Good day, everyone. My name is Laila and I will be your conference operator today. At this time, I would like to welcome you to MISTRAS Group Q3 2025 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the call over to Thomas Tobolski, Senior Vice President of Finance and Treasurer.

Good morning, everyone, and welcome to MISTRAS Group's Third 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 and involve risks and uncertainties as described in MISTRAS' SEC filings. The major factors that can cause MISTRAS' 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 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 conference over to Natalia Shuman.

Thank you, Tommy. Good morning, everyone. Thank you for joining us today. It is my pleasure to report on our Q3 results and update you on the progress made to date on our strategic initiatives. Let's start with our third quarter results. I'm pleased to report that third quarter was highlighted by consolidated revenue growth of 7% versus the prior year. As we planned and communicated early in the year, our goal was to grow revenue in the second half of 2025 year-over-year and we achieved this in the third quarter. With the improved revenue, we generated an expanded bottom line result in the third quarter with net income of $13.1 million or earnings per diluted share of $0.41 and our record quarterly adjusted EBITDA of $30.2 million. With regards to the performance within our end market, we have delivered year-over-year revenue growth for Q3 in each of our 5 largest industry verticals. Energy market consisting of our oil & gas and power generation industries led the way growing 8.1%. Oil & gas was up $6.2 million or 6.2% and power generation was up $2.8 million representing 24.3% growth year-over-year. These results are attributable to strong turnaround activity, PCMS projects and market conditions in power generation driven by increased demand for rope access services within our renewable business. Aerospace & defense, our second largest market, was up 10.6% or $2.3 million due to a solid volume gain across the private space and defense industries and in addition to the successful price increase strategies. Our largest customers in this market continue to forecast future growth in their businesses over both the short and long term as evidenced by their robust backlogs. With its higher than company average margin profile, aerospace & defense is one of our top strategic priorities for both…

Thank you, Natalia. As shown on Slide 6, revenue for the third quarter was $195.5 million, a 7% increase which exceeded expectations. This growth in the quarter reflects increases across several key areas of our business, including our PCMS offering and the aerospace & defense, industrials and power generation end markets. In particular, our PCMS offering within our data solutions business grew by nearly 25% in the quarter representing the second consecutive quarter of achieving significant growth. This growth was attributed to several implementation projects of PCMS programs. As Natalia mentioned earlier, gross profit increased by $9.3 million in the third quarter with gross profit margin expanding by 300 basis points. This improvement was attributable to favorable business mix and operating efficiencies. On a 9-month basis, our gross profit margin has expanded 180 basis points year-over-year from 26.3% to 28.2%. As a result of our gross profit expansion and SG&A cost control, we generated $20.4 million of income from operations, which is an increase of $8.5 million or nearly 72% growth versus the prior year comparable period. We improved adjusted EBITDA to $30.2 million resulting in a 29.6% increase over the prior year quarter. This significant improvement reflects our proactive cost management, operational efficiency leverage and a shift towards higher margin business. Our adjusted EBITDA margin increased to 15.4% from 12.7% for the third quarter, an expansion of 270 basis points. As noted in our press release yesterday, our results reflect certain overhead and personnel expenses, which have been reclassified from SG&A to cost of revenue. This reclassification recorded within our financials was $5.7 million for the 3 months ended September 30, 2024. The impact of this reclassification for full year 2024 was approximately $20.9 million from SG&A to cost of revenue. This redistribution of overhead and personnel expenses has…

Thank you, Ed. I'll conclude by summarizing the market opportunity we see and preview why we believe MISTRAS is well positioned to create and capture more value. Demand for our services is continuously driven by mission-critical projects, aging assets and aging infrastructure across a diverse set of demanding and dynamic industries. That said, the MISTRAS of today is not operating at the full potential of our capabilities. We have historically operated as a company in silos and on a project-by-project basis. Historically, it was more common to be commissioned by a customer to provide a single nondestructive testing at a specific plant versus an entire program on a more strategic enterprise-wide basis. In fact it is the exception and not the rule that the customers of MISTRAS utilized our services in a holistic way. This represents significant opportunities for future growth. Our overall strategic priority in the near term is to change this paradigm and drive more strategic value to our customers through the synergy and scale of our capabilities. The time is right because the challenges that our customers face today require an enterprise level approach to risk mitigation and optimal return on their CapEx investment. We believe MISTRAS has the technical know-how, proven expertise, data analytics and advanced solutions portfolio to best serve as the new standard for 21st century testing and inspection industry. Our Vision 2030 strategic plan is built on the foundation that MISTRAS is significantly more valuable to our customers when we deliver the complete suite of services of our platform as an integrated solution. In the months and quarters ahead, we will be sharing more detail on the execution of our plan and how we are connecting with our customers. In the meanwhile, let me close with recapping the 3 priorities of our strategic…

[Operator Instructions] Your first question will come from Mitch Pinheiro with Sturdivant.

So a couple of things. First, I didn't see a breakdown of the oil & gas revenue by subcategory and I didn't know if that was an omission or if you planned not to have that in your releases going forward.

Yes, Mitch. I will explain. We did in fact remove that subcategory reporting. As I reported before, I have done a lot of analysis of how our customers buy and how we operate and basically what we've learned that many clients of ours straddle between those 2 or 3 subcategories. So reporting on those subcategories is not very accurate. But I can tell you right now because of the strong quarter especially attributed to the turnarounds, downstream was up about 14% where we also saw the LNG sector is very strong and midstream and upstream was low single-digit growth. So that kind of gives you an idea of where we are. But again, several of our customers are in between those subcategories so reporting doesn't make sense.

Okay. Maybe you should figure out a way to recategorize it because it's obviously the lion's share 2/3 of your business and it does have a fairly large impact when you have strong upstream, downstream to at least have some visibility there and so enough of that. Then the other question I have, and this is sort of less to do with the quarter and more to do with reporting, is as I look at your business it's hard to understand what field services, shop lab, I understand data analytics. It's hard to really understand and how to model that. So to look at your -- and then on top of that with all your subsegments; oil & gas, aerospace, industrials, power gen; it's a confusing way to present your story financially. And I was wondering if you're going to look at changing the way you present your financials to better reflect how you're looking at the business.

Yes. Good comments, Mitch. We can certainly follow up with you on that and see what would make sense, how you would like us to give a view better picture. So Ed, do you have any comments?

Yes. I mean, Mitch, it's a good question. We struggle with this as well the best ways to look at the business, but we try to give you as transparent a view as we can. We give you, meaning all investors, geography; we give the end markets being served. We're talking about our service types now between the field, the in-lab and the data. So we are trying to pull it apart so you can better understand it and we're trying to give you multiple views of it. But we will continue to call out the high, the low and give you a feel for what's growth rates, relative mix. It is all very important. Run and maintain versus called out is something we also talk about. That's another important way of looking at the business to get to the run rates. But all of that's important and we'd like to give you different ways to view the business to understand the drivers of the activity.

We report separately the in-lab services as well as the field services. Some of our labs still are doing both. So we are certainly now separating that so to give more transparency into the operations and the performance so that you will see some improvements there for sure as we're going forward in '26. And again our strategic plan is built around the specific industries and market verticals that we serve. So you will see more there for sure as we're progressing with our strat plan.

Okay. I mean like for instance so just taking a look at -- so you had oil & gas good performance there and I would have thought field services would have been up then. I see field services down 1%. So why would field services be down 1% when you had such a nice quarter in the oil & gas segment?

But if you see the other category in the same table, that's the labs that do both. Those offices that do the field inspection and the in-lab testing and that's where you see the increase, right? So substantial increase. And again to that point, as we go forward in '26, we will separate those and you will not see others any longer. So that will give you a much better idea of field services and in-lab and then data analytics as well.

And PCMS, Mitch, is another piece of that answer. PCMS is oil & gas focused. They're in half the refineries in North America, but they're not field services. They're clearly data. So that's another example there where that industry is up because of PCMS, but they're not field services. They're in a different category, i.e., the data solutions category.

Okay. And then staying on this, your aerospace & defense, very nice growth sort of accelerating out of like a slower first half and I see that shop laboratories was up 12%. I'm assuming the shop laboratories is mostly your aerospace & defense business.

That is correct. Yes, aerospace, defense and industrials. As you know, third largest end market is industrial. So most of our in-lab is testing for the industrials and aerospace & defense.

So what kind of capacity do you have? I mean so you've consolidated some of that, but do you have the capacity to grow at this type of rate for a couple of years or is there a bottleneck there that you have to solve or can you talk a little bit about how you can grow the aerospace & defense business within the labs?

Absolutely. Couple of things there. Yes, very proud of the team in lab. They've done a very good job. There was a volume increase as well as the price calibration. So we can see that certainly that customers are now much more willing to pay for the services and the value we provide to them. But to answer to your specific question on capacity, that is our strategic plan, right? So to expand further on the capacity, we are continuing to build out hub-and-spoke model where we have several large hubs in different parts of the country as well as Canada where we have the most capabilities and then we have smaller labs where we can take the orders and be closer to the customers. So we're expanding 2 things. We expanding capacity by building out those hubs as well as we are expanding capabilities where we're adding new services. We reported earlier in Q2 that we added welding accreditation. So we continue to add machining, repairs, rework, cleaning. So basically optimizing the supply chain for our customers. So you've seen our CapEx is a little bit up, that all goes into growth investments. So that's CapEx and we're advancing our UT capabilities, ultrasonic capabilities, in our labs. So that again will give us much better and bigger capacity to serve our clients because market is growing, right? Market is -- our customers are disclosing publicly they have backlog. We're continuously talking to our customers and they are expecting growth. They are cautiously optimistic especially in the commercial aerospace sector, subsector. They're cautiously optimistic because there is some tightness in their own supply chain. Nevertheless, it's a growing business for us and it's growing not only in the U.S., but also in Europe. And another thing, don't forget is defense. Defense growth is obviously expected whether it's in Europe or military spend or U.S. So it goes also well for us.

Some of these same projects, Mitch, are being funded jointly with the customer. They need us to grow. They need this capacity. They want us to expand. So they're actually jointly funding some of this CapEx to help expand the footprint to service them going forward to help them catch up on their backlogs that they have and we're very happy to support them and we will expand capacity to do that.

Okay. Just 1 more question and I'll get back in the queue. On the last call, you were talking about new construction projects related to data centers, AI, electrical infrastructure. Can you talk a little bit more about anything that's developed over the last 3 months?

Yes. So we announced that new project with Batchelor & Kimball. So that's a good win for us. Again, as I mentioned last time, it's right now in an intersection where technology can no longer advance without the energy and we've been very prominent in the energy sector. So we're basically taking the same our testing methods and inspection methods and apply it to new use cases. So in data centers, it's the same. We're doing exactly the same what we've been doing all these years. It's ultrasonic testing, it's thermal infrared imaging to detect the heat issues. So there's radiography, there's visual inspection and testing. So all of those services we provide for the data center. So it's more to come on that. It's a big sector for us. We're certainly already creating capabilities or having the separate teams that are working on data centers. I reported earlier that we have hired some sales executives that are continuously looking into this sector and developing the relationship with prospective customers, with new customers. So more to come on that. It's a good opportunity for us. We feel confident that it's a good market for us. Again, it's a part of our diversification strategy in our Vision 2030. It's part of our strategic plan.

Your next question will come from John Franzreb with Sidoti & Company. We'll move on to Joichi Sakai with Singular Company.

On the margin side, can you help me quantify how much of that margin improvement is coming from deliberate lab or business exit versus pure operational execution? And how much of that runway remains for further portfolio pruning?

Certainly, absolutely. Certainly, the larger part of the margin improvement is attributed to the favorable business mix so that led to the improved gross profit. And then obviously operational efficiencies and the closure of unprofitable labs contributed to the improved EBITDA margin overall. But majority of the improvement comes from that the revenue improvement, gross profit improvement mostly in oil & gas attributed to our turnaround, very good traditional seasonality impact there and then growth in all the other sectors or industries. But in terms of operational efficiencies, obviously, it played a role there and closing of unprofitable labs as well.

Okay. And I know you commented a little bit about the aerospace industry and the data analytics industry. Which end markets are you really showing the most forward visibility into 2026 and then the kind of acceleration in spend from your key customers?

So what we are really seeing where we see -- first of all, kind of all markets right now and that's contributed to our Q3 results as well are quite stable. And we see growth is in aerospace & defense, in particular defense where we see the increased opportunities there as well as in infrastructure. Data centers are in our infrastructure segment. So that's where we see that there will be potential opportunities and growth as well as in power generation as well because again it's now infrastructure and energy and energy demand is coming from again technology expansion and advancement and so on. So I would say those 3 sectors; aerospace & defense, infrastructure and power generation; we believe that we will see growth in 2026. Having said that, obviously a large percentage of our business mix is in oil & gas and so we're continuously working with our clients in that sector, in that market vertical to offer integrated solutions. So that first pillar or first priority of our strategic plan is to increase the wallet share with existing customers. And we believe with integrated solutions, we certainly can achieve that where we envision growth coming from our oil & gas customers using more than just field services inspections. But we're adding additional services such as PCMS, such as other robotics, rope access and so on. So we're quite confident about the about the market as we're looking for next year. But of course what I can tell you right now, we will start making growth investments in those sectors to get this ability to grow and capitalize on opportunities.

Got you. And that CapEx that you were mentioning that you'll have to make, that's dependent on the cash conversion that you will be able to accomplish by the end of this year. Is that correct or would that -- are we trying to model increase in debt levels?

That's right. So obviously cash generation is one of our priorities internally. This is something that we can control and that is something that absolutely will take priority as we're stepping in into the new year.

Okay. And just 1 more question. You mentioned that the pricing environment is quite stable. As you transform into a more integrated solutions provider, what's the competitive environment like and what is kind of your early win rates as you maybe -- I don't know how early that is as you present yourself as a more integrated solution? What's the competitive environment like and how are you gaining traction?

Thanks for this question. Yes, we're tracking obviously the competitors. It's a slightly different set of competitors as we're reaching out to the other markets or they're looking at the other services and adding services, right? But this is not new to MISTRAS. This is not new to the company. So although we had the bulk of the services, so to speak, in our portfolio as our foundation so we know that environment. We're just integrating the solutions and we believe that we will produce more value with integrated solutions. In terms of the early wins, yes, I can tell you it's one of our KPIs for our strategic plan is to measure the cross-selling and how we're tracking on cross-selling. About $3 million to $3.5 million this quarter already attributed to the cross-selling results or cross-selling efforts. So that, I can tell you, we will report as we're going forward. So how we're doing specifically on integrated solutions and what progress we're making in that regard.

For our next question, we'll return to John Franzreb with Sidoti & Company.

Congratulations on a good quarter. I'm actually curious about the quarter itself. Was there any revenue that was pulled forward from the fourth quarter into the third quarter?

No. That was all third quarter generated revenue.

Okay. And I'm also curious about the guide. It kind of suggests at least at the midpoint that there's more gross margin sensitivity than I was cognizant of or potentially SG&A goes up sequentially. Am I thinking about that properly or am I missing one of the puts and takes here?

You're talking about Q4. Is it correct, John?

Correct. Yes.

Yes. So the way we're modeling Q4 is that we certainly -- so we believe that we will be in line with our own expectations. We've already seen again good traditional seasonality for October. So our turnaround season was quite strong in October. We also know that again traditionally, Q4 is not as strong as Q3. So we're implying in our guidance some revenue growth versus prior year. We believe there will be a moderate growth in EBITDA. But we believe there's no surprises at this time that we can tell you about for Q4.

I'm sorry, do you want to say something?

No, nothing else to add there, John.

Okay. And I'm curious if you're starting to get orders for the upcoming spring season yet and if that's the case, can you give us some kind of qualitative thoughts on it?

Yes. So as we plan for '26 and now we're in the middle of the budgeting season as you can imagine. So we believe it will be a strong spring turnaround season. You might recall last year was quite different or this year rather was quite different. So spring was not as strong as the fall. So right now we see that we have won some of the turnaround awards and bids. So we anticipate a stronger turnaround season that was in 2025.

That's good to hear. Just an odd question I think. Do you have any impact in any of your business from the government shutdowns or is that a nonissue for you?

No, there is not an issue for us.

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

All right. Thank you, Laila, and thank you, everyone, for joining this call today and for your continued interest in MISTRAS. I look forward to providing you with an update on our business, Vision 2030 strategic plan and progress achieved towards our ongoing initiatives on our next call. Thank you.

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