Q3 2020 Mistras Group Inc Earnings Call

[music].

We also benefited from modest market share gains driven by the increasing value of our comprehensive service offering to.

Delivering to our customers.

The added ongoing sales success of our diversification efforts as we further leverage our investment in technology into adjacent markets.

Continuing the efficiency trend that began last quarter. We once again recorded a strong gross profit margin of 32% for the quarter up.

37% higher than a year ago.

This enabled us to further reduce that in the third quarter by over three and a half million dollars.

Per year to date, thus far in 2020, we have paid off nearly $19 million of debt.

That service remains of top allocation priority for our residual free cash flow.

All in all it was a strong quarter mark by steady progress.

Sequential revenue growth is due to improvement in our existing markets.

First supplying into emerging growing adjacent and complimentary markets.

And continued tight cost controls.

Looking out at the market landscape conditions are beginning to improve in the energy sector with signs of stabilization and the oil and gas markets.

Though it is running slower and using fewer hours than last year.

We constantly monitor our field technician head count and have seen improvements from a year on year decline.

Of 21% during the second quarter.

Current decrease of approximately only 5%.

Mark.

Our energy diversification efforts continue to be an emerging growth opportunity, particularly in wind energy.

Our beta test of sensors on wind turbine blade is progressing nicely.

Innovation to match market conditions at the same time, we are making steady progress leveraging our core strengths to penetrate new and growing markets.

And despite the dual challenges created by the pandemic and end market volatility we continue to generate strong positive cash flow, which we are using to reduce debt.

While we believe fourth quarter revenues could be relatively flat slightly down from the third quarter. We are extremely optimistic that we will see steady improvement.

Over the course of 2021 and.

We are committed to our strategy to use a tremendous flexibility of our organization to maintain if.

If macro our position in our primary markets.

While strategically investing in growth initiatives that will capitalize on coming shifts in market toward more comprehensive solutions pre.

Predictive analytics and better use of technology.

As you heard today, despite the cautious nature of the markets we are already.

Demonstrating tremendous value through mistrust digital supply chain consolidation, Iowa.

Ill tee sensor technology and Mark.

Century creates a floor underneath our market. Furthermore, we continue to gain market share as customers increasingly adopt our more comprehensive service offerings, including mechanical services.

Makes sense at the expense of other companies providing narrower solutions.

Consistent with the second quarter gross profit margin increased 190 basis points to 32%.

This was down only slightly sequentially from our second quarter gross profit margin, which was the highest quarterly gross profit margin level achieved over the past five years gross.

Gross profit margin improvement is once again attributable to productivity improvements and a favorable sales mix in.

In particular gross profit margin benefited from the relative increased sales mix of Onstream aerospace and Pms, all of which offer higher than average profitability.

Apartment of maintaining a minimum liquidity of $20 million with liquidity being defined as kashi cash equivalents and unused credit on a revolving credit agreement.

And number two weeks see the minimum even a requirement for the six months ended September 30th 2000 23.7 billion.

Although the maximum funded that leverage ratio is currently suspended until the fourth quarter of 2020, when it resumes at a level of five and a quarter at September 30, we were in pro forma compliance on a trail only 12 month basis, and we expect to be in full compliance with all that covenants at December 32020.

We generated $41.8 million cash from operations in the first nine months of 2020 compared with $45 million in a year ago period. This is despite the significant decline in revenue year over year.

Even more impressive free cash flow was 38 million in the first nine months of 2020, compared with 22.5 billion comparable period last year, an increase 37%.

Free cash flow benefited from a $7 million reduction in capital expenditures year to date.

In line with our commitment to limit spending we do not expect any ketchup capex spending in the fourth quarter of 2020.

Our net debt.

Defined as total that less Kashi cash equivalents at September 30th 2020 was $214 4 million.

Compared to 239.7 million at December 31, 2019 at.

<unk>, a decrease of over $25 million or just over 10%.

To reduce script reduce gross debt by $18 2 million over the first nine months of 2022, $236 5 million September 30th 2020 from $254 $7 million at the end of last year.

Again get redemption remains the top allocation priority for a residual free cash flow.

We remain confident in our sustainable business model and remain firmly committed to carrying out our strategy today and a long term.

And with that I will now turn the call back over to guess.

Thank you.

He quickly conclude today's prepared remarks with our outlook remains.

It remains difficult to forecast with any degree of certainty at this time.

<unk> the ongoing COVID-19 pandemic continues to significantly impact, our two largest markets oil and gas and aerospace for.

For instance, after recovering sequentially in the third quarter, the oil and gas industry appears to be signaling a flattening for the fourth quarter and crude futures have fallen <unk>.

Recently from earlier highs in a year.

As I mentioned earlier aerospace is held strong, particularly in North America for the first nine months of 2020.

But it too is now facing headwinds, particularly in Europe.

As such it is likely that a fourth quarter consolidated revenue will be relatively flat to slightly down from the third quarter adjusted EBITDA will be lower than the third quarter, while operating and free cash flow are expected to be higher than the third quarter.

This outlook is contingent on continuing macroeconomic stability, including continuing stabilization and crude oil market and no implementation of new or increased stay in place mandate, resulting from an increase Friday, COVID-19, which could impact our ability to work as a critical service provider.

More importantly, we believe that as we look toward 2021 market conditions will improve particularly in the oil and gas sector.

These are indeed challenging times, but mistress continues to play offense.

Growing share investing in new technology, and providing the innovation that will drive our industry forward.

Our goal is to bring value to our customers their challenges will evolve as safety and compliance standards continue to arrive and for new an emergency emerging industries, such as alternative energy is a brand new world.

Where they are relying on the experience and skills of trusted advisers such as mistrust.

As always mistrusted goal is to remain at the forefront of the industry and to drive value for our shareholders.

Before taking your questions.

I would like to thank all the mistrust employees once again for your outstanding customer service dedication and attention to safety, which you have all shown and he's extremely trying times.

Carrying connects works Sarah Please open up the phone lines.

Ladies and gentlemen, if we have a question at this time the fastest I'm gonna number one.

<unk> is that question has been answered are you reached your name address on the Kia. These past the panty again, ladies and gentlemen, if you have question at this time <unk> I've been a number one P I got that <unk>.

Yeah first question comes from the line of C. N is Catherine Keybanc capital markets your line or something.

I got Zapped Congress, Sean Thanks for taking our questions.

Morning first.

Can you provide a little bit more color on the expansion into the alternative energy and wind turbines markets.

And then also the space and defense markets within aerospace like how how you position to grow in these markets how fragmented. The competition is with the services you provide there and maybe whether that a slight mixed up as a creative margins.

<unk>.

Sure I'll, let John was closest on that one.

Yeah. Thank asked several things there, but high it's John walk.

Yeah, we're very excited about.

The alternative energy particular wind turbines.

We've got.

Some important testicle in right now where we've installed R.

Online monitoring gear.

Wind turbine blades.

A number of turbines with owners that.

With names that everybody will recognize.

Those procedures those tests are going extremely well the trials are receiving very favorable feedback.

We're looking to rollout in a more Broadway.

In 2021, those services once we've got commercial acceptance of our product or service offerings.

It is this <unk>, how how did the margin profile compared to like your legacy typical stuff.

Better than average and typically typically this is because when we perform online monitoring the revenues a recurring.

The the margin margin profiles very favorable.

Got it and I'd like to add.

I would say I like that if I could you know when we talk about this for wind E.

Things that we're gonna be doing is a we're gonna be data streaming and monitoring the customers turbans or hubs or wherever the the issues for the different types of equipment. So it will be giving them online data and telling them right away, which ones are in need of service. So you go away from a time base.

Type of monitoring to one that is actually based on real time data.

It would also be servicing equipment to make sure that the sensors in the hardware is not what's causing the the noise or the.

Uhm, the duplex signals that we'd be getting we'd make sure that it's something to do with the piece itself. We would have folks that I can access it for a minute height and get to it without having to bring up scaffolding that could either service the hardware or data light repairs, if that's when damage or lighting or anything like that we would we would be able to do that and we'll be able to.

Get it back online so the idea of having one company that can be due on all that there's more of this consolidation and I know earlier, you asked about space and.

And it's the same kind of thing you know you've got right now our aerospace it's comprised of.

Commercial and some military well, we all know where that's at it till that is definitely down, but we're augmenting it with with a space. So we're helping out various names doing things like not only go into testing, but like we talked about where we might be doing some of the other mechanical services because.

When you started talking about aerospace in space.

Customers.

Their list is a much more complicated more nuanced ways to make sure that somebody can do work for them and it creates a very difficult process to send it all across the country to go from stuff the stuff as we can consolidate not only did you say the time and the queuing up from the location location.

But just the time on the road and and and the ability to good parts through so much quicker is creating a minutes value and and to your earlier question the space and the wind have.

The same kind of if not better margins that we would see an shopper or those types of environments.

Thanks, and if I can just ask one more with with all the talk about tablet sensors in greater use of industrial I O T for monitoring predictive maintenance.

Have you got seen much of an impact revenues and margin. This year from these offerings and if so how material has it been and then and then how much of a revenue a margin boots could receive resulting from these offerings in the next couple of years.

Sure I'll take that person on giant, Connecticut. So in the beginning right now what we're trying to do is is come up with a.

Value for our customers and this we're not pushing as hard on the revenue. So we're not really worried as much about the revenue. Although we are more than recovering our R&D investment on the revenues were getting from it right now it's more of making sure that customers in trying times like this call and just start looking at every binder and trying to do.

Unless like headcount or or hourly rate or fixed rate reduction just because if we can help. These differencing services. We believe that gets a stickier and a lot of places and as a protector of margins.

The margins as we get this going and growing a sales and getting more of the online and all that which we believe covid is slowing up it is definitely out there those would be those would be very good margins for that so we're not yeah predicting exactly how much the increase will be but we believe not so much he won't see it to be fair in 2020, but in mid and.

Later 2021 is when we expect to see those things really start to to add to our stickiness and the revenue and margins.

Yeah, it's just to start onto Dennis Dennis is comment that we're very excited also about the value being provided to customers and it's been a set you know the pandemic has slowed the progress but still the feedback we're getting is really remarkable from customers in terms of the <unk> the enhanced visibility being provided by Mister us digital.

And not only for our traditional service areas, but in related mechanical service areas.

Mistrust digital is also enabling higher visibility and productivity and real dollar savings Ah day after day with customers. So we're excited about this is not only for the you know pick up that we may go up from the digital.

No charges themselves, which will be relatively modest, but the market share gains, but we can expect in the stickiness with customers that are starting to come as well.

Thank you I'll hop back in the queue.

Thanks.

Your next question comes from the line of paint Sullivan from Mexican correct.

Question.

Thank you good morning.

And the <unk> cause the gross profit margin and a quarter or looking out I I've heard other companies talk about wage subsidies from Canada. In other countries is that do you have any wage subsidies in three two and might that be an option to get reimbursed for some wages and the coming quarters with other shut down.

Yeah. That's a good question Tate, it's Donald so yeah. There's this the C E. W. S from Canada, and all the different subsidies I mean, we definitely had those but you gotta remember when you were talking about European and Canadian.

Process to deal with Covid, what they said is instead of like you do in America, where you put them to the unemployment on unemployment <unk> unemployed folks have to find their their local governments or what have you to get reimbursed.

The European in the Canadian said keep them at your site. We we know where they are will reimburse you right. So we are getting some subsidies for that and and they got a little bit modified in Q3 forgive me modify more than two four although I will say, there's some European countries that are talking about Ah covid modifications all the way through.

2022, I believe so they were looking at some longterm ones, but they're they're reduced right. You know, it's it's we're getting three quarters of 50% of the people that you bring on and where do these complicated formulas, but there there is some reduction out there, but the thing I would say about that is we.

We had a we had the ability to keep some folks on because we were getting these direct subsidies.

If we didn't have to work to keep in mind, and we weren't getting a subsidy.

We wouldn't accept them on right. So really what you're getting is almost like pushed through dollars because if you pay.

A dollar to unemployed that you're keeping in mind, because there's there's no work, but the government reimburses you a dollar it's not so much a gross margin <unk>.

<unk> is it is it it's keeping your plant right, you're not really making any money on it you're just getting reimbursed in most cases, you're getting reimbursed for less than a dollar.

It's always a certain percentage up to somewhere at Max's out, but it's usually not 100%. So even this quarter, we were getting some of that in Europe, and France, and Germany, and places like that and you're all changing as well as as Canada.

Sure, it's gonna be a little bit left in the fourth quarter, but they're much more modest that when you say and Q2 and Q3 at any one country.

Okay. Thank you. Thank you Dennis and following up the wind turbine comments too I heard another company mentioned some fall to winter binds when they were installing the spread but do you and you can talk about going into adjacent markets and the sensor opportunity sounds sounds sounds like a great great opportunity in the winter months, but do you do other work currently inspecting the blades, but.

Or they go on <unk> or anything else in that market. So we've done a little bit on the manufacturing side, but to be for most of ours has been when they're existing car with the sensors. We may end up looking at deals where we can put the sensors on as it being manufactured and then have data real time kind of like you get your card you got theory on or whatever else is.

From day one.

But we we do a little bit on the manufacturing side, but for the most part that's contained inside the manufacturers and most of our work is once the turban is up.

Either with the owner.

The the wind turbine themselves or the manufacturer, we're actually talking to both there's there's large amount of turbines out there that are owned by various companies that are looking at what their warranty will look like going forward and it's kind of getting the end of their warranty period for them as well as as manufacturers are looking at their.

Are there existing fleet, but you know like I say, putting this into the new fleet as it comes out.

Yeah, John I'll, just piggyback on my dentist said, you know part of the value proposition two two owners winter months is the idea that they can actually avoid some of the cost that they're spending on inspections today like continuously monitoring the status of the turbine blades.

So if there's any impact damage things like lightning strikes or or you know other impacts to the players they know instantly because of our technology.

And as well, we can determine other defects happening too, whereas inspections are done is gonna sit on time intervals, where lots of damage.

Sometimes does occur unfortunately, causing millions of dollars of damage for owners that is undetected until some kind of catastrophic event occurs. So the idea is that with real time monitoring you can avoid not only inspection costs, but you can prevent potentially catastrophic damages.

Okay. Thank you. Thank you all.

Thanks. Thanks.

Your next question comes from the line for me, it's been had off I'm starting to think you may ask that question.

Hey, good morning.

<unk>.

Hey, I've been juggling three conference calls here. This morning, So I apologize just anything touched on but just listening to the winterberry conversation here I. I mean are you displacing anybody is this like a whole new category or.

Why all of a sudden or winter mine.

You know monitoring demand.

Does that happen.

So that's that's a good question and the way I see it Mitch is.

The wind turbine market has been growing and is becoming a larger and larger segment of the of the tire service Greg right.

And any things initially when they're up new and shiny, it's like having your brand new bolt right to harbor glass looks good and clean and then after a while you got it you got a third scraping barnacles and quite often right.

Same thing with the turbans, they're gonna age out like anything else and and let's face. It when you look at a wind turbine main things you see as the the top of it the tower and the three big Blake.

And those blades are inherently where most of the issues are so as these.

Big pieces of equipment age like everything else things have to be looked at and and and the turbine blades and the the attachment and things like that are proven to be the most challenging part of the entire system for the owners and the manufacturers as as the equipment ages out. So I think it's just a matter of just.

There's a whole market starting to get a little bit older and it's starting to get to the point, where how do you look at that and what's the the best way I mean, it used to be just send people out there with with binoculars or sculpts or the fly around a drawn but that means you're looking at three blades times Ah retirement trying to figure out where to damages.

Is if you had sensors that were telling me hey, something's going on here, whether it's a sensor going bad our system going bad or actual damage certain occur.

You'll know it like John said, you'll have you'll have some kind of indication of where to go to and you can chase things that are.

That are active and ongoing not just the calendar spelling you it's time to do it again.

And then.

And just one other just for context I mean.

I don't know if there's a number you can put around this but like how big is the wind turbine or alternative energy monitoring how big of a market is that.

You know when you're in the United States.

So that's a good question to your earlier question, which I couldn't really answer is who are we displacing I don't think we're displacing anybody cause I think this is a new.

Emerging part of the market. So I'm trying to put a contacts around how big that is I mean, I'm I'm not I can give you a guess, but it would be just a dentist type guys without real lot effects, but I I believe you know we were talking to customers, who have thousands hundreds and sometimes thousands and tens of thousands of units that they they have a project to have in the next.

Three to five years.

And those blades and and that part of the rotating set them is always gonna be the key part of looking at it more and more attention being put onto the powers for.

Bad applications of of coatings, and things like that and some failings here and there. So I mean, it's it's a new market, that's growing and they're getting to have bigger and bigger turbans and you're getting a bigger and bigger issues with these turbines because you're you're you've got more torque and it just.

Larger to size you know creates more issue. So I think it's gonna be something that as the market <unk>.

Moves from traditional oil and gas too.

And alternatives, you're gonna start to see more and more attention overall being paid to something like some and the owners don't really have an online.

Offering right now so they're all trying to work or what's the best way for us to do real time monitoring versus.

You know running around these these farms and trying to figure out, which one looks bad with a set of binoculars.

Another question.

I just need another question, which you mentioned something I I I I just caught the very beginning or end of it. So that <unk> you see robust bidding opportunities I think he said and pipelines but.

You know.

Are the big what's the catalyst for the increase in in in R. O T C and bit what is it.

New pipelines <unk>, you're getting on is a dissatisfaction with exist.

Existing you know Uhm service providers <unk> why are we see you know robust pipeline.

So that's a good question I think for us and we're talking about a bidding activity. There is some new in that mix, but it's probably more of the existing infrastructure were speaking to.

And I think it's it's less of a thing or something new coming into market moral that we are encouraged to see that the capital spend for 2021 is still has an appetite out there there's no pulling back when somebody's markets pipeline and some of the gas and oil we're getting bids for 2021.

We would normally expect.

It kind of got quiet there for awhile and second early third quarter right. So what we're really doing is telling you. There is a return to normalcy and somebody's markets. More then it's something different I don't think it's a spring up from slow at quarter, two or three it's just we're seeing getting back to what you would normally <unk>.

<unk> right. So that's the first leading indicators of 2020 should be getting back to some type of normalcy in different markets a different time, but it it looks like somebody's markets are starting to get back to a pre covid stance.

Just a couple of just a couple of quick ones what.

Can you talk about ebay talked about this I apologize, but he.

Sort of the status of your your technicians Labor Force I mean, where like from an employment point of view, where are you relatives to a year ago.

And what type of what type of capacity or is your sales for sort of operating at right now is that true.

Sure something so we track that we tracked at weekly in two different main ways one is the.

[noise] since March 15th we tracked pokes that were on furlough because of customer demands right from Covid.

And in the early days of Covid in late March and early April we had up to 21% of our North American market.

Some type of furlough, either most of their hours taken away or all of their hours taken away. We are now down below somewhere around 4.5% or so.

The employees there are still a affected by that and some might be at reduced salaries versus no hours.

The other thing we do is we track weekly hour hourly.

Billable count versus the same week, the previous year and versus the previous week in the same year shall we look at sequentially and year over year, and we were down by much more than at 27%. We were down 30, 40% on billable hours for awhile for now hovering around high single digits too low double did.

Its differences to the previous week.

Because the customers are still watching how many people are at a site they.

They don't like crushing too many people in front of turnarounds turnarounds in traditional times are all about oil alter oil in minimizing the amount of time that the unit is actually off line and generating.

Turnarounds this year, they're not worried about that pressure, they're allowing the hours to go slower it used to be you're running six seven day weeks 10, 12 hours a day. Many turnarounds are still being run it at lower levels. Some regions are are seeing overtime, but not all cause the customers are are concerned about covid spacing.

Amount of folks that are in contact with each other and just the overall cost.

And let's face it the inventory that they have in their product out in their tank farms means that they're not that much of a rush to get back online. So they were they were watching their spine. So our.

Hours over the previous year.

Really dropped off quick, but it's starting to catch up too. So like I say, that's that's within singled a double digit type territory in our previous.

Just one last question an S G and a.

He's gotta he's done a terrific job, we do see you know.

[noise] expenses, there right and I I didn't hear your comments at Fort Fourthquarter will be lower but you know you sort of lapping some of your whereas if some of the.

Costs are being restored a little bit but.

The sustainable great over.

Over the next couple of quarters will.

Is it.

What would we see it pop up a little bit.

I'll, let ed cover that for US sure I had yeah, but more of the latter there it will help a little bit when we had the salary rollbacks throughout the year, we were deferring some other some other projects and new heads being hired things like that so yeah. So that number will scale up a little but it's gonna be funded with you know contribution margin happening at.

The revenue rebound so yeah, it's gotta be to kind of what we're going to keep the their control there modulate what we're doing but yeah. The number you know we've been holding it down obviously consciously so it will it will creep up but it's not gonna pop up so I'm going to control it and scale it as revenue and as we have said all along here, we're going to continue to keep recalibrating all the overhead costs.

Print in SG&A as well as the indirect stopping cause we're going to continue to keep that calibrated to the revenue a hand, such that you know the margin stay there for it so yeah there'll be a little pressure on that number going up but we think that a lot. So that'll be all set with the revenue coming up as well.

Okay, alright, thanks for taking the questions.

Alright, thanks, Thank you.

Question comes from Tonight, with Andrew R. B S. M. B L. A a can ask a question.

Good morning. This is David Ridley mine on for Andrew Open [laughter].

You know what percentage of oil and gas service events have been pushed out from 2020 to 2021 I know that's tough to call exactly it that you know sort of anecdotal or qualitative thoughts.

Yeah, I can give you guidance I can give you an answer qualitative but.

I've been watching that throughout Q2, and three to see how much is getting moved and I I will say that there is work getting moved from 2020 to 21, but we have seen a very small handful of entire projects getting pushed out of the entire year.

And that's internationally in Europe, and Canada, as well as us here and I would say for the most part what customers are doing is watching her spend like I talked about watching the hours watch how many people they bring from overseas or I mean outside of their their local area. So you don't get pretty them and you don't get to travel and worry about try.

To get a positive covid back from a distance away and all those concerned.

But for the most part we haven't seen.

More than a couple in North America, and only one or two in Europe, where they actually took the entire project.

We had one customer in Europe that very early on that.

<unk> staffing and giving all kind of work for doing work in the hall and at the same time put a.

Engineering analysis to say, if we couldn't get the work done because of Covid was so looming and and.

Disruptive to our business into getting people into that that country to to handle all the work they want to know how much.

How long they could push off to work. So we looked at the major equipment that was being service. It was maybe like a dozen a dozen piece of equipment that was major why they were doing the work and we gave them an estimate of how long that can be so it was something like in the range of anywhere from 18 to 20. Some months you could push off that work if need be they were ready for that but they they.

Actually we're in the throes of finishing it went up and they pretty much went as planned because the covid was a problem, but it wasn't slash that it shut them down so for the most part.

The amount of work operating planning that goes into this.

Mitigates them from throwing the entire thing out, but they certainly go to get the safety and the most.

Pressing parts of the work done first and push off some of that work in the 21.

Got it that makes sense any quantification of of what the temporary cost savings will end up being for full year 2020, just wanted to make sure we understand sort of the cost drivers as they look out next year.

The temporary cost and he gets out here I mean that that it's it's been a decent sized number each corner I'm asked me said earlier in the year, we were going for a 10% overall reduction in 2020 of all overheads, then again, that's SG&A as well as fix overheads up in up within caused so you know <unk> <unk>.

Third quarter, we were at 12 and a half for 12, 23% full year. We're at I think seven seven per cent reduction in in SG&A. So a lot of that you know his policy decisions and and deferrals of things. Some of that is gonna is gonna come back. So it's somewhere between those numbers is what that you know number we.

Went after somewhere between seven and 777 to 12 23 is what's happening full year, maybe it ends up being you know eight 9%. So they got pretty close to that you know to the 10th so that's the number that spit in there all of that's not that's the savings even after all of that definitely go away. Some of that so we're gonna hang onto that and keep that just as a as a more efficient way of operating.

<unk> going forward. So we're gonna try to hang on to all of that you know we're in our budget right now and you know we have it loaded up just yet, but we are challenging all the budget managers think about what you went through and all the great effort and things you had to evolve into during 2020 and try to keep as much of that into the DNA actually operate going forward to keep that cost out it perfectly.

If we can so we're gonna try to make as much of that permit so to speak as we can so we.

We won't succeed with all of that but hopefully get a meaningful percent of that stays in our in our run rate going forward and there'll be able to talk more to that will be put the we have the official budget done and talk more about 20, you know 21, but you know that's the scale of what of the costs out that happened. This year. So we're gonna try to keep as much of that as we can in.

The 21 actuals.

Understood and then the last one for me we heard from from other companies in our coverage that you know oil and gas customers [noise] kind.

Kind of keeping.

Tight lid on budget, some 2020, and it's really gonna be until the new calendar year when budgets reset, but just on your own visibility do you think.

You're in conversations with customers.

Or they would you kind of agree they're waiting until they they sort of see their new calendar your budget before making decisions. How do you think about your disability right now and and space. Thank you get that is a good question I'll confirm what they're seeing on that in fact, we slowed down and we're gonna get our budget out a little bit.

Sooner than everyone.

Push back the budget manager said because of that same.

Tight lipped type scenario with the customers on what they're saying or like we can get a number now, but our confidence is going to be much less than what it had been in the past. So we slowed it down and that's why we're not gonna have ours rolled uphill.

Later in this month, we were gonna have it a little bit earlier cause the customers I think are looking at all the you know the pandemic response, whereas the health can be and all that but like I say the the sign of bidding activity is encouraging to us because people are thinking about it.

But I'm not so sure what they're thinking about in the first quarter versus a second or third right.

Thank you very much.

Sure no problem. Thank you.

Yeah anything can dramatically have a question at this time piece of crap car and then and number one key I'm gonna attach talent telephone.

Your next question comes from the line, Brian or a solid friendship Turkey, you may ask that question.

Hi, good morning.

Good morning.

So it's just a follow up on some of the oil and gas related questions. It seems that.

The majority of turnarounds, we're not done in 2020 and I'm curious soon as we get to that 18 or.

24 months time period.

Between turnarounds, you know needed to to.

Avoid any.

[noise] malfunctions did you see the turnaround she's in picking up again, this upcoming spring or or is it being pushed out more towards the second half of 2021.

Yeah, Brian if that's a great question I mean, I would clarify by saying that I think most of our turnarounds did get <unk>.

Performed in 20th but they got performed at a lesser then.

Originally scheduled type of a process right. So I do think there was some deferment of work, but the major things that they had to get done they didn't they didn't really have enough time to get away from what they needed to to do from a process safety to your point is a slice a little bit different but typically you're talking to short.

With a 12 months off to probably 24 months that you can defer things unless you really spend a lot of time and I forget sometime line and did some monitoring to.

To make sure that whenever you knew about those damage wasn't growing are getting worse. So typically you're gonna see things get pushed payment on my year year, and a half and on average.

I would think next year is going to be a.

Average do better year I'm turnaround, but.

I Gotta tell you I'm not so sure about the spring customers are still.

Planning and doing things I, just don't know how much. It asks gonna stick is what is planned if something were to change in the house and all that you can see that change I think by midyear later, we believe you're gonna see a lot more of a return to a 2019.

Posture and a lot of our customers were just not so sure it it might be depending on each customer and depending on what happens here you know just with with the health and all that in the next few days.

Okay got it and just you know from some of it.

<unk> Street statistics to did a lot of his phone. It's just a crack spread expansion set that you think is needed for refineries to commit more investment.

Investments capex or is it utilization rates, which one could argue had been overly depressed, but by the hurricanes to last.

Couple of months.

And in the oil price hovering around $40, but maybe any any insight or thoughts there is what we should be tracking.

So again I think it's it's from my perspective, I think it's demand right.

As long as they don't see heavy demand coming at them. They can run it these reduced rates they could have prolonged turnaround. They can do things like that because they know they've got enough going on just in what they already have started produced and or are waiting for the market that they're not that worried about it I think as you see the demand pick up you're gonna definitely see the.

Utilization.

Back to closer to a normal because right now you can't have a longer turnaround and they're doing that they're purposely making a turnaround was longer just to save on the care. So I think right now.

Just some idea of what is normal and when is normal and when is the man coming up to me I think that's gonna be the biggest driver on what's gonna, what's gonna happen in the refiners.

Okay got it and then just to follow up on some of the.

Renewable energy toy questions I think you've disclosed in the past.

Little energy or is.

Is profit was approximately 6%.

Of of total sales, you, where do you see that training over over the X.

Several years given that it doesn't seem like there was much just remote wind turbines censoring embedded in that single digits.

Sales percentage mix.

Yeah, I I can tell you I mean, we believe you're not gonna see new coal plants being built the United States and in North America, you're not gonna, you're gonna see a natural gas you're gonna see things like that so.

No that's gonna be coming to base low or natural gas she used to be the pickers right now a days gone by and now you're gonna see alternative trying to become a lot more of the space as well trying to augment that so I think these turbines are gonna be getting more and more in light of looking at how do you. How do you maintain them, they're not brand new there there'll be come.

At an age where you guys are doing something about it.

I I'd be remiss to try to throw in a percentage, but I think it's gonna be meaningful.

And made 21 into 22 of them in such that you're going to see a lot of growth in that part of the market not only from.

Just the inspection and repair part that we crossover and do but now more so if we can if we can get into this other monitoring.

Be such a game changer for for all those thousands of turbines out there each one with three blades three times amount of problems. If they could have I think it can be a real game changer. So I do believe it's got residential.

Yeah, It's just a follow up on that.

What are your what is mistresses competitive advantages in in that space. You know a lot of your other markets are are highly fragment in with a lot of local players I assume.

The remote censoring et cetera.

And product offerings set that that you have our our competitive advantages.

Are there any real.

Barriers to entry to this market.

So I would believe I could really find anyone that can put sensors on a turban or anyone can do monitoring or anyone who could do.

You know inspection for one or anyone can do mechanical repair, but I think when you try to put all those together and some of the other things that we're gonna be doing that you're not gonna find many vendors to do all that and do all that and house and have the R&D and and driving the technology for what it looks like now versus what they need in a year or two from now so.

So I don't think as many competitors I put all that together into one package and have the online capability and then the ability to install service monitor that online.

Online hardware as well as the actual equipment that the sensors around and do repairs and get it back up and running let's face it.

All they really care about they don't care about centers. They don't care about anything else take care of all of this is that.

Piece of equipment operating the way it should be and if it is and what have you gotta do to get me back operating and keep it running bright cause their uptime is there.

Is there a goal and our job is to figure out how to help the customer you're figure out how to keep off time, but I do like all of those things. So I think our advantage as we bring all those together into one market offering versus.

Having to have for Pfizer from blenders trying to do that for poor customer.

Yeah. This is John I'm thinking back on I'd piggyback on that by saying that we do have we are putting together an intellectual property portfolio.

Surrounding are are asset monitoring capabilities within winter months.

Because we do have some unique technology that we're bringing to bear in terms of the whole product offering and the visibility of real time notification and dashboards and so forth that we're providing customers.

Okay, and then just a real quickly last question.

Throwing out some leverage ratio targets over the next couple years of nearly three times.

Is that still.

Attainable.

In your opinion.

Yeah. Since then I'll I'll just absolutely we have stepped down scheduled in in the current leverage throughout the 21 and yeah. We're we're going to continue to take you know virtually all residual free cash flow and apply it to that we did that here significantly in 2020, we'll keep doing that in 21.

And then drive that down you know historically, that's where MS Ross was overtime.

Down in a two and a half and three we won't play cat two or three by the end of 20.

21, but certainly in a 20 do we would get there. So yeah. We're gonna continue to take all allocated obviously would be cashflows did that service to keep keep driving that that leverage number down.

Okay, great. Thank you very much.

Thanks Bye thank you.

Okay, I'm showing no further questions at this time I would not like to trying to conference back to understand tennis breaking lucky.

Okay. So the whole mistress team would like to thank you for joining the call today, and we wish everyone, a safe prosperous and healthy future.

Thank you.

Ladies and gentlemen face concludes today's conference call. Thank you for your participation half I'd definitely give me I'll just check.

[music].

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[music].

Thank you for joining Mistras group's conference call for its third quarter ended September 30 at <unk> <unk>. My name is Sarah and I'll be your event manager today, well be accepting questions. After managements prepared remarks participating on the call for me is just about to be honest with you.

Combined its breast <unk>, Chief Executive Officer Ed.

Ed question, <unk>, Executive Vice President, Chief Financial Officer, and Treasurer and John.

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 companys actual results could differ materially from those projected some of those factors that can cause actual results to differ are discussed in <unk>.

Companies. Most we've picked on well report on form 10-K, and I did report filed we would affect the discussion in this conference call will also include certain financial measures that were not prepared in accordance with U.S.G. A reconciliation of these non U.S.G.A. do you find that your I'm not sure if they do most.

Directly comparable U.S.G.A.B. Friday night sales metrics can be found in the tables contained in yesterday's press release and in the Companys really that current report on form 8-K.

The reports are available at the company's website under Investor section under SEC, such restaurant sales, although I've tried to conference over to Darren expert to Lucky.

Thank you Sarah good morning, everyone.

Our financial performance was strong in the third quarter of 2020 with revenue as we forecast that up nearly 19% sequentially gross profit up from the year ago quarter by nearly 200 basis points, an overhead was down over 12%.

As a result of this solid execution, we reported a net income of $1.6 million.

Five cents per share for the third quarter of 2020.

Additionally, we continue to generate positive cash flow in the third quarter of 2020, as we had anticipated.

Consequently, we generated more operating cash flow and free cash flow.

First nine month of 2020 than we did in the same period of 2019.

This in turn has allowed us to pay down nearly $19 million of outstanding debt, thus far in 2020.

Putting over three and a half million this quarter.

This has been adapting and evolving throughout the current pandemic and has been remarkably responses to its customers.

With that I want to thank the many dedicated mistress employees, who have endured these extremely volatile times over the past month.

All while ensuring the safety of our employees and customers.

I'm also pleased to report that we recently restored the remaining salary reductions for overhead positions that we had initiated at the beginning of April 2020, as part of our pandemic plan response.

We remain altogether and working through this unprecedented period.

Our results in the third quarter reflect a gradual strengthening in our key oil and gas end market.

And lesser than expected reductions in our domestic aerospace sector.

We also benefited from modest market share gains driven by the increasing value of our comprehensive service offering.

Delivering to our customers.

The added ongoing success of our diversification efforts as we further leverage our investment in technology into adjacent markets.

Continuing efficiency trend that began last quarter. We once again recorded a strong gross profit margin of 32% for the quarter.

Up from 30% a year ago and down only slightly from last quarter. When we posted the best gross profit margin in five years.

Gross profit margin improvement continues to reflect the mix and the impact of efficiency initiatives.

Productivity enhancement.

And a better sales mix.

So far this year for the first nine months.

Gross profit margin is ahead of last year by 60 basis points.

Despite the volatile end markets.

Net ticket revenue decline and.

And the impact of the global pandemic.

We have sequentially improved our annual gross profit margin for the past two years and we anticipate continuing this trend for full year 2020.

Selling general and administrative expenses.

Were also reduced significantly from a year ago.

And the quarterly reduction in the third quarter.

The highest rate experienced in 2020 at over a 12% year over year reduction.

Through this combination of strong gross profit margin and tight expense control, we were able to achieve a sequential quarterly improvement of over 50% and adjusted EBITDA.

Despite the adverse impact of August hurricane activity that reduced adjusted EBITDA by over $1 million during the quarter.

The adjusted EBITDA EBITDA margin in the third quarter was 11.8%, which is one of the highest levels. We have generated in recent quarters.

We had another quarter of positive operating cash flow and free cash flow.

With our year to date free cash flow of nearly 37% higher than a year ago.

This enabled us to further reduce debt in the third quarter by over three and a half million dollars.

For year to date, thus far in 2020, we have paid off nearly $19 million of debt.

Thats service remains a top allocation priorities for our residual free cash flow.

All in all it was a strong quarter marked by steady progress.

Our sequential revenue growth is due to improvement in our existing markets.

Diversifying into emerging growing adjacent and complementary markets.

And continued tight cost controls.

Looking out at the market landscape conditions are beginning to improve in the energy sector with signs of stabilization in the oil and gas markets.

Although it is running slower and using fewer hours than last year.

We constantly monitor our field technician headcount and have seen improvements from a year on year decline.

21% during the second quarter.

To a current decrease of approximately only 5%.

Revenue was down more than head count because of fewer hours being worked on the contracted works work scopes.

Which customers have reduced to save on spend.

While also reducing travel and head count at sites in response to call the concerns.

There are signs of improvement for instance, in Canada and other locations, where we are seeing some demand for overtime on projects.

And we are experiencing robust bidding opportunities in pipeline.

Binary and offshore markets.

Geographically, while North America is experiencing a slowdown.

Conditions in Europe, and the oil and gas market have not deteriorated to nearly the same degree thus showing signs of strength.

The aerospace market continues to lag in Europe, and recently announced coal good shutdowns in France, Germany, and UK will create additional headwinds in those countries.

In contrast to North American Aerospace business has been stable in 2020 and is up modestly year over year by nearly 3%.

This is a result of our diversification efforts beyond our commercial market and into defense and space.

For instance, one customer we have essentially become a project manager overseeing not only our own work, but other mechanical tasks related to our typical work scopes such as Walt.

This project arose from the customers desire to limit the amount of testing and we work required to yield usable parts.

Using our process expertise and industry know, how we substantially reduced the number of inspection and repair cycles previous are required for those parts.

And even repaired and validated a number of parts that were previously deemed unlikely to be salvaged.

This resulted in an extended work scope that will likely span several years and hundreds of parts for this customer.

Our energy diversification efforts continue to be an emerging growth opportunity, particularly in wind energy.

Our beta types of sensors on wind turbine blades is progressing nicely.

Our sensors are now being tested on different types of turbines and the results to date have been impressive.

This represents not only an increase in the growing alternative energy space.

But it's also part of our digital and Aiotv strategy as well.

Licenses for our mistrust digital technology continue to rise.

So call that has slowed some of this technology is accepted.

We believe when our customers return their employees to their facilities life.

License demand should rise accordingly.

And on stream, we are making great progress in the U.S., which is being somewhat offset by the challenges facing the Canadian energy market.

They are largest tool is 26 inches in diameter.

While we have been invited to bid on jobs that will take us to a 48 inch diameter tool potentially getting us into larger.

Lucrative markets.

So between our sensors Ruggedized tablets bridge monitoring applications PCM as and more.

We believe our data strategy is well positioned.

After call. Good we're convinced we would be much further along when markets improve we.

We expect data revenues to show strong growth and our mistrust digital strategy to be an even bigger part of our future.

Third quarter 2020, once again demonstrated our ability to flex the organization to match market conditions at the same time.

We're making steady progress leveraging our core strengths and penetrate new and growing markets.

And despite the dual challenges created by the pandemic and end market volatility we continue to generate strong positive cash flow, which we are using to reduce debt.

While we believe fourth quarter revenues could be relatively flat slightly down from the third quarter. We are extremely optimistic that we will see steady improvement over the course of 2021.

We are committed to our strategy to use the tremendous flexibility of our organization to maintain if.

If macro our position and our primary markets.

While strategically investing in growth initiatives that will capitalize on coming shifts in market toward more comprehensive solutions.

Addictive analytics and better use of technology.

As you heard today, despite the cautious nature of the markets, we are already demonstrating tremendous value through mistrust digital supply chain consolidation.

Ill tee sensor technology anymore.

As market conditions improve we believe these capabilities will be in high demand.

Is that we will have a significant footprint on which to build.

I would now like to turn the call over to Ed give you more detail on our financial results for the third quarter and first nine months of 2020.

Thank you Dennis.

For the second consecutive quarter revenue was consistent with our forecast increasing nearly 19% sequentially from the second quarter to 148 million.

This was at the high end of the range in our outlook last quarter.

And as Denis mentioned the impact of the August Hurricanes reduce revenue by nearly $4 million this quarter, which would have put us over the top of our previous revenue outlook for the third quarter.

While both services and international results were each down by more than 20% compared with prior year.

National revenues were relatively little weaker due to the ongoing challenges in European aerospace market.

Where aerospace comprises a larger percentage of the total international revenue as compared to the services segment.

For the nine months ended September 32020, our revenue was approximately 76% of prior year that means for the same period.

Despite the dual challenges of energy market volatility and the disruption caused by the global pandemic customers still need our essential services to comply with safety and regulatory standards and ensure their plants are operating at peak efficiency.

This demand requirement essentially creates a floor underneath our market.

Furthermore, we continue to gain market share as customers increasingly adopt our more comprehensive service offerings, including mechanical services for instance at the expense of other companies providing narrower solutions.

Distant what the second quarter gross profit margin increased 190 basis points to 32%.

This was down only slightly sequentially from our second quarter gross profit margin, which was the highest quarterly gross profit margin level achieved over the past five years gross.

Gross profit margin improvement is once again attributable to productivity improvements and a favorable sales mix.

In particular gross profit margin benefited from the relative increased sales mix of Onstream aerospace and P. CMS, all of which offer higher than average profitability.

Year to date 2020 gross profit margin is running ahead of the first nine months of 2019 by 60 basis points, despite revenue being down 24% year.

The year to date gross profit margin benefited from the same positive factors that impacted the quarterly performance.

Third quarter, selling general and administrative expenses decreased by 12.3% compared to the year ago quarter.

This is the largest quarterly decrease in our year over year overhead cost in 2020.

The contraction in the underlying S unique cost was even more aggressive let's considering that overhead costs also included the impact of unfavorable FX cost in both Q3 and year to date periods versus prior year.

The overhead cost decrease is realized in the last two quarters as well as those expected in the fourth quarter or the product of the cost reduction and efficiency program. We implemented in April 2020.

We expect fourth quarter overhead costs will also be lower than the prior year, although the magnitude of the decrease will be less significant as certain cost saving measures taken at the inception of the pandemic has been restored as Denis mentioned earlier.

Adjusted EBITDA for the quarter was 17.4 million.

$5.9 million or 51.3% sequential increase from the second quarter of 2020, although down compared to prior year.

We were in compliance with all of our bank covenants as of September 32020.

Specifically, we maintain minimum liquidity of $57.4 million versus a requirement maintaining a minimum liquidity a $20 million less liquidity being defined as cash and cash equivalents and unused credit on our revolving credit agreement.

And number two we exceeded the minimal either requirement for the six months ended September 32000 $23.7 million.

Although the maximum funded debt leverage ratio is currently suspended until the fourth quarter of 2020 that resumes at a level of five in the quarter. At September 30, we were in pro forma compliance on a trailing 12 month basis, and we expect to be in full compliance with all debt covenants at December 32020.

We generated $41.8 million of cash from operations in the first nine months of 2020 compared with $40.5 million in the year ago period. This is despite the significant decline in revenue year over year.

Even more impressive free cash flow was $30.8 million in the first nine months of 2020 compared with $22.5 billion in comparable period last year and increased 37%.

Free cash flow benefited from a $7 million reduction in capital expenditures year to date.

In line with our commitment to limit spending.

Not expect any catch up capex spending in the fourth quarter of 2020.

Our net debt.

Defined as total debt less cash cash equivalents at September 32020 was $214.4 million compared to 239.7 million at December 31 2019.

You can use a decrease of over 25 million or just over 10%.

To reduce script reduced gross debt by 18.2 million over the first nine months of 2020 to 236.5 million at September 32020 from $254.7 million at the end of last year.

Again debt reduction remains the top allocation priority for our residual free cash flow.

We remain confident in our sustainable business model and remain firmly committed to carrying out our strategy today and over the long term.

And with that I will now turn the call back over to guess.

Thank you.

Me quickly conclude todays prepared remarks with our outlook.

It remains difficult to forecast with any degree of certainty at this time.

I think also the ongoing COVID-19 pandemic continues to significantly impact, our two largest markets oil and gas and aerospace.

Soon after recovering sequentially in the third quarter, the oil and gas industry appears to be signaling a flattening for the fourth quarter and.

And crude futures have fallen.

Recently from earlier highs in the year.

As I mentioned earlier aerospace has held strong, particularly in North America for the first nine months of 2020.

But it too is now facing headwinds, particularly in Europe.

As such it is likely that a fourth quarter consolidated revenue will be relatively flat to slightly down from the third quarter adjusted EBITDA will be lower than the third quarter, while operating and free cash flow are expected to be higher than the third quarter.

This outlook is contingent on continuing macroeconomic stability, including continuing stabilization and crude oil market and no implementation of new or increased stay in place mandate, resulting from an increased credit COVID-19, which could impact our ability to work as a critical service provider.

More importantly, we believe that as we look toward 2021 market conditions will improve particularly in the oil and gas sector.

These are indeed challenging times, but mistrust continues to play offense growing share investing in new technology, and providing the innovation that will drive our industry forward.

Our goal is to bring value to our customers their challenges will evolve as safety and compliance standards continue to rise and for new and emergency emerging industries, such as alternative energy is a brand new world, where they are relying on the experience and skills of trusted advisers such as mistrust.

As always mistresses goal is to remain at the forefront of the industry and to drive value for our shareholders.

Before taking your questions.

I would like to thank all the mistress employees once again for your outstanding customer service dedication and attention to safety, which you have all shown and he's extremely trying times care.

Carrying connects works Sarah Please open up the phone lines.

Ladies and gentlemen, if we have a question at this time the spreads are the number one key on your attached town telephone. If your question has been answered or you wish to remove yourself from the Capex These price capacity.

Ladies and gentlemen, if we have a question at this time, Please press star and the number one key on your touched down telephone.

Your first question comes from the line of CN East <unk> from Keybanc capital markets. Your line is open.

Hi, guys, though Congress, Sean Thanks for taking our questions.

Morning first.

Morning.

Can you provide a little bit more color around the expansion into the alternative energy and wind turbine market.

And then also to space and defense markets within aerospace like how you're positioned to grow in these markets how fragmented. The competition is what the services you provide there and maybe whether the slight mix shift is accretive to margins.

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Sure I'll, let John Who's closest on that one.

[noise] yeah. Thank you asked several things there, but I, it's John walk yes.

We're very excited about.

The alternative energy in particular wind turbines.

We've got some.

Its important test going right now where we've installed our.

Online monitoring here.

Wind turbine blades.

A number of turbines with owners that.

With names that everybody will recognize.

Those.

Procedures are those tests are going extremely well the trials are receiving very favorable feedback and we're looking to roll out in a more broad way.

In 2021 those services once we've got commercial acceptance of our product and service offerings.

Is this what would be out of the margin profile compared to like your legacy that will stuff.

A better than average and typically typically this is because when we perform online monitoring the revenues are.

Recurring.

The the margin the margin profiles very favorable.

Got it and I'd like to add.

Hey, I like that I could you know when we talk about this for when the.

Things that were going to be doing is a we're going to be data streaming and monitoring the customers turbines or hubs or wherever the the issues are for the different cell types of equipment. So we'll be giving them online data and telling them right away, which ones are in need of service. So you go away from a time based.

Type of monitoring to one that is actually based on real time data. We would also be servicing equipment to make sure that the sensors on the hardware is not what's causing the noise or the.

The with deep like sitting with that we'd be getting we make sure that it's something to do with the piece itself. We would have folks that could access that for a minute height and get to without having to bring up scaffolding that could either service the hardware or do the leg repairs of its wind damage or lightning or anything like that we would we would be able to do that.

Sales to get it back online so the idea of having one company that can be due on all that as more of this consolidation and I know earlier, you asked about space and.

And it's the same kind of thing you know you've got right now our aerospace it's comprised of.

Commercial and some military well, we all know where that's headed so that is definitely down, but we're augmenting it with with space. So we're helping out various names doing things like not only doing the testing, but like we talked about where we might be doing some of the other mechanical services because.

When you start talking about aerospace and space.

Customers.

Their list is a much more complicated more nuanced way to make sure that someone can do work for them and it creates a very difficult a.

Process to fund it all across the country to go from start to stop as we can consolidate not only do you save the time and the queuing up from that location location.

But just the time on the road and the ability to get parts through so much quicker is creating immense value and to your earlier question the space and the wouldn't have the same kind of better margins that we would see it and shopper area those types of environments.

Thanks, and if I can just ask one more what's what.

All the talk about tablet sensors and greater use of industrial I would see for monitoring predictive maintenance have you got seen much of an impact on revenues and margin. This year from these offerings and if so how material hasn't been and then and then how much of a revenue and margin boost could we see resulting from these offerings in the next couple of years.

Sure I'll take that first and then John can add so into beginning right now what we're trying to do is come up with a.

Value for our customers in the us were not pushing that hard on the revenues. So we're not really worried as much about the revenue. Although we are more than recovering our R&D investment on the revenues were getting from it right now its more of making sure that customers and trying times like this don't just start looking at every vendor and trying to do a.

Yes, like head count or hourly rate or fixed rate reduction just because if we can at least differencing services. We believe that gives us stickier and a lot of places and is a protector of margins.

The margins as we get this going and growing the sales and getting more of the online and all that which we believe cogut is slowing up it is definitely out there those will be those will be very good margins, Florida. So we're not yet predicting exactly how much the increase will be but we believe not so much you won't see it to be fair and 2020, but in mid and.

Later 2021 is when we expect to see those things really start to to add to our stickiness and the revenue and margins.

Yeah, It's John I'll, just add onto Dennis Dennis was comment that we're very excited also about the value being provided to customers and as Dennis said pandemic has slowed the progress but still the feedback we're getting is really remarkable from customers in terms of the visit the enhanced visibility being provided by mistress digital.

And not only for our traditional service areas budgeted related mechanical service areas.

Mistrust digital is also enabling higher visibility and productivity and real.

Dollar savings a day after day with customers. So we're excited about this is not only for the pick up that we make up for the digital.

Charges themselves, which will be relatively modest but the market share gains that we expect of the stickiness with customers that are starting to come as well.

Thank you I'll hop back in queue.

Thanks.

Your next question comes from the line of Tate Sullivan from Maxim Group you May ask your question.

Thank you Doug good morning.

Could the gross profit margin in the quarter or looking out I've heard other companies talk about wage subsidies from Canada and other comp countries is that do you have any wage subsidies in threeq, you and might that be an option to get reimbursed for some wages in the coming quarters with other shutdown.

Yes, it's a good question say that's done so yes, theres this cws from Canada, and all the different subsidies I mean, we definitely had those but you got to remember when you're talking about European and Canadian.

Sales to deal with Kogut, what they said is instead of like you do in a market where you put on to the unemployment unemployment quote on employee folks have to find or their local governments or what have you to get reimbursed.

The European and the Canadian said keep them at your site, we know where they are will reimburse you right.

So we are getting some subsidies for that and they got a little bit modified in Q3, we're going to be modified more in Q4, Although I will say there is some European countries that are talking about a cold and modifications all the way through.

2022, I believe so we're looking at from long term ones, but there are reduced right with it we're getting three quarters of 50% of the people that you bring on these complicated formula but there is some reduction out there, but the thing I would say about that is.

We had we had the ability to keep some folks on because we were getting these direct subsidies.

If we didnt have the work to keep in mind, and we weren't getting a subsidy.

We wouldn't have kept them on right. So really what you're getting is almost like push through dollars because if you pay.

Dollar do Oh, unemploy that you're keeping in mind, because there's there's no work, but the government reimburses you a dollar it's not so much a gross margin vault.

Bump as it is keeping it flat right.

Really making any money on it you're just getting reimbursed in most cases, you're getting reimbursed for less than a dollar.

It's always a certain percentage up to somewhere at Max valve and it's usually not a 100%.

So even this quarter, we were getting some of that in Europe in France, and Germany, and places like that and they are all changing as well as Canada.

Theres going to be a little bit left in the fourth quarter, but they're much more modest than you see in Q2 and Q3 at any one country.

Okay. Thank you. Thank you Dennis and following up the wind turbine comments too I heard another company mentioned some faulty wind turbines when they were installing the spread but do you and you talked about going into adjacent markets and the sensor opportunity sounds sounds sounds like a great great opportunity in the wind turbines, but you do other work currently inspecting the blades.

Before they go on or anything else in that market. So we've done a little bit on the manufacturing side, but to be fair. Most of ours has been when their existing or with the sensors. We may end up looking.

Looking at deals where we can put the sensors on as they are being manufactured and then have data real time kind of like you get your card you've got theory on or whatever else is from day one.

But we we do a little bit on the manufacturing side, but for the most part that's contained inside the manufacturers and most of our work is once the turbine is up either with the owner of the wind turbine themselves or the manufacturer, we're actually talking to both there's there's a large amount of turbines out there that are.

Owned by.

Various companies that are looking at what their warranty will look like going forward and kind of getting the end of their warranty period for them as well as manufacturers are looking at some of their existing fleet, but you know I'm going to say, putting this into the new fleet as it comes out.

Yeah, David It's John I'll, just piggyback on what Dennis just said part.

Part of the value proposition to two owners.

Wind turbines is the idea that they can actually.

Oil some of the cost.

They're spending on inspections today by continuously monitoring the status of the turbine blades. So if there's any impact damage seems like lightning strikes or or.

Other impacts to the blades, they know instantly because of our technology.

And as well, we can determine other defects happening too, whereas inspections are done as Dennis said on tanker falls, where lots of damage.

Sometimes does occur unfortunately, causing millions of dollars of damage for owners that is undetected until some kind of catastrophic event occurs. So the idea is that with real time monitoring you can avoid not only inspection cost, but you can prevent potentially catastrophic damages.

Okay. Thank you. Thank you all.

Thanks.

Your next question comes from the line of mid spring had off from start to Sir you May ask your question.

Hey, good morning.

Mitch.

Hey, I've been juggling three conference calls here. This morning, So I apologize just anything you touched on but.

We're putting the wind turbine conversation here.

Sure.

Are you display sales anybody is this like a whole new category or.

Why all of the sudden our wind turbine monitoring.

Monitoring demand why does that happen.

So that's that's a good question and the way I see it Mitch is the.

The wind turbine market has been growing and it's becoming a larger and larger segment of the higher.

Higher service, Greg right and anything initially when they're up new and shining, it's like having your brand new boat ride to fiberglass looks good and clean and then after a while you got it you got a third scraping the barnacles incredible right. So.

Same thing with a turban, they're going to age out like anything else and let's face. It when you look at a wind turbine, making things you see is the top of it the tower and the three big blades.

And those blades are inherently where most of the issues are so as these.

Big pieces of equipment age like everything else things have to be looked at and the and the turbine blades and the attachment Hobbs and things like that are proven to be the most challenging parts of the entire system for the owners and the manufacturers as equipment ages out. So I think it's just a matter of just.

As the whole market starting to get a little bit older and it's starting to get to the point, where or how do you look at that and what's the best way I mean, it used to be this time people out there with binoculars your scopes or to fly around a drone, but that means you're looking at three blade things a return and trying to figure out where to damages first.

Versus npis sensors that were telling me hey, something is going on here, whether it's a sensor going bad system going bad or actual damage, if they're going to occur.

You'll know it like John said, you'll have you'll have some kind of indication of where to go to and you can chase things that are.

That are active and ongoing not just the calendars, telling it's time to do it again.

And then and just one other just for context I mean.

I don't know if there's a number you could put around this but like how big is the wind turbine there up to the energy monitoring.

How big of a market is that it.

In the United States So.

So that's a good question to your earlier question, which I didn't really answer is who are we displacing I don't think we're displacing anybody because I think this is a new emerging part of the market. So trying to put a context around how big that is I mean, I'm I'm not I can give you a gas but it would be just have done this type guys without real lot of facts, but I I.

I believe we were talking to customers, who have thousands hundreds and sometimes thousands and tens of thousands of units that they have or project to have within the next three to five years.

And we'll leave it at par the rotating system, probably is going to be the key part of looking at it more and more attention being put on to the towers for.

Bad applications of coatings, and things like that and some failings here and there. So I mean, it's a new market thats growing and they're getting to have bigger and bigger turbans and youre getting to add bigger and bigger issue.

Issues with these turbines because you've got more torque and just larger to size creates more issue. So I think it's going to be something that as the market.

Moves from traditional oil and gas too.

Wind and alternatives, you're going to start to see more and more attention overall being paid to something like this and.

And the owners don't really have an on line.

Offering right now so they're all trying to work or what's the best way for us to do real time monitoring versus you.

Running around these these firearms and trying to figure out, which one looks bad with us that binoculars.

Okay.

Shoot.

Just another question, which.

You mentioned something I, just very beginning or end of it.

You see robust bidding opportunities.

Thank you sitting pipelines, but it.

You know.

Yes.

Good bids what's the catalyst for the increase in in in our TV and bids but is it.

New pipelines you bidding on is that dissatisfaction with existing you know service providers why are we seeing robust pipeline.

So that's a good question I think for us and we're talking about a bidding activity. There is some new in that mix, but it's probably more of the existing infrastructure. We're speaking to.

And I think it's less of a thing of something new coming into market moral that we are encouraged to see that the capital spend per 2021 is still has an appetite out there there's no pulling back in some of these markets pipeline and some of the gas and oil we're getting bids for 2021.

We would normally expect.

It kind of got quiet there for a while and then second early third quarter right. So what we're really doing is telling you. There is a return to normalcy in some of these markets more than it's something different I don't think its a spring up from.

Slow quarter, two or three it's just we're seeing getting back to what you would normally expect right. So thats. The first leading indicator that Tony Tony should be getting back to some type of normalcy in different markets at different times, but it it looks like some of these markets are starting to get back to a pre Colgate Stan.

Just a couple just a couple of quick ones.

Yeah.

Can you talk about you might have said this I apologize but.

[laughter] sort of status of your your technician Labor force to mean, where like from an employment coordinate view where are you at.

Relative to a year ago.

And what type of what.

What type of capacity art is your sales force sort of operating at right now is that.

Sure absolutely. So we track that we track that weekly in two different main ways one is the.

Since March 15th we tracked folks that were on furlough because of customer demand sprite from Cove It and in the early days of coated in late March and early April we had up to 21% of our North American market.

On some type of furlough, either most of their hours taken away all their hours taken away.

We are now down below somewhere around 4.5% or so all the employees there are still affected by that and some likely reduce hours versus no hours.

The other thing we do is we track weekly our hourly.

Billable headcount versus the same week, the previous year and versus the previous week in the same here. So we look at sequentially in year over year.

And we were down by much more than that 27% were down 30, 40% on billable hours for a while we're now hovering around high single digits to low double digits differences.

The previous week.

Because the customers are still watching how many people are at that site.

They don't like crush and too many people in front of turnarounds turnaround in traditional times are all about oil all to oil in minimizing the amount of time that the unit is actually off line and not generating.

Turnarounds this year, they're not worried about that pressure there, allowing the hours to go slower it used to be or running six seven day week 10, 12 hours a day. Many turnarounds are still being run at lower levels. Some regions are seeing over time, but not all because the customers are concerned about coded spacing.

And most of the folks that are in contact with each other and just the overall cost and let's face it the inventory that they have in their product out in their tank farms means that they are not that much of a rush to get back on line. So they were they are watching their spend so our.

Hours over the previous year.

Really dropped off quick, but it's starting to catch up to it so like I say, that's that's within single to double digit type territory now previous.

And just one last question.

Unless DNA.

You got it he has done a terrific job we.

Do you see you know.

<unk> expenses, there what and I did hear your comments that for fourth quarter will be lower but you know you sort of lapping some of your Ah or is there some of the.

Costs are being restored a little bit but this.

This is Steve wambold rate.

Over the next couple of quarters so.

Is it in this level and we see it pop up a little bit.

I'll, let ed covered out for Us Oh sure Hey, it's more the latter there it will go up a little bit we had the salary roll backs throughout the year, we were deferring some other some other projects and new heads being hired things like that so that number will scale up a little but it's going to be funded with you know contribution margin happening.

The revenue rebound so yes, it's going to kind of what we're going to keep the control there.

Modular what we're doing but yeah. The number we've been holding it down obviously consciously so it will creep up but it's not going to pop up so we're going to control it and scale. It as revenue and as we have said all along here, we're going to continue to keep recalibrating all the overhead cost footprint in Argentina, as well as the Indirects up and today, we're going to continue to keep that calibrated to the.

Revenue ahead, such that you know the margin stay there for so yes, they'll be a little pressure on that number going up but we think that will also be offset with the revenue going up as well.

Hi, Thanks for taking the questions.

Alright, Thanks again.

Next question comes from denial of Andrew opinions from D. Inc. you May ask your question.

Good morning. This is David Ridley Lane on for Andrew Obin Huh.

You know what percentage of oil and gas service events have been pushed out till 2020 to 2021, I know that's tough to call exactly that.

Even sort of anecdotal or qualitative thoughts.

Yeah, I can give you.

Guidance I can give you an answer qualitative but.

I've been watching that throughout Q2, and three to see how much was getting moves I will say that there is work getting moved from 2020 to 21, but we have seen a very small handful of entire projects getting pushed out of the entire year.

And that's internationally in Europe, and Canada as well as here in the United States for the most part what customers are doing is watching their spend like I talked about watching the hours watched how many people they bring from oversea or I mean outside of their local area. So you don't get a per diem and you don't get the travel and worry about trying to get it.

I would have called it back from a distance away and all those concerns.

But for the most part we haven't seen.

More than a couple in North America, and only one or two in Europe, where they actually took the entire project.

We had one customer in Europe that very early on.

As staffing and giving all kind of work we're doing work in the hall at the same time put a.

Engineering analysis to say, if we couldn't get the work done because cold it was so.

Blooming and.

Disruptive to our business into getting people into that that country to handle all the work they want to know how much.

How long they can push off to work. So we looked at the major equipment that was being serviced it was maybe like it doesn't doesn't piece of equipment that was major why they are doing the work and we gave them an estimate of how long that can be so it was something like in the range of anywhere from 18 to 27 months you could push off that work if need be they were ready for that but they they.

Actually we're in the throes of finishing that went up and they pretty much went as planned because the coal with was a problem, but it wasn't such that as shut them down so for the most part.

The amount of work operating planning that goes into this.

Mitigates them from throwing the entire thing out, but they certainly go to get the safety and the most.

Crossing parts of the work done first and push off some of that work in the 21.

Got it that makes sense any.

Quantification of what the temporary cost savings will end up being for full year 2020, just want to make sure we understand sort of the cost drivers as we look out next year.

The temporary cost said he gets out here I mean, it's been a decent size number each quarter and as we said earlier in the year, we were going for a 10% overall reduction in 2020 of all overheads and again, that's X gene as well as fixed overheads up in up within Cogs. So.

You don't want to want to for the third quarter, we were at 12 and a half were 12.3% full year of we're at I think 7.7% reduction in NSG today. So a lot of that you know his policy decisions and deferrals of things. Some of that is going to is going to come back. So it's somewhere between those numbers is what that.

At a number we went after somewhere between 77.77 to 12 month rate is whats happening full year, maybe it ends up being eight 9%. So we got pretty close to that to the Ted. So that's the number that's been in there all of that now that the savings even after all of that doesn't go away some of that we're going to hang onto that and keep that.

Just as a more efficient way of operating going forward. So we're going to try to hang on to all of that you.

Where in our budget right now and we haven't rolled it out just yet, but we are challenging all the budget managers think about what you went through and all the great effort and things you had to evolve into during 2020 and try to keep as much of that into the DNA as we operate going forward to keep that cost out in perpetuity, but again, so we're going to try to make as much of that permanent so to speak.

We can so we wont succeed with all of that but hopefully we get a meaningful percent of that stays in our run rate going forward and levels that we'll be able to talk more to that when we put that as official budget done and talk more about 20.

21, but you know that's the scale of what the cost out that happened. This year. So we're going to try to keep as much as we can in the 21 actuals.

Understood and then last one from me.

We've heard from some other companies in our coverage.

Got you know.

Oil and gas customers kind.

Kind of keeping.

Tight lid on budgets in 2020, and it's really going to be until the new calendar year when budgets reset, but just on your own visibility do you think yes.

You're in conversations with customers.

Are they will be.

Kind of agree they're waiting until they they sort of see their new calendar year budget before.

Before making decisions how do you think about your visibility right now and in that space. Thank you that is a good question I'll confirm what they're seeing on that in fact, we slow down we are going to get our budget out a little bit sooner and everyone.

Kind of pushback to budget managers said because of that same.

Tight lipped pipe scenario with the customers and what they're saying, they're like we can get a number and all but our confidence is can be much less than what it had been in the past. So we slowed it down and that's why we're not going to have ours rolled off till later in this month, we're going to have a little bit earlier, because the customers I think are looking at all the pandemic response, though was the health and being all that like.

I'd say the the sign of bidding activity is encouraging to us because people are thinking about it.

But I'm not so sure what they're thinking about in the first quarter versus second and third grade.

Thank you very much.

Sure no problem.

Thank you.

And ladies and gentlemen, if we have a question at this time piece spreads far I've been in number one key on your Touchtone telephone.

Your next question comes from the line of Brinavess sales from Sidoti You May ask your question.

Hi, good morning.

Good morning.

So just to follow up on some of the oil and gas related questions.

It seems that the majority of turnarounds.

We're not done in 2020, and I'm curious you guys, we get to that 18 or.

24 month time period.

In between.

Turnarounds.

Added to two.

Avoid any.

Equipment malfunctions.

Do you see the turnaround season picking up again.

This upcoming spring or is it being pushed out more towards the second half of 2021.

Yes, Brian it's a great question I mean, I would clarify by saying that I think most of our turnaround that good.

Performed in 20, but they got performed at a lesser that.

Originally scheduled type of process right. So I do think there was some deferment of work, but the major thing. It was they had to get done they don't really have enough time to get away from what they needed to do from a process safety.

To your point each sites, a little bit different but typically you're talking the shortest the 12 month up to probably 24 months that you can defer things unless you're really spent a lot of time and effort did some timeline and thats a monitoring to make sure that whatever you knew about those damage wasn't growing or getting worse. So typically you're going to see things get pushed England.

A year year and a half on average I.

I would think next year is going to be a.

Average to better year on turnarounds, but.

I got to tell you I'm not so sure about the spring yet customers are still play.

Planning and doing things I, just wonder how much of that is going to stick as as it went as planned if something were to change in the health and all that you can see that change I think by mid year and later, we believe you're going to see a lot more of a return to 2019.

Cost sharing a lot of our customers were just not so sure it might be depending on each customer and depending on what happens here just with with the health and all that in the next few days.

Okay got it and just from some of the deal.

Industry statistics to put a lot of his follow.

It's just the crack spread expansions that you seek is needed for refineries to commit more.

Investments capex or is it.

Realization rates, which one could argue have been overly depressed by the hurricanes glass.

Couple of months.

And the oil price hovering around $40, but maybe any any insight or thoughts there as what we should be tracking.

So again I think it's from my perspective, I think its demand right as long as they don't see heavy demand come an add on them. They can run at these reduced rates. They can have prolonged turnaround. They can do things like that because they know they've got enough.

Going on just in what they already have stored produced and are waiting for the market that they're not that worried about it I think as you see the demand pick up you're going to definitely see the utilization.

Back to closer to a normal because right now you can have a longer turnaround and they're doing that they are purposely making the turnarounds longer just to save on the cash. So I think right now just some idea of what is normal and when his normal and when his demand coming up to me I think does can be the biggest driver of what's going to what's going to happen in the refiners.

Okay got it and then just a follow up on some of the.

The renewable energy type questions I think you've disclosed in the past that.

Renewable energy or.

His profit was approximately 6%.

Of of total sales, where do you see that trending over over the next.

Several years given that it doesn't seem like there was much.

Remote wind turbines censoring embedded in that single digit.

Sales percentage mix.

Yes, I can tell you I mean, we believe.

You're not going to see new coal plants being built in United States and in North America, you're not going to you're going to see a natural gas you're going to see things like that so you know that's becoming a base lower natural gas used to be the peakers right of days gone by and now you're going to see alternative trying to become a lot more of this basis, while trying to augment that so I think the.

Turbines are going to be getting more and more in light of looking at how do you. How do you maintain and they are not brand new there. They are becoming at an age where you guys are doing something about it.

I'd be remiss to try to throw out a percentage, but I think it's going to be meaningful.

In mid 21 to 22, and such that you're going to see a lot of growth in that part of the market not only from.

Just the inspection and repair part that we cross over into but now more so if we can if we can get into this earlier monitoring it.

Such a game changer for all those thousands of turbines out there each one with three blades at three times the amount of problems as they could have I think it can be a real game changer. So I do believe it's got residential.

Yeah, and just to follow up on that.

What are your what is mistresses competitive advantages.

In that space you noted a lot of your other markets are highly fragmented with a lot of local players I assume.

The remote censoring et cetera and profit.

Its offerings.

That you have.

Our competitive advantages.

Are there any real.

Barriers to entry into this market.

So I would believe I could readily find anyone that can put sensors on the turbine or anyone can do monitoring or any one had to do.

Inspection for one or anyone can do mechanical repair, but I think when you try to put all those together and somebody or things that were going to be doing that you're not going to find many vendors to do all that and do all that in house and have the R&D.

And driving the technology for what it looks like now versus what they need in a year or two from now so I don't think theres. Many competitors that put all that together into one package and have the capability and then the ability to to install service line up there that the online hardware as well as the actual equipment that centers around and do repairs.

You can get it back up and running let's face it.

All they really care about they don't care about sensors, they don't care about anything else. They care about is that that piece of equipment operating the way it should be and if it is if what are you going to do to get you back operating and keep it running right because their uptime is there.

Is there a goal and our job is to figure out how to help that customer figure out how to keep uptime by doing all those things. So I think our advantage is we bring all those together into one market offering versus having to have four or five different vendors trying to do that for per customer.

Yes. This is John I'll take you back on I'd put you back on that by saying that we do have we are putting together an intellectual property portfolio.

Surrounding our our asset monitoring capabilities within wind turbines.

Because we do have some unique technology that we're bringing to bear in terms of the whole product offering and the visibility and the real time notifications.

And dashboards and so forth that we're providing customers.

Okay, and then just real quickly last question.

You've you've thrown out some leverage ratio targets over the next couple of years of nearly three times.

Debt to EBITDA is that still.

Attainable in your opinion.

Yes is that I'll address absolutely we have stepped down scheduled into indifferent.

Leverage throughout the 21 and yes, we're going to continue to take you know virtually all residual free cash flow and apply it to debt. We did that here significantly in 2020, well keep doing that in 21 and that drive that down you know historically thats, where Mr. Ross was overtime.

Down into two and a half in three we won't quite get to a three by the end of.

21, but certainly in a 20.

Still we would have there we're going to continue to take whole alitalia, obviously, it will be cash flow debt service to keep keep driving that that leverage number down.

Okay, great. Thank you very much.

Thanks, Brent Thank you.