Mistras Group, Inc. (MG) Q2 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to your Second Quarter 2014 Mistras Group, Inc.'s Earnings Conference Call. My name is Kanthi, and I'm your operator for today. [Operator Instructions] I'd also like to remind you that this call is being recorded for replay purposes. And now I'd like to hand over -- hand the conference over to Sotirios Vahaviolos, Chief Executive Officer. Please go ahead, sir.

Kanthi, thank you very much, and good morning. Welcome to the Mistras Group earnings conference call. This is Sotirios Vahaviolos, Founder, Chairman and Chief Executive Officer of Mistras Group. Also joining me today is Jon Wolk, the company's new Executive Vice President and Chief Financial Officer, who joined our company in November. In today's call, we will review Mistras Group's financial results for the second quarter and first half of the fiscal year 2014 and will end -- that will end on May 31, and discuss our prospects going forward. Let me start by saying I am very pleased with Mistras' performance for the second quarter. The company's Services segment, and especially its International segment, experienced healthy organic revenue growth that exceeded our expectations for the quarter. As a reminder, our guidance for fiscal year 2014 includes organic year-over-year revenue growth ranging from 7% to 12%. Organic revenue growth for the Services segment was within that range at 8% for the first half of fiscal year 2014. Organic growth for Services was 2% in the second quarter compared with a tough prior year comp but will improve through the remainder of the fiscal year because of several important competitive evergreen contract wins, including one that we were awarded in December. Encouraging, and as expected, our International segment experienced organic revenue growth of 17% during the second quarter and improved its year-to-date organic growth to positive 2.5%. Total company-wide organic growth was consistent with the first quarter at a bit more than 4%. However, because of our market share gains and our expectation for a busy turnaround season for the first half of calendar 2014, we expect our organic growth for the second half of the fiscal year will improve to enable Mistras to finish the fiscal year within our organic revenue guidance. It is worth mentioning that the largest of the new contracts was a 5-year contract from BP to provide nondestructive examination, inspection and support in Prudhoe Bay, Alaska. This contract award was particularly important to Mistras because it bolsters our already strong partnership with this important customer and it augments our strength in run-and-maintain multiyear outsourced engineering and inspection services. These multiyear contracts provide recurring revenues that comprise 60% to 65% of the company's revenue base. The company's revenue are further enhanced by opportunistic contract wins for large capital projects, especially in the oil and gas industry, that includes pipeline construction. Our EPS of $0.32 per diluted share included $0.01 per diluted share of items that Jon will describe. Exclusive of these items, our EPS was $0.31 per share, which exceeded the consensus earnings estimate of $0.02 per share. I am particularly pleased with the improvement in our International segment, which nearly tripled its operating income compared with prior year, excluding acquisition-related items. Our company is gaining both market share and operational momentum and delivered a second straight strong quarter. Because of recent market share gains, the improvement in international operations and recent acquisitions, we have raised our outlook for the remainder of the year. I will talk more about that at a few moments later, but first, I will turn it over to Jon, who will cover the company's summary financial results. Jon?

Thank you, Sotirios. I am extremely pleased and proud to be with you today as a member of Mistras Group's senior management team. I'm excited about the company's many strengths and leading market position and also about its prospects for future growth and profitability. Before I continue, I have to remind everyone that the remarks made during this conference call will include some forward-looking statements. The company's actual results could differ materially from those projected. Some of the factors that could cause actual results to differ are discussed in the company's most recent annual report on Form 10-K and in other reports filed with the SEC. Also, the discussions during this conference 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 the company's current form on Form 8-K filed January 8, 2014. These reports are available on the company's website in the Investors section and on the SEC website. Now I am very pleased to present the company's summary financial results for the second quarter and first half of fiscal 2014. Revenues for the second quarter of fiscal year 2014 were $156.8 million, 13.8% above the prior year second quarter. Revenues for the first half of fiscal 2014 were $292.6 million, 16.5% above the prior year's first half. The company's second quarter year-on-year revenue growth of $19.0 million or 13.8% was driven primarily by the International segment, which grew by $16.4 million or 61%. Our International growth was mostly acquisition-driven as we lapped the acquisition of our German subsidiary made during the last month of the prior year's Q2. The company's international acquisitions accounted for 43% year-on-year Q2 international growth, with organic growth driving the remaining 17% of year-on-year improvement. Revenues from our Services segment achieved year-on-year growth of 3.5%, of which 2.2% was organic. Although Services revenues grew by less than our 7% to 12% annual guidance range, this exceeded our expectations for the quarter compared with an unusually strong prior year comp. The company's Products & Systems segment halted the trend of year-on-year declines by posting a 2% increase over prior year. For the first half of fiscal year 2014, our year-on-year revenue growth of $41.5 million or 16.5% was again driven primarily by our International segment, which rose nearly $30 million or 58%. As in the second quarter, our International growth was driven by the prior year acquisition of our German subsidiary. Acquisitions drove 56% of the year-on-year first half International growth while organic growth accounted for the remaining 2.5%. FX rate movement had a negligible impact in both the 3- and 6-month periods. Our Services segment achieved first half revenue growth of 9%, of which 8% was organic. Our Products & Systems segment, which tends to have the highest margin rates on incremental revenues, experienced a revenue decline of $2.8 million or 15% compared with the prior year's first half. Our second quarter gross profit was $48 million, up 14.5% over the prior year's second quarter on a revenue gain of 13.8%. Gross margins were 30.6% in the second quarter compared with 30.4% in the prior year. The improvement in the company's overall gross margin rate was driven by a 350-basis-point improvement in the International segment's gross margins, which more than offset margin declines in our Services and Products & Systems segments. For the fiscal year's first 6 months, gross profit grew by $11.6 million or 15.4% compared with revenue growth of 16.5% and the gross margin rate contracted slightly to 29.8% compared with the prior year's 30.1%. The gross margin rate for the 6-month period improved in both the Services and International segments by approximately 70 basis points each, but was slightly more than offset by a decline in the Products & Systems segment. The improvement in the International segment's gross margin rate was driven by an improved sales mix of more advanced services, including online monitoring systems and software, particularly in the U.K. and in Russia during the second quarter. The International segment is also benefiting from last summer's reorganization activities and will increasingly benefit as the ERP system used to manage the company's North American Services business is installed throughout Europe in 2014. Gross margin in the Services segment was 28.4% in the second quarter of fiscal 2014, down nearly 80 basis points below the prior year's second quarter. The causes of this decline were timing related, including cost incurred to position the company for growth in the Canadian Oil Sands region, as well as the timing of medical cost claims compared with the prior year's second quarter. Advanced services comprised 15% of Services revenues in both the current and prior year second quarters. Despite its decline in Q2, Services gross margin rate for the 6-month year-to-date period exceeded prior year by nearly 70 basis points, a trend that is expected to continue throughout the remainder of the fiscal year. Revenues from the Products & Systems segment represented 5.5% of the company's second quarter total while gross profit from this segment comprised 7.7% of the company's total. Although still a meaningful contributor to the company's success, Products & Systems' U.S. results were adversely impacted by the 2013 government sequester but improved somewhat during the second quarter, albeit with a lower gross margin rate than in the prior year. Operating expenses in the second quarter of fiscal 2014 were $32.7 million or 20.9% of revenues compared with $26.2 million or 19% of revenues in the prior year's second quarter. Operating expenses in the first half of fiscal 2014 were $62.4 million or 21.3% of revenues compared with $52.2 million or 20.8% of revenues in prior year's first half. Slightly more than half of the year-on-year increases was driven by the impact of the prior year acquisition of our German subsidiary. The remainder of the increase was split between our Services segment's discretionary investments to grow the business, including positioning for Canadian expansion and expanding capabilities in certain other Centers of Excellence, and an increase in corporate expenses related primarily to higher insurance and recruiting costs. Operating income in the second quarter of fiscal 2014 was $15.3 million or 9.7% of revenue compared with $15.8 million and 11% of revenue in the prior year. Excluding the impact of acquisition-related adjustments, operating income was $14.8 million or 9.5% of sales compared with $15.8 million and 11.5% of sales in the prior year. The drivers for the deleverage from prior year were lower operating margins in the Services and Products & Systems segments and higher corporate expenses, which more than offset the improvement in International results. The Services operating margin was a healthy 13.2% of revenues for the second quarter, but this was below the prior year's 15%. The Services decline was due to the higher levels of investments made to support growth in the Canadian Oil Sands region and to secure the Alaskan contract that Sotirios mentioned, which aggregated roughly $700,000 in the quarter, as well as other targeted expansions and the timing of medical claims. Products & Systems operating margin deleveraged due to delays in industrial and military system orders and canceled boiler leak -- boiler tube leak protection systems for coal-fired power plants. Excluding the release of previously recorded acquisition-related contingent liabilities, International operating results were 9 -- margins were 9.2% of revenues, nearly double the prior year's 5%. International results were driven by strong product and software sales in the U.K. and Russia and improving utilization of personnel, but importantly did not yet reflect a material improvement in Germany. Operating income during the first half of fiscal year 2014, excluding amounts pertaining to acquisition-related liabilities, was 7.6% of revenues compared with 9.4% in the first half of the prior fiscal year. Excluding acquisition-related items, operating margins for the Services business held steady at 12.4% while International margins improved to 6.6% from 6.0% in the prior year's first half. However, these favorable results were more than offset by the Products & Systems segment's decline driven by lower sales and an adverse sales mix and by increased corporate expenses, driven primarily by higher insurance and recruiting costs. Net income for the second quarter of fiscal 2014 was $9.3 million or $0.32 per diluted share. These results were nearly the same as the prior year's $9.2 million or $0.32 per diluted share. Excluding the impact of acquisition-related adjustments, second quarter net income was $8.9 million or $0.31 per diluted share. Net income in the first half of fiscal 2014 was $14.9 million or $0.51 per diluted share. Excluding the acquisition-related adjustments, net income was $13.2 million or $0.45 per diluted share, similar to the $13.8 million or $0.47 per diluted share earned in the prior year's first half. The company's adjusted EBITDA was $22.6 million or 14.4% of revenue during the second quarter of fiscal 2014 compared with $23.9 million or 17.3% of revenue in the prior year. For the first half of fiscal 2014, the company's adjusted EBITDA was $38.6 million or 13.2% of revenue compared with $39.3 million or 15.7% of revenue in the prior year. During the second quarter and first half of fiscal 2014, the company's top 10 customers represented 36% and 35% of revenues, respectively, compared with 32% and 31% during the comparable prior year periods. Revenues from Oil & Gas industry customers were 48% of total revenues in both the second quarter and first half of fiscal 2014 compared with 52% and 50% in the second quarter and first half of the prior year. Oil & Gas revenues were up in absolute terms but declined as a percentage of the company's total by 4% compared with the prior year's second quarter. The shift was primarily to Aerospace, which increased by 5% of the company's total revenues and was reflective of the company's prior year German acquisition, which was more heavily focused on aerospace customers. Finally, a few comments on the company's balance sheet and cash flows. Mistras generated $15.6 million of operating cash flow during the first half of fiscal 2014. The company used $8.2 million of cash for capital expenditures and also made noncash outlays to lease an additional $3.4 million of capital equipment in the first half. The company's aggregate capital investment during the first half of fiscal 2014 was $11.6 million or 4.0% of revenue. The company's free cash flow, defined as cash provided by operations less cash used for capital expenditures, was $7.4 million during the first half of fiscal year 2014. The company's debt and capital lease obligations, net of cash, was $80.0 million at November 30, 2013, compared with $70.2 million at May 31, 2013, a ratio of roughly 1x the current fiscal year's expected adjusted EBITDA. As of November 30, 2013, Mistras had an undrawn revolver balance of $59.8 million. And with that, Sotirios, I'll turn it back over to you.

Thank you, Jon. And now let me take the opportunity to brief you on some key developments and activities within each of our business segments. First, our Services segment. The Services segment completed and continued to capture a number of strategic projects in the upstream, midstream and downstream segments of Oil & Gas, the most important of which was a significant 5-year contract received from BP for extensive services in Prudhoe Bay, Alaska, that I mentioned earlier. During the quarter, we expanded the level of advanced services performed at many of our larger downstream evergreen accounts using our proven corrosion inspection programs. These programs leverage our Asset Integrity Management Services, AIMS, by applying a systematic approach to screen for the presence of corrosion based on API recommended practices throughout piping sections and components in service. In addition to extending these high-value services to our other evergreens, we're also seeing interest from new refining prospects. We are very excited about our strategic acquisition of a professional engineering and consulting services company, which augments our downstream capabilities by offering plant operation support for our customers, processes and equipment in their process. We can consult on areas of profit improvement, such as turnaround planning, risk-based inspection and energy management, project planning and execution, and we can conduct technical training services. All of these professional services are being provided today globally. The continued growth in the U.S. Gulf Coast region led us to complete an acquisition, in December, of an established nondestructive testing company that provides a comprehensive range of in-house and field material services, including high-energy radiographic capabilities from 2 locations that are nearby key energy and chemical firms. Our new acquisition comes with all the necessary accreditations and quality management certifications, as well as a tenured staff and a diversified blue-chip customer base. Our Asset Integrity Management Services, AIMS group, has successfully completed a major milestone with the implementation of our enterprise-based PCMS inspection data management system software for all 14 refining sites of a major U.S. energy company. Our midstream business sector continues to expand throughout North America, with the addition of significant pipeline and gas processing project that works in the Marcellus, midland Texas and Alberta, Canada regions. There, we have also continued positive results coming from our power generation and Chemical/petrochemical sectors. In power generation, we completed a major nuclear steam generator replacement, SGR, project, in the quarter with a utility in the Midwest. We're awarded and begin work this month on another major steam generation replacement project in the Midwest. We were awarded a 3-year contract from a major utility to provide NDT services for their fleet of nuclear power plants in the Southeast. Our added services continue to be contracted and will be provided at various nuclear and fossil plants in the first quarter of calendar 2014. We also continue to expand our presence at the 2 nuclear plant construction sites in the Southeast that were awarded to Mistras last year, with the addition of multiple crews to conduct advanced and other engineering and inspection services. In Chemical and petrochemical, we continue to see these sectors develop due to low-cost and abundant natural gas availability. During the second quarter, we secured a significant contract to provide traditional, advanced and predictive maintenance services for one of the largest chemical companies in the world at their largest production site, in addition to supporting them at their other facilities worldwide. As mentioned in the last call, we expect the winter, early spring turnarounds that are beginning later this month -- actually, I would just say next week, to be very healthy and above average and the same for the late spring turnarounds that follow. Next, our Products & Systems segment. Cautionary industrial capital spending, stricter EPA-enforced regulations on coal-fired power plants and military/government cutbacks are still impacting year-over-year growth in this segment in North America. However, in the quarter, we did receive and recognize sales of our ACTMS gas turbine blade monitoring systems, valve leak monitors and small- to medium-sized UT inspection systems for advanced composite and specialty metal component units. Outside of North America, both China and Japan show expanded high-margin Products & System sales in the quarter. Request for quotations for our mid- to large-scale inspection systems in the Industrial, Aerospace, military and infrastructure markets continue to be active, which could indicate that funding availability is on the horizon. And now let's discuss the international sector. As Jon mentioned earlier, our International organic revenue growth and gross margins for the second quarter exceeded our expectations. It was driven by strong execution, the delivery of key Products & Systems sales, growth in the run-and-maintain business and the united European team that has implemented the U.S. services model for collaboration in order to achieve EMEA operational excellence, especially for unbillable labor. In the U.K., we continue to expand our services at the world's largest offshore wind farm, providing raw boxes inspection services and life-extension engineering. On a separate opportunity, following successful trials, we completed the installation, commissioning and support of individual structure integrity monitoring systems on 32 wind turbines in the same farm. The Mistras Cambridge-based remote monitoring applications group, which also provides support for bridge monitoring in Oil & Gas assets in the region, will monitor the turbines on a 24/7 basis using our automated web-based reporting and alarm systems. In the Advanced NDT services, our automated ultrasonic program for onstream, noninvasive inspection of offshore-process vessel continues to expand. In France, we hired the technical support teams and senior project managers that will be servicing our previously announced long-term 6-year services agreement for a major Oil & Gas company at their 6 in-country refineries and petrochemical plants. We're already providing advanced services and engineering for improving and optimizing inspections, which was a key decision criteria for this customer selecting the Mistras Group. Additionally, during the second quarter of fiscal 2014, our French operations performed their first major turnaround for one of their refineries, helping the customer achieve outstanding services quality and safety and establishing Mistras as a key player in French turnaround management business. With a positive market trend developing in aerospace, our in-house Aerospace business secured 3 separate multiyear service agreements to support major suppliers to Airbus. To support our now growing nuclear business, for the recently awarded 8-year contract with a major French utility, an experienced unit manager was being hired. As mentioned in previous earnings call, we'll continue to work on efficiency improvements with rigorous cost controls and implementation of ERP tools to allow for better management of operations, using the U.S. services model as a baseline reference. Overall, results showed nice improvement for the second quarter in a row. In Germany, we're seeing an increase in the aerospace industry, applying both our destructive and nondestructive testing services, including working with Airbus to support such key programs as the A350 and the A320neo. Wind turbine projects are continue to increase in Germany for NDT blade inspection, repairs with raw boxes and engineering support. Expansion in NDT services continues in Germany and the Benelux, with conditional offices and radiographic bunkers. Strategic initiatives for improving operations and thus, profitability, are now paying dividends in Benelux, and we have stabilized our German business to breakeven levels. In short, the continuing and increasing synergies between our European operations, coupled with productivity and efficiency management improvements and strong focus in aerospace, Oil & Gas and power generation markets, led us to be optimistic about the future performance in EMEA. In South America, we are beginning to see the return of some investment in the Oil & Gas markets in calendar year 2014 in deep water oil production and refining projects. In the quarter, we were awarded a contract from a major energy company to perform computed radiography services for 2 years, and we have benefited from a growing railroad inspection business, mining and advanced NDT projects. For our smaller business in Russia and Japan, the quarter results were above our expectations. We expect the same for the rest of the fiscal year 2014. Additionally, 3 more PCMS software license were sold in the second quarter in Russia. And now for an update on our outlook and guidance. Our recent new contract wins and acquisitions, combined with improving results from our International segments, have led us to increase our expectations for both top line and bottom line performance for the current fiscal year. Previously, we had expected revenues to be in the range of $570 million to $600 million. We now expect that revenues will be in the range of $590 million to $615 million. Previously, we had expected adjusted EBITDA to be in the range of $74 million to $80 million. We now expect that adjusted EBITDA will be in the range of $77 million to $83 million. The company does not provide quarterly guidance, but we'll continue to update this annual guidance on a quarterly basis. In closing, we are pleased with our financial results. The organizational and marketing strategies that we have put in place and the positive market trends will support the future growth of our business segment -- of all our business segments. We're very thankful for the confidence and trust that our old and new customers have expressed in Mistras, rewarding us significant multiyear evergreen contracts with unprecedented durations of 8, 6 and 5 years. Once again, the Mistras model of run and maintain for outsourced Asset Protection Solutions has demonstrated its consistency with record revenues. Our new contract wins will certainly enable us to meet our organic growth and profitability goals. But as I conclude this conference call, let me thank our now 5,000 employees, our loyal customers and our valued shareholders during our transition year 2013. That concludes our prepared remarks, and we would like to now open the floor for questions. Kanthi?

[Operator Instructions] And your first question comes from the line of Andy Wittmann. Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division: So just wanted to dig in a little bit and make sure that we got a clear understanding of the guidance. You kind of mentioned that there's contribution from M&A, as well as organic contribution. Can you just clarify a little bit of how much revenue you expect here this year from M&A so we can kind of dissect that a little bit more?

Yes, sure. Andy, this is Jon. We raised guidance in revenues by about $15 million to $20 million in total, and we've consummated 2 acquisitions so far. And the 2 acquisitions we've done will have annualized revenues of about $20 million, and probably about half of that will occur during the current fiscal year just because of timing of when these 2 companies were acquired. So think of it as roughly $10 million of the revenue guidance increase coming from acquisitions and the other $5 million to $10 million coming from organic. Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division: Got it. That's helpful. And then you talked about some costs that probably ran through the Services segment. It sounded like they were to help you move into Canada a little bit more, as well as maybe -- I don't know, if there is procurement costs for the big contract that you won with BP and the kind. Can you give us a sense of how much some of those costs may have impacted the margins? And kind of the outlook for those costs, those kind of -- obviously, the contract costs will subside, but are there ongoing costs in Canada? And maybe more broadly, Sotirios, on this one, can you talk about your Canadian initiative of kind of where you are today and how you get to where you want to be?

Sure, I'll take it first. This is Jon. As I said in my prepared remarks, there was roughly $700,000 or so of additional costs that we incurred during the second quarter that we chose to invest, really stepping up our -- broadening our footprint in Canada, getting -- becoming part of the union up there, making sure that we were positioned to really make a bigger footprint, I'll let Sotirios talked about the market implications and the opportunities in Canada. But also Alaska, we won that increased footprint in Alaska that Sotirios mentioned, and we incurred a 6-figure cost to travel, certify employees and so forth, make sure that we were really ready to step our game up and step up to our important customers' requirements. So we chose to invest a good $700,000 or so during the second quarter in order to really broaden our footprint and step up to our goals in the future. And I'll let Sotirios talk about the opportunities in Canada in terms of the broader footprint.

Yes. Basically, Andrew, we already have operations in Canada, as you know, in both in the East and the West. And we have seen some great opportunities in pipelines, as well as in the oil sands. And what we are trying to do is to address those opportunities and we have addressed in -- as we were addressing, the last couple of years, in Europe. So rail for us is the new expansion area. And we have -- of course, we have also received positive response from our customers. Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division: Is the work starting to come in already on this? Or are you kind of investing ahead of the work? Just want to kind of get a sense of kind of what the near-term returns could be on this or if this is going to be maybe longer term?

Well, as you know, Canada even -- Canada is a different country, so we have to really, first off, certify our employees for their standards and everything else. So we have to prepare ourselves, and that's how you spend money first. And then the work has already started, and we expect it in the next quarter to start increasing. Andrew J. Wittmann - Robert W. Baird & Co. Incorporated, Research Division: Got it. Maybe final kind of question here. It sounded like products was an important subpart of the International segment. Jon, can you quantify kind of the year-over-year delta in terms of maybe revenue mix there on the product side that maybe helps us get a better understanding of how to think about the comparison there?

Yes. Sure, Andy. During the quarter, we had incremental Products & Systems sales in the International segment of about $3 million incremental over prior year. There's a healthy margin on that. So a good part of our 350-basis-point year-over-year improvement in International margins came from that -- those sales. But I would say that year-to-date, we've had International gross margins sort of in the mid-28% of revenues range, and as we go to the second half of our fiscal year, we expect that our International margins will perform roughly in that range. As we've said before, our goal is to get the International gross margins sort of -- certainly, well north of 30%, but we're going to continue to move toward that goal. But I would expect that, while we won't see necessarily, the second quarter gross margins that we had in International repeat in the second half of the year, we should see continued improvement certainly above the first quarter's level.

Yes. Also, Andrew, I'd like to make -- sort of become very clear, is Canada is not international for us. It's really part of the U.S. operations.

We have a next question, and that comes from the line of Tahira Afzal.

This is actually Saagar on for Tahira. First, looking at your international operations, I know you just -- you were just talking about margin potential. And I think, Jon, in your preferred comments, you mentioned that there was improved sales mix in the U.K. and Russia but that Germany still hasn't seen improvement. Can you just talk about what you guys still need to do and what's being done and when we can potentially see that improvement in Germany and what that really will mean for your top line and for your margin potential?

Yes. First of all, we also mentioned that we have seen improvement because we are now starting to breakeven to positive, okay? That's number one. Number two is, basically, we really will install -- as I said in my prepared text remarks, we're going to install the same system that we have in America, in the U.S. business. And that will be basically a lot easier to be able to manage the 11, 12 offices that we have in Germany, and that will help our German operations and the management there as well as us.

Yes. This is Jon. The other thing I would add to that is that, in Germany, we've got some investments that we've been making which are embedded in our cost structure today, to have some laboratories that will ramp up and serve the aerospace industry. They're not quite revenue-producing yet, but we expect they will be as the calendar year rolls out and once they are, will have contributions to our top and bottom line.

I think that's very good point, Jon. And basically, in destructive testing, you have a lot of certifications that you have to do before you start performing testing, so a little bit different than in nondestructive testing. So we really have incurred some of that expenses that now are starting paying some dividends.

All right. And then my second question really related to the guidance. You raised your top line 3%. You raised your EBITDA guidance by 4%. Part of that seemed as organic and part of that due to the 2 acquisitions that you folks have mentioned. But what really gets you to the top end of the range -- of your new range and what takes you above that when you look at your different segments? Is that stronger -- or you've been pretty positive on the turnaround season that's coming up. Is that what takes you above that range? Or is it one of the other segments or business lines?

Okay, sure. As we really had discussed in the fourth quarter of 2013, okay, we'd like to see more improvement in the international. Of course, we're going to see a lot of improvement in domestic services, USA services, because of the big turnaround season. We definitely have said, stated before, as well ourselves as our competitors, that last year, the first half of the year was terrible when it came to the turnaround. So we see a large improvement, and so that will really help us in the overall business.

Okay. And then last question on my end, seasonality. From the fiscal second to the fiscal third, you've always had a seasonal drop off. Is there anything within your business -- or is there any visibility you can give us qualitatively that maybe something has changed? Or should we expect that you'll see the same seasonality going forward?

Okay. As we have said this before, the first quarter and the third quarter are our worst and the second and the fourth are really our best. We might see some improvement this year on the third quarter because the February, they would start -- people start turnarounds in January, and we didn't really have turnarounds last year in the same month, in February. So we might see a little bit of improvement in the third quarter, but still first and third will be the worst.

That's right. Year-over-year, we think that, certainly, third quarter will be conservatively better than last year's third quarter and perhaps the same for the fourth quarter. That's embedded in the guidance range increase that we've done. But because of the December holidays, the January startup, the weather and so forth that you get in the third quarter, sequentially, that's always going to be a weaker quarter for us.

The next question comes from the line of Matt Duncan.

First question I've got just with regard to the gross margin improvement. Are you guys seeing anything in terms of pricing right now? Or is that maybe still yet to come assuming that we start to see the labor market tighten up some here?

Pricing will be much -- pricing is still the issue but maybe it's not as bad as maybe on past years, where there were a lot of turnarounds. So we're trying -- we'll keep up, but nothing major, okay? That's all I can say for that -- that we have witnessed so far.

Okay. On the BP contract, are you at liberty to talk at all about the size of that opportunity for you guys?

It's basically in the -- it's really -- it's a 5-year contract, as we said, and basically, we're talking about 45 year -- $45 million per year and hopefully, to improve that.

Yes. But the incremental to us is going to be in sort of the $20 million per year range once it's fully ramped up.

Okay, all right. That's very helpful. That's a nice win. On the petrochem cycle, I'm hoping maybe you can give us some thoughts on how the -- what appears to be shaping up as a pretty healthy expansion cycle in the petrochemical industry, what that might mean for Mistras.

Well, as we mentioned, we had a very big win in the Chemical side, okay, in the chemical side. In the petrochemical, because of the gas being very, very cheap, $3.50 per million BTUs, people, basically, are doing a lot more in the United States than we have seen for many years. We tried also to provide the market with PCMS -- with our PCMS software, which is very, very valuable to them, especially to the smaller companies, okay? And so we'll see a very strong, very strong second half forecast. We have a very strong second half forecast in the area. In many -- and as I said, in many areas, not only inspection, also we'd like to see in software.

Okay, that's helpful. And the last thing for me, just want to make sure I understand the guidance correctly. You're saying you expect 7% to 12% organic growth, Sotirios. But when I do the math, it looks like a 7% to 12% organic growth, with the acquired revenue you have year-to-date, and it sounds like about $10 million from the acquisitions that you've made that are going to contribute to the back half, that 7% to 12% organic growth might actually drive a revenue number -- a range a little bit higher than what you're giving. So is there just a little conservatism there, not knowing for sure maybe how the seasonal February quarter shapes up? Or how should we interpret that?

I think you should interpret it as conservative. We like to be very careful with that because, especially, of what we saw last year. Just don't forget -- I think everybody should really understand. Don't forget what Shell did in Louisiana, where they really stopped the project. So we are very cautious because of what happened last year. We're very nervous of what happened last year. But we are very optimistic, and we think if we beat the numbers, maybe we have some good news in the next quarter.

We have the next question, and it comes from the line of Tristan Richardson. Tristan Richardson - D.A. Davidson & Co., Research Division: Just a question on the Services segment. You talked about some of the new awards on the midstream side and on the nuclear side. I'm curious sort of how those projects lay out sort of on the schedule. I mean I'm just thinking about you're anticipating a stronger turnaround in the spring and assuming that this new steam generator project ramps up in the calendar year, I'm just sort of thinking about margins for the second half in Services.

Well, first of all, let me just tell you that life sometimes is a little bit difficult. We said -- all these turnarounds, especially for the power generation, do not happen together with the Oil & Gas. But the facts remain that all of these things will happen between February and May, okay, a lot of them. And of course, margin, we'll try to do -- as Jon mentioned before, we'll try to do better than what we did last year. That's -- I don't know, Jon, if you have anything to add here.

Yes. I mean those expectations are incorporated in our guidance, our new guidance range. We believe that we will have some kind of leverage versus last year's operating results. That will be incorporated in that guidance range as well. So we feel good about the margin opportunities in this business. Third quarter margins are always a bit lower because of the factors that I spoke of earlier, but we feel good about the second half and feel good about the year. Tristan Richardson - D.A. Davidson & Co., Research Division: Okay, great. And then just going back to Europe. I mean it sounds like you guys are working on a number of initiatives. And you've mentioned that you've sort of gotten Germany now to sort of a breakeven level, and that's before you've kind of completed the ERP initiative. So when you look at the guidance, I mean, does that assume that Germany sort of remains at these breakeven levels? Or do you see Germany actually contributing to the bottom line this year? Or is that a potential for incremental next year?

I think it's really some small potential this year and a lot more next year.

We have the next question, and it comes from the line of Tom Hayes.

I was just wondering, with all the talk we've heard, and you guys really talked about it as well, is the ramp-up in the turnaround season. I just wanted to get your thoughts on your current labor position and availability and the associated cost if you need to bring more labor on.

Well, we are like everybody else, short of labor right now, and we're trying to really -- trying to attract individuals. But remember, in our case, we always like to have people in run-and-maintain business and career, kind of, oriented. So we're not really as aggressive in getting people just by hiring our costs, okay? So basically, we also do a lot of sharing in our labs, okay? We transfer people from 1 lab to another, and so that really has improved our situation also. And of course, in -- if you look at the Gulf region, where there would be a lot of business, I think we probably have most of the -- a very large number of our people are in the Gulf.

Okay. I know it's kind of a bit of an issue last year, pushing the margin down was the mix within the International business. Just wondered maybe if you could remind us kind of the breakdown between products and services in the International business?

I think, basically, the products will be in the -- now, it used to be different. But right now, the way it's evolving because we now have a lot more Services business, I think it's probably going down to maybe 25% to 30% in products and maybe 70% -- it's really going in that direction, and 70% in service. That will be the run rate.

Yes. We're sort of transitioning. So in any particular quarter, it's going to be lumpy. The mix is going to bounce around a little bit, but the direction is going to increasingly be more towards services going forward.

Tom, the other thing I also want to make very clear is that labor, at least the way we look at things, is labor shortage for us is regional.

Okay. Lastly, I guess, in the previous guidance, we have been talking about a 38% to 39% tax rate, and that's been trending down to the 36% range. What do you kind of have embedded in the guidance?

36% is kind of -- we expect will continue for the balance of the fiscal year. And really, the greater contribution from international results is the principal driver there.

[Operator Instructions] We have the next question, and it comes from the line of Toby Riggs [ph].

I just have a quick question on -- you sort of talked around this a little bit -- what we're hearing a lot about is CapEx cuts coming through in the oil and G -- O&G sector and how that's going to affect your market. Could you talk a little bit about your confidence going forward and how much that relates to you performing better than your peers and how much of that you think relates to the actual industry performing well?

This is Jon. I'll try to take this, Toby [ph], really, just to start. Sotirios may chime in. But I think that in our sector, the macro situation is one of continuing investments. There's been hundreds of millions of dollars of projects announced in the U.S. Gulf region. So we feel very bullish, in general, about the sector and the level of investment in the shale play and the degree to which the U.S. is increasingly becoming energy independent by the end of this decade. So we feel very bullish in general. As Sotirios mentioned earlier, it's not to say that it's not going to come with fits and starts, but in general, we see a very positive climate of continued investment, continued constructions and abilities and opportunities for Mistras to help.

Toby [ph], basically, as you know our business and we concentrate a lot on the evergreens, which is really run-and-maintain work. And I have mentioned before, when we start the year, we probably have 60% to 65% of the income already -- of the business that we already have. So from our point of view, it's a fact that when we are looking at capital projects, okay, we're looking basically additional to that, okay? And that's where we're really sometimes very nervous about the organic growth because you have more of the capital projects that will contribute even more to the organic growth. That's where we are giving the range of 7% to 12%. So from our -- and since you are really in the U.K., we are trying to do the same business in Europe, and that's why we're excited with the contracts we got -- we received in France. And we hope to get in other countries. We like the run-and-maintain business. We like what we call outsource -- we like, basically, our customers to outsource their inspection to us and let us be the inspection department for them. We think we're doing a very good job, and we have the right people to do that.

We have no further questions. I would now like to turn the call over to Sotirios for our closing remarks. Please proceed.

Thank you very much, Kanthi. I would like to thank everyone for listening, and we wish you all a great day and a very healthy and prosperous 2014. Thank you very much for listening.

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