Good day, ladies and gentlemen, and welcome to the Fiscal 2015 First Quarter MISTRAS Group, Incorporated Earnings Conference Call. At this time all participants are in a listen-only mode. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Sotirios Vahaviolos, the CEO. You may begin.

Frances, thank you very much, and good morning to all. Welcome to the MISTRAS Group Earnings Conference Call. This is Sotirios Vahaviolos, Founder, Chairman and CEO of MISTRAS Group. Joining me today is Jon Wolk, the company's Executive Vice President and CFO. In today's call, we will review our Groups financial results for the first quarter of fiscal year 2015 that ended August 31st and discuss our prospects going forward. I will start by saying I'm very pleased with our 23% revenue growth in the first quarter and with the strength of MISTRAS' services business and its continuous strong organic growth but disappointed with a decline in our profitability and unfavourable leverage. Our Services segment had 10% organic revenue growth and our total company had 9% organic growth in the first quarter. Most of this growth was driven by increased inspection requirements at new and existing customers. We had spoken previously about our significant investments that we’re making to strengthen our franchise for this year and beyond. Our investments in people, processes, and equipment are going as planned. We are extremely pleased with our acquisition of NACHER Corporation and our entrance in the important offshore market in an extremely credible way with world class service capabilities. The addition of NACHER helps to uniquely position MISTRAS as a single source solutions provider to our integrated energy customers for their downstream, midstream, and upstream operations in the Gulf and beyond. Opening new markets organically takes time, cost, and patience. These initiatives often take longer than expected. Because of key customers demand we expected our Canadian oil sands start up would get off to a quicker start. Although this initiative is slower developing than planned, we remain excited about the significant growth opportunities and for gaining as first time customers new major energy…

Thank you Sotirios. I will 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. GAAP. 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 report on Form 8-K filed yesterday. These reports are available on the company's website in the Investor section and on the SEC website. First, I will summarize our first quarter results and then I will comment on our initiatives to address our profit margins. Revenues for the first quarter of fiscal year 2015 grew 23% above prior year driven by strong 27% growth in our services segment of which 10% of the services growth was organic. International revenues grew by 6% driven primarily by FX while products and systems revenue was flat. Our first quarter gross profit grew by 7% over prior year on a revenue gain of 23%. Gross margins were 25.2% in the first quarter compared with 28.9% in prior year. The decline in gross profit percentage was due to our continued investment in Canada, the unreimbursed wage increases that Sotirios discussed, and a less robust sales mix both in the services segment where advance services comprised 13% of revenues compared with 15% in the prior year’s first quarter and in the UK. Operating expenses excluding acquisition related costs were in line with prior year as a percentage of revenues. Operating income excluding…

Thank you Jon. I am very pleased of my team. They have recognized the opportunity in front of us and they have created a plan that I endorse to improve our results. I will comment more on this in a few moments but first I will update you on some key developments in our business. First I will start with the Services segment. Oil and gas chemical opportunities remain strong. Besides our evergreen run and maintained business we were awarded two important capital projects during the quarter. The first one we were awarded, the NDT Inspection Services for the second phase of a major three to five year Gulf Coast LNG capital project. We previously provided prebuilt engineering services and advanced implementation software tools to this customer from our AIMS Engineering Group. This contract award is a terrific example of our single source concept. Second, we were awarded a multi-million dollar contract to perform NDT Inspection Services for a large propane dehydration capital project in the Gulf. In all the business we secured a multi-million dollar turnaround for refinery in the Midwest owned by a major integrated energy company. Also we won our first Utica Shale regional midstream inspection project. For PCMS, inspection data management software we received additional orders from one of our nation's largest natural gas and crude oil pipeline companies as well as a northern major energy company that is starting the implementation a total 45 of their terminals nationwide. In the power generation sector, we are extremely pleased that we have become the primary inspection provider for PSEG (ph) nuclear fleet with a five year agreement. We are also pleased to announce our multiyear contract with Alliant Energy where we will provide quality assurance over site services for its major capital project in the Midwest. Our…

Thank You. (Operator Instructions). Our first question will come from the line of Andrew Obin from Merrill Lynch. You may begin.

Hi, Sotirios, it is Andrew Obin. Hi, how are you guys?

Okay.

Just a question on pricing, so when did you guys realize that labour pricing was an issue?

Andrew I think we have been feeling these pressures now for a number of months. The question about when to actually go to market and talk to customers was really sort of an internal debate and in the end we opted to make sure that we could have the resources in place and the customers discussions now have been following subsequent to that decision.

I completely appreciate that but the question then, when you guys provided guidance the last time around it sort of seems you were already aware of the fact that where these pricing pressures that were not addressed so I am just wondering how did the process work that, it seems that it is something that you were aware of for a while yet somehow it is still a surprise in terms of the guidance, where did the process go wrong?

I am not sure the prices -- the process went wrong. I mean what we said is we are maintaining the guidance. The guidance has a fairly wide range in EBITDA. There is some additional incremental EBITDA that will come from the NACHER acquisition. You know we are still within that range. So, we didn’t guide to a specific quarter but we did say that the second half would be better than the first in terms of year-over-year measurement.

I guess the broader issue for me in 2012 you guys had $436 million to $437 million in sales and you earned $0.76, it is four years later and we are going to make over $700 million in sales and we are probably going to earn less money. So, I guess this is where I am a little bit lost and it just seems -- I appreciate the message but it just seems something is broken, I am not quite sure what it is?

Well, there has been a lot of transition in the business model. There has been a lot of changes and just to correct you it has been three years later. We are in the third year following that year. And we are taking a lot of action steps to address the profit engine here and to get things on the right trajectory. There have been factors that had been present in the marketplace Andrew since the date of those earnings. I think most notably I think there are different pricing dynamics in the market, different competitive dynamics within the customer base than we were encountering at that time. So the management team has been dealing with that and dealing with that reality and we have strategies in place to counteract what we are experiencing.

I appreciate it. And just a question on end markets, so what is your view, I know you guys had a conservative view on the turnaround season in the U.S., are you feeling any better about it, what does the energy prices mean for the turnaround season if you could give us colour on that, thank you?

Yes, the turnaround season is a lot better than that was last year. Okay, we see -- we are already busy and we think that this will be an outstanding fall season.

Terrific, thank you very much.

Thank you.

Your next question will come from the line of Justin Hauke from Robert W. Baird. You may begin.

Good morning guys. Thanks for taking my questions here. Can I ask, I know you guys have talked about it a little bit in the past but can you refresh us on just how your contracts are actually structured on these contracts, how does the negotiation work because I think we are under the impression that most of what you do is under sort of a cost plus structure but maybe that's wrong, can you just kind of talk a little bit about how the negotiation process works?

Yeah, Justin most of our contracts are on a time of materials basis.

I mean sorry, that's what I meant.

Many of them are structured pursuant to master services agreements. So while pricing tends to be in place, virtually all of the contracts include provisions for us to seek increases, to pass along additional cost as market conditions warrant.

And so -- I mean that process still, if it is time and material, does labour count as your materials, I mean is it a cost that the client realizes is variable and you invoice them based on what you are paying at that time or do they have a bandwidth or how does that work?

Well Justin, labour would be time, materials would be things like equipment and consumable supplies most typically. So, all the costs are subject to discussion and to the extent that market conditions are causing cost to increase we have the capability to go back and have discussions with our customers on any one of the providential cost that we are incurring and to see it relieved.

Also you have to consider the fact that [COLA] [ph] is also negotiable okay. In all of these contracts we have to go back and really show to the customer that as everybody else that the cost are really going up in the labour and [COLA] [ph] is a key issue here.

And just to add to that, COLA is one thing but its incumbent upon us to demonstrate that we are providing added value to our clients and we feel when our clients tells us we do a nice job of doing that.

Okay, it is helpful. I guess my next question is just in terms of the ramp in the Canadian projects can you talk a little bit about your recruiting efforts in Canada and training and how that’s developed and what you are doing there?

Yes, sure. You know it’s a little bit chicken and egg. As we both mentioned Sotirios and I in our prepared remarks you know we certainly went into Canada with the definite Plan A in mind but unfortunately for various reasons Plan A hasn’t materialized as expected. So we are going with the Plan B still hoping Plan A can occur but going with the Plan B and as we get commitments from customers, we recruit, we hire employees, and we are able to service them.

Okay, and then just the last one as a clarification and I apologize if you did quantify it in the prepared remarks, I didn’t hear it but what was the margin impact of the unbilled labour expense specifically this quarter? Did you have a number?

Well it’s more than unbilled labour. You are right, we didn’t quantify it but it’s more than unbilled labour. There is union cost versus non union cost where we made a conversion to facilitate our entry into this specific Canadian oil sands region. There is additional overhead that we have taken on, there is additional salaried management team that we’ve taken on, the business development personnel and so forth. So there is quite a lot of components to the ongoing investment that’s incremental to at this point last year. We didn’t have those cost in last year’s first quarter as an example. But no, we didn’t quantify that but it was a similar drag as it was to what we had in the second half of last year on a quarterly basis.

Okay, all right, thank you very much guys.

Thank You.

Your next question will come from the line of Matt Duncan from Stephens Incorporated. You may begin.

Good morning guys.

Good morning Matt.

So I wanted to dive into the margin pressure a little bit more, Jon can you break down for us, your gross margin was down 370 basis points year-over-year, was that fairly evenly split among the three factors that you called out that were weighing on margins there?

Matt it was roughly split among those three factors, yes. It was fairly evenly but I don’t want to get down to rounding differences and so forth.

Sure, fair enough. And then on the wage inflation side, was this more the market dictated that you had to go ahead and do this if you were going to keep people, you started to lose technicians to other people that were taking them at higher wages and was it more of a reactionary move or was it more proactive?

We really Matt we tried to really put a common increase at the beginning of the year for everyone so, people really got their raises sometimes earlier than normal. But we had to do that so to make sure that we have the people available for the fall turnaround because we had commitment with customers for turnarounds and we had to provide the people. And we made sure that, that really happened.

And then in terms of the pricing discussions that you are having with customers where are you in that process and how long do you think it’s going to take to get enough price improvement to be able to sort of makeup the margin pressure you are getting from wage inflation, when did the two cancel each other out?

Well, it’s early in the process at this stage Matt you know, but the discussions have commenced and as I said we are starting with the larger customers first and then going to migrate really throughout the entire customer base. So I think that probably in the second half of the year we’ll start to see benefit not only from this initiative but from several of the others.

Okay, so in other words there is still going to be some margin pressure here in the second quarter but obviously you get the benefit of what sounds like a pretty healthy turnaround season so, you’re going to see a nice sequential improvement in margins but year-over-year there is still going to be a decent better gross margin headwind, is that the right way to think about it?

Probably but it remains to be seen how much of a headwind we will have. We will see the net effect of the two factors, it is hard to say right now.

Okay and then last thing for me on the NACHER acquisition, just hoping you could talk a little bit more about the market opportunity in the offshore market for you guys?

Well, Matt basically we are talking about almost 4000 plus firms in the country. We are only working with about maybe less than 20 of them. Okay, so we think there is a great opportunity but what it is more important is they are combining the type of work that they do with NDT and of course NDT and engineering services is really the most exciting part for this acquisition.

Okay, so Sotirios is there any way to put a dollar market size on that offshore platform, I mean if there are 4000 platforms what is the revenue opportunity per platform?

5%. You know 5% of the platform. So there is a tremendous…

But they are not, just to interrupt you, they got all created equal. So the platforms and the deep shelf are more of a revenue opportunity than not. So it is hard to just answer that question with well here is the number. But as Sotirios says I mean we think this is an exciting opportunity. This is a huge expansion potential for us for both sets of services.

Okay, thanks.

Thank you.

(Operator Instructions). Our next question is from the line Tahira Afzal from KeyBanc. You may begin.

Good morning Sotirios and Jon.

Good morning Tahira.

Good morning Tahira.

First question is on the macro side, have you seen oil prices come under pressure in the past, it really hasn’t had much of an impact on your business and of course there is some concerns about Europe, would love to get your thoughts on how you are thinking about those two macro factors as you plan ahead?

You know right now Tahira as you realize most of our work and we mentioned today a couple of capital projects but the majority of our work is really in maintenance. You know we see sometimes as we show in 2008, 2009 a decrease in maintenance but it really was nothing like let's capital projects. So, there may be some weaknesses but the opportunities for us is a lot more than that. So, we believe that it might affect us but not looking at the turnaround season in the fall and in the spring we cannot forecast their slow down.

Got it, okay and my second question more on the micro side, in the past quarter you talked about some interesting and I think positive changes you are making in terms of the incentive structures within your employee base and then really some integration in your offices in terms of how you view information, would love to get an update on both of those if possible?

Well the compensation structure was changed so that's been implemented. With regards to the infrastructure side and the development of middle wear and installation of that middle wear we are in the process of going out to our first lab with some of that solution during the upcoming quarter. So we feel very positive about those initiatives.

Great, and Jon even if I look at all the initiatives that you have announced today on margin improvement, does that -- do you need to further change or think over the incentive structure to really sort of help implement and make those initiatives effective or is the incentive structure really already taking that into account?

Well, I think the compensation structures are always works in progress and we tweak them overtime depending upon the working and operating dynamics that we face. So I think we made a really good step this year and we feel very positively about those changes but you know on an as needed basis I am sure we will tweak them going forward as everybody does.

Got it, thank you.

Sure.

At this time we have no other questions in the queue. I would like to turn the call back over to Mr. Sotirios Vahaviolos for your closing remarks.

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

And ladies and gentlemen this concludes your presentation. You may now disconnect, enjoy your day.