Mistras Group Inc (MG) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 FY 2013 Mistras Group, Inc. earnings conference call. My name is Grant, and I'm your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of this conference. (Operator instructions). As a reminder, this call is also being recorded for replay purposes.

And now I would like to turn the call over to Mr. Sotirios Vahaviolos, Chairman and CEO. Please proceed.

Grant, thank you very much and good morning to all. Welcome to the Mistras Group earnings conference call. Again, my name is Sotirios Vahaviolos; I'm the founder, Chairman and Chief Executive Officer of Mistras Group. Also joining me today is Frank Joyce, our Company's Chief Financial Officer.

The purpose of today's call is to review our financial results for the first quarter of fiscal year 2013, ended August 31, 2012, and to discuss our Company's performance, recent global expansion and prospects going forward. This discussion is intended to supplement our quarterly earnings release and our filings with the Securities and Exchange Commission.

I will begin by providing you a summary of the results for the first quarter of fiscal year 2013. Frank will follow with a brief disclaimer about the information we are providing you today and give you a summary view of our financials. I will then follow Frank with remarks and observations about our performance, marketing activity and prospects. We will then answer any questions you may have.

Let me start off by saying that the Mistras business model continues to produce impressive results, achieving higher revenues, gross profit, operating income, net income and EPS, than in any of the other first quarters of our history. It is noteworthy to mention that our first-quarter revenue growth of 24% came on top of 34% growth of the first quarter of fiscal 2012. Similarly, our 29% EBITDA growth of Q1 2013 is on top of last year's first quarter growth of 42%, and operating income growth of 34% is on top of last year's first quarter growth of 80%.

Our continued strong cash generation in the first quarter will provide us the fuel needed for uninterrupted organic and acquisition growth and is indicative of how we manage the business for our shareholders.

We are excited about our acquisition of German-based GMA Group, headquartered in Dusseldorf, which we completed at the end of September. GMA is a leader of aerospace destructive materials testing in Germany and a leader in the field of quality assurance, nondestructive testing and engineering services for the aerospace markets. GMA has more than 500 employees located in 11 offices throughout Germany with operations in the Netherlands and a strong entrepreneurial management team.

With that, Frank, let me turn it over to you.

Thank you, Sotirios. First, I want to remind everyone that our discussions during this conference call will include forward-looking statements. The actual results could differ materially from those projected, and factors that could cause actual results to differ are discussed in our annual report on Form 10-K and in other reports filed with the SEC. Also, the discussions during this call will include certain financial measures that were not prepared in accordance with US generally accepted accounting principles. Reconciliations of those non-US GAAP financial measures to the most directly comparable US GAAP financial measures can be found in Mistras Group's current report on Form 8-K, dated October 9. These reports are available on our website, www.MistrasGroup.com, in the investor section and on the SEC website.

I'm now very pleased to present summary financial results for the first quarter of fiscal 2013. Revenues for the first quarter of fiscal 2013 were $113.4 million, up 24% from the $91.5 million reported in the first quarter of fiscal 2012. Organic growth was once again a significant driver behind the revenue increase, contributing 9% in the first quarter followed by acquisition growth of 17% with the balance due to foreign exchange.

Gross profit grew by 23% in the first quarter of fiscal 2013 to $33.7 million versus $27.4 million in Q1 of 2012. Gross margins of 29.7% in the current quarter were relatively unchanged when compared to the 30% reported in Q1 of last year. Once again, the mix of project work performed during the quarter in the Services Segment as well as higher traditional NDT revenues from our recent acquisitions in Europe were the primary drivers in the change.

Operating income increased 34% to $8 million in Q1 2013 versus $6 million in the prior-year quarter. Operating income margin increased to 7% in the current quarter versus 6.5% in the prior year. SG&A in Q1 2013 was $23.5 million versus $19.3 million in the first quarter of 2012. Approximately $3 million of the SG&A increase was from companies acquired within the last 12 months. SG&A as a percentage of revenues continued to decline to 20.7% in fiscal 2013 versus 21.2% in the prior quarter.

Net income rose by 33% in the first quarter of 2013 to $4.3 million or $0.15 per share versus $3.2 million or $0.11 per share in Q1 2012. Adjusted EBITDA increased 29% to $15.5 million in Q1 2013 versus $12 million in the first quarter of the prior year. Adjusted EBITDA margins rose to 13.6% in Q1 versus 13.1% in Q1 of the prior year.

During the quarter, the Mistras model demonstrated higher operating leverage as approximately 16% of our revenue increase fell to the adjusted EBITDA line. Our top 10 customers represented 32% of revenues during the first quarter of fiscal 2013 versus 40% in the prior-year quarter. In the current quarter, oil and gas revenues represented approximately 47% of total revenues, down from 56% in Q1 of 2012. This change was, once again, due to revenue growth of more than 40% in our markets outside of oil and gas.

During the current quarter, advanced services revenue represented 15.2% of Services Segment revenues versus 16.3% in the prior year.

The Company continues to generate strong cash flows, and in Q1 2013 net cash provided by operating activities jumped by nearly 70% to $21.5 million versus $12.8 million in Q1 of 2012. During the quarter, the Company used its operating cash flows to reduce borrowings under its credit facility by $15 million. As a result, our net debt declined to $35.2 million as of August 31, down from $50.9 million at the end of fiscal 2012, and our net debt to EBITDA dropped to 0.5 times as of the end of August 31 versus 0.8 times at the end of the May quarter. As of August 31, the Company had cash and cash equivalents of $7.3 million and an undrawn revolver balance of approximately $112 million.

Total capital expenditures for Q1, including both cash capital expenditures and capital expenditures that were leased, were $4.3 million or 3.7% of revenues versus $6.7 million or 7.3% of revenues in Q1 2012.

And lastly, I wanted to provide you with a couple of data points on the GMA acquisition. GMA was acquired in September 28 and, as such, is not included in the first-quarter results being reported today, which of course are for the period ended August 31. Also, I would like to remind you that since our foreign subsidiaries are reported on a one-month lag, GMA will only have seven months of contribution to our fiscal 2013 results. Said differently, the year end for foreign subsidiaries is April 30, while year end for the rest of the Corporation is May 31.

Also, the GMA acquisition will produce additional amounts of acquisition, depreciation and amortization in fiscal 2013, and our best estimate at this time is that it will produce somewhere between $2.7 million to $3 million in additional D&A for fiscal 2013, bringing total D&A for fiscal 2013 to a range of approximately $27.5 million to $29 million.

And with that, I would like to turn it back to Sotirios.

Thank you, Frank. The Mistras team delivered an outstanding first quarter with a $22 million increase in revenues and demonstrated an operating leverage where 16% of our revenue fell to the adjusted EBITDA line, thus reversing the trend observed in the fourth quarter of fiscal year 2012. The continuing improvement of the first quarter EBITDA margin by 50 basis points is the result of better managing our services cost and the integration of our recent European and Brazilian acquisitions.

Needless to say, we are excited about the new service offerings in customer relationships that our German acquisition, GMA, brings to the Mistras Group of companies. However, we are also mindful of the near-term uncertainties surrounding Europe, where GMA operates, and as a result expect GMA to contribute slowly to our earnings and cash flows in the first 9 to 12 months of operations. Accordingly, we expect GMA to produce breakeven earnings during this period due to the transaction and integration costs, acquisition-related amortization and the first-year normal integration challenges that result when the two companies are brought together. However, we expect GMA to be accretive to adjusted EBITDA and EPS in the fiscal year 2014.

As many of you know, we focus on building our business for the long-term, and sometimes that also means acquiring good businesses when they become available. 50% of GMA's sales are derived from their robust Airbus-related aerospace business, and that gives us confidence in maintaining a long-term revenue stream. In addition, GMA's destructive testing business is a new but complementary product line for Mistras in a global market estimated to be in the billions.

The acquisition of GMA further enhances our customers, markets and geographic diversification.

Let us now discuss our segment performance and our strategy going forward. Our Services division this quarter experience positive activity across oil and gas in the midstream and downstream segments. The chemical, power generation and aerospace markets also continued to remain active for our traditional, advanced and engineering and PCMS enterprise software and services.

The midstream segment of our business continues to deliver robust growth compared to Q1 2012, driven by the Northeast and Gulf area shale plays which we experienced the past few quarters and now is also being driven by the even large Bakken oil shale play in North Dakota and Eastern Montana. We have secured master service agreements with the majority of the major energy companies and contractors within all of the shale play regions.

Of special note, we were awarded a contract with a major North American midstream pipeline and terminal storage customer to replace its existing database inspection software with our PCMS enterprise-based system at all of its facilities in North America. In addition, the customer also awarded us its risk-based inspection, RBI, implementation that will seamlessly integrate with Mistras's PCMS software platform. This application is another endorsement of the acceptance of PCMS in the midstream segments, as it is positioned today in downstream, operating in over 50% of all USA refineries.

In our downstream business, we renewed several long-term agreements with our refinery customers. The renewal of a 17-year-old continuing evergreen agreement is indicative of the trust and the value the long-term customers place on us. We also secured two new multimillion-dollar refinery turnarounds in the quarter. We have a high level of confidence that these will evolve into long-term evergreen accounts after the initial turnarounds are completed.

In the quarter, we secured a contract with a major utility having operations in Southeast, Northeast and the Midwest parts of the United States to provide inspection services for its aging natural gas pipeline replacement program, and it's planned to continue through 2013. We're involved in a similar program with a utility in Southern California region as well.

Our chemical business experienced another solid quarter of growth compared to Q1 2012. Here, we have seen an increase in the demand for our engineering and mechanical integrity services as we continue to track the large chemical and petrochemical capital projects that have been identified, driven by the economics that the new natural gas and oil shale plays are providing.

Our Products and System division continues to perform well with double-digit organic growth and profitability. Besides its normal materials research and online application, it has also been benefiting from the strong aerospace market with a steady increase in quotation activity as we are continuing to work on the delivery of a large backlog of system orders. It is worth noting the award of the first online boiler leak detection AMS system in Europe for a major utility in Spain. We hope to capitalize on this first installation to serve as a reference site for Europe and pave the way for the same results as achieved in the US, where systems have been installed in over 100 electric utility locations.

The division also has a number of exciting pilot projects in progress for the offshore wind turbine market, including online structural integrity monitoring and wind turbine blade monitoring that are critical for ensuring the safe and continued reliability of these massive structures.

Now, let me talk about our International segment. The integration of our recent international acquisitions is proceeding as planned and we have made staffing adjustments including new hires to assist our existing managers within the operations and implementations of the Mistras acquisition model. As I mentioned on our fiscal 2012 fourth-quarter call, we expect these acquisitions to be a couple of quarters away from the point where they will be operating at targeted levels. In the first quarter of fiscal year 2013, we gained traction in the International segment as operating income improved over the fourth quarter of fiscal year 2012.

We are excited about the service offerings and customer relations that GMA brings to Mistras, not just in Germany, but with Mistras's global reach, the ability to service GMA customers at locations outside Germany. We believe the GMA business will provide Mistras with the ability to better service existing Mistras multinational customers in Germany and provide a broader range of service offerings in Europe. GMA is very strong in the aerospace, automotive, power, chemical industries -- areas that Mistras is targeting for growth.

And now I would like to update our outlook for fiscal 2013. The Company now is adjusting upwards its previously issued 2013 guidance and now projects its fiscal 2013 revenues to be in the range of $520 million to $535 million and adjusted EBITDA to be in the range of $76 million to $85 million. Mistras does not provide quarterly guidance but expects to affirm or update its annual guidance at least quarterly.

In closing, I'm very pleased to have started fiscal 2013 with a strong quarter. Our efforts on operating leverage and profitability margin improvements is starting to pay dividends. We are looking forward to continuing these positive trends. The GMA acquisition brings Mistras to a different level in Europe for destructive and nondestructive market capture.

In conclusion, we are confident that our growth opportunities will continue in this fiscal year and beyond. Our confidence comes as a result of our market diversification strategy, growth in the USA and internationally, our safety and quality records of excellence and our relentless search for profitability improvements.

That concludes my remarks, and I would now like to open the floor for questions. Grant?

(Operator instructions) Scott Levine, J.P. Morgan.

Hi, good morning, it's Rodney Clayton here on behalf of Scott. So first, on the guidance revision, obviously revenue guidance and EBITDA guidance are coming up. It looks like maybe at the midpoint, just a little bit less margin than was previously expected. Is that reflective of the integration of GMA? And are there any other moving parts that we should be aware of there?

You know, it's not any one thing. I think it's -- at the midpoint, it's probably about 15.3% versus 15.6% in prior guidance -- a lot of moving parts, no one particular thing.

Okay, got it. And just to be clear, GMA was not in the previous guidance, and it is in this guidance. Is that correct?

That's correct.

Okay, got it, okay, thanks. And just staying on the margin theme just for a second, obviously a little bit more -- a step down and Services and International. I think that was probably expected. But just now that you are a quarter into the year, is there any additional color you can give us in terms of the timing of some of the pressures related to mix and integration, when those might wear off? I know you don't give quarterly guidance, but is it fair for us to expect margins to start to turn up at some point in the back half of the year, or is it maybe more of a 2014 event?

Well, I think that in the last time we spoke, we indicated that we thought that annual margins, gross margins, would be at the low end of the range, which was last year's actual, and it was about 29.7%, and a high end of about 30.5%. There's nothing in the first quarter that makes me think that that range would change. I will say that I think that, generally speaking, gross margins will be higher in the second and fourth quarters. So if you were to compare the first quarter versus the last three in total, I would expect the last three in total to be higher gross margins.

Okay, got it.

Basically, Clayton, also you have to remember that GMA is new to us, so it's a little bit of -- conservative in their numbers. And also, I would like to point out that in International business now, we are doing more traditional entity than we ever did before. That also brings the margins down.

Okay, got it. All right, that makes sense. And the growth there in International continues to impress on the revenue side. I know in the past, you have talked about aerospace and power being two markets that you are really looking to grow, and it looks like GMA plays right into -- particularly on the aerospace side. Can you really, I guess, talk a little bit about the power generation initiative? I think on the last call, you mentioned that you hired an executive to spearhead that effort. Is there anything tangible you can relate to us, related to that?

Yes. Basically, I mentioned the contract with one of the power companies that were already obtained, and there are more coming also. Okay? I already mentioned one in my text here, where basically it was in the Southeast and the Northeast. It's a new utility. They were never our customers, and now they are our customers. So that also helps our growth.

Okay, got it. And then just finally, on the G&A side, we saw that it was flat sequentially. And usually we see a bit of an uptick from Q4 to Q1. So it looked like maybe some progress there. Are there any internal initiatives that you have going on that are driving that down?

Well, the management group is aware that to deliver operating leverage is really two big levers; one is gross margin and the other is SG&A. We think we're going to get operating leverage from both of those, but we are very much focused on SG&A growth. So it's a management initiative.

And I think mostly, if you look at percentage wise, we really brought GMA costs down.

Yes, yes, absolutely. I guess I was talking about the G&A dollars being flat. But yes, certainly on a percent of sales (multiple speakers) --

Well, whenever you really acquire different companies, you have to make some adjustments to start with, and then eventually that will drop.

Okay, great. Well, nice quarter, thanks, gentlemen.

Andrew Wittmann, Robert W. Baird.

I wanted to dig in a little bit to the revenue side of the guidance. And I think to really understand a little bit more detail there, it might be instructive to have some color on the margin profile at GMA as well as maybe the multiple that you paid.

Well, I think, first off, it's just in the gate. But our initial sense is that it will have a neutral impact on gross margins, at this point in time. Now, keep in mind, I mean, just a few amount of details, they are currently under German GAAP. So there will be some translation issues there in terms of moving the line parts. But our view based on due diligence is that it will not have an impact on gross margins. I'm sorry, Andrew, your other question was?

So I would be curious specifically on the EBITDA margin as well as the EBITDA multiple that GMA was brought in at or that you expect to deliver here in the first year.

The EBITDA multiple on the purchase price as I calculate it was in the sixes. And I think that the EBITDA margin will probably be around the 10-ish area. That's my view of the initial margins from this business. Of course, we will know lot more in another quarter.

Okay, that helps. And by the way, the seven-month calculation and the mismatch of the calendar alignments also help. I think, even when you do some of those adjustments, is the organic growth rate that's implied for the legacy business -- has your outlook on that changed at all? It seems to maybe just smidged down a little bit, maybe 1%, 2%. Is that a fair calculation, or not?

Well, we don't expect to be in the 18% to 20%. But we have already said and will commit again today that we will continue to have double-digit growth. And we are committed to 2013 for double-digit growth. And the 9% will grow.

In our view, I think when we gave guidance in the last quarter, we were in the beginnings of double-digit growth and the high end of the range. And we feel that we are in the same position, the beginning of double-digit growth and the high end of this range as well, too.

Got it. And, Sotirios, just from a strategic point of view, GMA seems to be bringing some indoor, some laboratory testing. You mentioned that it does a little bit of destructive testing. I'd say this is kind of more classical nondestructive testing/inspection service, maybe more similar to what your publicly traded peers in Europe do. Can you just talk about your appetite for that business, why that makes sense in your business model and maybe your propensity to do more or less of that in the US, in your largest market?

Yes. As you probably know, we have in-house -- what we call in-house laboratories. There are people who bring their parts and we inspect them. What usually happens after we inspect them, they go through destructive testing, a lot of these parts. Okay? So therefore now, we will have the ability to be in one-stop shopping, in a way, where basically the customer will do the inspection and will do also the destructive testing. And the other thing -- it can be also the other way around. We can -- people that do destructive testing, sometimes they wanted to see -- they wanted to inspect it. So it gives us really the ability to do that.

But there's another important issue. I now have people on the ground in Germany so that I can really go after the evergreen contracts of several multinationals that are my customers in America but they are not in Europe. So this gives really the possibility also in expanding in the traditional and advanced nondestructive testing. So it gives me a product line with destructive testing, but at the same time it opens the doors for me in Germany. And I'm using the word Germany, but I really -- they will operate in central Europe because we are very weak in central Europe. So this will be basically, for us, an improvement in Europe. And we know what -- and as you probably realize, as some of the articles that came out of Wall Street the last couple of days, Germany continues to be the hot spot for aerospace and economy.

And keep in mind -- this is really -- if you are talking to tech -- technical people -- and I know you are also technical -- it's complementary. This is really a complementary business to nondestructive testing. They work together.

Yes, I get that. I guess that's really the question for me is, in the US, there's obviously opportunities for similar companies like this. Are these targets in the US as well, or was the geographic presence of GMA really one of the deciding factors there?

Well, it will open some markets for us because we have a product line in the US, because some of the multinationals you mentioned from Europe are doing that in America, and some of them really are now coming into our area in nondestructive testing. They are doing the destructive testing already.

Got it. Okay, that makes a lot of sense. And I guess maybe just one final question -- on the service side and your domestic business, I definitely understand that on the international side, some of the business that you've acquired, a little bit lower margin. But is there anything going on, on the Service domestically, in terms of pressuring that gross margin, pricing or competition? Can you just give us a little bit of color on the Service side in the main segment?

Well, as I mentioned on the call here is that we receive a lot of multi-year contracts again, you know, renew a lot of our contracts. Okay? And that basically put some pressure on our pricing. But, at the same time, we're trying to improve on unbillables, we are trying to improve on doing more advanced services and trying to counter that. Frank, I don't know if you have anything more to say.

No, I think -- we've said this last quarter and we'll say it again this quarter. In looking at Services and going down into individual labs, the flux from one year to the other is primarily mix, I mean, projects in this year and not in last year and vice versa. And we don't see anything in there that changes our outlook going forward. So, that's all I can add, really.

Okay, and just to kind of quickly follow up on that one, sorry, was there an unusually high level of activity in the renewals last couple of quarters? Or was it kind of consistent, and you expect to be at that rate going forward?

I'd say that it was consistent.

Yes, it was real even.

Okay, thank you very much.

Matt Duncan, Stephens.

Hey, guys, this is actually Stephen in for Matt this morning. Congrats on the good quarter. I guess most of my questions have been answered, but just one on your guidance. So if I take into account the acquisition, it looks like it's going to add about $29 million to $30 million-ish in sales to FY 2013, kind of assuming no growth. You said they did $50 million last year. So if that's correct, and then I know you guys recommitted yourself to doing double-digit organic growth and increasing the sales guide by about $20 million at the midpoint -- is it maybe fair to assume some conservatism baked into guidance, or how would you address that?

Well, first off, each quarter, we do a re-forecast of the whole Company by unit and roll it up, and upon that, that's what we use to actually do the guidance. In looking at -- so that's the bottoms-up approach. If you are looking at a top-down approach and wondering how GMA fits into that, I think the best way to look at that would be -- is to say that 7/12ths, if you would, of $50 million probably gets you around $29 million. And we raise the bottom end of the range by about $25 million, so we have baked it in there. I think that anytime we do guidance, we would like to think that there's conservatism in there. But we think we've come up with decent guidance.

Okay, that's fair, thanks.

Tom Hayes, Thompson Research Group.

Just a couple more questions on the GMA business -- I was just wondering, does it have the same type of revenue seasonality that the base business does, where we are seeing 2Q and 4Q a little bit higher than the other quarters?

Yes, basically, Tom, you have the typical European problems of June, July, August and December.

Okay. I guess a follow-up with Frank -- you mentioned that -- a good balance on the revolver. Did you use the revolver to pay for the acquisition?

Yes.

And then I guess just lastly on the acquisitions, I think on the last -- on the fourth quarter called, you had thought that the target for this year was about $30 million in acquired revenue. It seems like you grabbed it in one fell swoop this time. Does that put you on the sidelines for the rest of this year as far as acquisitions, or are you still out there looking for them?

Thomas, we basically have a business model. We have an acquisition model and a business model in general, and we are going to follow that. Okay? So this really was an uptick for us, but we will continue with our strategy as we did in the past. Nothing will change.

Okay. I guess just lastly, on the International business, it was a nice pickup with revenue on a year-over-year basis. Is that now reflective of all the acquisitions, because that's kind of a better indication of a run rate for the International revenue?

Yes. The run rate basically is indicative of the new acquisitions. And as I pointed out in the call, is we really -- if you look at our numbers have improved this quarter, as we expect. But, we are not going to basically implement our model instantly. So it will take another two or three quarters before we really are complete with our business model.

Great, thank you.

Tahira Afzal, KeyBanc.

Good morning, gentlemen, congratulations on a good quarter. I guess first question is, clearly, you are a company that has very successfully grown and as you have pointed out, superior to modelers, really still oriented towards growing. I guess my question is, as you internationally continue to grow, you will always have some drag as these acquisitions integrate. So if you are looking at the margins and mainly start to see that really creep in margins to the positive as the new acquisitions get integrated and the very new acquisitions are still coming through, do you have some clarity on where the margin inflection, net-net, is going to start to show up?

Basically, here to start with, let me just really mention for everybody is that we really did not only buy these acquisitions abroad, and they were the only people we had. We already had established before people since 1986 that have been working with us, but there were more working on advanced technologies. Okay? So we already have the people. So there, when we talk about integration, that integration is a lot faster than if somebody else did it because we already have people on the ground. That's number one.

Then number two basically is what we are trying to do is to, really, the same thing that we do in America, is to -- now that we have a lot of traditional, we bought companies with a lot of traditional nondestructive testing, is to bring more to them advanced technologies, like phased array ultrasonics, let's say, or acoustic emission, because we do a lot of above-ground storage tanks and pressure vessels in Europe. Okay?

So bringing -- so the blend -- the blend, of course, for X -- the blend is not going to be really in the upper -- above, let's say, 40% that were before. It will be probably in -- lower than 40%, but it's not going to be as low as in the United States.

But just to address your question on gross margins, we expect just internationally gross margins to be higher later in the year as we get 9 to 12 months of operations underneath them. So whether that's an exact inflection point -- but it's consistent with our view initially that it would take several quarters to harmonize those into the Mistras Group over there.

And we don't like to be -- to really give you a definite answer and precisely. We see the trend and we'd like to continue.

Got it, okay, and that's fair. The second question is in regards to GMA. You talked a bit about their exposure in the aerospace market. Do you guys have kind of an idea of the breakdown between -- is this largely European; is it Airbus-oriented; is it Boeing-oriented?

The majority is really Airbus. Recently, they started to do work for Boeing, but the majority was really Airbus and, as you know, related OEMs to Airbus.

Got it. And do you feel you have enough of the market for Boeing, or is there something within GMA you could leverage towards gaining more market share with Boeing?

Well, it would be the destructive testing part. The nondestructive testing, I think we are covered with all the certifications and all the things for Boeing, and we are prime contractor to them. But the destructive, we are basically doing nothing for them. So it's something that will grow for us.

Awesome, okay. And I guess last question, and I'll hop back in the queue -- as you pick up and you've done such an admirable job of integrating acquisitions, directionally what should we expect from DSOs as you continue to grow? I guess this is more a question for Frank. If you are looking at DSOs 2, 3 years down the line, do you want to keep them at the current levels? Do you feel that they could perhaps sway a bit before you could ring them in?

Well, DSOs have come down from our year end from -- and we look at that on a fully loaded basis to include unbilled receivables and receivables, because that's the -- they're all part of working capital. They are down to about 70 or 71 from about 75 at year end. I think realistically, we would be happy to bring those down in the low 60s, and that certainly is our target. I think mid last year they began to creep up a bit, and we put a full-court press management-wise on bringing those down.

So our target is the low 60s. We will continue to push toward that target. We will probably have a bump here and there, but we ended the quarter at around 70.

Got it, okay, thank you very much and I'll hop back in the queue.

Richard Wesolowski, Sidoti & Co.

Frank, you had mentioned the unfavorable mix of work in the Service division relative to a year ago. I look at the advanced services; it's about steady. Share of the business outside of oil and gas is up. From an outsider's perspective, that's what I think we think of when you refer to mix. And I'm curious as to exactly what you are referring to, whether it's the evergreens or the other side of services, or both.

Well, I wouldn't refer to it as an unfavorable mix. And advanced services revenues are down about 100 basis points year-over-year, so that is definitely part of it. But evergreens are probably about 30% or 35% of total revenue, so they are becoming a smaller piece of it. The balance is project work, and project work does fluctuate. If you go down to the lab level, sometimes you will see -- last year, a given lab would have a pipeline project; this quarter, they don't have it. They are expecting it in the fourth quarter. Those are the kinds of mix issues -- I would characterize them as unfavorable, but clearly --

Influential?

Yes, and reflective of the large amount of project work that we do, Rich.

I think, Rich, also you have to consider here the fact that if you look as a volume, as a dollar number, advanced is up. There's no question that advanced is up. If you're looking at percentage wise, and because of the growth sometimes that's where you see basically the same problem that we have, for instance, in SG&A. We have more cost in dollars, but if you look at it percentage-wise, we really lowered the SG&A cost.

Right.

So it's a similar thing with advanced. We really -- we have grown so fast the traditional, and especially in our broad, etc., that percentage-wise, to keep up with advanced sometimes is difficult.

And similarly, on that same subject, Sotirios, you mentioned the long-term renewals. I hadn't heard that in the past, I don't think. Are the multi-year contracts typically structured in a way that would give you a better gross margin at the end and a lower gross margin at the beginning? Or, is the bargaining position somehow less favorable today than it would have been in the past?

No, no -- definitely the other way around, okay, because you're probably, as you realize, on a 17-year-old contract, everybody and his uncle is really attacking us to get the contract. Okay? So therefore, you always have at the beginning.

The important issue here, why we mentioned that, is that it was an unusual renewal this year and it was a lot more than we had in typical in a year. And we are very excited. We are very excited, for instance, since I have mentioned -- we mentioned the International business. We are very excited because we got -- you know, the largest chemical company in France gave us a very large also evergreen contract for many years. So we are really moving in the right direction in that area. And of course, we always have to fight about the margins.

Very good. You mentioned the International acquisitions a couple of quarters away from reaching the targeted profitability. In the first quarter, the segment gross margin was 29%. I'm wondering what is the targeted level of profitability when they are running well and at full-tilt?

Are you talking that International?

Yes.

Well, we don't guide individually. But I think that you can probably conclude from 29.7% to about 30.5% total Company, they can be pretty even with last year. I will say that I do anticipate some upward movement in gross margins in international for the rest of the year. And clearly, even their operating margins sequentially were up.

They were up.

So we have a lot more work to do there. We're not completely happy there, but we are seeing some progress.

Okay, but there is certainly a distinction between what the International business was before the acquisitions, being mostly advanced --

Yes.

-- and now being a lot more traditional as you layer on more deals?

Correct.

Yes, and that's a fair point. In this quarter, I would say slightly up from this quarter is sort of where we see it trending.

Okay. And then last one, if I could, I'm hoping to flesh out the longer-term organic sales growth prospects for the Company. I understand you run into tough clumps in certain quarters, but this Company's history is a series of tough comps that you've grown so much. You are now discussing double-digit prospects. In the past five years, it has never been less than 15%. What is the proper organic sales growth expectation for the next 3 to 5 years?

Well, I don't think we've ever promised more than double-digit organic growth. And that is clearly our forecast for right now. And if you look at -- in this quarter, it was 9%, so not quite double-digit. But if you look at the quarter in terms of where it's going to come from, it's probably going to come from the same places that it came from in the past. This is yet another quarter where if you take all of our markets together in total outside of oil and gas, they grew by the mid-40s. So we are seeing growth across a broad base of customers. So that's likely where it's going to come from.

I think that you probably will not hear us talk about more than double-digit organic growth going forward, because I think if you were listening to us one year ago, we would be saying the same thing.

Rich, I think we have always mentioned that that's really double-digit from in standpoint one. But let me just bring one point here. Just [exceed] of two turnarounds in the first quarter could have given us all this money, because there was some shifting, and there has been some shifting in turnarounds even for the fall conference going into the fourth quarter of next year or to the spring, as they say, turn around. So some of the shifting is what really creates the hesitancy from us to say every quarter we are going to do double-digit. But -- and, as I pointed out before, I will say it once again, that we expect double-digit growth for fiscal year 2013.

Excellent. I appreciate your time; it's very helpful, thank you.

Thank you for your question. I would now like to turn the call over to Sotirios for closing remarks.

Okay, in closing, we are indeed very proud of our uninterrupted continuing growth in revenues and profits. We are committed to double-digit revenue growth in fiscal 2013 and beyond.

As I conclude this conference call, let me thank our 4000-plus loyal employees, our customers, our valued shareholders. And thank everyone for listening in our call, and wishing you a great day. Thank you very much. Bye-bye.

Thank you. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you all for joining and have a great day.