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spk00: Ladies and gentlemen, thank you for joining MRS Group's conference call for its fourth quarter and year-end 2020. My name is Tawanda, and I'll be your event manager today. We'll be accepting questions after management's prepared remarks. Participating on the call for MRS will be Dennis Bertolotti, the company's president and chief executive officer, Ed Prasner, executive vice president, chief financial officer and treasurer, and John Walt. 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 can cause actual results to differ are discussed in the company's most recent annual report on Form 10-K and other reports filed with the SEC. The discussion in this conference call will also include certain financial measures that were not prepared in accordance with the U.S. GAAP. Reconciliation of these non-U.S. GAAP financial measures to the most directly comparable U.S. GAAP financial measures can be found in the tables contained in yesterday's press release and in the company's related current report on Form 8-K. These reports are available at the company's website in the investor sections and in the SEC's website. I will now turn the conference over to Dennis Bertolotti. Sir, you may begin.
spk03: Thank you, Tawanda. Good morning, everyone. We entered the year on a high note, with strong performance across virtually every key performance metric, as well as with significant strengthening of our core financial condition. On the top line, it was our strongest revenue quarter of the year. In a quarter that is not historically high on a relative basis due to seasonality, revenues benefited from offshore mechanical, longer-running turnarounds, and growth in data services, particularly within PCMS and new century software. Gross profit margin was also up in the quarter to 30.7% compared to 28.3% in the same quarter last year, continuing the favorable trend over the past several quarters. Most importantly, we have now expanded gross profit margin by 100 basis points or more on a full-year basis for the third consecutive year. We also continued to drive down costs, which contributed to improvements broadly across our key profitability metrics, with operating income in the quarter nearly doubling over the year-over-year period and adjusted EBITDA up nearly 22%. And once again, we generated very strong cash flow, with both operating and free cash flow exceeding adjusted EBITDA in the quarter, as well as on a full-year basis. As a result, we actually generated more operating and free cash flow in 2020 than we did in 2019. This was quite an accomplishment, given the significantly lower level of revenue in 2020. This was, in part, attributable to an improvement in working capital, which we'll get more detail on later. The first priority remains using the free cash flow we generate to pay down debt, and by the end of 2020, we have reduced our net debt position by nearly 19% to under $200 million. This was all accomplished while continuing to assure the health and safety of our employees, customers, and vendors. In addition to paying down our debt, we also continued to invest in our sales and marketing infrastructure as we felt it was important to be prepared for the market's return to a more normal level of activity. We have also been making great strides in our expanding Mistrust Proprietary IP, which will position us to have one of, if not the most comprehensive asset integrity service offering in the market for our customers. It is a very strong finish to an extremely challenging year, and it puts us in an excellent position to build upon our success in the upcoming year and beyond. The fourth quarter represents the culmination of the steady progress achieved over the course of the year. adapting to a slowdown in economic activity, volatility in energy markets, and a quickening pace of change across nearly all of our end markets. The demand for services that assure safety, reliability, and regulatory compliance of our customers' valuable assets is on the rise and is being modified and enhanced by lessons learned during the remote working conditions imposed during the pandemic of 2020. The energy market will remain core for us. It is an extremely large market where we have ample opportunity to grow. We believe the changes in the energy market precipitated by the pandemic impact on supply and demand are working to our advantage as they are accelerating changes to which few competitors in our industry will be able to respond. We have been anticipating these changes by expanding vertically beyond NDP into mechanical and other services as vendor consolidation trends continue. We are also addressing rapid shift to new sources of energy by accelerating our horizontal expansion into renewables and especially wind. We are also accelerating development of new product offerings, such as a suite of data services that include much sought after predictive capabilities, which significantly improve efficiency. According to the Deloitte Analytics Institute, The ability to predict failures can increase equipment uptime by 20% and productivity by 25%, while lowering breakdowns by 70% and maintenance costs by 25%. Consequently, we are quite excited about the forthcoming introduction of our insights-based asset protection software ecosystem. The new platform is an integrated suite, bundling our existing data services together with improved connectivity to our customers. The changes we are making are key to profitably growing our energy revenues, expanding market share, enhancing our service offering, and delivering unique mistrust capabilities that meet industry's emerging needs. The sequential revenue growth experienced since the onset of the pandemic in the second quarter of 2020 is clear evidence that this strategy has been successful. We are adapting and changing our offerings in response to customer demand. Our strong relationships and diversified service capabilities helped us win work in a receding market. Renewable energy revenues are picking up, and the promise of more data services, a full line of required services, not just inspection, is attracting a lot of attention. Gross margins are likewise benefiting from our ability to demonstrate how NISTRUST offers customers more value that has been generally available to the market. The goal over the long term is to diversify both our end markets and our proprietary products and services in order to reduce volatility, generate more stable growth, and improve gross margins. As part of that strategy, we believe revenues from oil and gas will grow, but slower than consolidated revenues, ultimately representing less than half our total revenues in the future years, along with improved profitability. In the near term, a continued strengthening of energy prices seem to have stimulated the With demand increasing, there is more talk of a traditional spring turnaround maintenance season, which could materialize for us late in the first and into the second quarter of 2021, probably delayed by the severe weather seen in the Gulf this year. It should also provide the opportunity to exit the later part of 2021 at a revenue run rate approaching that of fiscal 2019. In aerospace, we continue to have success penetrating the private space flight operator and military market, while the commercial market works through its near-term challenges. Aerospace is a strategic market where we believe we can generate strong growth through horizontal expansion and increased penetration to adjacent markets and through the introduction of bundled services that are in strong demand. It is a large market where we can achieve better than corporate average margins, in which we are confident has an excellent long-term growth prospects. We see it generating a larger portion of our revenues over the next several years. Onstream, our midstream inline integrity testing business, had a very good year in 2020. This was due to its introduction of tools for larger diameter pipes, which is increasing its addressable market, as well as continued penetration of the U.S. market as we first design into our acquisition plans. Margins at OnStream also remain above the corporate average. OnStream is strategic not only because it serves a large and less volatile segment of the energy market, but also because it is another vertical in which we are able to grow by adding value through specialized data services. In MISRUS Digital, our mobile platform continues to evolve into more than an inspection tool. While prevailing economic conditions may have slowed new adoptions, They are also accelerating the pace of change across industries and creating more robust users of our digital platform. We are confident that owners in all of our end markets are anxious to adopt our new technology, which has already demonstrated the ability to improve both the productivity and efficiency of its users for not only inspection, but also for related services. Over the next few years, we believe we can significantly grow our digital revenues, which will represent an increasing proportion of our total revenues as well. Consequently, by staying focused on what customers will need in this changing market, we are confident that the hard work put in this year has positioned Mistrust for a strong rebound in fiscal 2021. For instance, we have created the right mix of resources to offer turnkey solutions to problems which many markets with significant assets never envisioned. For instance, in the wind turbine market, We can offer services to monitor, inspect, and repair the blades, housing, and hubs of those turbines. Probably most exciting, the beta test that we are developing using remote sensing technology that identifies potential damage in real time are demonstrating value with our customers. This will provide dramatic improvements compared to the slow, cumbersome, and expensive inspection and outdated monitoring methods currently in use. A new era for mistrust is now beginning. Over the longer term, we believe we can grow and diversify mistrust to generate more stable financial performance. All of our efforts today are positioning us for the markets of tomorrow. While fiscal 2020 may have been a pause in our growth, which was driven by the COVID-19 pandemic, it did not stop us from making great progress strengthening our organization to capitalize on existing and emerging opportunities. At the same time, we strengthen our financial condition. Another competitive advantage in an industry where owners are consolidating their vendors and the financial viability of their partners is becoming more and more important. Fiscal 2021 is setting up to be a strong rebound year. In newer, faster-growing markets such as space and alternative energy and data, we have already established a market presence and are building awareness around our brand and our offerings. We are essentially on the ground floor in these industries, building relationships and using our experience as a springboard to keep our products and services ahead of the competition. In addition, it is important to note that our existing markets remain very large and offer plenty of growth potential by growing share and introducing new solutions. We are confident in achieving steady improvement over the course of this year, especially in the second half of 2021. although we expect first quarter revenues could be relatively flat to slightly down in the fourth quarter of 2020 due to lingering COVID effects, weather, and usual seasonality. This optimism is not only due to anticipated recovery in our end markets, but also due to our strategic initiatives to grow in adjacent and new markets, introduce new products, and grow share, particularly in the oil and gas markets. Because of the various efficiency and productivity improvements achieved, we further believe our model will enable us to maintain our strong gross margins, keep costs under control, and grow the bottom line faster than ever. I would now like to turn the call over to Ed to give you more detail on our financial results for the fourth quarter and full year of 2020. Thank you, Dennis.
spk04: We grew our key performance measures significantly in the fourth quarter, once again illustrating how our asset-light strategy consistently generates strong cash flows even in the most challenging of times. Adjusted EBIT was up nearly 22 percent to $17.6 million. Operating cash flow of $26 million was up approximately 40 percent, and free cash flow was up an even more impressive 55 percent to $21.2 million for the quarter. we converted over 100% of our adjusted EBIT into free cash flow in the quarter, and that's quite a feat. For the year to date, we also converted over 100% of our adjusted EBIT into free cash flow. Again, that's rather remarkable and attributable in part to a reduction in trade receivables, a benefit from the CARES Act, which allowed us to defer certain payroll taxes, and a reduction in capital expenditures. Given our expectations for 2021 to be a growth year, We expect the cash conversion to adjusted EBITDA to trend back down to our historical norms of averaging about 50%, mostly due to working capital considerations as we invest in growth. Back at the top line, the fourth quarter was our strongest revenue quarter of the year, with nearly 9% sequential growth from the third quarter of 2020. It was also the third consecutive quarter in which we met or exceeded our revenue guidance. As Dennis noted earlier, energy markets have been recovering and are currently stable. Longer-running turnarounds supplemented our steady run and maintain business in the fourth quarter of 2020. While hours worked remained below the year-ago levels, they did reflect sequential improvement over the third quarter. Revenues in the quarter also benefited from growth in alternative energy, such as wind turbines, in addition to gaining momentum in the private space market. Offsetting these improvements were continued weakness in commercial aerospace, especially in Europe. However, international revenues in the quarter included improved turnaround volume in Germany, as well as favorable foreign currency translation. Products and systems also turned in a solid quarter, as increased infrastructure spending is leading to growing demand for our sensors and related technology, primarily in the transportation infrastructure market. And as Dennis mentioned, but it's worth repeating, Gross profit margin increased 240 basis points in the quarter after expanding 200 basis points the last quarter. As a result, we have recorded a 100 basis point or greater improvement in gross margins for the third consecutive year on a four-year basis. Gross profit margin improvement is attributable to productivity improvements and a favorable sales mix. Some of the gross margin benefit can be attributed to lower 2020 portion of revenues which comprises pass-through costs, that is, expenses we incur and bill at essentially costs, such as travel and per diems. As COVID restrictions loosen and revenue grows in 2021, gross profits should follow suit, but gross profit margin improvement may be somewhat muted as the increased pass-through cost as the year progresses due to the increased turnaround activity expected in 21. Selling general and administrative expenses were down nearly 5% compared to the year-ago quarter, These costs decreased on a relative basis less than in prior quarters of 2020, as certain cost reductions taken at the inception of the pandemic, such as temporary salary reductions, have been restored, effective at the beginning of Q4 2020. We constantly calibrate our overhead costs to be in line with our expected revenue level. Given our exceptional control of overhead throughout 2020, Operating income was $4.7 million in the fourth quarter of 2020, an increase of nearly 100% over the prior year period. And non-GAAP operating income more than doubled to $6 million for the fourth quarter from $2.9 million in the same quarter last year. Looking back on full year 2020, it is important to keep in mind that although revenues were down nearly 20%, gross margins expanded by 110 basis points to 30.1% for 2020. And cash flow was up significantly from fiscal 2019 as well, with operating cash flow up 15% to $68 million and free cash flow up 44% to $52 million. And with that reduction remaining the priority use of our residual cash flow in 2020, as well as continuing into 2021, we were able to reduce debt by $36 million in fiscal 2020. Given the significant cash and cash equivalents buildup, During 2020 in our international locations, we reduced net debt by $45 million in 2020 to under $200 million at December 31, 2020, a nearly 20% reduction. We were in compliance with all of our bank debt covenants at year-end. Specifically, the funded debt leverage ratio at 12-31-2020 was approximately 4.8 times versus an allowable 5.25 times. There are step-downs in the maximum funded debt leverage during 2021, and we expect to remain in full compliance with this covenant and all covenants throughout 2021. Our goal is to achieve a funded debt leverage ratio of three times by the end of 2021. We are highly confident in our sustainable business model and remain firmly committed to carrying out our strategy both today and over the long term. And with that, I will now turn the call back over to Dennis.
spk03: Thanks, Ed. Let me conclude today's prepared remarks with our outlook for 2021. Our business has been recovering over the past two quarters from the low experience in the second quarter of 2020 when the effect of COVID-19 was most impactful to our financial results. Although energy prices and demand are currently stable, the ongoing COVID-19 pandemic continues to impact our two largest markets. We expect annual revenue for this year to be higher than in 2020. However, the first quarter of 2021 revenues will decline modestly compared with those of the prior year to a full quarter's impact of COVID-19 and 21 as compared to a partial month in 2020. Moreover, our first quarter 21 revenue will be lower sequentially compared with the fourth quarter of 20 due to typical seasonality patterns in the first quarter of any given year, not to mention the recent severe weather impacts of the Gulf region. We are optimistic that the revenue will continue to rebound once we reach the second quarter of fiscal 21, and therefore expect that revenue will commence year-on-year improvements beginning in the second quarter of 2021, although we expect that year-on-year adjusted EBITDA improvements will commence beginning in the first quarter of 2021. This outlook is contingent on continuing macroeconomic stability, including continuing stabilization in the crude oil markets, timely and effective implementation of COVID-19 vaccinations in 21, and no new or increased stay-in-place mandates resulting from increased spread of COVID-19, which would impact our ability to work as a critical service provider. We believe that as we move deeper into 21, market conditions will improve, particularly in the oil and gas sector. But these remain challenging times. MISRUS continues to play offense by growing share and investing in our sales, marketing, and new technology initiatives, which provide the innovation that will drive MISRUS and our industry forward. Our goal is to bring value to our customers, knowing their challenges will evolve as safety and compliance standards continue to change with an evolving worldview. And for new and emerging industries, such as alternative energy, is a brand new world where they are relying on the experience and combined skills of trusted advisors such as Mistrust. The large layoffs seen in many of our customers have made them more dependent than ever on complex vendors such as Mistrust to operate efficiently. As always, Mistrust's goal is to remain at the forefront of the industry and to drive value for our shareholders. But before taking your questions, I'd like to thank all the NISTROS employees once again for your understanding and leadership shown in helping us through this crisis by continuing our solid reputation for safety, quality, and innovation, all while providing outstanding customer service and dedication during these extremely trying times of this past year. Please continue to show the same concern for others and leadership you have shown to all of our stakeholders in the future. Caring connects works. Tawanda, please open up the phone lines.
spk00: Thank you. Ladies and gentlemen, to ask the question, you will need to press star then one on your telephone. To withdraw your question, press the pound key. Again, that's star one to ask the question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Sean Eastman with KeyBank Capital Markets. Your line is open.
spk01: Hi, guys. Congrats on a really strong finish in the fourth quarter. It's great work. I guess first one for me, I'm just curious what the dialogue with customers is like right now. I mean, are they mostly focused on making sure, you know, you guys are going to have the capacity to support them as these facilities start to run harder? Or, you know, is the dialogue more so focused on, you know, trying to do things differently in terms of driving efficiencies through sort of new technologies and data. That would be an interesting dialogue.
spk03: Okay, Sean, I'll take it, and John will probably jump in. On capacity, the one thing that we didn't do is we didn't cut into our business when 2020 first popped up with COVID. We didn't cut back on our sales or marketing. We pushed in on that, and we didn't do anything on the technicians. We just modified the hours everyone worked according to the work that was out there. and we took other appropriate cost cuts. So for the most part, we have all the bodies we had before this started. We just have a lot less work for them. We trend our hours every week, both in unbillable and billable hours, and we trend how many people we had out. We peaked, Sean, at about 22% of our technicians that were billable in North America during the height of the COVID, late March and April. We're down now to sub 2% or something like that. It's minor. but the hours were always more than double whatever we were out in billable folks. So what happened is our customers really tried to get people back on as fast as possible. They didn't want to lose as much as they could from the vendor base ourselves and any other vendors, but they really needed the amount of hours. So we have the ability to come back and handle whatever hours that we see coming at us, even as we're growing here into the spring. Our bodies are there. You always need some supplement of some people or specialty folks, but We do a good job of every week we call every general manager. We get everyone on both an international and a domestic call, and we talk about resources and where we are short and where we're long. And we have our internal recruiting folks doing nothing really but moving bodies internally. So we feel very good about our capacity. To get to your second question on efficiency and technology, absolutely they're starting to think more and more about how do we do more, how do we – predict more before the turnaround, how do we do online monitoring before the turnaround, how do we minimize everything? Especially in 2020, the turnarounds were really minimized by the hours, but there's a lot customers are thinking about now about gaining efficiencies with our mobile solutions and just all the online capabilities. That's why things like the wind turbines are new. People still would go and look at a turbine every five years or whatever their schedule was, the day after you inspect it, something could happen and it needs repair again. With the new things that we're working on, we can tell them when it happens immediately and go do the inspections on what is most in need of a repair. I don't know, John, if you want to add anything to that.
spk05: Yeah, Dennis, I would, I think I agree with everything you said, but in addition, I think, as you said in your prepared comments, we spend an awful lot of time during 2020 enhancing the capabilities that we have and being able to be in a position with customers to produce value that we're being told by them, they're not seeing from others. So things, as Dennis said, like the digital, the mobile solution, you know, it's a differentiator. The fact that you get the visibility, the productivity from our solution and our workforce does. In fact, we've even got other trades, which customers have asked the other trades to use the Mistras Digital mobile solution. and they're using it with good success to drive additional productivity. That's just an example of the innovations that we've been bringing out to bear. So I think that that's really resonating with customers.
spk01: Okay, interesting. I'm just curious on the margin trajectory in the business. I mean, if we're back at that 2019 revenue run rate in 2022, I mean, do you anticipate the margin profile to be similar as what you guys did in 2019 or better or worse? I'm just kind of curious how to think about that.
spk03: Yeah, Sean, I'll let Ed follow me up, but I'll tell you the improvements we're seeing on gross margin. Maybe not all of them in 2020 because some of them are just the differences of pass-through and per diems and things like that. But we believe a good part of everything we've been doing in gross margins is sticky. It's a reflection of what parts of the business we're growing up and where we're focusing and the customers and everything else. So we believe we're not going to be slipping back to gross margins of the past. We're going to keep growing from where we are. Is there anything else you want to add?
spk04: Yeah, no, definitely. That's true. Absolutely. And again, the mix is very important. Again, the relative level of pass-through activity happening in a given period can absolutely start to affect your margins a little bit. Certainly, we're going to keep the overhead cost control and calibrate cost to revenue going forward. So, yeah, we do believe the EBITDA rebounds a little quicker than the revenue does here in 21. But, yeah, we definitely – you know, have aspirations to keep improving. But, again, it's not always linear. Every quarter is not going to move exactly in lockstep, you know, with the quarter before it. But, no, but, yeah, we definitely feel that those margins are certainly attainable back in 91 and 19, rather, and going forward.
spk01: Okay, great. One last quick one for me. I mean, you know, if we're exiting 21 at, you know, at the 2019 revenue run rate, what does that assume around commercial aero?
spk04: Go ahead, guys. Yeah, I'll start off there. Yeah, so what we're saying is if you were to sort of annualize the fourth quarter of, you know, 21, it'll, you know, look a lot like 19's level. We have in all of our, you know, budgeting and forecasting and planning, we have arrow lagging the oil and gas recovery, as most people do. You know, commercial in particular might be lagging. You know, we believe the defense and then the space, you know, might be moving a lot quicker and you know, buffering some of the weakness in commercial. But we have aerospace, you know, lagging a little further along before it gets back to 19. We're not suggesting that aerospace gets there in 21, but versus oil and gas gets close. But Aero will definitely lag a little bit into 22 before it gets back to 19 levels. Okay, very helpful.
spk03: Thanks for the time, gentlemen. Thanks, Sean.
spk00: Thank you. Our next question comes from the line of Brian Russo with Sedoti. Your line is open.
spk06: Hi, good morning. Morning, Brian. Hey, Ed, you mentioned your leverage ratio targets of three times by 2021. Could you just discuss the step-downs in your interest, expense, and borrowing costs as leverage falls?
spk04: Sure, absolutely, Brian. So, yeah, so the biggest break in the pricing grid would be once we're below a 3.75 leverage, which is two quarters from now, there's a huge step down in interest from the current, you know, 5.15 down to a 3.5. So there's a huge reduction. We won't get there until the, you know, effectively the fourth quarter of this year. The pricing goes into effect prospectively after the, you know, the new leverage is achieved. So you'll have fairly similar interest, slightly less, you know, debt, but similar interest rate for the next, you know, for three quarters of of 21. It'll drop down in the fourth quarter. So you'll have a modest reduction happening. But then from that point forward, you have a huge reduction going forward once you're down to that next pricing grid. There's a big drop from 515 down to 35 later this year as we get below a 375 leverage.
spk06: Got it. Great. And then just your comments on the SG&A. Do you have any SG&A as a percent of revenue targets, you know, as revenue increases with the understanding that, you know, you've retained a lot of your sales and marketing? You know, I think it's in the mid-20% that you're in, 20. Is that, should the SG&A track revenues or should revenue growth exceed the SG&A growth?
spk04: It's definitely the latter there. When we're budgeting and forecasting, obviously we want SG&A to grow at only a fraction of revenue. In some periods, it's even. It should be growing a fraction, a half, or only a quarter of the revenue increase. Right now, I think we ended Q4. SG&A is around 25% of revenue, approximately. Revenue will be scaling up next year. SG&A will not scale that much higher. I would look at it where that SG&A may stay flattish to creeping up slightly next year. revenue will be outpacing that. So hopefully, you know, as the year goes along, that number dips into, you know, a mid-20-ish percent. Aspirationally, we'd love to see that get to a 20 or lower, but it's going to take some, you know, multiple cycles to get to that level. But the run rate at that now is a pretty good number. There'll be, you know, some slight creep in that number as 21 goes along. But again, as we've been saying for, you know, really all of 2020, we'll continue to calibrate the cost footprint to the revenue level at hand. So as the, you know, contribution margin dollars come back in as the gross profit dollars come back in, then we'll, you know, we'll continue to let some of the costs come back and grow as we, as we said on the call, we're, you know, we'll invest in things, marketing and sales and whatnot. So we need to fuel that investment and that's going to come from top line. That's why we're pushing gross profit so much that allows us to, you know, to invest in the business. But right now, it's a pretty good indicator going forward. It'll creep a little bit up, but it's a pretty good range right now.
spk06: Okay, great. And the earlier comments on ONG to be below 50% of the sales mix over time, I think at year-end 2020, it was at 57%. Aerospace and defense was at about 12%. And, you know, power and renewables was somewhere in the mid-single digits. How fast do you think that sales mix can evolve?
spk03: So, Brian, it's Dennis. You know, that for us is our aspirational goals. That's more of a three- to five-year. I believe in three to four years we'll have the balance of gas and oil under 50%. This is without acquisitions or anything else. This is strictly organically. And it's by still growing gas and oil, but we believe the other markets in space, aerospace, you know, renewables and energy and other things that we're already in and can grow into like infrastructure, we believe that'll start taking more and more of it. Those three primarily will take more and more and chip away at that 50 some percent lead.
spk06: Okay, great. And then just lastly on, on the renewables and the remote sensors on, on wind blades, have you been involved in the Texas market yet or is that a, a market opportunity along with the Gulf and the South. You know, and then if you could comment on what type of work you're doing on the turbines as well.
spk03: Sure, I'll throw that to John.
spk05: He's more involved in it. Yeah. Yeah. Hi, Brian. This is John. So absolutely. So we've been installed on a number of wind turbines, primarily in the Southwest, including Texas during 2020 and through today. And so we were there as the, you know, during the big freeze and we incidentally could hear what was happening on the, on the blades during the big freeze, um, and, uh, able to impart this, this information to customers. So, uh, absolutely. It's, it's part of, uh, part of a global market that we're looking to, uh, to really serve. And in terms of what we're, you know, what we're doing is we're monitoring, primarily, but not exclusively, wind turbine blades to really hear the effect of impact damages. It could be lightning strikes. It could be ice falling. It could be some other impact to the blades. And those impacts tend to cause damages almost immediately upon impact. And oftentimes, as Dennis said, those impacts and the resulting damage are undetected until the next inspection occurs. But the great thing about our technology is we can hear the impacts immediately and we can hear the follow on effect of the impacts in terms of what's happened to the blades in terms of what type of damage has occurred immediately and how that's evolving over time. And we're able to impart that knowledge to our, uh, our customers so that they can use that data to determine if they can continue to run safely. That is certainly don't want to run to failure because that could be catastrophic in terms of cost and damage. and they can avoid those catastrophic costs by use of our technology and our know-how.
spk06: Got it. Great. Very interesting. Thank you very much. Thank you. Thank you. Thank you, Brian.
spk00: Thank you. As a reminder, ladies and gentlemen, that's star one to ask the question. Our next question comes from the line of Mitch Penharo with Sturtevant & Company. Your line is open.
spk02: Hi. Good morning. So I had a question, a couple questions here. Why wouldn't the revenues start annualizing at 2019 levels earlier than the fourth quarter?
spk03: So the answer is we believe it could happen as early as in the third quarter. We know it won't be at that rate in the first quarter and probably not in the second for 2019, but we believe it's going to keep creeping up. It's a function of vaccinations and people getting out and jumping back in their cars and demand on the inventory going down and power and everything else starting to get back to a normal. So it's not so much us, it's really just waiting for the energy and powering all those markets just to get back to a normal consumption rate, which we don't think is going to happen until sometime. I don't know if that's June 1st, July 1st, or what the particular date is, but sometime by the time you're getting to be mid or third quarter, we think we'll be getting back to a more normal.
spk02: Okay, that was helpful. Now, how does the revenue mix factor in? I mean, aerospace particularly, your international segment's been weak. Is that – I mean, are we going to see sort of a recovery across all segments equally, or is this going to be fueled more by your, you know, sort of your energy and customers and less so by aerospace as we, you know, get into the fourth quarter? Is there going to be an even sort of contribution, or will there be lag?
spk03: Well, I think – Yeah, I think you're right in the second half. I think you're going to see probably gas and oil getting back faster in aerospace, but like we say, we're doing some things in aerospace where we believe on the non-commercial side, on the military and the space side, we believe there we've got a lot of great traction and that can help us offset what you see. Aerospace is going to be slowest internationally to catch up. Domestically, we're seeing that we have some signs of a getting back to a normal, but it won't be back there yet in 21, one way or the other. But we're, we also see the things such as the wind and, and all the other parts of gas and all and everything else catching up a little bit faster. So, you know, it won't be a 2019 as far as the percentages go, but we're going to hopefully have our revenue back to where it was in 19 with just different percentages from the different industries as they, they come back online.
spk05: Yeah. And, and then it's just to add to that, um, On the international side, I mean, we still have Europe in the midst of lockdowns. In fact, lockdowns are increasing in some countries right now. So it's really hard to kind of model out when that's going to relax. You know, vaccine rollout pace has been much slower in Europe than it has in America, for example. So I think those are some of the variables we're trying to understand as well.
spk02: Okay. Thank you. And then When it comes to digital, it's right now – I mean, can you talk a little bit about what percentage of your customers are using your digital services and by what sort of end market they're currently at and where you think – you know, it'll head to?
spk03: Sure, I'll let John answer that one.
spk05: Yeah, so in terms of mobile deployment, really where we're focused right now is oil and gas primarily, but we are looking to expand that. Within oil and gas, we've got some initially very good penetration across several major customers, and typically it's at one or two sites within their fleet and looking to roll out beyond that. as we get into 2021. I think 2020 was really a year of proving that technology works. I think 21 will continue to be that with some of the customers that were going into their first sites and demonstrating the strong productivity enhancement that we bring, the strong visibility that we bring, as well as, as I said earlier, bringing the other trades on. so that visibility and productivity is multiplied, not only across the NDT trade, but across those other trades as well. So I think that 2021 is really going to be a very exciting time in terms of substantial rollout compared to where we have historically been. And then, you know, for Mr. House Digital, we use that term kind of broadly because it's not just the mobile app, even though that's substantial. You've also got... other applications for our in-house labs where we can track and trace parts, status completion, and as we work multiple stages of different activities, different mechanical activities, and help to achieve modification of those parts to customer specifications, we'll be able to track that as well. And that's a new application that's coming on soon.
spk03: Yeah, Mitch, the only thing I'll add is sentences. 2020, it was really tough to get on site, go see customers, prove out the solution, or even just, you know, add any extra bodies to the site to be the SME subject matter experts to stand it up and get it running. So it kind of put a pause on it. But the funny thing was everyone wanted more data from where they were working. They just didn't really want to spend a time effort or bring extra bodies on to do that. So we see 21 as a good impetus to get those kind of things going.
spk04: And finally, Mitt, just to add, you asked about relative size of this. I mean, this is a huge opportunity that we're all really excited about. If you added together all of our current, you know, Mishra's digital, our software, our sensors, remote monitoring, you would probably barely get 10% of our current revenue, but it's got an incredible upside to us in growth. As you're hearing, we're really just getting started with it. Incredible upside. It's a very small piece of our business, and we believe it will grow, you know, rather rapidly and become a much bigger part going forward now that we're past proof of concept and testing and demos and into real commercialization, it's going to grow. And it's currently coming from a very small base, but we're very excited about it. Okay.
spk02: Thank you. And then, actually, just one more question, Dennis, for you. Where do you think CapEx is going to fall, and is there going to be any seasonality to the CapEx?
spk03: So, you know, It's a good question because a lot of people wonder if we starve the business in any way, CapEx or something like that, to get our cash flow. We really didn't. I mean, we moved CapEx along to parts of our business where we needed it. We were careful about buying new things, but we didn't starve anything, so we don't think there's going to be a huge rebound. In fact, it'll come up, but it's still going to be sub $20 million, I think, is what we've got planned for 2021. So it's not going to be... where we have this pent-up demand for CapEx whatsoever in 21. Okay.
spk02: Thank you for your time. Appreciate it.
spk03: You got it. Thanks, Mitch.
spk02: Thank you.
spk00: Thank you. I'm sure no further questions in the queue. I would now like to turn the call back over to Dennis for closing remarks.
spk03: All right, everybody. Look, I appreciate the time everyone took to spend with us today. The whole Mistrust team would like to thank you for joining our call today, and we wish everyone a safe, prosperous, and healthy future. Thank you again, folks.
spk00: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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