Thank you for joining, Mistras Group's Conference Call for its Third Quarter Ended September 30, 2022. My name is Andrea, and I'll be your event manager today. We'll be accepting questions after managements prepared remarks.

Participating on the call for Mistras Group will be Dennis Bertolotti, the company's President and Chief Executive Officer; Ed Prajzner, Executive Vice President Chief Financial Officer and Treasurer; and Jon Wolk, Senior Executive Vice President and Chief Operating Officer.

I want to remind everyone that, remarks made during this conference call, will include forward-looking statements. The company's actual results could differ materially from those projected.

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

Reconciliation of these non-GAAP – non-US GAAP financial measures to the most directly comparable US 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 and in the Investors section on the SEC's website.

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

All right. Thank you, Andrea. Good morning, everyone, and thank you for joining us today. Mistras reported its ninth consecutive quarter of revenue growth.

Our legacy operations continued to deliver improving performance, while the investments we are making in our strategic initiatives across renewable energy, data and new markets are beginning to contribute to our overall success as well.

Consequently, we believe the top line obscures the financial and fundamental growth of the business, with both foreign translation, and the continued under-realization of expectations in the downstream market masking what was otherwise a quarter of strong growth.

On the bottom line, both net income and earnings per share were up more than 28% from a year ago, whereas adjusted EBITDA for the third quarter was essentially unchanged as both gross margin and overhead are battling a rising cost environment.

We are addressing this by implementing price increases, and we are making progress, breaking through customer resistance, primarily in the energy markets, where budgets do remain tight. However, there remains a significant lag between the time we increase our labor rate and the recovery time for the higher billing rate.

We are also currently taking a hard look at all company-wide overhead, to identify efficiency and productivity improvements that can better leverage our footprint, enabling us to focus more quickly on moving to our long-term goal of SG&A being 20% of revenue.

Reflecting some of the rebound that we anticipated from the delays experienced in the second quarter, revenues were up 11% in upstream and 8% in the downstream. Year-to-date, our revenue across the overall oil and gas industry is up 6%.

The typically more stable midstream business was a bit soft in the third quarter other than our onstream business, but we expect that sector to show steady performance over the longer term driven by higher production levels and the corresponding increase in demand for inspection services, across the transportation and distribution infrastructure.

Onstream again had a record high revenue in the third quarter of 2022, and we expect its growth to benefit both our revenue top line, as well as bottom line profitability. Business in our aerospace and defense industry remains strong.

Recovery in commercial aerospace, growth in private space and expansion into adjacent services, continues to drive strong growth. We are increasing investment in this business as we believe we are building a strong foundation in a market, where the demand for NDT is large and growing.

For instance, inspections for defense sectors, machining operations, cycle time reduction capabilities, and other services integral to inspection, represents just some of the new markets, we are seeing as powering strong growth in this vertical.

All of these opportunities are in fast-growing markets, which carry a prospective gross margin higher than our current consolidated gross margin, and we look for significant contributions from these new verticals. Our renewables business also has anticipated.

It now appears that, we will outpace our previous objectives and end the year with more turbine systems being delivered are already monitored than our originally anticipated numbers.

While this market is in the early stages for monitoring solutions, it is a large and growing market, with hundreds of thousands of wind turbines in operation globally, and more being added every year.

Every day our installed technology is delivering further evidence of Sensoria's significant advantage relative to conventional inspection technique, wherein we foresee an inflection point in the near future resulting in faster market adoption and an acceleration in our growth trajectory.

Importantly, once operators contact us for monitoring service, we expect to add incremental revenue for the repair and maintenance of any damage our sensors identify.

Repair and maintenance services revenue should be lucrative, along with higher margins and multiples for monitoring adding to our already $15 million plus per year business in renewable win. Our data solutions business continues to grow with strong results at PCMS and OneSuite.

We are constantly seeing new examples of how our data solutions are leading to stronger relationships and thus new opportunities with our customers. Customers that are looking for the best value for their spend represent an opportunity to rise above the competition and avoid commodity pricing.

This continues to be a point of emphasis as we integrate data solutions across our organization. The new credit facility negotiated this quarter has not only added much greater liquidity but is also freeing up financial resources that had previously been limited, allowing us to invest and build upon these strategic initiatives.

Now with additional financial flexibility, we are doubling down under growth, which we expect to accelerate in 2023 and beyond. Overall, it was a solid quarter at Mistras. We are certainly confident in our future opportunities, but there are challenges.

Exchange rates created an $11 million revenue headwind for the first nine months of 2022, with the related impact on margins. Tight budgets in our largest market and the lag being experienced in passing on the impact of our inflationary costs are also pressuring margins.

Since the onset of the pandemic, our primary focus has been on actions that will enable us to weather the storm and emerge stronger and better equipped for a more normalized world.

In 2020, when our two largest markets were virtually collapsing, we had one of our best years of cash flow, and we have reduced debt by $80 million over the past three years. And this year, we negotiated a new bank facility that created a much greater flexibility to invest in both organic and non-organic growth.

Although, our largest markets are improving, they are still below pre-pandemic levels, while undergoing their own structural changes. This has certainly been a challenge for us especially on the cost side, where we are experiencing labor cost pressures that lag and can be difficult to pass along to customers.

While we see this as transitory it is a near-term factor. With the worst of the pandemic behind us, we can now focus more of our resources on our goal to grow our strategic initiatives.

We are making great strides building new capabilities that will define our future, as a greater mix of higher-value products that are more technologically sophisticated, predictive in nature, and compatible with the directive of energy markets such as wind. Much has been accomplished, but there is more to do.

I'm extremely honored to be leading Mistras as it's important and exciting time in our evolution, and I believe the future is very bright. I will now turn the call over to Ed, to give you more detail on our financial results for the third quarter and the first nine months of 2022..

Thank you, Dennis and good morning, everyone. Revenue in the third quarter was up again led by a record third quarter revenue performance in our Services segment. Consolidated revenue increased approximately 2.2% to $179 million, but was up 5.1% excluding the impact of unfavorable foreign exchange.

Revenue in our Services segments, top two markets were up year-over-year in the third quarter, with overall oil and gas revenue exceeding that of the comparable pre-pandemic level in 2019. Our upstream sector was particularly strong, benefiting from strength in offshore Gulf and in the Alaska region.

Downstream was also up from prior quarter as well, but it lagged our Q3 expectations and it lags behind the pre-pandemic level of activity. The midstream recovery took a pause in the third quarter, but is up year-over-year on a full year basis.

Within midstream, onstream's in-line inspection testing business did have its best revenue and bottom line quarterly performance since inception. Aerospace and defense was also up significantly, at 27% growth in the quarter year-over-year.

Consequently, we believe the top line belies the fundamental growth of the business with both unfavorable FX and the continued weakness in some of our secondary end markets offsetting what was otherwise a quarter of solid growth in our two primary end markets.

Gross profit for the quarter was approximately $54 million, up 3% from a year ago, with gross margin expanding 20 basis points to just over 30%. Gross margin in the quarter is illustrative of the benefit of faster growth in our aerospace and defense end market.

In the near-term, gross margin will primarily depend on the rate, at which we can pass along price increases, in line with inflationary cost pressures that we are experiencing.

As we had noted during our second quarter earnings call, beginning this quarter that is the third quarter, we are comparing against a year ago quarter period in which almost all of the pandemic-related benefits had expired.

So going forward, this comparability will help highlight the process -- or sorry, the progress being achieved on gross margin, which trended higher from increased volumes improved sales mix and efficiency improvements.

Selling general and administrative expenses in the third quarter were $41.6 million, up $2.4 million or 6% from a year ago, in part due to expenses related to our bank refinancing of about $700,000 and an additional $600,000 of incremental cost down actions, which were restored in the third quarter versus same period last year, for a total of $1.3 million or just over half of the overall increase.

We're continually working to calibrate our overheads, to match our level of revenue and we are intensifying our actions in this important area.

As Dennis stated earlier, despite ongoing inflationary cost pressures, we expect to reduce overhead from the current level as we exit 2022 heading into 2023, as it is one of the keys to leveraging our -- increasing our operating leverage. Interest expense for the quarter was $2.7 million compared to $2.3 million in the same quarter of last year.

This increase reflects the generally higher interest rate environment, as well as some temporary interim borrowings that increased our average outstanding debt for the quarter. For the third quarter, we reported net income of $4.4 million or $0.14 per diluted share which is increases of 29% and 27% respectively.

Adjusted EBITDA for the quarter, was $18.6 million which was in line with a year ago. For modeling purposes, we would anticipate a prospective effective income tax rate of approximately 30% exclusive of any discrete items. Free cash flow for the quarter was $0.2 million compared to approximately $0.9 million, negative a year ago.

Operating cash flow in the third quarter was affected by a significant buildup in working capital, primarily attributable to September being our highest billing month of the year. We expect to see cash flow improve in the fourth quarter not only from continued positive operating results, but also by a decrease in working capital.

The fourth quarter has historically been one of our best cash flow quarters. In the fourth quarter, we do have a $4.5 million payment due for payroll taxes that had been deferred and accrued earlier under the CARES Act, that will satisfy all remaining CARES Act obligations.

We additionally made a $2.4 million payment in early fourth quarter for final settlement of an accrued legal matter. Capital expenditures were $2.5 million for the quarter and $9.6 million for the first nine months of this year.

We now expect total capital expenditures for the year, to be less than our original $20 million budget and to be more likely in the range of $12 million to $14 million.

As of September 30 2022, we had gross debt of approximately $201 million down from just under $203 million at the end of the year and net debt of $183.1 million compared to $178.5 million as of year-end.

Given that our primary use of residual free cash flow continues to be the reduction of outstanding debt, we believe our -- our forecasted full year free cash flow will enable us to pay down debt in the fourth quarter of 2022.

Our goal remains to get below a 3 times leverage level, even though our new credit facility provides quite a bit more flexibility. Once that level is achieved in 2023, we intend to evaluate our capital allocation strategy and use cash flow as a means to accelerate growth and build shareholder value.

Keep in mind, that under our new credit facility maximum allowable total funded indebtedness to adjusted EBITDA is 4 times through the second quarter of 2023's measurement date, with a step down to 3.75 times for Q3 2023 measurement period and going forward for periods thereafter. We feel very comfortable operating under these terms.

As noted in yesterday's release, we are updating our full year guidance to reflect our view on current market conditions. We now anticipate revenue between $683 million to $693 million adjusted EBITDA between $53 million and $58 million and free cash flow between $15 million and $18 million.

Note that unfavorable foreign exchange, is expected to lower revenue and adjusted EBITDA after translation into US dollars by approximately $15 million and $2 million respectively on a full year basis for 2022 compared to our original outlook for the year.

We expect both operating and free cash flow to improve in the fourth quarter of 2022, not only from continued positive operating results but also due to an anticipated decrease in working capital from September 30 2022. I will now turn the call back over to Dennis for his wrap up, before we move on to take your questions. .

All right. Thanks, Ed. I am very optimistic about the potential for Mistras to capitalize on the technology development projects, that we have been working on for the past few years.

On the heightened activities with Sensoria, the customer acceptance of Mistras Digital additional service lines with our aerospace to our corrosion under insulation crawlers, we are giving the market a new way to see and visualize – visualize value sorry.

There is certainly no lack of initiatives at Mistras in creating differentiators for our offerings. After having operated for the past 2.5 years in violent disruptive end markets and under an onerous financing facility, we now feel free to more aggressively implement the strategic growth initiatives that have been otherwise minimally resourced.

We are seeing the early results with increasing contributions from data and renewable energy and the ongoing expansion of our Services in aerospace and defense industry. With greater freedom we believe these initiatives will only further accelerate.

At the same time we are intently looking at expenses to make sure our cost profile calibrates with our revenue level. The ultimate goal is to get overhead to approximately 20% of revenues over time which should significantly improve the operating leverage in our model.

There are many macro factors that we believe provide a tailwind to our NDT market including government compliance and safety standards and aging infrastructure, evolving industries in need of new and innovative inspection solutions and the growing complexity of the supply chain. These are all areas in which Mistras has an unmatched reputation.

This is the long-term vision that is being strengthened every day. But before taking your questions, I would like to thank all Mistras' employees for their continued dedication to delivering a safe and superior product in this ever-changing environment we face on a daily basis.

I'm proud of our team and know that the financial results we are seeing is not reflective of the quality of our professionals or their expectations. Everyone that comes to work for Mistras expects to deliver a safe and conscientious product for our customers.

By adopting our Caring Connects tonnage, we provide a better workplace for the entire Mistras family and add to our legacy. Andrea with that please open up the lines for questions. .

Thank you. At this time we will conduct a question-and-answer session [Operator Instructions] Our first question comes from Chris Sakai from Singular Research. Please go ahaead..

Hi, good morning, Dennis and Ed.

I had a question on your price increases you say are expected to help with inflation, which – when are we supposed to expect these price increases to occur?.

So what's happening Chris, it's a good question that they are occurring but they're occurring behind the increases being given to the employees. So as the market changes so too does the pricing to the local employees.

The skill sets go up at that customer and then we start negotiating – will probably start before we pay it out but what happens is you don't get the increases with the customer immediately. So there's always a lag between getting the increases paid to us versus paying them out to the employees.

So with the inflationary thing we're in right now this market is going to keep us trailing that a little bit. So we are getting increases. But as the inflation stays at this higher rate it – normally you do this on an annual basis.

We have COLAs built into our contracts the cost-of-living allowance that allows for these discussions to happen every year. Now the timing is such as things just don't wait for the anniversary of the MSA or the contract, right? So you got to do them into once or twice in a year versus just onetime at the MSA time.

So it causes a lot of continuous increases that you keep battling.

But for the most part the customers are giving us the skill set increase that they don't do it across the board but they do it for the sets that they see and recognize as what's going on because you got to recognize that it's just not NDT folks that are looking at this all the customers going into those refineries and plants and everything else are better than the same problem.

.

Okay. Thanks.

And then with Sensoria and its recent deal with Bledina, can you sort of quantify what will that do for the top line?.

Yes.

So I mean we've already been representing [indiscernible] on the conferences that they hold and they are a major European and various markets of repair and maintenance on blades and they're promoting us as a very good way to get in front of understanding what's happening with your blades before they become very difficult to repair types of damage.

So we've already been in conferences with them and talking to some other customers as well as us using it both ways. So it's already helped us getting revenue. I wouldn't have the amount of dollars yet. It's still early on. But it's just another way to add our exposure and giving Sensoria credibility, because you got to remember we're new to the market.

There's right now probably five or six competing technologies none of which really measure the blade. They measure the effects the blade has on the wobble or the distortion on the shaft and other components that you could interpret are probably coming from a blade defect or taking a picture and hoping that is at a surface level and things like that.

So we're still being run against other technologies. We're being put on test beds currently with different owners and manufacturers to see how we hold up these other technologies.

So having somebody with the reputation of Bledina helping us and saying that this is something they believe in which they've seen a lot of other technologies and ideas as well it really helps in that credibility part..

Okay. Great. And then last one for me. With the new credit facility how – and it's supposed to help inorganic and organic growth.

Can you provide any color there as to what type of growth will this help?.

Hey, Chris, essentially a couple of things, Chris. It's number one, it gives us more liquidity. Number two, it gives us more leverage flexibility. So it just lets us – and thirdly there's less required term loan amortization.

So it just kind of is much more or less constrictive on the –– versus the prior credit agreement we can flex into putting more of that capital to work. Again job one is to still continue to pay down leverage and we are doing that but it gives us more upside again more flexibility.

It dropped – the credit spread was lowered, the availability was increased. Again required amortization went down. It just gives us – let alone some affirmative negative covenants were all flexed back to pre-pandemic levels. So it just kind of uncuffs us to really use that credit for growth going forward. That's the benefits it gives us..

And Chris, specifically things like machining for aerospace and space customers, where we're getting new inspections because we're bringing on machining. We do the machining pre-inspection and then we do the inspection.

So we're doing parts that we hadn't done the inspection on previously because the machining was located somewhere else and geographically, it was easier to get the inspection done somewhere else. Adding on more of these crawlers that we use for the corrosion under insulation.

We call them ART for automated RT crawlers, but things like that that we under the old facility we got to be more careful on how much money we're spending on things like that versus just keeping up the facility payments and all those constraints.

So there's things that we're doing inside and that's what we mean by we're adding into the renewables and other sectors even building on more of these, buying more sensors chips and everything for all these Sensoria components.

We're trying to build up for that to get ahead of and not have component problems as customers are making orders for more Sensoria blade as well. .

Okay. Thanks for the answers Dennis..

Thank you. Our next question comes from Mitch Pinheiro from Sturdivant & Co. Please go ahead..

Yeah. Hey, good morning..

Good morning, Mitch..

Good morning..

So I want to just look at guidance for a second.

How much of the guidance decline relates to foreign currency?.

It's a significant piece. So on the revenue side Mitch so full year revenue impact of the FX is about USD 15 million was FX, $2 million on the EBITDA line were due to pure FX translation differentials for the full year 2022..

For the full year. So I mean -- so if I look to sort of midpoint -- if I look at the midpoint of the fourth quarter, it looks like it will be somewhere around $170 million for fourth quarter revenue, which is maybe flat maybe slightly down from a year ago.

Is that -- I mean is that -- is there anything beyond foreign currency that we need to understand?.

So for what we see for the fourth quarter Mitch, we expect that there to be a little bit stronger for some of the push-offs into the third quarter. It certainly got started a little bit later. We're not sure how far and deep into the fourth quarter all these turnarounds and projects will go.

So our guess on this is that from what we're seeing and what we're hearing right now is getting it maybe a little bit less than 2021. It was a strong quarter in Q4 for us in 2021. So I think we'll be a little bit down. I think certainly you probably got over $4 million or $5 million in FX translation just in the quarter itself.

And that's going to be part of it. But yeah I think it's just -- is the customer going to stay as long as they did in 2021 on the turnarounds and activities and how strong it will be into later this month. Probably you don't expect too much normally in December. It's more of just how late into November it all goes..

Okay. So -- okay. And midstream in the quarter, the third quarter was down. You had mentioned the onstream was okay.

What was the other -- what was the cause for the weakness in the other business?.

I think some of it was just timing of larger projects that repeat from Q3 of 2021 to 2022. I don't -- I didn't see anything there as far as loss of customers or major differences. I think it's just activity levels customer-to-customer year-to-year. .

Okay. As you look at your price increases and I understand the lag.

Is the lag -- are we talking -- you may have mentioned this and I might have missed it, but is this a quarter lag, or does it go beyond that? And if you -- I mean how do you get pushback on price increases, or are you getting pushed back on any price increases? I mean, it's pretty evident the inflationary pressures.

So I would think that we would see I don't say easy to get the price increases, but it's pretty much a foregone conclusion that you'll get them a couple of months out. .

Right. So I'll start with your second question. You're absolutely right. Everyone sees and recognizes it.

Customers just don't have the same urgency to recover it to us as fast as we have to pay it to the employees, right? So we get it out as we see what's going on and while we're talking to customers, they say yes, we understand it, but then they want to see a document as to proving which one and why and the question are all these needed and you get into those kinds of granular parts of looking at the increase.

Again, they don't generally fight you on it. They just delay it and take their time to -- because I'm sure we're not the only ones coming at them. So it's probably a process that they're getting swamped with and it just kind of makes it a slow reply in getting it back. So the second half isn't so much that it's ununderstandable.

It's just -- it doesn't come with the same sense of urgency that we have to pay it out. And to your point on the increases, I mean truthfully the increases can be the first day of the quarter or the last day of the quarter. So they don't really fall neatly into the quarters in the month.

What does happen though is it continuously happening and it's still happening now. You pick a region sometimes one region is faster or more aggressive than the other, but in areas of high density of this kind of work is really there's a lot of pressure out there.

You get a lot of price increases from other folks that they're not controlling and then the customers having to keep up with it. So what happens is, we're constantly fighting this. And the truth is what we're trying to say is as long as the inflation stays high like this, we're going to always be dragging a little bit of this behind us.

Once the inflation slows down, we'll catch up. We'll get back to a normal and things will be there. But we had a better gross margin quarter -- this quarter, while still trying to drag these on, right? So it's always keeping probably anywhere from 50 to 90 100 basis point pressure on our gross margin.

And essentially, we're not trying to be cute about it. What it is it's going to be there until the inflation slows down a little bit.

So we'll be keeping up with it but always a little bit behind it, right?.

Okay. Just a couple other questions. How -- so with your company why your overhead goal you still got a little ways to go.

What kind of things are you working on? Where do you see the opportunity to get that down to 20%?.

Yeah, Ed I'll let you take that if you want..

Sure, Dennis. Yeah. So Mitch, it's more just focusing on our productivity, our efficiency making sure we're getting the best spend of our investment.

I mean, we're looking at how do we automate things? How do we get more process throughput on the footprint we have and leverage that? So, we're looking at all SG&A items even some of the overheads up in the COGS line just making sure we're getting the best return there being as efficient as we can and kind of looking internally at how we can maximize that.

So, it's really just an efficiency productivity review of all things we're doing kind of zero-based budget things and make sure that there is true value in what you do there. Does the customer appreciate it? Do they let us build them for that and pass this through as valuable activity? Obviously, all that stays.

We're not trying to affect the topline growth. We want to keep doing those investments. But if it's not mission-critical not value add it's fair game and that's the kind of things we're looking at. And we do -- we always do it. It's just we're doing it more urgently now where that top line is not where we wanted it to be.

We're obviously taking a much harder look at this as we get deep into our budget cycle. So, that's where we are and we're just taking a much harder look at things as we kind of roll the budget together here shortly in the next couple of months here. .

Do you expect to see -- I mean I know you're not giving guidance for next year, but do you expect to see productivity improvement in 2023?.

Yes. In fact, we said that just minutes ago in the script. Yes, absolutely, as we exit the year and look into next year we absolutely see this being able to help productivity and profitability next year. Yes, we're looking at this at a very holistic level. So, yes, we do expect some immediate benefits here and it's something we look at all the time.

But yes, we are looking at it in a very immediate term absolutely..

Okay.

And what's driving -- what drives the CapEx lower this year?.

Again that's just one of those things we look at intently. I mean it's driven by volume a little bit. But it's really just challenging the need for that. And hey, can you go a little longer on the existing asset to preserve that capital? Again we do focus very intently on it and there's a controllable level there.

But it is scaling to revenue to a certain extent. But we just looking at every item there and just doubling down on the return making sure it's something we really want to do now is what it is. So, we've just really clamped down and going to just the essentials there and letting the existing assets go a little longer.

As long as there's no risk there we do that. But that's just kind of a whole bunch of little things there in the CapEx bucket is what we controlled. And that's just a part of the same studying the asset base here that we need to get our jobs done making sure we're being very efficient with it..

I also say we are still feeding opportunities. So, we haven't slowed down the growth of the business. We're making sure we're doing it. We're just looking at and saying okay because we spent last couple of years does it still need to be.

But we -- the things that we're doing for aerospace and machining and crawlers and building into the software and all that we're still feeding opportunities and still trying to plan for the future. It's just -- we want to make sure if we are putting some of the CapEx as it really did it so. We're not slowing down any of the growth that way no. .

Okay. I mean I seem to model like the CapEx would be about 3% of revenue.

Is that still something fair to look at in the out years, or is this -- or maybe is it a little lower than that these days?.

3% would be a high side. If we do as Dennis is describing investing more in our internal labs any given period, it might drift up a little higher closer to 3% but more historically it's been averaging closer to 2.5%.

But yes in a high year it could be slightly higher than that but 2.5% of revenue is a pretty good approximation for long-term CapEx requirements for us. And again as Dennis said we will be leaning into our labs a little bit trying to grow them a little faster than not organically but 2.5% is a good number for CapEx modeling. .

Okay. And then just last question.

Just -- Dennis what should -- or maybe Ed what should I -- from an interest rate perspective of your debt in the fourth quarter what do you think the rate should model?.

The interest rate I mean we're going to be pushing five in a fraction probably percent. So, yes, so you're all in with all the uncommitted pieces maybe closer to 5.75%. So, yes in that range. .

Okay. All right. thank you much..

All right. Thank you..

Thank you. Our next question comes from Brian Russo with Sidoti. Please go ahead..

Hi, good morning..

Good morning Brian..

Hey. So, just looking at the revenue breakdown by industry third quarter 2022 versus the year ago quarter. It looks like you're seeing a nice recovery in oil and gas and aerospace and defense.

We're clearly not showing up in the topline first of all? And do you attribute all of that to the negative sensitivity to the strong dollar, or is there something fundamental that might be going on in this third quarter and/or maybe this fourth quarter that had you moderate the topline of the guidance?.

I don't think so. I'll throw it to Jon in one second. I mean it's -- the sectors that we expected to be growing aerospace and some of the other recovery are there. I will say there is a little bit of chunkiness like in aerospace as far as the whole supply chain.

Customers are complaining that they -- our customers are complaining they're trying to get more through and they just can't get to it. So I think there's a want to get more through in aerospace. The demand is there. They just haven't found a way to get it out yet. So that's going to come up a little bit slower than you expect.

There are some things like that are just structural but I don't see anything else major.

Jon, I don't know if you got any of your thoughts on that?.

Yes. Thank you, Dennis, and thanks for the question, Brian. I think supply chain, believe it or not is still, wreaking havoc. So we've got some customers, for instance, that were testing raw materials for that they just can't get the material. And that's been an ongoing challenge as kind of as the years rolled on they were good earlier in the year.

And as the years rolled on they haven't had material available to test. So, I think that's one of these realities that it's hard to plan on. And when you give guidance, you don't anticipate those kind of things that are outside of your control but they're real factors too..

Okay. Got it. And remind me and I apologize if you conveyed this earlier, but you mentioned what the full year FX impact is on revenue? What was it year-to-date? And then, to follow on a prior question that just backing into the fourth quarter relative to year-to-date and full year fourth quarter is basically flat versus a year ago.

And I'm curious if there is a headwind on FX that maybe masking some of the overall improvement in your end markets and your business model?.

Hey, Brian. It is a little bit -- yes, the full year effect on revenue is expected to be about $15 million. Through nine months it was about $11 million.

So, you have another $4 million or so headwind hitting us here expected in Q4 on the revenue line due to FX?.

Okay. Got it.

And what was your leverage ratio -- what was the leverage ratio as of September 30?.

We're right -- just under a 3.75, 3.70-ish or so..

Okay. And that's including what was a relatively weak first quarter, right? So it looks like you're well on your way to under three times.

I'm just curious how much of that's going to be debt reduction -- absolute debt reduction versus improvement in EBITDA or a combination of both? And maybe tie that into what are your debt amortization payments on a quarterly basis? And are you looking to exceed that with your free cash flow?.

Yes. Good questions, Brian. Yes, so -- well, two things. A combination of higher trailing EBITDA and lower-funded debt will move, both numerator denominator in our favor. Q4 is routinely a very good strong free cash flow period for us that was last year. We expect that the same thing this year.

So that will certainly help in our favor there driving that downwards. So amortization is very low right now. The new credit agreement effective August pushed amortization down from 20% to 2.5%. So, modest level of amortization now.

But as we said on the call, in the prepared remarks, we're not going to do anything other than keep paying leverage down now. So we'll pay beyond the required amortization to get leverage down to below three. I believe that happens sometime before next year is over.

So we'll keep doing that in the interim taking that residual free cash flow, well beyond what the required term loan necessitates. But again to Dennis' earlier point, we have optionality now. We've got some flexibility. We see a great organic growth capability to grow a revenue stream. We can do that and we'll do that.

But it's not going to affect or otherwise step down in leverage to the 3.0. That will continue. Again, we've got a little more flexibility if we want to do something in the interim on a little bit on the growth side where there's a high ROI. But no we're in a good place there. We'll keep knocking that down.

I think the combination of the leverage -- of the EBITDA going up and then [Audio Gap] funded debt down both of those combine to continue to bring the leverage down as we go into next year and beyond..

Okay. And then just lastly, when we look forward to 2023 with the understanding that you don't have guidance but it seems as if oil and gas has normalized and maybe we're still seeing an aerospace and defense recovery.

But where does the growth in your core end markets come from post 2022? Is it gaining market share from the digital offerings, or is it from top line diversification through some of these emerging markets like wind remote sensoring, et cetera?.

Yes. I'll take that and throw it to Jon to answer. Thanks, Brian. So oil and gas is recovering. I wouldn't say it's quite there in the downstream. There's still a lot of hesitancy to spend some of the money that they had pre-pandemic.

I talk to customers all the time that are just amazed on how much lighter they're running, they're running to maintain than they had been. And I don't know, something will probably force them to change it over time you would expect. So I think part of '23's recovery is oil and gas still has a way to go.

I think inside the aerospace and defense, I put a little bit lighter than Jon did. He's right. I mean some of our markets we got customers waiting for material and the spend is much less than everyone anticipated because the material [indiscernible] to fabricate. So we have some of that that we believe is going to continue getting better.

Things like that are out of our control.

So we're not so sure, how fast and how much but we are doing the things like you're talking about with Sensoria and doing that and with the Mistras Digital, we're starting to push digital a different way to try to get through faster get our customers in place to understand it so we're making initiatives there too.

So there's a lot of things that we're doing with the crawler and everything else. We're not waiting for the market to come back to us. But I do think both of those; defense, aerospace and in the oil and gas, they are coming back.

It's just probably never as fast as you want it, but with everything else that we're working on we feel good about getting some of these things in place and keeping ourselves stickier and showing value with the digital and all that.

While it's small, we got signs in many, many places that the digital is not only helping us get stickier, but bringing work in where customers are talking about looking at doing more and more locations with this because they really are starting to see the advantage of getting this data centralized and getting in one place.

So, I guess my answer to it is a little bit of everything to what you asked, Brian. I don't know if it's -- I wouldn't put my finger on any one of them as being the major contributor. Certainly, the supply chain gets itself figured out oil and gas site spending more. We still got a way to go in our recovery.

We've got our shop businesses [indiscernible] starting to hit months that haven't been seen before. We anticipate that keep going. But at the same time, we know there's some additional demand that they just can't get through and get it to us right? So it's just a function of all these things getting back a little bit more normal.

But we don't really see anything as too far out of our control that we don't -- we will come out later with a '23 guidance. But we don't see anything out there that's really going to be structurally in our way right now.

Even the inflation right now is definitely a drag on the margin, but we don't see it right now changing our customer habits or spend unless something dramatic probably more in the health care side and the inflation really would hurt us there..

Okay. Got it. And then one more on the free cash flow conversion. Historically, you were averaging about 50% obviously, a lot lower than that in 2022 due to some onetime payroll CARES type repayments and another discrete item you mentioned.

But when we look forward over the next several years, is that historical 50% cash conversion still kind of achievable?.

Brian, it's Ed. Absolutely. In fact, it's been trickling up ever so slightly that average as well. So yes, you're right, a couple of discrete items this year are knocking that down and our AR which is accounts receivable and with deferred costs on the balance sheet that number is up significantly almost $132 million at the end of September.

That number will come back down. So, there is that just delay in the collection side this year that's a little bit slower. But no, 50% plus a little -- our goal and I believe very achievable..

All right. Thank you, very much..

Thanks, Brian..

Thank you. I'm showing no further questions at this time. I'd now like to turn it back to Dennis Bertolotti for closing remarks..

All right, Andrea. So I'd like to thank everyone for joining the call today and we look forward to updating you on our progress on our various initiatives. Have a great day. Thank you, folks..

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