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spk00: Thank you for joining MISTRESS Group's conference call for its third quarter ended September 30, 2020. My name is Sarah, and I'll be your event manager today. We'll be accepting questions after management's prepared remarks. Participating on the call for MISTRESS will be Dennis Bertolotti, the company's president and chief executive officer, Ed Breschner, executive vice president, chief financial officer and treasurer, and John Wood, the Senior Executive Vice President and Chief Operating Officer. I want to remind everyone that remarks made during this conference call will include forward-looking statements. The company's actual results could differ materially from those projected. Some of those factors that can cause actual results to differ are discussed in the company's most recent annual report and Form 10-K and other reports filed with the SEC. The discussion in this conference call will also include certain financial measures that were not prepared in accordance with US GAAP. Reconciliation of these non-US GAAP financial measures to the most directly comparable US GAAP financial measures can be found in the tables contained in yesterday's press release and in the company's related current report on Form 8K. These reports are available at the company's website, in the investor section, and on the SEC section's website. I'll now turn the conference over to Dennis Bertolotti.
spk04: Thank you, Sarah. Good morning, everyone. Our financial performance was strong in the third quarter of 2020, with revenue, as we forecasted, up nearly 19% sequentially, gross profit up from the year-ago quarter by nearly 200 basis points, and overhead was down over 12%. As a result of this solid execution, we reported a net income of $1.6 million, or five cents per share, for the third quarter of 2020. Additionally, we continued to generate positive cash flow in the third quarter of 2020 as we had anticipated. Consequently, we generated more operating cash flow and free cash flow in the first nine months of 2020 than we did in the same period of 2019. This in turn has allowed us to pay down nearly 19 million of outstanding debt thus far in 2020, including over three and a half million this quarter. MISRUS has been adapting and evolving throughout the current pandemic and has been remarkably responsive to its customers. For that, I want to thank the many dedicated MISRUS employees who have endured these extremely volatile times over the past month. all while ensuring the safety of our employees and customers. I am also pleased to report that we recently restored the remaining salary reductions for overhead positions that we had initiated at the beginning of April 2020 as part of our pandemic plan response. We remain all together in working through this unprecedented period. Our results in the third quarter reflect a gradual strengthening in our key oil and gas end markets. and lesser than expected reductions in our domestic aerospace sector. We also benefited from modest market share gains driven by the increasing value of our comprehensive service offering, delivering to our customers the added ongoing success of our diversification efforts as we further leverage our investment in technology into adjacent markets. Continuing the efficiency trend that began last quarter, We once again recorded a strong gross profit margin of 32% for the quarter, up from 30% a year ago, and down only slightly from last quarter when we posted the best gross profit margin in five years. Gross profit margin improvement continues to reflect the mix and the impact of efficiency initiatives, productivity enhancements, and a better sales mix. So far this year, for the first nine months, Gross profit margin is ahead of last year by 60 basis points, despite the volatile end markets, significant revenue decline, and the impact of the global pandemic. We have sequentially improved our annual gross profit margin for the past two years, and we anticipate continuing this trend for full year 2020. Selling, general, and administrative expenses were also reduced significantly from a year ago. and the quarterly reduction in the third quarter was the highest rate experienced in 2020 at over a 12% year-over-year reduction. Through this combination of strong gross profit margin and tight expense control, we were able to achieve a sequential quarterly improvement of over 50% in adjusted EBITDA, despite the adverse impact of August hurricane activity that reduced adjusted EBITDA by over $1 million during the quarter. The adjusted EBITDA margin in the third quarter was 11.8%, which is one of the highest levels we have generated in recent quarters. We had another quarter of positive operating cash flow and free cash flow, with our year-to-date free cash flow nearly 37% higher than a year ago. This enabled us to further reduce debt in the third quarter by over $3.5 million. For year-to-date thus far in 2020, we have paid off nearly $19 million of debt. Debt service remains a top allocation priority for our residual free cash flow. All in all, it was a strong quarter marked by steady progress. Our sequential revenue growth is due to improvement in our existing markets, diversifying into emerging, growing, adjacent, and complementary markets, and continued tight cost controls. Looking out at the market landscape, conditions are beginning to improve in the energy sector, with signs of stabilization in the oil and gas markets, although it is running slower and using fewer hours than last year. We constantly monitor our field technician headcount and have seen improvements from a year-on-year decline of 21% during the second quarter to a current decrease of approximately only 5%. Revenue is down more than headcount, because of fewer hours being worked on the contracted work scopes, which customers have reduced to save on spend, while also reducing travel and headcount at sites in response to COVID concerns. There are signs of improvement, for instance, in Canada and other locations where we are seeing some demand for overtime on projects. And we are experiencing robust bidding opportunities in pipelines, refinery, and offshore markets. Geographically, while North America is experiencing this slowdown, conditions in Europe for the oil and gas market have not deteriorated to nearly the same degree, thus showing signs of strength. The aerospace market continues to lag in Europe and recently announced COVID shutdowns in France, Germany, and UK will create additional headwinds in those countries. In contrast, the North American aerospace business has been stable in 2020, and is up modestly year-over-year by nearly 3%. This is a result of our diversification efforts beyond our commercial markets and into defense and space. For instance, for one customer, we have essentially become a project manager, overseeing not only our own work, but other mechanical tasks related to our typical work scope, such as welding. This project arose from the customer's desire to limit the amount of testing and rework required to yield usable parts. Using our process expertise and industry know-how, we substantially reduced the number of inspection and repair cycles previously required for those parts and even repaired and validated a number of parts that were previously deemed unlikely to be salvaged. This resulted in an extended work scope that will likely span several years and hundreds of parts for this customer. Our energy diversification efforts continue to be an emerging growth opportunity, particularly in wind energy. Our beta test of sensors on wind turbine blades is progressing nicely. Our sensors are now being tested on different types of turbines, and the results to date have been impressive. This represents not only an increase in the growing alternative energy space, but it's also part of our digital and IoT strategy as well. Licenses for our MISRUS digital technology continue to rise. Though COVID has slowed some of this technology's acceptance, we believe when our customers return their employees to their facilities, license demand should rise accordingly. In OnStream, we are making great progress in the U.S., which is being somewhat offset by the challenges facing the Canadian energy market. Today, our largest tool is 26 inches in diameter, but we have been invited to bid on jobs, that will take us to a 48-inch diameter tool, potentially getting us into larger lucrative markets. So between our sensors, ruggedized tablets, bridge monitoring applications, PCMS, and more, we believe our data strategy is well positioned. If not for COVID, we are convinced we would be much further along. When markets improve, we expect data revenues to show strong growth, and our MISROS digital strategy to be an even bigger part of our future. Third quarter 2020 once again demonstrated our ability to flex the organization to match market conditions. At the same time, we are making steady progress leveraging our core strengths to penetrate new and growing markets. And despite the dual challenges created by the pandemic and in-market volatility, we continue to generate strong positive cash flow. which we are using to reduce debt. While we believe fourth quarter revenues could be relatively flat slightly down from the third quarter, we are extremely optimistic that we will see steady improvement over the course of 2021. We are committed to our strategy to use the tremendous flexibility of our organization to maintain, if not grow our position in our primary markets, while strategically investing in growth initiatives that will capitalize on coming shifts in the market toward more comprehensive solutions, predictive analytics, and better use of technology. As you heard today, despite the cautious nature of the markets, we are already demonstrating tremendous value through MISROS Digital, supply chain consolidation, IoT sensor technology, and more. As market conditions improve, We believe these capabilities will be in high demand and that we will have a significant footprint on which to build. I would now like to turn the call over to Ed to give you more detail on our financial results for the third quarter and first nine months of 2020.
spk03: Thank you, Dennis. For the second consecutive quarter, revenue was consistent with our forecast, increasing nearly 19% sequentially from the second quarter to $148 million. This was at the high end of the range in our outlook last quarter. And as Dennis mentioned, the impact of the August hurricanes reduced revenue by nearly $4 million this quarter, which would have put us over the top of our previous revenue outlook for the third quarter. While both services and international results were each down by more than 20% compared with prior year, international revenues were relatively a little weaker due to the ongoing challenges in the European aerospace market. where aerospace comprises a larger percentage of the total international revenue as compared to the services segment. For the nine months ended September 30, 2020, our revenue was approximately 76% of prior year revenue for the same period. Despite the dual challenges of energy market volatility and the disruption caused by the global pandemic, customers still need our essential services to comply with safety and regulatory standards and ensure their plants are operating at peak efficiencies. This demand requirement essentially creates a floor underneath our market. Furthermore, we continue to gain market share as customers increasingly adopt our more comprehensive service offerings, including mechanical services. For instance, at the expense of other companies providing narrower solutions. Consistent with the second quarter, gross profit margin increased 190 basis points to 32%. This was down only slightly sequentially from our second quarter gross profit margin, which was the highest quarterly gross profit margin level achieved over the past five years. Gross profit margin improvement is once again attributable to productivity improvements and a favorable sales mix. In particular, gross profit margin benefited from the relative increased sales mix of on-stream, aerospace, and PCMS, all of which offer higher-than-average profitability. Year-to-date 2020 gross profit margin is running ahead of the first nine months of 2019 by 60 basis points, despite revenue being down 24%. The year-to-date gross profit margin benefited from the same positive factors that impacted the quarterly performance. Third quarter selling general and administrative expenses decreased by 12.3% compared to the year-ago quarter. This is the largest quarterly decrease in our year-over-year overhead cost in 2020. The contraction in the underlying SG&A cost was even more impressive when considering that overhead costs also included the impact of unfavorable FX costs in both the Q3 and year-to-date periods versus prior year. The overhead cost decreases realized in the last two quarters, as well as those expected in the fourth quarter, are the product of the cost reduction and efficiency program we implemented in April 2020. We expect fourth quarter overhead costs will also be lower than the prior year although the magnitude of the decrease will be less significant as certain cost-saving measures taken at the inception of the pandemic have been restored, as Dennis mentioned earlier. Adjusted EBITDA for the quarter was $17.4 million, a $5.9 million or 51.3% sequential increase from the second quarter of 2020, although down compared to prior year. We were in compliance with all of our bank covenants as of September 30, 2021. Specifically, we maintained a minimum liquidity of $57.4 million versus a requirement of maintaining a minimum liquidity of $20 million, with liquidity being defined as cash and cash equivalents and unused credit on our revolving credit agreement. And number two, we exceeded the minimum even requirement for the six months ended September 30, 2020, by $3.7 million. Although the maximum funded debt leverage ratio is currently suspended until the fourth quarter of 2020, when it resumes at a level of five and a quarter, At September 30, we were in pro forma compliance on a 12-month basis, and we expect to be in full compliance with all debt covenants at December 30, 2020. We generated $41.8 million of cash from operations in the first nine months of 2020, compared with $40.5 million in the year-ago period. This is despite the significant decline in revenue year-over-year. Even more impressive, free cash flow was $30.8 million in the first nine months of 2020, compared with $22.5 million in the comparable period last year, an increase of 37 percent. Free cash flow benefited from a $7 million reduction in capital expenditures year-to-date, in line with our commitment to limit spending. We do not expect any catch-up capex spending in the fourth quarter of 2020. Our net debt, defined as total debt less cash than cash equivalents, at September 30, 2020, was $214.4 million, compared to $239.7 million at December 31, 2019, a decrease of over $25 million, or just over 10%. We reduced gross debt by $18.2 million over the first nine months of 2020 to $236.5 million at September 30, 2020, from $254.7 million at the end of last year. Again, debt reduction remains the top allocation priority for our residual free cash flow. We remain confident in our sustainable business model and remain firmly committed to carrying out our strategy today and over the long term. And with that, I will now turn the call back over to Dennis.
spk04: Thank you. Let me quickly conclude today's prepared remarks with our outlook. It remains difficult to forecast with any degree of certainty at this time. The ongoing COVID-19 pandemic continues to significantly impact our two largest markets, oil and gas and aerospace. For instance, After recovering sequentially in the third quarter, the oil and gas industry appears to be signaling a flattening for the fourth quarter, and crude futures have fallen recently from earlier highs in the year. As I mentioned earlier, aerospace has held strong, particularly in North America, for the first nine months of 2020. But it too is now facing headwinds, particularly in Europe. As such, it is likely that a fourth quarter consolidated revenue will be relatively flat to slightly down from the third quarter, adjusted EBITDA will be lower than the third quarter, while operating and free cash flow are expected to be higher than the third quarter. This outlook is contingent on continuing macroeconomic stability, including continuing stabilization in crude oil markets and no implementation of new or increased stay-in-place mandates, resulting from an increased spread of COVID-19, which could impact our ability to work as a critical service provider. More importantly, we believe that as we look toward 2021, market conditions will improve, particularly in the oil and gas sector. These are indeed challenging times, but MISRIS continues to play offense, growing share, investing in new technology, and providing the innovation that will drive our industry forward. Our goal is to bring value to our customers. Their challenges will evolve as safety and compliance standards continue to rise. And for new and emergency emerging industries such as Alternative Energy is a brand new world where they are relying on the experience and skills of trusted advisors such as Mistrust. As always, Mistrust's goal is to remain at the forefront of the industry and to drive value for our shareholders. Before taking your questions, I would like to thank all the Mistrust employees once again for your outstanding customer service, dedication, and attention to safety which you have all shown in these extremely trying times. Caring Connects works. Sarah, please open up the phone lines.
spk00: Ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, ladies and gentlemen, if you have questions at this time, please press star and then the number one key on your touchtone telephone. Your first question comes from the line of CN Eastman from KeyBank Capital Markets. Your line is open.
spk01: Hi, guys. This is Alex, not for Sean. Thanks for taking our questions. Morning. Good morning. Can you provide a little bit more color around the expansion into the alternative energy and wind turbines markets, and then also the space and defense markets within aerospace, like how you're positioned to grow in these markets, how fragmented the competition is with the services you provide there, and maybe whether this slight mix shift is a creative to margins. Thanks.
spk04: Sure. I'll let John, who's closest on that one.
spk08: Yeah. I think you asked several things there, but hi, it's John Walk. Yeah. We're very excited about, um, the alternative energy, in particular wind turbines. We've got some important tests going right now where we've installed our online monitoring gear on wind turbine blades on a number of turbines with owners with names that everybody will recognize. Those tests are going extremely well. The trials are receiving very favorable feedback. and we're looking to roll out in a more broad way in 2021 those services once we've got commercial acceptance of our product and service offerings.
spk01: How do the margin profiles compare to, like, your legacy type of stuff?
spk08: Better than average, and typically this is because when we perform online monitoring, the revenues are recurring and the margin profile is very favorable. Got it.
spk04: And I'd like to add, I'll say I'd like to add if I could, you know, when we talk about this for wind, the Things that we're going to be doing is, A, we're going to be data streaming and monitoring the customer's turbines or hubs or wherever the issues are for the different types of equipment. So we'll be giving them online data and telling them right away which ones are in need of service. So you go away from a time-based type of monitoring to one that is actually based on real-time data. We would also be servicing the equipment to make sure that the sensors and the hardware is not what's causing the noise or the... the defect signal that we'd be getting. We would make sure that it's something to do with the piece itself. We would have folks that could access it from at height and get to it without having to bring out scaffolding that could either service the hardware or do the light repairs if it's wind damage or lightning or anything like that, we would be able to do that. And we'd be able to get it back online. So the idea of having one company that could be doing all that is more of this consolidation. And I know earlier you asked about space. And it's the same kind of thing. You know, you've got right now our aerospace is comprised of commercial and some military. Well, we all know where that's headed, so that is definitely down, but we're augmenting it with space. So we're helping out various names doing things like not only doing the testing, but like we talked about where we might be doing some of the other mechanical services because when you start talking about aerospace and space customers, their list is a much more complicated, more nuanced way to make sure that someone can do work for them. And it creates a very difficult process to send it all across the country to go from step to step. As we can consolidate, not only do you save the time and the queuing up from location to location, but just the time on the road and the ability to get parts through so much quicker is creating immense value. And to your earlier question, the space and the wind have the same kind, if not better, margins that we would see in shopper or those types of environments.
spk01: Thanks. And if I can just ask one more. With all the talk about tablets, sensors, and greater use of industrial IoT for monitoring, predictive maintenance, have you guys seen much of an impact to revenues and margins this year from these offerings? And if so, how material has it been? And then how much of a revenue or margin boost could we see resulting from these offerings in the next couple of years?
spk04: Sure, I'll take that first, and then John can add it. So in the beginning right now, what we're trying to do is come up with a value for our customers in this. We're not pushing as hard on the revenue, so we're not really worried as much about the revenue, although we are more than recovering our R&D investment on the revenues we're getting from it. Right now, it's more of making sure that customers in trying times like this don't just start looking at every vendor and trying to do a holistic headcount. or hourly rate or fixed rate reduction just because. If we can add these differentiating services, we believe it gets us stickier in a lot of places and is a protector of margins. The margins as we get this going and growing the sales and getting more of the online and all that, which we believe COVID is slowing up, it is definitely out there. Those will be very good margins for that. So we're not yet predicting exactly how much the increase will be, but we believe Not so much you won't see it, to be fair, in 2020, but in mid and later 2021 is when we expect to see those things really start to add to our stickiness and the revenue and the margins.
spk08: Yeah, it's John. I'll just add on to Dennis' comment that we're very excited also about the value being provided to customers today. And as Dennis said, the pandemic has slowed the progress, but still the feedback we're getting is really remarkable from customers in terms of the enhanced visibility being provided by Mistrust Digital. And not only for our traditional service areas, but in related mechanical service areas that Mistrust Digital is also enabling higher visibility and productivity and real dollar savings day after day with customers. So where we're excited about this is not only for the, you know, pickup that we may get from the digital, you know, charges themselves, which, you know, will be relatively modest, but the market share gains that we can expect and the stickiness with customers that are starting to come as well.
spk01: Thank you. I'll hop back into the queue. Thanks.
spk00: The next question comes from the line of Tate Sullivan from Maxim Group. Let me ask you a question.
spk06: Thank you. Good morning. In the gross profit margin in the quarter, I've heard other companies talk about wage subsidies from Canada and other countries. Do you have any wage subsidies in 3Q, and might that be an option to get reimbursed for some wages in the coming quarters with other shutdowns?
spk04: Yeah, it's a good question, Tate. It's done. So, yeah, there's this CEWS from Canada and all the different subsidies. I mean, we've definitely had those, but you've got to remember, when you're talking about European and Canadian process to deal with COVID, what they said is instead of like you do in America where you put them to the unemployment and unemployed folks have to find their local governments or what have you to get reimbursed, the European and the Canadian said keep them at your site. We know where they are. We'll reimburse you, right? So we are getting some subsidies for that, and they got a little bit modified in Q3. They're going to be modified more in Q4, although I will say there are some European countries that are talking about COVID modifications all the way through 2022, I believe. So they're looking at some long-term ones, but they're reduced, right? You know, you're getting three-quarters of 50% of the people that you bring on, and there are these complicated formulas, but there is some reduction out there. But the thing I would say about that is we had it. we had the ability to keep some folks on because we were getting these direct subsidies. If we didn't have the work to keep them on and we weren't getting a subsidy, we wouldn't have kept them on, right? So really what you're getting is almost like push-through dollars because if you pay a dollar to an employee that you're keeping them on because there's no work but the government reimburses you a dollar, it's not so much a gross margin bump as it is. It's keeping you flat, right? You're not really making any money on it. You're just getting reimbursed. In most cases, you're getting reimbursed for less than a dollar. It's always a certain percentage up to something where it maxes out, but it's usually not 100%. So even this quarter, we were getting some of that in Europe, in France and in Germany and places like that, and they're all changing as well as Canada. So there's going to be a little bit left in the fourth quarter, but they're much more modest than you see in Q2 and Q3 in any one country.
spk06: Thank you, Dennis. And following up the wind turbine comments too, I heard another company mention some faulty wind turbines when they were installing the spread. And you talked about going into adjacent markets and the sensor opportunity sounds like a great opportunity in the wind turbines. But do you do other work currently inspecting the blades before they go on or anything else in that market?
spk04: So we've done a little bit on the manufacturing side of But to be fair, most of ours has been when they're existing or with the sensors, we may end up looking at deals where we can put the sensors on as they're being manufactured and then have data real time, kind of like you get your car and you got theory on or whatever else is from day one. But we do a little bit on the manufacturing side, but for the most part, that's contained inside the manufacturers. And most of our work is once the turbine is up, either with the owner or of the wind turbine themselves or the manufacturer. We're actually talking to both. There's a large amount of turbines out there that are owned by various companies that are looking at what their warranty will look like going forward, and it's kind of getting to the end of their warranty period for them as well as manufacturers are looking at not only their existing fleet, but, you know, like I say, putting this into the new fleet as it comes out.
spk08: Yeah, Ted, it's John. I'll just piggyback on what Dennis just said. Part of the value proposition to owners of wind turbines is the idea that they can actually avoid some of the cost that they're spending on inspections today by continuously monitoring the status of the turbine blades. So if there's any impact damage, things like lightning strikes or other impacts to the blades, they know instantly because of our technology that And as well, we can determine other defects happening, too, whereas inspections are done, as Dennis said, on time intervals where lots of damage sometimes does occur, unfortunately, causing millions of dollars of damage for owners that is undetected until some kind of catastrophic event occurs. So the idea is that with real-time monitoring, you can avoid not only inspection costs, but you can prevent potentially catastrophic damages.
spk06: Okay. Thank you. Thank you all. Thanks, Dave.
spk00: Your next question comes from the line of Mitch Pinheiro from Star Design. You may ask your question.
spk07: Hey, good morning. Good morning, Mitch. I've been juggling three conference calls here this morning, so I apologize if anything you've touched on. But just listening to the wind turbine conversation here today, I mean, are you displacing anybody? Is this like a whole new category or why all of a sudden are wind turbine, you know, monitoring demand? Why does that happen?
spk04: So that's a good question. And the way I see it, Mitch, is the wind turbine market has been growing and it's becoming a larger and larger segment of the entire service grid, right? And these things, initially, when they're up new and shiny, it's like having your brand-new boat, right? The fiberglass looks good and clean, and then after a while, you've got to start scraping the barnacles and crud off it, right? Same thing with the turbines. They're going to age out like anything else. And let's face it, when you look at a wind turbine, the main things you see is the top of it, the tower, and the three big blades. And those blades are inherently where most of the issues are. So as these big pieces of equipment age... like everything else, things have to be looked at. And the turbine blades and the attachment hubs and things like that are proven to be the most challenging parts of the entire system for the owners and the manufacturers as the equipment ages out. So I think it's just a matter of just the whole market starting to get a little bit older and it's starting to get to the point where how do you look at that and what's the best way? I mean, it used to be just send people out there with binoculars or scopes or You fly around a drone, but that means you're looking at three blades times every turbine trying to figure out where the damage is versus if you had sensors that were telling you, hey, something's going on here, whether it's a sensor going bad, a system going bad, or actual damage starting to occur. You'll know it, like John said. You'll have some kind of indication of where to go to, and you can chase things that are active and ongoing, not just the calendars telling you it's time to do it again. Sounds good.
spk07: And just one other, just for context, I mean, I don't know if there's a number you could put around this, but, like, how big is the wind turbine or alternative energy monitoring? How big of a market is that, you know, in the United States?
spk04: So that's a good question to your earlier question, which I didn't really answer, is who are we displacing? I don't think we're displacing anybody because I think this is a new emerging part of the market. So trying to put a context around how big that is. I mean, I'm, I'm not, I can give you a guess, but it would be just a dinosaur guts without real lot of facts. But I, I believe, you know, we've, we're talking to customers who have thousands, hundreds, and sometimes thousands and tens of thousands of units that they have or project to have in the next three to five years. And those blades and that part of the rotating system is always going to be the key part of looking at it. More and more attention is being put onto the towers for, bad applications of coatings and things like that and some failings here and there. So, I mean, it's a new market that's growing and they're getting to have bigger and bigger turbines and they're getting to have bigger and bigger issues with these turbines because you've got more torque and just the larger the size, you know, creates more issues. So, I think it's going to be something that as the market moves from traditional oil and gas to wind and alternatives, you're going to start to see more and more attention overall being paid to something like this. And the owners don't really have an online offering right now. So they're all trying to work for what's the best way for us to do real-time monitoring versus, you know, running around these farms and trying to figure out which one looks bad with the set of binoculars. Okay. Another question.
spk07: Just another question, which you mentioned something I just caught at the very beginning or end of it. You're saying robust bidding opportunities. I think you said in pipelines, but, you know, are the bids, what's the catalyst for the increase in RFPs and bids? Is it new pipelines that you're bidding on? Is it dissatisfaction with existing, you know, service providers? Why are we seeing, you know, robust pipelines?
spk04: So that's a good question. I think for us when we're talking about our bidding activity, there is some new in that mix, but it's probably more of the existing infrastructure we're speaking to. And I think it's less of a thing of something new coming into market more of that We are encouraged to see that the capital spend for 2021 still has an appetite out there. There's no pulling back in some of these markets, pipeline and some of the gas and oil. We're getting bids for 2021 that we would normally expect. It kind of got quiet there for a while in the second and early third quarter, right? So what we're really doing is telling you there's a return to normalcy in some of these markets, more than It's something different. I don't think it's a spring up from a slow quarter two or three. It's just we're seeing getting back to what you would normally expect, right? So that's the first leading indicator that 2020 should be getting back to some type of normalcy in different markets at different times. But it looks like some of these markets are starting to get back to a pre-COVID stance.
spk07: Just a couple quick ones. Can you talk about, you might have talked about this, so I apologize, but what's the sort of status of your technicians, labor force? I mean, where, like, from an employment point of view, where are you relative to a year ago? And, you know, what type of capacity is your sales force sort of operating at right now?
spk04: Sure. So we track that. We track that weekly in two different main ways. One is the, uh, since March 15th, we tracked folks that were on furlough because of customer demands right from COVID. And in the early days of COVID in late March and early April, we had up to 21% of our North American market on some type of furlough, either most of their hours taken away or all their hours taken away. We are now down below somewhere around four and a half percent or so. of the employees that are still affected by that. And some might be at reduced hours versus no hours. The other thing we do is we track weekly hourly billable count versus the same week the previous year and versus the previous week in the same year. So we look at sequentially and year over year. And we were down by much more than that 27%. We were down 30%, 40% on billable hours for a while. We're now hovering around high single digits to low double digits differences to the previous week because the customers are still watching how many people are at a site. They don't like crushing too many people in for the turnarounds. Turnarounds in traditional times are all about oil out to oil in, minimizing the amount of time that the unit is actually offline and not generating. Turnarounds this year, they're not worried about that pressure. They're allowing the hours to go slower. It used to be you're running six, seven-day weeks, 10, 12 hours a day. Many turnarounds are still being run at slower levels. Some regions are seeing overtime, but not all, because the customers are concerned about COVID spacing and amount of folks that are in contact with each other and just the overall cost. And let's face it, the inventory that they have in their product out in their tank farms means that they're not in that much of a rush to get back online. So they were watching their spend. So hours over the previous year really dropped off quick, but they're starting to catch up too. So like I say, that's within single to double digit type territory now of previous.
spk07: Just one last question. On SG&A, you've done a terrific job reducing expenses there. And I did hear your comments that fourth quarter will be lower, but, you know, you're sort of lapping some of your – or some of the costs are being restored a little bit. But what's the sustainable rate over the next couple quarters? Is it in this level, and we see it pop up a little bit?
spk04: I'll let Ed cover that for us. Sure.
spk03: Yeah, more of the latter there. It'll pop up a little bit. I mean, we had – The salary, you know, rollbacks throughout the year. We were deferring some other projects and new heads being hired, things like that. So, yeah, so that number will scale up a little, but it's going to be funded with, you know, contribution margin happening as the revenue rebounds. So, yeah, it's going to kind of – we're going to keep the control there, modulate what we're doing. But, yeah, the number, you know, we've been holding it down, obviously, consciously. So it will creep up, but it's not going to pop up. So we're going to control it. and scale it as revenue. And as we have said all along here, we're going to continue to keep recalibrating all the overhead cost footprint in SG&A as well as the indirect stuff in COGS. We're going to continue to keep that calibrated to the revenue at hand such that, you know, the margins stay there for us. So, yeah, there will be a little pressure on that number going up, but we think that will also be offset with the revenue going up as well.
spk07: Okay. All right. Thanks for taking the questions. Thank you. Thanks. Thank you.
spk00: Your next question comes from . Can you ask your question?
spk05: Good morning. This is David Ridley-Lane. I'm for Andrew . You know, what percentage of oil and gas service events have been pushed out from 2020 to 2021? I know that's tough to call exactly, but even sort of anecdotal or qualitative thoughts.
spk04: Yeah, I can give you an answer qualitative, but I've been watching that throughout Q2 and Q3 to see how much is getting moved. And I will say that there is work getting moved from 2020 to 2021, but we have seen a very small handful of entire projects getting pushed out of the entire year. And that's internationally in Europe and Canada as well as here in the United States. For the most part, what customers are doing is watching their spend, like I talked about, watching the hours, watching how many people they bring from overseas, or I mean outside of their local area so you don't get the per diem and you don't get to travel and worry about trying to get a positive COVID back from a distance away and all those concerns. But for the most part, we haven't seen more than a couple in North America and only one or two in Europe where they actually took the entire project. We had one customer in Europe that very early on had us staffing and giving all kind of work for doing work in the fall, and at the same time put an engineering analysis to say if we couldn't get the work done because COVID was so looming and destructive to our business and to getting people into that country to handle all the work, they want to know how long they could push off the work. So we looked at the major equipment that was being serviced. There was maybe like a dozen, a dozen piece of equipment that was major while they were doing the work. And we gave them an estimate of how long that could be. So it was something like an range of anywhere from 18 to 20 some months. You could push off that work if need be. They were ready for that, but they, they actually were in the throes of finishing that one up. And they pretty much went as planned because the COVID was a problem, but it wasn't such that it shut them down. So for the most part, The amount of work, effort, and planning that goes into this mitigates them from throwing the entire thing out, but they certainly go to get the safety and the most pressing parts of the work done first and push off some of that work in the 21. Got it. That makes sense.
spk05: Any quantification of what the temporary cost savings will end up being for full year 2020? Just want to make sure we understand sort of the cost drivers as we look out next year.
spk03: The temporary cost savings gets out here. I mean, it's been a decent-sized number each quarter. I mean, as we said earlier in the year, we were going for a 10% overall reduction in 2020 of all overheads. And, again, that's SG&A as well as fixed overheads up within COGS. You know, for the third quarter, we were at, you know, 12.3%. Full year, we're at, I think, 7.7% reduction in SG&A. So, you know, a lot of that, you know, is policy decisions and deferrals of things. Some of that is going to come back. So it's somewhere between those numbers is what that, you know, number we went after, somewhere between, you know, 7.7% to 12.3% is what's happening. Full year, maybe it ends up being, you know, 8%, 9%. So we got pretty close to the, you know, to the 10. So that's the number that's been in there. All of that's not, that's the savings we went after. All of that doesn't go away. Some of that we're going to hang on to that and keep that just as a more efficient way of operating going forward. So we're going to try to hang on to all of that. You know, we're in our budget right now and, you know, we haven't rolled it up just yet, but we are challenging all the budget managers. Think about what you went through and all the great effort and things you had to evolve into during 2020 and try to keep as much of that into the DNA as we operate going forward to keep that cost out in perpetuity if we can. So we're going to try to make as much of that permanent, so to speak, as we can. We won't succeed with all of that, but hopefully we get a meaningful percent of that stays in our run rate going forward. And we'll be able to talk more to that when we put the, you know, we have the official budget done and talk more about 20, you know, 21. But, you know, that's the scale of what, of the cost outs that happened, you know, this year. So, you know, we're going to try to keep as much of that as we can in the 21 actuals.
spk05: Understood. And then, uh, last one from me, um, we've heard from, from other companies in our coverage, uh, that, uh, you know, oil and gas customers kind of keeping a tight lid on budgets in 2020. And it's really going to be until the new calendar year when budgets reset. So just on your own visibility, do you think, uh, your conversations with customers, Are they, would you kind of agree they're waiting until they sort of see their new calendar budget before making decisions? How do you think about your visibility right now in that space? Thank you.
spk04: Yeah, that is a good question. I'll confirm what they're seeing on that. In fact, we slowed down. We were going to get our budget out a little bit sooner, and everyone kind of pushed back. The budget manager said because of that same tight-lipped type scenario with the customers and what they're saying. They're like, we can get a number now, but our confidence is going to be much less than what it had been in the past. So we slowed it down, and that's why we're not going to have ours rolled up until later in this month. We were going to have it a little bit earlier. Because the customers, I think, are looking at all the, you know, the pandemic response, where's the health going to be and all that. Like I say, the sign of bidding activity is encouraging to us because people are thinking about it. But I'm not so sure what they're thinking about in the first quarter versus second and third, right?
spk05: Thank you very much.
spk04: Sure.
spk05: No problem.
spk04: Thank you.
spk00: Thank you. Ladies and gentlemen, if you have a question at this time, please press star and then the number one key on your touchtone telephone. Your next question comes from the line of Brian Russell from Sedoti. You may ask your question.
spk02: Yeah, good morning. Morning. Just to follow up on some of the oil and gas related questions. It seems that the majority of turnarounds were not done in 2020. And I'm curious, you know, as we get to that 18 or 24 month, you know, time period, you know, between turnarounds, you know, needed to, you know, avoid any equipment malfunctions. Do you see the turnaround season picking up again this upcoming spring, or is it being pushed out more towards the second half of 2021?
spk04: Yeah, Brian, it's a great question. I mean, I would clarify by saying that I think most of our turnarounds did get performed in 20, but they got performed at a lesser than originally scheduled type of process, right? So I do think there was some deferment of work, but the major things that they had to get done, they didn't really have enough time to get away from what they needed to do from a process safety. To your point, each site's a little bit different, but typically you're talking the shortest of 12 months up to probably 24 months that you can defer things unless you really spent a lot of time and effort, did some online and did some monitoring to make sure that whatever you knew about those damage wasn't growing or getting worse. So typically you're going to see things get pushed in from a year, year and a half on average. I would think next year is going to be an average to better year on turnaround. But I got to tell you, I'm not so sure about the spring yet. Customers are still planning and doing things. I just don't know how much of that's going to stick as what is planned. If something were to change in the health and all that, you could see that change. I think by mid-year and later, we believe you're going to see a lot more of a return to a 2019 posture in a lot of our customers. We're just not so sure. It might be depending on each customer and depending on what happens here, you know, just with the health and all that in the next few days.
spk02: Okay, got it. And just, you know, from some of the industry statistics that a lot of us follow, is it the crack spread expansion that you think is needed? for refineries to commit more investment to CapEx, or is it utilization rates, which one could argue have been overly depressed by the hurricanes the last couple months, and the oil price hovering around $40? But maybe any insight or thoughts there as to what we should be tracking?
spk04: So, again, I think it's, from my perspective, I think it's demand, right? As long as they don't see heavy demand coming at them, they can run at these reduced rates. They can have prolonged turnaround. They can do things like that because they know they've got enough going on just in what they already have stored, produced, and are waiting for the market that they're not that worried about it. I think as you see the demand pick up, you're going to definitely see the utilization get back to closer to a normal because right now you can have a longer turnaround, and they're doing that. They're purposely doing that. making the turnarounds longer just to save on the cash. So I think right now just some idea of what is normal and when is normal and when is demand coming up, to me I think that's going to be the biggest driver on what's going to happen in the refiners.
spk02: Okay, got it. And then just to follow up on some of the renewable energy type questions, I think you've disclosed in the past that renewable energy was approximately 6%. of total sales. Where do you see that trending over the next several years, given that it doesn't seem like there was much of this remote wind turbine censoring embedded in that single-digit sales percentage mix?
spk04: Yeah, I can tell you, I mean, we believe, you know, you're not going to see new coal plants being built in the United States and North America. You're not going to You're going to see natural gas. You're going to see things like that. So, you know, that's becoming the base load where natural gas used to be the peakers, right, days gone by. And now you're going to see alternative trying to become a lot more of this base as well, trying to augment that. So I think these turbines are going to be getting more and more in light of looking at how do you maintain them. They're not brand new. They're becoming at an age where you've got to start doing something about it. I'd be... remiss to try to throw a percentage, but I think it's going to be meaningful in mid-21 and into 22 and such that you're going to see a lot of growth in that part of the market, not only from just the inspection and repair part that we cross over and do, but now more so if we can get into this earlier monitoring. It would be such a game changer for all those thousands of turbines out there, each one with three blades, that's three times the amount of problems that they can have. I think it could be a real game changer. So I do believe it's got real potential.
spk02: Yeah, and just to follow up on that, what is Mistros' competitive advantages in that space? A lot of your other markets are highly fragmented with a lot of local players. I assume the remote censoring, et cetera, and product offerings that you have are competitive advantages. And are there any real... barriers to entry to this market?
spk04: So I would believe I could readily find anyone that could put sensors on a turbine or anyone could do monitoring or anyone could do, you know, inspection for one or anyone could do mechanical repair. But I think when you try to put all those together and some of the other things that we're going to be doing on them, you're not going to find many vendors to do all that and do all that in-house and have the R&D and and driving the technology for what it looks like now versus what they need in a year or two from now. So I don't think there's many competitors that put all that together into one package and have the online capability and then the ability to install, service, monitor that, the online hardware, as well as the actual equipment that the sensors are on and do repairs and get it back up and running. Let's face it. All they really care about, they don't care about sensors, they don't care about anything else they care about is that piece of equipment operating the way it should be. And if it isn't, what do you got to do to get me back operating and keep it running, right? Because their uptime is their goal. And our job is to figure out how to help that customer figure out how to keep uptime by doing all those things. So I think our advantage is we bring all those together into one market offering versus having to have four or five different vendors trying to do that for our customers.
spk08: Yeah, and this is John. I'd piggyback on that by saying that we are putting together an intellectual property portfolio surrounding our asset monitoring capabilities within wind turbines because we do have some unique technology that we're bringing to bear in terms of the whole product offering and the visibility and the real-time notification and dashboards and so forth that we're providing customers with.
spk02: Okay, and then just real quickly, last question. You've thrown out some leverage ratio targets over the next couple years of nearly three times. Is that still attainable in your opinion?
spk03: Yes, I'll address that. Absolutely. We have step-down scheduled in the current leverage throughout 2021. And, yeah, we're going to continue to take, you know, virtually all residual free cash flow and apply it to debt. We did that here significantly in 2020. We'll keep doing that in 2021 and drive that down. You know, historically, that's where Mistrax was over time, you know, down in a two and a half and a three. You know, we won't play cat to a three by the end of 2021, but certainly in 2022, we would get there. But, yeah, we're going to continue to take all, you know, allocate all residual free cash flow the debt service to keep driving that leverage number down.
spk02: Okay, great. Thank you very much. Thanks, Brian. Thank you.
spk00: I am showing no further questions at this time. I would like to turn the conference back to Mr. Dennis Bertolotti.
spk04: Okay, so the whole NISTOS team would like to thank you for joining the call today, and we wish everyone a safe, prosperous, and healthy future. Thank you.
spk00: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and have a wonderful day. You may all disconnect.
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