Mistras Group, Inc. (MG) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 MISTRAS Group Inc. Earnings Conference Call. My name is Chantale, and I will be your facilitator for today's call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Sotirios Vahaviolos, Chairman and CEO. Please proceed, Sir.

Thank you very much, Chantale. Good morning to all. Welcome to the MISTRAS Group earnings conference call. Again, my name is Sotirios Vahaviolos, I'm the Founder, Chairman and Chief Executive Officer of MISTRAS Group. Also joining me today is Frank Joyce, our company's Chief Financial Officer. The purpose of today's call is to review our financial results for the company's fiscal third quarter ending February 29, 2012, and to discuss our prospects going forward. The discussion is intended to supplement our quarterly earnings release and our filings with the Securities and Exchange Commission. Frank will begin with a brief disclaimer about the information we're providing today and a summary review of our financial results. I will then follow Frank with a few remarks and observations about our performance and prospects going forward. We will then answer any questions you may have. With that, Frank, let me turn it over to you.

Thanks, Sotirios. First, I want to remind everybody that our discussions during this conference call include forward-looking statements. Actual results could differ materially from those projected, and factors that could cause actual results to differ are discussed in our Annual Report on Form 10-K and in other reports filed with the SEC. Also, the discussions during this call will include certain financial measures that were not prepared in accordance with U.S. Generally Accepted Accounting Principles. Reconciliations of those non-U.S. GAAP financial measures to the most directly comparable U.S. GAAP financial measures can be found in MISTRAS Group's current report on Form 8-K dated April 4, which is today. These reports are available on our website, www.mistras.com (sic) [www.mistrasgroup.com], in the Investor Relations section and also on the SEC website. Now I would like to present a summary of the financial results for our fiscal third quarter ending February 29. I'm very pleased to report that revenues for the third quarter of fiscal 2012 were $104.1 million representing an increase of 31% over the $79.2 million reported in the third quarter of fiscal 2011. Organic growth of 17% was once again the principal driver behind our third quarter revenue growth, followed by acquisition growth of 15% with the balance due to foreign exchange. Each of our operating segments contributed to the revenue increase, with Services posting a 27% increase over the prior year, Products & Systems posting an 81% increase and International a 98% increase. In the third quarter of fiscal '12, the top 10 customers represented 38% of revenues versus 50% in fiscal 2011's third quarter. During the quarter, advanced services represented approximately 14% of total Service segment revenues, which is unchanged from the prior year. Gross profit in the third quarter of fiscal '12 grew by 31% to $29.6 million versus $22.6 million in Q3 of 2011. Gross margins in the third quarter were relatively unchanged at 28.4% of revenues versus 28.5% in the prior year. During the third quarter, higher gross margins in the Services segment were offset by declines in the International and Products segments. During the quarter, the company recorded $0.8 million in net acquisition-related expenses in connection with transactions work done during the quarter. Excluding these acquisition costs, operating income in the third quarter of fiscal '12 increased by 36% to $6.4 million versus $4.7 million in Q3 2011. Operating income margin in the third quarter, adjusted for acquisition-related expenses, increased to 6.1% versus 5.9% in Q3 2011. SG&A for the third quarter of fiscal '12 was $20.8 million versus $16 million in the third quarter of fiscal 2011. However, SG&A as a percentage of revenues dropped to 20% in the quarter versus 20.2% in the third quarter of fiscal 2011. SG&A in the current quarter includes approximately $2.3 million related to companies acquired within the last 12 months. And if you're looking at SG&A sequentially, SG&A in the quarter includes approximately $0.8 million for companies that were acquired after November 30, 2011. In the third quarter of fiscal 2012, the company recorded a charge of $0.1 million related to the early renewal and upsizing of our credit facility. Adjusting for this charge and the acquisition-related cost mentioned above, net income attributable to MISTRAS Group increased by 51% in the third quarter of fiscal 2012 to $3.7 million versus $2.4 million in Q3 of 2011. Adjusted EPS in the third quarter was $0.13 versus $0.09 in the prior year quarter. Adjusted EBITDA increased by 28% to $13.4 million in Q3 2012 versus $10.5 million in last year's quarter. Now I would like to make a few brief comments on the company's balance sheet and cash flows. Net cash provided by operating activities grew in the first 9 months of fiscal '12 to $21 million versus $18.6 million in the first 9 months of fiscal 2011. Total capital expenditures for the first 9 months of fiscal '12 were $15 million or 4.8% of revenues versus $9.7 million or 4.1% of revenues in the first 9 months of fiscal 2011. Excuse me. As we've mentioned in earlier calls, the increased capital expenditure level in fiscal '12 reflects spending on new business opportunities, including the U.S. shale and oil sands areas and other Advanced NDT projects. As of February 29, 2012, our net debt was $52.2 million,, and our net debt to EBITDA ratio was 0.8x. As of 2/29/12, the company had cash and cash equivalents of $7.9 million and an undrawn revolver balance of approximately $98 million. And with that, Sotirios, I'd like to turn it back to you.

Thank you, Frank. I continue to be pleased with MISTRAS Group's momentum, especially in our recent third fiscal quarter, which many of you know is traditionally one of our softer quarters of the year. Once again, we saw solid growth in just about all financial metrics, starting with revenue growth of 31%, followed by growth of 36% and 49% in operating income and net income, respectively, after adjusting for acquisition costs. And as Frank mentioned, in the third quarter we continued our historic trend with another 17% organic revenue growth and 15% acquisition growth. It should also be noted that we achieved a double-digit organic growth rate in all 3 of our business segments, and as in the past, 2/3 of our 15% acquisition growth was synergistic. I would also like to remind you that the 31% revenue growth rate we achieved in the third quarter follows a healthy 23% revenue growth rate achieved in the last year's third quarter. As mentioned in previous calls, we believe that strong organic and synergistic growth is the best indicator of how our "one source" asset protection solutions are being received by our customers. Our third quarter continues a trend where our revenue growth was achieved across a broad spectrum of our end markets. As most of you know, oil and gas is our largest end market and, in the third quarter, represented 55% of total revenues, down from 64% in the third quarter of last year. I'm pleased to report that in the third quarter, oil and gas revenues grew by a healthy 14% over the prior year. However, as we have seen in the last several quarters, revenues from all markets other than oil and gas grew at a much faster pace. And in the third quarter of fiscal 2012, such market as chemical, industrial, infrastructure, aerospace and power generation grew in total by more than 60%. Please keep in mind that in the third quarter, we performed very little in the way of small or large turnaround services in the oil and gas market. Nonetheless, we view this growth in all other markets as a positive development as we continue to extend our asset protection solutions across a broader and more diverse platform of customers and industries. One of the drivers behind our oil and gas revenue growth in the quarter was the increased demand for our inspection services coming from the U.S. shale plays. During the quarter, our growth in the midstream portion of oil and gas revenues far outpaced the growth in all other sections of oil and gas. This was due to continued growth in our pipeline inspection business, where we saw an increase in the number of crews working in expanded southwestern and western regional shale plays, as it continues to demand our inspection services to work the vast amount of gathering lines and compressor stations. MISTRAS offer an attractive combination of strategic locations, certified technicians and a vast equipment and services to satisfy both the energy companies and construction contractors who are active in these newer segments of the expanding domestic energy markets. We're seeing strong revenue growth in the chemical business. And here, we suspect that the plentiful supply of natural gas in America -- in North America is playing a key role. During the quarter, we secured an evergreen contract with a major chemical company at its main headquarter's facility, with the anticipation of securing additional contracts in the company's other worldwide locations. During the third quarter, we entered into a master services agreement with one of the largest petrochemical companies in the world to provide Advanced NDT on their fixed assets and Predictive Maintenance Services, PdM, on their rotating equipment assets. MISTRAS is the only company to have such an agreement in place with this major manufacturer. As mentioned in our previous call, MISTRAS has been awarded the NDT inspection services for both the Plant Vogtle and V.C. Summer, 4 new nuclear plant sites in Georgia and South Carolina. Last week, the Nuclear Regulatory Commission, NRC, put its final stamp of approval of the 4 new units. During the quarter our Asset Integrity Management, AIMS organization, received a contract for $1 million for engineering services and the implementation of our PCMS enterprise software and risk-based inspection services. This represents a significant expansion to be performed at one of our evergreen refineries located in the Gulf, proving up our business model. Further diversifying from downstream application, we also received orders in the quarter for our PCMS enterprise software for a major Canadian energy company to help manage its midstream operations and an additional order from a power generation company located in the midwestern part of the United States, which is the first for PCMS. The Services business has experienced strong sales and more -- our in-house material inspection centers across the country. These centers provide outsourcing inspection services for companies on various materials and sized components, such as critical aircraft engine components to valve bodies to specialty piping, using a wide range of technologies and methods ranging from immersion tank-based ultrasonics to computed radiography. To support all these services, we're developing strong capabilities within focused Advanced NDT training centers to develop the future technicians. In our Products & Systems business, revenue grew across -- our target markets remained strong in the third quarter, especially in engineering and testing, oil and gas and power generation in all its segments, including nuclear, fossil and alternative energy. During the quarter, we have also experienced continued solid [ph] growth for both our large custom gantry and ultrasonic immersion inspection systems. This has been driven by the upsurge in the commercial and defense aerospace segments, requiring the inspection of highly -- of high quality advanced composites base structural components and high-value specialty metal, metal parts. Continuing to strengthen our solutions in power generation, our Products & Systems segment made a strategic acquisition of a company which is an online acoustic leak detection systems used to identify leaks in pressurized vessels, including power boilers, recovery boilers, feedwater heaters, and heat recovery steam generations, within -- with the installation of over 50 electric utilities in more than 125 sites. The company designs and manufactures the systems in addition to providing 24/7 remote surveillance monitoring programs that provides continuous information for operational and maintenance decision in support of planned versus forced outages and avoidance of secondary asset damage. And now, I will turn to the International segment of our business. During the quarter, we began the integration of 3 acquisitions in the European region. As I have mentioned in the past, these acquisitions are strategic for us as they enhance our product offerings and allow us to participate in larger, outsourced inspection projects. In the quarter, we completed work on a small turnaround project and it was our first in the Europe. While this project was not very large from an overall revenue point, it is strategically significant since it represents the launching point for implementing our inspection outsourcing evergreen business model internationally. The International business is very seasonal. And while the acquisitions are accretive as expected, it will take a period of time to align them to perform to our business model. With the recent acquisition of a Brazilian NDT services company in early March, we're now in a position to better serve this emerging market as Brazil becomes an exporter of oil and will require our "one source" Advanced NDT solutions. And now I would like to spend a minute on the company's outlook for fiscal 2012. As mentioned in the -- our earnings release, the company has adjusted its previously-issued guidance for fiscal 2012, and we now expect revenue to be in the range of $415 million to $420 million and adjusted EBITDA to be in the range of $66 million to $68 million. The company does not give guidance for individual quarters but will update annual guidance each quarter. We're also proud to report that MISTRAS's commitment to safety was recognized in February when 2 of our labs, one located in Pascagoula, Mississippi and one in Benicia, California, received the Chevron Safety Award for work performed at these refinery evergreens sites. The Chevron Safety Award is given to Chevron's business partners who work incident free, have no lost time and no recordable injuries. MISTRAS also reached a safety milestone at the Shell Oil Refinery located in Martinez, California, working 14 consecutive years without a recordable injury, earning the Shell Eagle Award for Excellence in Safety. We're very proud of all the employees that contributed to receive these honors. In closing, I am very pleased on MISTRAS's performance thus far in 2012. We have never been more confident that our growth opportunities will continue in the fourth quarter and beyond. This confidence come as a result of our successful market diversification, strategy and the new asset protection market dynamics that are presenting themselves both here domestically and internationally. Our sole positive position is also strengthened by our ability to service these opportunities with our skilled services workforce and further enhance them by our continued development of innovative products that are utilized by our own services organizations worldwide, as well as sold to third-party customers. That concludes my remarks, and I would like to open up the floor for questions. Chantale?

[Operator Instructions] Your first question comes from the line of Scott Levine of JPMorgan.

So your guidance for the fourth quarter does imply a little bit of a slow down here on a year-over-year growth basis. And I'm wondering if I could ask in terms of the thought process on whether you're seeing anything fundamentally that might change the outlook for growth going forward, either organic or otherwise, and maybe a little bit of color. It seemed like there was a significant ramp in the growth outside of oil and gas relative to oil and gas, a little bit more color on the thought process behind guidance would be helpful.

Sure. This is Frank. Basically, the guidance doesn't reflect any change in our view of the business. I mean, the business is running well and the third quarter proves that. I think we might be a little bit cautious in the fourth quarter. By my count, we're putting together probably 4 international acquisitions during the third and fourth quarter. So that may take a quarter or 2 to be accretive, but I suspect they'll be accretive after that. But there's really no change other than we're probably taking just a cautious approach to looking at the fourth quarter.

Got it. Okay, that make sense. And then I think you indicated as well that the quarter in oil and gas turnarounds was a little bit light and the results were solid in light of that, I mean, was there anything fundamental or any change in terms of customer behavior, whether anything else driving the turnaround activity in the quarter that was notable?

Well, Scott, December and January is really the wrong times for turnarounds, okay. That's really what we mentioned. We do not mention -- there will be turnarounds in the fourth quarter, a lot more than the third quarter, definitely, okay. The question is we like to be a little bit conservative on our forecast for the year. We see the turnaround season a lot better than it was in the previous years, okay, as many of you have seen it in the literature. But at the same time, we'd like to be very cautious in our predictions.

So the activity then in the quarter was really typical for seasonal and not fundamental?

There's very -- definitely. There was -- the third quarter really is not -- as I said, December and January is not time for -- basically, people really take their time off and there's no other time for turnarounds. Turnarounds really start on March, April and May, and it's really typically on September, October and some in November.

Understood. One last, and if I may, Sotirios. I think you mentioned pipeline inspection and integrity in the shales, wondering what you're seeing on that front. And we understand there's new PHMSA regulations potentially being imposed to crack down on pipeline integrity, and whether you see this as an incremental growth opportunity going forward with any change in the regulatory landscape.

Scott, as we mentioned in our text here, that is really the best area in oil and gas for us. The more growth which comes from that area in the shale is -- both business, both in the southwestern as well as in all the 3 areas, let's say that we're talking in America for the shale project, there's business of that. And you're 100% correct. Integrity plays a very important role now and the government is really -- enforces that.

Just to continue what Sotirios said. Midstream in the quarter grew much faster than the other pieces of oil and gas. So yes, it is something that's growing for us.

Do you know how large a piece of the oil and gas business it is right now? Could you qualify that?

I know we'll have it in our Q, but it's a growing piece. I don't have that set in front of me but you'll see it's growing, and we'll put it out there for you in a couple of days.

Your next question comes from the line of William Stein of Credit Suisse.

So it looks like M&A dragged margins a bit, especially in the International segment, or maybe I had just gotten ahead of myself but that's how I'm seeing it. So can you confirm that maybe some of these acquisitions took you a bit of incremental effort relative to running the business normally, maybe a bit more than typical M&A activity and also more international where you haven't done as much in the past? So can you confirm that view? And then also when you'd expect margins in International to kind of converge back to maybe a more normalized level?

Yes. Scott -- I mean, Will, you're real correct in -- the effect, basically, on the International business is really the new acquisitions. Keep in mind that we have done acquisitions in America for many years, and we have a lot of experience. And we integrate these acquisitions very quickly, both in the type of work that you do, as well as in operationally. In this particular case, basically, some of them -- while they are accretive and they will be accretive, we needed some time, maybe a quarter, maybe a little bit more, but there will definitely -- definitely, you will see a change even in the fourth quarter on this.

Great, that's helpful. And then just a couple other quick ones. Capital allocation plans in the next couple of years, are you more likely to continue acquisitions, or would you consider delevering? Where do you -- how do you strike that balance?

We will really -- as we have done in the past, we will always be concentrating in investing with more capital equipment on our organic growth. And when the opportunities happen and they are bolt on, especially the bolt-on type of acquisitions, we will pursue them.

And then can you comment on the M&A pipeline today? Is it all international similar to what you've been doing more recently? Is that really where we should think about the growth? It sounds like you did one deal on the technology side as well, which was encouraging. So maybe talk about what the pipeline looks like relative to International versus domestic and technology versus services.

Well, if you remember, we announced in several earnings call that we like to grow both in Europe and South America. And I think we already have attempted to do that, and we're there now. We're trying to really integrate the companies that we acquired, which -- in America, we will continue to make acquisitions in America and abroad, and we will be very opportunistic. And keep in mind that no matter what country it is, we really are not -- we're going to pay the multiples that we have always paid before.

Your next question comes from the line of Matt Tucker of KeyBanc.

Just wanted to follow up on a couple earlier questions. First, on the International margins. You said that you do expect those to improve in the fourth quarter as the integration of those acquisitions continues. But it sounds like we shouldn't expect it to kind of bounce all the way back to that kind of mid-30% level, but we should see kind of some improvement towards that level. Is that the way to look at it?

I think that's partially correct. As Sotirios mentioned, I think margins internationally in the fourth quarter will come up. In terms of being accretive, by my count, we're probably putting together 4 International acquisitions in this quarter. So I wouldn't expect them to be accretive to the bottom line for -- in the fourth or even the first quarter. But it just takes -- it takes time to make adjustments on International acquisitions. As Sotirios mentioned, it's a lot more quicker in the ones we do in the U.S. But we like the businesses, and margins, we think, will start to grow up in the quarter, probably accretive maybe 2 or 3 quarters out.

Got it. And the on the pipeline integrity side, there's been a lot of focus on that business among some of your competitors as well. So I was hoping you could talk a little bit about the competitive environment. Are you seeing new entrants in that market? Is there so much work that there's enough to go around, it doesn't really matter? And what's really MISTRAS Group's advantage there in terms of your technology or experience?

Well, I mean, midstream is in -- our fastest growth area in that segment. And we have geography. We have technology. I mean, we have been growing nicely in midstream and pipelines. And from what we can see, we're going to continue to grow there quite nicely, and we have the capabilities.

As you -- some of you probably have read, okay, pipeline integrity opportunities will grow in that area because of the PHMSA regulations, okay, where basically, the operators have to really be more careful on the integrity. And we have a lot of products to provide with that in that area, and we have done work over the years. And we have mentioned actually in the last year or so that midstream is really a very high-growth area for us, both on the pipelines but also on the terminal side, above and below, okay, both above ground, components that we test as well as below ground, okay, which is pipelines underground.

Great. And just one last question. Sotirios, you mentioned several contracts in your prepared commentary that relate to the advanced services or PCMS. I know you guys sign up new contracts every quarter, but I'm curious if you could give us a sense of kind of magnitude of this new contracts. I mean, does this really represent or suggest, going forward, a big step up on the advanced services side, or is this kind of more in line with the run rate of signing up those types of contracts?

Well, basically, Matt, these contracts basically are in line with our expectations. And if you look at the numbers, you will see that Services, which is really that's where they belong, Services' gross profit margin increased in the last quarter, okay, very small amount, but still increased. And that's the first for us in 1 year, 1 year to 1.5 year, all right.

One thing -- I have one clarification. PCMS is not something we consider as advanced services, and it is one of our fastest growing products throughout the whole company, for sure.

Your next question comes from the line of Matt Duncan of Stephens Inc.

First question I've got is on the recent acquisitions. Frank, is the dollar amount of acquired revenues in the quarter, is that about $12 million?

That is about right.

And then what should we expect for that amount into the fourth quarter? It sounds like you've also closed one in March.

Yes. We did close one in March. Probably a little bit less than $12 million, somewhere around the $10 million range.

Okay. So then try to translate that over to guidance, if you've got $10 million of acquired revenue in the May quarter, that implies, based on your $415 million to $420 million in guidance, that organic revenue growth would be virtually nil. I'm assuming that that's probably just you guys being conservative and you would expect organic sales growth to continue to be in the double digits, is that right?

Absolutely. And quite frankly, these companies that we have, and we mentioned integrating 4 or 5 of them, our ability to predict those is not as good as it will be in 3 or 4 quarters from now. So I tried a number of $10 million, I mean, who knows what it is. But clearly, it's not any indication that we feel organic growth is going to drop in the fourth quarter.

Okay. So we should still expect double-digit growth with acquisitions adding to that going forward?

That sounds reasonable.

That sounds reasonable, okay.

Okay, that's helpful. And then looking at your growth outside of oil and gas, very, very strong there, above 60%. Were there any particular end markets that outshine the others? It sounds like maybe chemicals is very, very good. Is there anything else?

Just about every market other than oil and gas will be faster than the company's overall growth rate. So it was really widespread.

I think, basically -- if I summarize, Matt, basically, you had a growth in the chemical. You also have in the aerospace, because we do a lot of components now, in-house work, that we do a lot of work there, okay, and as I mentioned before. So really, you have a different -- you have in more than one area. And power generation also is really growth for us. And as we gear up now for the nuclear power plants, we'll increase.

Your next question comes from the line of Rich Wesolowski of Sidoti & Company.

Between the 3 acquisitions made in the quarter in western Europe, Brazil in March, what sounds like another 3 or so internationally in the months ahead, you have bought up to 10 foreign companies in fiscal '12. I'm curious how you find these targets since in the U.S., I know you buy companies that you've partnered with and you don't have the same presence internationally that you have in the U.S. And also maybe an idea of whether these companies are purchased for new services or they offer geographic presence.

Yes. First of all, I don't think they are not -- really, there will be 6, okay. There will be 6, but first of all. The second thing I want to discuss is this, NDT, nondestructive testing, is very international business. People really know us. They know me over the years because I have been President of the world association of nondestructive testing. They know -- some of our employees here, like Mike and others in the company, and so they really approach us. And some of them, by the way, were used as subcontractors over the years. Keep in mind that a lot of the acquisitions we make is people that we have worked and we know them. In the case that we mentioned, for instance, in Europe, a couple of them basically have worked with us for many years. As a matter of fact, one of them buys -- exclusively used to buy for inspection of parts our immersion tanks from MISTRAS. They used to buy from us. So that's -- so there's a lot of knowledge, and there's an abundance of a lot of these small companies. But of course, you have to be opportunistic, and they have to fit our model. If they don't fit our model, it really doesn't matter. We're not going to -- we really reject as many companies as we buy, if not more.

With the Brazilian acquisition, about how many international employees do you have now?

A little bit more than 500.

Okay. Your gross margin tracking 30%, 31% in F'12, the same range as was reported in the last 2 fiscal years. As you look out over the next 2 or 3 years, is there a reason to expect a big departure from that general level in either direction?

Well, I think big departure depends on how you define that, but I think there's the possibility for overall margins to grow. In the current quarter, we saw services margins grow. And while it's always due to mix and there's a thousand factors, there's a couple of things that are noteworthy. And one is that our evergreen contracts, as a group, their margins grew year-over-year. And that's something that we have been talking about for several quarters, that once we get these contracts on board and we get an experience factor and have an ability to up-sell into advanced services, that those margins will grow. So we think that, that, coupled with growth outside of oil and gas, holds the potential for margins growing in the future.

Okay. And then lastly, other companies have said increase in international business has lengthened their collection cycle. MISTRAS's collection cycle has lengthened as the share of International business has risen. Is that the main factor, and should we expect it to continue?

That is definitely a factor. You're 100% correct on that. During the quarter, we tightened up a little bit. We have more to go on the domestic side but international is a longer horizon.

Your next question comes from the line of Andrew Wittmann of Robert W. Baird.

I wanted to follow up a little bit on the last question. Just talk specifically about the role that pricing has had recently and that you expect to have over the coming few quarters. You mentioned evergreens. The margins have grown. Is that really price led? And what else in the business in general is kind of giving the sense that pricing could potentially head higher, if that's possible?

I would say a lot of it has to do with the management of the contracts and the ability to deliver favorable economics to the customers by selling advanced services. That's probably most of it. It's still a very tight pricing environment.

Is the customer-risk activity to pricing increases, at least, a little bit improved now that we've had somewhat of a recovery here?

No, absolutely. I think the customers all -- but there's got to be efficiencies that we have to implement, and that's what we're trying to do. We had 14% -- as Frank mentioned, 14% basically Advanced NDT in the same quarter. But I can guarantee you that this year's 14% was more possible than last year's 14%. So there's really for us to really manage the business a little bit better, offer more savings to the customers. And by offering more services to the customer, I think we can charge a little bit more.

Was there -- can you quantify the pricing contribution in the quarter?

Very, very difficult. I mean, we bill on an hourly basis, and we probably have thousands of contracts so a little bit hard to do.

Then -- okay. You talked last quarter about some of the hiring that you've done. I think you said 600 was year-to-date last quarter. Clearly, that weighed a little bit on your margins in the near term with longer-term benefits. Can you just talk about the role of the hiring that you've done recently? Has that abated somewhat? And the unbilled labor contribution, have those recently trained employees started to go out into the field and bill hours?

Well, that's -- if you're talking about unbillable hours, that's how really we got more profitability in the Services sector. That's what I just basically said. By managing our contracts a little bit better and by being more careful, we have been able to really start getting a little bit more gross profit margin.

Sotirios is correct. Unbilled revenues as -- I'm sorry, unbilled direct labor as a percentage of revenues declined in the third quarter. Whereas, you correctly recall, in the first and second quarter, it had increased.

Yes, okay. And then just one last question. I still remain pretty curious about the new contracts and the new nukes. Clearly, they seem like material contributors, potentially, at least, to your business. Now that both of the COLs are approved and maybe you've looked at it a little bit more in depth, can you give us a sense, at least, when some of that work might begin? The potential scope of the work, is that a product sale or is that x-raying welds? Or can you just give us some of the sense of the things that you'll be doing in that job? And then maybe as a percent of your existing power group, what -- how big do you think that, that could be at its peak?

Well, all of this really starts very slowly. You're going to start getting 4 to 6 people to start with and then you start really growing with the year to reach a certain level. But it might be about 2 years from now when this -- the level that we wanted to be constant that would be constant. It might take a couple of years. But slowly now, we're start ramping up and putting people there as they need it. And -- because remember, in this, we are doing NDT but we're also doing basically certify weld inspection and other things, and some of them are very advanced, okay. So we cannot really discuss with you and tell you exactly how much and what the level will be. And maybe 6 months from now, we might have that number because we're working with our partners there. And we know that as in the past, it might take a year before you start really having a substantial amount of people there working every day.

Okay. That seems fair. So we'll probably have to model it fairly conservatively for now. As you get more ingrained, we'll keep asking the question and get a better view later maybe.

Exactly, exactly.

At this time, there are no further questions in the queue, and I would like to turn the call back over to management for closing. Please proceed.

Okay. I would like to thank everyone for listening to our call and hope that you have a great day. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.