Ladies and gentlemen, thank you for joining MISTRAS Group Conference Call for its Second Quarter ended June 30, 2021. My name is Olivia and I will be your event manager today. We'll be accepting questions after management prepared remarks. Participating on the call for MISTRAS will be Dennis Bertolotti, the company's President and Chief Executive Officer; Ed Prajzner, Executive Vice President, Chief Financial Officer and Treasurer; and Jon Wolk, Senior Executive Vice President and Chief Operating Officer. I want to remind everyone that remarks made during this conference call will include forward-looking statements. The company's actual results could differ materially from those projected. Some of those factors that can cause actual results to differ are discussed in the company's most recent annual report on Form 10-K and other reports filed with the SEC. The discussion in this conference call will also include certain financial measures that were not prepared in accordance with the US GAAP. Reconciliations of these non-US GAAP financial measures to the most directly comparable US GAAP financial measures can be found in the tables contained in yesterday's press release and in the company's related current report on Form 8-K. These reports are available at the company's website in the Investors section and on the SEC's website. I will now turn the call over to Dennis Bertolotti.

Thank you, Olivia. Good morning, everyone. Results in the second quarter were outstanding, consistent with our expectation that this quarter would mark an inflection point in our growth trajectory for 2021. Consolidated revenue was up nearly 43% in the quarter. We saw strength in our energy markets both domestically, including onstream and in Europe. Actually, all of our end markets were up year-over-year in the second quarter, with the sole exception of aerospace and defense, although that market was up internationally. Consequently, we believe end markets are rebounding and will we'll continue to do so over the balance of 2021. Together with a solid first quarter, results to date have us excited about the momentum achieved over the first half of this year and leading into what we believe will be continued strength over the remainder of 2021. For the second quarter, gross profit margin increased over $14 million from last year, which is an increase of over 34%. Gross profit margin did decrease to 31.1% from 33.1% last year, which was anticipated as 2020 had a lower relative level of pass-through costs, such as travel and per diem due to COVID lockdowns last year. On a year-to-date basis, gross profit margin is consistent with the first six months of 2020, both periods being up 28.8%. We remain very focused on improving gross profit dollars and gross profit margin through efficiency enhancement and better product mix. Selling, general and administrative expenses were up in the second quarter over prior-year quarter by $2.1 million due primarily to restoring substantially all of the interim cost reduction measures that have been in place last year, most of which I am pleased to report have now been restored. Compared sequentially to the first quarter of 2021, SG&A is essentially flat. And SG&A is also…

Thank you, Dennis. And good morning, everyone. It was truly an outstanding quarter, and it could be an inflection point. And while some of the improvements over a year ago are attributable to the extreme effects on the year-ago quarter from the COVID-19 pandemic and other related macroeconomic factors, we nevertheless established new all-time records or near records in several key metrics. A five year high adjusted EBITDA margin and the second best all time quarter of adjusted EBITDA puts the quarter's accomplishments in a more appropriate overall historical perspective. For the three months ended June 30, 2021, total revenue increased 43% versus the prior year comparable period due predominantly to organic growth as well as the low single digit favorable impact of foreign exchange. All end markets improved, again, with the sole exception of aerospace and defense market, which is down only modestly for the quarter and actually up in the international segment. The oil and gas market was 57.2% of revenue for the quarter, and is now 58.6% for the first half of 2021, which is up 140 basis points from last year. As Dennis mentioned, while we continue to invest in our growth initiatives such as digital, private space and renewable energy, the traditional oil and gas market will remain a large market for us, where we are having tremendous success gaining share, while expanding our service offerings and best growing revenue and earnings. Gross profit in the quarter increased over $14 million or just over 34%. Gross profit margin was down from a year ago at 31.1% compared to 33.9%, but was consistent at 28.8% on a year-to-date basis for both the current and prior year. Keep in mind as conditions normalize, our travel and related expense increases, and these costs are reimbursed by our customers…

Thanks, Ed. So, to recap, as we recover from both the pandemic and the fall off in the oil market experienced in 2020, we are planning for our next stages of growth. The first half of the year has us back on a more solid footing and we believe markets will continue their gradual recovery. Our goal has been to end this year with revenues that approximate the exiting quarterly run rate of 2019. And in the second quarter of 2021, we have already attained that level of revenue. From here, we can focus on returning to the steady growth trajectory that MISTRAS has generated over the years, while also improving our operating leverage and reducing debt. Although the energy markets, both oil and gas and power generation, are cyclical and beyond our direct control, they are currently stable and rebounding. And we are focused on continuing to gain market share with winning new contracts and expanding our services in mechanical and data services, particularly via OneSuite. We are largely agnostic about the industries we support. And we have and will continue to flex into alternative sectors such as renewable energy, particularly wind. This is an area that we can't control by focusing our efforts into adjacent markets, utilizing our core competencies such as Acoustic Emission and complementary mechanical offerings. This is very similar to how our Nadcap-certified aerospace labs are flexing into support of space work. Again, realigning our core capabilities into higher growth sectors of our existing markets. OneSuite is yet another illustration of how we continue to enhance the value of our legacy investments, while increasing the ROI for our customers today and into the future. In many ways, MISTRAS has always and certainly will continue to focus on customers' ESG compliance, particularly the E for environmental and especially the S for safety, which is our primary value proposition. For MISTRAS, safety is so paramount to what we do for our customers that our recently implemented initiative was chartering a new board level function known as the SES Committee, which stands for social, environmental and safety. And speaking of safety, before taking your questions, I would like to thank all the MISTRAS employees once again for your understanding and the leadership shown in helping us through this crisis. You have shown an unwavering focus on building on our solid reputation for safety, quality and innovation, all while providing outstanding customer service and dedication during these extremely trying times. By sticking to the tenets of our Caring Connects initiative, we can provide a better workplace not only for the MISTRAS family, but for all those whom we work with on a positive and safe manner. Olivia, please open up the phone lines.

[Operator Instructions]. And our first question coming from the line of Andrew Obin with Bank of America.

This is David Ridley-Lane on for Andrew Obin. Can you talk a little bit about the headwinds and tailwinds to gross margins as you think about the second half? I understand you'll have some lower pass-through costs – or assuming higher pass-through cost in the second half. Just trying to understand if that kind of offsets the underlying improvement you're seeing.

So, I'll start with that, David, and let Ed or Jon back me up. You're right about the pass through. That was a big part of the savings while we increased quite a bit in 2020, probably about a third to a half in some quarters, all because of the reduced pass through. But customers really right now are still being a little bit cautious about how much travel and how much extra expense they're doing. So, I don't really foresee the second half of 2021 to look like 2019 as far as their travel and all that goes. So, I still think there's some savings there. And we are being much more cautious on what work we're picking up. And our sales mix – sales mix is an easy way to say that we're watching how we work with customers and how our expenses and our cost of goods are flowing. So, I think we're going to be able to keep some of that. It'll be a little bit different, but I don't see it going below where we've been. I think we can hold it and grow from there.

It's Jon. I echo Dennis' comments. I think I'd say that sequentially, for the Q3 versus Q2, I think revenue should be similar. Margins may be a little bit lower. Q2 tends to be a strong margin quarter for us. It tends to rebound again in Q4. So, you have some seasonality in there. Compared to prior year, I think what Dennis highlighted in terms of the pass-through costs, we'll have more of that this year as business is at more typical levels. So, we may not quite reach prior-year gross margin levels, but still we feel good about the margin profile. We feel good about our volumes at this point. And so, therefore, I think margins should be healthy.

One of the topics that's come up in many of the other earnings reports has been labor availability and also some wage pressures. So, what are you seeing on those fronts? Thank you.

I'll take it and then let Jon jump in. So, we did a strong focus during COVID to not do anything to reduce our technician base more than what the customers were doing. If they would take off some work, we would try to find other places for them during the peak of it. We were trying to do what we could to keep them there. Consequently, we are working them less hours, but we are still trying to keep the bulk of our employees. Most of our employees stayed with us through COVID and have returned. So, we don't have any overall problem as far as labor to handle the work. There's always going to be some type of hard skill sets or things needed for a certain area where you use more of one type of technology than the other. So, there's always some individual needs that may be exceeded our capabilities. But overall, we really believe we're in good shape there as far as total bodies. We just haven't worked them as many hours as we have pre-COVID as we have post. As far as increases, again, those certain skill sets will have to find some ways in certain areas, and customers realize that, for us and other labor, they're going to have to adjust accordingly. And so far, we find them willing to do so.

Congratulations on the strong results.

Our next question coming from the line art Sean Eastman with KeyBanc Capital.

This is Alex on for Sean. Congrats on the strong quarter. First one for me. It's clear that the oil and gas segment has recovered nicely. Revenue growth of 50% this quarter. And with a spring turnaround season that started later, but ran longer than historical norms. What is your expectation for the fall turnaround season? And what's your visibility like? I'm just wondering if there's still uncertainty around push out and activity levels into next year or a turnaround season that's just doesn't run as long as the spring?

It's a great question. I don't think there's any doubt customers try to save some money in the first half of 2021. For the most part, every turnaround that was scheduled happened, but if there was a way to make a couple of dollars savings, either on traveling per diem, or maybe not as many hours. During COVID, you work 40 hour weeks during a turnaround which was unheard of. We were working overtime, but maybe not at the same amount of hours. I don't think, in the fall, you'll probably get back to those 7/12s, like we had seen pre-COVID. I don't think customers are spending that – and they might try to harvest some savings in the back half. But it wasn't as aggressive or like you've seen anything in COVID days. It was just a little bit more logical. They're putting some back. So, I could see some savings, but for the most part, they're not pushing too much work out of this current year into 2022. I think what they're trying to do is make up for what happened in 2020, so they don't have that much room to keep pushing things out. They're just trying to save where they can. But I think the second half will probably look the same. Traditionally, the spring turnaround season, the last few years have been stronger than the fall. I wouldn't doubt that would probably happen this year, but you never know what could happen with one-off customers or something like that.

Second one, if we break out your oil and gas business between downstream, midstream, upstream and maybe petchem, which is smaller, how did all those sectors perform during the quarter maybe compared to last quarter? I'm just wondering what you think is driving the strength and energy and maybe which of these have been weaker?

Jon, if you want to get into the details there.

I think for us, echoing Dennis's comments, we've seen a resumption to more normalized patterns. But for us, the biggest gain in oil and gas in Q2 was really more market share driven. As we picked up some new business, we were awarded some contracts that we staffed up. For us, downstream has not really recovered to the extent yet that we expected to recover. I think I'll echo Dennis' comments that there's still a cautiousness in the market, spending levels haven't resumed to what we would have seen in 2019 yet, and there's always uncertainty in turnarounds because they run long, they run short and they're hard to predict. But I'd say that, in Q2, mostly it was market share gains. Secondly, it was resumption to activity levels that were starting to approach normal. I think, certainly, we're strong offshore. But downstream, it's a bit cautious yet, and it's on the way back.

I guess the one thing I'll add Alex to Jon's last comment on offshore or upstream in total, we still worry about close camps and we still worry about COVID. Right? So, it's in closed camps where you're on a rig or in a remote area, whatever it is, there's still – COVID is still there, however you want to argue it. And there has been some breakouts and things like that. So there's still a little bit of concern there, it feels, about safety of personnel and just COVID safety in those operations.

Next question coming from the line of Brian Russo with Sidoti.

There's a lot of discussion on your SG&A run rate. Should we assume going forward that the SG&A run rate looks something like the first quarter of 2020 pre-pandemic or are there sustained cost savings outside of what's variable and what you commented that you're adding back?

There'll be some cost outs that'll be sustained. So, we won't exactly rebound – revenues could rebound, but not cost to 2020 level. If you look at the current quarter, SG&A, approaching $40 million exclusive of R&D and G&A. That $40 million is going to creep up, the cost-outs came back this quarter, as we said, but be fully back in fourth quarter. So, the current $40 million maybe is going to grow another million, million and a half going forward to its peak levels. So, you can think of it maybe capping out around there and sustaining itself at that point. Some of the cost measures will stay sustained. So, yeah, the $2 million increase you saw this quarter versus same quarter last year, we don't intend to go back up to that level. We can hopefully go up half of that, maybe a little bit more going forward. But, yeah, we will stay under the 2020 run rate going forward.

And with your commitment to debt reduction, are you still targeting 3 times or less leverage by the end of 2022? Or given the solid first half results, do you think that could be accelerated?

By the end of 2022, certainly, we'd be at a 3.0. Hopefully, sooner than then the end of the year. So, yeah, we're going to definitely keep our focus on reducing debt. So, yeah, that target is absolutely still our goal. Yep.

Correct me if I'm wrong, but I think there was some commentary in the press release that – and you may have mentioned this earlier, but by the end of 2021, you'll be on a run rate of 2019. Is that a top line run rate? Or is that a margin run rate, just want to be clear on that.

We were referring to the revenue run rate. So, the exit revenue run rate in fourth quarter of 2019. Coincidentally, it's the same revenue run rate this quarter, is where we said we would end the year, exiting this year at how we exited 2019 at the revenue run rate level. Hopefully, margins and everything else holds up as well, if not being a little bit better. But we were referring to the revenue run rate exiting this year would be feeling very much like how we exited 2019.

So, to summarize or to characterize, you're going to be at a 2019 top line run rate, but meaningfully higher EBITDA and operating income type margins, correct?

You should be similar, yeah. But then, you'll have cost outs, weren't in 2019. Cost-outs have all covered here in 2021. So, yes, your overhead dynamics should be similar. Hopefully, a little more efficient this year than we were in 2019. Mix plays a part of that obviously on the gross margin side. Overheads will be controlled very well, but margins are relative to the mix at that time. So, that's a bit of a variable but should be very comparable. Hopefully, a little stronger, if we're lucky.

And then, the low to mid-teens percentage top line increase in 3Q 2021 versus the year-ago period, is that all driven by energy just given your comments that aerospace isn't really recovering yet.

I'd say it's not all driven by energy. Energy is still slightly the majority of revenues. And it's been a good portion of the growth so far in the first half of the year. We look for energy to continue to be strong in the second half – third quarter and second half. But also, as Dennis alluded to in his comments, aerospace, and with this emphasis on space, commercial is starting to edge back in. But it's a slow burn at this point. We anticipate commercial arrow really starting to tick up the middle of next year and beyond to much higher levels. But for the second half of this year, it's energy, it's space. There's other sectors which are doing well, too.

Then just on renewables and private space, as you've mentioned, emerging markets contributing very little currently to revenue and margin. Where do you see that headed over the next several years in terms of the percentage of your overall mix of business?

When we look out four to five years, we'd like to be below 50/50 on the oil and gas portion of our business. And that is not at all by saying we're reducing or letting our foot off the gas pedal in oil and gas. We believe there's a lot of room for growth there. But we want to start focusing on alternatives such as wind, alternatives such as infrastructure, and all these are things that we can do. Over the next year or so, it's going to be organic growth, and we'll follow that path. But eventually, we can get back to being more purposeful and looking at diversification in the third and fourth and fifth year out. Next couple of years, we're going to be probably still over 50%. But we see in five years to be below just by focusing on those things that are not oil and gas, while keeping oil and gas strongly in our portfolio.

Just lastly on the wind sensor and monitoring and detection products and services that you're working on. Offshore wind is gaining momentum. Like you said, there's federal support. Utilities are pursuing it, especially on the East Coast. I would imagine that that market would be a big opportunity for you given that these wind turbines are nearly 4 to 5 times higher in the air as the ones on land. And then just given the climate, there's got to be a lot more erosion and wear and tear. Any thoughts on that?

Brian, I'll let Jon answer it, but the one thing you want to think about is we're promoting a remote sensing capability. We're better both in the middle of the North Sea or how many miles off the coast of Jersey, wherever else they put these new places up. Because you want to remote capability, right? That is absolutely running into the kind of thinking we're doing, but I'll let Jon answer what we think we can do on wind.

As Dennis just said, our remote sensing capability works wherever a wind turbine is located. And so, the great thing is, if you're in the middle of the country in a wind farm in Texas or in Iowa, or especially if you're offshore, the thing is, is that access to these wind turbines is difficult and it doesn't happen very frequently. So, the great thing about our remote sensing capability is it's on all the time. So, you're not beholden to time intervals where you're inspecting whenever you can get to it on some kind of a rotational basis all the time the condition of your wind turbine blades or even your wind turbine hubs, for that matter, other parts of the wind turbine. So, offshore, the value proposition is even stronger, if you can imagine, because access is so difficult. And to your point, damage occurs on a more frequent basis. So, yes, that's a definite yes here to answer your question.

And our next question coming from the line of Mitchell Pinheiro with Sturdivant & Company.

I wanted to just step back a bit. It's been such a disruptive environment for the last 12 months. It's really hard for me to understand the moving parts from a longer-term growth basis. And the way you sort of report your revenue is not as helpful for me to sort of understand what's really driving everything. And I understand now this pent up demand in energy and I understand the aerospace part. As we look six months out, brand new year in 2022, can you talk about, like, the composition of revenue, not from a growth rate point of view? For instance, can you talk about maintenance and mechanical, is that all incremental business for us next year? Your online monitoring and your OneSuite? How do we build through a revenue growth rate next year that I can sort of understand in a normal environment. I'm not sure if I ask the question properly, but I don't really understand how it's going to build. Are we going to see – it's going to be alternative energy markets in monitoring, it's going to be the big incremental boost next year, or can you talk a little bit about some of the tangible things that we'll see next year in terms of end markets and initiatives?

Mitch, let me throw it out to Jon. But before I do, a couple of quick comments here. The segments that you're saying, we're looking at different ways of maybe representing our segments might maybe make it easier for folks going forward. But one of the things I'd like to say is, because of COVID, owners and our customers in aerospace and in oil and gas, all segments are going to be looking for vendors that are more reliable, that are strong, that came out of this. You don't want to give a five-year contract to a vendor who may or may not be able to either be there or be handicapped in their funding for growth and technology. And when we talk about these crossover services, all we're doing is really talking about – every project we work on has a lot of preparation before and after to prepare it and put it back after our inspections. And all these steps can be time consuming and very, very dysfunctional for our customers. And the more we take on some of these simple steps, the more we can control the cost. So, total cost containment, someone who's using technology and/or crossover services to get the job done more efficiently is going to be a better partner for them than having 12 different people trying to run the hourly cost canvas that we see so many times in the T&M market. I'll throw it to Jon for some of the longer term things that he sees. But we really see all of our segments growing because of COVID recovery and because of the things that we're doing. We're not sitting and waiting on any one thing.

That's a perfect setup. Mitch, it's a great question. And it's one we ask ourselves all the time. Is Dennis just indicated, the thing is, to an owner, sometimes a purchasing department can really start thinking along the lines of, if I just get the lowest rates, I've done my job and I've reduced costs for my employer. And of course, that's partly true. But the thing is, that we're emphasizing, that Dennis keyed on is this convergence of services, this convergence of different disciplines that we bring to bear, be it multi certified technicians, be it accessing inspection or mechanical service points in a different way, not just on ground and not just be a scaffolding, for instance, it's with a rope access personnel, it's with the convergence of mechanical services and group access to create greater value to customers in ways that they haven't been able to realize before, it's remote monitoring in the renewable sector where we're essentially displacing or replacing other forms that are not as effective at sort of barely doing the job. And we can do it for a very compelling business proposition, a business model that gives them a great return on any investment they make with us. It's in the convergence of mechanical, with inspection, for aerospace for both commercial and for space, which we do today, and we're doing increasing amounts as we're alluding to. And essentially, again, by that crossover of combining disciplines, combining different activities that the owner needs on their parts and doing it under one roof and doing it in an innovative way to reduce cycles, to reduce time, to reduce cost, and to produce recovery rates, to reduce scrap rates for them in ways that they just don't have other alternatives to get the same kinds of results that we do. So, I sympathize because it's hard to model that, what we're saying. And it's up to us, I think, over time to increasingly provide more visibility into those kinds of activities. And as they mature, and as they really start to grow even more, as Dennis said, we're going to increasingly try to do that.

How do you know whether you're capturing your fair share of a customer's overall needs? Obviously, you just can't sit back and hope that they come to you. You're going out and selling them. Is there a growth rate among these services that are growing faster than the others?

Absolutely.

Are we seeing growth in the digital solution, in the tablets? Is there growth rates we can you can talk about, so you can help us understand how to build the revenue model. That's also part of my question is, it's hard to see – I understand turnarounds and length of turnarounds and things like that, but it's hard to see clearly how the revenue builds next year. I'm sure it will, but I just need a little help in – whether we can talk about contracts, new contracts, wins and things like that, is there visibility that you have? Or is it literally just one sales call after another sales call and hope they build higher revenue?

It's a little bit of both, to be honest. In terms of how we measure, how we're doing with the customer, we're working with them day in and day out. As you can imagine, we've got technicians working with customers at their sites, at our sites, et cetera. We're working with the operational folks at our customers and understand how we're performing. We regularly grade ourselves with key performance indicators that were reporting out to our customers and getting their feedback all the time. So, that's how we're gauging that and that's how we're kind of measuring how we're doing with the customers to answer that part of the question. In terms of the growth and where it comes from, absolutely. Some of the areas that we've already called out in our prepared remarks and in some of these Q&A questions, we're talking about sort of the areas of emphasis. Dennis mentioned many of them in terms of the digital aspects, that if we were to show you the adoption chart right now of MISTRAS Digital tablets, that looks, as you would hope, like a great hockey stick going up into the right. The base was relatively small where we started from, of course, but where it is right now, where it goes by the end of the year, and importantly, where it goes next year, we're really excited about. And that's why we're talking about these in our comments. As Dennis said, we're not quite ready on a resegmentation basis as we're exploring to share that data as we're going through that analysis. But we're really emphasizing these parts of the market. The renewable sector and the monitoring and so forth, space and commercial aerospace, in addition to oil and gas, these are all levers that we're – my team is actively pulling to great effect right now. So, we're really excited about it.

And without getting into the resegmentation later this year, Mitch, to make it easy for you guys, we've already been internally working some of the data metrics. So, we have that running and we'll start bringing that out later in the year just to show you where we were, like the adoption of the tablets and all the MISTRAS Digital and OneSuite and all that. So, we are going to be doing that. The other point that we do do, when you're asking how we do the selling, we actually sell to the customers by showing them our key performance indicators, which shows them our productivity, our total cost and savings, obviously, our safety and things like that are always in there first. But we are always showing them what we're doing for them. And on the savings, we're using their metrics of cost per whatever it is they're trying to measure and showing them how our time on tools were improving that and all these things. Time on tools can be a huge waste of time for a refiner or any type of oil and gas customer, power out there in the field where they have these turnarounds. And there's just so many people just stepping over each other trying to get the job done. So, anything that we can do to improve that – MISTRAS Digital and all these things are huge improvements in there. We're absolutely going to be running metrics to show them those savings. And that's one of the ways we're going to be showing them how we're growing. What we've got to do for you is show you guys measurements to understand how that translates to revenue for us.

I'm showing no further questions. At this time. I would now like to turn the conference call back over to Mr. Bertolotti for any closing remarks.

All right. Thank you. I'd like to thank everyone for your interest today in MISTRAS and for joining our call. Please have a safe and a productive day and we look forward to updating you next time. Thanks, Olivia.

Thanks. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.