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Edited Transcript of MG earnings conference call or presentation 5-Nov-19 2:00pm GMT

Q3 2019 Mistras Group Inc Earnings Call PRINCETON Dec 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Mistras Group Inc earnings conference call or presentation Tuesday, November 5, 2019 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Dennis M. Bertolotti Mistras Group, Inc. - President, CEO & Director * Edward J. Prajzner Mistras Group, Inc. - Senior VP, CFO & Treasurer * Jonathan H. Wolk Mistras Group, Inc. - Senior EVP & COO * Nestor S. Makarigakis Mistras Group, Inc. - Group Director of Marketing Communications ================================================================================ Conference Call Participants ================================================================================ * Alexander David Dwyer KeyBanc Capital Markets Inc., Research Division - Associate * David Emerson Ridley-Lane BofA Merrill Lynch, Research Division - VP * Edward James Marshall Sidoti & Company, LLC - Senior Equity Research Analyst * Tate H. Sullivan Maxim Group LLC, Research Division - Senior VP & Senior Industrials Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, ladies and gentlemen. My name is Brian, and I'll be your event manager today. We'll be accepting questions after management's prepared remarks. I'll now pass the call to Mistras Group Director of Marketing Communications. Please proceed. -------------------------------------------------------------------------------- Nestor S. Makarigakis, Mistras Group, Inc. - Group Director of Marketing Communications [2] -------------------------------------------------------------------------------- Welcome to the Mistras Group conference call for its third Quarter of 2019. My name is Nestor Makarigakis. Participating on the call for Mistras will be Dennis Bertolotti, the company's President and Chief Executive Officer; Ed Prajzner, Senior Vice President, Chief Financial Officer and Treasurer; Dr. Sotirios Vahaviolos, Founder and Executive Chairman; and Jon Wolk, Senior Executive Vice President and Chief Operating Officer. I want to remind everyone that remarks made during this conference call will include forward-looking statements. The company's actual results could differ materially from those projected. Some of those factors that can cause actual results to differ are discussed in the company's most recent annual report on Form 10-K and other reports filed with the SEC. The discussion in this conference call will also include certain financial measures that were not prepared in accordance with U.S. GAAP. Reconciliation of these non-U. S. GAAP financial measures to the most directly comparable U.S. GAAP financial measure can be found in the tables contained in yesterday's press release and in the company's related current report on Form 8-K. These reports are available at the company's website in the Investors section and on the SEC's website. I will now turn the conference over to Dennis Bertolotti. Dennis? -------------------------------------------------------------------------------- Dennis M. Bertolotti, Mistras Group, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Nestor. Good morning, everyone. During today's call, we will provide an update on Mistras' business performance, our financial results for the third quarter and first 9 months of 2019 as well as discuss our lowered outlook for the remainder of the year. Third quarter results continue to reflect the progress being achieved toward our long-term strategic initiatives. Revenues were up, margins expanded and earnings increased on a year-over-year basis. We also generated strong cash flow, a hallmark of Mistras. Let me note some key highlights for the quarter. Gross margin increased across all 3 segments. SG&A decreased by 100 basis points as a percentage of revenue, generated strong cash from operations of $19.4 million and free cash flow of $13.4 million. On a per share basis, free cash flow was $0.46 for the third quarter. Additional highlights for the first 9 months of the year: Consolidated gross margin increased 160 basis points. Cash from operations of $40.5 million, with free cash flow of $22.5 million. Debt paydown of $23.3 million, exclusive of the $4.8 million paid for New Century Software, our latest acquisition. Revenue and operating earnings were ahead of fiscal 2018 on a year-to-date basis through the first 9 months, indicators of a robust business. However, our strong momentum developed over the past 2 quarters encountered some headwinds coming into the fourth quarter of 2019. In particular, a note of caution unexpectedly rose among our oil and gas customers, attributable primarily to increased macroeconomic uncertainty. Although our long-term outlook remains intact, these factors are clearly influencing current activity in the oil and gas market with pushouts in demand. Most of our oil and gas exposure is predominantly in the up and downstream sectors, with downstream being driven by capital spend, including turnarounds and modestly in the run-and-maintain OpEx spend. Consequently, we feel well positioned with our strategy focused on growing our run-and-maintain revenue, a sector of the market that we dominate. I feel very good about where we are in our outlook for the long term, but this unexpected pause in the oil and gas end markets has created some immediate challenges that will affect our performance through the end of 2019 and may drag into the first quarter of next year. Consequently, you can understand why our full year outlook is now lower than originally anticipated and while we are accordingly lowering our guidance for 2019. We view this as a timing issue, as we expect most of the work will return to the market over the next couple of quarters. Ed will walk you through a detailed update in a few minutes. But looking out into 2020 and beyond, our underlying oil and gas business remains strong, and our plans and strategies to grow profitably over the long term are unaffected. Based on what we are seeing and hearing on the ground, we believe we are gaining market share and except for a few locations, we have retained a vast majority of the customers served by our close to 90 labs across the U.S., Canada and Europe. Each of these locations remain staffed with our experienced professionals so that we are well positioned to serve customers and capitalize on current opportunities as well as to continue to grow our market share in 2020 and beyond. Even by conservative estimates, we serve a $14 billion industry within the NDT spend of the business, not counting the greater spend generated in the data and mechanical sectors in which we participate. These markets are growing at healthy rates and support our growth aspirations. Our product line expansion into adjacent markets, such as mechanical and pipeline inspection that increase that opportunity and our quickly evolving MISTRAS Digital platform, is providing us even greater opportunity. Though quite large, it is a highly fragmented industry and many of our smaller competitors simply can't match the depth of our resources or the breadth of our services and valuable experience. This builds strong relationships with our customers because we save them unnecessary spend. We are also utilizing our resources to create new products and services and to make strategic acquisitions, all of which help diversify our end markets, provide additional stability to our results and further distance ourselves from the competition. Before turning the call over to Ed, let me offer a few comments on some of the key developments in the quarter. Performance at Onstream continues to reflect a strong U.S. growth but a relatively weak Canadian market. The recent commercialization of their 20-inch tool and the impending introduction of their larger 24-inch tool shall increase their contribution. And with the geospatial technology from the New Century acquisition providing an excellent complement to Onstream's Stream data view analytics, we believe there are strong synergies that will open up new possibilities in the future as well as benefit our complementary PCMS software. We see this acquisition as a strong strategic fit in one of our stated pillars for growth, that being the midstream sector of the energy market. We view this as a growth market, driven by increased regulatory oversight and rising customer demand due to more vigilant mechanical integrity programs, all needs Mistras is uniquely qualified to deliver. West Penn has good momentum and should outperform the fourth quarter as of last year. We expect them to continue to ramp up utilization at a second facility. In aerospace, we also continue to benefit from the strength of our French operations. Overall, aerospace remains a key corporate growth pillar, where the outlook for the industry over the next few years continues to be strong. Data management is also one of our strategic objectives, and MISTRAS Digital is a discrete way to integrate our vast data capabilities. Onstream Streamview, PCMS software, our ruggedized MISTRAS Digital field tablets, sensing and monitoring capabilities, and now the New Century Software are just some of the various ways that are weaving -- that we are weaving together our data management capabilities to establish a leading position as the asset-protection market enters the age of the industrial Internet of Things. As the market gets more sophisticated, we want to be the leader in the market for more data and predictive analytics, which we think are the industry big growth drivers. An exciting endorsement of our strategy has been the rapid adoption of our MISTRAS Digital tablet rollout that we've been piloting at a growing number of refineries. These customers value this technology, so much so that they are asking us to open up the app to let other on-site vendors piggyback on the software, hence, we are reviewing the monetization of this application to other third parties. We expect to continue to roll out our MISTRAS Digital tablet to other customers at an accelerating rate to more of our locations throughout the fourth quarter and especially in 2020. This quarter, we acquired New Century Software, which forms another element of MISTRAS Digital. More importantly, this acquisition is another example of forward thinking about the direction of the midstream sector and the opportunity to leverage technology to grow. New Century is a leading provider of pipeline integrity management software and services to energy transportation companies. New Century provides software solutions, data management expertise and extensive pipeline experience to enable a global network of customers in the oil and gas industry to manage pipeline integrity, meet regulatory compliance requirements and maximize safety and reliability. This acquisition aligns with MISTRAS' mission of delivering value-added, integrated, smart data solutions to its customers. I will now turn the call over to Ed for a detailed review of the financials for the quarter. -------------------------------------------------------------------------------- Edward J. Prajzner, Mistras Group, Inc. - Senior VP, CFO & Treasurer [4] -------------------------------------------------------------------------------- Thank you, Dennis. Looking at results for the third quarter, consolidated revenues were up 5.5% to $192 million. Organic growth was 2.1%, with acquisitions contributing 4.4%, offset by a 1% decline due to unfavorable currency translation. Consolidated gross profit for the quarter was $57.8 million, a 10% increase over the year ago quarter. Consolidated gross profit margins improved significantly to 30.1% for the third quarter compared with 28.7% in the prior year quarter, an increase of 140 basis points. The ongoing expansion of our gross profit margin is indicative of the success of our underlying strategy, focusing on more profitable opportunities in our core operations, shedding less profitable businesses, and making strategic acquisitions that help to improve margins. We believe that our year-to-date gross margin in 2019 can be maintained into 2020, even with short-term volatility in revenue volume. Operating income improved for the third quarter to $10.8 million compared with $3 million in the comparable period last year. On a non-GAAP basis, adjusted operating income was $11.2 million compared to $10.1 million last year, an increase of 10%. Net income for the third quarter was $3.1 million compared with a net loss of $1 million for the same period last year. Adjusted EBITDA was up 7% to $22.4 million for the third quarter of 2019. As a percentage of revenue, adjusted EBITDA improved to 11.6% for the third quarter compared to 11.4% in the same period last year. The improvement in adjusted EBITDA is reflective of the success being achieved by focusing on higher-value operations and better leveraging our global infrastructure. As Dennis mentioned earlier, the company is a strong cash generator. We stated last quarter that we had anticipated a continued strengthening of our cash flow generation coming into the back half of the year, and we achieved that with third quarter cash from operations of $19.4 million and free cash flow of $13.4 million. On a per share basis, free cash flow was $0.46 for the third quarter, this was consistently strong on a sequential basis over the second quarter and a significant improvement over the prior period last year. Strong cash flow this year has benefited in part from our commitment to improved working capital management. Now looking more closely at our segments. Services revenue increased by almost 8% in the third quarter. Organic revenue grew a little over 2%. And acquisitions, primarily Onstream, incrementally added nearly 6% to revenue growth. The Services segment generated a gross profit margin of 28.4% for the quarter, an improvement of 90 basis points compared to the year ago period of 27.5%. Margin expansion is a key corporate strategy and we are pleased to see our margins continue to expand in our largest segment, driven by pruning low-margin operations and growing higher margin operations, including acquisitions such as West Penn and Onstream. We have a strong operating leverage in this segment with significant contribution margins on incremental revenue. International revenues in the third quarter were up 5.4% organically, offset by 4.4% unfavorable currency rates for a 1% nominal increase. The growth organically is noteworthy in that it was achieved despite the previously disclosed run-off of the low-margin German staff leasing business. For the third quarter, International reported a 31.6% gross profit margin compared to 29.7% a year ago, which represents a 190 basis point improvement. We attribute that improvement largely to higher labor utilization, which is a result of increased visibility and visibility that was a key focus in this past year. Products and Systems revenue decreased slightly in the third quarter to $5.5 million due to the sale of a subsidiary that was divested in 2018. Gross profit margin increased for this segment to 49.6% compared with 45.6% in the prior year due to a favorable product sales mix. We had another prudent quarter in maintaining strong cost controls with a below inflation increase of 1% in SG&A year-over-year. As a percentage of revenue, SG&A was down 22% from 23% in the same period last year, a decrease of 1 full percentage point, once again reflecting our focus on improving operating leverage. Considering expenses this year contain those assumed in the inclusion of the Onstream acquisition, the ongoing investment we are making in sales and marketing as well as with developing and launching MISTRAS Digital, we believe our efforts are beginning to reflect the many efficiency initiatives underway at MISTRAS. Spending in the quarter was consistent with our expectation that the first half 2019 levels represented what we felt would be the run rate for the full year. We continually review and rationalize our company-wide overheads for savings to make sure we maintain a flexible and efficient footprint to support and invest in our growing business. The company's net debt, defined as total debt less cash and cash equivalents was $252.9 million as of September 30, 2019, compared to $265.1 million at December 31, 2018. The company has paid down over $23 million of total debt during the first 9 months of this year. The company additionally paid a total of $7.7 million for acquisitions and income taxes related to the net settlement of share-based awards during the 9 months ended September 30, 2019. As defined in our credit agreement, our leverage ratio was approximately 3.6x as of September 30, 2019. Our goal is to reduce this ratio to below 3x by no later than the end of fiscal 2020. Given our cash flow, annual interest expense and net debt, we believe our balance sheet is strong and will support the funding of both our organic growth objectives as well as any selective tuck-in acquisitions such as New Century Software. Our effective tax rate was approximately 61% for the third quarter of 2019, including a $1.4 million or $0.05 per share write-off of certain deferred tax assets. As Dennis mentioned earlier, we are seeing a weak oil and gas market coming into the fourth quarter, and we experienced an overall fall season that ended much sooner than anticipated. In particular, the oil and gas turnaround sector slowed attributable to factors such as supply buildups early in the year as well as refinery shifting resources to prepare for IMO 2020. The note of caution that unexpectedly arose amongst oil and gas customers towards the middle of September 2019 into October 2019 is attributable primarily to increased macroeconomic uncertainty. It is the same note of caution that is being heard in various sectors, stemming from many factors including trade tensions, negative European interest rates and the slowdown of domestic GDP growth. Although the long-term outlook remains intact, these factors are clearly influencing current activity in the oil and gas market, resulting in pushouts of demand. Consequently, the company's full year outlook is now lower than originally anticipated for the fourth quarter and accordingly, the company is lowering its guidance for full year 2019 as follows: total revenues are expected to be between $740 million to $750 million; adjusted EBITDA is expected to be between $70 million to $75 million; capital expenditures are expected to be under $25 million, and free cash flow is expected to be between $28 million to $32 million. We are still developing our full year 2020 budget, but preliminarily, we anticipate modest single-digit top line growth while maintaining year-to-date 2019 gross profit, operating margins and cash flow levels. There are also a number of additional growth opportunities, all of which will be incremental to our current expectations. We will provide our outlook for full year 2020 on our next scheduled call. We are confident in our sustainable business model, which has proven to be nimble in responding to sudden and severe cyclical changes in the oil and gas sector. We remain firmly committed to diversifying our end markets over the long term, while at the same time, embracing our current end markets with an evolving differentiated solution. With that, I'll now turn the call back over to Dennis. -------------------------------------------------------------------------------- Dennis M. Bertolotti, Mistras Group, Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- Thank you, Ed. As we implement our long-term strategy, we recognize there may be some bumps along the road. However, these distractions are not a hindrance to achieving our ultimate objective of becoming the partner of choice in the NDT market and its adjacencies. We continue to steadily transform Mistras with our basic principles always at the forefront, that being delivering value, meeting our promises, innovating to drive productivity for our customers and developing industry-leading productivity tools. I am confident and continue to see signs that our customers' operations see value in the spend with us as a true ROI. The enthusiastic reception of our MISTRAS Digital tablet initiative further illustrates the partnerships we are forming with our clients. I also believe that we do this better than our competition, and this will be evidenced by our relatively stronger performance than our market as we exit 2019 and head into 2020. We are keenly focused on differentiating ourselves in the markets, particularly through our expanding service lines, which solve for customers' needs of reduced overall labor to accomplish a given project and evolving digital solutions, as I mentioned earlier. We also remain firmly committed to maintaining our position at the forefront of leading the development of advanced inspection tools utilizing proprietary technology. We add value and this enables us to price at market and generate solid operating profit with predictable, attractive cash flow. In the process, we serve our customers with an exceptional return on their investment by delivering top-quality results with superior economic value. I am confident that we are on the right path, executing on our strategy and creating value over the short, mid and long-term for Mistras shareholders. We will now take your questions. Brian, please open up the phone lines. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And our first question will come from the line of Edward Marshall with Sidoti & Company. -------------------------------------------------------------------------------- Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [2] -------------------------------------------------------------------------------- So I'm looking at the gross margin here, and it's easy, I guess, to attribute to acquisitions made over the last couple of years and maybe the returns you're seeing on that. But you've done considerable work on the costs, and that's good to see. Can you kind of break down the gross margin improvement for us and kind of how much of that's generated by these higher-margin acquisitions versus what you're doing from a cost basis? -------------------------------------------------------------------------------- Dennis M. Bertolotti, Mistras Group, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- So I'll take the first crack at that for you, Ed. The truth is Onstream and West Penn have not been performing as strong as we wanted to. So while they are very good cash generators and very good gross margin attributed to our gross margin profile, they haven't been pushing it as far as we were looking for. So a lot of the gross margin improvement is simply coming from our sales mix, our focus on our utilization in Europe, our maintenance of making sure that the kind of sales that we get are the type of sales we want. The oil and gas market, while it can be competitive, you can find the right customers to align yourself. And if we add value, we believe we've been doing a good job of getting the gross margins up. I don't know if Ed wants to add anything? -------------------------------------------------------------------------------- Edward J. Prajzner, Mistras Group, Inc. - Senior VP, CFO & Treasurer [4] -------------------------------------------------------------------------------- Yes. I agree, Dennis. It's definitely -- I mean, acquisition is an absolute part of it, and sales mix. Some of this is that we exited such as staff leasing, had lower-than-average margins. But we're also driving utilization and efficiency across the board, international being one that has showed very good improvement there. So it's really across the board on lots of levels improving that gross margin. -------------------------------------------------------------------------------- Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [5] -------------------------------------------------------------------------------- Yes, I was surprised to see it actually go up on a down revenue basis. Is this something that you could potentially sustain as we move forward, even in difficult revenue environments? -------------------------------------------------------------------------------- Edward J. Prajzner, Mistras Group, Inc. - Senior VP, CFO & Treasurer [6] -------------------------------------------------------------------------------- Yes, we believe so. Even if revenue were to dip off a little bit, we still -- we're very comfortable and confident that the gross margins would hold off. Absolutely. -------------------------------------------------------------------------------- Dennis M. Bertolotti, Mistras Group, Inc. - President, CEO & Director [7] -------------------------------------------------------------------------------- Yes, we're very proud of the fact that our margins are holding even in a little bit less than what we wanted for revenue, for sure, in Q3. -------------------------------------------------------------------------------- Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [8] -------------------------------------------------------------------------------- Got it. I heard the comments about 6% to revenue, I guess, from Onstream. I'm curious, what's the investment been for the new tooling -- larger-diameter tooling in that business? And then maybe, ultimately, the contribution to earning -- the earnings profile in Q3? -------------------------------------------------------------------------------- Jonathan H. Wolk, Mistras Group, Inc. - Senior EVP & COO [9] -------------------------------------------------------------------------------- Ed, it's Jon. Thanks for the question. The investment is relatively modest. It's in the high 6 digits to low 7-figure number. The contribution is almost instantaneous, and it's very impressive because the high-technology content and effort to design and roll out these kind of tools, the margins that could be earned on them are very good. The question is just utilization. So we're in the early stages of getting qualified with customers on the 20-inch tool, and the 24-inch tool will be ready in about a month. So a lot of rollout, a lot of activity that we're excited by and upside to come. -------------------------------------------------------------------------------- Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [10] -------------------------------------------------------------------------------- Got it. And I guess it's easier to measure the actual capital outlay, but you mentioned trials just a moment ago. I'm assuming there's an investment period of that trial at relatively lower noncontributing margins. Is there any way to quantify that as you kind of expand into the U.S? -------------------------------------------------------------------------------- Jonathan H. Wolk, Mistras Group, Inc. - Senior EVP & COO [11] -------------------------------------------------------------------------------- There is, Ed, but I'd say that's more of a rounding difference in terms of -- Onstream is certainly a profit contributor even with those investments. So it's just really a matter of when the uptake comes from them. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- And our next question will come from the line of Sean Eastman with KeyBanc Markets. -------------------------------------------------------------------------------- Alexander David Dwyer, KeyBanc Capital Markets Inc., Research Division - Associate [13] -------------------------------------------------------------------------------- This is Alex on for Sean. Just given the single-digit growth guide for 2020, I'm kind of just wondering what the drivers are to think about that can help achieve the higher end of the range versus the lower end of the range, the low single-digit range? And then I was kind of wondering if the near-term headwinds you're seeing right now are going to carry into 2020 at all? -------------------------------------------------------------------------------- Dennis M. Bertolotti, Mistras Group, Inc. - President, CEO & Director [14] -------------------------------------------------------------------------------- Yes, good question. So at this point, we're still forming it together, but we don't see a huge January and February. We believe the spring although is going to be a strong spring. In fact, it might be one where we have constraints on just trying to make sure we have all the labor. So we're trying to beef up for that. As far as the things that we have going on, it's actually, most recently, even inside the aerospace, there's a lot of potential for investment. We've consistently had a lot of work in the LNG market with the new construction and inside renewables with wind generators. Our Canadian and European markets have a lot in renewable power and aerospace. There's a lot of oil and gas potential. There's a lot of customers who were 2 years ago buying on the hourly rate, and now are trying to look at this more on the value. And we see there's a lot of potential on those kind of changes. So we feel real good, truthfully, in our oil and gas market even in the up and downstream. Once we get past this little cost trough that we have ourselves in Q4, and we see aerospace and renewables also pushing it. So there's really no one driver. But fortunately, it's a little bit more across the board for us. -------------------------------------------------------------------------------- Alexander David Dwyer, KeyBanc Capital Markets Inc., Research Division - Associate [15] -------------------------------------------------------------------------------- Thanks, that's helpful. And I was just also wondering if you could comment on the M&A pipeline for, I guess, tuck-ins versus larger acquisitions you're seeing nowadays? And maybe how that compares to what you were seeing over the past couple of quarters? -------------------------------------------------------------------------------- Dennis M. Bertolotti, Mistras Group, Inc. - President, CEO & Director [16] -------------------------------------------------------------------------------- Sure. That's a good question. I mean right now, we've been kind of quiet since we had our 2 larger acquisitions, and we're watching our leverage. But we did the New Century one and it was one that actually came up as a very, very good strategic fit. And right now, we're doing smaller tuck-ins because most of our money is going down to pay our debt service. But we do believe it's a very strong market out there for looking for acquisitions. We do believe there's a lot of opportunities. We still have folks dedicated to it full time and looking to make sure nothing very strategic gets by us while we're watching our spend. But there is no lack of things going on out there, and that just might be because of people seeing it as a good time with the market being up. But yes, there's a very rich pipeline out there. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- And our next question will come from the line of Andrew Obin with Bank of America. -------------------------------------------------------------------------------- David Emerson Ridley-Lane, BofA Merrill Lynch, Research Division - VP [18] -------------------------------------------------------------------------------- This is David Ridley-Lane on for Andrew. Can you talk about the New Century Software, help us with the rough revenue and margins? And maybe talk about the client overlap or if this is -- opens up opportunities for cross-sell? -------------------------------------------------------------------------------- Dennis M. Bertolotti, Mistras Group, Inc. - President, CEO & Director [19] -------------------------------------------------------------------------------- Okay. So roughly speaking, PCMS is a very good established software for pipeline integrity management assets such as stationary and primarily a lot of pipeline above ground. We weren't very well-known or very good on the buried pipes, and there's different codes and measurements that you have to go by. So New Century was actually that portion of it. They had the buried pipeline market very strong. We have a lot of crossover customers. In fact, prior to us doing the acquisition, by pure coincidence, we had 4 different customers asking us in -- 2 in the U.S., one in Canada and one in Europe, asking us to look at New Century, specifically by name. We had already gone there and been reaching out to them. But just by coincidence, they were talking to us about that because a lot of customers own -- that own pipeline, they also have to have stations where the pipeline comes from belowground to aboveground, and then you treat the chemical or fluid or gas that's in there. You pressurize it, you dry it out, whatever they have to do. So these pumping stations were where we were with PCMS, we just didn't get to follow the pipeline below grade. Now that we do, we have very good connection on that. So our crossover, our customers, hooking up PCMS to New Century back and forth is actually a very, very strong profile. But truthfully, we actually originally looked at New Century for the Onstream acquisition because Onstream puts out the data where the pipes are, they put out the GPS, they locate it, but they don't show that to a customer. People like New Century actually geolocate it, put it on maps and do the consequential [vantage] that Onstream didn't have. So between Onstream, PCMS and New Century, it's a real great fit for us. And there was one other part of the question I didn't get to write-down, I think that I may not have answered. -------------------------------------------------------------------------------- David Emerson Ridley-Lane, BofA Merrill Lynch, Research Division - VP [20] -------------------------------------------------------------------------------- Just the rough revenue and margins. -------------------------------------------------------------------------------- Edward J. Prajzner, Mistras Group, Inc. - Senior VP, CFO & Treasurer [21] -------------------------------------------------------------------------------- We haven't disclosed the purchase price or much of the transaction details. Again, as Dennis said, this is more strategic, how it helps the other Onstream and PCMS's software components. So we haven't -- it's fairly -- it's not the size it has, it's the impact it has on our other businesses. -------------------------------------------------------------------------------- David Emerson Ridley-Lane, BofA Merrill Lynch, Research Division - VP [22] -------------------------------------------------------------------------------- Understood. And then how does the current environment compare with late 2016, which I believe had some similarities in oil and gas weakness. You had a very strong bounce back in the second half of 2017. So are you sort of anticipating a similar trajectory here? -------------------------------------------------------------------------------- Dennis M. Bertolotti, Mistras Group, Inc. - President, CEO & Director [23] -------------------------------------------------------------------------------- So that's a good question, but I don't believe at this point that we're seeing it's going to be -- last as long. So I don't think the bounce will be as prominent because last time it went from '16 into '17, and to your point, it caused a pretty big change in the first half of '18 because there was a lot of pent-up. I believe there will be some of that, but I think the amount of pushed off or deferred work will be minimized only because it's going to be mostly a Q4 and maybe a smaller amount for Q1 as well. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- And our next question will come from the line of Tate Sullivan with Maxim Group. -------------------------------------------------------------------------------- Tate H. Sullivan, Maxim Group LLC, Research Division - Senior VP & Senior Industrials Analyst [25] -------------------------------------------------------------------------------- You mentioned a couple of times the digital tablet rollout. Can you update -- I mean, is it already -- I mean, what phase are you? Is it already with customers? And are you already seeing higher margins with where the tablet has been for a bit? Or where are you in the stage of that rollout, please? -------------------------------------------------------------------------------- Jonathan H. Wolk, Mistras Group, Inc. - Senior EVP & COO [26] -------------------------------------------------------------------------------- Tate, this is Jon. So 2019 is the year that we officially started to roll out the tablet. Right now, we're just in a handful of sites. We've got about 4 or 5 sites that we're looking to roll out on a pilot basis in the fourth quarter. There's a lot of upfront demonstration and show and tell, and we're getting a lot of enthusiastic thumbs up. Now it's a question of just getting through the day-to-day of implementation and getting out into active production. So far all the feedback is terrific, we're hearing incredibly positive support. Even though we're not necessarily the first to the market in our industry, what we're hearing is from people who've seen other's attempts at this by other competitors of ours that we seem to have the best solution available. So it's relatively early. And the focus right now is for our existing customers doing NDT first. The next focus will be our existing customers and expanding to mechanical services that are adjacent to NDT, you heard Dennis speak of that. Think of insulators and scaffolders, as an example, but there could be others. And then the next phase will be going to new customers that are not existing customers doing both sets of NDT and related mechanical sets of services. So we've got a roadmap mapped out. We've got the product built at this point. And now we're in active rollout on a number of pilots. And as Dennis said in his commentary, that's really the activity for 2019, looking to get very busy on this in 2020. -------------------------------------------------------------------------------- Dennis M. Bertolotti, Mistras Group, Inc. - President, CEO & Director [27] -------------------------------------------------------------------------------- Tate, it's Dennis. First, welcome to the call. And to build on that -- what Jon said, it's a productivity tool that we really believe will be something that customers are looking for. I mean, virtually, as Jon said, no one's finding this by surprise. Everyone is trying to find a secret sauce and creating it. But I think us being first to market with the ideas we have and the ability to lean on what we've done with PCMS and other digital projects already and years of working on that, I think gives us an edge as to what the customers are looking for. So we're really pushing that strong and do think it'll get good favorable results in the market as we roll it out, like Jon said. -------------------------------------------------------------------------------- Tate H. Sullivan, Maxim Group LLC, Research Division - Senior VP & Senior Industrials Analyst [28] -------------------------------------------------------------------------------- Okay. Second one for me. You mentioned that fully staffing your 90 labs in anticipation of meeting future client demand. I mean, is part of your implied guidance for 4Q related to not -- the lower refining work not absorbing as much as the overhead from those labs? Or is a meaningful portion of that lab work tied to the oil and gas customers as well? -------------------------------------------------------------------------------- Edward J. Prajzner, Mistras Group, Inc. - Senior VP, CFO & Treasurer [29] -------------------------------------------------------------------------------- We're fully staffed up for the volume level. Our labor force kind of flexes to the volume at hand. So that was kind of the comment there that we're -- we ratchet down overheads where we can, but we're fully ready to go in the ebbs and the flows of the business. -------------------------------------------------------------------------------- Dennis M. Bertolotti, Mistras Group, Inc. - President, CEO & Director [30] -------------------------------------------------------------------------------- But to be fair, Tate, the work is in the capital side of it. And that's always something that is our overage on our labor. I mean we are sized very well for our run-and-maintain portion of the business. And then when it comes to the additional work, people go from 40 hours to 60, 70, or 80 and we bring in other folks and all that. So we feel like our staffing for what we have is going to be fine. That's why we believe we can do well on the margin as well, even in this down cycle. -------------------------------------------------------------------------------- Tate H. Sullivan, Maxim Group LLC, Research Division - Senior VP & Senior Industrials Analyst [31] -------------------------------------------------------------------------------- Okay. And Ed, on the free cash flow in the quarter, receivables declined from $155 million to $148 million. Was that a onetime faster collection on those receivables? Or what -- is there something more fundamental that you can extend going on there, please? -------------------------------------------------------------------------------- Edward J. Prajzner, Mistras Group, Inc. - Senior VP, CFO & Treasurer [32] -------------------------------------------------------------------------------- You know, that was just a good fundamental quarter. We continue to work hard at working capital. I'm still not happy where DSO is, we can drive that down further. So yes, we see continued increases and improvements in cash flow from driving down the working capital, and it's a team sport. We're all very heavily involved in that, the operations and the finance side. And I think there's still more gains we can have on the working capital. -------------------------------------------------------------------------------- Tate H. Sullivan, Maxim Group LLC, Research Division - Senior VP & Senior Industrials Analyst [33] -------------------------------------------------------------------------------- Okay. And last one, just based on your comments, for me, on the oil and gas exposure. And I think you covered, I mean, how quickly it can turn in some previous comments as well too, but can you clarify what you meant by the IMO 2020 prep? I mean, does -- are refineries shifting their CapEx to preparing for more output related to that IMO 2020, could more inspection work follow that? -------------------------------------------------------------------------------- Dennis M. Bertolotti, Mistras Group, Inc. - President, CEO & Director [34] -------------------------------------------------------------------------------- Sure, Tate, it's Dennis. I mean typically, we don't get a lot of the reasons why they're doing turnarounds; it could be capital, it could be safety, debottlenecking, things like IMO and all that. But lately, a few of our customers have told us that their budget spend while being curtailed earlier than usual, was partly driven by IMO 2020 and them having to buy different slates or different, more expensive feedstock. So while we don't truly understand what that's about as far as how it affects them and why, we do have customers telling us that their budget for 2019 got cut off abruptly because of what's going on with IMO 2020. As you know, that's a 1/1/2020 thing for them supplying the higher grade fuel. So we do believe, for some reason, this does have some effect. But we're not close enough to understand if it's going to go much into January or February. We do believe it might have part of the softening there as well. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- We have follow-up questions coming from the line of Edward Marshall with Sidoti & Company. -------------------------------------------------------------------------------- Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [36] -------------------------------------------------------------------------------- You caught my attention when you said not a huge January and February, but you see March trending better. Is that what you're hearing from customers? I mean, jobs are lined up. What -- can you maybe elaborate on what you are -- what you were talking to there, please? -------------------------------------------------------------------------------- Dennis M. Bertolotti, Mistras Group, Inc. - President, CEO & Director [37] -------------------------------------------------------------------------------- Sure. Typically, in years past, spring and fall was just that, it was just in the spring and then in this time of year. And a few years ago, customers started in the areas where they had the weather to support it, they started doing January and February turnaround. Early '18 was a very good indication of that. All the pent-up demand that was being asked about earlier got pushed back into early '18, and people were doing January and February. We didn't see that in 2019, we don't see that in 2020, but we absolutely aren't speaking about turnarounds that are booked. Customers are talking to us about skill sets needed and work requirements that will be happening. Again, I don't know if that's all March or April when that starts, but it's all spring-related. So there is, what we consider to be at least a normal, if not above-normal spring facing us in 2020. It's just it may not be a January or February start. -------------------------------------------------------------------------------- Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [38] -------------------------------------------------------------------------------- Got it. Got it. And you also mentioned labor. And is -- I guess, first question would be, is labor an issue now or is it aligned with price? And then you talked about it specifically towards margin being somewhat constrained. Can you kind of talk about how you're going to manage through that cost scenario? -------------------------------------------------------------------------------- Dennis M. Bertolotti, Mistras Group, Inc. - President, CEO & Director [39] -------------------------------------------------------------------------------- Sure. It's Dennis again. So the customers that are talking to us about these busy areas are a lot of times inside the more dense industrial areas in the Gulf, in the West -- Western Canada, Western U.S., and they know that they are competing with other competitors of theirs for that same type of labor skills. So they are very open to talking to us about payroll increases, not so much about margin increases, but to pay all the way through to the taxes and everything else that go with that. So there's a lot of talk going on now about what does the colo look like for next year. Predominantly in the busier areas, but truthfully, in most areas, customers are willing to talk about pay increases for skill sets. It may not be across the board, it might be in the ones where they believe the biggest impingement on the labor is coming from in the higher skill sets. But yes, there's really been no pushback on customers talking about increases. It's just really about holding the margins and letting their payroll flow through. -------------------------------------------------------------------------------- Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [40] -------------------------------------------------------------------------------- Got it. And typically, you're a -- you're kind of flexible with your -- with employment. Is this more permanent labor adds for potentially future growth? Or how will you manage the operations surrounding the additional labor? -------------------------------------------------------------------------------- Dennis M. Bertolotti, Mistras Group, Inc. - President, CEO & Director [41] -------------------------------------------------------------------------------- So the spring turnaround itself is typically more of just flexing up and down. But the things that we were talking about earlier in the oil and gas market, the things that we see in construction and renewables and all that, those certainly are going to be organic, and they will be permanent jobs added to wherever the markets are. So we do see a lot of growth out of that. But again, the spring time is typically, for the most part, you're just moving bodies out of areas where they're weak and moving them to the strong. Us having a lot of run-and-maintain contracts, where we have a lot of people in the same families, allows us to move people from one refinery family type to another, helping them out during their turnarounds and giving them people who are familiar with their operations and way of taking in data as well. -------------------------------------------------------------------------------- Operator [42] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes our question-and-answer session for today. It is now my pleasure to hand the conference back over to Dennis Bertolotti, Chief Executive Officer, for any closing comments or remarks. -------------------------------------------------------------------------------- Dennis M. Bertolotti, Mistras Group, Inc. - President, CEO & Director [43] -------------------------------------------------------------------------------- Okay, thank you. We appreciate your interest in Mistras. We look forward to updating you on our next scheduled call. Before I leave, I'd like to thank all Mistras' employees for their continued hard work and dedication to making our company one that safely and effectively delivers reliable and increasingly more predictive data for all our customers. Thank you for listening to today's call, and wishing everyone a safe and productive day. -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program, and we may all disconnect. Everybody, have a wonderful day.