Q3 2021 Mistras Group Inc Earnings Call

[music].

And other reports filed with the S E C.

Discussion and just conference call will include a certain financial measures that we're not prepared in accordance with U S gap reconsider.

The cancellation of these non <unk> financial measures to the most directly comparable U S got financial measures can be found in the tables contained in yesterday's press release, and then accompanies related current.

Port on form 8-K.

Parts are available at the company's website and investors section on the S. A t's website.

I will now turn the conference over to Dennis <unk>.

Thank you Victor.

Everyone.

The third quarter was a strong encore to our second quarter results.

Oh shredding that we've reached an inflection point in our projected growth of 2021.

Just like the second quarter, our performance exceeded expectations and the third and both are top and bottom line financial results. Despite.

Despite the impact of Hurricane Ida we achieved revenue at the top end of our outlook range.

And we do expect a good point of those revenues I'm sorry, a good portion of those revenues lost from Ida They made up in the coming months.

Looking at some highlights for the third quarter consolidated revenue was up 18% with continued strength across all of our end markets with the sole exception I'll be industrials.

With the aerospace and defense markets were both off nicely in the quarter.

Gross profit increased nearly 5 million from last year and gross profit margin was approximately 30 principles approximately 30 <unk>.

Spike the higher proportion of revenue attributable to reimburse will travel costs this quarter.

We had discussed is expected scenario and our earlier calls this year, which creates Laura anticipated growth gross profit margin, but higher gross profit dollars.

Nevertheless.

Gross profit margin in the third quarter was actually up from that of the first six months of this year by over 100 basis points as we continue to focus on efficiency and productivity improvements and have achieved a favorable sales mix.

We expect the fourth quarter gross profit margin to be comparable to the third.

And our continuing efforts to improve operating leverage SG&A expenses were reduced in the third quarter sequentially from the second.

And this will despite the fact that the third quarter included the final reversal of costs that had been temporarily reduce last year.

This is clear evidence that cost containment remains a top priority for us.

As a result of our efforts of our operating are operating income of $9.2 million for the third quarter.

Was it an approximate 61% expansion over the same period last year.

And the net income more than doubled back from a year ago, while our adjusted EBITDA margin was nearly 11%.

In summary is a very solid quarter illustrating that we are sustaining the momentum that are robust and evolving business model has been developing at the same time.

We are continuing our investment in new technologies, including our data initiatives, such as one sweet and since Soria, which will further differentiate us from our competition.

An example of an early adopter of such technology Ah mistrust customer, which is a large midstream company wanted to insure asset integrity for its equipment located in dozens of plants across southern Midwestern states.

The one sweet ecosystem most selected by this company because it offered a secure cloud environment for centralized data management.

A single access point for plant personnel and integrated apps that perform asset integrity calculations the.

The company subscribed to data management, and analytical apps that assist with the compliance and business initiatives offering additional insights and recommended actions.

All of this was enabled via one sweet.

I will elaborate further on both of those too exciting initiatives later in my remarks.

Looking more closely at our various industry served revenues and our energy markets were strong again in the third quarter.

In part due to the recent strength of crude oil prices and demand approaching prepandemic levels.

These conditions have motivated our energy industry customers to maximize our production levels, which potentially limits our ability to perform offline services plus.

Thus potentially decreasing our level of activity during maintenance outages.

Nevertheless are run and maintain services do however, provide us a window, where and we can remain onsite pre.

Dividing inspection services, while our customer is running at peak production level.

Our focus is to use technologies to learn more for our customers while they are online.

So while the markets have certainly improved relative to a year ago. The industries balancing their inspection need against an opportunistic time to benefit from favourable economic conditions [laughter].

Over the intermediate term, we continue to believe the energy markets will remain our largest opportunity in both traditional and especially in the growing renewable sector.

We have a multi pronged strategy to succeed in energy.

First by continuing to take profitable market share.

Second by expanding our scope of services.

And finally by introducing new products.

Keep in mind that on average overtime about 70% of the revenue generated and our energy markets is from ongoing run and maintain business.

Which does not experienced that dramatic peaks and valleys with capital budgets nor.

Nor is it overly dependent on periodic turnarounds.

This is particularly helpful. In the current climate, where and our customers are tending to operate longer taken advantage of high market prices for their product.

As we continue to implement our strategy, we believe we will become an increasingly valuable partner.

Throwing our share of this less volatile reoccurring revenue, improving our stickiness with customers, while expanding operating margins.

Keep in mind that we are largely agnostic with respect to the source of energy power.

And we have and will continue to flex into serving renewable energy providers, particularly when.

In this regard I am very pleased to announce the mistrusted, sorry, a wind blade monitoring technology platform.

Sorry, the innovative <unk> technology management tool, helping to drive operational excellence through real time monitoring and damaged detection.

The industry norm of conducting periodic glade inspection leaves site operators in the dark on real time blade integrity raised.

Raising operator, operating and maintenance costs, while reducing generating capacity.

Whereas in sorry, it makes it easier than ever to maximize the uptime performance and safety a wind turbine blades.

Real time monitoring.

Since Soria simplifies the blade management process, helping owners make more informed integrity and even inventory planning decisions.

We are currently validating our testing in the field and we are very excited about the enormous opportunity to address bolted aging wind farm fleet and incremental OEM opportunities that could arise.

In the interim we will continue to strengthen her position in this emerging and growing market by constantly improving our inspection maintenance and repair capabilities in the process of building relationships that can move into news and sorry of opportunities.

And our wind business or when business is growing from a solid foundation, we have been generating in excess of $15 million per year and turbine blade repair and maintenance revenue. This provides us with established relationships and technical industry knowledge, which we are using to move into the lucrative sensor and mine.

Three market.

There, we are adding new customers and then in turn are adding new blades and hubs for those we already inspect and the wind turbine sector.

We are demonstrating how our proprietary acoustic emission technology.

Consisting of them very sophisticated sensors and detection algorithms can provide better information faster than your inspection technologies currently used in the market today.

Which primarily rely on less sensitive Brian vibration technology.

This is an exciting and rapidly evolving opportunity I encourage you to learn more by visiting since Sawyer win Dot com.

And the aerospace market, we continue to grow both our defense and private space business, while the commercial aerospace sector recovers, our private space revenues are growing nicely offsetting some commercial revenue.

That is soft and and and is the main reason our aerospace revenues are up 14% in the third quarter as compared to the prior year period.

We anticipate further strengthening going forward, particularly as the commercial sector recovers as anticipated throughout 2022.

This was another quarter in which we continue to narrow the gap with Prepandemic performance, especially in our energy markets are inline pipeline inspection business led by Onstream had a very strong third quarter and is on pace to have their best year ever in 2021.

The last few quarters are assigned that we are well positioned to return to more normal economic conditions and strong bottom line results.

I would now like to turn the call over to add to give you more detail on our financial results for the third quarter of 2021.

Thank you Dennis and good morning, everyone.

It truly was another outstanding quarter in which we achieved the high end of our revenue outlook and our bottom Michaels as well.

With a significant expansion in operating profit and net income.

As Dennis said coming sequentially on the heels of one of our most profitable quarters, our ability to follow that with a strong strong second quarter what to get another small quarter. Clearly suggests that we have reached an inflection point and.

And we're working very hard to sustain this positive momentum.

For the three months ended September 30th 2021, consolidated revenue increased 18% over the prior year to 174.6 million, which was down less than 2% on a sequential basis from our very strong second quarter.

Revenues were up in the third quarter due to organic growth as well as from the additional benefit of a low single digit cable impact of foreign exchange.

Revenue in our largest and markets energy and aerospace and defense both increase significantly over the prior year.

We expect the energy markets to remain strong in the fourth quarter as well.

On the West Denis mentioned, they are contending with an industry that is focused.

Oh I'm running their plants, a high capacity because of Sean crack spreads as well as building up inventory levels. Nazi mentioned, the typical seasonality scene in the fourth quarter.

We expect aerospace and defense market to continue to recover, albeit slower than the energy markets with the exception of private space sector, where revenues have grown robustly you over here.

We believe the traditional oil and gas market remains a large market opportunity over the next few years, where we can grow modestly by taking market share and adding additional services, while reducing volatility in improving returns.

Gross profit dollars increased by nearly $5 million in the third quarter over the prior year over $18 million on a year to date basis, while gross profit margin contracted from a year ago as we had anticipated.

Great compared to a year ago, we had a much greater proportion of revenue attributable to reimbursable travel costs, which <unk>, which yield little if any gross profit dollars.

Nevertheless, gross profit margin in the corner was up over 100 basis points compared to the first half of this year a.

A clear indication of the progress being achieved and uproot and improving productivity and efficiencies.

During our second corner commentary we.

We have noted that we would be reversing the remaining temporary cost reductions from 2020 that run out that we're not already restored and that this would modestly increased overheads in the third and fourth quarter of 2021.

Well, we are proud to report that those costs are now fully restored yet SG&A cost in the third quarter were actually down modestly sequentially from the third quarter. This was due to our continued focus on overheads as well as the benefit of a slightly favorable FX translation conversion rate.

Demonstrating our continued efforts to improve the operating leverage in our business model.

Both expanded gross margin dollars in tight overhead expense control operating income was up nearly 61% in the third quarter.

Similarly, those net income and earnings per diluted share, we're up significantly from a year ago, both actually more than doubling with net income of 3.4 million or 11 cents per diluted share.

Turning to an income tax rate Orange is holidays. It effective tax rate was just over 50% for the third quarter of 2021 due to an incremental discreet expense of 1.2 million B E. P. S impact up this spring item was about four cents per diluted share in the third quarter.

We anticipate an effective tax rate of approximately 30% with a fourth quarter of 2021.

Cash flow from operations in the third quarter was $4.2 million in free cash flow was just under $1 million net outflow are significant increase in revenue. This year as required us to fund the corresponding increase in working capital, particularly buildup in accounts receivable.

Nevertheless, we expect to be free cash flow positive for the fourth quarter and certainly for the full year, although the free cash conversion rate cause a full year 21 will be below our historical average of approximately 50% of adjusted EBITDA.

This is attributable to hire capex in the current year.

And to the effect of one time items, such as the repayment of the cares Act painful taxed apparel, which is due in the fourth quarter of this year.

Our free cashflow conversion rate of approximately 13% for the first nine months of 2021 is lower than what we expect for the full year as we anticipate that the fourth quarter will be a strong free cash flow period.

On a year to date basis for the first nine months of 2021 operating cash flow was $22.5 million in free cash flow was 659.

Capital expenditures are running modestly ahead of last year as expected given the higher revenue volume Hope you still anticipate total capital expenditures for the year to be in the 20 to 22 million dollar range.

The need to fund working capital has also temporarily slowed our debt reduction efforts never.

Nevertheless at the end of September net debt was below our $200 million goal at just 193.3 million.

As previously noted we expect free cash flow to rebound in the fourth quarter and debt reduction means our number one priority use of cash.

More importantly, since we remain below a tree seventy-five leverage level as of September 30th 21 are effective interest rate for the third quarter was just about to 6% and this will carry over into the fourth quarter as well.

Actually our consolidated that leverage ratio has declined by our credit agreement as returned to Prepandemic levels remain at the end of the third quarter. This metric was the lowest level. It has been since December 31, 2019 measurement period.

The result of this improvement and corresponding reduction in borrowing rate was a decrease in interest expense this quarter from $3.6 million in the prior year down to 2.3 million in the current quarter, which was a 1.3 billion dollar cashing base.

It's really wasn't another out to any quarter, where we sustained argument them through the business.

Improve profitability and met our financial expectations nation.

Our business has been recovering from the low level of demand experience in the second quarter of 2020, when the effective COVID-19 Pete.

Although energy prices and demand type improved throughout 2021.

<unk> COVID-19 pandemic continues to impact us. This effect is most pronounced on our second largest market aerospace and defense, especially in the commercial sector.

Accordingly for the fourth quarter of 2021, we expect revenue to be flat with the prior year quarter, primarily due to the energy markets immediate focus on peak uptime and a lightning commercial aerospace recovered.

Just to even it is expected to contract contract modestly in the fourth quarter of 2021 due to substantially all of the remaining temporary cost reductions initiated in 2020, having been fully reversed during the third quarter of 21, and the lower level of Canadian reach subsidies in 2021 verse of 2020.

Our outlook for the remainder of 21 is contingent on continuing macroeconomic stability, including.

Including continuing stabilization and the crude oil markets, one telling effectiveness of COVID-19, vaccination and boost the rollout and no significant global supply chain disruption as our leaders shortages, which would impact our ability to work as a critical service provider.

Throughout the pandemic and now as we rebounded me cover we have demonstrated Mr. <unk> ability to quickly adapt to a challenging market and not just for immediate results, but also to set the stage to capitalize on emerging opportunities as we look forward to the end of 2021 and into 22, we are confident that our business model is.

Robust and sustainable and we remain firmly committed to executing our planes by <unk> by maintaining our intense focus on cost containment, while continuing to prudently invest in the business that is our strategy both today and over the long term and it will continue to be a very exciting journey.

Although the interview markets, both oil and gas and power generation are cyclical.

Currently stable and continuing to rebounds further back to create pandemic levels with this rebound we are focused on continuing to gain market share I'm learning, new contracts and expanding our services and complimentary mechanical and data services, particularly real once a week.

We aren't largely agnostic about the industry's we support we have and will continue to flex into alternative sectors, such as renewable energy, particularly when as demonstrated by our recently announced censorial offering which leverages, our core competencies, including acoustic mission monitoring.

And with that I will now turn the call back over to Dennis furnished wrap up before we move on to take your questions.

Thanks.

So to recap as we recover from both the pandemic and the fall off in the energy market experienced in 2020.

We are planning for our next stages of growth.

First nine months of the year have us back on a more solid footing.

And we believe markets will continue the gradual recovery into 2022.

Let me conclude by offering an update on one sweet which is perhaps our most exciting initiative serving as a significant step forward the digital transformation of asset protection.

We Ain't can meet the growing demand for solutions and technologies that can assure.

The safety.

Reliability and regulatory compliance of the world's most valuable and critical assets.

Whether a natural gas turbine a wind blade, a public bridge or private space satellite or rockets.

One of these exciting technology is our new software ecosystem restaurants, one sweet which provides our customers with Mr. Us as popular software and services branches integrated apps and a secure cloud environment.

Once sweet serves as a single access customer portal for cross functional data activities with access to 50 plus applications soon to be 75.

All being offered on one centralized interconnected platform.

The pandemic has accelerated the transition to digitally connected and integrated technologies such as one sweet.

Which provide users with data driven insights that make their operations later and more intelligent.

This represents an evolution of asset protection and mistrust is uniquely qualified to leverage our proven capabilities.

And know how including acoustic emission monitoring while innovating to meet the needs are changing global landscape.

Just like any thriving ecosystem apps within the once we platform interact with each other sharing critical information in real time <unk>.

Put simply the stress is one sweet makes asset protection smarter and more digitally connected than ever before.

Right now we have over two dozen customers using one sweet and we anticipate adding dozens more in the near future.

With the number of discrete users growing from.

A few hundred to nearly 1000 in the near future as well.

These early adopters covered many diverse and markets beyond our core energy sector.

One sweet as an illustration of how we continue to enhance the value of our legacy investments.

While increasing the R O y for our customers today and into the future.

In many ways.

Stress.

Have always and certainly will continue to focus our investments on ways to enhance customers ESG complaint.

Particularly to eat for environmental and especially S.

For which we used for safety, which is our primary value proposition in fact safety is paramount to our operation. When we were in we utilize in E. S. S Board level Committee standing for environmental social and safety recognizing the G is covered by our separate.

Got a governance committee.

For most of our safety is paramount to what we do for our customers.

And speaking of safety before taking your questions I would like to thank all the mistrust employees once again for your understanding and your leadership shown in helping us through this crisis.

Have shown an unwavering focus on building on our solid reputation for safety quality and innovation.

All while providing outstanding customer service and dedication during these extremely trying times.

My understanding our customers paying point, we will continue to innovate using complimentary services and leading edge technology to deliver greater customer value, allowing us to always stay relevant and ever changing market.

As we stick to the tenants are are carrying connects initiative.

We can provide a better workplace not only for the mistrust family, but for all those when we work with in a positive and safe manner.

With that Victor please open up the phone lines.

Of course at this time in order to ask a question. Please press star one on your telephone and to remove yourself from queue peace pinch pound key once again, that's star one for questions one more for questions.

Our first question comes from the <unk> from Keybanc capital you may begin.

Hi, guys. This is out of Congress, Sean Thanks for taking our questions.

Good morning.

So so regarding the fourth quarter revenue got I'm I'm, just trying to think about moving parts here and if if we should do a sequential down to tick is conservative like on one hand, we have COVID-19 lingering that's focused on pick up time, and then commercial aerospace weakness.

No we have the strong energy demand and we'll have some hurricane idol works going into next quarter that we lost in the third quarter.

Any color here would be helpful.

So I'll take that person like Johnny and Ed.

Want to you know certainly we're a little conservative because you never know what happens at the end of the year with customers hauling off their budget with additional.

Processors and followers of Ida and all that kind of weathers and things that you can get commercial aerospace has been soft but within the last probably week or two we're seeing a lot of anecdotal signs that it's actually coming up faster both internationally and.

And domestically than we anticipated we still believe commercial we'll get a better boost in 22, but you're seeing a lot more of engine parts for the single engine commercial planes out there than we had expected.

The idea of customers fallen off their budget on the energy side and and shortening the anticipated.

All turnaround activity is always real and and with the higher.

Cause that they have for crack spreads and everything else. That's going on you never know if they want to take advantage of that right. Nowadays anticipated strong work because of what happened from September and the weather and all that pushing into October November but we are trying to just make sure that we don't overstuff, what we what we know as real as of today.

You're very helpful and and how would you characterize your visibility at this point in the year into next year may be compared to a normal year I'm just wondering how discussions with customers I've been around planning for the 2022 budget season.

Okay.

I'll do a quick one and I'll throw it to John cause he's been working closer with all the asphalt, but we do have what we believe is the <unk>.

Drawing visibility on the first.

<unk>, let's say.

First quarter looks to have a good level of activity right now it seems to be a bunch of piling up of customers piling up at the same time is we don't know if they'll eventually look at that and try to reduce their labor, but we have Ah what we consider to be a good forecast. So far while we haven't finished any budgeting for the upcoming year.

We do think we have a good idea of the first half I think just like it might be a little cloudier John off yeah.

<unk> comments.

Yeah, Dennis sense, I think you characterized it exactly right.

We've got good visibility in the first half we feel good about working with customers in scheduling.

Labour availability is going to be a little bit of a challenge in queue to I think the closest Dennis said right now there's a bunch of turnaround so it seemed to be kind of clustered in a similar timeframe for similar disciplines.

Terms of labor requirements, but we're working hard to be able to.

Strong position to serve that and we still good. The other thing is Dennis alluded to it is prepared comments is that.

We're just starting to see the tournament commercial aerospace.

It's early we're seeing it actually in Europe, a little bit about what we're seeing in North America, but we're starting to see it in North America as well, so I think those those transferred well.

Thanks, guys.

Our next question comes from China, and you're open from Bank of America May begin.

Good morning. This is David Ridley laying on for Andrew open.

<unk>.

Is there any reason why the second half 21 gross margin levels would not be a good proxy for the run right into 22.

Just sort of you know her set differently, it's kind of.

The reimbursable travel wage subsidies in the back half of this year, how those all kind of normalized.

So.

David is Dennis I'll throw it to add one SEC, but I would say.

You do have a lot of your costs back in there we reinstate it all of the things that were pandemic Lee.

Brought on to us so all the costs are back to your point a.

Bulk of the travel's kind of getting normal I would think of spring or twenty-two might be a little bit does your travel that we've seen in the fall of 21.

But I think a lot of that's back the thing that could offset that is John and I were saying, if we do see the aerospace coming back up that.

That could that could help us on the margins as well, but I'll, let it go a little more color to that.

Right and it makes it will be the differentiator favorable say a sales next aerospace and defense being higher than average certainly data services and whatnot being higher than average going into next year that that's where you upside would come from but this year's differential was oil and gas snapping back.

You know quicker because it had fallen more last year. It it's it's what serving to to lower the weighted average this year, but I know that you guys should be pretty well normalize now going into next year mix will be the only real variable going forward and you know we've always said we had the goal of increase in gross profit every year.

You know.

Over time every single period doesn't follow suit due to the relative mix, but we are confident that you no longer term, they're still efficiencies to be gained and we we study overheads. We are looking at things like you know some selected price increases going into next year with customers as well to help prevent any erosion in margin.

As we're all dealing with cost pressures, so that'll help as well, but we do focus on gross margin and the.

Right there at now 30% would be a pretty good approximation going forward hopefully some uplift with a little bit of favorable sales mix would help that.

Oh, that's good to hear and then on the on the free cash flow. So I understand you're rebuilding some of the working capital balances now in 2021 I'm just wondering.

Do you think could be at pretty close to normal levels by the end of this year.

E. You know free cashflow conversion as a percentage of EBITDA coming back to those.

Sure to those historical novels and 22.

Yes, 22 should be pretty typical for us this year had some unusual things capex.

Capex being high your cash taxes being a little higher but certainly the bill was the largest single item. This year. So it is simply timing, we will run the DSO back down and that cash will kind of normalized once we catch back up to putting the higher hours down in payroll out.

Takes you 60 75 days to collect at some times that will get back one cycle next year. So I do think we will get back to more average don't forget as well we had that significant cares act payroll deferral of about nine point something million dollars. So four and a half million. It gets paid back. This December four and a half million next December that that's a significant 911.

I'm item there that's the final remaining kind of head would be have to work through but yeah, we should be more or less back to our 50% conversion of EBIT in the free cash flow in in 22.

Perfect. Thank you so much.

Thank you.

Our next question will come online paint Sullivan for Maxim Group, and then again.

[noise] hi, thank you.

With the focusing on sensorial, Please and you certainly mentioned more wind opportunities in previous calls and I think you mentioned Dennis that's already out in the field testing then you have about $15 million, if I heard it correctly of revenue from wind customers already what what is the usual ramp.

<unk> I mean as are you testing this product in the field before January already revenue or has it already gone through the testing phase here can you just give an overview of that usual process of weeks.

Sure. Thanks, Good morning, So we're actually type.

On the <unk>, we've got a lot of revenue as as quoted you know put them services normal things that we do but we're a little prerevenue unto testing, we're getting some money for it but we're just we're just kind of pricing a breakeven improve off the concept can be sir what's going on as as we've used those type of monitoring for many many applications other turbines the gas turbine.

That's been at 3600, 8000, Rpms, which is what our windows and.

Bridges that hope, we don't spend it all in all kinds of things pipe and everything else and all we're trying to do is just finish off our characterization and <unk>.

And making sure that we can characterize and monitored properly identify how critical it is to the operating future of until they can have an understanding of it Roy customers not only want to know how.

How fast is it is it the damage occurring in leading edge cracking whatever it is and also what the Roy could be based on.

Type of unit and Nathan and productivity are getting out of it. So we're working on all that we really believe for the main things that we were challenging ourselves to fine we can finding them in characterizing and we're just trying to prove it out.

Right now, it's kind of a hung packed because we don't really have one that we can damage. It will show you kind of get away for things to happen and prove that you knew what it was when it occurred.

And we're doing that so it's a little bit slow process and you want we were hoping maybe get someone to help us.

Accelerate that process by having one center on monitoring that are unknown damage or things like that but yeah.

Yeah, it's actually been working well, we're proving all our technology is a new to us our ability to automated and all that is part of what what kind of but no lets me to us. It's just trying to get these new types of defence and making sure. We've actually use the same kind of technology on helicopter blades. Many years ago it'll pick up damage. So we know we can do it whether it's spending past like.

I say gas turbines are revolving 3600, rpms and we can pick up crafts and all that too. So it's just a matter of.

Nailing down all the parameters to make sure what we have is consistently the right thing.

Great and with sensor you in with the growing opportunity for the wind when market is it starting for you mostly in the U S or is it a Europe N U S opportunity at the same time or how do you see I know that's a good question I would say for the service was we currently perform we're doing quite a bit and in Europe throughout our European.

<unk> Western Europe, all the way into some eastern countries monitoring inspection, there's some unique things gone out there that we're all hoping customers to identify and figure out what's happening on some of the damage.

But on the.

Online monitoring is primarily but not exclusively in North America. We do have some monitoring we're doing in Europe, as well, but I'm gonna play the bulk of it is here in the U S. But I I don't think once the thing it's often proven I don't think there's gonna be any geographic boundaries to pay for your body to just take the centres I'm a little bit of technology.

Put it into the inside of the blades and and planning on the hub and all that is very simple and easy to do so we can deploy people to wherever we need to be whether it's domestically here, we have a location right by it or we gotta fly to get to it or go a little further to get them to a different location right. So I don't see boundaries being too much other than just the normal.

Getting in and out and all that but I think it'll it'll be.

Something that's gonna get traction in many locations once we get I'll just put it out.

Oh, it was great to see the earliest behavior.

Yeah, just to add to it that is a shame we absolutely see this is a global opportunity and we see it as an opportunity not only for onshore, but also for offshore wind turbines as well and that's a particular growth area of the industry.

We may have to adaptive product a little bit because of the of the turbine blades are longer et cetera, but we're.

We're very excited and more importantly, our customers are excited.

Is Dennis said, we're we're primarily not quite cream revenue, but early revenue because we're getting revenues for for trials and test pilots that are large customers are doing and it's a mix of both existing customers, though today, we're servicing by preparing their their wind turbine blades.

As well as new customers that we aren't necessarily join the service for but they're really.

Intrigued and excited about the potential to have remote 24, seven monitoring them too.

To maintain their uptime. So we are just starting to give him good sized purchase orders now the backlog is starting to build and we're excited about where this is going.

False who is most of the work now and onshore and offshore wind performed bye bye in person inspections.

[noise] cause it already competitive or milk monitoring field.

Please you know there's no there's no excellent.

Alternative to remote monitoring right now is Dennis alluded to in his in his prepared remarks.

Some of that competition might be like a vibration.

But that is is not as accurate and that is indicative and doesn't pinpoint the damage the way that our technology does our patented technology does.

So today.

Youre doing inspections typically via drums on some kind of a time interval, it's not based on damage intervals, but it's on time it might be every 12 18 24 months that you're inspecting your flying drones up on a schedule and that's when you're learning that there's damage. If you can see it they can't always see the damage, but it might.

Actually be there the beautiful thing about our technology is you're seeing it you're hearing it every day, you're getting a visualization of what that damages, even if it's not yet visible to the human eye. So it's a great thing is is that we can understand damaged that exists real time, given it really has up to our customers. So that they can take appropriate measures.

<unk> and and prevent them from having to catastrophic repairs later on.

Great great. Thank you it sounds like an exciting remote monitoring opportunity with a lot of customer engagements. So thanks, Matt. Thank you for those additional detail.

Thank you.

Claim that Mitch Monero from Sturdivant, maybe again.

Yeah, Hey, good morning.

Yeah.

It just sort of following up on the.

On the wind side.

Just.

Since there is that is that gonna be Oh M equipment, I mean, a canopy or should it be or is it all going to be monitored.

Monitored just.

Applied as you.

As testing as customers wants you to you know.

Monitor you know.

Their equipment is is it how how's the breakout of the the revenue worker.

Yeah, Michelle I'll answer that throat, John So I think right now we're looking more on the existing to prove out the technology, obviously, but I think the potential the way we see it and we would we would anticipate customers stay on it the same way is that he'd want to put these things in early on some customers believe that the first three to five years.

The warranty period, and they're not worried about that but we're trying to work with the manufacturers of the boys and disturbing to try to get done will catch them early on aspects. So in our mind this could be either but right now it's obviously just the.

This thing just to prove up the technology and once you approve. It then you can always embedded early on.

And you you mentioned that you're you know you're doing the best 15 million a year I mean, what type of growth rate does that have.

Huh.

So.

It's a good question I guess, we didn't prepare for that but we we have something like seven hours plus of our employees, who have rope access technology training on that that they're different skill size from mechanical two N D. T. Two visual one other thing.

Many of them are applied on the rope side because broke his we're very strong user of Oh.

For Windows very strong views with any kind of rope technology a lot of this came from off shore in the north Sea and everything else. So we have a lot of people doing anything from blade inspections to blame you pair a lot of our techs are trained on the various manufacturers fibreglass repair techniques recording overlays on leading edge.

We're playing with Terrorism's, the holes cramps and bleeding edge damage.

You know, we're finding in some cases, there's some problems and hubs and and doing proprietary inspections and hubs of turbans and everything else. So right now it's it's.

Something that's kind of a robust market, we've even done some painting.

Painting blasting it and work on the towers themselves with her former acquisition.

Of nature and things is what they were doing there you can do work on them.

On the foundation and everything else.

So so.

Yeah.

So with root access you know.

The capabilities I mean is that and that's not something that you're just gonna you know that that takes some training I mean, how fast can you ramp up.

You know.

Sure I mean, I know you're trying to do remote access with the rope access is needed for repair.

Mhm, Yeah, I know, we're in a labor shortage I I would think that there's gonna be.

Will you be able to find rope access technicians.

To keep up with the demand.

Truthfully Michie, though it's the other way around and you find people have the ability to do the skills whatever you need in the field and then you get them rope access training, we do it the other way, where we get rope accident and train them as well a lot of times, you've taken people who are mechanically adept on the ground and getting them to like what they're doing up in the air.

A lot of times are getting specter to that can do it up in the air, especially when you're talking about a higher skilled mechanical or inspector or something like that.

Move on that you know many years, you're talking four or five years or more to get somebody to that to get someone where they are rope competent capable.

Levels, and obviously the level threes, where there.

People shut him up and and making sure everything's done safely properly you have lost or it goes but to get to be a love of one where a person's company on doing those activities via a rope, but they're higher skill comes from what they're doing once or up on the rule. It kind of work it that way. So the idea of growing it has taken the people that you have that are mechanically.

Or your inspection capability and being able to look down and see the ground quite a ways off and be comfortable with that to that point. It wouldn't be me, but there's a lot of people who are comfortable taken it down that way.

Yeah. This is just to just to augment within us to say.

We feel that there's pretty good growth potential in this because there's great synergies right as I as I said earlier.

Some of our customers that we're working with on this new offering our existing customers and some are new.

And we've already seen for instance, in one company that you're going to a trial with it.

Excited about we've already got some some work booked for comply to repair their winter mind blades next year.

That we hadn't been doing the work before so we think that there's gonna be a very good cross so within our existing customer base and also to expand our existing customer base.

To perform the the repair activities that we do today.

Okay well.

Well.

The other question I have for you is.

When it comes to the aerospace the commercial aerospace Margaret and.

And for how it moves through 2022, what what what what are you, saying.

Yeah.

Typically that that's gonna and it gives you confidence.

Things are getting back to normal you mentioned you know single engine.

Ladies and things like engines and things like that but what what what's the bigger picture. That's that's relaxing is it just the COVID-19 restrictions as there are are there any other factors that are allowing the market to return to normal.

So I guess, there's two parts Mitch.

One is is what our customers are telling us foundries and casting houses and and manufacturers. There's a lot of talk now about being ramping up from being ready for.

Different periods of time based on on who they are and 2022.

And we're seeing a lot more bidding activity on that I mean, certainly it's in the single aisle planes. The engines that we see for the single aisle versus the double wide and that's pretty much everyone sees the same notes.

You know, it's it's not even so much are they buying new planes that somebody attention as can be for replacements and parts of one but I've been setting for is in part for how many months you don't do the Covid and everything else. So as the the public gets back to playing and doing more if not that's that you need more brand new ones you gotta maintain the ones that are out there and and there's just.

Probably a larger.

And the total for sure, but Gary what Oh activity that we're hearing back Johns hearing it from internationally and domestically or hearing it all over the place that our customers are talking to us about their grandpa channel and when do you want anything else on that.

Sure exactly right.

We first started hearing about this more in Europe from several countries, where we're aerospace business was picking up because of and against the phenomenon you talk about that a smaller planes that seem to be what's returning back into production more quickly.

As travel normalizes post COVID-19.

And it seems to be traveled driven.

As planes or fly again and schedules are chilly when they can they're still labor shortages that or impact on the airlines to us we've all they'll carry about but certainly the expectation as they resolve those labor shortages of air traffic you know.

Games that are pretty normal level, we're seeing the increase is.

We said it started in Europe, a few months ahead of North America and now we're finally, just starting to see it in North America Gateway.

So that.

If that trend persist if that continues that'll be a real good setup for next year.

Okay.

Just just one more question and it relates to the private space.

Revenue growth that you're saying I mean is this revenue growth isn't steady quarter to quarter year over year is it lumpy.

Is it visible.

And and what type of growth rate. When you talk about you know you have had some nice growth in the quarter. What are we talking about is that you know double digit or is it 50% you know I'd be curious to get some sort of color around that.

China why don't you take that.

Yeah, we're talking aerospace on the commercial side any growth is good growth right [laughter], because we've had the whole industry has had a negative comps really.

It started in the beginning of 2020 once Covid first hit it accelerated throughout 2020 is certainly the first half of 21 was even down further versus the first half of 20th for us.

But we're finally starting to see the comps turn positive and so as I said any positive is great compared to the declines that we had so you did see a small positive in Q3 versus prior year and it's I think the question was more on the private side, though right.

Huh.

Private space.

Oh, I'm, sorry obsessed commercial.

Sorry for that kind of a private space we've seen.

Very good growth.

That throughout 2021, it's been certainly double digit.

I'm strong double digit over over 20 and.

The great thing there is that as a marriage shows a variety of services mechanical inspection that we're providing.

Which are which are proving to be strong value to to customers. So the private spaces picking up it's still for us not as big as the commercial aerospace but.

This rating it could certainly rival commercial aerospace in size and in a year or two.

The one thing to keep in mind matches. What we're doing is you know we keep talking about listening our customer and people think that's just a cliche or something that.

And this market's really important customers with trying to find a way to find innovation to make savings and can only do so much when you talk only rates.

Sounds like that you got to find a new way to do things and the.

Aerospace market, both private and commercial has a very difficult long and tedious supply chain and the mortgage you can do to pick that support you have.

You're not eliminating stops, but the more you can do to consolidate stumps and get them done locally and get them done in one place and speed up the look I mean, you've taken raw materials and you're getting into a finished product.

Faster quicker and more effective you're doing that and we've got a case where.

Customers were getting off and 50 per cent of the original product through because of the supply chain and the timing and the costs and we're off into the 19, 95%.

So it's it's really a functional just listening to the paint <unk> like we're doing on data and everything else final or they have issues and answering that and so Friday, it's become very.

Very good all set to a challenge describing what's going on in the commercial spot. So once the commercial flights to you know charming what we're doing private we really see a good future putting a puzzle.

Okay.

You for your time.

Got it thank you.

And once again, it's time for questions. Our next question a complaint right, Brian Russo from Sidoli may begin.

Hi, good morning.

<unk>.

Just to follow up on the.

[noise] blade censor market opportunities you referenced Oh, <unk> customer base evolving over time from you know Oems. So I guess, maybe one warranties run off to developers and or C. O. Two two utilities at Gmail owned and operated you know for the next 25 30.

[noise] years.

Yeah, you're exactly right, Brian I mean, right now we're starting with the owners that have [noise].

Sleep agent to the clinical but I'm trying to figure out what to do with like cause I was kind of where the <unk>.

Questions and opportunities Kangols from to the earlier questions being asked we think also that could evolve.

Type of.

Uhm placement and claimed the time and not for the money of getting up there and just having a there for maybe a lighter review on the first couple of years, and then get hungry and heavier, but you know, there's some things such as a leading edge damage and lightning strikes and things like that you can't.

Quite that pulled a length of years of service or blade. It you know I was involved in that's just happenstance that can happen anytime to any age so.

So I think I would say the more aged ones that are falling off of warranty right now makes sense.

But eventually I I do think we would be looking to try to see how the Oems wood.

Who would want to try to get this technology and how suddenly wanted to get it in there and have a man.

All the way to to do it like we've talked about the the vibrations out there and it's always been there but by the time he got a vibration on a shelf now you could have any one of the three blades on various levels of damage that's been occurring what could have been found at a much earlier stage.

Okay got it and and are you currently beta testing on offshore wind or.

There's a lot of growth potential there, but I'm. Just curious you know where you are with that given all the the federal support for for offshore.

Yeah due to the complexity of the getting to the offshore and just the size, we're starting more of onshore application will.

But like John said once we find it and know what's going on and we know we have the day to find that then I'll sure. It's just you've got that much longer with fiberglass linked to figure out can you still find what types of details from the size and quantify.

But we do there's no reason, we can't get into the offshore and do that we just want to.

Start off a little bit easier in tomorrow, and make sure that everything is nailed down an automated.

On short first.

Okay just to follow up on a commercial aerospace is there any way you could break down and you mentioned revenue mix was favorable in the third quarter, but I would suppose dead.

Energy.

Was a bigger percentage of the overall.

Revenue recorded in the third quarter of this year relative to historical levels given that commercial aerospace is lagging so I'm just trying to get a sense of.

Are we in the recovery and commercial aerospace you know in terms of top line growth as we move 320.

22.

You probably closest to those percentages.

Yeah, I mean, the aerospace did have a nice third quarter for nine months, it's still lagging but in third quarter. It picked up nice momentum. So that's where you got a little more margin uplift, where you know two three gross profit K is higher than the first six months. So what's really happening is you've got the space piece.

Whether it's you know satellite parts or rocket parts et cetera that private space Peace is bolstering aerospace and defense, where I mean, the commercial pieces lagging there's other that other sector of aerospace and defense is picking it up a little bit now you know that's the piece that commercial piece that we expect to be fully recover and next year if.

Not in the front half certainly in the back half of the year, but that's the next benefit that aerospace did have a very strong two three it does have a nice margins attached to it. So that's what gave us kind of a little bit of an uplift in third quarter gross profit versus the first six months of this year.

And then just on energy.

Maximising customers maximising up Tom.

Ah Ah Ah Ah, we see are you seeing a shift from you know major maintenance or.

Business opportunities for Mistrusts shifting from you know spring of twenty-two into into the fall of 2022 now.

Assuming no market dynamics stay where they are in terms of get oil prices and utilization rates et cetera.

Yeah, I'll start that burning a throw of the John again, I, we do see a robust potential for the spring, we still being a little bit chaotic and a little bit difficult. If all the the fires keep the for overlap going so you know.

It's possible they could move that outside sooner or later than the menu that appears in the geographic area.

But I Gotta tell Ya I don't have a false lately for our customers spend time with him to try to look at their budget and see where to spend it so typically.

<unk> 20th and.

21 haven't been a typical year, we believe there's a lot of maintenance being pushed into 22. So there is a real potential for things to be made up while we're not guaranteeing that they're gonna stay on on there.

Capital budgets that they have right now so I don't know if you have any more color.

No I think you said just write this.

Okay, great. Thank you very much.

And can I get national set of questions in a queue.

Call back over to Dennis friends final remarks.

Okay I'd like to thank everyone for your interest in materials for joining our call today. Please have a safe and productive day, we look forward to updating you next thing.

And doesn't cause today's conference call. Thank you for participating you may now disconnect.

[music].

[music].

[music].

Thank you for joining Mistras group's first sorry conference call for the third quarter ended September 32021.

My name is Vicky and I'll be your event manager today, we'll be accepting questions. After management's prepared remarks participating on the call from Mistras will be Dennis Bertolotti, the company's president and Chief Executive Officer.

That pressure there.

Executive Vice President.

Chief Financial Officer, and Treasurer, and John <unk>, Senior Executive Vice President and Chief operating Officer, I want to remind everyone that remarks made during this conference call will include forward looking statements. The company's actual results could differ materially from those projected.

That can cause actual results to differ are discussed.

The company's most recent annual report on Form 10-K, and other reports filed with the S E C.

In this conference call will include certain financial measures that were not prepared in accordance with U S. GAAP.

Installation 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 then the company's related current report on form 8-K.

These reports are available at the company's website in the investors section on the SEC's website.

I will now turn the conference over to Dennis Bertolotti.

Thank you Victor good morning, everyone.

The third quarter was a strong encore to our second quarter results clearly illustrating that we've reached an inflection point in our projected growth for 2021 just.

Just like the second quarter, our performance exceeded expectations in the third and both our top and bottom line financial results. Despite the impact of Hurricane Ida we achieved revenue at the top end of our outlook range.

And we do expect a good point of those revenues I'm sorry, a good portion of those revenues lost from Ida They made up in the coming months.

Looking at some highlights for the third quarter consolidated revenue was up 18%.

With continued strength across all of our end markets with the sole exception all the industrials.

But the aerospace and defense markets were both up nicely in the quarter gross profit increased nearly $5 million from last year and gross profit margin was approximately 30% was approximately 30%.

Despite the higher proportion of revenue attributable to Reimbursable travel costs this quarter.

We had discussed this expected scenario in our earlier calls this year, which creates lower anticipated growth gross profit margins, but higher gross profit dollars.

Nevertheless.

Gross profit margin in the third quarter was actually up from that of the first six months of this year.

Over 100 basis points as we continue to focus on efficiency and productivity improvements and have achieved a favorable sales mix.

We expect fourth quarter gross profit margin to be comparable to the third.

And our continuing efforts to improve operating leverage SG&A expenses were reduced in the third quarter sequentially from the second.

And this was despite the fact that the third quarter included the final reversal of costs that had been temporarily reduced last year.

This is clear evidence that cost containment remains a top priority for us.

As a result of our efforts of our operating our operating income of $9 2 million for the third quarter.

It wasn't an approximate 61% expansion over the same period last year.

And the net income more than doubled from a year ago, while our adjusted EBITDA margin was nearly 11%.

In summary, it was a very solid quarter illustrating that we are sustaining the momentum that are robust and evolving business model has been developing at the same time.

We are continuing our investment in new technologies.

<unk>, our data initiatives, such as one suite and sensor you, which will further differentiate us from our competition.

An example of an early adopter in such technology, a mistrust customer, which is a large midstream company wanted to ensure asset integrity for its equipment located in dozens of plants across southern Midwestern states.

The one suite ecosystem are selected by this company because it offered a secure cloud environment for centralized data management.

A single access point for plant personnel and integrated apps that perform asset integrity calculations.

The company's subscribed the data management and analytical apps that assist with the compliance and business initiatives offering additional insights and recommended actions.

All of this was enabled via one sleep.

I will elaborate further on both of those two exciting initiatives later in my remarks.

Looking more closely at our various industries served revenues in our energy Americas were strong again in the third quarter.

In part due to the recent strength of crude oil prices and demand approaching pre pandemic levels.

These conditions have motivated our energy industry customers to maximize their production levels, which potentially limits our ability to perform offline services.

Potentially decreasing our level of activity during maintenance outages.

Nevertheless, our run and maintain services do however, provide us a window, where and we can remain on site.

Providing inspection services, while our customer is running at peak production levels.

Our focus is to use technologies to learn more for our customers while they're online.

So while the markets have certainly improved relative to a year ago, the industry's balancing their inspection needs against an opportunistic time to benefit from favorable economic conditions.

Over the intermediate term, we continue to believe the energy markets will remain our largest opportunity in both traditional and especially in the growing renewable sector.

We have a multi pronged strategy to succeed in energy.

First by continuing to take profitable market share.

Second by expanding our scope of services.

And finally by introducing new products.

Keep in mind that on average over time about 70% of the revenue generated in our energy markets is from ongoing run and maintain business.

Which does not experience a dramatic peaks and valleys with capital budgets nor.

Nor is it overly dependent on periodic turnarounds.

This is particularly helpful. In the current climate, where and our customers are tending to operate longer taking advantage of high market prices for their product.

As we continue to implement our strategy and we believe we will become an increasingly valuable partner.

Knowing our share of this less volatile reoccurring revenue, improving our stickiness with customers, while expanding operating margins.

Keep in mind that we are largely agnostic with respect to the source of energy power.

And we have and will continue to flex into serving renewable energy providers, particularly wind.

In this regard I'm very pleased to announce the mistrusted sorry of wind blade monitoring technology platform.

Sorry, as an innovative blade technology management tool, helping to drive operational excellence through real time monitoring and damaged detection.

The industry norm of conducting periodic blade inspection leaves site operators in the dark on real time blade integrity raised.

Raising operator, operating and maintenance costs, while reducing generating capacity.

Whereas in sorry that makes it easier than ever to maximize the uptime performance and safety of wind turbine blade via real time monitoring.

Censorious simplifies the blade management process, helping owners make more informed integrity and even inventory planning decisions.

We are currently validating our testing in the field and we are very excited about the enormous opportunity to address both an aging wind farm fleet and incremental OEM opportunities that could arise.

In the interim we will continue to strengthen our position in this emerging and growing market by constantly improving our inspection maintenance and repair capabilities in the process of building relationships that can move into newson sorry of opportunities.

And our wind business, our wind business is growing from a solid foundation, we have been generating in excess of $15 million per year in turbine blade repair and maintenance revenue. This provides us with established relationships and technical industry knowledge, which we are using to move into the lucrative sensor in mind.

<unk> market.

There, we are adding new customers and they in turn are adding new blades and hubs for those we already inspect in the wind turbine sector.

We are demonstrating how our proprietary acoustic emission technology.

Consisting them very sophisticated sensors and detection algorithms can provide better information faster that need inspection technology is currently used in the market today.

Which primarily rely on life sensitive Brian vibration technology.

This is an exciting and rapidly evolving opportunity I encourage you to learn more by visiting since Sarnia when dot com.

In the aerospace market, we continue to grow both our defense and private space business, while the commercial aerospace sector recovers, our private space revenues are growing nicely offsetting some commercial revenue.

That is soft and it and is the main reason our aerospace revenues are up 14% in the third quarter as compared to the prior year period.

We anticipate further strengthening going forward, particularly as the commercial sector recovers as anticipated throughout 2022.

This was another quarter in which we continued to narrow the gap with pre pandemic performance.

Especially in our energy markets are inline pipeline inspection business led by Onstream had a very strong third quarter and is on pace to have their best year ever in 2021.

The last few quarters are a sign that we are well positioned to return to more normal economic conditions and strong bottom line results.

I would now like to turn the call over to Ed to give you more detail on our financial results for the third quarter of 2021.

Thank you Dennis and good morning, everyone.

It truly was another outstanding quarter in which we achieved the high end of our revenue outlook and met our bottom line goals as well.

With a significant expansion in operating profit and net income.

As Dennis said coming sequentially on the heels of one of our most profitable quarters, our ability to follow up that with a strong a strong second quarter with yet another strong quarter. Clearly suggests that we have reached an inflection point and we are.

Working very hard to sustain this positive momentum.

For the three months ended September 32021, consolidated revenue increased 18% over the prior year to $174 6 million, which was down less than 2% on a sequential basis.

Our very strong second quarter.

Revenues were up in the third quarter due to organic growth as well as from the additional benefit of a low single digit cable impact of foreign exchange.

Revenue in our largest end markets energy and aerospace and defense both increased significantly over the prior year.

We expect the energy markets to remain strong in the fourth quarter as well.

Although west Denis mentioned, they are contending with an industry that is focused.

Oh and running their plants at high capacity because of the strong crack spreads as well as building up inventory levels not to mention the typical seasonality seen in the fourth quarter.

We expect aerospace and the defense market to continue to recover, albeit slower than the energy markets with the exception of private space sector, where I mean revenues have grown robustly year over year.

We believe the traditional oil and gas market remains a large market opportunity over the next few years, where we can grow modestly by taking market share and adding additional services, while reducing volatility and improving returns.

Gross profit dollars increased by nearly $5 million in the third quarter over the prior year over $18 million on a year to date basis, while gross profit margin contracted from a year ago as we had anticipated.

Compared to a year ago, we had a much greater proportion of revenue attributable to reimbursable travel cost which would.

Which yield little if any gross profit dollars.

Nevertheless, gross profit margin in the quarter was up over 100 basis points compared to the first half of this year.

A clear indication of the progress being achieved in a prudent and improving productivity and efficiencies.

During our second quarter commentary.

We had noted that we would be reversing the remaining temporary cost reductions from 2020 that were not that were not already restored and that this would modestly increase overhead in the third and fourth quarter of 2021.

Well, we are proud to report that those costs are now fully restored yeah SG&A cost in the third quarter were actually down modestly sequentially from the third quarter. This was due to our continued focus on overheads as well as the benefit of a slightly favorable FX translation conversion rate.

Demonstrating our continued efforts to improve the operating leverage in our business model.

Both expanded gross margin dollars and tight overhead expense control operating income was up nearly 61% in the third quarter.

Similarly, both net income and earnings per diluted share were up significantly from a year ago, both actually more than doubling with net income of $3 4 million or 11 cents per diluted share.

Turning to the income tax rate.

Holiday to the effective tax rate was just over 50% for the third quarter of 2021 due to an incremental discrete expense of $1 2 million. The EPS impact of this discrete item was about <unk> <unk> per diluted share in the third quarter, we anticipate an effective tax rate of approximately 30%.

Quarter of 2021.

Cash flow from operations in the third quarter was $4 2 million and free cash flow was just under $1 million net outflow or significant increase in revenue. This year has required us to fund the corresponding increase in working capital, particularly a buildup in accounts receivable.

Nevertheless, we expect to be free cash flow positive for the fourth quarter and certainly for the full year, although the free cash conversion rate for the full year 'twenty. One we will be below our historical average of approximately 50% of adjusted EBITDA.

This is attributable to higher capex in the current year.

And to the effect of onetime items, such as the repayment of the cares Act payroll tax deferral, which is due in the fourth quarter of this year.

Our free cash flow conversion rate of approximately 13% for the first nine months of 2021 is lower than what we expect for the full year as we anticipate that the fourth quarter will be a strong free cash flow period.

On a year to date basis for the first nine months of 2021 operating cash flow was $22 5 million and free cash flow was $6 five right.

Capital expenditures are running modestly ahead of last year as expected given the higher revenue volume.

Still anticipate total capital expenditures for the year to be in the $20 million to $22 million range.

The need to fund working capital has also temporarily slowed our debt reduction efforts.

The last at the end of September net debt was below our $200 million goal at just $193 3 million.

As previously noted we expect free cash flow to rebound in the fourth quarter and debt reduction remains our number one priority use of cash.

More importantly, since we remained below a 375 leverage level as of September 30, 21, our effective interest rate for the third quarter, we shipped about two 6% and this will carry over into the fourth quarter as well.

Actually our consolidated net leverage ratio as defined by our credit agreement has returned to pre pandemic levels remain at the end of the third quarter. This metric was the lowest level. It has been since December 31, 2019 measurement period.

The result of this improvement and corresponding reduction in borrowing rates was a decrease in interest expense this quarter from $3 6 million in the prior year down to $2 3 million in the current quarter, which was a $1 $3 billion cash savings.

It truly was another outstanding quarter, where we sustained our momentum through the business.

<unk> profitability and met our financial expectations.

Our business has been recovering from the low level of demand experienced in the second quarter of 2020, when the effect of COVID-19 peaked.

Although energy prices and demand patterns improved throughout 2021, no ongoing COVID-19 pandemic continues to impact US. This effect is most pronounced on our second largest market aerospace and defense, especially in the commercial sector.

Accordingly for the fourth quarter of 2021, we expect revenue to be flat with the prior year quarter, primarily due to energy markets immediate focus on peak uptime.

Lagging commercial aerospace recover.

Adjusted EBITDA is expected to contract a contract modestly in the fourth quarter of 2021 due to substantially all of the remaining temporary cost reductions initiated in 2020, having been fully reversed during the third quarter of 'twenty, one and a lower level of Canadian reach subsidies in 2021 versus 2020.

Our outlook for the remainder of 'twenty, one is contingent on continuing macroeconomic stability.

<unk>.

Including continuing stabilization in the crude oil markets, one selling effectiveness of COVID-19, vaccination and booster rollout and no significant global supply chain disruptions or labor shortages, which would impact our ability to work as a critical service provider.

Throughout the pandemic and Alex will rebound and recover we have demonstrated initial hudson's ability to quickly adapt to a challenging market and not just for immediate results, but also a necessity to capitalize on emerging opportunities.

As we look forward to the end of 2021 and into 'twenty. Two we are confident that our business model is robust and sustainable and we remain firmly committed to executing our plans by 19th by maintaining our intense focus on cost containment, while continuing to prudently invest in the business manage our strategy both today and over the long term.

We will continue to be a very exciting journey.

Although the energy markets, both oil and gas and power generation are cyclical.

Currently stable and continuing to rebound further back to pre pandemic levels with this rebound we are focused on continuing to gain market share and winning new contracts and expanding our services and complementary mechanical and data services, particularly real once we were.

We are largely agnostic about the industries, we support we have and will continue to flex into alternative sectors, such as renewable energy, particularly when as demonstrated by our recently announced sensorial offering, which leverages, our core competencies, including acoustic emission monitoring.

And with that I will now turn the call back over to Dennis for his wrap up before we move on to take your questions.

Thanks.

So to recap as we recover from both the pandemic and the falloff in the energy market experienced in 2020.

We are planning for our next stages of growth. The first nine months of the year have us back on a more solid footing and.

And we believe markets will continue with a gradual recovery into 2022.

Let me conclude by offering an update on one suite, which is perhaps our most exciting initiative serving as a significant step forward in the digital transformation of asset protection.

We aim to meet the growing demand for solutions and technologies that can assure.

The safety.

Liability and regulatory compliance of the world's most valuable and critical assets.

Weather and natural gas turbine or wind blade, a public bridge or private space satellite or rocket.

One of these exciting technology is our new software ecosystem.

One suite, which provides our customers with most Ross its popular software and services brands and integrated apps and our secure cloud environment.

Once suite serves as a single access customer portal for cross functional data activities with access to 50 plus applications soon to be 75, all being offered on one centralized interconnected platform.

The pandemic has accelerated the transition to digitally connected and integrated technologies such as one suite.

Which provide users with data driven insights that make their operations leaner and more intelligent.

This represents an evolution of asset protection and Mistras is uniquely qualified to leverage our proven capabilities.

And knowhow, including acoustic emission monitoring while innovating to meet the needs of our changing global landscape.

Just like any thriving ecosystem apps within the <unk> suite platform interact with each other sharing critical information in real time.

Put simply this trust is one suite makes asset protection smarter and more digitally connected than ever before.

Right now we have over two dozen customers using one suite and we anticipate adding dozens more in the near future.

With the number of discreet users growing from.

A few hundred to nearly 1000 in the near future as well.

These early adopters cover many diverse end markets beyond our core energy sector.

Once suite as an illustration of how we continue to enhance the value of our legacy investments.

While increasing the ROI for our customers today and into the future.

In many ways.

Yes.

As always and certainly we'll continue to focus our investments on ways to enhance customers' ESG compliant.

Particularly to acre environmental and especially us.

But which we use for safety, which is our primary value proposition.

Safety is paramount to our operations.

Whereas we utilize an E S. S Board level committee standing for environmental social and safety recognizing the G is covered by our separate.

Our governance committee.

<unk> safety is paramount to what we do for our customers.

And speaking of safety before taking your questions I would like to thank all the Mistras employees once again for your understanding and your leadership shown in helping us through this crisis.

Shown an unwavering focus on building on our solid reputation for safety quality and innovation.

All while providing outstanding customer service and dedication during these extremely trying times.

By understanding our customers' pain point, we will continue to innovate using complementary services and leading edge technology to deliver greater customer value.

Allowing us to always stay relevant in an ever changing market.

As we stick to the tenants of our carrying connects initiatives.

We can provide a better workplace not only for the Mistras family, but.

But for all of those when we work with in a positive and safe manner.

With that Victor please open up the phone lines.

Of course at this time in order to ask a question. Please press star one on your telephone and to remove yourself from the queue pinch pound key once again Thats star one for questions one more for questions.

Our first question comes from the line of Sheila <unk> from Keybanc capital you may begin.

Hi, guys. This is Alex on for Sean Thanks for taking my questions.

Good morning.

No.

So regarding the fourth quarter revenue guide I'm, just trying to think about the moving parts here and then if.

If we should view a sequential down tick is conservative.

On one hand, we have COVID-19 lingering thats focused on peak uptime, and then commercial aerospace weakness.

Have the strong energy demand and we'll have some hurricane idle works going into next quarter that we lost in the third quarter.

Any color here would be helpful.

So I'll take that personally Johnny and want the.

Certainly we're a little conservative because you never know what happens at the end of the year with customers hauling off their budget with additional.

Processors, and empowers of Ida and all the kind of weathers and things that you can get a commercial aerospace has been soft but within the last probably week or two we've seen a lot of anecdotal signs that it's actually coming up faster both internationally and.

And domestically than we anticipated we still believe.

So we'll get a better boost in 'twenty, two but you've seen a lot more of engine parts really single engine commercial planes out there than we had expected.

Oh.

The idea of customers falling off their budget on the energy side and in shortening the anticipated.

<unk> turnaround activity is always real end and with the higher.

You know cost that they have for a crack spreads and everything else. That's going on you never know if they wanted to take advantage of that right. Now there is anticipated strong work because of what happened from a September and the weather and all of that pushing into October November but we are trying to just make sure that we don't overstep, what we what we know is real as of today.

Very helpful.

And how would you characterize your visibility at this point in the year into next year, maybe compared to a normal year.

I'm just wondering how discussions with customers have been around planning for the 2020 to budget season.

I'll do a quick one and I'll throw it to John because he's been working closer with all of the ops folks, but we do have what we believe is a strong visibility of the first half.

<unk>, let's say.

The first quarter it looks to have a good level of activity right.

Right now it seems to be a bunch of piling up of customers piling up in the same timing. We don't know if they'll eventually look at that and try to reduce their labor but.

We have a what we consider to be a good podcast so far while we haven't finished and budgeting for the upcoming year. We do think we have a good idea of the first half I think looks like it might be a little cloudier John off yet any additional comments.

Yes, Dennis I.

I think you characterized it exactly right.

We've got good visibility in the first half we feel good about working with customers and scheduling.

Labor availability is going to be a little bit of a challenge in Q2, I think because as Dennis said right now there's a bunch of turnarounds that seem to be kind of clustered in a similar timeframe for similar.

Disciplines.

In terms of labor requirements, but we're working hard to be able to get a strong position to serve that and we feel good.

The thing as Dennis alluded to in his prepared comments is that we're just starting to see the terminated commercial aerospace it's.

It's early we're seeing it actually in Europe, a little bit in advance of where we're seeing it in North America, but we're starting to see it in North America as well. So I think those are those trends bode well.

Thanks, guys.

Our next question will come from the line of Andrew <unk> from Bank of America, you may begin.

Good morning. This is David Ridley Lane on for Andrew Open.

Yeah.

Is there any reason why the second half.

21 gross margin levels would not be a good proxy for the run rate into 'twenty, two just sort of you know.

Said differently, it's kind of the.

Reimbursable travel.

Wage subsidies in the back half of this year, although it was all kind of normalized.

So good morning, David It's Dennis I'll throw it to any one thing, but I would say.

You do have a lot of your cost back in there we reinstated all the things that were pandemic Lee.

Bought onto us so all the cost out back to your point the.

Bulk of the travel is kind of getting normal I would think of spring of 'twenty two might be a little bit busier travel than what you've seen in the fall of 'twenty one.

But I think a lot of that is back.

The thing that could offset that as John and I were saying, if we do see the aerospace coming back up.

That could that could help us on the margins as well, but I'll, let Ed show a little more color to that.

Right mix will be the differentiator, a favorable sales mix aerospace and defense being higher than average certainly data services and whatnot being higher than average going into next year.

That's where your upside would come from but this year's differential was oil and gas snapping back.

Quicker because it had fallen more last year.

It's what serving to you know to lower the weighted average this year, but that's that should be pretty well normalized now going into next year mix will be the only real.

Variable going forward and again, we've always said we had the goal of increasing gross profit every year.

Well.

Over time, you know every single period doesn't follow suit due to the relative mix, but we are confident that you know longer term, there's still efficiencies to be gained and we study overheads. We are looking at things like you know some selected price increases going into next year with customers as well to help prevent any erosion in margin.

As you know as we're all dealing with cost pressures, so that'll help as well, but we do focus on gross margin in the.

Right now you know, 30% would be a pretty good approximation going forward hopefully some uplift with a little bit of favorable sales mix would help that.

Got it good to hear and then on the on the free cash flow. So I understand you're rebuilding some of the working capital balances now in 2021 I'm just wondering.

Do you think could be pretty close to normal levels by the end of this year I E. You know free cash flow.

Low conversion as a percentage of EBITDA coming back to those closer to those historical levels.

Levels in 'twenty two.

Yes, 'twenty two should be pretty typical for us this year had some unusual things.

Capex being higher cash taxes, being a little higher but certainly the AR build was the largest single item. This year. So it is simply timing, we will run the DSO back down and that cash will kind of normalize once we catch back up to putting the higher hours out and payroll out.

It takes you 60 75 days to collect at some time that we'll get back one cycle next year. So I do think we'll get back to more average don't forget as well we had that significant cares act payroll deferral of about nine point something million dollars. So $4 5 million gets paid back. This December $4 5 million next December.

Difficult one one time item there thats the final remaining kind of headwind we have to work through but yes, we should be more or less back to our 50% conversion of EBIT into free cash flow in in 'twenty two.

Perfect. Thank you so much.

Thank you.

Our next question will come online.

Sullivan from Maxim Group you may begin.

Hi, Thank you.

With the focusing on sensorial, Please and you certainly mentioned more wind opportunities in previous calls and I think you mentioned Dennis that's already out.

And the field testing and then you have about $15 million, if I heard it correctly of revenue from wind customers already.

What is the usual ramp.

Process I mean are you testing this product in the field before generating revenue or is that already gone through the testing phase or can you just give an overview of that usual processed meats.

Sure. Thanks, good morning.

We're actually.

Pipe.

On the market. We've got a lot of revenue is as he quoted you know putting services are normal things that we do but we're a little pre revenue on the testing we're getting some money for it but we're just we're just kind of pricing are breakeven and prove out the concept can be sort of what's going on is as we've used this type of monitoring for many many of their other applications other turbines the gas turbine.

That's been a 3600 80 odd rpms voices for non Windows.

Is that I hope, we don't spend it all in all kinds of things pipes and everything else and all we're trying to do is just finish off our characterization.

And making sure that we can characterize and monitor properly identify how critical it is to the operating future of until they can have an understanding of an ROI customers not only want them all.

How fast is it is it is the damage occurring on leading edge cracking whatever it is and also what the ROI could be based on.

Type of unit and Nathan and the productivity, we're getting out of it. So we're working on all that we really believe for the main things that we were challenging ourselves to find we've been finding them in characterizing and we're just trying to prove it out.

Right now, it's kind of a hung pack because we don't really have one that we can damage. It will so you kind of get away for things to happen improve that you knew what it was when it occurred.

We're doing that so it's a little bit slower process than you want we were hoping maybe to get someone to help us accelerate that process by having one center on monitoring that all have known damage or things like that but yeah.

It's actually been working well, we're proving all of our technology isn't new to us our ability to automate it and all that is part of what we're working on them, but none of that's new to US. It's just trying to get these new types of defects and making sure. We've actually use the same kind of technology on helicopter blades many years ago to pick up damage. So we know we can do it whether it's spending class.

I'd say gas turbines are revolving 36 on rpms, and we can pick up kratz from paying all that too. So it's just a matter of.

Nailing down all of the parameters to make sure what we have is consistent with the right thing.

Yeah.

Great.

So are you in with the growing opportunity for the wind when market is it starting for you mostly in the U S or is it a Europe and U S opportunity at the same time or how do you see that that's a good question I would say for the services. We currently perform we're doing quite a bit.

Europe throughout our European operations Western Europe, all the way into some eastern countries monitoring inspection there are some unique things going on out there that we are all helping our customers to identify and figure out what's happening on some of the damage.

But on the.

Online monitoring its primarily but not exclusively in North America. We do have some monitoring we're doing in Europe, as well, but I would say the bulk of it is here in the U S, but I I.

I don't think once the thing gets up and proven I don't think theres going to be any geographic boundaries behavior.

If you just take the sensors I'm, a little bit of technology and put it into the inside of the blades and in cloud on the hub and all of that is very simple and easy to do so we can deploy people to wherever we need to be whether it's domestically here and we have a location like buy it or we got to fly to get to it or go a little further you get into a different location right. So.

Don't see boundaries being too much other than just the normal you know.

Getting in and out and all that but I think it'll it'll be.

Something that's gonna get traction in many locations once we get all of this proves out.

Oh, great it's great to see the earliest Oh, Hey, John.

Yes, just to add to what Dennis is saying, we absolutely see this as a global opportunity and we see it as an opportunity not only for onshore, but also for offshore wind turbines as well and that's a particular growth area of the industry.

We may have to adapt the product a little bit because of the turbine blades are longer et cetera, but.

We're very excited and more importantly, our customers are excited.

As Dennis said, where we're primarily.

Not quite pre revenue, but early revenue because we're getting revenues for trials.

Tests and pilots that are large customers are doing and it's a mix of both existing customers, though today we're servicing.

Carrying their wind turbine blades.

As well as new customers that we aren't necessarily doing a service for but they're really.

Intrigued and excited about the potential to have remote $24 seven monitoring them.

To maintain their uptime. So we are just starting to get in good sized purchase orders now the backlog is starting to build and we're excited about where this is going.

But it does fall to as is most of the work now in onshore and offshore wind performed bye bye in person inspections.

Or is it already competitive or melt monitor greenfield.

Please you know Theres no theres no excellent.

Alternative to remote monitoring right now as Dennis alluded to in his in his prepared remarks.

Some of that competition might be like vibration.

But that is not as accurate and not as indicative and doesn't pinpoint the damage the way that our technology does our patented technology does.

So today.

Youre doing inspections typically via drones on some kind of a time interval, it's not based on damage intervals, but its on time it might be every 12 to 18 24 months that youre inspecting you're flying drones upon a schedule and that's when you're learning that theres damage. If you can see it they can't always see the damage, but it might.

Be there the beautiful thing about our technology as Youre seeing it you're hearing it everyday youre getting a visualization of what that damage is even if it's not yet visible to the human eye. So the great thing is that we can understand damage that exists real time, given early heads up to our customers. So that they then can take appropriate measures.

<unk> and prevent them from having to do catastrophic repairs later on.

Great. Thank you it sounds like an exciting remote monitoring opportunity with a lot of customer engagements. So thanks, Matt. Thank you for those additional detail.

Thank you.

And then Mitch Pinheiro from Sterne.

You may begin.

Yeah, Hey, good morning.

Yeah, just sort of following up on the.

On the wind side.

Sensory is that is that going to be.

OEM.

Equipment, I mean, it canopy or should it be or is it all going to be.

The monitor just.

Why it is you are.

As I say.

As customers once you do you know.

Monitor.

Their equipment is it how is the breakout of the.

The revenue work there.

Yeah, Mitch I'll answer that and throw it to Jon So I think right now we're looking more on the existing to prove out the technology, obviously, but I think the potential the way we see it and we would we would anticipate customers staying at the same ways that you'd want to put these things in early on some customers believe that the first three to five years.

The warranty period, and we're not worried about that but we're trying to work with the manufacturers of the blades and turbines to try to get down to catch them early on aspects. So in our mind this could be either but right now. It's obviously just the existing just to prove out the technology and once you've proven that you can always embedded early on.

And you mentioned that Youre doing about $15 million a year I mean, what type of growth rate does that have.

So.

It's a good question I guess, we didn't prepare for that.

But we have something like southern hour plus of our employees who have rope access.

Knowledge and training of that they're there and different skill sets from mechanical to NTT to visual one other thing many of them are applied on a rope side because brokers is a very strong user.

For Windows very strong use of any kind of real technology a lot of it came from offshore in the north sea and everything else. So we have a lot of people doing anything from late inspections to blade repair a lot of very pegs are trained on our various manufactures fiberglass repair techniques, we're putting overlays.

Leading edge as well.

Arizona, the holes cracks and leading edge damage.

No.

Finding in some cases, there are some problems in hubs and doing proprietary inspections and hubs of tier ones and everything else. So.

Right now it's it's.

Something thats kind of a robust market, we've even done some.

Painting blasting and work on the towers themselves with a form of our acquisition of.

The nature of those there's work that we're doing there you can do work on the platform.

On the foundation and everything else.

So.

Sure.

Yeah.

So with rope access.

The capabilities I mean is that that's not something that you're just going to that.

It takes some training I mean, how fast can you ramp up.

Hi.

Sure I mean, I know, you're trying to do remote access, but the rope access as needed for care.

I know, we're in a labor shortage.

Would think that theres going to be Uh huh.

You'd be able to find rope access technicians.

To keep up with demand.

Truthfully mentioned it goes the other way round, you'll find people have the ability to do with skills on whatever you need in the field and then you get them rope access training, we do it the other way, where we get rope accident and train them as well a lot of times, you're taking people who are mechanically adept on the go.

And getting them to like what they're doing up in the year a lot of times youre getting spectrum that can do it often here, especially when you're talking about the highest skilled mechanical or inspect or something like that the curve on that as you know many years, you're talking four or five years or more to get somebody to that to get someone where they are competent capable is different.

Levels and kind of obviously the level threes were there.

People shutting up and making sure that everything is done safely properly you have lesser of those but to get to be at level, one where a person who's company.

Doing those activities via a rope, but they're higher skill comes from what Theyre doing once they're up on the rule you kind of work it that way. So the idea of growing it has taken the people that you have that are mechanically or inspection capability and being able to look down and see the ground quite a ways off and be comfortable with that at that point. It wouldn't be me, but there's a lot of people who are come.

<unk> taken it down that way.

Yeah. This is just to.

Just to augment what Dennis is saying.

We feel that theres pretty good growth potential in this because there's great synergies right as I said earlier.

Some of our customers that we're working with on this new offering our existing customers and some are new.

And we've already seen for instance in one company that we have begun a trial with it that we're really excited about that we've already got some some work booked for compliance to repair their winter behind blades next year.

That we haven't been doing the work before so we think that theres going to be a very good cross sell.

Within our existing customer base and also to expand our existing customer base.

To perform the work.

Pair activities that we do today.

Okay.

Hum.

The other question I have for you is.

When it comes to the aerospace commercial aerospace market and.

And sort of how it moves through 2022.

What are you seeing.

Specifically, that's going to that gives you some confidence.

Things are getting back to normal you mentioned you know single engine.

Ladies and things like engines and things like that but what what's the bigger picture.

Relaxing.

Is it just the Covid restrictions is there are there are any other factors that are allowing the market to return to normal.

So I guess, it's two parts Mitch.

One is what our customers are telling us foundries and casting houses and manufacturers. There's a lot of talk now about being ramping up and being ready for.

Different periods of time based on who they are in 2022.

And we're seeing a lot more bidding activity on that.

Certainly it's in the single aisle planes the engines that we see for the single aisle versus the double wide and that's pretty much everyone sees the same notes.

<unk>.

You know, it's it's lighting so much are they buying new planes, but somebody decisions can be for replacements and parts are ones that have been setting curve had been parked for how many months you don't do the COVID-19 and everything else so as the public.

Public gets back to flying and doing more it's not to say you need more brand new ones you got to maintain the ones that are out there and there's just.

Probably a larger.

And in total for sure, but very lot of activity that we're hearing back Johns hearing it from internationally from domestic we're hearing at all over the place that our customers are talking to us about that ramp up which I don't know if you want anything else on that.

Hi, Dennis you're exactly right.

We first started hearing about this more in Europe.

From several countries, where aerospace business was picking up because of it and again, it's a phenomenon that you talked about Dennis the smaller claims that seem to be returning back into production.

Production more quickly.

As travel normalizes post COVID-19.

And it seems to be travel driven.

Planes are flying again and schedules are showing when they can they're still labor shortages that are impacting the airlines to us we've all been hearing about.

But certainly the expectation is they resolve those labor shortages.

<unk>.

Resumes at a pretty normal level, we're seeing the increase.

As we said it started in Europe, a few months ahead of North America and now we're finally, just starting to see it in North America and a good way.

Yeah.

If that trend persist if that continues that will be a real good setup for next year.

Okay.

Just one more question and it relates to the private space.

Revenue growth that you're seeing I mean is this revenue growth.

Steady quarter to quarter year over year is it lumpy is it visible.

And and what type of growth rate. When you talk about you know you have had some nice growth in the quarter. What are we talking about is that.

Double digit or is it 50% I'd be curious to get some sort of color around that.

John why don't you take that.

Yes, we're talking aerospace on the commercial side any growth is good growth right now because we've had the whole industry has had negative comps really.

Started in the beginning of 2020 once Covid first hit it accelerated throughout 2020 is certainly the first half of 'twenty one.

Even down further versus the first half of 'twenty for us.

But we're finally starting to see the comps turn positive and so as I said any positive is great compared to the declines that we had so we did see a small positive in Q3 versus prior year and it's I think the question was more on the private side, though right.

Private space.

Oh, I'm, sorry, plus commercial sorry.

Sorry for that on the private space.

We've seen that.

Good growth.

That debt throughout 2021 it's been certainly double digit.

Strong double digit over over 'twenty and.

The great thing there is that it's a marriage of a variety of services mechanical inspection that were providing which are which are proving to be strong value to our customers. So the private space is picking up it's still for us not as big as the commercial aerospace but at this rate.

It could certainly private commercial aerospace in size.

A year or two.

The one thing to keep in mind Mitch is what we're doing as you know we keep talking about what's in your cost of my people think that its just pushed out or something that.

In this market, it's really important customers are trying to find a way to find innovation to make savings and you can only do so much when you talk hourly rates.

Things like that you got to find a new way to do things in the.

Aerospace market, both private and commercial has a very typical long and tedious supply chain.

You can do to pick that supply.

Youre not eliminating swaps, but the more you can do to consolidate bumps and get them done locally and get them done in one place and speed up the look I mean, you've taken raw materials and getting into a finished product.

It's a quicker and more effective youre doing that and we've got a case of where.

Customers were getting off and 50% will be original product through because of the supply chain and the timing and the cost we're up into the 90, 95%.

So it's really a function of just listening to the pain points like we're doing on data and everything else playing out where there are issues in answering that and so far that's becoming very.

Gary go to offset to what challenge describing what's going on in the commercial side. So once the commercial starts to.

Chime in with what we're doing on the private we really see a good future for the puzzle.

Okay. Thank you for your time.

Got it thank you.

And once again next door for questions. Our next question will come from the line of Ryan Brian Russo from Sidoti.

Again.

Yeah, Hi, good morning.

Good morning, Brian just to follow up on the.

Wind blade a sensor market opportunities you referenced Oems do you see customer base evolving over time from.

Oems I guess, maybe when warranties run off to developers and door.

Two utilities that own and operate it for the next 25 30 years.

Yeah, Youre exactly right, Brian I mean, right now, we're starting with the owners that have sleep.

Sleep agents to the point that they were trying to figure out what to do real quick what kind of world.

<unk> and opportunities Kangols from.

But to the earlier questions being asked we think a well so that could evolve.

Type of.

Placement and claimed the time enough for their money of getting it out there and just having it there for maybe a lighter review on the first couple of years and indeed have been heavier, but you know theres, some things such as leading edge damage and lightning strikes and things like that you can.

Equate that to a link of years of service to ablate. It involved and that's just a handful of stuff that can happen at any time to any age.

So I think obviously the more aged ones that are falling off of warranty right now makes sense.

But eventually I do think we would be looking to try to see how the Oems.

I would want to try to get this technology and how suddenly wanted to get it in there and kind of having that.

Another way to do it like we've talked about the vibration is out there and it's always been there but by the time you got a vibration on shelf.

One of the three blades on various levels of damage thats been occurring.

<unk> found at a much earlier stage.

Yeah.

Okay got it and are you currently beta testing on offshore wind.

Or I mean, there's a lot of growth potential there, but I'm just curious you know where you are.

With that given all the federal support for offshore.

Due to the complexity of the getting to the offshore and just the size, we're starting more of onshore applications.

But like John said once we find it and know what's going on and we know we have the data to find it then offshore. It's just you've got that much longer of a fiberglass linked to figure out can you still find what types of deep thought from a size and quantified at the clip, but we there's no reason, we can't get into the offshore and do that we just wanted to.

Started off a little bit easier in smaller and make sure that everything is nailed down and automated.

Onshore first.

Okay, and just to follow up on a commercial aerospace is there any way you could break down and you mentioned revenue mix was favorable in the third quarter, but I would suppose that end.

Energy.

<unk> was a bigger percentage of the overall <unk>.

Revenue recorded in the third quarter of this year relative to historical levels given that commercial aerospace is lagging. So I'm just trying to get a sense of where are we in the recovery in commercial aerospace.

In terms of top line growth as we move through two.

'twenty two.

As you're probably closer to those percentages.

Yes, I mean, the aerospace did have a nice third.

Third quarter for nine months, it's still lagging but in third quarter. It picked up nice momentum. So that's where you got a little more margin uplift where Q3 gross profit is higher than the first six months.

What's really happening is you've got the space piece.

Whether its satellite parts or rocket parts etcetera that private space piece is bolstering aerospace and defense, where I mean, the commercial pieces lagging theres other that other sector of the aerospace and defense is picking it up a little bit now you know that.

That's the piece that commercial piece that we expect to be fully recovering next year, if not in the front half certainly in the back half of the year, but that's the mix benefit that aerospace did have a very strong Q3. It does have nice margins attached to it. So that's what gave us kind of a little bit of an uplift in third quarter gross profit versus the first six months of this year.

And then just on energy.

Maximizing customers maximizing uptime.

Does it.

We see are you seeing a shift from major maintenance or.

Business opportunities for Mr Us shifting from.

Spring of 'twenty two into into the fall of 2022 now.

Assuming market dynamics stay where they are in terms of oil prices and utilization rates et cetera.

Yeah, I'll start that Brian and I'll throw it to John again, we do see a robust potential for the spring, we see it being a little bit chaotic and a little bit difficult. If all the refiners keep the overlap going so.

It's possible they could move that out as far as some of our later than many of their peers in that geographic area.

But I got to tell you I don't have a false lately for our customers spend their time with them to try to look at their budget and theater spending so typically.

2020.

'twenty one haven't been a typical year, we believe theres a lot of maintenance that's being pushed into 'twenty. Two so there is a real potential for things we've made up but we're not guaranteeing that theyre going to stay there.

Capital budgets that they have right now John I know if you have any more color there.

No I think you said it just right.

Yeah.

Okay, great. Thank you very much.

Yeah.

And I'm not showing any further.

Questions in the queue I'd like to turn the call back over to Denis for any final remarks.

Okay I'd like to thank everyone for your interest in <unk> and for joining our call today. Please have a safe and productive day and we look forward to updating you again next time.

And this concludes today's conference call. Thank you for participating you may now disconnect.