, but downstream is definitely off the pace and it would have been -- again, I don't have the numbers either handy, we can pull that together, but it would have been significantly higher in Q2s and prior periods bigger than the other two sectors..

Well, I'm not sure it helps me understand anything more, but I do appreciate the quarterly breakdown of the three subsegments there. So much appreciated disclosure probably can confuse things sometimes. But I had a question for Dennis also. You talked about your confidence sort of in the second half.

And at the same time, you mentioned digital solutions service offerings, which will be a driver.

Can you explain that?.

Yes. I'll tell you. I think we may not have been messaging always great. I think people were thinking as digital as some new segment in some industry we don't have. A lot of -- we talked about the 90 different applications that we have now and every quarter, you'll notice it's been going up.

And we're not creating new ones as much as we're just taking one and bringing them up to the forefront and get them turned on more and more. And a lot of them started from our legacy businesses in PCMS digital as some new segment in some industry we don't have.

A lot of -- we talked about the 90 different applications that we have now and every quarter, you'll notice has been going up. And if we're not creating new ones as much as we're just taking ones and bringing them up to the forefront and get them turned on more and more.

And a lot of them started from our legacy businesses and PCMS and acquisitions of New Century that are a lot more gas and oil in all three of those sectors, right? So a lot of what we're doing is delivering a stronger data message to our customers that comes back quicker instead of just a piece of paper that comes back slow.

We give them a digital solution that tells them the readings the same day. We're turning these things into actionable items.

We're giving them these red amber green reports to tell them the conditions of their assets as all these readings combined because [when] the times, you're looking at hundreds of readings on one asset, look at them individually, you don't get any trending idea or information. So we're putting that all together.

And then we're also starting to incorporate a lot of the engineering calculations and capabilities we've always had using the API, [indiscernible] and other codes and standards that are out there.

And as we bring that in there, we're now also giving them an actionable thing that they can or should do to get that yellow or red back to a green condition. So a lot of the data solutions we're doing, Mitch, is really strengthening the core things that we've already got in our industries.

But at the same time, this data is part of really what's been driving Sensoria, right, been monitoring in the renewable and the wind blade. It's technology that we've used on bridges and other assets for years.

We're just now deploying that technology with the same acoustic sensors in a different way of monitoring a turbine blade, right? And that's driving a new market for us.

So a lot of the data apps that we have now are going to make us stickier, smarter and better for the customer inside the core businesses we have, up mid and downstream, inside, gas and oil. It's helping in power, it's even helping in aerospace and the -- especially the space market.

So they're really trying to show the differentiating of how we can add value to a customer that we've already got. Certainly, they're going to help us grow into new customers. But initially, they're going to help us really grow in where we already are.

Does that help you?.

Yes, it does. I mean I was just looking at those. So as it relates to the third quarter and you call out the digital solutions being a part of your -- what's driving your rapid growth for the third quarter.

I was just curious whether that -- you were like signaling that you're getting either new customers through these digital solutions that will be online in the third quarter.

Or why are digital solutions going to be a driver of the third quarter? Is it been a driver of your business? And -- but I was just curious whether there was something specific when you call that out..

It's a good question because the things that we're doing inside PCMS and such.

One of the things we're seeing, we're seeing a lot more growth in the chemical industry because a lot of those customers are under pressure to put in what they call these mechanical integrity programs, which is a more formal way of understanding your assets and how they age and what to do to look at it.

Everyone's had a program out there, but these mechanical integrity programs and risk-based inspection programs and all that are the next step up. And you're starting to see a lot more chemical customers jumping into that methodology. And everything we're doing inside the OneSuite, which starts with a lot of what the PCMS applications have.

But not every customer has or wants to go into PCMS or has something else. And we used to get stopped there if they had something else and we had PCMS. Now we take all the attributes of PCMS, put it into OneSuite.

And we still give them better data even with whatever systems homegrown or competitive or through wherever they're getting it, we're giving them more actionable items all the time. So we are signaling that OneSuite revenue which is starting at lower miles will be doubling and getting bigger and bigger.

We are saying that the data will be breaking out as a -- now it's in a mid-single-digit kind of range, and we expect to really be driving that. But to your point, it's really going to help us differentiate inside a market that's just looking for the lowest rate. What they're really looking for is the best value.

And by showing the customer the data quicker and showing them how we can help them get less spend and get more done and do more things for them.

That's why we don't mind less spend in NDT if we're doing all these crossover services and everything because we're getting a bigger share of the total, what they're doing on their project, but yet we're saving them more money. It's a win-win. So we are signaling that the data is driving -- it's going to be driving how we grow into our markets..

Okay. Good. And then -- last question just relates to acquisitions. And I heard your answer, you get down below 3x leverage, and I certainly understand why that's important.

But from an acquisition point of view, why -- given what you have your infrastructure, your digital solutions and what appears to be a growing -- you'll get a growing share of your customer opportunities.

Can't you -- wouldn't you just -- couldn't you just grow through hiring more technicians as demand merits? Is there some need, is it capabilities that you'd be acquiring? Because I would think where you stand in the industry, you certainly would be an attractive employer because you're growing and you're gaining share amongst these very large and quality accounts.

So as a technician, you feel like you'd have stability of income and working for a company that knows how to manage their cash in difficult times, et cetera. So why I would just think that you could grow because you're slowly becoming the leader in the industry thought leader, innovation leader.

Why do you have to buy your growth as really what the question would be? Because you have such a great free cash flow capital-light model..

I get you. And actually, thank you for some of the comments about helping us where we're at and what we're looking at. So thank you for that. I don't think we have to buy our growth. But I think to your earlier points, we want to faster increase our diversification of industries.

And right now, we have much bigger contract potentials in gas and oil than we have in other ones. So trying to get below 50% is another thing that some investors say, gas and oil is too high, it can be an issue as well. So we're looking at our diversification.

And the whole IT thing, we've got companies that we've been -- own and PCMS has been doing the data management for refineries for -- I don't know, we bought them in '91 and they're running like 10 years before that. So we've been doing that for a long time, but the IT skills and all that.

There's other things that we could be looking at that would be IT-centric that could help us in our core markets as well as maybe moving us faster into some of these other markets. Like when we bought New Century, to give you a quick idea, we -- not to say that what New Century didn't do was very good, but we know it was good.

And we knew we could replicate it. But the one thing we couldn't replicate is they've had 25 years in that market that we weren't in, and they had 25 years of folks going to them as a leader to take their data and make it actionable. So sometimes if you're getting into a new market, you got to look to say how can you increase that.

So we don't believe we need to buy growth in where we are. But if we want to make ourselves smarter and its evolving IT, what you thought was great today, it may not be as good tomorrow and all that. We got to be out there looking to keep pushing that innovation edge because that's really where we're going to differentiate all the way through.

So I think that's our answer. Thanks for joining our conference call today..

That will be our last question. I am turning it back over to Dennis Bertolotti for our closing..

Great. Thanks, Kurt. So thank you to everyone for your continued interest in Mistras and for joining our conference call today. Please have a safe, productive day, and we look forward to updating you on our next earnings call. Have a good day..

Thank you all for your participation in today's conference. This concludes the program. You may now disconnect. Thank you..