Q4 2020 Mistras Group Inc Earnings Call
Ladies and gentlemen, thank you for joining Mistras group's conference call for its fourth quarter of year end 2020.
My name is to want them and I'll be your EBIT manager today.
We'll be accepting questions after management's prepared remarks.
Participating on the call for Mistras will be Dennis Bertolotti, the company's president and Chief Executive Officer.
Ed Fred Smith, Executive Vice President, Chief Financial Officer, and Treasurer, and Jon Wolk, Senior Executive Vice President and Chief operating Officer.
I want to remind everyone that remarks made on this conference.
Call will include forward looking statements.
The company's actual results could differ materially from those projected.
Some of those factors can cause actual results to differ are discussing the company's most recent annual report on form 10-K, and other reports filed with the SEC.
The discussion in this conference call will also include certain financial measures that were not prepared in accordance with the U S. GAAP.
Because of filiation of these non U S GAAP financial measures to the most directly comparable U S. GAAP financial measures can be found in the tables contained in yesterday's press release and in the company's related current report on form 8-K.
These reports are available at the company's website in the investors section and the SEC's website.
I will now turn the conference over to Dennis Bertolotti, Sir you may begin.
Thank you Wanda good morning, everyone.
We ended the year on a high note the strong performance across virtually every key performance metrics as well as with significant strengthening of our core financial condition.
On the top line it was our strongest revenue quarter of the year.
On a quarter that is non historically high on a relative basis due to seasonality revenues benefited from offshore mechanical longer running turnarounds and growth in data services, particularly with the N P. CMS of new century software.
Gross profit margin was also up on the quarter to 37 per cent compared to 28, 3% in the same quarter last year, continuing the favorable trend over the past several quarters.
Most importantly, we have now expanded gross profit margin by 100 basis points or more on a full year basis for the third consecutive year.
Okay.
We also continued to drive down costs, which contributed to improvements broadly across our key profitability metrics with operating income in the quarter nearly doubling over the year.
Year over year period, and adjusted EBITDA up nearly 22%.
And once again, we generated very strong cash flow with both operating and free cash flow of exceeding adjusted EBITDA in the quarter.
As well as on the full year basis.
As a result, we actually generated more operating and free cash flow in 2020 than we did in 2019.
This was quite an accomplishment given the significantly lower level of revenue in 2020.
This was in part attributable to an improvement in working capital.
More detail on later.
The first priority remains using the free cash flow, we generate the pay down debt and by the end of 2020, we have reduced our net debt position by nearly 19% to under $200 million.
This was all accomplished while continuing to assure the heat of the health and safety of our employees customers and vendors.
In addition to paying down our debt. We also continued to invest in our sales and marketing infrastructure.
As we thought it was important to be prepared for the market's return to a more normal level of activity.
We have also been making great strides in our expanding mistras proprietary IP.
Which will position us to have one of if not the most comprehensive asset integrity service offering.
And the market for our customers.
It was a very strong finish to an extremely challenging year and it puts us in an excellent position to build upon our success in the upcoming year and beyond.
The fourth quarter represents the culmination of the steady progress achieved over the course of the year.
Accuse me of adapting to a slowdown in economic activity volatility in the energy markets and a quickening pace of change across nearly all of our end markets.
The demand for services that assure safety reliability and regulatory compliance of our customers' valuable assets.
Is that on horizon is being modified.
And enhanced by lessons learned during the remote working conditions imposed during the pandemic of 2020.
The energy market will remain core for us. It is an extremely large market, where we have ample opportunity to grow we believe the changes in the energy market precipitated by the pandemic impact on supply and demand are working to our advantage.
As they are accelerating changes to which few competitors in our industry will be able to respond.
We have been anticipating these changes by expanding vertically beyond the NDP into mechanical and other services as vendor consolidation trends continue.
We are also addressing the rapid shift to new sources of energy by accelerating our horizontal expansion into renewables and especially when.
We are also accelerating development of new product offerings, such as the suite of data services that include much sought after predictive capabilities, which significantly improves efficiency.
According to the Deloitte analytics Institute, the ability to predict failures can increase of equipment uptime by 20% and productivity by 25%.
While lowering breakdowns by 70 and maintenance cost by 25% cash.
Consequently.
We are quite excited about the port coming introduction of our insights based asset protection software ecosystem.
The new platform is an integrated suite of bundling our existing data services together with improved kind of <unk>.
Activity to our customers.
The changes we are making are key to profit of profitably growing our energy revenues expanding market share enhancing our service offerings and delivering unique mistras capabilities that meet the industry's emerging needs.
The sequential revenue growth experienced since the onset of the pandemic in the second quarter of 2020 is clear evidence that this strategy has been successful.
We are adapting and changing our offerings in response to customer demand.
Our strong relationships and diversified service capabilities helped us win work and are receiving market renewed.
Renewable energy revenues are picking up.
And the promise of more data services of full line of required services not just inspection is attracting a lot of attention.
Gross margins are likewise benefiting from our ability to demonstrate how mistras offers customers more value.
It has been generally available to the market.
The goal over the long term is to diversify both our end markets and our proprietary products and services in order to reduce volatility generate more stable growth and improved gross margins.
As part of that strategy, we believe revenues from oil and gas will grow but slower the consolidated revenues ultimately representing less than half of our total revenues in the <unk>.
Future years, along with improved profitability.
In the near term the continued strengthening of energy prices seem to have stimulated the market.
With demand increasing.
There is more talk of the traditional spring turnaround maintenance season, which could materialize for us late in the first and into the second quarter of 2021.
Probably delayed by the severe weather seen in the golf this year.
You should also provide the opportunity to exit. The later part of 2021 at a revenue run rate approaching that of fiscal 2019.
In aerospace we continue to have success penetrating the private space flight, operator and military markets.
The commercial market works through its near term challenges.
Aerospace is the strategic market, where we believe we can generate strong growth through horizontal expansion and increase penetration to adjacent markets and through the introduction of bundled services that are in strong demand.
It is the large market, where we can achieve better than corporate average margins and which we are confident has an excellent long term growth prospects, we see of generating a larger portion of our revenues over the next several years.
On stream our midstream in line integrity testing business had a very good year in 2020.
This was due to its introduction of tools for larger diameter pipes, which is increasing as addressable market as well as continued penetration of the U S market as we first design into our acquisition plans.
Margins at Onstream also remain above the corporate average.
Onstream at the strategic not only because it serves a large unless volatile segment of the energy market, but also because it is another vertical in which we are able to grow by adding value through specialized data services.
And Mistras digital or mobile platform continues to evolve into more of an inspection tool.
While prevailing economic conditions may have slowed new adoptions.
Also accelerating the pace of change across industries, and creating more robust users of our digital platform.
We are confident that owners and all of our end markets are anxious to adopt a new technology, which has already demonstrated the ability to improve both the productivity and efficiency of the choosers pronounce.
For not only inspection, but also for related services.
Over the next few years, we believe we can significantly grow our digital revenues, which will represent an increasing proportion of our total revenues as well.
Consequently by staying focused on what customers will need in this changing market. We are confident that the hard work put in this year as position Mistras per a strong rebound in fiscal 2021.
For instance, we have created the right mix of resources to offer turnkey solutions to problems, which many markets with significant assets never envision for instance in the wind turbine market.
We can offer services to monitor inspect.
And repair the blades housing and hubs of those turbines.
Probably most exciting the beta test that we are developing using more of remote.
Using remote sensing technology that identifies potential damage and real time are demonstrating value with our customers.
This will provide dramatic improvements compared to the slow cumbersome and expensive inspection and outdated monitoring methods currently in use.
A new era for Mistras is now beginning over the longer term, we believe we can grow and diversify the miss for us to generate more stable financial performance.
All of our efforts today are positioning us for the markets of tomorrow.
Fiscal 2020 may have been a pause on our growth, which was driven by the COVID-19 pandemic.
It did non stop us from making great progress strengthening the organization to capitalize on existing and emerging opportunities.
The same time, we strengthened our financial condition another competitive advantage in the industry, where owners are consolidated in the vendors.
On the financial viability of their partners is becoming more and more important.
Fiscal 2021 is setting up to be a strong rebound year.
The newer faster growing markets, such as space and alternative energy and data we have already established our market presence and our building awareness around our brand and our offerings.
We are essentially on the ground floor in these industries building relationships and using our experience as a springboard to keep our products and services ahead of the competition.
In addition, it is important to note that our existing markets remained very large and offer plenty of growth potential by growing share and introducing new solutions.
We are confident in achieving steady improvement over the course of this year, especially in the second half of 2021 of.
We expect first quarter revenues could be relatively flat to slightly down from the fourth.
The quarter of 2020 due to lingering COVID-19 effects, whether an usual seasonality.
This optimism is not only due to anticipated recovery on our end markets, but also due to our strategic initiatives to grow in adjacent and new markets and introduce new products and grow share, particularly in the oil and gas market.
Because of the various efficiency and productivity improvements achieved we further believe our model will enable us to maintain our strong gross margins.
The costs under control.
And grow the bottom line faster than ever.
I would now like to turn the call over to Ed to give you more detail on our financial results for the.
The fourth quarter and full year of 2020.
Thank you Dennis.
We grew our key performance measures significantly in the fourth quarter once again illustrating how our asset light strategy consistently generate strong cash flows even in the most challenging the times.
Adjusted EBIT was up nearly 22% to $17 6 million.
Operating cash flow of 26 million was up approximately 40% and free cash flow was up an even more impressive 55% to $21 2 million for the quarter.
We converted over 100% of our adjusted EBITDA into free cash flow in the quarter and that's quite a feat for the year to date. We also converted over 100% of our adjusted EBIT into free cash flow again, that's rather remarkable and attributable in part to a reduction of trade receivables the benefit from the cares Act, which allowed us to defer certain.
Cable taxes, and a reduction in capital expenditures.
Given our expectations for 2021 to be of growth year, we expect the cash conversion to adjusted from adjusted EBITDA to trend back down to our historical norms of averaging about 50%, mostly due to working capital considerations as we invest in growth.
That's at the top line the fourth quarter was our strongest revenue quarter of the year of.
With nearly 9% sequential growth from the third quarter of 2020.
It was also of the third consecutive quarter of which we met or exceeded our revenue guidance.
As Dennis noted earlier energy markets have been recovering and are currently stable.
Longer running turnarounds supplemented our steady run and maintain business in the fourth quarter of 2020.
While ours works remains below the year ago levels. They did reflect sequential improvement over the third quarter.
Revenues in the quarter also benefited from growth in alternative energy such as wind turbines. In addition to gaining momentum in the private space market.
Offsetting these improvements were continued weakness in commercial aerospace, especially in Europe. However, international revenues in the quarter included improved turnaround volume in Germany, as well as less favorable foreign currency translation.
Products and systems also turned in a solid quarter as the.
Priest infrastructure spending is leading to growing demand for our sensors and related technology.
Early in the transportation infrastructure market.
And as Dennis mentioned, but it's worth repeating gross profit margin increased 240 basis points in the quarter. After expanding 200 basis points of last quarter. As a result, we have recorded a 100 basis point, where greater improvements in gross margins for the third consecutive year on a full year basis.
Gross profit margin improvement is attributable to productivity improvements and a favorable sales mix.
Some of the gross margin benefit can be attributed to lower 2020 portion of revenues, which comprises panther. The pass through costs that is expenses, we incur in deal on essentially costs, such as travel and per diem.
As COVID-19 restrictions loosen and revenue grows in 2021 gross profit should follow suit, but gross profit margin improvement may be somewhat muted as the increased pass through costs as the year progresses due to the increased turnaround activity expected in 'twenty one.
Selling general and administrative expenses were down nearly 5% compared to the year ago quarter.
These costs decreased on a relative basis less than in prior quarters of 2020 as certain cost reductions taken at the inception of the pandemic such as temporary salary reductions have been restored effective at the beginning of Q4 2020, we constantly calibrate on overhead cost to be in line with our expected revenue level.
Given our exceptional control of overheads throughout 2020 operating income was $4 7 million in the fourth quarter of 2020, an increase of nearly 100% over the prior year period.
Non-GAAP operating income more than doubled to $6 million for the fourth quarter from $2 9 million in the same quarter last year.
Looking back on full year 2020, it is important to keep in mind that a lot.
The revenues were down nearly 20% gross margins expanded by 110 basis points to 31% for 2020 on cash flow was up significantly from fiscal 2019, as well with operating cash flow of 15% to 68 million and free cash flow of 44% to $52 million.
And the debt reduction remains the priority use of a residual cash flow in 2020 as well as continuing into 2021, we were able to reduce debt by $36 million in fiscal 2020.
Given the significant cash and cash equivalents buildup during 2020 in our international locations, we reduced net debt by $45 million in 2022 under $200 million at December 31, 2020, a nearly 20% reduction we were at some points with all of our bank debt covenants at year end, specifically the funded debt.
Leverage ratio at 12, 31, 2020 was approximately four eight times versus an allowable five in the quarter times. There are step downs in the maximum funded debt leverage during 2021, and we expect to remain in full compliance with this covenant and all covenants throughout 2021, our goal is to achieve a funded debt leverage ratio of three times.
By the end of 2021.
We are highly confident in our sustainable business model and remain firmly committed to carrying on our strategy both today and over the long term.
And with that I will now turn the call back over to Dennis.
Thanks, Ed.
Let me conclude today's prepared remarks with our outlook for 2021.
Our business has been recovering over the past two quarters from the low experienced in the second quarter of 2020.
On the effect of COVID-19 was most impactful to our financial results.
Although energy prices and demand are currently stable.
The ongoing 20, COVID-19, I'm, sorry of Yangel with COVID-19 pandemic continues to impact our two largest markets.
We expect annual revenue per this year to be higher than in 2020. However, the first quarter of 'twenty, one revenues will decline modestly compared with those of the prior year to a full quarter's impact of COVID-19 in 'twenty, one as compared to a partial month.
In 2020.
Moreover, our first quarter 'twenty, one revenue will be lower sequentially compared with the fourth quarter of 'twenty due.
Due to typical seasonality patterns in the first quarter of any given year not to mention the recent severe weather impacts of the Gulf region.
We are optimistic that the revenue will continue to rebound once we reach the second quarter of fiscal 'twenty, one and therefore, we expect that revenue will commence year on year improvement beginning in the second quarter of 2021.
Although we expect that year on year adjusted EBITDA improvements will commence beginning in the first quarter of 2021.
This outlook is contingent on continuing macroeconomic stability, including continuing stabilization of the crude oil markets timely and effective implementation of COVID-19 vaccinations in 'twenty one.
And no new or increased stay in place mandates, resulting from increased spread of COVID-19.
Which would impact our ability to work is of critical service provider.
Believe that we as we move deeper into 'twenty, one market conditions will improve.
The improved particularly in the oil and gas sector.
But these remain challenging times Mistras continues to play offense by growing share and investing in our sales marketing and new technology initiatives, which provide the innovation that will drive the mistras and our interest in our industry forward.
Our goal is to bring value to our customers knowing their challenges will evolve.
Safety and compliance standards continued continuing to change with an involving worldview.
And for new and emerging industries, such as alternative energy is the brand new world, where they are relying on the experience and combined skills of trusted advisors such as Mistras.
The largely all seen in many of our customers have made them more dependent on ever on complex vendors such as mistras to operate efficiently.
As always Mistras. His goal is to remain at the core front of the industry and to drive value for our shareholders.
Before taking your questions.
I'd like to thank all of the measure of employees once again for your understanding and leadership shown and helping us through this crisis by continuing our solid reputation for safety quality and innovation.
While providing outstanding customer service and dedication during these extremely trying times on this past year.
Please continue to show the same concern for others and leadership have shown to all of our stakeholders in the future per.
Peering connects works.
The Wanda please open up the phone line.
Thank you.
Ladies and gentlemen to ask the question you would need the press Star then one on your telephone.
To withdraw your question press the pound key.
Again, Thats star one to ask the question.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Sean Eastman with Keybanc capital markets. Your line is open.
Okay.
Hi, guys. Congrats on a really strong finish on the fourth quarter.
Great well, thank you Sean.
I guess first one from me I'm just curious what the dialogue with customers is like right now I mean are they mostly focused on making sure.
You guys are going to have the capacity to support them as these facilities start to run harder on.
Or is the dialogue more so focused on.
Trying to do things differently in terms of driving efficiencies through sort of new technologies and data.
That would be an interesting dialogue.
Okay, Sean I'll take it on the journal will probably jump in on capacity or the one thing that we didn't do is we didn't cut into our business when 2021st popped up with Covid, we didn't cut back on our sales and marketing we pushed in on net and we didn't do anything on the technicians. We just modified the hours of everyone works. According to the work that was out there.
And we took all the appropriate cost cuts.
For the most part we have all of the bodies. We had before this started we just have a lot less work for them, we trend our hours every week, both an unbelievable and billable hours and we try and how many people we had out.
We peaked sean at about 22% of our technicians that are billable in North America. During the height of the Covid late March and April we're down now to sub 2% or something like that it's minor, but the hours were always more than double whatever we were out in billable folks. So what happened is our customers really.
Try to get people back on as fast as possible and they didn't want to lose as much as they could from the vendor base ourselves on any other vendors, but they're really neither of the amount of hours. So we have the ability to come back and handle whatever hours that we see coming out of season, even as we're growing here into the spring. Our bodies are there you always need some supplement of some people.
Our specialty folks, but we do a good job of every week, we call a regional manager we get everyone on both the international and the domestic call. We talk about resources and where we are short of where we're along and.
And we have our internal recruiting folks doing nothing really but.
Moving bodies internally, so we feel very good about our capacity to get to your second question on.
The efficiency and technology, absolutely. They are starting to think more and more about how do we do more of how do we how do we predict more before the turnaround how do we do online monitoring report of terminal on the turnarounds during how do we minimize everything, especially in 2020 of the turnarounds were really minimized by the hours.
But theres a lot customers are thinking about now about gaining efficiencies with our mobile solutions and just all of the online capabilities. That's why things like the wind turbines on our new people still will go and look at the turbine every five years or whenever their schedule was.
The day after you inspect that something can happen and it needs the paragon.
With the new things that we're working on we can tell them when it happens immediately and go on to the inspections on what is most <unk>.
In need of repair.
I don't know John if you want to add anything to that.
Yes Dennis.
I would I think I agree with everything you said, but in addition, I think as you said in your prepared comments, we spend an awful lot of time during 2020.
Enhancing the capabilities that we have.
And being able to be in a position with customers to produce value that we're being told by them theyre not seeing from others. So things like Michael the digital of the mobile solution.
It's a differentiator of the fact that.
You get the visibility of the productivity from our solution on our work Force does Inc.
In fact, we've even got other trades, which customers have asked the other trades to use the mistras digital mobile solutions and they are using it with good success to drive additional productivity. That's just an example of the innovations that we've been bringing out to bear so I think that that's really resonating with customers.
Okay interesting.
Yes.
I'm just curious on on the margin trajectory in the business I mean, if we're if we're back at the 2019 revenue run rate in 2022.
Do you anticipate the margin profile to be similar as what you guys did in 2019 or better or worse I'm, just kind of curious how to think about that.
Yeah, Sean I'll, let Ed Paul Me up on I'll tell you on media improvements, we're seeing on gross margin maybe not all of them in 2020 from some of them on just the differences of pass through and per Dms and things like that but we believe a good part of everything we've been doing on the gross margins the sticky it's a reflection of.
What parts of the business, we're growing off of where we're focusing and the customers and everything else. So we believe we're not going to be slipping back the gross margins of the past, we're going to keep growing from where we are.
Is there anything else you want on that.
Yes, no definitely that's true absolutely and again the mix is very important again the.
The the relative level of pass through activity happening happening in a given period can absolutely start to effect.
Your margins a little bit certainly we're going to keep the overhead cost control and calibrate cost of revenue going forward. So yes, we do believe the the EBIT of rebounds, a little quicker than the revenue does here in 'twenty one.
But the.
Yes, we definitely.
Have aspirations to keep keep improving but again its not always linear every quarter is not going to move exactly in lock steps.
The quarter before it but no but yes, we definitely feel that those margins are certainly attainable back of 91.
In 19, rather than going going forward.
Okay, Great and one last quick one from me.
Exiting 'twenty one at the.
2019 revenue run rate.
What does that assume around commercial aero.
Yes.
Good luck guys.
John I'll start off there, yes, so what we're saying is if you were the sort of annualize the fourth quarter of.
'twenty one it'll it'll look a lot like 19th level, we have in all of our.
Budgeting and forecasting and planning we have era of lagging the oil and gas recovery as both of them will do.
Commercial in particular, it might be lagging we believe the defense and then the space might be moving a lot quicker.
Buffering some of the weakness in commercial but we have we have aerospace lagging a little further along before it gets back to 19, we're not suggesting that aerospace gets there in 'twenty, one but versus the oil and gas gets close but arrow will definitely lag a little bit into 'twenty two before it gets back to 19th levels.
Okay very helpful. Thanks for the time gentlemen.
Thanks, Sean.
You.
Our next question comes from the line of Brian Russo with Sidoti Your line is open.
Hi, good morning.
Good morning, Brian.
Jim You mentioned your leverage ratio targets of three times by 2021.
Could you just discuss.
The step downs in your interest expense and borrowing costs as leverage falls.
Sure absolutely Brian So, yes, so the biggest break in the pricing grid would be.
Once we are below of 375 leverage which is two quarters from now there's a huge step down in interest from the current 515 down two of $3. Five. So there is a huge reduction we won't get there till the the effectively that the fourth quarter of this year. The placement of that goes into effect prospectively after that the new law.
Average has achieved so you'll you'll.
Have fairly similar interest slightly less but similar interest rate for the net for three quarters of of 'twenty. One it will drop down in the fourth quarter. So you'll have a modest reduction happening, but there's but then from that point forward do you have the huge reduction going forward once you're down to that next pricing grids. There was a big drop from five five down to three five.
Later this year as we get below of 375 leverage.
Got it great and then just your comments on on the SG&A.
Do you have any.
SG&A as a percentage of revenue targets as revenue increases with the understanding that you've retained a lot of your sales and marketing.
I think it's in the mid 20% at year end 'twenty is that it.
The the SG&A track revenues or should revenue growth exceed the SG&A.
Growth.
It's definitely the latter there I mean, we were budgeting and forecasting obviously, we want SG&A to grow at only a fraction of revenue in some periods, it's even though it should be growing a fraction of half or only a quarter of the revenue increase C of right. Now I think we ended Q4 SG&A is around 25% of revenue of approximately.
Revenue will be scaling up next year actually will not scale of that much higher.
We look at it where that SG&A may stay flattish to creeping up slightly next year revenue will be outpacing that so hopefully as the year goes along that number of Gibson too.
Our mid Twentyish percent aspirational that we'd love to see that get to a 20 year lower but it's going to take some multiple cycles to get to that level, but the run rate at that now is a pretty good number there'll be some slight creep in that number as 'twenty. One it goes along but again as we've been saying for really all of 2020, we will continue to calibrate the cost footprint to the.
Revenue of 11 at hand, so as the contribution margin dollars come back in as the gross profit dollars come back in the then we'll continue to let some of the costs come back and grow as we as we said on the call, where we will invest in things marketing and sales and whatnot. So we need to fuel that investment and thats been of come from top line. That's why we're pushing gross profit.
So much that allows us to invest in the business, but right now it's a pretty good indicator going forward it'll it'll creep a little bit up but it's a pretty good pretty good range right now.
Okay great.
On the earlier comments on <unk> to be below 50% of the sales mix over time I think at year end 2020. It was at 57% Aerospace and defense was at about 12.
And power and renewables.
Somewhere in the mid single digits, how fast do you think that sales mix.
Kind of evolve.
So Brian it's Dennis.
<unk> is our aspirational goals, that's more of a three to five year on believe in three of four years, we'll have the balance of gas and oil under 50%. This is with all of the acquisitions or anything else of strictly organically.
It's still growing gas than oil, but we believe the other markets in the space Aerospace.
The renewables and energy and other things that we're already in and can grow into like infrastructure. We believe that will start taking more and more of it those three primarily will take more and more.
And chip away at that 50 some percent fleet.
Mhm, Okay, Great and then just lastly on on the renewables.
And the remote sensors on on wind blades.
<unk> been involved in the Texas market, yet or is that of <unk>.
The opportunity along with the Gulf in the South.
And then if you could comment on.
What type of work Youre doing on the turbines as well.
Sure I'll put up the job he's more involved in it.
Yeah, Hi, Brian This is John so absolutely. So we've been installed on a number of wind turbines, primarily in the southwest including Texas.
During 2020 and through today.
And so we were there as the.
During the big freeze and we.
Incidentally could here of what was happening on the on the blades during the big freeze.
And able to impart the disinformation to customers.
So absolutely it's part of part of the global market that we're looking to to really serve.
And in terms of of what we're what we're doing is we're monitoring.
Primarily but not exclusively wind turbine blades.
Here the effect of the impact damages could be lightning strikes it could be ice falling it could be.
Some other impacts of the blades.
And those impacts tend to cause damages almost immediately upon impact and oftentimes as Dennis said those impacts of the debt, resulting damage are undetected until the next inspection occurs but the great thing about our technology is we can hear the impacts immediately and we can share of the follow on.
Fact of the impacts in terms of what's happened to the blades in terms of what type of damage has occurred immediately and how that's evolving over time, and we're able to impart that knowledge to our.
Customers, so that they can use that data to determine if they can continue to run safely that I certainly don't want to run to failure, because it could be catastrophic in terms of cost and damage.
And they can avoid those catastrophic costs by use of our technology and our know how.
Got it great very interesting thank you very much.
Thank you. Thank you thank you Brian.
Thank you.
As a reminder, ladies and gentlemen that star one to ask the question.
Our next question comes from the line of Mitch Pinheiro with instead of it and the company. Your line is open.
Hi, good morning.
So good morning Mitch.
The question couple of questions here.
Why.
Wouldn't the.
The.
Revenues start Annualizing at 2019 levels earlier than the fourth quarter.
So the answer is we believe it could happen the solar is on the third well.
I don't think we know it won't be at that rate in the first quarter and.
Probably not in the.
The second for 2019, but it's we believe it's going to keep creeping up it's a function of the explanations and people getting on jumping back in their cars and demand on on the inventory of going down.
Power and everything else on starting to get back to a normal so its not so much of it is really just waiting for the energy and power and all of those markets just to get back to a normal consumption rate, which we don't think is going to happen until.
Some time, you know I don't know if Thats June 1st line from what the particular.
Thicker datas, but sometime by the by the time you are getting to be mid or in the third quarter. We think we'll be getting back to a more normal.
Okay that was helpful, but now how does.
So how does the mix.
Revenue mix factor in aerospace, particularly.
Your international segment has been weak.
Is that I mean are we going to see sort of the.
On a recovery across all segments equally or is this going to be fueled more by your.
Sort of your energy on customers and less so by aerospace as we get into the fourth quarter or is there going to be an even sort.
The contribution or will there be true I think.
Yeah, I think I think youre right on the second half I think youre going to see probably guests on all getting faster on the aerospace, but like we say we.
We're doing some things in the aerospace where we believe on.
The non commercial side on the military in the space side. We believe there we've got a lot of great traction and that can help us offset what you see aerospace is going to be slowest internationally to catch up domestically. We're seeing that we have some signs of the getting back to.
Two of normal, but it won't be back from there yet in 'twenty, one one way or the other.
We also see the things such as the the wind.
And all of the other parts of guests on all of them everything else catching up a little bit faster. So.
It won't be a 2019 as far as the percentages go but we're going to hopefully have our revenue back to where it was of 19 with just different percentages from the different industries as the.
They come back online.
Yeah, and just to add to that.
On the international side, I mean, we still have Europe in the midst of Lockdowns in fact, lockdowns are increasing in some countries right now.
So it's really hard to kind of model out.
When that's going to relax vaccine rollout pace has been much slower in Europe than it has in America. For example, so I think those are some of the variables, where we're trying to understand as well.
Okay.
Thank you and then.
When it comes to digital.
Digital.
It's right now I mean can you talk a little bit about.
What percentage of your <unk>.
Customers are using.
You know your digital services.
And.
And by what sort of end market.
The are currently at and where you think.
It'll it'll head too.
Sure I'll, let John answer that one.
Yeah. So.
In terms of mobile deployment.
Really where we're focused right now is oil and gas primarily but we are looking to expand that.
Within oil and gas we've got some initially very good penetration.
Across several major customers and typically it's the one or two sites within their fleet and looking to roll out beyond that as we as we get into 2021.
2000, 22020 was there was really a year of proving the technology works I think 'twenty. One we will continue to be that with some of the customers that we're going into the first sites.
And demonstrating the strong productivity enhancement that we bring the strong visibility that we bring as well as as I said earlier, bringing the other trades on so the visibility on productivity is multiplied not only across the MDT trade, but across the other trades as well.
So I think of 2021 is really going to be a very exciting time in terms of <unk>.
Substantial rollout compared to where we have historically been and then for Mistras digital.
We use that term kind of broadly because it's not just the mobile app, even though that substantial you've also got of.
Other applications for our in House Lab labs.
Where we can track and trace parts.
Status completion, and as we work multiple stages of different activities of different mechanical activities and help model too cheap modification of those parts of the customer specifications will be able to track that as well and that's a new application that's coming on soon.
Yes, the only thing I'll add incentives of 2020, it was really tough to get on site.
<unk> customers prove out the solution or even just add any extra body instead of site to be the SMA subject matter experts of the standard up and get it running.
It kind of put a pause on it but the funny thing was everyone wanted more data from where they were working and they just didn't really want to spend the time effort of bringing extra bodies on to do that so we see 'twenty. One is of good impetus the to get the kind of things going.
And finally, just to add you asked about relative size of this I mean this is a huge opportunity that we're all really excited about if you add it together all of our current Mistras digital our software our sensors remote monitoring you you would probably barely get 10% of our current revenue, but it's got an incredible upside to us in growth as you hear me.
Just getting started with the incredible upside it's a very small piece of our business and we believe it will grow.
Rather rapidly become a much bigger part of going forward now that we're past proof of concept of testing and demos and into real commercialization.
Is going to grow and it is currently coming from a very small base, but we're very excited about it.
Okay. Thank you and then actually just one more question.
Dennis for you.
Where do you think capex is going on.
It's going to fall and is it going to be any.
Any seasonality to the Capex.
So.
It's a good question because a lot of people wonder if we start of the business in any way of capex or something like that to get our cash flow. We really didn't I mean, we moved capex along two parts of our business, where we needed it.
We're careful about buying new things, but we didnt starve anything so we don't think theres going to be a huge rebound.
It will come up, but it's still going to be sub $20 million I think of it as well.
We've got.
Planned for 2021, so it's not going to be where we have all of this.
There is pent up demand for cap on whatsoever in the 12 months.
Okay. Thank you for your time I appreciate it you got it. Thanks, so much thank you.
Thank you.
I'm showing no further questions in the queue I would now like to turn the call back over to Dennis for closing remarks.
Alright, everybody look I appreciate the time, everyone took the spud of today.
The whole Mistras team would like to thank you for joining our call today.
We wish everyone the safe prosperous and healthy future. Thank you again.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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