Good day, ladies and gentlemen, and welcome to the Q1 FY 2013 Mistras Group, Inc. Earnings Conference Call. My name is Grant, and I'm your operator for today. [Operator Instructions] As a reminder, this call is also being recorded for replay purposes. And now I would like to turn the call over to Mr. Sotirios Vahaviolos, Chairman and CEO. Please proceed.

Grant, thank you very much, and 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 first quarter of fiscal year '13 ended August 31, 2012 and to discuss our company's performance, recent global expansion and prospects going forward. This discussion is intended to supplement our quarterly earnings release and our filings with the Securities and Exchanges Commission. I will begin by providing you a summary of the results for the first quarter of fiscal year '13. Frank will follow with a brief disclaimer about the information we're providing you today and give you a summary review of our financials. I will then follow Frank with remarks and observations about our performance, marketing activity and prospects. We will then answer any questions you may have. Let me start off by saying that the Mistras business model continues to produce impressive results, achieving higher revenues, gross profit, operating income, net income and EPS than in any of the other first quarters of our history. It is noteworthy to mention that our first quarter revenue growth of 24% came on top of 34% growth of the first quarter of fiscal 2012. Similarly, our 29% EBITDA growth of Q1 2013 is on top of last year's first quarter growth of 42%, and operating income growth of 34% is on top of last year's first quarter growth of 80%. Our continuous strong cash generation in the first quarter provides us the fuel needed for uninterrupted organic and acquisition growth and is indicative of how we manage the business for our shareholders. We're excited about our acquisition of German-based GMA Group, headquartered in Düsseldorf, which will completed at the end of September. GMA is a leader of our space destructive materials testing in Germany and a leader in the field of quality assurance, non-destructive testing and engineering services for the aerospace markets. GMA has more than 500 employees located in 11 offices throughout Germany with operations in the Netherlands and a strong entrepreneurial management team. With that, Frank, let me turn it over to you.

Thank you, Sotirios. First, I want to remind everyone that our discussions during this conference call will include forward-looking statements. The 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 October 9. These reports are available on our website, www.mistrasgroup.com, in the Investors section and on the SEC website. I'm now very pleased to present summary financial results for the first quarter of fiscal '13. Revenues for the first quarter of fiscal '13 were $113.4 million, up 24% from the $91.5 million reported in the first quarter of fiscal '12. Organic growth was once again a significant driver behind the revenue increase, contributing 9% in the first quarter, followed by acquisition growth of 17% with the balance due to foreign exchange. Gross profit grew by 23% in the first quarter of fiscal '13 to $33.7 million versus $27.4 million in Q1 of 2012. Gross margins of 29.7% in the current quarter were relatively unchanged when compared to the 30% reported in Q1 of last year. Once again, the mix of project work performed during the quarter in the services segment, as well as higher traditional NDT revenues from our recent acquisitions in Europe, were the primary drivers in the change. Operating income increased 34% to $8 million in Q1 2013 versus $6 million in the prior year quarter. Operating income margin increased to 7%…

Thank you, Frank. The Mistras team delivered an outstanding first quarter with a $22 million increase in revenues and demonstrated an operating leverage where 16% of our revenue fell to the adjusted EBITDA line, thus reversing the trend observed in the fourth quarter of fiscal year '12. The continuing improvement of the first quarter EBITDA margin by 50 basis point is the result of better managing our services cost and the integration of our recent European and Brazilian acquisitions. Needless to say, we're excited about the new service offerings and customer relationships that our German acquisition, GMA, brings to the Mistras Group of companies. However, we're also mindful of the near-term uncertainties surrounding Europe where GMA operates and as a result, expect GMA to contribute slowly to our earnings and cash flows in the first 9 to 12 months of operations. Accordingly, we expect GMA to produce breakeven earnings during this period due to the transaction and integration cost, acquisition-related amortization and the first year normal integration challenges, the result when the 2 companies are brought together. However, we expect GMA to be accretive to adjusted EBITDA and EPS in the fiscal year '14. As many of you know, we focus on building our business for the long term, and sometimes, that also means acquiring good business when they become available. 50% of GMA sales are derived from the robust Airbus-related aerospace business, and that gives us confidence in maintaining a long-term revenue stream. In addition, GMA's destructive testing business is a new but complementary product line for Mistras in a global market estimated to be in the billions. The acquisition of GMA further enhances our customers, markets and geographic diversification. Let us now discuss our segment performance and our strategy going forward. Our services division this quarter experienced positive…

[Operator Instructions] And our first question comes from Scott Levine from JPMorgan.

It's Rodney Clayton here on behalf of Scott. So first, on the guidance revision, obviously, revenue guidance and EBITDA guidance are coming up. But it looks like maybe at the midpoint, just a little bit less margin than was previously expected. I mean, is that reflective of the integration of GMA? And are there any other moving parts that we should be aware of there?

It's not any one thing. I mean, I think it's -- at the midpoint, it's probably about $15.3 million versus $15.6 million in prior guidance, a lot of moving parts, no one particular thing.

Okay, got it. And just to be clear, GMA was not in the previous guidance, and it is in this guidance. Is that correct?

That's correct.

Okay, got it. All right. And then just staying on the margin theme just for a second, obviously, a little bit more a step-down in services and international, and I think that was probably expected, but just now that you're a quarter into the year, is there an any other -- any additional color you can give us in terms of the timing of some of the pressures, I guess, related to mix and integration, when those might wear off? I mean, I know you don't give quarterly guidance, but is it fair for us to expect March to start to turn up at some point in the back half of the year? Or is it maybe more of a '14 event?

Well, I think that in the last time we spoke, we indicated that we thought that annual margins, gross margins would be in the low end of the range, which was last year's actual, and that was about 29.7% and a high end of about 30.5%. There's nothing in the first quarter that makes me think that, that range would change. I will say that I think that, generally speaking, gross margins will be higher in the second and fourth quarter, so if you would compare the first quarter versus the last 3 in total, I would expect the last 3 in total to be higher gross margins.

Basically, Clayton, also you have to remember that GMA's new to us, so it's a little bit of conservative in their numbers. And also, I would like to point out that in the international business now, we're doing more traditional NDT than we ever did before. That also brings the margins down.

Okay, got it. All right. That makes sense. And the growth there international continues to impress on the revenue side. I know in the past, you've talked about aerospace and power being 2 markets that you're really looking to grow, and it looks like GMA plays right into particular in the aerospace side. Can you really, I guess, talk a little bit about the power generation initiative? I think on the last call, you mentioned you hired an executive to kind of spearhead that effort. Is there anything tangible you can relate to us related to that?

Well, yes. Basically, I mentioned the contract with one of the power companies that we already obtained, and there are more coming also, okay? We already -- I already mentioned one in my text here, where basically, it was in the Southeast and the Northeast. It's a new utility were never -- that were never our customers, and now they're our customers. So that's -- that also helps our growth.

Okay, got it. And then just finally, on the G&A side, we saw that it was flat sequentially. And usually, we see a bit of an uptick from Q4 to Q1, so it look like maybe some progress there. Are there any internal initiatives that you have going on that are driving that down?

Well, the management group is aware that to deliver operating leverage is really 2 big levers. One is gross margin and the other is SG&A. We think we're going to get operating leverage for both of those, but we are very much focused on SG&A growth. So it's a management initiative.

And I think mostly, if you look at it percentage-wise, we really brought G&A cost down.

Yes, yes, absolutely, that was -- I guess, I was talking about the G&A dollars being flat, but yes, certainly, on a percent of sales, you were down [indiscernible].

When we really acquire different companies, you have to make some adjustments to start with, and then eventually, that will drop.

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

I wanted to dig in a little bit to the revenue side of the guidance and I think to really understand a little bit more detail there, it might be constructive to have some color on the margin profile at GMA as well as maybe the multiple that you paid.

Well, I think first off, it's just in the gate, but our initial sense is that it will have a neutral impact on gross margins at this point in time. Now keep in mind, I mean, just a few minor details. They're currently under German GAAP, so there will be some translation issues there in terms of movement in the line parts. But our view based on due diligence is it will not have an impact on gross margins. I'm sorry, your other question was?

So I'd be curious, specifically on the EBITDA margin as well as the EBITDA multiple that GMA was brought in at or that you expect to deliver here in the first year.

The EBITDA multiple in the purchase price, as I calculate it, was in 6s and I think that the EBITDA margin will probably be around the 10-ish area. That's my view of the initial margins from this business. Of course, we'll know a lot more in another quarter.

Okay, that helps. And by the way, the 7-month calculation and the mismatch of the calendar alignments also helps. I think, even when you do some of those adjustments, is the organic growth rate that's implied for the legacy business, is your outlook on that changed at all? It seems maybe just smitched [ph] down a little bit, maybe 1%, 2%? Is that a fair calculation or not?

Well, we don't expect to be in the 18% to 20%, but we already have said and we'll commit again today that we'll continue to have double-digit growth, and we're committed to 2013 for double-digit growth. And the 9% will grow.

Just in our view, I think when we gave guidance in the last quarter, we were in the beginnings of double-digit growth in the high end of the range. And we feel that we're in the same position the beginning of double-digit growth in the high end of this range as well, too.

Got it. And Sotirios, just from a strategic point of view, GMA seems to be bringing some indoor, some laboratory testing. You mentioned that it does a little bit of destructive testing. I'd say this is kind of more classical non-destructive testing inspection services, maybe more similar to what your publicly traded peers in Europe do. Can you just talk about your appetite for that business? Why that makes sense in your business model and maybe your propensity to do more or less of that in the U.S. in your largest market?

Yes. As you probably know, we have in-house, what we call in-house laboratory. There are people who bring their parts, and we expect them. What usually happens after we inspect them, they go through destructive testing a lot of these parts, okay? So therefore now we would have the ability to be an one-stop shop in a way, where basically the customer will do the inspection and we'll do also the destructive testing. And the other thing, we -- it can also be the other way around. We can -- people do destructive testing. Sometimes they wanted to see -- they want to inspect it . So it gives us really the ability to do that. But there's another important issue. I now have people on the ground in Germany so that I can really go after the evergreen contracts of several multinationals that are my customers in America, but they are not in Europe. So this gives, really, the possibility also in expanding in the traditional and advanced non-destructive testing. So it gives me a product line, which is destructive testing, but at the same time, it opens the doors for me in Germany. And I'm using the word Germany, but I really -- they will operate in Central Europe because we're very weak in Central Europe. So this will be, basically, for us, an improvement in Europe, and we know what -- and as you probably realizes, some of the new -- some of the articles that came out of the Wall Street the in last couple of days, Germany continues to be the hotspot for aerospace and economy. And keep in mind, this is really -- would -- if you talk and text, technically, I know you are also technical. It's complementary. This is really a complementary, business to non-destructive testing. They work together.

Yes. I get that. I'm mean, it's -- I guess, that's really the question for me is in the U.S., I mean, there's obviously opportunities for similar companies like this. Are these targets in the U.S. as well? Or was the geographic presence for GMA really one of the deciding factors there?

No. Well -- will open some markets for us because we got a product line in U.S. because some of the multinationals you mentioned from Europe are doing that in America, and some of them really are now coming into our area in non-destructive testing. They are doing the destructive testing already.

Got it. Okay, that makes a lot sense. And then, I guess, maybe just one final question on the service side in your domestic business. I definitely understand that on the international side, some of the business that you've acquired are a little bit lower margin. But is there anything going on the service domestically in terms of pressuring that gross margin, pricing or competition? Can you just give us a little bit of color on the service side in the main segment?

Well, as I mentioned on the call here is that we received a lot of multiyear contracts again, renew a lot of our contracts, okay? And that basically puts some pressure on our pricing, but at the same time, we're trying to improve on unbillables. We're trying to improve on doing more advanced services and trying to counter that. Frank, I don't know if you have anything more to say.

No. I think we've said this last quarter and we'll say it again this quarter. I mean it -- in looking at services and going down at individual labs, I mean, the flux from one year to the other is primarily mix, I mean, projects in this year and not than last year and vice versa. And we don't see anything in there that changes our outlook going forward. So that's all I can add really.

Okay. And just to kind of quickly follow up on that one, sorry. Just was there unusually -- was there an unusual high-level activity in the renewals the last couple of quarters? Was it kind of consistent you expect it to be at that rate going forward?

I'd say it was consistent.

Yes, it was really even.

Our next question comes from the line of Matt Duncan from Stephens.

This is actually Stephen in for Matt this morning. I guess, most of my questions have been answered, but just one on your guidance. So if I take into account the acquisition, it looks like that's going to add about, I don't know, $29 million to $30-ish million in sales to FY '13. Kind of assuming no growth. You said they did $50 million last year. So if that's correct, and then I know you guys recommitted yourself to doing double-digit organic growth and increasing the sales guide by about $20 million at the midpoint. Is it maybe fair to assume some conservatism baked into the guidance? Or how would you address that?

Well, first off, each quarter, we do a forecast of the whole company by unit and roll it up, and upon that, that's what we use to actually do the guidance. In looking at -- so that's the bottoms-up approach. If you're looking at a top-down approach and wondering how GMA fits into that, I think the best way to look at that would be is to say that 7/12, if you would, of 50, probably gets you around $29 million, and we raised the bottom end of the range by about $25 million. So we've baked it in there. I think that anytime we do guidance, we'd like to think that there's conservatism in there. But we think we came up with a decent guidance.

Our next question comes from Tom Hayes from Thompson Research Group.

Just a couple more questions on the GMA business. I was wondering does it have the same type of revenue seasonality that the base business does, where we're seeing 2Q and 4Q a little bit higher than the other quarters?

Yes. Basically, Tom, you have the typical European problems of June, July and August and December.

Okay. I guess, follow-up with Frank. Do you -- you mentioned that a good balance on the revolver. Did you use a revolver to pay for the acquisition?

Yes.

Yes. And I guess, just lastly on the acquisitions, I think on the last, on the fourth quarter call, you had thought that the target for this year was about $30 million in acquired revenue. It seems like you grabbed it in one fell swoop this time. Does that kind of put you on the sidelines for the rest of this year as far as acquisitions? Or are you still out there looking for them?

Thomas, we basically have a business model. We have an acquisition model and a business model in general, and we're going to follow that, okay? So this really was an uptick for us, but we'll continue with our strategy as we did in the past. Nothing will change.

I guess, just lastly on the international business, there was a nice pick up with revenue on a year-over-year basis. Is that now reflective of all the acquisitions, so that's kind of a better indication of a run rate for the international revenue?

Yes, the run rate basically is indicative of the new acquisitions, and as I pointed out in the call, is we really, if you look at our numbers, have improved this quarter as we expect. But we're not going to basically implement our model instantly. So it will take another 2 or 3 quarters before we really are complete with our business model.

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

I guess, first question is, clearly, you're a company that has very successfully grown, and as you pointed out, Sotirios, your model is really still oriented towards growing. I guess, my question is as you internationally continue to grow, you will always have some drag as these acquisitions sort of integrate. So if you're looking at the margins and when we start to see that real creep in margins to the positive as the new acquisitions kind of get integrated and the very new acquisitions are still coming through, do you have some clarity on where the margin inflection net-net is going to start to show up?

Basically, Tahir, to start with, let me just really mention for everybody is that we really do not only buy this acquisition abroad and, they were the only people we had. We already had established before people. Since 1986, they have been working with us, but they were more working on advanced technologies, okay? So we already have the people so that when we talk about integration, that integration is a lot faster than if somebody else did it because we already have people on the ground. That's number one. Then number two is basically what we're trying to do is to really the same thing that we do in America, is to -- now that we have a lot of traditional -- we bought companies with a lot of traditional non-destructive testing -- this will bring more to them advanced technologies like phasory [ph] ultrasonics, let's say, or Acoustic Emission because we do a lot of background storage tanks and pressure vessels in Europe, okay? So bringing -- so the blend. The blend, of course, for X, the blend is not going to be really in the upper -- I'd -- let's say 40% lower before, it will be probably in the -- lower than 40%, but it's not going to be as low as in the United States.

But just to address your question on gross margins, we expect just internationally gross margins to be higher later in the year, as we get 9 to 12 months of operations underneath them. So whether that's an exact inflection point, it's -- but it's consistent with our view initially that it would take several quarters to kind of harmonize those into the Mistras Group over there.

Yes. And we don't like to be -- really give you a definite answer, and precisely, we see the trend and we like to continue.

Got it, okay. And that's fair. The second question is in regards to GMA. You talked a bit about their exposure in the aerospace market. Do you guys have kind of an idea of the breakdown between is this largely European? Is it sort of Airbus-oriented? Is it Boeing-oriented?

The majority is really Airbus. They started -- recently, they started to do work for Boeing, but the majority was really Airbus and as you know, related OEMs to Airbus.

Got it. And do you feel you have enough of the market for Boeing? Or is there something within GMA you can leverage towards gaining more market share with Boeing?

Well, it would be the destructive testing part. The non-destructive testing, I think, were covered with all the certifications and all the things for Boeing and we're a prime contractor to them. But the destructive, we're basically doing nothing for them. So that's something that will grow for us.

Awesome, okay. And I guess, last question and I'll hop back in the queue. As you pick up and you've done such an admirable job of integrating acquisitions. Directionally, what we should we expect from DSOs as you continue to grow? And I guess, this is more question for Francis. I mean, if you're looking at DSOs 2, 3 years down the line, do you want to keep them at the current level? Do you feel that they could perhaps square a bit before you can could bring them in?

Well, DSOs have come down from our year end from -- and we look at that on a fully loaded basis to include unbilled receivables and receivables because that's the -- they're all part of working capital. They're down to about 70 or 71 from about 75 at year end. I mean, I think realistically, we would be happy to bring those down in the low 60s, and that certainly is our target. I think mid last year, they began to creep up a bit, and we put a full court [ph] press, management-wise on bringing those down. So I mean our target is the low 60s. We'll continue to push toward that target. We'll probably have a bump here and there, but we ended the quarter at around 70.

Our next question comes from the line of Richard Wesolowski from Sidoti & Co.

Frank, you had mentioned the unfavorable mix of work in the service division relative to a year ago. I look at the advanced services, it's about steady. Share of the business outside of oil and gas is up. I mean, for an outsider's perspective, that's what I think we think of when you refer to mix. And I'm curious as to exactly what you're referring to, whether it's the evergreens or the other side of services or both.

Well, I wouldn't refer to it as an unfavorable mix, and advanced services revenues are down about 100 basis points year-over-year, so that is definitely part of it. But evergreens are probably about 30% or 35% of total revenue, so they're becoming a smaller piece of it. The balance is project work, and project work does fluctuate. I mean if you'd go down to the lab level, sometimes you'll see -- last year, a given lab would have a pipeline project. This quarter, they don't have it. They're expecting it in the fourth quarter. I mean, those are the kinds of mix issues. I wouldn't characterize them as unfavorable, but clearly...

Influential.

Yes. And reflective of the large amount of project work that we do, Rich.

Yes. I think, Rich, also you have to consider here the fact that if you look as a volume, as a dollar number, advanced is up, okay? There's no question that advanced is up. If you look at it percentage-wise and because of the growth, sometimes that's where you see basically the same problem that we have for reasons in SG&A. We have more cost in dollars, but if you look at it percentage wise, we really lowered the SG&A cost. So it's a similar thing with advanced. We really -- we grow so fast the traditional, especially broad, et cetera, that we -- the percentage-wise to keep up with advanced sometimes is difficult.

And similarly on that same subject, Sotirios, you mentioned the long-term renewals. I hadn't heard that in the past, I don't think. Are the multiyear contracts typically structured in a way that would give you a better gross margin at the end and a lower gross margin at the beginning? Or is the bargaining position somehow more favorable today than it would have been in the past?

No, no, definitely the other way around, okay, because you probably, as you realize, on a 17-year-old contract, there's -- everybody and his uncle is really attacking us to get the contract, okay? So therefore, you always have at the beginning. The important issue here why we mentioned that is that it was an unusual -- this -- an unusual renewal this year, and it was a lot more than we had in typical in a year. And we're very excited. We're very excited, for instance, since I've mentioned -- we mentioned the international business, we're very excited because we got -- the largest chemical company in France gave us a very large also evergreen contract for many years. So we're really moving in the right direction in that area, and of course, we always have to find about the margins.

Very good. You mentioned the international acquisitions a couple of quarters away from reaching the targeted profitability. In the first quarter, the segment gross margin was 29%. I'm wondering what is the targeted level of profitability when they're running well and at full tilt?

Are you talking about international?

Yes.

Well, we don't guide individually, but I think that you can probably conclude from 29.7% to about 30.5% total company. They can be pretty even with last year. I will say that I do anticipate some upward movement in gross margins in international for the rest of the year. And clearly, even their operating margins sequentially were up, so we have a lot more work to do there. We're not completely happy there, but we're seeing some progress.

Okay, but there is certainly a distinction between what the international business was before the acquisitions being mostly advanced and now being a lot more traditional as you layer on more deals?

Yes. That's right. And that's a fair point. In this quarter, I would say slightly up from this quarter is sort of where we see it trending.

Okay. And then last one, if I could, I'm hoping to flesh out the longer-term organic sales growth prospects for the company. I understand you run into tough comps in certain quarters, but this company's history is a series of tough comps that you've grown so much. You're now discussing double-digit prospects in the past 5 years. It's never been less than 15%. What is the proper organic sales growth expectation for the next 3 to 5 years?

Well, I don't think we've ever promised more than double-digit organic growth, and that is clearly our forecast for right now. And I mean if you look at -- and this quarter was 9 so not quite double-digit, but if you look at the quarter in terms of where it's going to come from, it's probably going to come from the same places that it came from in the past. I mean, this is yet another quarter where if you take all of our markets together in total outside of oil and gas, they grew by the mid-40s. So we're seeing growth across a broad base of customers. So that's likely where it's going to come from. I think that you probably will not hear us talk about more than double-digit organic growth going forward because I think if you were listening to us 1 year ago, we'd be saying the same thing.

Yes, Rich, I think, we have always mentioned, that that's really double-digit for -- means standpoint 1. But let me just bring one point here. Just to exceed of 2 turnarounds in the first quarter could have given us all this money because there were some sifting, and there has been some sifting in turnarounds even for the full conference going into the first -- to the second -- I'm sorry, to the fourth quarter of next year or the spring, as they say, turnaround. So some of this sifting is what it really creates the -- that has done -- seen from us. Let's say, every quarter, we're going to do double-digit but I -- and as I pointed out before, I will say it once again, that we expect double-digit growth for fiscal year '13.

I would now like to turn the call over to Sotirios for closing remarks.

Okay. In closing, we are indeed very proud of our uninterrupted continuing growth in revenues and profits. We are committed to double-digit revenue growth in fiscal 2013 and beyond. As I concluded -- as I conclude this conference call, let me thank our 4,000-plus loyal employees, our customers, our valued shareholders and thank everyone for listening in our call, and wishing you a great day. Thank you very much. Bye-bye.

Thank you, ladies and gentlemen. That concludes your conference call for today. You may now disconnect. Thank you, all, for joining, and have a great day.