Mistras Group, Inc.
Q3 2016 Earnings Call Transcript

Published: 17 Mar 2017

[Operator:]

Good morning, ladies and gentlemen. And welcome to the Mistras Group Earnings Conference Call for its transition period ended December 31, 2016. My name is Vince and I will be your event manager today. We will be accepting questions after management’s prepared remarks. Participating on the call from Mistras Group will be Dr. Sotirios Vahaviolos, Chairman and CEO; Jon Wolk, Senior Executive Vice President and CFO; Dennis Bertolotti, Mistras Group President and COO. I will now hand the conference over to Dr. Vahaviolos. Please proceed.

[Sotirios Vahaviolos:]

Vince, thank you very much, and good morning to all. In today’s call, we will review Mistras Group’s financial results for abbreviated stub period that ended on December 31, 2016. Today, we are filing our report with the Securities and Exchange Commission on Form 10-K that coincides with our change in fiscal year end to December 31. For the last two years, we have been speaking about challenging market conditions imposed by low oil prices and the many actions we have taken in recognition of these challenges. Our review is very much aligned with the market conditions, but the energy market will be lower for longer. For the first year and a half of this downturn, our financial results defined market conditions. Our revenues were flat to slightly positive in a market that was in decline and our operating profit margins improved by over 200 basis points. This performance gave us lower, but the actions we have taken to-date would enable us continue to perform well in the market that seem poise to improve in calendar 2017. But during the second half of 2016, the market decline intensified, discussed on a differed spending and this cause our revenues and profit margins to decline as well. We now are in the middle of the spring 2017 turnaround season and we have not yet seen a significant improvement in market conditions. We remain optimistic. The customer workloads will retain to traditional levels as we get to the fall of 2017 and beyond. But in the meantime, we're using this time to make some important adjustments to our strategy that Dennis will describe, which would reduce cost and help our, as we gain our growth momentum. Our long-term outlook remains very promising. Customer assets continue to rise and projects that we're competing cannot be deferred indefinitely. We remain optimistic about our prospect for organic growth in all of our vertical markets. Our acquisition pipeline is promising and our balance sheet provides us with many options for future growth. Jon will now provide details of our results and then Dennis will provide more color on our operations and initiatives. Afterwards, I will close and then we will take your questions.

[Jon Wolk:]

Thank you, Sotirios. 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 annual 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 Company's current report on Form 8-K and in other reports filed with the SEC. These reports are available on the Company's website in the Investors section and on the SEC website. The Company changed its fiscal year end to December 31st. Accordingly the Company's financial results contain in its Transition Report on Form 10-K and discuss -- which will be filed Monday by the way, there's a slight correction, and discuss on this call pertained to the abbreviated stub period from June 1, 2016 to December 31, 2016. The Company incurred some unusual cost during the stub period that were driven by the change in fiscal year ends including an acceleration of audit fees into a period that is less than 12 months. In addition, the stub period also included non-recurring costs pertaining to an intangible asset -off severance, lab closure costs, and stock-based compensation. In the aggregate, these items had a year-on-year adverse pre-tax impact of approximately $5 million, which makes comparability difficult. Revenues for the stub period through December 31, 2016, were $404 million compared with $428 in the comparable period of the prior fiscal year. As had been the case through November 30th, the services segment drove this decline driven by an organic decline stemming from the timing of customer projects, shorter duration turnarounds, and a lower overall margin for NDT spend. International segment revenues experienced a mid-teens during the stub period driven primarily by organic growth in Germany. Products and systems revenues were weaker in the stub period driven by lower sales volume. Net income for the stub period was $9.6 million or $0.32 per diluted share. Adjusted EBITDA during the stub period was $43 million or 10.6% of revenues, compared with $58 million in the comparable period of the prior fiscal year. The $15 million decline in adjusted EBITDA during the stub period was almost entirely experienced in the services segment. Factors which led to this decline included. First, the weak fall 2016 turnaround season, during which several turnarounds were curtailed earlier than planned due to reduced scope. Second, a global reduction in industrial inspection revenues, Mistras global calendar 2016 revenues declined by 4% in comparison publicly traded competitors, industrial inspection revenues were down in the mid-teens during 2016, in most cases driven by weakness in oil and gas. And third, the year-over-year impact of stub period charges. Operating cash flow for the stub period was $30 million while free cash flow was $20 million. Total debt and capital lease obligations net of cash was $84.3 million at December 31, 2016. Net debt was approximately 1.1 times trailing 12 months adjusted EBITDA. We used $9 million to repurchase approximately 420,000 shares during stub period at an average price of approximately $21.40 per share. Included in those amounts were purchased of 274,000 shares directly from Dr. Vahaviolos pursuant to the Company's previously announced agreement. As of December 31, 2016, the Company had $41 million remaining on its share repurchase authorization. Yesterday's press release contains the Company's unaudited financial data recast on a calendar quarter end basis for 2015 and 2016. Our unaudited results for calendar 2016 yielded revenue of $685 million, adjusted EBITDA of $74 million and net income of $16 million which was reduced by charges of approximately $5 million net of tax. As we look to calendar year 2017, our expectations are as follows for market data. First, North America, we expect market oil and gas inspection spend will be down in the first half and then be flat to somewhat positive in the second half of the year, as the market anniversary is below spend from the fall of 2016. Second, International, we expect industrial NDT spend in our primary markets of Germany, France, UK and Brazil will be roughly the same as 2016 levels. And third, FX rates are expected to provide a headwind of approximately 1% to 2% of revenues compared to 2016. For company specific items, revenues are expected to be plus or minus 2% to 2016 levels. We have set our initial revenue guidance at $670 million to $700 million compared with calendar year 2016 to $685 million. Revenues are likely to be less than calendar 2016 in the first two quarters, but higher than calendar 2015 in the second half of calendar 2017. Adjusted EBITDA is expected to range from $73 million to $78 million or in the range of -- a decline of 1% to an increase of 5% of calendar 2016s $74 million. Net income is expected to be higher than calendar 2016 by our range of 26% to 45%, inclusive of the prior year's charges and plus or minus 8% of prior year excluding those charges. As of revenue adjusted EBITDA and net income are likely to be somewhat lower in the first half of calendar 2017 than in calendar 2016. Earnings per diluted share are estimated to be in a range of from $0.68 to $0.78 million per share and operating cash flow is expected to approximate $15 million inclusive of the $6 million payout pertaining to a 2016 legal settlement and free cash flow is expected to approximate $30 million inclusive of $5 million additional CapEx for to build out to support our Safran contract in France. And with that, I turn this over to Dennis Bertolotti, President and Chief Operating Officer.

[Dennis Bertolotti:]

Thank you, Jon. As Sotirios mentioned in his opening remarks, we are disappointed by the difficult energy market conditions and our performance in the second half of calendar 2016. Even though, our core NDT inspection services provide a strong value proposition, sometimes as in the present market, customers reduce our work scope to save money. And as a good and responsive vendor, we facilitate those reductions and are there for them when budgets are restored and when the work is called up. Rather than be victims of the difficult market, we can make choices that change our trajectory so we're focusing and doing things that are within our control that will drive substantially better growth and profitability. We believe the surest path to achieving these goals is to provide a broader array of related services that are focused on delivering even more value to our addressable market of both existing customers and potential new customers. In order to achieve this position and we start with a vision of what Mistras Group will become. Our vision builds upon our strong foundation of core NDT services, as a provider of choice to some of the best customers in the world; and from there we'll focus on three key areas. First, is mechanical services, when we briefly mentioned this area on previous calls, we probably confused more people then we helped. For us, mechanical services include services that are complementary and adjacent to NDT inspection, examples include removing and reapplying mechanical installation, preparing surfaces as in applying either coating or painting or performing repair services. All these services can be performed both underground and at height, done properly we believe these can earn a greater share of our customers spent, providing them with a very strong combined value proposition and new efficiencies and economies that they cannot achieve with multiple vendors. And we envision profit margins that are accretive It's still early days, but we've made good progress so far. We've formed and staffed the center of excellence that is actively building out these capabilities including work of onshore and offshore. We've commenced a small number of projects that utilize a combination of NDT inspection and mechanical services that are poised to deliver substantial value for some important customers. We're also moving quickly to identify and target acquisition candidates but that fits profile performing mechanical services that has strong value for their customers. Second, importantly to our vision is concerning the aerospace sector. The backlog of next generation aircraft extends to approximately a decade of planes that used advanced materials and require complex inspection technologies and techniques for the regions and for the engines and various body components. Our recently announced Safran contract will begin to generate revenue in 201 7, ramp up in 2018, and then achieve the expected annual revenue run, approaching $10 million per year in 2019 which should be maintained for years to come. This important organic victory will build upon and drive important additional capabilities within Mistras at a greater scale than ever before. And we believe these capabilities will have value to other industries and other participants in addition to Safran. In addition, just as we completed an acquisition of a shop business that performs coating services for primarily aerospace customers. We're very focused on continuing to grow our aerospace business in both NDT inspection and mechanical services. The third leg to our vision concerns pipeline integrity. Recent regulations issued by the Pipeline and Hazardous Materials Safety Administration for our pipeline owners to inspect, test, assess, risk, and document the condition of their entire pipeline networks. We've had several recent sales of our PCMS software to pipeline owners, and our vision is to significantly expand the utility of PCMS to become a solution that more broadly services the needs of the pipeline industry. We already have 15% of our services revenues coming from the midstream market, including a recent recurring multiyear contract with a large pipeline owner. Our vision also includes a goal to broaden our pipeline integrity capabilities and market share in this area of the market that requires focus solutions and expertise and is poised to increase its expenditures to maintain its infrastructure. Although, prepared remarks like these can sometimes fail to convey enthusiasm, we hope this is not the case here. We are approaching this vision with the strong sense of urgency and we are moving quickly to reposition the Company to drive more value for our customers in the fall of 2017 and beyond. At the same time, we are also driving cost reductions in our core business, driven by excess capacity and an extensive period select demand. We will have more to come in this area and I will continue to update you on the progress we are making towards achieving our vision in future calls. And now for Sotirios’ closing remarks.

[Sotirios Vahaviolos:]

Thank you, Dennis. As the founder and CEO of Mistras Group, I have always managed the business with the goal of delivering long-term value built upon our foundation to always deliver the best value to our customers. In the nearly 40 years that Mistras Group and its predecessor companies have been in existence, we have adjusted our strategy several times driven by change in market dynamics and new market realities. This time that we have adjusted our strategy, a change in mark at times, cause results to be less than we have desired and we used that as a call to action to think and act differently. This market at this time is yet another inflection point and I'm confident in our team to deliver as we have always done in the past. I'm pleased with the vision that Dennis has just describe because it will continue our tradition of studying and understanding our customer needs and then figuring out innovative ways to use great people to deliver great solutions for a great customers. This will ignite in legacy of strong organic growth beginning in the fall of 2017 and continuing to 2018 and beyond. Many of our customers are large global companies with global scale and we have vast opportunities to help them. Our customers have big challenges and we are strived to be the asset protection solution provider that can be counted onto help them in the best way possible. As always, I extend my personal thanks to our management team, our loyal employees and their strong commitment to safety and quality, and our loyal and valued customers and shareholders. We will now open the floor for questions. Vince?

[Operator:]

Thank you. [Operator Instructions] Our first question is from Edward Marshall of Sidoti & Company. Your line is open sir.

[Edward Marshall:]

So the confidence you have in the second half of 2017, I want to parse out the comments about the petroleum prices persisting for the foreseeable future causing less spend. And the implied rebound that you have in the second half of 2017. Are your thoughts at this point that you are having specific questions and discussions with your customers? Or is this just kind of a feeling that the second half is likely to pick up?

[Dennis Bertolotti:]

Edward, this is Dennis I'll take it. It's actually a combination of both by talking to the customers and actually it's already in the middle mark. So, we know where we are in the spring, it's not a surprise to where our spring is going. We see the customers are being a little bit more cautious in the beginning half, but looking at their schedules looking at what they are talking about for work and what they are talking about capital obviously without conditions change in that we don’t see at this point. We see it is picking up for the later half. We see fall being closer to what we've considered to be a normal fall where a spring is just little bit like.

[Edward Marshall:]

Are these discussions different than what you've had, say, six months and a year ago?

[Dennis Bertolotti:]

Yes -- Dennis again -- especially, if you look at by the segments, the upstream segment is probably the most difficult to be coming out of where they were a year ago, but when you're talking to midstream folks especially and even the refinery market, yes, there's a lot more enthusiasm that even the owners and people who are controlling or getting these budgets, they believe they're going to have a more liberal budget than what they've had in the past.

[Edward Marshall:]

In the event of scope changes in the future, you guys have revised cost quite significantly. And I know you've laid out kind of additional cost programs. But in the event that you -- midseason and you realize it's going to be softer, how easy is it for you to kind of flex your workforce up or down if necessary?

[Dennis Bertolotti:]

What we've got is a workforce where we always try to do as much as we can internally and try not to have excess capacity. We'd rather not be able to staff one or two versus have six extra. So, we're always a little bit short in that regard and making sure that we're ready to go. We do have the ability to bring another people. So, if someone came to us and said okay, next month the job wasn't there that we thought, we've been pretty lucky so far and continue to believe we can be to keep moving people around our system. We've calls weekly with all of our management team and find out where resources have abundance and where they have demand. So, we've the ability to keep moving around; if it wasn't a huge scale thing that would, might be different but nominal changes here and there we believe we can take up a slack or add a little bit to a region.

[Edward Marshall:]

And when you gave the comparable data to some of your competitors, you didn't say it, but the numbers implied that there's market share gain. I'm curious what your customers are telling you about winning business over the competition. Are you simply giving price or is there something different that you're doing in the marketplace that's being well received?

[Dennis Bertolotti:]

Right now, there's a lot of customers looking for value, there's a lot of customers looking for ways to save money and get more out of their vendors. So, there's a lot of opportunity for bids for all types of work; so there's a lot of moving around of contracts and everything; we believe we're holding our own and in some cases we do believe we're gaining market share; again it differs by the type of industry and even within any industry, oil and gas and all that, but there's a lot opportunities right now; customers are trying to get the most value; so there's a lot of work being put Street and being relooked at. Because they want to make sure they got the best value even if they recently got into a contract with a vendor a year or two ago.

[Edward Marshall:]

So I just want to be clear -- you're not saying that you are offering price concessions to win business. You are simply saying that there was, contracts or bids out that typically you don't normally see, just given the period of time. There's more…

[Dennis Bertolotti:]

Correct. This isn't so much about price and concessions. It's about value when we talk about mechanical and things like that. If we can put a crew of four people versus two and get the job done of two vendors or do things that is more advantageous to them, that's how we're looking to do it; we're looking to see do we have to have all the people that's on there; I mean part of the cost reductions is maybe you get done with a crew of nine that used to be a crew of 11 or 12; so while there's not a margin decrease; it'll be difference in just volume on that too.

[Sotirios Vahaviolos:]

And that's part of the vision that Dennis just articulated. Part of that vision or where that the evolution of that is sort of the genesis is really the market conditions that Dennis is speaking of. We've got a number of customers who are being forced by their present conditions and budgets to spend less. And so we know we can help them in these adjacent and complimentary areas and really this is sort of a natural evolution of their issues, us understanding their issues and as bringing solutions to their, that can help them and help us at the same time.

[Operator:]

Thank you. Our next question is from Andy Wittmann of Robert Baird. Your line is open.

[Andy Wittmann:]

Just on the new strategy, I got to just ask on the mechanical services portion or maybe the mechanical services light portion, I think a lot of investors have come to think about Mistras as kind of a real technical company. Nondestructive testing; in particular, you've long offered advanced services. It just feels like the activities that you guys describe -- painting and putting on installation -- I have no doubt that your customers need that. It just seems like I don't know if they need it from you guys. At least from the external perspective, I think most investors would say, hey, that sounds like low margin. I know you guys said its higher margin, but are you able to take your same people who are maybe underutilized to do these? Or is this a separate person that you will also be carrying to do that kind of work? It just seems like it's kind of away from the core of what you do and it sounds like you want to put some capital at that. I think a lot of investors really want to understand that strategy in a little bit more detail. And I'd hope maybe you guys can articulate some thoughts on that.

[Dennis Bertolotti:]

Yes, Andy, it's Dennis. Good question, we are not walking away from the technology that's always gotten this two customers and brought us interrogate with customer. We still believe that, that is a core differential between us and standard and the key companies. So, it is always going to be some high skill cortile there that do that. With that being said those people aren’t going to pick up a pen, brush or a file and do some of the mechanical at the same time. But like any company, you have a progression of apprentices and journeymen and all that type of skill sets. So, we do believe that crews can have multiple skills and people who are learning the trades and NDT can also learn to do some of the mechanical trades as well. But as they progress and find the path, they will eventually become more of a mechanical journeymen or a NDT with all the phased array going on and other things that we do. So, what we see as we're offering multiple more paths for those employees and for the customers. Yes, you are right that there is other vendors who provide just standard paining and things like that. But when customers are looking for value, they are looking at how many contracts around there, there is the management of those contracts, there is apprentice and journeymen in each company and group, and we've taken on many contracts where we brought it from a larger skill set of multiple with vendors and competitors to a smaller group get it done. So, we believe you can get it done by a smaller and multi-training group than you can with two or three vendors all with maybe a moderate level of training across the Board. Does that make sense to you?

[Andy Wittmann:]

Thank you for that. I guess my follow-up question would be just on the share buyback, Jon, you've done a little bit more than the kind of required or not required, but the plan for Sotirios's shares. As you move into calendar 2017 and a new calendar year for you guys, how are you thinking about the buyback? Is it going to continue to be opportunistic? Are you going to put a 10b5-1 plan in place? I think you've got about, what, $43 million left on that? Can you just update us how much is left on the authorization?

[Jon Wolk:]

Yes, there is 41 million as of December 31, 2016 Andy, and we haven’t done any more than the program requires and quite frankly there is no requirement of the program. We can stop this in any time and we will continue to evaluate it as we do, based on market conditions and based on alternative uses for capital. So, if the acquisition pipeline for instance suddenly looks like it bulks up to a point where we need to, just allocate more cash to that useful, we'll do that and we'll temporarily suspend stock buybacks. So, we've a lot of optionality here.

[Andy Wittmann:]

But it sounds like M&A is still going to be a focus for you guys going forward. Any change in the way you think about preference to tilt between M&A and buyback?

[Jon Wolk:]

Not at all, M&A has always been the first use of our capital because our goal is to become a broader, more important solution provider to our customers and to our addressable market and to grow the business. That is first and foremost our priority here. Secondly, for alternative uses of cash, clearly share buyback at times where you think the intrinsic value of the stock is significantly higher than market value is also a compelling use. And thirdly, we want to make sure that we maintain the right level of debt leverage considering the opportunities in front of us.

[Operator:]

Thank you. Our next question is from Sean Eastman with KeyBanc Capital Markets. Your line is open sir.

[Sean Eastman:]

Thanks for taking my questions on behalf of Tahira today. I'd just like to start with the oil and gas market in North America being slightly more cautious for '17. I was just wondering would you characterize this as being just kind of a broad-based, more cautious view or is it specific clients or specific end markets or geographies? Some color there would be helpful.

[Dennis Bertolotti:]

Sure, again, this is Dennis. I think like I said earlier, I think it's really based when you talk about oil and gas, you really got to look at up, mid and down-stream. Midstream to us looks to be the most aggressive right now at this point. There is a lot more activity. There's a lot more going on, maybe because they brought their lifting costs down over the last couple of years when the price came down and natural gas having the boom now it is which we think that midstream is very active, that's why we were talking about it. We see refineries is getting better, but they're probably not in the same place as the mid- as in -- and upstream we still see as being more hurt by it truthfully.

[Sean Eastman:]

And how do you guys track it? Obviously, you talk to your customers and follow the oil price outlook, but is there any other way? How else do you guys sort of try and get some forward visibility on things like turnarounds?

[Dennis Bertolotti:]

We don't have any better insight than you guys do on oil price or visibility there. So, all we're really doing is talking to our owners, talking to about where they're at. A lot of times the people that we're dealing with are seeing the budgets coming to them too. So, they're the ones who telling us the budgets look tight this year. We think we have a chance to get more spend and get more things done. So, they're hearing it flow down. So, essentially what we're hearing is like I said different segments that they believe it’s a better year and getting to be better as long as it's a 55 or 50 something barrel as long as the price doesn't crash. What we're hearing is that people think there's to be more spend in general and you're starting to see more bidding activity and more closing things like that; so these are all straight line markers as to what's coming up for us.

[Sean Eastman:]

And then just lastly for me, just as we kind of try to look for some potential growth offsets for '17, I was hoping you guys could just kind of run through some of the other major buckets, maybe within services, as well as in the international segment, how the aerospace is tracking. If you could kind of bucket out some of the other growth rates within the mix, that would be great.

[Jon Wolk:]

Yes, Sean this is Jon. Internationally, we feel good certainly within aerospace. Safron contract is a major focus for our French operation, but they are not standing still there, they are being aggressive in the market and seeing a pretty neat a funnel of organic opportunities that are there actively bidding on so we're excited about that. In Germany, in the UK even in Brazil, we've got a number of really compelling opportunities that we're pursuing. In North America, it's been as Dennis was explaining with the oil and gas market, it's little bit more challenging. Internationally, we're focused on aerospace than we are on oil and gas so that's probably explains why our pipeline maybe feels little bit richer over there at the moment. But even within oil and gas, I mean Dennis and his team is certainly actively pursuing a bunch of opportunities and the vision that Dennis was articulating along those lines there are lot of things we're working on with potentially will be very pleased to announce that the couple of years things kind of fruition there in the year.

[Operator:]

Thank you. Our next question is from Andrew Obin of Bank of America Merrill Lynch. Your line is open.

[Andrew Obin:]

Just a question on visibility. Have your customers -- and specifically, I think sort of visibility on turnarounds -- do you think in the past several years, your customers have just changed timeline on how long they take to decide to do turnarounds? Has anything changed in how business is done that you no longer have the kind of visibility you might have had three years ago? So that's the first question

[Dennis Bertolotti:]

Andrew, this is Dennis. The over the last three years so the first part of your question, I do believe that customers are trying to get out of each other's way it use to be there as a very hard piling in the spring and fall and they would triple to each other for manpower and resources. So, a lot of the owners who can get out of each other's way specifically the warmer weather owners in West Coast and Gulf Coast are trying to do things differently, so sometimes there is spring as an always the same spring as it was many years ago because they can move work into January and February or later so sometimes that peak is in quite as much as it use to be because they have the ability to move it around so that they don’t fight each other for all types of skill labor. With that being said, it's not always that the turnaround aren’t happening, it's just that there is things that they can do to either when it's a softer market, they can engineer amount using RBI or just engineering where they can feel because they can differ some of these work with six months a year, year and a half whatever it is. They can do it definitely, but there are also technologies that we use and others can do to help them to look externally and get an idea of it without going in. And in that way, they can have a higher level of confidence to get further. They will have to eventually go in. But they can do things to shorten and reduce the scope. So, they are still getting maintenance done, but what they do is they break it up between what is the safety related if it work to that outrage versus something that is non-safety related and then these are looking to return investment on that, and it's just becomes a higher and higher hurdle as the prices and challenges for the owners are increased.

[Andrew Obin:]

And just a question on -- just a follow-up question on share buyback. You guys highlighted that the reason you are buying back shares from Dr. Vahaviolos is you have these concerns about the float of the stock. Given that the stock -- in the low 20s, would you consider getting more aggressive in terms of reducing the public float? How do you think about trading off lower public float versus where the stock is and attractiveness of the buybacks at current levels?

[Jon Wolk:]

Andrew, it's Jon. Great question. Last December or early January, I believe it was we bought back about $3 million in the open market at an average price of about $20 a share give or take. And we did so at the time because we just thought it was a compelling value, so we'll be opportunistic about this. Our preference is not to reduce the float but if the stock is such a compelling value and we don't have alternative uses for the cash at that time. We intend to be in the market and be aggressive as need to be.

[Andrew Obin:]

But it does sound, based on what I've heard maybe, is that you sort of think on the margin, M&A is just tad more attractive than it was before. Is that a fair takeaway?

[Jon Wolk:]

Well, I don't think it's ever changed. I mean the foremost objective that we've got as said earlier to grow the business in a way that's going to return long term value to the shareholders. There's a conflicting theory that says well, there's not sure value you can get them buying back stock at a discount where you think it's worth, but it's sort of chicken and egg, if we grow the business to what it needs to be; it's going to drive long term value and so forth; so we think both are great uses for cash for our preference is to acquire if we can.

[Operator:]

Thank you. Our next is from Matt Duncan from Stephens Inc. Your line is open sir.

[Will Steinwart:]

Hey, good morning guys, this is Will on this call for Matt. Can you talk about how customer conversation and monthly trends change throughout the late fall into the end of the year? And how those customer conversations might have evolved once the calendar flipped to 2017 and how they've come to today?

[Dennis Bertolotti:]

I think the conversations were always out there about there was some speculation as to what this panel is going to be and the length of it. So, I don't think that really changed so much. The spring was never to us our visibility we've never seen anything very large, we know we've talked and we've heard from other peers and competitors saying they thought, it was a very large one. We're never seeing that truthfully, so it really didn't surprise too much where the spring went. We thought it could have been a little bit better, but we knew it's going to be somewhat soft. We knew it wasn't going to be a large rebound. So, we weren't surprised that it wasn't a large rebound. We may be surprised a little bit that it came in a little softer than we thought, but it wasn't a complete shock to where we're at and that's why we think we've that much better visibility in the fall, and thinking that the talk is just stronger for later in the year than it is early truthfully.

[Will Steinwart:]

And do you think the scope reduction that you've been seeing over the last few turnaround seasons, do you think those abate? Do you think those start to shake loose and create outsized growth for you in the next couple turnaround seasons, possibly? Or how do you think about that? Is that something that just comes up as you get closer to the season? Or can you comment on how you think about the scope reductions that we've seen over the past few turnarounds?

[Dennis Bertolotti:]

I mean eventually those assets have to have the same type of inspection rather than that they were planned to have. So, while they can do engineering and RBI and all these things and non-intrusive, they can do things to defer and put if off for some amount of time. Eventually, it has to come back. Would it all come back in the same period or over a couple of periods that's the where we don’t have a good hand on yet, but it has to be done because those assets are still critical to maintenance of our facility and they still have to have their uptime and make sure that they are not having unplanned outrages between schedules. So at some point they are going to have to start stretching up in some of those absolutely.

[Jon Wolk:]

And Will, this is Jon. Just to add on to Dennis' commentary. It's been two consecutive weak turnaround seasons for us. It was fall of 2016 and now spring of 2017. Just as a reminder spring of 2016 for us was just fine. We had organic revenue growth that was mid-single digits. We had profits that were up. We were feeling really good about spring 2016 and that's what let us to think that perhaps maybe this downturn thing is going to try to work as way through and the rest of 2016 won't be quite as bad and so forth and unfortunately that wasn’t the case. But it's only been really two seasons that we've had that were just below our expectations.

[Operator:]

Our next question is a follow-up from Edward Marshall of Sidoti & Company. Your line is open.

[Edward Marshall:]

I just want to follow up, I guess, to what Andrew was asking. You mentioned California quite a bit, and the West Coast, rather. As maybe some of the issues and where you are seeing some issues, I'm curious then did the industry change at all after the USW strike in 2015?

[Jon Wolk:]

It's Jon. I'll take this to start-off with that. First, I don’t know that we did mention the West Coast all that much in this commentary. But I don’t think we've seen a fundamental change in the industry. I think if anything that altered time frames in 2015 and to 2016 and into stored of comparability probably for second several quarters because work schedules got moved in 2015 and then the 2016 sort of like a ripple on a pond you had some ripples spread out and there was some ripple impacts but I don’t think we would say that the industry change because of it.

[Dennis Bertolotti:]

This is Dennis. Fundamentally, the industry is just reacting to what they have to do tightening up their budgets. We don’t see anything different on how they operate as far as long-term they still have to get these the de-bottlenecking and the safety things done so there is still a lot of work out there they still have a lot of capital spend. They are just deferring for a shorter period that they can but there is not an indefinite putting this out. They are going to have to get back because they are going to have to do, so we don’t we still feel very strong about the industry we serve about the customers we have, we feel very good about everything coming back to us it's just matter of is it today, tomorrow or sometimes down the road. But we actually don’t see any fundamental changes that what you are thinking.

[Edward Marshall:]

But you do compete with internal crews that are operated at some of these refineries. Is that right?

[Dennis Bertolotti:]

You mean like the inspection companies. I can tell you, that's a difference maybe 10 years ago, yes, you had a lot of assets and engineering and inspection even 20 maybe showing my age, maybe 27 years ago. But not anymore, they are really going to the model of those things are that are only key to their businesses what they kept in there. So for people who are doing inspection and have to flex up and down plus the adding of technology and the new equipment and all that, they've really walked away from trying to be experts and inspections or even engineering. So, we have a lot of folks that works for us that are former owner users that are now on the contracting side. So, that's a fundamental shift, but that's been going out over the last decade or two. So, no, we don't compete with internal inspection groups whatsoever.

[Jon Wolk:]

And that's within oil and gas.

[Dennis Bertolotti:]

That's within oil and gas, I'm sorry. But that's where you're speaking.

[Edward Marshall:]

And then speaking to oil and gas, it's about 50% of your business. First, can you remind me how much is refinery? And then secondly, as we talk about the growth in your business, we talk about other markets. Like aerospace, for instance, was discussed quite a bit. It seems as though you are shifting away from maybe petrochemical a little bit from your growth drivers. Can you kind of talk about maybe what the vision is? And I understand that Mistras has always been kind of a diversified inspection business. I'm just kind of thinking about where the growth drivers are in the business going forward. It seems to be even more outside of the petrochemical space.

[Dennis Bertolotti:]

Ed, it's Jon. I'll take that to start off with. First, to answer your question, refineries or downstream makes of about half of our oil and gas business, so about a quarter of company revenues give or take, and the other half is split between upstream and midstream. But the other part of your question, no, I mean we -- certainly we see aerospace is a stable, growing market and so we're doing well in it and we're excited by it and our abilities are increasing and our value add is improving. And I think increasingly we're seeing as a really good answer by customers. But the other part of your question, I mean the vision that Dennis just articulated, the mechanical services will be performed primarily for the benefit of oil and gas customer. So, if anything, we're not -- we're absolutely not backing away on that sector one bit, if anything we're trying to solve for how we become an even higher and integral value added supplier and solution provider to that sector.

[Dennis Bertolotti:]

This is Dennis. We've good customers there and we believe the easiest way to get new sales with our existing customers as opposed to finding new one. That being said we do acknowledge these other market that has strength and growth and we want to be seen as only having strength in the one sector. So, we've been strong in aerospace for years but we just really haven't promoted as much. And so, what we're trying to do is also look -- the aerospace sector is a little bit harder to find those type of acquisitions and stuff, so we're going after them. But we believe there's a lot of potential and power, we be this aerospace I mean our company has always held a diversified group portfolio and as well as technologies. We're just trying to push them a little bit stronger, but no, the mechanicals is right inside oil and gas and those customers that we've right now.

[Edward Marshall:]

And finally, when you talk about oil and gas weakness, and we look at the split of the business within oil and gas, is it the entire supply chain there? Or is it the petrochemical turnaround type business that you are having the most issues in? Maybe you just parse that out for me.

[Jon Wolk:]

Ed, this is Jon. I think the biggest negativity in terms of revenue comparisons between periods, that's turnaround driven. There's just simply less activity at the very moment than it was year ago because of that reason. And it's really because as Dennis said, customers are looking to spend less, and they're deferring something and budgets are light and so forth. That's really the single biggest change in revenues this year versus year ago this time.

[Operator:]

Thank you. At this time, there's no other question in queue. I'd like to turn it to Dr. Vahaviolos for any closing remarks.

[Sotirios Vahaviolos:]

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

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes your program. You may now disconnect. Everyone, have a great day.