Mistras Group Inc (MG) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your second-quarter 2014 Mistras Group, Inc.'s earnings conference call. My name is Conti, and I am your operator for today. (Operator Instructions) I would also like to remind you that this call is being recorded for replay purposes.

And now I would like to hand the conference over to Sotirios Vahaviolos, Chief Executive Officer. Please go ahead, sir.

Conti, thank you very much and good morning. Welcome to the Mistras Group earnings conference call. This is Sotirios Vahaviolos, founder, Chairman, and Chief Executive Officer of Mistras Group.

Also joining me today is Jon Wolk, the Company's new Executive Vice President and Chief Financial Officer, who joined our Company in November. In today's call we will review Mistras Group's financial results for the second quarter and first half of the fiscal year 2014 that will end on May 31, and discuss our prospects going forward.

Let me start by saying I am very pleased with Mistras's performance for the second quarter. The Company's Services segment and especially its International segment experienced healthy organic revenue growth that exceeded our expectations for the quarter.

As a reminder, our guidance for fiscal-year 2014 includes organic year-over-year revenue growth ranging from 7% to 12%. Organic revenue growth for the Services segment was within that range, at 8% for the first half of fiscal-year 2014. Organic growth for Services was 2% in the second quarter compared with a tough prior-year comp, but will improve through the remainder of the fiscal year because of several important competitive evergreen contract wins, including one that we were awarded in December.

Encouraging and as expected, our International segment experienced organic revenue growth of 17% during the second quarter and improved its year-to-date organic growth to positive 2.5%.

Total Companywide organic growth was consistent with the first quarter at a bit more than 4%. However, because of our market share gains and our expectation for a busy turnaround season for the first half of calendar 2014, we expect our organic growth for the second half of the fiscal year will improve, to enable Mistras to finish the fiscal year within our organic revenue guidance.

It is worth mentioning that the largest of the new contracts was a five-year contract from BP to provide nondestructive examination, inspection, and support in Prudhoe Bay, Alaska. This contract award was particularly the important to Mistras because it bolsters our already strong partnership with this important customer, and it augments our strength in run and maintain multiyear outsourced engineering and inspection services.

These multiyear contracts provide recurring revenues that comprise 60% to 65% of the Company's revenue base. The Company's revenues are further enhanced by opportunistic contract wins for large capital projects especially in the oil and gas industry that includes pipeline construction.

Our EPS of $0.32 per diluted share, including $0.01 per diluted share of items that Jon will describe. Exclusive of these items, our EPS was $0.31 per share, which exceeded the consensus earnings estimate of $0.02 per share.

I am particularly pleased with the improvement in our International segment, which nearly tripled its operating income compared with prior year, excluding acquisition-related items. Our Company is gaining both market share and operational momentum, and delivered a second-straight strong quarter.

Because of recent market share gains, the improvement in International operations, and recent acquisitions we have raised our outlook for the remainder of the year. I will talk more about that at a few moments later, but first I will turn it over to Jon, who will cover the Company's summary financial results. Jon?

Thank you, Sotirios. I am extremely pleased and proud to be with you today as a member of Mistras Group's senior management team. I am excited about the Company's many strengths and leading market position, and also about its prospects for future growth and profitability.

Before I continue, I have to remind everyone that the remarks made during this conference call will include some forward-looking statements. The Company's actual results could differ materially from those projected. Some of the factors that could cause actual results to differ are discussed in the Company's most recent annual report on Form 10-K and in other reports filed with the SEC.

Also, the discussions during this conference call will include certain financial measures that were not prepared in accordance with US generally accepted accounting principles. Reconciliations of those US GAAP financial measures to the most directly comparable US GAAP financial measures can be found in the Company's current form on Form 8-K filed January 8, 2014. These reports are available on the Company's website in the Investors section and on the SEC website.

Now I am very pleased to present the Company's summary financial results for the second quarter and first half of fiscal 2014. Revenues for the second quarter of fiscal-year 2014 were $156.8 million, 13.8% above the prior year's second quarter. Revenues for the first half of fiscal 2014 were $292.6 million, 16.5% about the prior year's first half.

The Company's second-quarter year-on-year revenue growth of $19.0 million, or 13.8%, was driven primarily by its International segment, which grew by $16.4 million or 61%. Our International growth was mostly acquisition driven, as we lapped the acquisition of our German subsidiary made during the last month of the prior year's Q2. The Company's International acquisitions accounted for 43% year-on-year Q2 International growth, with organic growth driving the remaining 17% of year-on-year improvement.

Revenues from our Services segment achieved year-on-year growth of 3.5%, of which 2.2% was organic. Although Services revenues grew by less than our 7% to 12% annual guidance range, this exceeded our expectations for the quarter, compared with an unusually strong prior-year comp.

The Company's Products and Systems segment halted a trend of year-on-year declines by posting a 2% increase over prior year.

For the first half of fiscal year 2014, our year-on-year revenue growth of $41.5 million, or 16.5%, was again driven primarily by our International segment, which rose nearly $30 million or 58%. As in the second quarter, our International growth was driven by the prior-year acquisition of our German subsidiary.

Acquisitions drove 56% of the year-on-year first-half International growth, while organic growth accounted for the remaining 2.5%. FX rate movement had a negligible impact in both the three- and six-month periods.

Our Services segment achieve first-half revenue growth of 9%, of which 8% was organic.

Our Products and Systems segment, which tends to have the highest margin rates on incremental revenues, experienced a revenue decline of $2.8 million, or 15%, compared with the prior year's first half.

Our second-quarter gross profit was $48 million, up 14.5% over the prior year's second quarter on a revenue gain of 13.8%. Gross margins were 30.6% in the second quarter, compared with 30.4% in the prior year.

The improvement in the Company's overall gross margin rate was driven by a 350 basis point improvement in the International segment's gross margins, which more than offset margin declines in our Services and Products and Systems segments.

For the fiscal year's first six months, gross profit grew by $11.6 million or 15.4%, compared with revenue growth of 16.5%. And the gross margin rate contracted slightly to 29.8% compared with the prior year's 30.1%.

The gross margin rate for the six-month period improved in both the Services and International segments by approximately 70 basis points each, but was slightly more than offset by a decline in the Products and Systems segment.

The improvement in International segment's gross margin rate was driven by an improved sales mix of more advanced services, including online monitoring systems and software, particularly in the UK and in Russia during the second quarter. The International segment is also benefiting from last summer's reorganization activities and will increasingly benefit as the ERP system used to manage the Company's North American Services business is installed throughout Europe in 2014.

Gross margin in the Services segment was 28.4% in the second quarter of fiscal 2014, down nearly 80 basis points below the prior year's second quarter. The causes of this decline were timing related, including costs incurred to position the Company for growth in the Canadian oilsands region, as well as the timing of medical cost claims compared with the prior year's second quarter.

Advanced services comprised 15% of Services revenues in both the current and prior year's second quarters. Despite its decline in Q2, Services gross margin rate for the six-month year-to-date period exceeded prior-year by nearly 70 basis points, a trend that is expected to continue throughout the remainder of the fiscal year.

Revenues from the Products and Systems segment represented 5.5% of the Company's second-quarter total, while gross profit from this segment comprised 7.7% of the Company's total. Although still a meaningful contributor to the Company's success, Products and Systems US results were adversely impacted by the 2013 government sequester, but improved somewhat during the second quarter, albeit with a lower gross margin rate than in the prior year.

Operating expenses in the second quarter of fiscal 2014 were $32.7 million, or 20.9% of revenues, compared with $26.2 million, or 19% of revenues, in the prior year's second quarter. Operating expenses in the first half of fiscal 2014 were $62.4 million, or 21.3% of revenues, compared with $52.2 million, or 20.8% of revenues, in the prior year's first half.

Slightly more than half of the year-on-year increases was driven by the impact of the prior-year acquisition of our German subsidiary. The remainder of the increase was split between our Services segment's discretionary investments to grow the business, including positioning for Canadian expansion and expanding capabilities in certain other centers of excellence, and an increase in corporate expenses related primarily to higher insurance and recruiting costs.

Operating income in the second quarter of fiscal 2014 was $15.3 million or 9.7% of revenue, compared with $15.8 million and 11% of revenue in the prior year. Excluding the impact of acquisition-related adjustments, operating income was $14.8 million or 9.5% of sales, compared with $15.8 million and 11.5% of sales in the prior year. The drivers for the deleverage from prior year were lower operating margins in the Services and Products and Systems segments and higher corporate expenses, which more than offset the improvement in International results.

The Services operating margin was a healthy 13.2% of revenues for the second quarter; but this was below the prior year's 15%. The Services decline was due to the higher levels of investments made to support growth in the Canadian oilsands region and to secure the Alaskan contract that Sotirios mentioned, which aggregated roughly $700,000 in the quarter, as well as other targeted expansions and the timing of medical claims.

Products and Systems operating margin deleveraged due to delays in industrial and military system orders and canceled boiler tube leak detection systems for coal-fired power plants.

Excluding the release of previously recorded acquisition-related contingent liabilities, International operating results were -- margins were 9.2% of revenues, nearly double the prior year's 5%. International results were driven by strong product and software sales in the UK and Russia and improving utilization of personnel, but importantly did not yet reflect a material improvement in Germany.

Operating income during the first half of fiscal year 2014, excluding amounts pertaining to acquisition-related liabilities, was 7.6% of revenues, compared with 9.4% in the first half of the prior fiscal year. Excluding acquisition-related items, operating margins for the Services business held steady at 12.4%, while International margins improved to 6.6% from 6.0% in the prior year's first half.

However, these favorable results were more than offset by the Products and Systems segment decline, driven by lower sales and an adverse sales mix, and by increased corporate expenses, driven primarily by higher insurance and recruiting costs.

Net income for the second quarter of fiscal 2014 was $9.3 million or $0.32 per diluted share. These results were nearly the same as the prior year's $9.2 million or $0.32 per diluted share. Excluding the impact of acquisition-related adjustments, second-quarter net income was $8.9 million or $0.31 per diluted share.

Net income in the first half of fiscal 2014 was $14.9 million or $0.51 per diluted share. Excluding the acquisition-related adjustments, net income was $13.2 million or $0.45 per diluted share, similar to the $13.8 million or $0.47 per diluted share earned in the prior year's first half.

The Company's adjusted EBITDA was $22.6 million or 14.4% of revenue during the second quarter of fiscal 2014, compared with $23.9 million or 17.3% of revenue in the prior year. For the first half of fiscal 2014, the Company's adjusted EBITDA was $38.6 million or 13.2% of revenue, compared with $39.3 million or 15.7% of revenue in the prior year.

During the second quarter and first half of fiscal 2014, the Company's top 10 customers represented 36% and 35% of revenues, respectively, compared with 32% and 31% during the comparable prior-year periods. Revenues from oil and gas industry customers were 48% of total revenues in both the second quarter and first half of fiscal 2014, compared with 52% and 50% in the second quarter and first half of the prior year.

Oil and gas revenues were up in absolute terms, but declined as a percentage of the Company's total by 4%, compared with the prior year's second quarter. The shift was primarily to aerospace, which increased by 5% of the Company's total revenues and was reflective of the Company's prior-year German acquisition, which is more heavily focused on aerospace customers.

Finally, a few comments on the Company's balance sheet and cash flows. Mistras generated $15.6 million of operating cash flow during the first half of fiscal 2014.

The Company used $8.2 million of cash for capital expenditures, and also made non-cash outlays to lease an additional $3.4 million of capital equipment in the first half. The Company's aggregate capital investment during the first half of fiscal 2014 was $11.6 million or 4.0% of revenue.

The Company's free cash flow -- defined as cash provided by operations, less cash used for capital expenditures -- was $7.4 million during the first half of fiscal year 2014. The Company's debt and capital lease obligations, net of cash, was $80.0 million at November 30, 2013, compared with $70.2 million at May 31, 2013, a ratio of roughly 1 times the current fiscal year's expected adjusted EBITDA.

As of November 30, 2013, Mistras had an undrawn revolver balance of $59.8 million. And with that, Sotirios, I will turn it back over to you.

Thank you, Jon. And now let me take the opportunity to brief you on some key developments and activities within each of our business segments.

First, our Services segment. The Services segment completed and continued to capture a number of strategic projects in the upstream, midstream, and downstream segments of oil and gas, the most important of which was the significant five-year contract received from BP for extensive services in Prudhoe Bay, Alaska, that I mentioned earlier.

During the quarter, we expanded the level of advanced services performed at many of our larger downstream evergreen accounts, using our proven corrosion inspection programs. These programs leverage our Asset Integrity Management Services, AIMS, by applying a systematic approach to screen for the presence of corrosion based on API recommended practices throughout piping sections and components in service.

In addition to extending these high-value services to our older evergreens, we are also seeing interest from new refining prospects. We are very excited about our strategic acquisition of a professional engineering and consulting services company which augments our downstream capabilities by offering plant operation support for our customers' processes and equipment in their process.

We can consult on areas of profit improvement, such as turnaround planning, risk-based inspection, and energy management, project planning and execution, and we can conduct technical training services. All of these professional services are being provided today globally.

The continued growth in the US Gulf Coast region led us to complete an acquisition in December of an established nondestructive testing Company that provides a comprehensive range of in-house and field material services, including high-energy radiographic capabilities from two locations that are nearby key energy and chemical fields. Our new acquisition comes with all the necessary accreditations and quality management certifications, as well as a tenured staff and a diversified blue-chip customer base.

Our Asset Integrity Management Services, AIMS: AIMS group has successfully completed a major milestone with the implementation of our enterprise-based PCMS inspection data management system software for all 14 refining sites of a major US energy company.

Our midstream business sector continues to expand throughout North America with the addition of significant pipeline and gas processing project awards in the Marcellus, Midland, Texas, and Alberta, Canada, regions. There, we're also continued positive results coming from our power generation and chemical/petrochemical sectors.

In power generation, we completed a major nuclear steam generator replacement, SGR project, in the quarter with a utility in the Midwest. We were awarded and begin work this month on another major steam generation replacement project in the Midwest. We were awarded a three-year contract from a major utility to provide NDT services for their fleet of nuclear power plants in the Southeast.

Our NDT services continue to be contracted and will be provided at various nuclear and fossil plants in the first quarter of calendar 2014. We are also continuing to expand our presence at the two nuclear plant construction sites in the Southeast that were awarded to Mistras last year, with the addition of multiple crews to conduct advanced and other engineering and inspection services.

In chemical and petrochemical, we continue to see these sectors develop due to low cost and abundant natural gas availability. During the second quarter, we secured a significant contract to provide traditional, advanced, and predictive maintenance services for one of the largest chemical companies in the world at their largest production site, in addition to supporting them at their other facilities worldwide.

As mentioned in the last call, we expect the winter/early spring turnarounds that are beginning later this month -- actually I should say next week -- to be very healthy and above average; and the same for the late spring turnarounds that follow.

Next, our Products and Systems segment. Cautionary industrial capital spending, stricter EPA-enforced regulations on coal-fired power plants, and military/government cutbacks are still impacting year-over-year growth in this segment in North America. However, in the quarter we did receive and recognized sales of our ACTMS gas turbine blade monitoring systems, valve leak monitors, and small to medium-sized UT inspection systems for advanced, composite, and specialty metal component units.

Outside of North America, both China and Japan show expanded high-margin product and system sales in the quarter. Requests for quotations for our mid-to large-scale inspection systems in the industrial, aerospace, military, and infrastructure markets continue to be active, which could indicate that funding availability is on the horizon.

Now let's discuss the International sector. As Jon mentioned earlier, our International organic revenue growth and gross margins for the second quarter exceeded our expectations.

It was driven by strong execution, the delivery of key products and system sales, growth in the run and maintain business, and a united European team that is implementing the US Services model for collaboration in order to achieve EMEA operational excellence, especially for un-billable labor.

In the UK, we continue to expand our services at the world's largest offshore wind farm, providing rope access inspection services and life-extension engineering. On a separate opportunity, following successful trials, we completed the installation, commissioning, and support of individual structure integrity and monitoring systems on 32 wind turbines in the same farm.

The Mistras Cambridge-based remote monitoring applications group, which also provides support for bridge monitoring in oil and gas assets in the region, will monitor the turbines on a 24/7 basis using our automated, Web-based reporting and alarm systems.

In the advanced NDT services, our automated ultrasonic program for onstream noninvasive inspection of offshore process vessels continues to expand. In France, we hired the technical support teams and senior project managers that will be servicing our previously announced long-term six-year services agreement for a major oil/gas company at their six in-country refineries and petrochemical plants. We are already providing advanced services and engineering for improving and optimizing inspections, which was a key decision criteria for this customer selecting the Mistras Group.

Additionally, during the second quarter of fiscal 2014, our French operations performed the first major turnaround for one of the refineries, helping the customer achieved outstanding services quality and safety and establishing Mistras as a key player in French turnaround management business.

With a positive market trend developing in aerospace, our in-house aerospace business secured three separate multiyear service agreements to support major suppliers to Airbus. To support our now-growing nuclear business, for the recently awarded eight-year contract with a major French utility, an experienced unit manager was being hired.

As mentioned in previous earnings call, we continue to work on efficiency improvements with rigorous cost controls and implementation of ERP tools to allow for better management of operations, using the US services model as a baseline reference. Overall results showed nice improvement for the second quarter in a row.

In Germany, we are seeing an increase in the aerospace industry applying both our destructive and nondestructive testing services, including working with Airbus to support such key programs as the A350 and the A320neo. Wind turbine projects are continuing to increase in Germany, for NDT blade inspection, repairs with rope access, and engineering support.

Expansion in NDT services continues in Germany and the Benelux, with [conditional] offices and radiographic bunkers. Strategic initiatives for improving operations and thus profitability are now paying dividends in Benelux, and have stabilized our German business to breakeven levels.

In short, the continuing and increasing synergies between our European operations, capital productivity, and efficiency management improvements and a strong focus in aerospace, oil and gas, and power generation markets lead us to be optimistic about the future performance in EMEA.

In South America we are beginning to see the return of some investment in the oil and gas market in calendar-year 2014, in deepwater oil production and refining projects. In the quarter, we were awarded a contract from a major energy company to perform computer radiography services for two years, as we have benefited from a growing railroad inspection business, mining, and advanced NDT projects.

For our smaller business in Russia and in Japan, the quarter results were above our expectations. We expect the same for the rest of the fiscal-year 2014. Additionally, three more PCMS software licenses were sold in the second quarter in Russia.

And now for an update on our outlook and guidance. Our recent new contract wins and acquisitions, combined with improving results from our International segments, have led us to increase our expectations for both top-line and bottom-line performance for the current fiscal year. Previously, we had expected revenues to be in the range of $570 million to $600 million. We now expect that revenues will be in the range of $590 million to $615 million.

Previously, we had expected adjusted EBITDA to be in the range of $74 million to $80 million. We now expect that adjusted EBITDA will be in the range of $77 million to $83 million. The Company does not provide quarterly guidance, but we'll continue to update this annual guidance on a quarterly basis.

In closing we are pleased with our financial results, the organizational and marketing strategies that we have put in place, and the positive market trends that will support the future growth of all our business segments. We are very thankful for the confidence and trust that our old and new customers have expressed in Mistras, rewarding us significant multiyear evergreen contracts with unprecedented durations of eight, six, and five years.

Once again, the Mistras model of run and maintain for outsourced asset protection solutions has demonstrated its consistency with record revenues. Our new contract wins will certainly enable us to meet our organic growth and profitability goals.

But as I conclude this conference call, let me thank our now 5,000 employees, our loyal customers, and our valued shareholders during our transition year 2013. That concludes our prepared remarks, and we would like to now open the floor for questions. Conti?

(Operator Instructions) Andy Wittmann.

Hey, guys. Good morning. So, just wanted to dig in a little bit to make sure that I've got a clear understanding of the guidance. You mentioned that there is a contribution from M&A as well as organic contribution.

Can you just clarify a little bit of how much revenue you expect here this year from M&A, so we can dissect that a little bit more?

Yes, sure, Andy. This is Jon. We raised guidance in revenues by about $15 million to $20 million in total, and we have consummated two acquisition so far. The two acquisitions we have done will have annualized revenues of about $20 million; and probably about half of that will occur during the current fiscal year, just because of timing of when these two companies were acquired.

So think of it as roughly $10 million of the revenue guidance increase coming from acquisitions, and the other $5 million to $10 million coming from organic.

Got it. That's helpful. Thank you.

Then you talked about some costs that probably ran through the Services segment. Sounded like they were to help you move into a Canada little bit more, as well as maybe -- I don't know if there is procurement costs for the big contract that you won with BP in it.

Can you give us a sense of how much some of those costs may have impacted the margins and the outlook for those costs? Do those -- obviously the contract costs will subside; but are there ongoing costs in Canada?

And maybe more broadly, Sotirios, on this one, can you talk about your Canadian initiative, of where you are today and how you get to where you want to be?

Sure, I will take it first. This is Jon. As I said in my prepared remarks, there was roughly $700,000 or so of additional costs that we incurred during the second quarter that we chose to invest. Really stepping up our -- broadening our footprint in Canada; getting -- becoming part of the union up there; making sure that we were positioned to really make a bigger footprint. I will let Sotirios talk about the market implications and the opportunities in Canada.

But also Alaska. We won that increased footprint in Alaska that Sotirios mentioned, and we incurred six-figure costs to travel, certify employees, and so forth, make sure that we were really ready to step our game up and step up to our important customer's requirements.

So we chose to invest a good $700,000 or so during the second quarter in order to really broaden our footprint and step up to our goals in the future. I will let Sotirios talk about the opportunities in Canada in terms of the broader footprint.

Yes. Basically, Andrew, we already have operations in Canada as you know, both in the East and in the West. We have seen some great opportunities in pipelines as well as in the oilsands. And what we are trying to do is to address those opportunities. And we have addressed in -- as we were addressing the last couple years in Europe. So really for us this is a new expansion area.

Got you.

Also, of course, we have also received positive response from our customers.

Is the work starting to come in already on this? Or are you investing ahead of the work? Just want to get a sense of what the near-term returns could be on this, or if this is going to be maybe (multiple speakers).

As you know, Canada is a different country, so we have to really first off certify our employees for their standards and everything else. So we have to prepare ourselves, and that is how you spend money first.

And then the work has already started. And we expect it in the next quarter to start increasing.

Got it. Maybe a final question here, it sounded like Products is an important part of the International segment. Jon, can you quantify the year-over-year delta in terms of maybe revenue mix there on the Products side, that maybe helps us get a better understanding of how to think about the comparison there?

Yes, sure, Andy. During the quarter we had incremental Products and Systems sales in the International segment of about $3 million incremental over prior-year. There is a healthy margin on that. So a good part of our 350 basis point year-over-year improvement in International margins came from that, those sales.

But I would say that year-to-date we have had International gross margins in the mid-28% of revenues range. And as we go to the second half of our fiscal year, we expect that our International margins will perform roughly in that range.

As we have said before, our goal is to get the International gross margins certainly well north of 30%, but we are going to continue to move toward that goal. But I would expect that, while we won't see necessarily in the second quarter gross margins that we had in International repeat in the second half of the year, we should see continued improvement, certainly above the first quarter's level.

Also, Andrew, I would like to make -- so that it becomes very clear, is Canada is not International for us. It is really part of the US operations.

Yes. That is all very helpful. Thank you, gentlemen.

Tahira Afzal.

Hi, good morning. This is actually Saagar on for Tahira. Congratulations on a solid quarter, first off.

First, looking at your International operations, I know you were just talking about margin potential. And I think, Jon, in your prepared comments you mentioned that there was improved sales mix in the UK and Russia, but that Germany still hasn't seen improvement.

Can you just talk about what you guys still need to do and what is being done, and when we can potentially see that improvement in Germany, and what that really will mean for your top line and for your margin potential?

Yes. First of all, we also mentioned that we have seen an improvement because we are now start breaking even to positive. Okay? That is number one.

Number two is basically we are really -- we'll install, as I said in my prepared text remarks, we are going to install the same system that we have in America, in the US business; and that will be basically a lot easier to be able to manage the 11, 12 offices that we have in Germany. And that will help our German operations and the management there, as well as us.

Yes, this is Jon. The other thing I would add to that is that in Germany we have got some investments that we have been making, which are embedded in our cost structure today, to have some laboratories that will ramp up and serve the aerospace industry. They are not quite revenue producing yet, but we expect they will be as the calendar year rolls out. And once they are, we will have contributions to our top and bottom line.

I think that is a very good point, Jon. Basically in destructive testing you have a lot of certifications that you have to do before you start performing testing. It is a little bit different than in nondestructive testing.

So we really have incurred some of that expenses that now start paying some dividends.

All right, thank you. then my second question really related to the guidance. You raised your top line 3%; you raised your EBITDA guidance by 4%. Part of that seemed organic and part of that due to the two acquisitions that you folks have mentioned.

But what really gets you to the top end of your new range? And what takes you above that when you look at your different segments?

Is that stronger turn -- you have been pretty positive on the turnaround season that is coming up. Is that what takes you above that range? Or is it one of the other segments or business lines?

Sure. As we really are discussing the fourth quarter of 2013, we would like to see more improvement in the International. Of course we're going to see a lot of improvement in domestic services, USA Services because of the big turnaround season.

We definitely have said, stated before -- as well our self as our competitors -- that last year, as you know, the first half of the year was terrible when it came to turnaround. So we see we have a large improvement, and so that will really help us in the overall business.

Okay. Then last question on my end. Seasonality: from the fiscal second to the fiscal third you have always had a seasonal drop-off. Is there anything within your business, or is there any visibility you can give us qualitatively, that maybe something has changed? Or should we expect that you will see the same seasonality in going forward?

Okay. As we have said this before, the first quarter and the third quarter are our worst, and the second and the fourth are really our best. We might see some improvement this year on the third quarter because the February would start -- people start turnarounds in January, and we didn't really have turnarounds last year in the same month and February. So we might see a little bit of improvement in the third quarter; but still first and third will be the worst.

That's right. Year-over-year we think that certainly third quarter will be considerably better than last year's third quarter and perhaps the same for the fourth quarter. That is embedded in the guidance range increase that we have done.

But because of the December holidays, the January startup, weather and so forth that you get in the third quarter, sequentially that is always going to be a weaker quarter for us.

Thank you; and congratulations again on a solid quarter.

Matt Duncan.

Good morning, guys. Congrats on a great quarter.

First question I have got just with regard to the gross margin improvement, are you guys seeing anything in terms of pricing right now? Or is that maybe still yet to come, assuming that we start to see the labor market tighten up some here?

Pricing, Matt, pricing is still the issue; but maybe it is not as bad as maybe on past years, where there were a lot of turnarounds. So we are trying; we will keep up, but nothing major, okay? That is all I can say for the -- that we have witnessed so far, okay?

Okay. On the BP contract, are you at liberty at all to talk about the size of that opportunity for you guys?

It is basically in the -- it is really a five-year contract, as we said, and basically we are talking $45 million per year and hopeful to improve that.

Yes, but the incremental is going to be in the $20 million per year range, once we fully ramp up. That is the (multiple speakers).

Okay. All right. That is very helpful. Thank you. That is a nice win then.

On the petrochem side cycle, I am hoping maybe you can give us some thoughts on how the -- what appears to be shaping up is a pretty healthy expansion cycle in the petrochemical industry, what that might mean for Mistras.

Well, as we mentioned we had a very big win in the chemical side, okay? In the chemical side.

In the petrochemical, because of the gas being very cheap -- you know, $3.50 per million BTUs -- people basically are doing a lot more in the United States than we have seen for many years. We tried also to provide the market with our PCMS software, which is very, very valuable to them, especially to the smaller companies. Okay?

So we will see a very strong -- we have a very strong second-half forecast. We have a very strong second-half forecast in the area.

But as I said, in many areas, not only inspection; also we like to see it in software.

Okay. That's helpful. The last thing for me, just want to make sure I understand the guidance correctly. You are saying you expect 7% to 12% organic growth, Sotirios. But when I do the math, it looks like it is 7% to 12% organic growth, with the acquired revenue you have year-to-date. And it sounds like about $10 million from the acquisitions that you have made that are going to contribute to the back half, that 7% to 12% organic growth might actually drive a revenue number -- a range a little bit higher than what you are giving.

So is there just a little conservatism there, not knowing for sure maybe how the seasonal February quarter shapes up? Or how should we interpret that?

I think you should interpret it as conservative. We like to be very careful of that, because especially what we saw last year. Just don't forget -- I think everybody should really understand -- don't forget what Shell did in Louisiana, where they really stopped the project.

So we are very cautious because of what happened last year. We are very nervous of what happened last year.

But we are very optimistic. And we think if we beat the numbers maybe we have some good news in the next quarter.

Okay, great. Thanks, guys. Congrats again on a good quarter.

Tristan Richardson.

Morning, guys. Happy New Year. Just a question on the Services segment. You talked about some of the new awards on the midstream side and on the nuclear side.

I am curious how those projects lay out on the schedule. I mean I am just thinking about you're anticipating a stronger turnaround in the spring, and assuming that the new steam generator project ramps up in the calendar year. I am just thinking about margins for the second half in Services.

Well, first of all let me just tell you that life sometimes is a little bit difficult. We wish that in all these turnarounds you're -- especially for the power generation, did not happen together with the oil and gas. But the facts remain not all of these things will happen between February and May. Okay?

A lot of the -- and of course you know margins we drive to do, as Jon mentioned before -- we will try to do better than we did last year. That is -- I don't know, Jon, if you have anything to add here.

Yes, those expectations are incorporated in our guidance, our new guidance range. We believe that we will have some amount of leverage versus last year's operating results. That will be incorporated in that guidance range as well.

So we feel good about the margin opportunities in this business. Third-quarter margins are always a bit lower because of the factors that I spoke of earlier. But we feel good about second half and feel good about the year.

Okay, great. Then just going back to Europe, it sounds like you guys are working on a number of initiatives. You mentioned that you have got Germany now to a breakeven level, and that is before you have completed the ERP initiative.

So when you look at the guidance, does that assume that Germany remains at these breakeven levels? Or do you see Germany actually contributing to the bottom line this year? Or is that a potential for incremental next year?

I think it is really some small potential this year and a lot more next year.

Got you. That's helpful. All right. Well, thank you guys very much. I appreciate it.

Tom Hayes.

Thanks. Good morning, gentlemen. I was just wondering, with all the talk we have heard -- and you guys certainly talked about it as well -- it's the ramp-up in the turnaround season. I just wanted to get your thoughts on your current labor position and availability and the associated costs if you need to bring more labor on.

Well, we are like everybody else, short of labor right now. And we are trying to really -- trying to attract individuals.

But remember in our cases we always like to have people in run and maintain business and career category oriented. So we are not really as aggressive in getting people just by highering our costs. Okay?

So basically we also do a lot of sharing in our labs. We transfer people from one lab to another, and so that really has improved our situation also.

And, of course, if you look at the Gulf region which will be a lot of business, I think we probably have most of -- a very large number of our people already in the Gulf.

Okay. I know it is a bit of an issue last year, pushing the margin down was the mix within the International business. Just wondering if maybe you could remind us the breakdown between Products and Services in the International business.

I think basically Products will be in the -- now. It used to be different, but right now the way it is evolving, because we now have a lot more Services business, I think it is probably going down to maybe 25% to 30% in Products and maybe 70% -- it's really going that direction -- and 70% in Services.

That will be the run rate. I don't --

Yes, we are sort of transitioning. So in any particular quarter it is going to be lumpy. The mix is going to bounce around a little bit; but the direction is going to be increasingly more towards Services going forward.

Tom, the other thing I also want to make very clear is that labor, at least the way we look at things is, labor shortage for us is regional.

Okay. Lastly, I guess, in previous guidance we had been talking about a 38% to 39% tax rate, and it's been trending down to the 36% range. What do you have embedded in the guidance?

36% is going to -- we expect will continue for the balance of the fiscal year. And really the greater contribution from International results is the principal driver there.

Okay, great. Thank you.

(Operator Instructions) Toby Reeks.

Hi, Sotirios. How are you doing? I just have a quick question on -- you sort of talked around this a little bit, talking about it, because what we are hearing a lot about is CapEx cuts coming through in the O&G sector and how that is going to affect your market.

Could you talk a little bit about your confidence going forwards, and how much of that relates to you performing better than your peers, and how much of that you think relates to the actual industry performing well?

This is Jon. I will try to take this, Toby, really to start; and Sotirios may chime in. But I think that in our sector the macro situation is one of continuing investment. There has been hundreds of millions of dollars of projects announced in the US Gulf region, so we feel very bullish in general about the sector and the level of investment, the shale play, and the degree to which the US is increasingly becoming energy independent by the end of this decade.

So we feel very bullish in general. As Sotirios mentioned earlier, that is not to say that it's not going to come with fits and starts. But in general we see a very positive climate of continued investment, continued construction, and abilities and opportunities for Mistras to help.

Toby, basically, as you know, our business, we concentrate a lot on the evergreens which is really run and maintain work. I mentioned before when we started the year we probably have 60% to 65% of the income already; we have a business that we already have.

So from our point of view its effect -- when we are looking at capital projects we are looking basically additional to that. Okay? And that is where we are really sometimes very nervous about the organic growth. Because you have more of the capital projects that will contribute even more to the organic growth.

That is why we are giving the range of 7% to 12%. So from our -- as you know, since you are really in UK, we are trying to do the same business in Europe, and that is why we are excited with the contracts we got -- we received in France and we hope to get in other countries.

We like the run and maintain business. We like what we call outsourced. We like basically our customers to outsource their inspection to us and let us be the inspection department for them.

We think we are doing a very good job, and we have the right people to do that.

Okay. Thanks very much, guys.

Thank you. We have no further questions. I would now like to turn the call over to Sotirios for closing remarks. Please proceed.

Thank you very much, Conti. I would like to thank everyone for listening, and we wish you all a great day and a very happy, healthy, and prosperous 2014. Thank you very much for listening.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Have a good day. Thank you.