Mistras Group Inc (MG) 2021 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for joining MISTRAS Group's conference call for its Fourth Quarter and year-end 2021. My name is Howard, and I will be your event manager today. We'll be accepting questions after management's prepared remarks.

Participating on the call for MISTRAS will be Dennis Bertolotti, the company's President and Chief Executive Officer; Ed Prajzner, Executive Vice President, Chief Financial Officer and Treasurer; and Jon Wolk, Senior Executive Vice President and Chief Operating Officer.

I want to remind everyone that remarks made during this conference call will include forward-looking statements. The company's actual results could differ materially from those projected. Some of those factors that can 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 also include certain financial measures that were not prepared in accordance with U.S. GAAP. Reconciliation of these non-U.S. GAAP financial measures to the most directly comparable U.S. GAAP financial measures can be found in the tables contained in yesterday's press release and in the company's related current report on Form 8-K. These reports are available at the company's website in the Investors section and on the SEC's website.

I will now turn the conference over to Dennis Bertolotti.

Thank you, Howard. Good morning, everyone. Thank you for joining us today. In the fourth quarter, revenues exceeded expectations for the third consecutive quarter, reinforcing our confidence in our strategic initiatives in addressing the COVID-19 market challenges. Adjusted EBITDA for the fourth quarter was in line with our expectations.

It was truly a great finish to a year of strong top and bottom line growth. Revenues for the full year increased over 14% and gross profit dollars were up over 10%. Selling, general and administrative expenses were up only a small fraction relative to the revenue increase due to our continuing focus on overhead. As a result, both operating income and net income improved substantially year-over-year, with adjusted EBITDA up over 21%, significantly more than our increase in revenue, illustrating the operating leverage built into our business model.

These results were achieved while also continuing to invest in our growth initiatives throughout '21, including OneSuite, Sensoria and MISTRAS Digital, which I'll elaborate on more in a few minutes.

A very crucial aspect of our recovery is the significant free cash flow we generated. In fact, we generated over $16 million in the fourth quarter alone, which we used to pay down our outstanding debt at year-end, and we will continue to focus on rapidly reducing our debt. We have now paid down just over $90 million of debt over the last 3 years, significantly strengthening our financial condition.

By staying focused on paying down debt through the rest of '22, we anticipate that we will gain flexibility in our capital allocation strategy and be in a position to potentially restart acquisitions by 2023 in order to enhance and accelerate our growth initiatives, our end market diversity and add increasingly smart and predictive data-centric solutions to our existing portfolio.

MISTRAS maintained a very strong financial foundation as we head into the new year.

Jumping into our various end markets. Energy remains our largest and our revenue in this industry was up nearly 17% in '21. We expect to maintain our growth in the energy market as it continues to rebound back to pre-pandemic levels of activity and expect continued growth within our petrochemical market, which we continue to expand our offering to this underserved market.

Our success is built on our ability to respond to the market's demand to get more for less. This has been a major driver behind our investment in ruggedized tablets and digital data capabilities, as well as complementary mechanical offerings for all of our sectors. These efforts are making our total offering sticky, as buyers look for partners that offer smarter data solution and greater overall project value.

We believe our digital offerings are a true differentiator, led by OneSuite, which is a unique offering within the industry. Essentially, it's our industrial version of the App Store. Users can access over 85 applications, helping them to better understand and monitor the condition of their plant and equipment assets from a variety of perspectives. These applications also help them predict when they'll need to conduct needed maintenance, which ideally would minimize repairs and downtime. It's already been widely adopted at nearly 100 customers with over 1,000 individual subscriptions since the start of '21 and we anticipate further growth in '22.

These inaugural users are currently executing several million processes and calculations monthly within the related applications, and we anticipate further expansion of OneSuite utilization throughout 2022.

Crude oil prices now significantly exceed pre-pandemic levels, and this is certainly a positive for our energy industry customers. But at the same time, this has caused many refineries to run longer cycle times, as they capture the additional income resulting in the postponement or scaling back of planned inspections. And this more for less paradigm is also putting pressure on the industry. Consequently, this may and most likely will impact the spring turnaround timing, as customers who initially had heavy overlap in projects in certain sectors of the country are now making small timing adjustments with some deferrals until later this year, and other case curtailments of the work itself.

Regardless, we believe conditions will improve as we move through 2022. And on the strength of our digital strategy led by MISTRAS Digital and OneSuite, our broad product offering and complementary mechanical services, we believe we can achieve our objective to grow our energy business.

MISTRAS has a longer-term strategy to succeed in the energy market. First, by continuing to take profitable market share. Second, by expanding our scope of services and finally by introducing new proprietary solutions. For instance, our Onstream acquisition completed in December of 2018 gave us entry into the in-line integrity testing market by utilizing internal pipeline inspection gauges to inspect the underground pipe. Onstream had a record revenue year in '21, and with our expanding diameter tool set service offerings, we expect additional growth from Onstream in '22.

Our deep breadth of data services and product and service offerings are easily adaptable for us to expand into growing infrastructure and renewable energy sectors as well. One of our most exciting growth initiatives is the MISTRAS Sensoria Wind Blade Monitoring and Insights web portal, our wind blade monitoring technology platform.

Sensoria provides real-time detection and visualization of turbine blade damage, utilizing our recently patented wind turbine blade monitoring systems based on our tried and true acoustic emission capability. Sensoria is currently in proof of concept on a dozen of turbines with a variety of owners. Ultimately, we see Sensoria as the key to expanding what is already an approximate $17 million wind turbine blade repair and maintenance global business.

We envision a service offering that includes the sale and installation of the sensors on the turbine, providing 24/7 monitoring service and ongoing repair and maintenance of any damage detected. We are finalizing our proof of concept for this initiative, have generated some positive momentum and we anticipate being in commercial operation in the later part of '22, monitoring up to 100 turbines. In addition, our goal is to expand our monitoring capacity for up to 1,000 wind turbines by the end of 2023. I encourage you to learn more about this exciting new offering by visiting sensoriawind.com.

Both OneSuite and Sensoria represent an evolution in asset protection. And MISTRAS is uniquely qualified to leverage our proven capabilities and expertise to meet the needs of the changing global landscape. These newer data-centric tools complement our more established MISTRAS Digital mobile cloud-based field inspection. It's an execution and reporting platform, which digitizes the field inspection process via a powerful end-to-end workflow solution. All of these interrelated data solution initiatives, when combined together, create a robust predictive analytical platform, delivering an enhanced customer ROI. We are very excited about our prospects for growth in these new markets.

In the aerospace market, we continue to experience outstanding growth in our private space business. Consequently, despite a weak commercial aerospace market, revenues in this overall vertical were down less than 3% for the full year, although we still lag significantly behind our 2018 market peak. While commercial aerospace revenues remain soft, we believe the waning pandemic and resultant resumption of air travel to be positive signs of an impending recovery in the industry, which we believe for us could begin as soon as the second half of 2022.

Gross margin in the aerospace sector is very attractive and growth in this vertical will provide a nice boost to our consolidated performance. I also want to note that we generated significant growth in our other process industries segment, which includes pharmaceutical and agricultural industries, as well as in our Industrial segment, especially in its fourth quarter. It is great to see the growth being achieved in these other verticals, which is a result of the success of our strategy to find new sales outside of the energy sector.

While the ongoing Ukrainian conflict has certainly caused an extreme volatility in the world oil and gas market, it is not, at this time, had a significant impact on MISTRAS' current business. The U.S. and certain EU countries have imposed immediate restrictions on various Russian oil and gas activity and we are in the process of assessing the specific impact this could have on our customers and on us. We are also addressing the overall potential risk this situation might have on our business going forward. But at this time, there are still many unknowns and uncertainties.

In summary, it was a strong finish to a year in which we organically grew the business. We increased profitability and strengthened our financial condition while rapidly approaching pre-pandemic performance. At the same time, we made significant investments in the business to bring innovation and new products to the market that will fuel the next leg of our growth.

I would now like to turn the call over to Ed to give you more detail on our financial results for the fourth quarter and full year '21.

Thank you, Dennis, and good morning, everyone. We are certainly pleased to report another strong quarter, reflecting an ongoing gradual recovery, wherein our financial performance is steadily approaching pre-pandemic levels. MISTRAS keeps getting stronger each quarter. In this quarter, we exceeded our top line guidance and generated adjusted EBITDA that was in line with our expectations. We exited 2021 with strong momentum, and we expect this will be maintained throughout 2022, particularly in the second half of this year.

Turning to the results. For the quarter, consolidated revenue increased 6.5% over the prior year to just over $171 million. Revenue growth in the fourth quarter was driven primarily by industrials, aerospace and defense and other process industries. As Dennis mentioned earlier, we are pleased to see the success of our strategy to diversify our revenue base beyond our core in the energy market.

Gross profit for the quarter was $49.6 million, a very nominal increase as compared to the year ago period. Gross profit margin was 29%, down from 30.7% a year ago, primarily due to higher benefit costs in the U.S. and lower Canadian wage subsidies in the current year quarter compared to a year ago.

Selling, general and administrative expenses in the fourth quarter of 2021 were $42.8 million, up from $40.5 million in the fourth quarter of 2020. This increase was due primarily to the removal of temporary COVID-19 cost reductions in August of 2021, which had been initially implemented in 2020. Despite these added costs, we were able to limit our full year overhead increase to just 2.7%, which was significantly below our annual revenue growth rate, again, improving the operating leverage in our model.

On a full year basis, operating income was up substantially to just over $18 million. And on a non-GAAP basis, it was $22.3 million. This was an improvement of over 200% for the full year. For the quarter, we reported a GAAP net loss of just under $100,000, compared to net income of just under $200,000 in the same quarter a year ago. Adjusted EBITDA for the quarter was $14.6 million and was in line with our expectations.

As we anticipated, operating and free cash flow rebounded quite significantly in the fourth quarter. Cash flow from operations in the fourth quarter was $19.8 million, and free cash flow was $16.5 million. Free cash flow was net of a $4.5 million cash repayment made in December 2021 related to employer payroll taxes deferred under the CARES Act from fiscal 2020. Our free cash flow conversion of adjusted EBITDA was over 100% in the fourth quarter, 114% to be more exact. We anticipate being back to our approximate 50% average conversion of adjusted EBITDA into free cash flow during 2022.

Our annual effective income tax rate was approximately 47%, including discrete items recorded earlier in the year that added approximately 17% to the overall rate. We anticipate an effective income tax rate of approximately 30% for full year 2022.

Looking back at results for the full year, revenue was up over 14%, with all of our end markets growing with the exception of aerospace and defense for all the mentioned -- reasons Dennis mentioned earlier, and infrastructure, which had a large bridge project benefiting the prior year results.

Gross profit for the year was $197 million, which is an increase of over 10%. Gross profit margin of 29.1% was a contraction of 100 basis points attributable to higher benefit costs in the U.S. in the current year period and lower relative Canadian wage subsidies in the current year, as I had mentioned earlier.

Selling, general and administrative expenses were held to just a 2.7% increase on a full year basis, despite the reversal of remaining COVID-19 temporary cost reductions in August of 2021 as originally implemented in April of 2020. Thus, by controlling overhead, we expanded the operating leverage in our model, with non-GAAP operating income up over 200% for the year, while adjusted EBITDA grew by 21% to $63 million.

CapEx for the year was just over $19 million, up modestly from a year ago due to the significant revenue increase, and this was in line with our expectations. Because of our asset-light model, you can expect a typical capital expenditures budget of approximately 3% of annual revenue for the upcoming year.

As Dennis said, debt reduction remains our #1 priority use of cash. And this year, we used cash to pay down gross debt by $16.3 million. Over the past 3 years, we have now reduced our total debt by just over $90 million. As of December 31, 2021, our consolidated debt leverage ratio at just over 3.5x as defined by our credit agreement, is the lowest level it's been since the third quarter of 2018, which was prior to the Onstream acquisition, and it remains well within the limits of our current covenant requirement.

Our goal is to lower our leverage level to less than 3x by the end of 2022, and we are well on our way to doing so. This will facilitate a more flexible capital allocation strategy by 2023, as Dennis mentioned earlier.

Our business has been recovering since the low level of demand experienced beginning in the second quarter of 2020, when the initial effect of COVID-19 peaked. Although energy prices and demand improved during 2021, the ongoing COVID-19 pandemic continues to impact us. This effect is most pronounced on our second largest market, aerospace and defense, especially in the commercial sector, where a rebound to pre-pandemic levels is lagging other end markets.

More recently, with crude oil prices now significantly exceeding pre-pandemic levels, this has caused many refineries to run longer cycle times, resulting in the postponement or scaling back of planned inspections. Consequently, this may impact the timing of the spring turnaround, as customers who had initially had a heavy overlap of projects in certain regions are either curtailing or deferring work to later in the year. Regardless, we believe conditions will improve throughout 2022.

For the first quarter of 2022, we expect revenue to be a low single-digit increase as compared to the first quarter of 2021. And we expect adjusted EBITDA to be essentially flat in the first quarter of 2022 compared to the first quarter of 2021. Keep in mind that the first quarter of 2021 benefited from a significant level of Canadian wage subsidies and the temporary cost reductions that had remained fully in place through August of 2021, thus also benefiting the first quarter of last year.

Overcoming these significant headwinds to achieve a flat first quarter on adjusted EBITDA as compared to the prior year shows our continued focus on cost containment and expanding our operating leverage. This outlook is contingent on continuing geopolitical and macroeconomic stability, including stabilization in the crude oil futures market, ongoing effectiveness of the international COVID-19 vaccination rollout, no additional global supply chain disruptions or labor shortages, which would impact our ability to work as a critical service provider and no significant additive inflationary pressures on our business model.

Again, the ongoing conflict in the Ukraine is certainly an extremely volatile situation, with unknown impacts to world energy markets. We are reviewing the potential impact this might have on our business in the immediate term, including U.S. and EU sanctions on Russia.

This will certainly have an adverse impact on the world's oil and gas market in the short term, although this will be partially mitigated to MISTRAS by the fact that our business is geographically more concentrated in North America and Western Europe than the regions more directly involved in the ongoing conflict. Currently, we do not maintain any operations within Russia and our exports to Russia are very limited.

Over the long term, it is too early to tell yet as to what impact the current crisis and related sanctions will have on our business. Nevertheless, we are highly confident that our business model is robust and sustainable through the extremes of economic cycles, and we remain firmly committed to executing our plans by maintaining our intense focus on cost containment, while continuing to prudently invest in our business. That is our strategy, both today and over the long term.

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

All right. Thanks, Ed. Fiscal '21 was a year of rapid recovery from the twin challenges of COVID-19 and the collapse of the energy market in 2020. We grew the business, improved profitability, and we strengthened our financial condition. Now, we are preparing for even greater opportunity.

First, we are transitioning the business to a more data-centric organization, delivering an enhanced ROI for customers who are demanding more be done for less. OneSuite and Sensoria are the most visible changes in an organization that is increasingly looking different today than it did just a few short years ago. We strongly believe the expanding acceptance of MISTRAS Digital can add value to all our evergreen projects, making us more firmly the choice of owners for their industrial assets.

This growing portfolio should expand our growth opportunities and deliver better margins.

Second, we are looking at alternative markets such as renewable energy, private space and many others, where the need for our services are emerging. Increased regulation, compliance requirements and the drive to optimize the performance of valuable assets is driving industries to increase the market for NDT and our other related services.

Third, we are dedicated to reducing outstanding debt. I am proud that we have paid down just over $90 million of total debt over the past 36 months, which equates to roughly $3 per share, although this has not been reflected in our equity valuation over this period. Once we pay down to historic metrics, we intend to consider strategic acquisitions to potentially enhance and accelerate our growth.

Finally, we are focused on optimizing our own efficiency, improving the operating leverage in our business and generating increased shareholder returns. With adjusted EBITDA expected to grow faster than revenues over the course of '22, you can clearly see our commitment to this objective. The first step is to return operations to prepandemic levels, and we are rapidly approaching this objective. In some of our metrics, such as gross profit margin, we are already there as our gross profit margin in '21 was slightly higher than that of 2019. And our SG&A dollars were 4% lower in '21 than they were in 2019.

Both OneSuite and Sensoria represent an evolution in asset protection, and MISTRAS is uniquely qualified to leverage our proven capabilities and expertise such as the acoustic emission monitoring, while innovating to meet the needs of the challenging and changing global landscape.

These newer data-centric tools complement our more established MISTRAS Digital, which is our cloud-based field inspection, execution and reporting platform, which digitizes the field inspection process via a powerful end-to-end workflow solution. All of these interrelated data solutions interact and combine, which will differentiate our offerings by creating a robust predictive analytical platform.

I'm very excited about our prospects for growth in these new areas of opportunity in 2022. We believe that our new project-specific mechanical and data services will help us to accelerate our growth objectives.

But before taking your questions, I'd like to thank all the MISTRAS employees once again for your understanding and leadership. It has been almost 2 years to the day since we started creating strategic goals that address the market disruptions from the pandemic. Those strategic investments we have made in the digital space will help to drive growth in our future targeted end market.

We have observed the extreme consequences that our customers and competitors have experienced during this worldwide crisis. Your focus on caring for everyone that we interact with has made MISTRAS more resilient than ever as a valued partner. You have shown an unwavering focus for building on our solid reputation of safety, quality and innovation, all while providing outstanding customer service and dedication during these extremely trying times.

By sticking to the tenets of our Caring Connects initiative, we can provide a better workplace not only for the MISTRAS family, but for all of whom that we work with on a positive and safe manner.

Howard, please open up the phone lines for questions.

(Operator Instructions) Our first question or comment comes from the line of Brian Russo from Sidoti.

Just first on the first quarter 2022 guidance of low single-digit revenue growth, could you just kind of compare or contrast what you saw in the fourth quarter in the Services segment? I believe it was 11% overall growth. Could you kind of drill a little bit deeper, how that growth might have been dispersed between energy versus aerospace and defense versus industrials? And then what you're seeing in the first quarter of 2022 that kind of triangulates with the low single-digit guidance?

Yes, I'll take it. I'll throw it to -- and Jon will take a quick comment on that. So in the fourth quarter, it's always a little bit volatile with our customers. Sometimes in the energy market having their budgets exceeded or spent, they'll come off of the year quicker than normal.

That didn't happen in 2021. We've seen the signs of that in previous years, such as 2019, where late November or very early December, you'd start having customers pulling back people or hours or the capital. They stayed quite a bit later almost into the holiday season. So that was one of the things that helped us. And we did have a lot of activity inside the private space in some of the other sectors.

Coming back into this year, what we're seeing is that a lot of customers from 6 months ago when we were looking at our budget and our planning and all that, there was a lot of activity in the spring, but there was a lot of piling on in certain areas on certain times. I think that just exceeded the capacity of the local workforce, not only in NDT, but all the sectors that support it. And I think there's been a lot of corrections to that that made some of it move around a little bit.

Jon, if you want to give a little bit more?

Yes, sure. Thanks, Dennis. Yes, I think, as Dennis said in his comments, we had some projects that ran a little bit longer and stronger in Q4. And from a seasonal perspective versus the prior year's Q4, we had a nice uptick. So the industries there, in particular, were probably energy-related just with that activity. So you have some seasonality there, which kind of worked in our favor and some projects which ran longer.

In the first quarter, I think we're looking for a similar industry mix. But as Dennis said in his prepared comments, I think from a seasonality perspective and also, just given a little bit of what's happening in the macro energy markets right now, the turnaround activity that we're expecting for Q1 is kind of in line with what it would have been in last year's Q1.

Originally, we might have thought it might have been a little bit advanced versus last year's Q1 from a seasonality perspective. But as Dennis said, things seem like they may have moved a little bit out -- a little bit later in the year. So that's why our first quarter increase, while still good, low single digits, we might have thought it might have been a little bit higher when we entered the year, still thinking it's going to be good.

Okay. Great. And then just on Sensoria and your comments on the global market opportunity, clearly, going from 100 kind of turbine capacity or service -- in the market specific to MISTRAS to 1,000, kind of supports a considerable amount of growth.

But if you just kind of look at the number of wind facilities in operation in terms of megawatts and the number of turbines in operation and then also, just the nearly 29,000 or 30,000 megawatts of new wind capacity forecasted by the EIA, it even seems that 1,000 turbines is only a small fraction of kind of the U.S. market potential. If you could just kind of add some insight there, quantitatively or qualitatively, that would be appreciative.

It's Jon. I can give that one a shot and let perhaps Dennis or Ed add on. But yes, I think we are -- as Dennis said in his prepared comments, we are in a number of ongoing trials with some name brand customers, these are going very well. But we're in the early stages of proving ourselves and I think that as we continue to improve ourselves, the commercial orders are starting to come. But we're not trying to rush that process as much as we are trying to make sure that with every step we take, our ability to perform, our ability to never overpromise is sacrosanct because the credibility that we need to have in this very important market is just really key.

So we're taking this step by step. We're not rushing these processes with customers. We did have a great commercial installation in Q1 that just finished. So activities are ongoing, and we're really excited about it. I think that the numbers we presented probably, with regard to capacity may prove to be somewhat conservative. But again, we're trying to under-promise and over-deliver with our customers and with you folks on this call.

Yes. Brian, one more comment. it's Dennis. Keying on the world capacity. Right now, we know the technology works and we can prove it up and we're doing that with these concept projects that we have. But what's going to happen is as we nail the software and automate it a lot more, our capacity will go up. So what we're really looking at is making sure that we got probability of detection nailed. We want to make sure that we have automation of signal enhancement and bringing that to the website.

Right now, there's a mix of automation and manual verification. So once we get past all that, get the proof of concept more in the rearview mirror, that's where our capacity to grow. And to your point, you know the numbers much better than most, a lot of times quoting capacity and on mill, there's a lot out there. So we're not worried about how much growth potential we have, we just want to make sure, like Jon said that the system is working right, the probability of touching it is high enough that we're going to capture them.

And right now, we're still really focusing strictly on the land base. We haven't even gotten into the offshore where they're bigger, and we believe that the same technology will work. We just have to prove that it can reach a little further out on a blade, but we don't see, at this point, any reason that it should be that much different.

Right. Got it. Understood. And then just on aerospace and defense. Clearly, commercial aerospace is lagging. You know that. You guys have been mentioning that for a couple of quarters. But when you look at the aerospace and defense revenues in 2019 of about $94 million, I mean, do you think if the recovery gains momentum in the second half of 2022, do you think you can reach that level for the full year of 2023?

Dennis, do you want to take that or...

Yes, I'll start. Yes, great question. Great question. I mean, we are -- as Dennis said, we're very strong right now in private space. The other area that we're doing very well is defense. So within aerospace and defense, it used to be when we talk about this 2 or 3 years ago, we were almost exclusively talking about commercial aero. And nowadays, commercial aero is certainly still the biggest portion of this category for us, but it's lagging, as you said.

With the growth in defense and private aero, I think, absolutely, we could approach that level in the latter part of '23, and we're trying real hard to get there sooner.

Brian, what I will say is our customers from casting foundry houses, OEM manufacturing, everything else, they believe that by midyear, picking on June, July, in that range, that the volume in production will be at a point -- outside of the wide-bodies, will be at a point that it's going to be getting back to some normalization.

So there's been a lot of activities and discussions with our customers about what can you do to ramp up, not only us, but we hear from machining and everything else out there, is starting to become stressed in the industry. So there is an expectation that the volume will get back to a much stronger on the commercial side by midyear and then start to carry through through '22 into '23.

Our next question or comment comes from the line of Mitch Pinheiro from Sturdivant & Co.

Just a follow-up on the wind turbine business. So I mean, what does revenue look like when you have 1,000 turbines under monitoring? What's -- what's that? I mean, is it meaningful? Is it...

So Mitch, I'll give it to you this way. We're going to have different types of revenue coming in from those turbines. You're going to have the installation, which you're talking the installation per turbine, less than 5 digits. So it's going to be some thousands of dollars per turbine to do the hardware and do the actual boots on the ground, get them installed and put them into the blade. We're getting quicker and quicker on that, and we can do a couple of turbines a day if we're in a farm where we could have access to more than 1 at one time.

So there's some money there. There's going to be -- the monitoring of the annual isn't going to be that high a money, because those things run fairly on tight economics. So we'll be making some money on that as well, but when you multiply it times 1,000, obviously, there's good money there because of the automation and such, but we'll have subject matter experts working with the customers to understand the data and all that. So there won't be free money coming in, but it will be good margin.

And then you're also going to have the third tranche of money coming at it is when we're looking at this stuff and working with the customers and when the data is representative of something with the asset, not with the equipment itself, not with the sensors over that, then we could be going out there and finding the damage and repairing it.

And on the sensor farm that Jon was just talking about that we're finishing up, we actually had found some damage on blades that they didn't know about. So there's a lot we can do. Some of it was actually even visually that they haven't even seen some of it from repairs previously that weren't done right. So a lot of the money is going to come -- probably the bulk of the money will come from being hands-on in doing those repairs and things that our present business already has and does. And then the other part will come from those other 2 streams.

So I mean, I don't know if I want to get into the exact dollar per, but you're going to have those 3 different levels. And obviously, the installation will be a onetime, the reoccurring will be the monitoring and then the maintenance.

That's helpful. But -- and then, you had mentioned that, listen, you still have -- you have a lot to prove here to your wind customers. I mean -- but what are you being compared to? I mean, what do you have to prove? That you show up on time or to install things? Or do you have -- or is there some more significant proof that needs to happen?

So yes, I'll catch in and Jon wants to elaborate. It's a good question. There's 2 things. When you say compare to, there isn't really technology comparable for the monitoring that we've seen. There's people that can put video cameras on there and pointed at it 24/7 if you want, or some kind of microphones and things like that, but nothing really directly attached to the blades that makes sense.

You can do things on the -- where the blade attach to the hub and to the axles and all that and do vibration and alignment and all that, but that's an indirect idea of what's happening with the blade. So comparable, we don't really see much out there, especially when you bring in the fact that we will do the manufacturing, the installation, the monitoring and then the maintenance.

The proof is the one that we're trying to ensure to customers that our technology, when it sees the signals, it not only sees signals on a basis from the base down to the tip or down far enough down the tip at a high enough sensitivity that it picks up anything that is significant to the blade. If it's a small pinhole or something at the very tip and it does not cause any damage or growing. Are we worried about that versus something as you get closer and closer to the blade, obviously, the leverage on the defect is greater and greater, and it's more important.

So we're trying to prove that out. We're trying to prove that we can find all the different types of damage, perforations, lamination, delamination, cracking, falling, lightning strikes, anything that occurs to it that does it. And be able to tell them what that different damage is just not that there's a signal that looks wrong to identify that characteristics. And then most importantly, is that damage growing, and is it becoming significant to the blade.

So all those 3 things and anticipation of where you'd be thinking, we're proving all those signals. We've proving that we can see them. Now, we just got to prove that we can see them consecutively. We can nail them with the software. That's why I talk about the probability detection to make sure that we can see them on a high enough probability that regardless of where the defect in orientation is, that we can see it. As it grows, most importantly, can we monitor and give them data that says not only is there something there, but it's becoming to a point where you need to start thinking about your planned maintenance.

So that's what's important. If we can tell them, not only do you have a problem, but how rapidly do you have to work on it and do something with it. That's when it becomes valuable to the customer, because they can plan their outage time and look, they're like anything else. They want to keep their assets running and keep the utilization as high of a percentage as they can. So that's where this technology really comes in.

Okay. That's helpful, Dennis. And then back to the sort of the energy markets. When energy prices are low, budgets are tight. When energy prices are high, no one wants to stop. Shorter turnarounds. Where is there a sweet spot? Is there ever a sweet spot where things just sort of run normally? Is part 1.

Part 2 is, over the last several years, I mean, there's got to be pent-up demand for all sorts of maintenance and even new equipment. Can you give us a little color on the extent to which there is pent-up demand? Or will this pent-up demand just get pushed off forever?

So great questions. Quick way of looking it from the customer point of view, I don't know if they'll ever tell you there's a sweet spot. But I think, to their point of view, the volatility is not great for them, high or low, because it's hard to plan capital allocation. Many people have asked, well, is at $130 a couple of days ago, it's $116 a barrel now. How does that affect?

When you're looking at the upstream and down, especially. Let's just take the down and midstream really. When you look at those 2, their capital budgets are put out a year or so in advance, right? 6 months in advance. So they're pretty much locked into what they're going to spend. Certainly, when you get extreme high crack spreads and things like that, they're going to take a little bit of advantage of it like we're talking about, possibly, in the spring turnaround. You could see them trying to snip off a little from the front and the back and pare it down to just those essentials again.

So they can do something like that, but they really can't change too much through the year their planning and all that. The barrel price changes in a week or two wouldn't make up for the differences and removing contractors and the timing of turnarounds around unless it really could make a major difference. So they don't react that way.

When you look at upstream and frackers and things like that, certainly, those that are drilling the wells, that's where we see the largest amount of change probably happening from these higher prices. If they see it happening for long, whether it's $113 or $116 or $100, if they see it in triple digits at the price, they are going out and drilling holes.

For those facilities that are in the cold areas and in the deserts where they're land-based and locked in, they're not going to change too much. So it doesn't really affect really 2/3 of our -- on that. It could affect it next year if they believe the prices will stay extremely high or extremely low. Certainly, that's where it comes into it.

So for them, it's more about sustainability and an idea of what it's going to look like. And regulations from government and everything else about leases and all that. I think everything that's going on in Europe might make the focus on making sure that we have the same amount of supply to match demand as you can have, because you can curtail supply, but if you don't do anything about demand, the price is just going to go in one direction.

On the amount of deferrals, there's -- I can tell you right now, from what we've seen in the spring, some of that was '20 and '21 deferrals of maintenance. So what they're going to have to do is still get that done. They may be able to try to play with, like you're saying, maybe some of the things that were needed to do in '22. But '20 and '21, items like that, you're going to have to pick it up.

So there's always going to be a drag behind the owners that they have to start making some of this up. Do they have to make it up in any 1 quarter or a year? Possibly not, but they can't move it out 5 to 10 years, certainly can't move it out 2 cycles for them. So they'll have to pick it up in a mini or a major at some point.

So you're going to see it bleeding out, but they can always continue to play with what's mandatory for today versus what they'd have to make up from last year and the year before.

Does that make sense?

Yes. And then -- so I haven't seen the breakdown for the fourth quarter. You haven't released your K yet, but as you look at the energy market and your energy business for 2022, is that -- on a global basis, is that expected to be up year-over-year?

Jon, do you want to...

Yes, absolutely. Yes, this is Jon. Thanks for the question, Mitch. Absolutely. We're expecting virtually all of our sectors to be up to some degree in 2022 versus 2021. In the energy sector, we see certainly, the commodity prices are good for budgets. They're good for encouraging customers to, as Dennis said, if they were thinking about CapEx, assuming that they've got operating window to implement it, certainly, the cash flow is going to be there. So our expectation is that we're going to be positive in energy revenues in 2022.

Okay. And then just last question for Ed. And when you're looking at gross profit, I know -- I realized you had mentioned about the first quarter from last year, some of the one-offs. What -- should we -- is -- obviously, there's going to be maybe some labors or higher cost pass-throughs. How do we expect, how do we look at gross margin for the full year 2022?

I mean, we would certainly expect to hold serve with 2021 on the gross margins overall, if not, hopefully get a little incremental benefit. There is good seasonality, though. I mean, Q1 of any year, gross profit is lower than the other 3 quarters. That's without fail and has been for the last 3 years running, mix of business there. Q2 is generally a much stronger gross profit period, and Q3 is a little -- dips a little from there. Q4 is a little weaker than 2 and 3. So you do -- it's not linear. You do see that trajectory changing throughout the year, and you've seen that over years seasonality affecting that.

But we are pushing for gross profit expansion. We're not showing the basis point improvement this year that we've shown for a number of years running. Again, there was some additive cost this year, and there was some subsidies last year. So when you normalize that, you do actually see that we were able to actually improve gross profit ever so slightly on a true pro forma apples-to-apples basis, '21 versus '20.

So yes, we are going to lean into it for '22, but obviously, inflation is here. There is cost pressures. We're trying to maintain and push through any higher cost through as best we can. So that's real pressure. We can't deny that. But we do expect to hold margins this year, if not, maybe, have a little incremental benefit if we possibly can.

But again, we're earning back last year's tailwinds, incentives and became a headwind this year as well as the higher cost that we restored to the business in August of '21. All that has to be earned back this year, so we [are excited]. That's work in the opposite direction this year becoming a headwind that had last year's tailwind.

Okay. Thank you very much. I appreciate it. That's all the questions I have.

(Operator Instructions) Our next question or comment comes from the line of Chris Sakai from Singular Research.

I just had a question. For Sensoria and OneSuite, what are the profit margins on them?

All right, Chris, I'll take it. And I'd like to thank you and welcome you to -- on the call and for picking up coverage for us. Appreciate it. So any time you start talking about Sensoria and OneSuite and things like that, because it's data-centric, and that's why we'll be bringing out more of some data metrics for you guys in the year of the '22 numbers, data has always got the richest margins for us.

You're doing a lot of things with automation, you're doing a lot of things of high value for the customer. So it does have a much better blend for that. So anything in Sensoria, anything on MISTRAS Digital and all those, those will definitely help our margins and flow through much better. Multiples above what you would see in the field.

Okay. Great. And for Sensoria, how did you get from your -- you say 100 -- you're going from 100 to 1,000 by 2023. How did you get to that number?

So again, Chris, what we're looking at there is our capacity to get to that number. We believe that the part of selling it is a different issue. We believe there's enough volume out there. There's enough customers that we're talking to that we can get there. But what we're talking about is, right now, we're limited to how many we can add on because we're still having a blend of automation and manual. Once we get past all that and we automate the software and get the whole proof-of-concept behind us, we're going to have all the signals being characterized automatically.

The signals will give a discrete type of identifier to the customer based on their return objective. Sometimes, it's purely just the detriment to the blade. Sometimes, they mix the detriment with the blade mechanics and the financials for it, so they get an ROI before they want to look at shutting it off. So we'll make sure we have all that set up. And then that's what our capacity to get into from 3-digit kind of monitoring to 4-digit and 5-digit.

So it's more of the capacity. It's not so much that we're saying we have a customer waiting on the line. But we believe there's enough capacity out there that we can certainly add customers and grow it and do it. So we're just trying to basically say, we will be at a point where we're going to be ready to bring online not unlimited amount of customers, but a much greater volume than we can handle right now.

Okay. Great. And one question on your inventory levels. How is your supply chain? Are you running into any problems there? And are you comfortable with your inventory levels?

It's Jon. I'll take that one. From an inventory levels perspective, I think they're adequate. We have had some elongated lead times for chips and so forth. Just as much as the world is experiencing right now across many different industries. But so far, we're finding it manageable.

Thank you. I'm showing no additional questions in the queue. I'd like to turn the conference back over to management for any closing remarks.

All right, Howard, thank you. I'd like to thank everyone for your continued interest in MISTRAS and for joining our conference call today. Please, have a safe and a productive day, and we look forward to updating you during our next call in a few months.

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