Mistras Group Inc (MG) 2016 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Mistras Group Quarter One fiscal year 2016 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

With us on today's call is Sotirios Vahaviolos, Chairman and CEO, Jon Wolk, Executive Vice President and CFO, and Dennis Bertolotti, Executive Vice President and President of the Company's Service segment. I would now like to turn the call over to Sotirios Vahaviolos. Sir, you may begin.

Thank you very much and good morning to all. In today's call, we will review Mistras Group's financial results for the first quarter for fiscal year 2016 that ended on August 31 and discuss our prospects going forward.

I'm very pleased that Mistras started its new fiscal year with results that are strongly improved compared to prior year. In our last conference call, we described the number of actions that we took to reduce our cost and improve accountability across all of our business lines and locations. And we stated that these improvements will start with the first quarter. Our team took this message to heart and profit margins were substantially improved not only in all three of our segments but also in every country in which we operate.

Overall, we gained strong bottom-line leverage. Mistras' adjusted EBITDA grew by $9 million to 66% over the prior year's first quarter and a revenue increase of 8%. Our adjusted EBITDA margin improved by 400 basis points. Most of this improvement was driven by the changes we have made, but we also got some benefit from changes in traditional seasonality patterns. As I mentioned in our last call, we benefited from two small turnarounds in the first quarter.

Overall, our market has been significantly impacted by the oil price decline and my last winter's refinery labor strike. The oil price decline has affected organic growth as oil and gas customers seek to reduce their spending levels.

The refinery strike affects traditional seasonality patterns. While our Q1 turnarounds were an unusual positive factor, our fall turnaround season looks to be lighter but or Q3 turnaround activity seeks to be stronger than prior year. Overall, turnaround volumes look to be similar to the prior year, but with different seasonality, and therefore different comparisons to prior-year results.

When we spoke with you last quarter, we described in detail the difficult staffing actions we have taken. We made these choices because they were necessary to achieve profitability levels that we collectively expect and demand from our company. As any of our managers will tell you, we have been very focused on delivering much higher profits and we have been taking actions now for several quarters. I'm very pleased that we delivered the quarter that demonstrates we are making good progress but we are far from finished, and there's a lot more to come.

Jon will now explain our results in more details and then Dennis will provide more color on our operations. Afterward we will take your questions. Jon?

Thank you Sotirios. I remind everyone that 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 other reports filed with the SEC.

The discussion in this conference call will include certain financial measures that were not prepared in accordance with US GAAP. Reconciliations of those non-US GAAP financial measures to the most directly comparable US GAAP financial measures can be found in the Company's current report on Form 8-K filed yesterday. These reports are available on the Company's website in the Investors section and on the SEC website.

First, I will summarize our financial results and then I will comment on our initiatives to improve profit margins. Revenues for the first quarter of fiscal year 2016 were $179.9 million, 8% higher than the prior year's Q1. Net revenue increase was 13% on a constant dollar basis had foreign exchange rates been unchanged from prior year.

Services revenues grew by 13% over prior year, driven by high single-digit acquisition growth and mid to high single-digit organic growth, offset in part by the impact of a weaker Canadian dollar. International segment revenues declined by 8%, but this result is misleading as high teens foreign-exchange declines, coupled with the impact of dispositions, masked a double-digit improvement in organic growth.

Product and systems revenues enjoyed a 32% increase over prior year, driven by improved sales volume and improved sales mix.

The news is even better from a profit margin perspective. The Company's gross profit margin improved by 330 basis points, reaching 28.5% compared with the prior year's 25.2%. Services segment gross margin improved by 220 basis points, reaching 26.6%, compared with a weak prior-year comp. Most of this improvement can be attributed to sound execution in managing contracts, improved staff utilization, tightening up on processes and better matching of changes in labor rates with changes in pricing.

The first-quarter turnarounds that Sotirios mentioned improved organic growth and also aided margins. It's worth noting that the first quarter's improvement of 220 basis points follows Service's 150 basis points year-over-year gross margin improvement in our previous Q4, indicative that the good work done by Dennis and his team is being sustained.

Gross margins improved by over 500 basis points in both our international and products and systems segments compared with the prior year's first quarter. International gross margins were favorably impacted by about 200 basis points related to sales of products, but even without this benefit exceeded prior-year levels by more than 300 basis points.

While it's too early to declare victory, we feel confident that the actions we took to reorganize operations and eliminate redundant staffing and related costs are working as intended. As well, some of the organic growth that we plan to achieve has begun to occur, which has also boosted our gross profit margin.

It's worth noting that some of the largest improvements in the international and products and systems segments occurred at the two units where we recently changed CEOs. Products and systems segment results tend to be lumpy, reflecting the varying mix of customer solutions that we are able to deploy.

Our Q1 results benefited from both higher volume and improved sales mix. Our operating expenses reflected significant improvement for the third consecutive quarter. Total operating expenses were in line with the prior year's first quarter, even though revenues improved by 8%. Consequently, operating expenses were favorable as a percentage of sales by over 175 basis points compared with last year's first quarter. Operating expenses in both our services and international segments improved by over 75 basis points while products and systems improved by far more than that as products operating expenses were $0.3 million lower than in last year's Q1 on revenues that were 32% higher.

The Company's total EBITDA margin was 12.4% in the first quarter. Our operating income and EBITDA margins each improved by over 400 basis points compared with the prior year's admittedly low comp. This improvement bodes well for further year-over-year improvements.

Cash flow was yet another strong positive. The Company nearly doubled its operating cash flow to $17.7 million in the first quarter compared with $9.2 million in the prior year's Q1. Free cash flow more than doubled, reaching $13.2 million compared with $5.3 million in the prior year's Q1. Total CapEx, including non-cash capital lease outlays, were $5.1 million or 2.9% of revenue compared with 3.5% in the prior year's Q1.

Total debt and capital lease obligations net of cash was $112 million at August 31, 2015 compared with $155 million nine months ago. Net debt to adjusted EBITDA was 1.5 times at August 31, down from over 2 times last year.

The drivers to our improved cash flow were the improved profit levels as well as a reduction in days sales outstanding of approximately 1.5 days. Our Accounts Receivable balance at August 31, 2015 was more than $8 million lower than one year ago despite our 8% revenue increase.

Our cash flow focus has worked well, and this in turn has created more flexibility in our capital structure, enabling our team to consider using our strong cash flows and conservative balance sheet to enhance shareholder value. Because we believe our stock is trading well below its intrinsic value, we have obtained approval from our board to commence a stock buyback program of up to $50 million. These favorable comparisons have not been easy to achieve in this difficult and uncertain market, but they are precisely what is needed considering the realities of today's environment. They have been driven by decisive actions and strong execution by our entire team in every country and in every line of business.

I have previously mentioned our key initiatives which have been our game plan to achieve these improvements. These include contract operational reviews, focus on SG&A costs, reducing unbillable time, improving in the Canadian oil sands region, and pricing discussions with customers. Of these five, the least impactful has been pricing, which reflects both the market's challenges and our team's strong focus on driving improvements from these other areas.

The second least impactful area has been the Canadian oil sands region, although there are positive signs that Dennis will discuss next. Before that, I will briefly update the Company's financial guidance.

As Sotirios mentioned earlier, our first-quarter revenues benefited in part from unusual seasonality that we expect will impact results negatively in the second quarter and positively in the third quarter. As well, the year-over-year impact from previous acquisitions has almost been entirely realized in the first quarter. So, we continue to expect that revenues will be in the range of from $710 million to $725 million, inclusive of a combined $20 million reduction due to foreign exchange and dispositions.

Our adjusted EBITDA for Q1 exceeded prior year levels by nearly $9 million. Our guidance for the remainder of the fiscal year, which includes a likely year-over-year second-quarter decline compared with prior year's record results, is now at the high end of our previously stated $72 million to $78 million range.

And with that, I am pleased to introduce Dennis Bertolotti, our Executive Vice President and President of the Services segment, to this call.

Thank you Jon. I'm pleased to participate on this call and provide updates on our Services segment as well as our international and products segments. I am proud of our team and its resilience in a tough market. Our plan is working in North America and in all of our key countries as reflected in the performance numbers that Jon just shared with you. I'll provide some color on key developments in our business.

In our services segment, it's no secret that the oil and gas market remains subdued. My team and I are regularly meeting and speaking with our customers, exploring ways to improve their productivity and gain even more value from our wide-ranging inspection services. In these discussions, we are also cross-selling other value added Services that can save money for our customers. In some cases, we are introducing onshore services such as inspection to offshore customers and in others we are introducing offshore services to onshore customers.

In addition, we have a strong sales pipeline in the petrochemical, power generation and aerospace sectors. Part of the organic growth in Q1 came from supporting a large LNG storage facility that is being built in the Gulf region, providing best-in-class productivity and responsiveness and providing our customer with the best value given their demanding requirements. This multi-million dollar award positions us well as similar facilities are built in the future.

As you know, we have made a considerable investment to service large customers in the Canadian oil sands region. For many reasons that we have discussed previously, this effort did not achieve the traction that we initially expected. However, our sales levels are gradually increasing and we have been awarded fall turnaround work which could lead to even more work in the future. We are encouraged by our profit margin improvement in services and are continuing to implement the actions that Jon described earlier.

The improvement realized by our international business reflects the rigor our team is undertaking to eliminate efficiencies and to contribute to our success. Our new CEO in France has driven a terrific combination of cost reductions in organic growth, which has improved our utilization of service technicians and led to improved profits. Our UK subsidiary experienced organic growth primarily from its wind business line, providing services and products to both offshore and onshore customers.

Our Brazilian subsidiary has made a remarkable improvement despite the continuing challenges presented by that economy. Our GM there has done a good job in changing our mix of work performed for Petrobras to be more mandatory and less discretionary, improving our utilization of people and reducing the risk of work stoppages.

And in Germany, we have begun to receive more work from Airbus and other key customers, improving our sales mix and positioning us well for future growth. Also, we expect to benefit from increased NDT inspection and turnaround work.

As Jon mentioned, our significant improvement in international results was also helped by stronger product sales. But international gross margins improved by over 300 basis points exclusive of these sales and we expect that international results will be favorable to prior year in each of our quarters to come.

With that, Sotirios, I turn it back over to you.

Thank you Dennis. In closing, we are running our business assuming that the present oil rate -- oil price range will be the new normal for the foreseeable future. If anything, recent announcements by other participants in our space merely serve to confirm what we already knew about market conditions.

In this environment, we're focused on operating as efficiently as possible. Maximizing our staff utilization and minimizing our capital outlays, finding incremental value for the consumers, for our customers, and driving our profitability initiatives are our top priorities. We have made and implemented difficult decisions to reduce our cost base and we will continue to be vigilant in doing what the market demands of us.

In fiscal 2016, we have a big opportunity to improve our overall profitability and we are very focused on achieving this goal. As Jon mentioned, we have obtained unanimous approval from our board to commence a stock buyback. We believe that our stock price offers a competitive value at these low prices and we plan to utilize a portion of our free cash flow for this purpose. But we will also continue to make acquisitions when we find companion opportunities and can be accretive to our operations and provide more value to our customers.

In concluding this conference call, we think our loyal employees for their commitment to safety and quality, our loyal and valued customers, and our loyal and valued shareholders. That concludes our prepared remarks. Theresa, please open the floor for questions.

(Operator Instructions). Andy Wittmann, Robert W. Baird.

Good morning. Given that the margins were I think one of the really key stories for the quarter, I wanted to start there and particularly just kind of think about, get your thoughts on where we are on the cost reduction efforts or the margin improvement efforts, recognizing that we saw I think you said 150 basis points the fourth quarter, more than that here. Can you talk about were the initiatives that you been putting in place in place for the full quarter? Were there other initiatives that went into effect part way through this quarter? And what are some of the continuing actions that you see for the balance of the year and how could that affect your margins from here?

Thanks Andy. I'll take that. It's Jon. I think that, as I indicated in my comments, the changes that Dennis and his team have made in services have really been in place now for a couple of quarters, and if anything, what we are now starting to do is see the benefit of some of those actions. But it's going to be a continuing story. There's no finish line here. We're going to continue to react proactively to what we foresee in the market and what customers expect of us. And therefore we're going to try to run as leanly and as efficiently as we can given the market environment.

I think, on the international side, that's a more recent improvement story, and those are much more a derivative of the actions we took at the end of our last fiscal year, and we are seeing direct benefits of that now. I think that our expectation is that we are going to continue to utilize our labor and be as efficient as we can there, but seasonality plays a role. So Q3 is always more of a challenge for us. It's still going to be a little bit of the lumpy business.

But I think that -- look, a lot of the benefit, to answer your question as directly as I can, a lot of the benefit we have realized at this point is into the numbers, so you can see it in the performance. But there are still actions that will be forthcoming to the extent that the market demands us to take them.

Would you consider your utilization rates Company-wide here in the first quarter higher than normal as a result of some of the summer, unusual summer turnaround activity? And can you quantify what the financial benefit of some of what you would consider the unusual summer turnarounds was in terms of the utilization or margin or profits in general?

I think, from a financial perspective, we probably saw -- our organic growth in services was probably maybe half attributed to some of the summer turnaround work and half attributed just to other projects and timing and so forth. And it did help lift margins, but services margins went up pretty considerably and I think that was a small portion of the story.

I'll let Dennis comment on the utilization of personnel.

In the service group, we always have a high focus on personnel. We always we want to make sure that the amount of time to billable versus non is the key to making that business go.

Another part that we gained in our margins this last couple of quarters is just keeping an eye on our contract management, keeping an eye on just the fundamentals of the business. So we are doing a lot more work on making sure that everything we do within the contracts maximizes what we can do for the customer and for us. And I think that's been a benefit. Certainly, utilization is always a part of it, and it becomes a bigger focus, especially in your off quarters than it does in your busier quarters.

One final question from me, and then I'll jump back in queue. But I wanted to just get a better sense of the growth outlook from here and particularly around you mentioned, Jon, in the prepared remarks about some of the construction projects that you are participating in. You mentioned the LNG. But more broadly speaking for new construction projects, what is that looking like today on a year-over-year basis and what's the pipeline? Do you expect -- in other words like the backlog is growing in that business or is that more of a flattish type of business right now?

I think the market is flattish at best in terms of -- I don't know that I say it's growing. I think what I would say, and Dennis can comment on this too, is I think we are seeing a greater share of those projects in terms of bidding activity. I think our business development team has been a lot more active in the last 12 months at really aggressively trying to find those opportunities and be considered for those opportunities. So it might work out fairly well for us, although it's too early to say would be my take on it.

This is Dennis. I believe that right now it is still somewhat of a tight market. Customers are going to spend on what they need to do for mandatory. The discretionary part of their spend is something that they look at much more closely. So capital projects that have already been funded and planned are certainly underway, but you've got to wonder about how many new ones are going to be put on the table. So it's just a function of where were they in the planning process?

And if I summarize basically what both the Dennis and Jon said, run and maintain was really our business. The last couple of quarters, even maybe more than a few quarters, we are now concentrated also in some projects because this is really project work. It's a one-time kind of an event. And so that's how we have improved. But we are not only improving in America, we are also improving abroad.

Great. Thank you guys.

Edward Marshall, Sidoti and Company.

Good morning guys. So I just wanted to ask for some clarification. I think you said guidance on the 2Q, you said there would be a weaker 2Q turnaround. But did you mean that on a year-over-year basis to not necessarily compare -- it's not comparable on a sequential basis? If I remember correctly, 2Q last year was unusually strong too, so it's no surprise, but some clarification around that.

That's exactly it. Again, we are not commenting on the market per se, just our own experience, our own customer base. Last year, we had very high -- we had good turnaround volume. We also had some considerable project volume that also benefited our Q2. So we had a record quarter.

We don't see the same level of project volume or turnaround activity in our second quarter that we are in the midst of right now. Although we think it will be a good quarter, it just probably won't approach the same levels as last year. However, some of that turnaround work that we had in last year's Q2 will move into our Q3 this year. So again, the seasonality patterns are a little bit disrupted, but we still see turnaround volume overall will be close to what it was last year for us, Q2 a little bit weaker, Q3 a little bit stronger.

Okay. And Q2 you expect to be slightly better than Q1?

It should be considerably better than Q1, just from a seasonality perspective. It just probably won't quite approach the Q2 levels of last year.

Great. And you talked about the costs and I'm wondering how much more you can squeeze out of this business. When you look at kind of the margin profile and maybe some of the other names in the space, 200 basis points discrepancy between you and maybe some of the other players. And I'm wondering how much volume necessary that you need, assuming that currency is kind of the swing factor too, but how much more volume you need in the business to actually get that 200 basis points, and is that achievable?

We had a really strong year-over-year comp, but last year's comp was low. If you would have had a normalized first quarter last year, we still had a better first quarter this year than a normalized quarter would've been in last year's Q1, and we probably. It was higher probably by about 200 basis points.

I think that as we look at our profit engine and our margin engine and so forth, there's probably another 100 basis points or 200 that we can get out of our operations just by continuing to act on the actions that we've got in place. We are still in the early innings of process improvement and really standardizing best practices across our entire operation. We've got a lot of run room still to go there. So I think that certainly we can continue to improve profit margins in a consistent operating environment absent the market getting better or worse. But certainly if the market were to improve, that would help as well.

And I noticed in the cost discussion in the release last night there wasn't a lot of discussion around Canada. I'm just curious as to what's going on there. How successful are you at achieving I guess your plan B? But also I think there's been some more positive developments around plan A. And so what are the next steps here and how should we be thinking about the Canadian business?

This is Dennis. We went into a relatively new market geographically, speaking for us, up there in that part of Canada. And it just took a little bit of time, more than we expected, to get the traction. We are actually online with the traction we were expecting to get out of the market. It's a rich market in terms of NDT spend, inspection spend. It just took us a little bit more time than we expected to get it going. We do see it coming along. We had a lot of startup costs that we've overcome and gotten back into it what we would consider more of a normal run. So while that is a depressed area compared to year-over-year, for us, it's a new market. So, there's a lot of potential for us and we see a lot of potential growth in the next year or so.

Just to add more color to what Dennis just said, I would say that he's right in terms of momentum. It's going the right direction for us and as you allude, added sort of both a plan A and plan B as we described earlier. But it is still early for us up there in terms of the market share that's attainable, so I don't want to leave with the impression that this is as good as it gets. Hopefully, we can continue to grow from here. It's just incrementally improving at this stage.

That was my follow up. So there is more share opportunity there still. That's good.

So when I think about the repurchase, I want to know what that means from the capital, the capital outlays. Does this mean that acquisitions potentially are off the table in the near term?

Not at all. Last year, we generated a little bit north of $35 million of free cash flow, and we used almost all of that to fund acquisitions. In this current fiscal year and really since that big acquisition we made in the first quarter of last year, we've been paying down debt and using our free cash flow to pay down the debt that we took on with that acquisition.

I think, at this stage of the game, what we are kind realizing is that we really have three alternatives to use for our cash flow. We either can continue to pay down debt. We can make acquisitions or we can buy back stock. We just felt that now that the balance sheet feels more comfortable to us at 1.5 times EBITDA, we've got more flexibility than we had a year ago. And really we are looking at the stock price, which has just traded well below what we think is worth. So we've added that to our potential arsenal of deployment opportunities for the cash flow.

I think, going forward, we're going to be opportunistic. At times like this when the stock price is well below what we feel intrinsic value is, we will be in the market and we will be buying, which is not to say that, if a compelling acquisition or acquisitions come our way, that we won't seriously take a look at those and deploy cash in that avenue. And if neither is available, debt pay downs are still an option too. So I would see a scenario, quite frankly, where we do some of all three and sometimes to balance swings in one direction or the other depending upon what seems the most compelling opportunity to us.

I would agree.

Sotirios just agreed if you didn't quite pick that up.

You took a stab at EBITDA for the year. Could you think about maybe your free cash flow targets for the year, what do you think you could be generating?

We generated a little bit north of $36 million last year. My expectation is we will generate north of $40 million in this fiscal year that we are in right now. And obviously the higher the better.

Got it. Thanks guys.

Andrew Obin, Bank of America Merrill Lynch.

So the stock is up 20% on the open. What does that mean for the buybacks?

It means we won't be able to buy quite as many shares as we could have yesterday.

So the question is sort of a deeper question. As you guys -- it seems the Company is in the midst of significant changes. Can you talk about the challenges and opportunities for changing the culture inside the Company? And are there any specific challenges to sort of how you need to run international operations? It seems big significant improvement. We are just wondering longer-term what culture changes you need to institute to make it sustainable.

I think we already made the changes internationally because we certainly changed CEO in the place. We've made all the changes necessary, now we are really going to continue the performance that they show us in the first quarter. That's really where we are. We have made all the changes, and now we're looking for results. And I think our team, because we had several meetings, our team is behind all the changes that we are making, both here and abroad.

Jon, what do you think?

Look, I think we are all about creating value for the customers and offering the broadest set of compelling solutions to the customers as we can, providing a terrific environment for the employees so they can further their careers and also generate great returns for the stockholders. We're trying to really hit all three constituencies and provide what they really need. And that's been true since before I joined the Company, and it will be true well for years to come.

I think, if anything, these initiatives that we are doing are just really emphasizing that third constituency to a greater extent than maybe we had before. But we've always been about (technical difficulty) the customers are getting superior value and that the employees are getting a great place to work in a great environment.

This is Dennis. From the services point of view, we do have a focus on -- we know at this market is. We know it's a tighter market. So we have to be careful on what opportunities we go after. We judge that day in, day out with the thought of we have to be more careful on which projects we go after. We have even changed incentive program for the management team to be more focused on the profitability. So our culture is to ride with this market and make sure that what we are doing are the higher value returns, and I think that's paying off so far.

Let me ask you another question, just in terms of your customer base. The work we are doing suggests that the customer base is quite strapped for cash. How does it change the behavior and does it mean there is more long-term opportunity for outsourcing?

I think in oil and gas space at least, there's a high --

That's specifically what I was referring to, sorry about that.

I don't think there's -- I think there's a high percentage of the work that's being outsourced in our space today. So if you're talking about inspection services, it's been -- it's got a high penetration in terms of outsourcing.

But to your point, customers are looking to be more frugal in the oil and gas space in general, so discretionary projects that were nice to do or a good idea in the previous environment are being reevaluated and deferred in today's environment. But having said that, day-to-day inspection, that's going to be persistent and it needs to continue just because it's a risk mitigation and they just can't afford to take on levels of risk that are unhealthy.

So, as I look forward and I try to get a sense of are there going to be a change in the trends, I think that for as long as this present oil price environment persists, we will have a stable environment. I think customers will continue to look to be frugal, and it's up to us to continue to be creative at finding productivity and finding ways that we can help them get as much value as possible from their spend.

Thank you very much.

Matt Duncan, Stephens.

Good morning guys. Congrats on (multiple speakers). So I want to drill down a little bit on the margin outlook because, as we look at the guidance, it's sort of hard to get into the EBITDA guidance range I think if we assume that the margins that you had this quarter are achievable again in the future. So I want to make sure we understand sort of what you guys are thinking is going to happen with gross margins. You've talked some about sort of shifts in the seasonality in the business. Are you thinking the gross margins may be a little bit lower for the balance of the year? You'll most have to to get to the EBITDA guidance. And if so, why?

I think, from a seasonality perspective, the third quarter is always challenge for this industry. You've got fewer business days because of holidays. You've got seasonality. You've got winter weather and so forth. And to compound that this year, the offshore part of the business is really being hit hard just by the lower oil prices and customers are really trying to reduce spending in that sector. I think because of all those reasons, it just makes us cautious, particularly on Q3 challenges that will face us. Some of them are traditional. Some of them are a little bit additional now or incremental because of the current environment.

I think with that backdrop, we're just looking to be cautious. As we model out the fiscal year, certainly we guided to the upper end of the EBITDA range because we do feel that, based on how we are performing, that there certainly is every chance that we could exceed the range. But we just feel comfortable at this early stage of the fiscal year just keeping our powder dry and waiting this out. Let's see how it develops.

Okay. And then last thing for me, just on the buyback, how should we think about how opportunistic you're going to be here? Is there a certain share price that you have in mind where you might shift more from buying stock to acquisitions or debt pay down, or how are you looking at sort of the decision tree on capital use?

That's a good question. We see the intrinsic value at quite a bit higher than where it closed yesterday and even where Andy said it opened up this morning. So I think we are buyers, certainly at the price range that certainly we closed at yesterday or even where we apparently have opened today. And I think we just have to really play it by ear in terms of how we see the future, just kind of cash flows of the Company, and where we see the likely intrinsic value to be versus today's environment. So I don't think I would set a specific price out there as much to say that, look, in the midteens, we think this is a screaming by. As you get into the high $20s, it's less so with today's environment so it really will depend.

Okay. Thanks Jon.

[Jeff Balstein].

My first question is on product sales. You saw some benefit in this quarter, but I wanted to understand first of all if you can expand on why it was so successful? And secondly, was it more of a one-time benefit or more sustainable type improvement?

There's nothing we can point to that would say there was an event or some kind of unusual occurrence. I think there's an ebb and flow to the product sales and we just had a few opportunities came our way that we've been working on for a while. Some of them came to fruition in the first quarter. We've always got a pipeline going and it was really just a timing thing.

Makes sense. And the M&A scenario, I know you are selectively interested. When you say attractive, does it mean inside of the oil and gas industry or outside of the oil and gas industry to diversify away from it?

I think it really depends. If you can get the right dynamic, the right entrepreneurs, the owners, the customer base, the potential of the business going forward, and especially given our present footprint and how we build it out, the applicability that we could let's say enhance our platform with another set of services maybe to apply to our large customer base, that could be very compelling too. So I think within or without is not as big a question to us as what the type of opportunity it is.

Okay. And the last one from me, more on the housekeeping side. Can you update us on what's implied on your guidance for D&A, for interest expense, and tax rate?

Yes, sure. For D&A, it should be steady as she goes. For interest expense, it will decline. It was unusually high in the first quarter. It will decline by about $700,000 per quarter going forward. And for a tax rate, I think give or take around 37%.

Okay. Thank you very much.

(Operator Instructions). Tahira Afzal, KeyBanc.

Hey folks. Congratulations. Good job Jon. I guess as I look at how you guided in essence qualitatively for the rest of the year, and Matt already touched on this, it seems as you go later out in the year, you've probably felt a little more caution. Would that be the right way to think about it?

I think that's exactly the way to look at it.

Exactly the way you look at it.

Got it, okay. Given your fiscal third-quarter comps, are they easy because the refinery strike was happening? I guess most of the caution in a sense is really built into the fourth quarter.

I'm not sure I would say that. I think Q3, because of the offshore outlook for this winter coming up is -- I'd say it's on our minds.

Okay, fair enough. That sounds like a fair assumption given the environment.

The second question from me really is in regards to as we look beyond the CEO. You would have seen essentially two years of sort of pretty mixed spending, clearly partly because of what's happening on the oil and gas side in general, but also partly because there seems to be a lot of deferred maintenance for whatever reason.

As you look past the fiscal year, and I know it's too early, qualitatively speaking, do you think at some point organic growth has to start picking up again, or have you seen (technical difficulty) destruction of some of the maintenance work?

This is Dennis. Inspection work is all so lumpy, there's also a base amount work that has to be done due to regulatory or insurance requirements and productivity. But there's also always the differences in the capital and things like that and as the market expands, I believe we can get back to our historic organic growth levels very easily.

Got it, okay. Perfect. And last question from me, and that is really in regards to, again, a question that was asked around really obviously your stock is depressed right now. Hopefully it gets into the mid $20s, and then you are all happy and you have other places to spend your money. Where would you be spending your money let's say a year out from now? Would it be -- are there any end markets that look appealing given everything is getting hit now?

I'm sorry, so if the stock price went up and we weren't doing stock repurchases, is that really the question?

Yes. As you look maybe a year out from now, let's hope everything plays out well, and you revisit your cash allocation strategy, are there any end markets for NDT testing that seem attractive where the valuations might have become a little more amenable a year from now, let's say?

Here is Dennis. There's a lot of diversification we can do into power and other markets. Obviously (multiple speakers) in is oil and gas and chemical and there's a lot of service line expansion we can do within those same customers. So we believe we've still got a lot of growth, not only just in what we do in NDT but how we expand how we work with a customer and the service lines we do with them. So we really see diversification as an issue. But as you see every year, not only do we diversify our segments but our growth in oil and gas is so big just because there are so many opportunities, it kind of keeps the balance where it is.

The other thing I would add to that is that while the mid-$20s might seem a really good place compared to the midteens, and admittedly it is, everything is relative, we don't see that as the endgame or certainly some kind of a goal of ours. We have aspirations well beyond that.

And I think besides basically doing an NDT, there's a related (technical difficulty) (inaudible) nature, the comment that we acquired in the offshore industry, it was not an NDT. And so making these acquisitions where we can really expand our NDT lines would be very beneficial to us.

Got it, okay. Congrats again.

I'm showing no further questions at this time. I would now like to turn the call back to Sotirios Vahaviolos for any further remarks.

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

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.