Good day everyone, my name is Abigail and I will be your conference operator today. At this time I would like to welcome you to Mistras Group, Inc., Q1 2025 Earnings Call. [Operator Instructions]. At this time I would like to turn the call over to Thomas Tobolski, Treasurer.

Good morning, everyone and welcome to Mistras Group's first quarter 2025 earnings conference call. I'm joined today by Natalia Shuman, President and Chief Executive Officer, and Ed Prajzner, Senior Executive Vice President and Chief Financial Officer. Before we start, I want to remind everyone that remarks made during this conference call as well as supplemental information provided on our website contain certain forward-looking statements that involve risks and uncertainties as described in Mistras' SEC filings. The company's actual 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 non-GAAP financial measures that we believe are useful to investors evaluating the company's performance but that were not prepared in accordance with U.S. GAAP. Reconciliation of these non-U.S. GAAP financial measures to the most directly comparable U.S. GAAP financial measures can be found in the tables contained in yesterday's press release and the company's related current report on Form 8-K. These results are available on the company's website in the investors section and on the SEC's website. I will now turn the call over to Natalia Shuman.

Thank you. Good morning, everyone. Thank you for joining us today. It is my pleasure to be providing you with an update on our progress. Despite the larger than anticipated year-over-year decline in revenue driven by overall market uncertainty, we were nevertheless able to rapidly calibrate costs and expenses down during the first quarter to the revenue level in order to preserve our bottom-line operational matrix. Having said that, with our continued focus on cost and expense management, including a reduction in our administrative support functional costs, and coupled with anticipated growth across all primary end markets, we are confident that these drivers will provide an improvement in key profitability measures over the remainder of the year. As shown on Slide three, during first quarter as a CEO of Mistras, I have been focused on three key initiatives for our business, which are, first, leadership talent evaluation, second, recalibration of our cost base to the current revenue levels and market conditions, and third, developing growth strategies across all businesses and service delivery optimization. On the talent evaluation initiative, I'm very pleased to have onboarded various high-caliber talent to our organization, including two senior executives focused on growth within our data solutions, a new leader for our aerospace and defense division, and new heads of our marketing, safety and compliance, and IT functions. Each of these individuals have proven track records of success in their careers and bring strong industry expertise and critical thought leadership to continuously improve and enhance our organization. These individuals are quickly getting up to speed. These positions, plus several strategic hires to our operations team, have the entire leadership team excited for the current and long-term future of the company. On the service delivery model optimization initiative, we are continuing to review all operational aspects of…

Thank you, Natalia, and good morning, everyone. As we noted on our Q4 earnings call, as Natalia mentioned earlier, the spring turnaround season in 2024 was robust and the fall turnaround season in '24 was relatively weaker. We stated that we expect the inverse trend in 2025 with a weaker spring and more robust fall turnaround season, and this trend materialized in our first quarter results. This is reflected on Slide eight. Additionally, our first quarter '24 results benefited from low double-digit growth rates in our two largest end markets, that being oil and gas and aerospace and defense, which provides for a challenging prior year quarter to compare with the current period. These trends, coupled with project delays and overall market uncertainty, caused first quarter revenue to lag our expectations. We have continued with our disciplined approach and commitment to only take on contracts that align with our profitability targets. Our international segment revenue was up for the first quarter, nearly 4% organic growth in local currency, which was offset by adverse FX translation. As noted in our press release and as shown on Slide nine, our results reflect certain overhead and personnel expenses, which have been reclassified in our consolidated statement of operations from SG&A to cost of revenue, as we determined this reclassification would be preferable as it provides greater transparency regarding the true cost of the company's revenue and aligns with how our business is managed. These overhead and personnel costs, which were determined to be directly related to the company's delivery of services, are generally variable to revenue being recognized and results in gross profit that fully encompasses all costs necessary to generate such revenue. The reclassification recorded within our financials was $6 million and $4.9 million for the three months ended March 31 and…

Thank you, Ed. I have been intently focused on developing our five-year group strategic plan and roadmap along our senior leadership team and board of directors. This roadmap is still in progress but is expected to provide a meaningful path to build upon for continued profitable growth for the company. We are also working closely with our customers and focus on bringing our skilled workforce of technicians and advanced technologists to continue to create value-added solutions wherein we can expect higher margins where there are ROI benefits generated for our customers. As a result of this assessment and strategic planning, I am very optimistic about the future of the company and our plan for growing our business across our key end markets and geographies. Our currently addressable market of approximately $25 billion is a large and highly fragmented market that rewards innovative companies who can effectively and expeditiously help their customers keep their assets safe, compliant, and efficiently operating. For 40 years, Mistras has been a key industry leader in non-destructive testing and data analytics that solve these increasingly complex challenges. As we look forward with our long-term strategy, we are striving to become a credible provider in the larger TIC market, and we are committed and focused on creating value for our customers by combining our software, services, and products to provide our customers with the knowledge and insight to operate their critical assets. We will not provide full year guidance for Fiscal 2025 due to unprecedented market uncertainty, and while we are still reviewing our entire portfolio of businesses, we are also assessing the impact of recently enacted tariffs on our business and results for Fiscal 2025. Having said that, as a result of our ongoing cost calibration discipline, we expect our 2025 adjusted EBITDA achievement to at least meet or exceed the adjusted EBITDA level achieved in 2024. I am very pleased to be leading Mistras into the future, and I am extremely encouraged by the energy and enthusiasm of my nearly 5,000 dedicated colleagues who believe in our vision and are working tirelessly every day helping us achieve our goals by delivering on our mission for our customers. While we have made significant progress, we recognize that there is still much more to be done. Thank you for being part of this journey. We truly appreciate your continued support. And at this time, I would like to ask the operator to open the call for your questions.

We will now begin the Q&A. [Operator Instructions]. Your first question comes from the line of John Franzreb of Sidoti & Company.

I'm kind of curious. Today versus three months ago, can you talk a little bit about the operating environment and what's changed either positively or negatively that wasn't expected going in?

Sure. Sure. I can address this question. So, obviously, what we've seen as we're working with customers, as we are discussing the customer's situation with the tariffs, and we see unprecedented uncertainty, right? So, the project's being delayed. The customers are still evaluating their impact of tariffs on their business. And that's what we see is different from what has been in three months ago. So, the operating environment is quite challenging at this time. And again, we're just using this time wisely, proactively, talking to the customers proactively, working with them, and figuring out the ways to help them.

So, Natalia, are you actually seeing jobs being pushed to the right meaningfully? And I guess, I'm kind of curious about data analytics. We're seeing any kind of projects being stalled or pushed into later in the year.

Actually, data analytics, specifically PCMS segment in our data solution did quite well. As I mentioned in our prepared remarks, they grew the business 6% in this quarter. So, what we've seen is actually more interest from our customers as they very intently focused on the savings and budgetary reductions. There's more interest in our platform that provides more analytics for them to gain that insight to manage their businesses better. So, we are very optimistic, John, about our performance when it comes to data, especially the PCMS platform.

Okay. I just wanted to make sure nothing's been pushed to the right in general. I guess one other question, I'll get back into queue. Can you talk a little bit about your pricing initiatives? It sounds like in the prepared remarks that you're going back to customers and trying to get value for your offerings and what you do. How are those discussions working out right now? Can you kind of give us any kind of background?

Yes. Thank you, John. The commercial discipline that we have instituted a while ago still remains very much of a focus area for the company. We are reviewing the economics behind our larger customer contracts and we're determining what levers we can pull in addition to ways to provide more services. Basically, this includes working together with our customers to provide fair and adequate ROI for the services that we provide. So, that's on pricing. We do see some price pressure at the moment as, again, there's some pressure from the macroeconomic situation. So, we're working again with the customers on that, but we believe that this commercial discipline that we have continues to serve us well.

Our next question will come from Mitch Pinheiro with Sturdivant & Co.

So, I'm curious specifically where you see tariffs affecting the business or your customers' decisions? I mean, everything's on hold and what's on hold? What kind of projects do you see being delayed?

Thank you, Mitch. Given that our business provides essential services to our customers, that what we see is direct impact to Mistras on tariffs is not very significant. But rather, the impact is coming from our customers, right? And we're experiencing that impact from tariffs, supply chain disruption, economic policies, those factors causing our customers to pause or delay their spending. And based upon our discussions with the customers, there's still robust demand for our services, but the current economic conditions are hard to predict with our customers to really convert that demand into the actual projects. So, that's why we see that softer top line in Q1.

So, is this mostly energy market related? I mean, and I'm just sort of curious, I mean, global demand looks pretty good. I mean, there's some uncertainty, but I don't really see a lot of things affected by tariffs that probably will end up being for naught. And it makes, it just doesn't make sense that, to me, that energy markets would be affected by tariffs other than demand here or there for global oil output or something. It's just a little.

Yes, that's right, Mitch. And that's what we see, right? That this sort of overall demand is unchanged. So, it is temporarily paused as our customers collaborating on the new environment, right? In fact, we're thinking that tariffs in the long run will be beneficial to us, right? Because as the advanced manufacturing moves to the U.S., we believe that there will be a higher demand for our services overall. So, we are quite optimistic about the long-term prospects. But again, right now, it's temporarily paused when our customers are evaluating their own situations.

It's a short-run uncertainty, Mitch. Our assets are largely North American-based. They're not subjected to tariffs, but the consumables, the raw materials that run through those assets that our customers operate are potentially subjected to supply chain stops and starts. And energy is related. A crude oil can be cracked and refined into all different byproducts going into lots of different industries, not just as a fuel source. So, it does cause a lot of little ebb and flowing there as the supply chain thinks through demand, supply, and tariff impact. So, it does have this indirect effect, as Natalia said, not as much directly on us. Our in-lab testing might bring in a source outside of North America. They have to think through that as well. So, it's a temporary thing. They're thinking through how it affects them here and now, but longer term, could be a positive to us.

What about the price of oil being just below $60? How does that affect your outlook?

Well, obviously, we are depending on oil prices, and the impact of declining crude prices is primarily contained to our downstream business. And this business, our business model is predicated upon our customer spending behaviors, which obviously, in turn, is potentially impacted by future, oil prices and the duration of these prices changes, right? So, actually, when we look at the customers, their models are built to flex up and down with the future oil prices. So, that's what we see. We certainly have, we see right now that the prices are more of a lower end of normal prices, right? So, where it's beneficial for us. So, and again, that's the impact to our downstream business.

Okay. Yes, and then, the other thing that really caught my eye is that midstream, you know, was weak again. And I kind of thought midstream was going to be, you know, more of a steadier revenue picture. Can you talk a little bit about what's happening in the midstream business?

Yes. Our midstream business, we had some reduction in revenue. This is, again, mostly because there was some budget restrictions. And although it's regulatory-driven, most of our business in midstream is regulatory-driven. So, we believe that we will catch up on that demand later in a year. It's just the temporary pause and temporary delay.

Okay. And then, I think I heard you say that, like, as far as your guidance, you're not giving formal guidance, but you think that, was it your adjusted EBITDA to be similar at a minimum to last year? Did I hear that correctly?

That's right. That's right. We believe that we at least will meet or exceed our prior year EBITDA levels.

So, I mean, so, does that imply at all that revenue will be not too far off from last year? Or because your margins have improved nicely, but I don't know if they could withstand a big revenue shock. So, for AEBITDA to be flattish, to maybe up, would suggest that revenue is not going to be too far off from last year. Is that correct? Or is there other factors to consider?

No, Mitch. I think you're interpreting that correctly. We can't control that end market demand and our customers buying decisions and when. But, yes, we're definitely signaling a moderation there. However, with our discipline cost calibrations focus, we can control the bottom line much more, and we fully intend to do that. We have been doing that. We will continue to do that. So, that's why we have a lot more confidence in that EBITDA outlook for the full year.

Your next question will come from the line of Chris Sakai with Singular Research.

Can you talk about what's happening internationally? What growth is happening there? And do you foresee more growth there?

Yes, Chris. International was up about 4% organically. And FX, unfavorable FX translation to U.S. dollars does flatten that out. But international has a fairly diversified business model. They're a lot less oil and gas dependent than North America, much more diversified. They have some of the same macroeconomic challenges that we're dealing with in North America. But more diversified business model for them really probably reduces some of the variability going forward in that they had a really good year in '24 on the top line and bottom line. And we see them having, you know, they're a little less volatile. It's really a function of their much more diverse end markets than we would have in North America.

Okay. Great. Thanks for that. And looking at midstream and downstream, what sort of things are we to expect to see an uptick there on a macro level?

Well, on a macro level, demand, we predict that demand will not change that much. But again, because of the unknown situation currently and on a macro level, there is some insurgency. So but this is for oil and gas overall, whether it's downstream or mainstream upstream. So we're seeing that softness currently. But again, we believe that it will settle down as there's more clarity around the around the tariffs around the rules. Right.

Your next question will come from John Franzreb with Sidoti & Company.

Yes, I actually got a question about the how April kind of played out. Can you kind of talk to the context of how that played out compared to the March quarter? Is it down the same magnitude?

Right. In April, we still impacted a bit of the turnarounds. The number of turnarounds is not as robust, right, as that we saw in H1 of 2024. But we do see some improvement in demand. So it's definitely we again, we're very closely working with the customers to see how we can help and create that greater insight for them using our PCMS mobile application. So but we see there's a slight improvement in April already.

So should we be thinking about the magnitude of the weakness in the second quarter being similar to down in what you saw in the first quarter at roughly 10%? How should we contextualize the relative weakness on a year-over-year basis?

Good question, John. Q2 will be a much easier comparison. Q1 to Q1. Q1 last year was so strong and we did expect a drop off in the downtrend. We had communicated that. Q2 does not have that variability built in there. It's an easier comparison. So you'll see less variability and we have, you know, in Q2 versus Q2. So different model. Q1 was just extraordinarily high last year. That's what's causing much of that comparison to variance. We expected to be down, as we said in the prepared remarks. We were down a little more than we had thought in Q1. But Q2, you'll see a little less, actually a lot less volatility versus expectations. And again, comparing to last year, it's not as peaky.

Got it. And did I hear it properly that you expect that $6.5 million of revenue to be recovered in the balance of the year in the oil and gas sector? I don't think you said that it was downstream dependent, but I think it sounded like to me that you were going to get it through all three end markets.

That's correct, John. So what we expect is what I was talking about turnarounds specifically. So we noticed several times that turnarounds were softer. So we didn't have as many turnarounds as we had in 2024. However, if we look at the total backlog that we already have for turnarounds planned in H2, we believe that we at least exceeded overall total number and in dollars as well, exceed the level of '24 by $6.5 million.

At this time, I see no callers in the queue. So I will hand the call back to Ms. Shuman for her closing remarks.

Well, thank you very much again for being with us on this journey. And we're very confident in our prospects for the future. And again, thank you to all my team members and our my colleagues for their continuous efforts and hard work in the field. Thank you.

This ends today's conference call. You may disconnect at this time.