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Edited Transcript of MG earnings conference call or presentation 12-Mar-19 1:00pm GMT

Q4 2018 Mistras Group Inc Earnings Call

PRINCETON Mar 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Mistras Group Inc earnings conference call or presentation Tuesday, March 12, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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

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Conference Call Participants

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* Chip Moore

Canaccord Genuity Limited, Research Division - Senior Associate

* Edward James Marshall

Sidoti & Company, LLC - Senior Equity Research Analyst

* Tahira Afzal

KeyBanc Capital Markets Inc., Research Division - MD, Associate Director of Equity Research, and Equity Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. My name is Liz, and I'll be your event manager today. We'll be accepting questions after management's prepared remarks. One moment, please, while I pass the call over to MISTRAS Group Director of Marketing Communications.

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Nestor S. Makarigakis, Mistras Group, Inc. - Group Director of Marketing Communications [2]

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Welcome to the MISTRAS Group conference call for its fourth quarter and full year results for 2018. 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; as well as Dr. Sotirios Vahaviolos, 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?

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Dennis M. Bertolotti, Mistras Group, Inc. - President, CEO & Director [3]

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Thank you, Nestor, and good morning, everyone. During today's call, we will give you an update on MISTRAS' business performance, financial results for the fourth quarter and year ended December 31, 2018, as well as give you our outlook for 2019.

Full year revenues were a record and up 6% over 2017 to $742.3 million. Revenue growth was driven by a combination of acquisitions and organic growth, which was about 1.5%, but was actually much stronger considering we overcame the nonrenewal of a large contract and divested operations. Margin performance was even stronger, as the revenue we added organically and through acquisitions has been from more profitable operations, which is a corporate priority as we evolve our business.

Adjusted EBITDA was up 15% for the year, with adjusted EBITDA margin expanding nicely from a year ago. This was driven by an expansion in gross margins, which have been steadily increasing over the course of fiscal 2018 and reached a 3-year high of 28.9% in the fourth quarter. Ed will go through the detail, but we had several and frequent charges in the fourth quarter, which was a major reason adjusted EBITDA was slightly below our 2018 guidance.

While our financial performance was strong, more importantly, we made significant progress towards realizing our vision, executing on our strategy to achieve more sustainable growth, both organically as well as from acquisitions, as well as leveraging our increased revenue to grow earnings even faster.

The core business is strong. We were able to grow revenues by $40 million over the course of the year despite absorbing a $30 million reduction in revenues commencing back at the beginning of the second quarter in 2018. I think this speaks volumes to our strong product offering and industry relationships and clearly illustrates that our services remain in great demand. And we continue to improve our capabilities. This includes new digital initiatives that leverage technology to improve performance and quality while reducing cost. From tablets in the field to onstream centralized data analytics facility, we are finding ways to leverage technology to provide our customers with more value and in a more rapid manner.

International is also doing very well. Aerospace is a growing market, and our aerospace business is proceeding on plan and expanding with new parts and added volume as we deploy new capital expenditures. We also expect to see a pickup from West Penn volumes in the U.S. market.

Products and Systems revenues were also up for the year, again despite the loss of revenues arising from the disposition of an underperforming product line in 2018. Since acquisitions are an integral part of our growth strategy, I wanted to provide some insight as to the success we have achieved with 2 of the company's largest-ever acquisitions.

West Penn was a strong contributor to fiscal 2018's success. Their nondestructive testing capabilities are unsurpassed, and they are a partner to many companies in the aerospace industry that rely upon them for the valuable service they offer. This enables them to generate margins higher than that of field operations. Growth in the aerospace market is one of our corporate objectives, and the outlook for the industry continues to be strong, which we expect will benefit West Penn in 2019 and beyond.

Onstream has only been part of the MISTRAS family for 3 months. However, it is already clear that this is going to be a strong pillar of our overall growth strategy. Onstream provides a number of benefits that leverage our competitive advantages and core competencies, while offering complementary capabilities that will facilitate rapid expansion into adjacent markets.

Their strong presence in in-line inspection provides a strong foundation within the midstream oil and gas market, which is significantly less volatile than our traditional base. As one example at a recent trade show, the MISTRAS Onstream team generated a significant number of new business opportunities through introductions of our in-line inspection capabilities to existing midstream MISTRAS customers.

Our most recent acquisition, Onstream, is also expanding their capabilities and is now in the process of taking orders using their new 16-inch tool. They are also commencing commercialization of their 20-inch tool, with their larger 24-inch tool expected to be ready later in the year. The addition of 3 new inspectable pipe diameters means our addressable market will have been dramatically increased.

Perhaps the most exciting aspect of the Onstream acquisition is their innovative application of advanced digital technology. This fits hand in glove with our vision for the NDT industry, which we see evolving from its traditional roots in inspecting and reporting to its role as a strategic activity for anticipating and predicting asset risk. This is a key element of our MISTRAS digital solution as well, as we have been mentioning over the past year. We will have more to share regarding our specific ongoing pilots over the next few quarters.

Onstream is well down the digital road, and it's already able to digitally send data from the field to their central lab in Calgary for reporting and analysis.

Our Plant Condition Management Software, or PCMS, is undertaking similar technology applications. This is what the industry wants, and this is where we are headed. It's being driven not only by a recognition of how this technology can reduce costs over the long term and also by increasing regulation that is consistently raising asset integrity standards.

Getting better information and faster, that can help predict when and to what degree an asset may be at risk is an attractive value proposition. We already have a solid foundation. And over the next several years, you will see us continue to enhance and expand this capability across the many vertical industries we serve. This will be a much faster growing market, and MISTRAS intends to be at the forefront of this evolution.

With that, I would now like to turn the call over to Ed for a detailed review of the financials.

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Edward J. Prajzner, Mistras Group, Inc. - Senior VP, CFO & Treasurer [4]

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Thank you, Dennis. It was a very good operational year for MISTRAS Group as the various initiatives and programs implemented over the year resulted in record revenues and significant margin expansion across all segments.

Looking first at results for the year. On a consolidated basis, revenues were up 6% to a record $742 million, driven by a similar 6% revenue increase in our largest segment, Services, which comprises 77% of our total 2018 revenue. More broadly, the increase was due to both acquisitions and organic growth, which was up approximately 1.5%, more than earning back the $30 million of revenue losses Dennis mentioned.

Consolidated gross profit for the full year was $208 million, about 11% higher than the prior year. Consolidated gross margin for the full year was 28% compared with 26.8% in the prior year, an increase of 120 basis points. Reflecting the broad-based improvement across the company for the year, all 3 segments expanded their gross margin and grew their gross profits.

Margin expansion reflects a more favorable service and product mix, which in turn reflects a more disciplined growth strategy, selective pruning of underperforming operations and contracts, and an acquisition strategy focused on higher-margin businesses.

Adjusted EBITDA was up 15% for the full year to $73.5 million, with all of our segments again generating a year-on-year increase. As Dennis mentioned, we did have a number of infrequently occurring items during the fourth quarter, particularly in late December, which reduced adjusted EBITDA by approximately $2.5 million. This included operating items such as an earlier-than-anticipated completion of a turnaround and an unexpected weather-related slowdown as well as nonoperating items such as Onstream-related financing cost and other legal and statutory expenses.

The company generated $41.7 million of cash flows from operating activities and $20.5 million of free cash flow for the full year 2018. As anticipated, we had a strong improvement in cash flows in the fourth quarter relative to the first 9 months of 2018, with $17.5 million of cash from operations and $12.1 million of free cash flow generated during the fourth quarter of 2018. This positive trend has continued into the beginning of 2019, driven by working capital reductions. We foresee continued improvement throughout 2019.

Looking at the fourth quarter, we finished the year strong. Although revenues were somewhat lower than a year ago, we were comping against Services' strong year-ago quarter. More importantly, gross margins expanded to 28.9%, the highest quarterly margin in 3 years.

Looking more closely at our segments. Services revenue decreased by 4% in the fourth quarter. This was primarily due to Services comparing against a very strong year-ago quarter wherein customers were completing deferred maintenance. For the year, revenues increased by $31 million or 6%, attributable to acquisition as well as modest organic growth. If you consider this $30 million of revenue growth was accomplished after essentially backfilling $30 million of revenue from a contract that had been part of our underlying revenues in 2017, you can see why we believe Services had a very strong year and remains one of the industry's premier providers.

Services segment turned in a gross profit margin of 27.4% for the quarter and 26.4% for the year, improvements of 90 and 80 basis points, respectively, compared to the same period a year ago. Margin expansion is a key corporate strategy, and we are pleased to see margins continue to expand, driven by pruning lower-margin operations and growing higher-margin operations, including acquisitions such as West Penn and Onstream.

International revenues in the fourth quarter were down 2% from a year ago, although up in local currency. For the year, revenue increased 6% and was due to the combination of organic growth and favorable foreign exchange translation. For the quarter, International reported a 30.1% gross margin, which is up 570 basis points from a year ago, and a full year gross margin of 29.6%, an increase of 260 basis points. This improvement is attributable to better manpower utilization, improved sales mix and growth in aerospace. As mentioned last quarter, the winding down of the German staff leasing business will present a headwind to International in fiscal 2019.

Products and Systems revenues were down slightly in the fourth quarter, but were up modestly for the year despite this segment having divested a product line earlier in 2018. Products and Systems gross margins came in at 46.5% for the fourth quarter and 45.1% for the year, improvements of 750 basis points and 300 basis points, respectively.

SG&A as a percentage of revenue was approximately 24.4% in the fourth quarter of 2018 and 21.1% in the fourth quarter of 2017. There were a number of infrequent charges booked in the fourth quarter as well as a deliberate increase in our sales and marketing investment as a strategy to accelerate growth. For the year, SG&A was 22.4% of revenues compared to 21.8% in fiscal 2017.

Outside of some nominal growth in sales and marketing as well as an increased investment in research and development, we expect any increase in overhead spending to generally fall below the rate of revenue growth in fiscal 2019.

Operating income was $2.5 million for the fourth quarter of 2018 and $22.2 million for the full year 2018. Non-GAAP operating income was $5.4 million for the fourth quarter of 2018 and $31.7 million for the full year 2018.

GAAP net loss was $1.1 million or $0.04 loss per diluted share for the fourth quarter of 2018 compared to GAAP net income of $900,000 or $0.03 per diluted share in the prior year. The loss in the current year quarter was largely due to an exceptionally high income tax rate attributable to primarily adverse items related to the Tax Reform Act of 2017.

For the year, we reported GAAP net income of $6.8 million or $0.23 per diluted share, whereas we had a GAAP net loss in fiscal 2017 of $2.2 million or $0.08 per diluted share, primarily due to a $16 million impairment charge recognized in fiscal 2017.

On a non-GAAP basis, we had $16.1 million of net income or $0.55 per diluted share for full year 2018 compared to $12.7 million or $0.43 per diluted share in the prior year period. This represents a 26.8% and 27.9% increase, respectively, in these metrics for full year 2018 over 2017.

The company generated $41.7 million of cash flows from operating activities and $20.5 million of free cash flow for full year 2018. For fiscal 2017, we had a positive $8 million in operating cash flow from a reduction in working capital, whereas this year, the change in working capital was a negative $9 million to cash flow.

As anticipated during our third quarter conference call, working capital did improve and was a meaningful reason cash flows from operating activities was a very strong $17.5 million for the fourth quarter of 2018. We still have room for further improvement, which we expect to see throughout 2019. The new year is, in fact, off to a good start with strong cash flow so far during the first quarter of 2019.

Interest expense for the quarter rose to $2.4 million. Based on the debt added with the Onstream acquisition, offset by repayments we anticipate in 2019, we believe total interest expense for fiscal 2019 should be in the range of $12 million to $14 million. We closed out 2018 with $25.5 million of cash on hand compared to $27.5 million at the end of last year.

The company's net debt, defined as total debt less cash and cash equivalents, was $265.2 million at December 31, 2018, compared with $139.3 million at December 31, 2017. This increase in net debt was primarily attributable to the Onstream acquisition, which closed during the fourth quarter of 2018.

Given our cash flow, annual cash interest expense and net debt, we believe our balance sheet is strong and will support the funding of both our organic and any acquisition growth objectives. Income tax expense was exceptionally high in 2018 due to a number of factors, the primary one being certain adverse impacts of the Tax Reform Act of 2017, which drove the rate year-to-date up to slightly over 50%. For 2019, we expect the effective tax rate to be in the range of 32% to 35%.

And with that, I will now turn the call back over to Dennis.

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Dennis M. Bertolotti, Mistras Group, Inc. - President, CEO & Director [5]

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Thank you, Ed. I will conclude with our preliminary outlook and guidance for 2019. Our North American oil and gas customers suggest that their spending in 2019 will improve over 2018. And I am optimistic about our growing aerospace and complementary mechanical services business and excited about our growth plans to expand further into the midstream segment by leveraging our industry experience and technological know-how.

Given the opportunities ahead, we expect to more than compensate for the known challenges and foresee on a full year basis for 2019 an outlook with total revenues expected to be between $765 million to $785 million; adjusted EBITDA expected to be between $90 million and $93 million; capital expenditures are expected to be up to $25 million; and free cash flow expected to be between $42 million to $45 million.

Please keep in mind that our progress in year-over-year comparable won't, however, be linear throughout 2019 because of the first quarter of 2019 lapping a year-ago quarter that included more than $10 million of Services revenue from the large former customer site. And beginning late in the first quarter of 2019, we commenced the exiting of the staff leasing business in Germany, representing a further reduction of approximately $13 million in revenue in full year 2019.

We are nevertheless confident that we can essentially offset the earnings effect of the revenue decreases through continuing margin expansion, particularly in our Services segment, as we have demonstrated throughout 2018. We stated at the beginning of last year on our guidance outlook for 2018 that we would offset the annualized revenue loss of $40 million that anniversaries in a few short weeks and have net organic revenue growth for full year 2018. I am proud to say that we achieved and actually exceeded that goal.

On the whole and over the longer term, we believe macro-level economic drivers will remain positive, and we are confident in maintaining our forward momentum.

We will now take your questions. Operator, please open the phone lines.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Edward Marshall with Sidoti & Company.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [2]

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So I wanted to ask about what the assumptions are for revenue, looking at -- I guess there's a lot rolling off, some acquisitions coming in. So if you can kind of give us a sense as to the organic growth rate of revenue baked into your 2019 guidance, I'd appreciate that.

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Edward J. Prajzner, Mistras Group, Inc. - Senior VP, CFO & Treasurer [3]

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It's Ed here. Yes, there is -- if you pull off the last quarter of the troubled region and then the German staff leasing, that's about $24 million. We had that small product segment divestment as well of $3 million in the year. So if you kind of normalize that and then add in Onstream, you're looking at -- our outlook has a range of maybe 2% to upper 4%, 5% kind of organic growth kind of assumed in there.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [4]

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Okay, okay. So the next question is, I think you mentioned in your prepared remarks about SG&A, and in the particular quarter, I mean, it was heavier than the rate for the majority of the year. What happened in Q4? And then what's the anticipation for 2019? If you could elaborate a little bit more.

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Edward J. Prajzner, Mistras Group, Inc. - Senior VP, CFO & Treasurer [5]

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Sure. Yes, that did go up sequentially. We were about $42 million in Q3, $44 million in Q4. As you mentioned, there was a number of infrequent items there, about $1.5 million of that in Q4 there was -- that aren't recurring. There was some non-capitalized financing cost, a couple of statutory charges and some bad debt expense we recorded, about $1.5 million. If you took that out, you could -- you're at about $42.5 million. That's a pretty good number to annualize, maybe $43 million a quarter into next year. That's pretty close to our year-to-date. Our year-to-date is 22.5%. So that's not a bad percentage to be thinking about for '19.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [6]

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And thinking about the Onstream, were there intangibles at all in the Q4 number? I don't think it would be. Maybe a couple of weeks of...

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Edward J. Prajzner, Mistras Group, Inc. - Senior VP, CFO & Treasurer [7]

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Correct, very little. Just the 2 weeks post the acquisition, so there was very little activity in the P&L for '18 relative to Onstream.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [8]

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So are you planning to materially bring other SG&A costs down to absorb some of those intangibles that might roll through in SG&A as I start to think about next year?

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Edward J. Prajzner, Mistras Group, Inc. - Senior VP, CFO & Treasurer [9]

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No, this is not too much a cost-out synergy type of acquisition, so -- that their SG&A will be additive to ours, but obviously, we're always looking to ratchet down cost and minimize the footprint. But their -- you think of their amortization clearly as being additive.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [10]

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Got it. And what do you see from a wage inflation as the industry improves? I mean, how's wages look? How does -- how are you being able to pass those wages off to customers, et cetera, through price increases?

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Dennis M. Bertolotti, Mistras Group, Inc. - President, CEO & Director [11]

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Yes, Dennis here. It's still more regional than it is across the board, but we haven't seen any pushback from customers not willing to accept increases, because the industry is actually getting pretty heavy in '19, for later half of '19. Spring is probably going to be a little bit lighter than you would see typically. It's going to be about an average spring, but we think the fall is going to be heavier. So customers know that there's a lot of regional fighting for labor and [still] labor size. So they are willing to talk to us about doing a pass-through on these things now that -- what they're going to do is they're going to allow it to be passed through and be passed through for the labor in. Gulf Coast, [barkman], regions where they're getting tight.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [12]

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Last one, a follow-up on just that last statement about the spring versus the fall. Is that an anticipation of back-ending their CapEx or their spend -- their maintenance spend to the back half of the year to make sure that they can kind of get a wait-and-see throughout the year? Is it just timing? Is it -- any comments that you could add to that statement about an average spring versus a heavier fall would be helpful.

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Dennis M. Bertolotti, Mistras Group, Inc. - President, CEO & Director [13]

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Yes. I guess, comparatively, when you look at last year's, I think there was a lot of catch-up activity going on more so than this is a lighter spring. And it doesn't seem to be a little bit later in the year. It does seem like it's happening more in late February and March and April when sometimes in the year, there's a lot of activity. January, February, we're not seeing that as much. So I don't know if that's capital planning or just the way the projects are rolling off.

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Operator [14]

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Our next question comes from the line of Tahira Afzal with KeyBanc.

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Tahira Afzal, KeyBanc Capital Markets Inc., Research Division - MD, Associate Director of Equity Research, and Equity Research Analyst [15]

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So folks, if you look at Onstream and you talked about the addressable market and as you bring in the wider bite to that market band is essentially going up. So can you kind of talk about how much that addressable market is going up by as you bring in the new tools? Is it like doubling in size over the next 5 years? Or am I being too optimistic?

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Jonathan H. Wolk, Mistras Group, Inc. - Senior EVP & COO [16]

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Tahira, it's Jon. I'll take that one. So we have sized -- we've been -- people have helped us size the North American in-line inspection opportunity at roughly $0.75 billion per year. And Onstream, at the time of acquisition, probably addresses about -- mostly up to about 30% to 40% of that market and -- at the time of acquisition. And we believe that with the tools that Onstream is introducing to the market, both in 2019 as well as on the drawing board over the next couple of years, that we'll be able to address at least 2/3 of that market size. And we expect the market to grow as well.

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Tahira Afzal, KeyBanc Capital Markets Inc., Research Division - MD, Associate Director of Equity Research, and Equity Research Analyst [17]

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So I mean, is it conceivable between these 2 lines of traditional business because there has been potentially some pent-up spending or at least it seems like even it sounds minimal conservative. [or] optimistic about the oil and gas customers picking up spending, is it conceivable organically we could see growth in the high single digits for that business from a 2-year to 3-year perspective?

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Jonathan H. Wolk, Mistras Group, Inc. - Senior EVP & COO [18]

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Yes, Tahira, we're certainly planning on that. Our underwriting thesis was certainly that we believe Onstream will grow organically, at least in the high single digits per year.

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Tahira Afzal, KeyBanc Capital Markets Inc., Research Division - MD, Associate Director of Equity Research, and Equity Research Analyst [19]

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Got it, okay. And then just in terms of margins, obviously you're going to be very specialized in that business. As you cover that with your more traditional business, is there a marginal pricing opportunity for yourselves?

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Jonathan H. Wolk, Mistras Group, Inc. - Senior EVP & COO [20]

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I think there is a marginal price opportunity in there because Onstream is a terrific service provider, delivers reports to customers much sooner than the industry standard, is pretty nimble in terms of organizing to suit plant needs and so forth and tends to be value-priced to an extent. So there is a pricing opportunity that is implied in there, yes.

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Tahira Afzal, KeyBanc Capital Markets Inc., Research Division - MD, Associate Director of Equity Research, and Equity Research Analyst [21]

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Got it, okay. And then just wanted to circle back on Safran. Clearly, there's Boeing seen in the news with the 737 MAX. I know Safran has some exposure there. Is this potentially a positive development for yourselves? Will there be more testing in fuselage integrity needs? Or do you see this as net neutral to your business?

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Dennis M. Bertolotti, Mistras Group, Inc. - President, CEO & Director [22]

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Tahira, it's Dennis. I mean, I think it's very early. From what we see, this might be more of a safety device or something other than an aerospace propulsion issue. Certainly, if it became something where an engine component fail or some critical structure be part of the scenario, then absolutely more testing would be involved. Right now, it's too early to say. I will say -- so I mean, we're not sure on that. I will say one thing. I mean, we picked the aerospace, mechanical and pipeline markets for our growth in the near future, and we see all 3 really still performing well. So West Penn, Safran, all of our aerospace growth we see as being good, Onstream fitting inside the pipeline and even the mechanical [blowing over]. So the [3 doors] been our pillars, we still see as being very, very aggressive in the next couple of years and a chance for us to really maybe outperform a lot of what you would think in normal oil and gas or other aerospace markets, right?

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Tahira Afzal, KeyBanc Capital Markets Inc., Research Division - MD, Associate Director of Equity Research, and Equity Research Analyst [23]

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Okay. That's actually good to hear. Last question from me, Dennis. One of your peers has already started talking a bit more about taking some of their inspection tools and technology then applying them to the upstream space of oil and gas. It's an area you guys dabbled in. It seems from all the customer growth that I've been listening to, there's a great opportunity over there. Any thoughts about that? Or would you rather just digest all the initiatives that are currently in place?

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Dennis M. Bertolotti, Mistras Group, Inc. - President, CEO & Director [24]

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Well, I'm really not familiar with the one you're talking about. But what I can tell you, from our point of view, we do see there's possibilities of growth for us in upstream or anywhere else in the oil and gas through our digital capabilities. We're trying to grow the digital to become a value player and find ways to save money and be more efficient. So I'm not sure if that's the company -- if that's kind of the idea that the other company is looking at. But what we are looking at is the more efficient we can become and give data to them quickly and smartly and something they can react on very, very quick in the field versus weeks or days later, so much the better. So we definitely are going down that path. Somebody else, I can't speak to, but...

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Operator [25]

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Our next question comes from the line of Chip Moore with Canaccord.

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Chip Moore, Canaccord Genuity Limited, Research Division - Senior Associate [26]

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I guess, on Onstream, now that you've had them for 3 months or so, can you talk about accelerating their presence in the U.S. in the shales? How do we think about investments to help accelerate that and timing?

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Jonathan H. Wolk, Mistras Group, Inc. - Senior EVP & COO [27]

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Chip, this is Jon. We are really -- and Onstream shares our excitement in the U.S. growth that Onstream is starting to experience now and, more importantly, the potential market that's out there. Now Onstream really has earned its reputation and grown to its present size largely on the back of a Canadian market that is about 30% the size of the total North American market. And as we think about the applicability of Onstream in the United States, there's lots of opportunity. What we're doing is focusing and focusing on our path to make sure we don't try to boil the ocean. But we're very excited about the uptick that we're seeing and the potential that exists.

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Dennis M. Bertolotti, Mistras Group, Inc. - President, CEO & Director [28]

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Chip, it's Dennis. Our recent growth in PCMS and many other platforms prior to Onstream, were in actually midstream, so we have a lot of connections and customers in the U.S. market that we always felt would be a very strategic benefit for us to help them grow in the U.S. And just like when we try to go into Canada, it took us a while to kind of understand and know what that market's about and how to best work within it, it would take them similar type of time to understand the U.S. market. We have the ability to put them in every place that they need to be. Every zone that they're looking at, we have people and customers already in.

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Edward J. Prajzner, Mistras Group, Inc. - Senior VP, CFO & Treasurer [29]

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And Chip, it's Ed. You mentioned the investment there. We have scaled up the CapEx. We've been running at $20 million last couple of years. So we're envisioning up to maybe $25 million this year for CapEx, fairly modest in the greater scheme, but this is not going to require major CapEx to expand into the U.S.

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Chip Moore, Canaccord Genuity Limited, Research Division - Senior Associate [30]

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Got it. That's great, guys. And maybe if I flip over the balance sheet, obviously, leverage stepped up with the deal. I think you talked about more of a focus on tuck-ins. How do we think about dry powder and paydown on the debt?

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Edward J. Prajzner, Mistras Group, Inc. - Senior VP, CFO & Treasurer [31]

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Chip, it's Ed again. We ended the year at pro forma about a 3.5 leverage. We would, at this point, use free cash flow in '19 to pay down the debt. So if we didn't do any acquisitions, you'd probably get to a 2.75 or so by the end of year. So we've got more than enough capacity. The current facility allows us a 4.0 leverage, so we can do the tuck-ins as they come along. But we're really focusing on the business at hand, what's in front of us here. And the tuck-ins, as we focus on them, will happen, but the balance sheet is there if we need it.

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Chip Moore, Canaccord Genuity Limited, Research Division - Senior Associate [32]

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That's great. And maybe one last one on the outlook. Given some of the headwinds you called out in Q1 and where we stand here halfway through March, can you talk a little bit more directionally on Q1, at least revenues, would you expect those to be up year-over-year? Or anything you can do to help us calibrate that.

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Edward J. Prajzner, Mistras Group, Inc. - Senior VP, CFO & Treasurer [33]

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Well, I mean, as the outlook kind of indicated, as we talked about it on the call, you're going to see kind of a growing in the back end of the year. Again, we have some of that comparable challenges in the first quarter and second quarter, so you'll see some strength in the back end of the year. But we feel very good about the outlook and our ability to achieve.

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Dennis M. Bertolotti, Mistras Group, Inc. - President, CEO & Director [34]

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Chip, it's Dennis. I think Q1 is going to be our struggle. I think 2, 3 and 4 will probably come through with year-over-year growth. The percentages right now, I'm not so sure. I think they will build up on the second to the third as far as the growth year-over-year. But we think really Q1 is our really only struggle at this point.

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Operator [35]

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I'm showing no further questions in queue at this time. I'd like to turn the call back to Dennis Bertolotti for closing remarks.

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Dennis M. Bertolotti, Mistras Group, Inc. - President, CEO & Director [36]

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All right. Thanks, everybody. We appreciate your interest in MISTRAS. We look forward to updating you on our next call. We'd like to thank everyone for listening, and have a great day. Thank you.

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Operator [37]

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Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.