Mistras Group Inc (MG) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Mistras Group Incorporated's Fiscal 2010 Second Quarter Earnings Conference Call. My name is Antoine and I will be you event manager today. Throughout the conference you will remain on listen-only. We will be accepting audio questions after the presentation. And now I would like to hand the conference over to CEO Sotirios Vahaviolos. Please proceed.

Antoine, thank you very much and good morning. Welcome to the Mistras Group earnings conference call to discuss our recent company performance. First, my best wishes to all for a healthy and prosperous new year. Again, my name is Sotirious Vahaviolos. I am the Founder, Chairman and CEO of Mistras.

Joining me today is Pete Peterik, the company's Chief Financial Officer. The purpose of today's conference call is to discuss our recently released financial results for the company's second fiscal quarter that ended November 30, 2009. Our primary objective of this call is to provide you with a clear understanding of our performance and prospects.

This discussion is intended to supplement our quarterly earnings release and our filings with the Securities and Exchange Commission. Peter will begin with a review of our financial results. I will then follow Pete with a few remarks and observations about our performance, marketing activity and prospects. We will then answer any questions you may have. With that, let me turn it over to you, Pete.

Thank you, Sotirios. First I want to remind everyone that our discussions during this conference call will include forward-looking statements. Actual results could differ materially from those projected and factors that could cause the actual results to differ are discussed in the perspectives for our IPO dated October 7, 2009 and on our reports on Form 10-Q and Form 8-K.

Also, the discussions during this conference call will include certain financial measures that were not prepared in concordance with US generally accepted accounting principles. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in Mistras Group Inc's current report on Form 8-K dated January 7, 2010. These reports are available on our website at www.mistrasgroup.com under the section for investors and also on the website of the Securities and Exchange Commission.

Now I would like to present the financial results for our second quarter. As a reminder, we have a May 31st fiscal year-end and our second quarter ended November 30, 2009. For the second quarter of fiscal 2010, revenues were $71.9 million compared to $59.3 million for the same quarter last fiscal year. The increase of $12.6 million or 21.3% was primarily attributed to revenue increases in our services segment which had an outstanding growth rate of 29.5%.

This increase was partially offset by decreases in revenues of our other segments, which were more impacted by the economy and adverse foreign currency affects. For the first half of fiscal 2010 our consolidated revenues were $128 million or 20.4% greater than the first half of fiscal 2009.

For the quarter, our gross profit was $23 million. This represents an increase of 6.9% from the second quarter of fiscal 2009 and an increase of 34.2% compared to the first quarter of this year. As a percentage of revenues, our overall gross margin was 32% and 36.3% for the second quarter of fiscal 2010 and 2009 respectively and 30.6% in the first quarter of this year.

The primary reasons for the decrease in margin percentages were rapid growth in our lower margin services segment as well as other pricing volume and mix changes which were for the most part caused by the economy. Our operating income for the second quarter was $7.7 million or 10.7% of revenues as compared to $7.2 million or 12.1% of revenues for the second quarter last year.

Although behind last year's margin on a percentage basis, our sequential quarterly operating margin percentage more than doubled from the 5% margin reported in the first quarter of this fiscal year. For the quarter, selling, general and administrative expenses were 19% of revenues as compared to 18.8% of revenues in the second quarter of fiscal 2009.

In this quarter, these costs included an additional $0.7 million or 1% of revenues for non-cash stock compensation expense. There were other dollar increases primarily for additional infrastructure to support our growth from acquisition and our centers of excellence.

For the quarter, net income attributed to Mistras Group Inc was $3.6 million as compared to $3.3 million in last year's second quarter and $0.8 million in our first quarter this fiscal year. Earnings per diluted share were $0.14 versus a negative $0.97 for last year's second quarter. Last year and for approximately one-third of the second quarter this year, we did not have the full impact of the newly issued shares of our public offering in this calculation.

We use adjusted EBITDA, a non-GAAP measurement, to evaluate our performance as we believe this represents a better short-term metric given our acquisition amortization, non-cash stock compensation expense and certain other non-recurring items.

For our second quarter of fiscal 2010 adjusted EBITDA was $12.3 million or 17.1% of revenues compared to $11.9 million or 20.1% of revenues for the same quarter last year and $7 million or 12.4% of revenues in the first quarter of this fiscal year.

Although we prefer not to mix periods in our analysis, we believe it may be of interest to you to compare our first half to fiscal 2010 with the last half of 2009 to demonstrate our improving profitability since the unprecedented economic downturn began. The adjusted EBITDA for the first half of fiscal 2010 was $19.3 million or 15.1% of revenues compared to $12.2 million or 11.8% of revenues for the last half of fiscal 2009.

Now a few comments on our operating segment quarterly results. As noted earlier, our Services segment increased revenues 29.5% or $13.9 million to a total of $60.9 million. The organic and acquisition growth rates in this segment were approximately 13% and 17% respectively.

For the quarter, the Product and Systems segment had a 421 basis point improvement in the gross margin percentage as compared to the second quarter last fiscal year on approximately the same revenue base. This improvement was attributed to sales of higher margin products and several cost initiatives implemented to reflect the slowdown in capital spending in the economy.

The second quarter, our International segment revenues declined approximately 11% on a local currency basis as well as foreign currency fluctuations of another 5%. However, we experienced high double-digit of organic growth in Brazil and Europe. This segment revenue decrease and the fixed nature of many of our expenses caused our cost of revenues to be higher compared to the second quarter of last year.

Now with respect to our balance sheet and cash flows. We continue to be pleased with our performance and related metrics. For the first half of fiscal 2010, our cash flow from operations was $8.6 million with $4.1 million generated this quarter. Due to our seasonality, our receivables increased $11.5 million to $50.4 million while we improved our day sales outstanding and our accounts payable and accrued liabilities only increased by $2 million.

For the first half of our physical year, cash used for capital expenditures was $0.6 million and another $14.4 million used for acquisitions. Total capital expenditures, including our capital leases were $4.7 million or 3.7% of revenues. As of November 30, 2010 (sic), our net debt was $17.2 million including cash and cash equivalents of $14.6 million, and we have full availability under our $55 million revolver. And with that Sotirios, I'll turn it back over to you.

Thanks, Pete. Now I would like to add several observations and comments to Pete's remarks. First, I will start by reminding you that Mistras is a unique company that relies on our strong feelers of support, first, and most importantly, our customers, then technology in all our offerings, secular growth, both organic and by acquisition and the financial motive that drives cash flow and profitability.

We are very pleased with our second quarter results, especially in this economy. We set a new record in quarterly revenues and I can assure you it will not be the last. We not only had 21% growth, but we added new customers and contracts and increased our human capital complementing our existing team with approximately 400 highly qualified, and most importantly certified, technicians.

We're encouraged by our profitability increase over the last half of the last fiscal year and will not waiver from our pursuit or pursuing our target 20-20 business model of 20% growth and a 20% adjusted EBITDA. Now let me give you some insight on the growth of Services segment.

Revenues grew approximately 30%, as Pete stated as a result of the new multi-year contracts obtained in the first quarter, growth in nuclear plant work as well as growth from existing customers, new service offerings and acquisitions. We continue to have growth from our centers of excellence including mechanical integrity and tube inspection.

Compared to the second quarter of the last fiscal year, we had double digit growth in several of our target markets, including oil and gas, chemical, fossil and nuclear power. During the quarter, we acquired a small non-destructive testing division of an engineering company that provides additional skilled services technicians to support our expanding nuclear customers while expanding our footprint in the south.

Our outstanding growth was realized in spite of declines in capital projects, turn around work and reduce pipeline, aerospace and industrial parts and inspection activity compared to the prior year. We expect these larger markets to improve as the economy further stabilizes.

We'll now momentarily digress to a question that we hear frequently from our shareholders and the investment community. This question has to do with an impact of lower refinery profits and reported refinery closures. Certainly this is a relevant question since approximately 50% of our revenues year to date has been generated from refineries.

It is true that our valued customers are hurting and several refineries have reduced some of their capacity and two plant closures were announced. Also, there has been much press on this subject with many conflicting views and much speculation about inventory level, oil prices, et cetera.

To start with, we do not have any exposure to the closed facilities. Moreover, the December statistical report from the American Petroleum Institute, API, reported the November US gasoline derivatives increased 1.5% versus the same month a year ago continuing a nearly uninterrupted string of increases since June indicating a continuous demand. Although we do not heavily rely on new capital and project spending for our growth, announced 2010 capital budgets for the oil and gas industry for US capital spending will approach $200 billion, modestly lower than 2009.

Regardless of what the opinions or market trends may be, the fact is that Mistras had approximately 30% growth in our oil and gas business both in this quarter and during the first half of this fiscal year.

Mistras is leading in the refinery market, particularly with some of the larger US refineries. However, we're just scratching the service of our opportunities in this industry serving less than 5% of the world's 698 refiners. While our historical focus within the oil and gas market has been largely in refining, other opportunities for us exist in other sectors of this industry, particularly for midstream applications.

We also continue to be asked about price and presence and concessions. No matter what state of the economy, our customers are sensitive to price. All of our customers want to improve their profits. This is part of managing any business. While we're not the cheap guys pitching low prices, we seek and find collaborative approaches for our customers utilizing our comprehensive portfolio of technology, engineering rich resources and one stop advanced asset protection solutions and services.

For example, with the capabilities of our enterprise software, PCMS, combined with the expertise of our American Petroleum Institute Inspectors, Mistras can save money for our customers by doing inspections as needed through our risk based inspection methodology versus performing unnecessary time interval inspection activities.

Customers select their provider based on mutual trust and their confidence in the quality of services provided, safety and technical confidence. We believe we are that company. While oil and gas including petrochemical represents a large percentage of our business, please remember that this is just one of many end markets and opportunities for growth.

We see large immediate opportunities in fossil power and nuclear markets where Mistras again has a complete suite of solutions. Revenue within this target market significantly increased in the second quarter of the fiscal year. We have also increased opportunities in the smart grid sector where we have partnered with the Electric Power Research Institute.

We have already performed nearly 700 transformer tests, a key component of the electric wreath, giving us a large database and the experience to now monitor approximately 40 large transformers on online 24s and unattended. This market is ripe for future growth given our portfolio of application-rich solutions including products, software and services and can support customers even ala carte or in the comprehensive approach.

Although not yet dominant sale of our revenue mix, we continue to see the potential for long-term growth for Mistras in sales of software services, 24/7 online monitoring, and testing advanced composite materials.

Now shifting to the products and system side of our business, during the quarter, we received a second contract to develop a robotic ultrasonic imaging system to inspect large and complete structures of advanced composite materials for the new joined strike fighter. More recently we won a contract to monitor 24/7 the Hammersmith Bridge in London which crosses the River Thames in West London. This suspension bridge was originally build in 1824 and has historically suffered normal structural and corrosion problems.

In addition our Products and System segment through their research and development capabilities continues to work on several projects to develop niche products and systems for sale as well as proprietary items that are used exclusively by our Service segment. One such effort nearly completion is a wireless sense of fusion application using proprietary dual technology of acoustic admission and vibration for 24/7 unattended remote online monitoring.

Although the primary focus is for the wind turbine industry, this technology also has other possibilities. These and similar projects, as well as our strong secular markets should produce growth in the Products and System segment in the future.

As to the outlook for the second half of the year, we continue to see uncertain market conditions, uncertain industries and geographic boundaries. Overall, are bullish about our own business over the next six months. As I mentioned last quarter, the near-term questions about the economy or a particular industry, such as maintenance spending, do not change the overall broad drivers of the Mistras business model.

I strongly believe that downturns are ideal for gaining market share for those that are prepared. Both private and public infrastructure continues to aid and needs to be assessed and monitored. While it is difficult for us and our customers in these tough economic times, we believe the solutions we offer are not optional, but critical. We expect turnaround and project work will increase for the remaining of our fiscal year.

Rather than mobilizing a large number of technicians at one time, we believe our customers are exploring ways to get work done over time, creating a more frequent but less intense effort. This appears to offer cost benefits to the customer by avoiding costly per diem and mobilization costs of bringing technicians on location from outside the region while providing higher quality results from technicians who are on the customer's side at a daily basis. We're well-positioned to support this new development trend.

Based on our year-to-date revenue, our current forecast and our historic revenue pattern where the second half of our fiscal year is higher than the first half, we expect our revenue will be near or about the midpoint of our previously announced guidance range of $250 million to $280 million. Our business model continues to provide predictable and consistent revenue, less vulnerability to more cyclical capital projects and is the base for leveraging our growth.

Our strategy has been successful and will continue to be so. We see many additional growth opportunities, both organically and through acquisitions. But we are maintaining our discipline to ensure that we will provide the highest level of quality, value and safety to our customers.

We have a clear path forward to further improve our margins, including increasing our revenues from advanced engineering and inspection services, 24/7 online monitoring, software services, line scan and tomography and guidance diagnostics to name a few. Our goal is to be that unique, global, technology-enabled, asset-protection solutions company, delivering strong returns to our shareholders through continued growth and profitability while providing technology and exceptional value to our customers.

The improvements in our quarter's results from the first quarter, is only the beginning. We're excited about prospects and look forward to a second half of the year. That concludes our initial remarks. I would like to open that now for questions. Antoine, can you help us?

Thank you. (Operator Instructions). Your first question comes from the line of Scott Levine with JP Morgan. Please proceed with your question.

Good morning, guys.

Good morning.

Good morning.

A question regarding SG&A; SG&A came in a little bit below we were expecting there in the quarter. What can we think about in terms of modeling overhead as we -- and if growth indeed continues to accelerate as you guys anticipate?

Scott, we certainly believe that the trend of leveraging or selling, general and administrative expenses will continue with growth. We're well-positioned with our infrastructure. So on a modeling basis, I would certainly see continued SG&A on the same percentage and certainly lower going forward.

Okay, great. And then maybe you can help us with regard to what types of data points we should look for in order to assess client uptake of more of the advanced service offerings within your business mix. What types of trends should we be looking for or what kind of help could you offer in terms of assessing how you're doing there?

Well, Scott, our strategy has been all along that we like to see the advanced services to be, at least in the service sector, to be at least 25% of the total sales of the service sector. We're now approximately at 15%. And we see that trend going forward. That, as I said before, will probably increase.

Okay, maybe one last one. It sounds like from your prepared comments like the power market is maybe one of the areas that we can look to grow more aggressively here in the near-term. What are you seeing on some of the businesses that are more on the alt energy side that are maybe more driven by the regulatory catalysts, things like wind or smart grid, what have you? Are you seeing any opportunities emerge there? Are you still cautious?

Well, we're very cautious. But at the same time, as I stated, in the product sector, we already have a large investment, and we're now, we're introducing the near-term a new product that really is utilizing wireless technology and it would be useful 24/7, unattended monitoring, not only of the wind turban blades, but also the gear boxes, the bearing as well as the motor. Now that's really something that will be in the future.

Now when you say future, are you talking a couple years out? What are you -- do you have any rough expectations or too early to tell?

We'd like to introduce that in the first quarter of the calendar year 2000 -- by the end of the first quarter of the calendar year 2010.

Great, thanks. Nice quarter.

Thank you.

Thank you very much.

Your next question comes from the line of Richard Eastman with Robert W. Baird. Please proceed with your question.

Yes, good morning. Could you talk just a couple minutes about, or a couple seconds about your international business? Given maybe the lack of seasonality in the second quarter, what's the momentum or lack of momentum look like for the balance of the year in international? And are those end markets -- are the weaker end markets there similar to what we're seeing here?

The international market is probably about 60% as services and 40% products. The products, as we discussed, is really adversely affected. And, therefore, internationally was affected a lot more than in the US sector.

We see, though, a lot of changes right now that are taking place, both in the service sector international as well as in the product sales business. And we hope that the third and the fourth quarter will be a lot better than what we saw so far.

The other factor, Rick, is that the foreign exchange currency impact, the year-to-date, had about a 12% increase. And based on what we're seeing in foreign exchange expectations that will define over the second half of the year.

I'm surprised that your FX was a negative impact.

If you go back against the Euro and some of the currencies we're trading, certainly the dollar during that period acted in a manner that caused the change.

And can I also ask you, Pete, has FX impacted the gross profit line as well?

It would impact all the lines, Rick --

Yes, okay.

-- all the way down. Obviously, since it impacts revenue as the highest, it has a higher percentage all the way down.

Okay, then, just one last question. In terms of the gross margin on the overall services side of the business, as we now enter the third quarter, a seasonally weaker quarter, would you expect the gross margin in the third quarter to be at least at the first quarter level or above?

No, I think it would be a lot higher than the first quarter.

The gross margin in services.

Yes, sir.

Okay, great. Thank you.

Your next question comes from the line of William Stein with Credit Suisse. Please proceed with your question.

Thanks. Actually, I have a couple of housekeeping items. I think you might have given some of this on the prepared comments. But, Pete, can you go over what some balance sheet items were, AP, AR and inventory please?

Certainly, Will. And again, on the accounts receivable, $50 million, inventory's about $13 million, and then certainly accounts payable and accrued expenses, which were significantly down based on our volume, were about $5 million and $17 million respectively.

Great. Then on the guidance, Sotirios, I appreciate the update. It sounds like tracking to the mid to high end of that range on the revenue side. I think you've also given adjusted EBITDA guidance, I think $39 million to $45million. Can you confirm that that's the current guidance? And is there any update to that or is it similar to the --?

I think it would be very, I will make the similar comment that I made on sales I will also make on the guidance on the adjusted EBITDA.

Okay. So $39 million to $45 million stays, but I think you're tracking to the midpoint or possibly higher.

That's exactly the point. I will agree to that.

Okay. And any chance we'll hear comments on EPS guidance?

Will, we don't give guidance on EPS. So you'll have to figure that out on your own other than you can certainly start figuring out a full complement of share account from the offering that we'll start to track into the earnings.

Right. Thank you for that. And just one other quick one, acquisitions, you did one in the quarter I think. Can you give us an idea of the size of that maybe trailing 12 months revenue when it was closed? And then also if you can characterize the acquisition pipeline going forward, should we expect more of these smaller deals? Is there anything big in the pipeline characteristic of that? That would be helpful.

Will, as I stated, this was really a part of an engineering company. It's really in the same range, as we discussed before, in the $5 million range as we discussed before. And as you know, it's our business model. All of this includes acquisition for now and in the future.

Great, thank you.

Your next question comes from the line of Elana Wood with Bank of America Merrill Lynch. Please proceed with your question.

Good morning.

Good morning.

Good morning, Elana.

Most of my questions were answered. I did just want to touch on products and systems margins. They were, let's see, 23%, much higher than we had modeled. So just wondering would you attribute this trend wholly to mix or how should we think about it?

Go ahead, Pete.

There would be two primary factors there. Obviously, mix had -- we sold more products that have a higher margin. Then the other thing is the operational team in the products and inside them did a nice job of identifying cost reductions and initiatives to improve that margin.

Okay, I mean, but is it more skewed toward mix or the operational improvements, would you say?

Most of that, Elana, it comes really from the fact that the majority of the sales where in the acoustic emission field where we dominate and it's really a very profitable segment for us.

Okay. And then just lastly on the corporate and other $1.9 million, would expect the same run rate over the next two quarters or might that go down somewhat? It just seemed like a relatively high level?

We would expect that number to remain on a dollar basis consistent.

For the next two quarters?

Right.

Okay, thank you.

Your next question comes from the line of Evan Marwell with Criterion. Please proceed with your question.

Good morning, a couple of questions. First, if you could talk a little bit about the advance services. As you go from 15% to 25% of your services revenue, do you believe you can get there with the existing advanced services you have in your product offering or is that going to require you to come up with new things as well?

Well, we strongly believe [there were] technology coming in, so we're always ahead. We actually think we're ahead with the products that we have. So we believe very strongly we will do exactly what you just said. With the existent technologies we have, I think we can meet that goal.

And do you have a sense of a timeline for what your objectives are for getting to that goal? I mean, is that a three year goal? Is that a 12-month goal?

It will be two to three years?

Two to three years, okay, great. And my second question is, when you talked a little bit about the change in the nature of your work, I was hoping you could expand a little bit upon that in terms of what the implications are in terms of people doing longer, smaller, less intense projects as opposed to big turnaround projects and why they're going in that direction?

Basically, if you're looking at the refinery, it's made out of many units. It's not just really -- the refinery is just the one part. Its different units of the refinery producing different products. Their typical [set down], really the one that we're talking about turn around, will involve in doing all of these units at the same time. That automatically will imply that we need to bring a lot of people from outside the territory.

If you bring people from outside the territory, two things happen. The first one, of course, is the cost because you have a lot of per diems and mobilization costs. The second one, of course, is the fact that these people that come from outside have less knowledge of the refinery, specific knowledge of the refinery.

By doing smaller turn arounds, let's say take care of one unit or two units at a time, now you do not need as many people as you needed before and you can really do that by really expanding the hours of the technicians that you have or maybe bring a couple technicians from an adjacent laboratory. That will cut down on the per diem and of course the knowledge of the plan will be a lot higher and the productivity will be a lot higher also. Did I answer you?

Yes. So just following up on that, I guess two questions. One, why are customers deciding to do this? Does it ultimately increase the amount of time the refineries are shut down? And is this a long-term trend do you think? Or is this just a temporary thing because customers are realizing they have to do certain work that they've been putting off, but they don't want to do it all at once for cost reasons?

Well, our belief is that they started as a short-term thinking because of the economy, but now they see the benefits. And the benefits, I think are very high.

And so the benefits for them are less shut-down time or are the benefits are just lower costs for doing this?

I think it's really the benefits - it's both. First of all, of course the shutdown time would be less if you do less units, but at the same time it's a lot less in costs; as I said per diem, mobilization tests and others.

In terms of doing the work this way as opposed to mobilizing to do everything at once, how does that impact the margins for Mistra?

Well, Mistra basically has local employees that are our own employees. We don't have to really hire because when you have a bit shutdown you sometimes have to subcontract to others. The margins that you make when subcontracting are not very high. So now by really having more time with our own employees, using our own employees for both overtime or regular overtime, it would be a lot more profit for us.

Okay great, thank you.

Your next question comes from the line of [Chris Sansone] with the [Sansone Partners]. Please proceed with your question.

Hi guys, good morning. With respect for the Joint Strike Writer Contract, what's the size of that opportunity, I guess versus what you're currently doing in defense and maybe can you talk about the opportunity in that category going forward?

Well, Chris, we're not really doing a lot of work in defense. We have not really concentrated in that area for many years. This opportunity of course is more in the range of $3 million for us. And $3 million for the product area, it's a big number.

Okay, great. Do you think that there will be more to follow in --?

Well, that's our hope because we're developing the robotics system that is really advanced state of the art and really monitors not just small parts, it monitors very large parts in a robotic fashion using not only the ultrasonics but also the mechanics of that are very sophisticated.

And how long was the lead time to get that win?

The lead time for that was less than six months. The development of the product and finish probably would be more than six months.

Okay, great, thanks a lot.

Your next question comes from the line of Matt Duncan with Stephens. Please proceed with your question.

Good morning, Sotirios and Pete. Congrats on a good quarter.

Thanks, Matt.

Thank you, Matt.

The first question I've got, looking at the growth rate you guys had this quarter, you put up 9% organic growth and it was more like 13% on the services side. I'm wondering if you can break that down for us. When you look at the oil and gas guys, the chemical guys and the power guys, which, Sotirios, you had said had double-digit revenue growth with those customers. How much of that growth was with existing customers and how much can you attribute to new customer wins?

Well, we really want some major contracts as I said in my prepared statements. I would assume that the new customer's probably a little bit more around -- I think it was around 50-50, new customers and the existing customers. The existing customers, of course, is increasing more about technology, buying more about technology. That's really what happened with our existing customers.

So you're getting those guys to buy mechanical integrity and they're buying more the advanced stuff and that's helping to grow the revenues then.

Exactly and also buying more of the PCMS, more of our planned condition monitoring software which will give us really a lot more future revenues.

Sure, okay great. Next thing I've got is, Pete, you mentioned in your comments on gross margin that price has been a little bit of a factor there. Can you quantify in terms of basis points, how much you think price hurt your gross margin this quarter?

Well, over all certainly price continues to be a factor, more so on new contracts or contract renewals. The overall has been, in terms of margin, at most one to 1.25 basis points. I did a calculation in terms of any customers that we lost and as a percent of revenues it was very small.

Okay, that's helpful, I appreciate it. And then the last thing I've got, guys is you look at the fundamentals for your business, obviously the asset protection services industry has been far less impacted by the economy than other industrial service arenas. But as we look at your customers, they clearly have been pretty heavily impacted. Are you seeing any signs that the underlying fundamentals of your customers businesses are improving at this point that might help sort of increase the growth rate for your industry?

Matt, as we discussed before, the industry's hurting, I mean everybody knows that the industry's hurting. But at the same time, we try to provide more different services to the customer that really stresses more productivity for them utilizing some of the new technologies some of the software. As I mentioned before, instead of doing time scheduling servicing, do something basically by doing all of our software suites and our technology do service as needed. That has helped us a lot.

Okay, thanks.

(Operator Instructions). Your next question comes from the line of Richard Eastman with Robert W. Baird. Please proceed with your question.

Hi, just as a follow-up, Sotirios or Pete, could you just tell us what the utilization rate of your employment base was in the second quarter?

Do you want to cover that?

The utilization rate was still below our optimal rate because we had pockets of the country that were still impacted by the economy and so that it was certainly, we still have another 50 to 75 basis points of improvement there.

When you say optimal can you just hang a number on that? Is it 70% or --?

We target roughly 2% to 2.5% of our revenues as being unbillable time which includes time to train our people and get them ready for their certifications.

Okay. And then, Sotirios, could you just give a quick overview of this application on the smart grid side? You had mentioned 40 transformers being -- I presume that's kind of on-line monitored? That would seem a big opportunity. Is that technology being deployed into that base? Is that new or where are we in that maybe growth curve?

Basically one of the key members of the smart grid, of course, is the transformer. The last shutdown that we had, the last problem that we had, the last blackout really depended because the transformer failed. And transformers also are very critical because delivery of a new transformer can be anywhere between nine and 12 months.

We undertook a program about four years ago with the Electric Power Research Institute, with EPRI, to really use acoustic emission and older technology because it's not only acoustic emission. It's also vibration and overall sense of fusion, what we call sense of fusion.

And we undertook a project to really start monitoring transformers. Doing so, we developed a database of approximately 680, very close to 700, say 700 transformers. And we basically found out what are the critical areas of the transformer. Once we found that, within the last year, 1.5, we started really developing systems for online monitoring, installing transducers permanently, some of them wireless to monitor the transformer and tell the customer the health of that transformer.

That experiment at the beginning, now a practice, is becoming better and better accepted. That's why, as I said, in a very short time we are now up to about almost 40 transformers. Keep in mind that these transformers are very, very large. They're not the typical small transformers you see in your neighborhood. You're talking about transformers there that can be easily 35 to 55 let's say dimensions. It may be something like three-quarter sizes of a typical executive room, in a way, you might say. So you're talking about very large structures that we monitor continuously.

That area is becoming more and more attractive to us and we will pursue it very aggressively now and in the future because we also now start providing the customer with a variation of our PCMS software. So the customer can have not only data take-in but analysis, archiving and data management for the future so that he can start talking about the health monitoring of the transformer and he can really make predictions about when to open the transformer, clean the transformer, fix the transformer or buy a new transformer.

Do you consider the 700 to be your market? I mean, is there anything under contract there or if we're at 40 now?

No, this is basically -- when you're talking about transformers, especially -- talking about, again, transformers are between 2K MVA and above. You're talking some big transformers. Don't be surprised. There are more than 35,000 to start with, 35,000 in America. I do not know how much there is throughout the world. But that's on the business plan that we're doing right now as we're talking.

I see. Okay, very good. Well, thank you.

Your next question comes from the line of Tim Marsek with Sandler Capital. Please proceed with your question.

Hi, guys. Great quarter. I'm pinch hitting for Vito here.

Thanks, Tim.

Hey, given you have a good deal of future visibility, given the nature of business, do you think 9% organic growth will be the low point of the year and we can expect deceleration from here?

Well, the 9% for the first quarter was really something, but it was on the low side of what we're thinking. You will see really acceleration from now on.

Okay. Great. Thanks so much.

There are no further questions at this time. I will now turn the call back over to management.

That concludes, I guess, our remarks and we thank you very much for listening to us.

Thank you for your participation in today's conference call. This concludes the presentation. You may now disconnect. Good day.