Mistras Group, Inc.
Q2 2017 Earnings Call Transcript

Published: 12 Aug 2017

[Operator:]

Good morning, ladies and gentlemen, and welcome to MISTRAS Group's Earnings Conference Call for its second quarter ended June 30, 2017. My name is Adam and I'll be your event manager today. We will be accepting questions after the management's prepared remarks. Participating on the call from MISTRAS Group will be Dr. Sotirios Vahaviolos, Executive Chairman and Outgoing CEO; Dennis Bertolotti, recently named as the Company's President and Chief Executive Officer; and Jon Wolk, Senior Executive Vice President and CFO, recently named as the Company's COO. I will now hand the conference over to Dr. Vahaviolos. Please proceed.

[Sotirios J. Vahaviolos:]

Adam, thank you very much, and good morning to all. In today's call, we will review MISTRAS Group's financial results for the second quarter of our fiscal year 2017 that ended on June 30, 2017. But first, I want to make a few remarks concerning the transition of our executive positions that we announced on Monday. As the founder of MISTRAS Group, I have been the CEO for 40 years. Along the way, I have led a team that has developed a terrific business that is even more relevant now than back in 1978. Although I still love this business, I couldn't continue as CEO forever, and we have been developing a succession plan for five years. I have complete confidence in Dennis, who has been driving our Services business over the last 14 years and I believe that under his leadership MISTRAS Group will achieve new heights that will far surpass our achievements to date. I also have great confidence in Jon and I believe that in his new role he will be a terrific partner to Dennis and help him drive performance in a sustainable way that benefits our customers, our employees and our shareholders. As Executive Chairman, I will continue to be in active presence within the Company, helping the team with its transition, helping with technology development and strategic direction, and even occasionally with some of our key customers. I look forward to this new role and to watching the Company grow with Dennis as Chief Executive. I will now hand the call over to Dennis. Dennis?

[Dennis M. Bertolotti:]

Thank you, Sotirios. It's been my pleasure and privilege to work for you and to grow our business under your leadership. You have set a tone for MISTRAS that is unparalleled in our industry and we owe our legacy and our business model to you. Thank you for your confidence in me and in our team. We will work hard to fulfill our vision and exceed even your aggressive expectations. Since the beginning of 2015, we have been speaking about challenging market conditions imposed by low oil prices and many actions we have taken in recognition of these challenges. The U.S. market was very much in line with our expectations in the first half of 2017. Our Services segment performed well given market conditions, but our International segment had a difficult quarter as follows. Global revenues declined 4%, reflecting a 2% Services decline combined with a 7% International decline, and a double-digit decline in Products, our smallest segment. Operating income declined by over $5 million, mostly driven by the International segment. And cash flow remained strong as free cash flow for the first half of 2017 was nearly $13 million despite increased CapEx of $3 million pertaining to our Safran buildout in France and also reflecting a $6 million payment pertaining to our prior year legal settlement. Despite these negative year-on-year Q2 comparisons, we are excited about implementing our vision and the numerous initiatives we have underway to drive improved performance, and we are also looking forward to improving North American market conditions commencing this fall. I'll let Jon take us through the financials and I will explain the many actions we are taking.

[Jonathan H. Wolk:]

Thank you, Dennis. I'll 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 transition report on Form 10-K and in other reports filed with the SEC. The discussion in this conference call will include certain financial measures that were not prepared in accordance with U.S. GAAP. Reconciliations of those 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 our related current report on Form 8-K. These reports are available on the Company's Web-site in the Investors section and on the SEC Web-site. Before my financial update, I want to thank Sotirios and Dennis for their confidence in me. I am excited to take on my new role, which will occur on a phased basis until we have found my successor for the CFO role. I look forward to working with Dennis to provide leadership to our business units. Revenues for the second quarter of 2017 were $170.4 million, 4% below the prior year's Q2. Services Q2 revenues declined 2% compared with prior year, driven by negative mid single-digit organic growth, which resulted as expected from shorter duration turnarounds and a less than robust market for NDT spend. Excluding a challenged region that includes a fairly large customer contract, Services revenues were flat with the prior year's Q2. After a strong Q1, International segment revenues fell by 7% compared with the prior year's Q2, as the timing of work in all three of our largest countries worked against us. Results continued soft in the U.K., where we installed a new GM last year and are transitioning into a growth mode. Products and Systems revenues had an organic contraction in Q2, driven by lower sales volume. Breaking this down further by segment, Services operating income, including special items, was 65% better than the prior year's Q2. Exclusive of special items, which mostly included a few hundred thousand dollars of lab closure costs in 2017 and approximately $6 million of legal settlement costs in the prior year, Services operating income was 5% less than prior year on a revenue decline of 2%. Excluding the results of the one challenged region and special items, Services operating income actually improved by 20% over prior year levels. The International segment had a small operating loss in the second quarter compared with an operating profit of over $2 million in the first quarter excluding special items, and of nearly $3 million in the prior year's second quarter. These unfavorable results were driven by declines in our three largest countries. The French and U.K. shortfalls were primarily driven by unfavorable timing of customer work. French results will be stronger in the second half with incremental revenues from the Safran contract commencing in Q4. U.K. results will pick up seasonally in the second half and a number of promising sales cycles are underway to grow that business back to at least the levels it attained in 2016. Germany had a strong Q1, but unfortunately suffered a Q2 decline due to both declining customer production levels and a customer decision to relocate production out of the country. Products and Systems continued a string of disappointing quarters with another double-digit sales decline and an operating loss. This segment has some promising sales cycles underway, which should lead to improved results soon. Operating cash flows for the first half of 2017 were $23 million, while free cash flows were $12.5 million. Both amounts included a reduction for a $6.3 million legal settlement that was accrued in 2016 and paid in 2017. In addition, free cash flows included the impact of a $3 million increase in 2017 capital expenditures related to the Safran contract buildout, which is proceeding on track. We added to our net debt slightly as our $12.5 million of free cash flows were used to repurchase $12 million of stock and fund one acquisition with $4.5 million of upfront cash. During the second quarter, we repurchased approximately 284,000 shares of our stock at an average price of approximately $21.10 per share. These shares were purchased at a discount to the Company's weighted average stock price, pursuant to the Company's previously announced agreement with Dr. Vahaviolos. As of June 30, 2017, the Company had $29 million remaining on its share repurchase authorization. Subsequent to the end of Q2, the Company completed the share purchase program with Dr. Vahaviolos. In total, the Company repurchased 1 million shares at an average purchase price of $21.92 per share. The Company's balance sheet remained strong as total debt and capital lease obligations, net of cash, was $90 million at June 30, 2017. Net debt was approximately 1.3x trailing 12-months adjusted EBITDA and we are looking forward to a good second half cash flow generation. I will conclude with a brief discussion on our expectations of market performance and Company-specific guidance. Although spring 2017 turnaround volumes were lower than in the prior year, our conversations with customers and our knowledge of customer schedules indicate activity is expected to pick up this fall and become even more positive in the spring of 2018. Our North American revenue performance in the first half of 2017 reflected this market dynamic and we expect our Services segment will comp positively against both prior year revenues and operating profit in the second half and for the entire 2017 fiscal year. On the other hand, we expect that results in our German and U.K. subsidiaries will fall short of their prior year profitability levels. And for this reason, we are reducing our expectations for 2017 EBITDA to a range of $66 million to $70 million, below our previous range of $73 million to $78 million. And with that, I'll turn this back over to Dennis.

[Dennis M. Bertolotti:]

Thank you, Jon. Even though the oil and gas sector is spending less on almost everything due to the lower [indiscernible] oil market, we at MISTRAS see big opportunities to help customers with these challenges by providing them with more value. Our job is to improve the likelihood that we solve their problems better before someone else. As I mentioned earlier, based upon customers' schedules, it seems likely that our fall 2017 workload in North America will be modestly higher than in the prior year. Even more encouragingly, the spring 2018 turnaround season is looking even more favorable and looks to be stronger than this past spring. While we are glad that our near-term outlook is positive, we continue to expect that micro market conditions will be impacted by the overhang of lower oil prices. So we have launched several actions that are intended to increase our accountability, ownership, focus and speed of execution. First, we are restructuring not only the senior leadership team, but also the leadership of our Services segment and of our larger International subsidiary. As for the senior team, Sotirios will still be here and we will continue to benefit from his counsel. I am confident that Jon and I will leverage each other's expertise as we look to aggressively drive the business forward, pursuing our vision to expand our service delivery capabilities. We are recruiting Jon's replacement as CFO and also adding a key role to our senior team. The lead sales role has gone unfulfilled for too long and we are searching for a senior leader to drive this vital functional area. Regarding the Services segment, we are dividing our North American business into four regions and assigning senior members of our Services team as regional executives in charge. These individuals, David Thigpen, Randy Sweet, John Smith and Scott Ristenpart, each stand out as key leaders who know how to satisfy customers and drive results. We are taking this important step to give them expanded spans of control and benefit from their achievements on a greater scale. Naturally, they will have performance-based compensation plans that reward them when our shareholders are rewarded. Regarding our International segment, the two leaders of our German subsidiary have elected to resign. These outgoing leaders are former owners of their business who stayed with us for five years and over time have driven improved performance with a true spirit. They have developed a strong team and the replacements have been developed and mentored from within their company. We salute this team and thank them for their service and their achievements. Our second initiative is investing in our capabilities to grow. As the third quarter commenced, we consummated an important acquisition of a Canadian company that employs technicians who perform electrical, insulation, coating, and other mechanical services at height, primarily suspended from ropes. We are excited to combine the talents of this new acquisition with those of our existing MISTRAS inspection team to present a wide array of services to our existing customers and our prospects. We view the talented managers who joined us as people who can grow into leadership roles in America as well. We are very excited to welcome this new addition to our MISTRAS team. Speaking of acquisitions, our Senior Executive Vice President, Mike Lange, continues to lead our acquisition efforts, and we have added a key manager to team up with him to enable us to be more proactive in selecting our targets and to expedite deal closure once we have reached agreement. Our third action concerns cost reduction. One of the benefits of our new Services leadership structure is they will be able to follow local general manager performance, utilization of personnel, and a host of other important operational metrics more closely. Our restructuring efforts have already resulted in the closure of a handful of labs in the second quarter and are continuing in the third quarter as we look to streamline some managers and some service lines which are not earning an acceptable return. Overall, we have targeted $5 million of annual cost that we are seeking to take out of our cost structure and I am confident we will hit this target. And now, I will briefly update our progress on achieving our strategic vision. On our recent calls, Sotirios and I have explained our vision that builds upon our strong foundation as a leading NDT inspection provider and drives expansion of our services in three key areas, mechanical services, aerospace and pipeline integrity. We took a major step forward on the mechanical services front with our recent acquisition. Initial customer feedback has been excellent and we are moving quickly to drive additional work. We are well aware that some of our competitors have had a difficult time in mechanical services, and so I will remind everyone that the mechanical services we are focused on include those that are complementary and adjacent to NDT inspection and less subject to being deferred. Examples include, removing and reapplying mechanical insulation, electrical, pairing services, and then applying either coating or painting or performing light mechanical services or maintenance services. We believe we can earn a greater share of key customer spend providing them a strong combined value proposition and efficiencies they cannot achieve with multiple vendors, and we continue to envision profit margins that are accretive. In aerospace, we completed an acquisition of a shop business earlier this year that performs cleaning and coating services, primarily for aerospace customers. Our buildout to serve Safran for its LEAP engine program remains on track, with initial revenues expected to commence in just a couple of months. And market interest in its new facility is high among members of the European aerospace supply chain. Regarding pipeline integrity, we remain encouraged by the proposed Pipeline and Hazardous Materials Safety Administration PHMSA regulation that will require pipeline owners to inspect, test, assess risk, and document the condition of their entire pipeline networks. We are working with a partner to jointly market a unique combined solution that will provide great value to pipeline owners. As Jon mentioned, our balance sheet is solid and our acquisition pipeline contains some very interesting companies and we seek to furthering the scope of services that MISTRAS Group performs. And now, for Sotirios' closing remarks.

[Sotirios J. Vahaviolos:]

Thank you, Dennis. Of all my priorities over these last several years, foremost on my mind has been this leadership transition that we have just completed. I know that you will lead MISTRAS forward to great achievements and I'm confident in our direction and vision to provide an enhanced array of services that help our customers and create value for our shareholders. MISTRAS must always remember that it exists to serve its customers, in the most honest way possible, to help them protect their assets safely and cost effectively. This message will always resonate with our customers and I know that you and the team will deliver it with honesty and integrity. I am leaving the CEO role with a grateful feeling in my heart. I owe a debt of gratitude to all our loyal customers, employees and shareholders. Please understand that if anything, this transition only makes for a stronger MISTRAS and the future will only become brighter. We now will open the floor for questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Matt Duncan from Stephens. Matt, your line is open.

[Matt Duncan:]

Congrats everybody on your new roles. So the first question I've got is on the International business. That business had been progressing nicely and then you had a step-back in profits here. Is this really more driven by the revenue shortfall, are costs a little out of whack there, or is it both?

[Dennis M. Bertolotti:]

Matt, it's Dennis. I think revenue drives a little bit of cost imbalance that we're catching up with. I don't think it's anything severe. I think we're getting ourselves in line. The German operation and some of the others were having a rebalance in some of the locations where some of the aerospace pulled back on some of the projects faster than we expected. But overall, markets are still good. We just have to rebalance what we have with what's coming at us.

[Matt Duncan:]

Okay. On the outlook for the back half of the year, people I think are probably understandably a little hesitant to believe improvement because it's been a while since we've seen it in this industry. Obviously, eventually it does have to happen. Can you maybe talk a little bit more about what you're hearing from your customers, what the turnaround schedule looks like? We should be about a month out from the start, since it usually starts right after Labor Day. So, what are you guys hearing and seeing that gives you confidence that you will start to see growth in the back half of the year?

[Dennis M. Bertolotti:]

Sure. The one thing I'll say, it is probably not every location, everywhere, but regionally you have some strong pockets, the West Coast, some of the Midwest, and some other areas. It may be dependent on our customers or maybe the activity levels, but in some areas we're seeing a stronger fall and spring turnaround activity level. Some of it is planned. I mean there is nothing in there that's really that surprising. I think the customers are starting to feel a little bit more confident about their ability to make money at $50. The price of oil is going to be between $45 to $55, whatever is driven there, but I think the customers have a good feeling that they know what they have to do and have to get done within that range, and I think the activity is starting to pick back up. So, while it's not maybe every refinery, every customer across the country, there is some strong pockets out there for the next six months.

[Matt Duncan:]

Okay, that helps. And then last thing for me, Jon, on the guidance, I didn't see a reiteration of the revenue guidance in the press release, but I assume since it didn't change, it's still $670 million to $700 million?

[Jonathan H. Wolk:]

That's right, Matt. We're still squarely right in the middle of that range.

[Matt Duncan:]

Okay, all right. Thanks guys.

[Operator:]

And your next question comes from the line of Edward Marshall from Sidoti. Edward, your line is open.

[Edward Marshall:]

So it sounds like you have confidence moving into the second half of 2017 and including into 2018, and I'm curious, and I know you've cut cost before, but why are you cutting cost in front of a pickup in what you perceive to be demand?

[Jonathan H. Wolk:]

Ed, this is Jon. I'll take that to start. I think this reorganization of Services that Dennis mentioned in his remarks is really important. I think as we think through that reorganization, we've realized there are some redundancies that result from it as well as there are a couple of targets or pockets within the business that are just not as profitable or not earning a profit, and there are some rational, logical choices we can make to reduce the load there in areas that we just don't see picking up in the near term. At the same time, we have some investments we want to make. So, I think that on balance you will see us cut cost, but we're also investing as well.

[Dennis M. Bertolotti:]

Yes. It's Dennis. I think, for the most part, we recognized we don't want to hurt our future revenue potential. So we are investing, like we said, in leadership for acquisitions, for sales, and other things. But there is always a little bit of pruning you could look at and try to trim up. So all we're trying to do is just be judicial about our spend, that's all.

[Sotirios J. Vahaviolos:]

[Indiscernible]

[Dennis M. Bertolotti:]

That's our slogan.

[Edward Marshall:]

Right. So, I guess as hawkish as you've been, you've missed a few things that have slipped through the cracks and you're just cleaning it up now?

[Dennis M. Bertolotti:]

Basically, yes.

[Edward Marshall:]

Okay. So, let's fast forward and look at say the industry rebounds, and looking at kind of the footprint in the industry, I'm curious about employments, what that might do to wage and ultimately what that might do to the price of your services provided to your refiners? How does that work, kind of walk me through how you would predict that to happen?

[Dennis M. Bertolotti:]

Yes, that's good question. Dennis, again. I think a year ago definitely the power was within the employers because the market was so low. While I see the market is picking up, it's definitely not on fire yet where employees are tending to jump around and price escalation would happen both at the customer level and at the labor level. I don't think it's that hot where right now we have to worry about getting the employees that we need to get the revenue that's going to come at us. We feel we're in pretty good shape to capture most of what comes at us, or certainly if you get a peak season, there is always a couple of dollars could slip out, but we'd rather have that than be over-weighted on our cost, waiting for something that didn't come in.

[Edward Marshall:]

Got it. And when we think about – I guess we're looking at it more from a GAAP accounting, but when you think about maybe some of the options that would flow through the P&L over the next say six months or so related to some of the changing of executives, how do I think about that flowing through, Jon?

[Jonathan H. Wolk:]

Ed, I think it will be a minor impact. As you know, stock compensation awards best over a period of time. So, you may see stock compensation move by a couple of hundred thousand at most. But I would think that it would be pretty muted on a quarterly basis.

[Edward Marshall:]

There is no acceleration of options on the retirement?

[Jonathan H. Wolk:]

Yes, first, we don't really have options per se. I think there are some original stock options outstanding from when the Company did its IPO, but we don't issue options anymore. For years, we've been doing RSUs. And no, we're not accelerating anything.

[Edward Marshall:]

Got it. Thanks very much. I appreciate it, guys.

[Operator:]

Your next question comes from the line of Andrew Obin from Bank of America Merrill Lynch. Andrew, your line is open.

[Andrew Obin:]

So, first question, does this mean that there is no more Greek food associated with MISTRAS or what's happening to all the Greek food?

[Sotirios J. Vahaviolos:]

That's why they named me the Executive [indiscernible].

[Andrew Obin:]

Okay. I just wanted to make sure. Sotirios, thank you so much for your service and congratulations. And Dennis, congratulations, and Jon, congratulations as well. Just a question, broader question, I know that you've described that there are several initiatives that you've described on the phone, you've also identified them in your press release for restructuring. Given that you guys have been around MISTRAS for a while, does that mean that six months from now, there is not going to be a deeper plan? What I'm asking, just what you've announced, does it already reflect sort of the deep look of the new management team?

[Sotirios J. Vahaviolos:]

We think so.

[Dennis M. Bertolotti:]

I think what we did for Services group will actually stabilize and help it for the future here. I mean, I couldn't say how many years are out there before we have to make a change, but we don't see we have a lot more major changes lined up, if that's what you are asking. I mean, these are what we think we need for what we have for the next six months, a year, for sure. As we continue to grow and do acquisitions, certainly that's part of our profile as we add new services, be it mechanical or something else, there is a lot of room for other senior managers to move up and take the helm of other things, and we hope that's part of the plan always, but there's nothing major planned right now.

[Sotirios J. Vahaviolos:]

And basically, Andrew, this is really the result of our succession plan. We don't have a succession plan only for the executives like Dennis and Jon, we have also for people below them, and that's really what Dennis has implemented.

[Andrew Obin:]

Got you. That makes a lot of sense. Another question we get a lot from investors, and I know you addressed sort of issues with one of your competitors and their preannouncement, what are you guys seeing – a lot of companies talk about predictive analytics and we're getting a lot of inbound calls sort of asking how does it impact your business model, in so far that your customers may be able to do some of the diagnostics themselves or sort of do it in the cloud? I'm not even sure how to describe it, but what your customers tell you about that and how do you think this will impact your business model over the next couple of years?

[Dennis M. Bertolotti:]

Andrew, it's Dennis. As you know, we own software such as PCMS, which is very much predictive in inspection model for a major part of the refineries in the U.S. But I can tell you, you are absolutely right. The value proposition we are talking to customers about is, a major part of it is, how do we handle data, how do we get data from the owner to the inspectors and back to the owner quicker with less paper loss and time lag and all that. So, the ability to handle data – I mean, inspectors go out and create a lot of data, but the ability to use it effectively and quicker for the owners, is a big part of it. And right now, there's a lot of flux in the market and we see a lot of opportunities for partnerships and acquisitions and all kinds of things to improve ourselves on that aspect as well.

[Jonathan H. Wolk:]

This is Jon. I'll just follow up on to what Dennis said. We get that question a lot too, Andrew, and we don't see that as obviating the need for inspection. As much as it is a method of storing data and using data more intelligently, but inspection still has to happen.

[Andrew Obin:]

Got you. And right now, as you sort of look at pricing and contract structure, are you seeing any impact from it, or it's just more theoretical at this point?

[Dennis M. Bertolotti:]

No, it hasn't affected our pricing. If anything, truthfully, it's given us more opportunities than it's taking anything away.

[Sotirios J. Vahaviolos:]

Exactly.

[Andrew Obin:]

Terrific. Thank you very much and congratulations to everybody.

[Dennis M. Bertolotti:]

Thank you, and we're working on some Italian food too.

[Andrew Obin:]

Good.

[Operator:]

Your next question comes from the line of Andrew Wittmann from Baird. Andrew, your line is open.

[Andrew Wittmann:]

I just want to understand the International market dynamics a little bit better. I guess you definitely went through them in your commentary. I think what I heard was, there's been volume reductions at the customer, and I think I also heard that there is some work that was moved kind of out of country. So I guess of the revenue declines that you saw in the order of 7%-ish in the business, how much of that just is not going to come back because some of this business is permanently gone versus a cyclical trend?

[Jonathan H. Wolk:]

I never say never, I never say permanently. This is Jon. I think that in Germany the customer that moved out is probably a very low single-digit percentage of that revenue stream. And there is active sales cycles going on right now and qualifications with other prospects and customers to certainly backfill the factory that we've got. So, we view this as something that will impact the business probably for the remainder of the calendar year, and as we get into spring of 2018, we should have some revenue to offset.

[Sotirios J. Vahaviolos:]

And we should not forget that basically that business with Airbus is in Germany and in France, okay.

[Andrew Wittmann:]

Yes. Now just you guys have been making some other acquisitions around the aerospace arena in Europe. Are those relatively new acquisitions affected by these same market dynamics?

[Dennis M. Bertolotti:]

Andrew, it's Dennis. No, for the most part, there's only a couple of locations that had that. We really still see the aerospace sector as a whole as being a strong sector and we're very focused on that domestically here in the States as well as Europe for market growth.

[Andrew Wittmann:]

Okay, great. And then just on the $5 million, I think, Jon, this one is probably for you, can you talk about how much of that has been actioned already or at least planned, and when you expect to see the material benefits from these $5 million?

[Jonathan H. Wolk:]

Andrew, great question. I think that probably about a quarter of it has been actioned so far, and I think that as the third quarter rolls out, we will certainly have more initiatives in place and you'd start to see some impact in the fourth quarter.

[Andrew Wittmann:]

Okay, that's helpful. And then, I guess my last question is just a technical question, but it looks like the effective tax rate was up pretty materially in the quarter. Were there some like maybe non-deductibility of some international costs or something that made the tax rate unusually high here, Jon, in the quarter? And maybe even on a go-forward basis with the revenue mix changing maybe more towards the U.S. and less towards internationally, how should we think about that tax rate on a go-forward basis, what level should we be planning on?

[Jonathan H. Wolk:]

Yes, good question, Andy. In the second quarter and for the remainder of the year, you've really got two impacts. The primary one is that with a lower mix of International profit, where we tend to have a lower effective tax rate, that brings up the overall ETR. The other thing is we have some discrete items in the second quarter which went the wrong way. Sometimes they help, sometimes they hurt. And that certainly impacted Q2 and it will have an overhang effect for the remainder of the fiscal year. I think as we think about going forward, we tend to be pretty close to a 37% effective tax rate, assuming a historical blend of domestic and international sources of income, and that's what we would expect at this point.

[Andrew Wittmann:]

Okay. So, for the remainder of the fiscal year, there is some hangover effect from the second quarter items. If it's 38% on a normalized basis for the second half of the year, is it closer to like 40% or 42%? Is that part of the EPS guidance that we should be...?

[Jonathan H. Wolk:]

Yes, as I said, normally it would be around 37%. I think for this fiscal year, we're probably closer to 41%, perhaps for the entire fiscal year, and look to step it down the subsequent year.

[Andrew Wittmann:]

All right, that's helpful. Thank you.

[Operator:]

[Operator Instructions] Your next question comes from the line of Tahira Afzal from KeyBanc Capital Markets. Your line is now open.

[Patrick Sullivan:]

This is Patrick on for Tahira. So, I guess in terms of acquisitions, I was wondering if you could provide a little bit more color on your plan of selecting new areas for growth given the international weakness that you're expecting through 2017, and then I guess in terms of that, are you looking more into North American acquisitions or international?

[Dennis M. Bertolotti:]

Patrick, it's Dennis. As far as acquisitions, the three that we said we focus on for the mechanical and aerospace and pipeline is probably going to be the three that we'd focused on domestically or internationally. Right now, it's a strong pipeline coming at us for acquisition potentials, in both locations right now. I can't say what the balance is one way or the other. It's really just based on what comes at us and we're getting a little bit more aggressive in being hunters for acquisitions as opposed to waiting to collect them. So, even within the European community, there's markets where things are still going strong. So, there is still plenty of opportunity for us. So we're not going to be balanced with one country or other, just basically what comes at us with the best fit.

[Patrick Sullivan:]

Okay, great. Thank you. And then, kind of if soft market conditions were to continue or get worse, what would be some primary plans to improve profit and overall cost savings, and would you try to implement this more in the International segment, kind of switching over from how you've been doing it in the Services?

[Jonathan H. Wolk:]

Patrick, this is Jon. Look, I think we are foremost a services company, an outsourced services company, and primarily with the North American footprint. We don't see that changing. We don't have a strategic initiative to change that. I think that there is – we believe the international market as with the domestic market are both improving. We have some short-term customer timing things that have impacted us internationally in 2017, but we don't see that as a long-term indication of market activity or our abilities to grow organically. As Dennis said, we'll look at acquisitions on an opportunistic basis in accordance with our vision and our strategic plan and where we are focused on growing.

[Patrick Sullivan:]

Okay, great. Thanks guys.

[Operator:]

Your next question comes from the line of Edward Marshall from Sidoti. Edward, your line is open.

[Edward Marshall:]

So I just wanted to ask the question about what aircraft programs you service or inspect on the, I guess it goes through the International segment right now?

[Dennis M. Bertolotti:]

Edward, it's Dennis. I mean the truth is – a hidden secret of MISTRAS is, we have a lot of aerospace domestically as well. I know we talk about the programs internationally, because there's been a larger contract award recently, but we have all the major first, second-tier suppliers throughout the United States, East or West, including Canada East and West, as well as Europe. So, I mean, without mentioning individual OEMs, I think we're fairly strong and robust having ISO and NAAC [indiscernible] and all the other certifications throughout the entire, all offices.

[Edward Marshall:]

Got it. So, I realize that Airbus started making the A320 in Alabama I guess in May. So, is that the program that you were referencing in with the international moved out of the specific region?

[Jonathan H. Wolk:]

No, Ed. No, no, absolutely, not. This is not like a major structural airframe or model changeover. This is the production of some components for a specific type of aerospace application that moved countries out of Germany into a neighboring country. And unfortunately, it's no longer proximate to our service lab. It's not a major switchover like you're thinking of.

[Edward Marshall:]

Okay. And I know you've mentioned that aircraft before. Do you have the same services in North America that you do internationally to service that program?

[Dennis M. Bertolotti:]

Edward, Dennis here. Absolutely. We have major locations across East and West U.S. and Canada doing the same kind of stuff.

[Edward Marshall:]

Perfect. Thanks for the help, guys.

[Operator:]

There are no further questions at this time. I'll turn the call back over to Dr. Vahaviolos.

[Sotirios J. Vahaviolos:]

Okay, I would like to thank everyone for listening and we wish you a great day. And we'll have Italian food together with the Greek food.

[Operator:]

And this concludes today's conference call. You may now disconnect. Have a lovely day.