Thank you for joining Mistras Group’s Conference Call for its Third Quarter Ended September 30, 2023. My name is Michelle, and I will be your event manager today. We will be accepting questions after management’s prepared remarks. Participating on the call from Mistras Group will be Manny Stamatakis, the company’s Chairman of the Board and Interim President and Chief Executive Officer; Ed Prajzner, Senior Executive Vice President and Chief Financial 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 causing 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 the conference call will also include certain financial measures that are not prepared in accordance with 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 the company’s related current report on Form 8-K. These reports are available on the company’s website in the Investors section and on the SEC’s website. I will now turn the conference over to Manny Stamatakis.

Good morning, everyone, and thank you for joining us today. In my October call, I provided a broad overview of the Board’s strategic vision for Mistras. Today, in addition to sharing more about our financial performance, I want to talk about the future of Mistras as it relates to the status of Project Phoenix. Our results for the third quarter were in line with our expectations for revenue and adjusted EBITDA. Revenues were up, and I am particularly pleased with another quarter of growth in our commercial aerospace and Data Analytical Solutions businesses, which we believe are only beginning to blossom. Gross margin expanded while selling, general and administrative expenses contracted to help us achieve our adjusted EBITDA expectations for the quarter. The improvements in gross margin and reduction in SG&A reflect the initial impact of Project Phoenix, which we expect to continue in 2024 and beyond. As also announced yesterday in a separate press release accompanying the earnings announcement, subsequent to September 30th, we completed additional actions associated with Project Phoenix that will further reduce overhead and improve sales efficiency. Ed will provide more details on that later. But first, I would like to take a moment to reflect on the year-to-date results of the company, which reflect low single-digit revenue growth, a slight gross profit margin increase, and nearly 10% EBITDA growth that the EBITDA growth was driven by savings associated with Project Phoenix. In 2023, the company decided to make changes to key senior management positions. These changes were instituted by the board in conjunction with Project Phoenix to strengthen the organization and to enable us to better execute our Project Phoenix initiatives to help accelerate profitable growth by identifying meaningful margin improvement opportunities and steps to achieve sustained cost savings. The meaningful and timely contribution of Project Phoenix-related actions helped to offset softness in revenue and profitability experienced in 2023, and will also contribute a material sustained benefit to the company into 2024 and going forward. Project Phoenix’s overall target is to eliminate waste and redundancy and to improve efficiency with the goal to reduce SG&A to approximately 21% of total revenues by the end of 2024, primarily through a rationalization of the overhead workforce, including a targeted 15% reduction in administrative headcount, but without adversely impacting the company’s technician base or ability to support operations and services to its customers. Together with the other initiatives implemented, we expect total Project Phoenix savings and other benefits of approximately $30 million in fiscal 2024. These income from operations improvement initiatives should not be viewed as reactive measures, as we are just as committed and plan to make more proactive, strategic, and robust investments into growth initiatives moving forward. While we plan to reinvest some of our Project Phoenix savings, we still expect fiscal 2024 adjusted EBITDA will be greater than our previous all-time high of $88 million. I am confident that these initiatives will accelerate profitable growth, as well as sustain cost controls and result in margin expansion going forward. Equally as important to the profitability of Project Phoenix is the behavioral discipline, accountability, and energy that this project has brought to the reshaped senior leadership team of the company. I am pleased to be leading the company at this crucial juncture, supported by a highly skilled, motivated, and invigorated senior leadership team. Speaking on behalf of the board, I am optimistic for the future of the company and believe that the implementation of these initiatives will create real value for our shareholders. Now I’d like to turn the call over to Ed for his update on our recent results and a little more detail on Project Phoenix.

Thank you, Manny, and good morning, everyone. It was another quarter of meaningful progress and significant change for Mistras. And Project Phoenix will fundamentally change our company and significantly increase shareholder value. But before highlighting these changes, let me provide some highlights for the quarter. For the third quarter of 2023, consolidated revenue was up slightly, primarily reflecting growth in oil and gas, in addition to continued strength in several of our key growth initiatives, particularly commercial aerospace and Data Analytical Solutions. I would also note that revenue in our International segment was up 21% in the quarter, driven primarily by a strong turnaround market and increased aerospace and defense volume. Gross profit margin expanded 20 basis points as compared to the prior year quarter and was also up 210 basis points on a sequential basis, driven primarily by a favorable sales mix and lower healthcare expenses, somewhat offset by inflationary pressures, including rising energy costs and incremental subcontractor costs. Selling, general and administrative expenses were down 3% compared to the third quarter of 2022 and were also down 4.7% sequentially from the second quarter of 2023. As Manny mentioned earlier, this decrease largely reflects the impact of Project Phoenix and ongoing cost controls to achieve sustained overhead savings. Loss from operations was $4.7 million for the third quarter, yet income from operations before special items totaled $11.8 million on a non-GAAP basis when excluding the goodwill impairment charge and reorganization and other related costs associated with Project Phoenix. The non-GAAP income from operations represents a 19% increase as compared to the prior year period. Net loss for the third quarter was $10.3 million, or negative $0.34 per diluted share, before adjusting for the same aforementioned items, while adjusted EBITDA in the quarter was up 12.5% to $20.9 million, meeting our expectations. The net loss in the quarter was largely attributable to a non-cash impairment charge of $13.8 million related to our International segment, stemming from macroeconomic factors in Europe, before consideration of the impact of any prospective Project Phoenix benefits. I will provide more detail on this item in a few minutes. Net income on a non-GAAP basis, excluding the aforementioned special items, was $5.6 million or $0.18 per diluted share for the quarter. Our net cash provided by operating activities was $10.7 million for the first nine months of 2023 compared to $10.5 million in the prior year period. Free cash flow was negative $5.6 million for the first nine months of 2023 compared to positive $0.9 million in the prior year period. This decrease in free cash flow was primarily attributable to an increase in capital expenditures during the current year and higher than normal accounts receivable balances as of September 30th, due to the timing of projects in the third quarter. This $6.6 million increase in capital expenditures during the current year reflects investments in our shop laboratories and in Data Analytical Solutions offerings to foster future revenue growth. Gross debt increased by $10.2 million during the quarter ended September 30, from $183.7 million as of June 30, 2023 to $193.9 million as of September 30, primarily due to the aforementioned factors impacting cash flow. Our trailing 12-month bank-defined leverage was just under 3.5 to 1 as of September 30. Accordingly, we are pushing back our timetable to achieve a leverage ratio of 3 to 1 or lower from our previous December 31, 2023 target to an expectation of that being achieved in early fiscal 2024. As I referenced earlier, we incurred a non-cash impairment charge of $13.8 million in the quarter due to decreased gross margin in the current period as a result of inflationary pressures and rising energy costs impacting our international reporting units operations. As a result, we performed an interim quantitative goodwill impairment test during the third quarter of 2023. This decreased gross margin, in addition to higher interest rates in the current period, contributed to an unfavorable decrease in this reporting unit's value, which caused this impairment charge of $13.8 million, which was recorded within the International segment of our business. Excluding this non-cash impairment charge, the International segment achieved positive non-GAAP operating income as well as positive EBITDA for both the three months and nine months ended September 30, 2023, and has also experienced strong growth over the prior year comparable period. We are optimistic for continued growth in this business in 2024 and beyond. Despite this economic headwind caused by this non-cash impairment, we will also benefit from pricing and cost improvements as part of Project Phoenix initiatives, which will be implemented during Q4 for International. The reorganizational cost of $2.7 million recorded during the quarter relates to professional fees and certain restructuring charges associated with the changes made to our organizational structure. In the third quarter of 2023, these charges included severance costs associated with the transformation of our Products and Systems segment as announced back on October 2nd. Before providing additional data and details on Project Phoenix, I would like to highlight that our Data Analytical Solutions revenue, which has experienced growth of nearly 16% for the year, is experiencing strong growth throughout all of 2023, and we believe this provides customers with a significant benefit achieved through data analytical procedures, which in turn transforms the data into actionable information, which our facility operators and our customers can use to maximize safety, enhance their productivity, and optimize their budgets. But now let me provide a little more detail on Project Phoenix. A brief overview of actions taken thus far are as follows. First is strategic pricing, wherein we have developed and will further enhance a proactive structural pricing strategy to address inflationary costs being experienced within our business. This is the commercial function of Project Phoenix, which we mentioned earlier. Secondly, this reduction to overhead, our goal is to reduce overhead, as Manny said, to approximately 21% of total revenue by the end of 2024, primarily through a rationalization of the overhead workforce, including a targeted 15% reduction in administrative headcount without impacting the company’s technician workforce base or our ability to support operations and service our customers. And finally, the new leadership as a part of our transformation plan to improve shareholder value by lowering SG&A overheads, improving free cash flow, and accelerated growth, the board made recent changes to senior leadership within the company to further strengthen the organization and enhance the execution of the various initiatives comprising Project Phoenix. We anticipate the new commercial focus, which emerged from Project Phoenix, will help drive organic revenue growth in 2024, leading to a record adjusted EBITDA of greater than $88 million, primarily attributable to a significant increase in operating leverage arising from a meaningful reduction in overhead combined with profitable growth. More immediately, however, we are lowering our guidance ranges for fiscal 2023 with full-year revenue now expected to be between $695 million to $705 million from a previous $710 million to $720 million range, and adjusted EBITDA is now expected to be between $65 million and $68 million from a previous $68 million to $71 million range. The reduction in revenue and EBITDA are due to lower than previously forecasted fourth quarter results. Free cash flow guidance is also being lowered to between $7 million to $10 million from previously $23 million to $25 million range, which had excluded certain cash expenses incurred to achieve the cost savings of Project Phoenix. This reduction in free cash flow guidance was due to an adverse day sales outstanding and buildup of accounts receivable and the incurrence of these cash expenses to achieve the Project Phoenix cost savings, and to a lesser extent, the increased capital expenditures to foster revenue growth. We anticipate modest single-digit revenue growth in 2024, yet a significant expansion in adjusted EBITDA attributable to operating leverage and the ongoing benefits of Project Phoenix. Accordingly, we expect to generate an all-time adjusted EBITDA in fiscal 2024. This outlook includes approximately $20 million of incremental benefit from Project Phoenix in 2024, and this detail was delineated in a separate press release issued yesterday, which accompanied the earnings release, as Manny alluded to. Project Phoenix provides a roadmap for sustained cost savings and increased profitable growth with the ultimate goal of driving bottom-line improvement and increasing shareholder value. After thorough planning, we are now implementing or have implemented many of its initiatives, which are yielding immediate benefits. We appreciate your continued support and expect to reward your patience with significantly improved results in 2024. At this time, I would like to turn the call back over to Manny for his closing remarks before we move on to take your questions.

Thanks, Ed. The successful implementation of Project Phoenix will stabilize our core business and allow us to expand and achieve further successes in our growth areas, and I am confident that management will achieve these objectives. Specifically, I anticipate that Project Phoenix will lead to the following results. Stabilization of our legacy oil and gas business, wherein we can maintain if not gain market share in an otherwise mature market, while yielding better economic returns through a combination of strategic pricing actions, a lower-cost footprint, and a comprehensive productivity and efficiency improvement plan. In addition, in 2024, the company will be making increased investments in our key growth initiatives. We will be targeting investments in our Data Analytical Solutions and in-line pipeline inspection offerings, as well as our aerospace and defense. We already have a significant presence and are rapidly expanding in all of these markets. Through organic growth strategies, we intend to invest in each of these markets to capitalize on the growing demand for better and more efficient technology. Our data analytical proprietary software is currently analyzing over 1 million assets in over 500 plants. Our target is to increase our revenue in this sector of higher margin business by 15% to 20% CAGR over the next three years. These solutions will enable our customers to better pinpoint when and what actions should be taken to protect and preserve their assets, resulting in meaningful cost savings. I’m very pleased to be serving Mistras at one of the most pivotal junctures in the company’s history, and I am confident in the decisions the Board has made and the actions that management will execute on. I believe this will lead to significantly improved results. We hope this, in turn, will restore investors’ confidence in Mistras’ proven ability to create shareholder value. Finally, as I indicated previously, one of my key focuses for 2024 will be to identify and engage the right individual with the right leadership and skill sets to lead our reinvigorated company forward. We plan to engage a leading executive search firm in the near future to assist us with this most important objective. At this time, I would like to ask the operator to open the call up to your questions.

Thank you. Our first question is from Chris Sakai with Singular Research. Your line is open. Please go ahead.

Hi, good morning. I wanted to ask about Power Generation & Transmission and Other Process Industries. It looks like there was a decline there in both of those segments for the quarter one year ago. I wanted to ask what was going on there and why was there a decline?

Sure. I’ll take that one, Chris. That’s a drop-off of a long-term recurring contract, new construction bills happening that’s dropping off. So that was expected. We’ve been envisioning that. That was actually a delayed exit. But, yes, we’ll be replacing that with new contract work we’re going after, but that’s a sunsetting of a long-term project in those particular sectors, actually.

Okay. And there was an increase in accounts receivable. What was going on there?

A little bit of that timing is, Chris, at the end of the quarter, we built up the third month of the quarter was heavier on the invoicing side. So a lot of that timing of projects and when the invoicing took place with the customer, we maybe took our eye a little bit off the working capital. So we will tighten that up in the fourth quarter to improve that. No real issues there other than we need to tighten back up on the working capital and bring that back down in the fourth quarter and I anticipate that we will do that.

Okay. Sounds good. And then last one for me. It looks like – was there – can you comment on oil and gas? What were your – what was the major improvements for upstream?

Yes, all three sectors actually, Chris, had a good quarter. It’s just that there is a good flow of product. I mean, there is good demand. That upstream is probably the least volatile of the three for us, but just good level of business there across the board, North America and Europe. Just steady state business there, a lot of volume flowing. So the upstream is not nearly as cyclical as the other sectors, but that’s a strong one. I mean, that’s largely where our onstream business plays. They had another record quarter, so they would fall into that sector there in the quarter that – the connecting capillary lines off of the drilling back to the Midstream. So onstream would have helped that sector of the upstream for us. But, no, it’s just a nice solid piece of the business for us. All three were actually very solid, but we do like that upstream piece in particular.

Okay, great. Thanks for the answers.

Thank you.

Thank you and one moment as we move on to our next question. And our next question is going to come from the line of Mitchell Pinheiro with Sturdivant & Co. Your line is open. Please go ahead.

Yes, hi. Good morning.

Good morning, Mitch.

So, hey – Manny, this is a question, I guess, for you. You’ve been on the board now for 20 years. And I’m sort of curious – I mean, obviously, the results at Mistras have been a little bumpy over the last several years for a lot of obvious reasons, including COVID. And I’m curious why now is Project Phoenix happening, and maybe why wasn’t it five years ago? What’s happened? Is it just that there’s a little more sense of urgency for – because of the stock price or is there changes in the business that made Project Phoenix more relevant now than five years ago, let’s say?

That’s a good question, Mitch. The board felt it was time to reassess where we were. Probably should have done it five years ago, but we didn’t. And as when COVID came, I think the whole world changed. We had hoped that we would come out of COVID better. We always had some concerns about our expenses. Our SG&A wasn’t performing at the level we had hoped it would. And we just felt that we were now at a point, look 2022 was not a good year for this company. And had it been a better year, we might have attacked things differently, but I think the combination of our coming out of COVID, the results in 2022, we decided that it was time, it was time to bring in some people to look at what we were doing, it was time to identify opportunities that we could save money in. It had not been done on an ongoing basis. So we decided that 2023 was going to be our rebuilding year and that’s exactly what we’ve done in 2023. We’re examining a lot of things, we’re making changes, we’re very optimistic about 2024.

So, you are going to get a new CEO, and you talked about finding the right person with the right skill set, so a) I am curious to know, like, what are those skill sets; b) it’s sort of – so here is this person that’ll be coming in and Project Phoenix is well underway. Sometimes you would think that the new CEO would have been the one embarking on Project Phoenix, but now that the new CEO is going to be the one, I guess, executing Project Phoenix. So, what kind of skill sets do you want? And are the skill sets for the new CEO, does it involve different things beyond what we’ve seen in the Project Phoenix initiatives?

We are looking for someone that has leadership skills and experience, somebody that knows how to delegate, understands accountability, knows how to build a cohesive, strong management team, and to profitably grow the company. We want our next CEO to be responsive, a good listener, a strategic thinker that has the experience to navigate the public company arena and, importantly, a passion to get things done. In simpler terms, our next CEO must have affability, availability, and ability. We are confident we are going to find that person, we are going to work hard to do that. We think that bringing the – when we bring the right person in, it will not matter whether we started Project Phoenix before he got here or she got here or after. So that’s our thinking, that’s our plan, that’s what we’re looking for, and we’re going to invest a lot of time and effort to try to identify that individual and engage them.

Okay. And then just a couple other things related to Project Phoenix. One, is you talk about pricing strategy. Generally, pricing is sort of dictated by the market. So what is it – I mean, are you going to be raising prices, I don’t say across the board, but where you can? And I guess are you willing to lose business that does not opt for higher pricing? I would love to hear your answer on that.

Yes, I am sure you would. Look, the past year to year and a half, the world has changed again, inflation is up, interest rates are up, our labor shortages have not changed, and it costs us more for good talent. We need to make sure that as we develop our pricing that we are accounting for all of that. It does us no good to have business that we are losing money on. We just – nobody can operate in margins where you are losing money. We believe our customers are fair and reasonable, and we hope that we can work with them to, at a minimum, make sure that we are covering our incurred costs, do so in a strategic way, and we believe that because we have now undertaken an initiative to lower our SG&A, we can still be competitive.

So – okay. And then also related to Project Phoenix, and maybe this is for Ed. From SG&A, when I was looking at the separate press release where you updated on Project Phoenix, you talk about $21 million of cost savings, estimated cost savings for SG&A, which would be, I guess, a relative, maybe, what is that, looks like $12 million of incremental SG&A savings. Did I read that correctly, number one? And number two, what are the investment – what are the dollars that are going to be spent – on a free cash flow basis, what are the dollars that will offset a lot of these improvements? Do you have a cash investment figure that you can share?

Yes, but certainly. And you read those numbers correctly. The $21 million is the run rate in 2024, of which we have $9 million achieved in 2023. So that is an incremental $12 million benefit in SG&A year over year. That’s before COGS benefits and revenue uplifts. The effort to do this is largely behind us. I mean, the actions have been taken here in 2023. The cost has been incurred. So, incrementally in 2024, there is not additional investment needed to do that. This 15% back-office overhead reduction we alluded to on the call, that’s largely behind us now. So, there is cost to achieve that taking place in 2023, but there really will not be a whole lot of incremental cost in 2024 to achieve this. We are otherwise automating things, looking for workflow and automation, we do that all the time to be more efficient. But, no, there is not any forward spend necessary to effectuate the savings of Phoenix that we’re giving you here today. That effort is behind us. And there is not an incremental investment to do that. Manny was talking about investing in the business going forward, that’s an entirely different thing and we may redeploy some overhead in our higher growth areas. That’s a whole different topic, but that’s reinvestment. But, no, there is not any incremental effort needed to achieve the savings that we’re laying out today. We are very confident. We’ve spent a lot of diligence going through that and feel very confident that will be a true savings and a benefit in fiscal 2024.

Okay. Well, thank you for taking the questions. I’ll pass it on.

Okay. Thank you, Mitch.

Thank you. And one moment while we move to our next question. And our next question is going to come from the line of Tim Moore with EF Hutton. Your line is open. Please go ahead.

Thanks. I just want to follow-up on your updated free cash flow guidance for this year. Ed, what are the exact total cash costs spent already or will be spent by the end of this year, by December for the year, to implement Project Phoenix, including the lease break costs and the severance? And then the other part I had was, just reconciling the free cash flow guidance, that one account receivable, do you expect that maybe to convert more like in January? I know you said you are going to work on working capital towards the end of this year, but if your free cash flow guidance came down, do you think that might be more of a January collection?

Yes. Hi, Tim. Great question, yes. Well, the first part of your question of the outflows relative to Project Phoenix, real costs to make that happen, that’s probably about an order of magnitude, maybe $6 million this year, or probably cash out the door to effectuate that savings. So that’s about the number that’s baked in. That was not in our guidance earlier, but we have a pretty good line of sight now to that number. So $6 million came off free cash flow from that region. The AR, yes, the WIP bill that we’ve seen and some of the delay in AR, we’re working hard to pull that down here in 2023. I hope to be able to achieve, if not slightly exceed, that new revised free cash flow. Worst case, it might trickle into January, but we are working very hard to bring that back down here in the fourth quarter. I will mention there’s a third piece there. There is some incremental CapEx year-over-year, that’s a little bit higher now, where we are investing in some of the new higher growth areas, that’s also bringing down that free cash flow a little bit. Again, that’s good investment in the future that will lead to some growth there. But it’s primarily the WIP bill in the AR that is adversely hurting me now that made us bring down the free cash flow, and we’re going to work that back down as hard as we can by 12/31, but, yes, to your point, some of that may slip into Q1.

Great. That was really helpful, giving that bridge of the components. I think that really helps investors. Definitely all adds up to the free cash flow guidance difference. It clearly makes sense. What about that one defense project? I know it was pushed out, stop-and-go from the first half of the year. I don’t know it could be maybe $7 million or $8 million in sales. Did that start up again, or is it about to start up?

Unfortunately, no, Chris – Tim sorry – that’s still delaying a little bit, so that’s not appreciably picking up here in the back half, second half of 2023. We had hoped that. That’s kind of maybe a reason why our revenue guidance came off a little bit. We do see that getting back online next year. Again, the job didn’t go away, it just got pushed out and delayed. But, no, we did not have that appreciably help through the third quarter. It is slowly coming back up, and the staffing is occurring, and it will get back online. But you can think of that more of a 2024 event at this point. That’s not going to appreciably get back online in 2023.

Yes, that’s helpful, Ed. And my last question is around Data Analytical Solutions. Manny had mentioned, I think, on the prepared remarks, maybe a 15% to 20% CAGR. If you look at the first half of this year, stripping out the September quarter, it was growing, I think, at 22%. And it decelerated, I don’t know if my math is right, maybe 5% in the September quarter. Was there any lumpiness in that Data Solutions? Was it just because it was lapping a really good growth period the year before? Was there anything with OnStream or something that went on in the September quarter that might have caused the sales growth rate to be below kind of the target goal?

I will let Manny expand on that one. Well, it’s 16% through the nine months, so it will ebb and flow any given quarter. The very nature of data and software, there is a big piece of implementation that happens there. It’s not just pure software licenses. There is work to implement along the way so that number may not climb in a linear manner, but that CAGR growth that Manny alluded to is real, we are right in that range now at 16%. But no, it’s a high growth area for us and we want to do more of it as Manny said. I’ll defer to Manny any other color he wants to add on data analytics?

Yes, what I would like to just add is this. This is a very – it’s a profitable and important sector in our business, and we are now going to be focusing on scaling that to a greater level. We want to be able to put, to get into more plants quicker. And we think that the proprietary software that exists there will be very helpful to our customers. It has been helpful to the customers we’re in now, but there is a huge market for this type of service. And we need to be able to get into all those markets, including our own markets which were – a lot of these plants that we have are plants that we identified and brought in outside of our customer base, and so part of our plan is to scale, to bring those solutions to our own customers. We think there is a lot of opportunity there. We think there is a lot of room for growth, but we don’t want to do it unless we’re prepared. So 2024, we’re going to be focusing on getting ready to scale so that we can do multiple installations at the same time and so that we can get into more and more plants with this solution.

Great.

I don’t know if that answers your question.

It did. It did. I am a big believer in the data solutions driver for your top line. So thanks Manny and Ed. And I’ll turn it back over to the operator.

Thank you, Tim.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Brian Russo with Sidoti. Your line is open. Please go ahead.

Yes. Hi. Good morning.

Good morning, Brian.

Just a few follow-ups, I guess, from previous questions. The first on the price – or just Project Phoenix in general, clearly the SG&A appears to be completely within your control. So visibility there is pretty good. But just on the price increases to follow up on a previous question, I think, in 2023 the majority of that was focused in your North American operations and specifically in Oil & Gas, which is a very competitive market. Feel free to disagree. But in terms of aerospace and defense, it seems that that’s where you might have higher barriers to entry, a lot of certifications needed where price increases might be more palatable for customers given the unique expertise that Mistras brings to the table. Just trying to get a better sense for the price increases, which I assume fall in your gross profit and/or revenue benefit category for Project Phoenix in 2024?

Yes, you're correct, Brian, there isn't a universal solution for all our customers and sectors. Our focus is on adopting a proactive rather than a reactive approach. We have strong partnerships with our customers, and we do implement price increases each year, which is not something new for us. It's more about establishing a policy and routine that ensures we receive fair value from our customers. This effort ties into our commercial strategy to enhance our key performance indicators and connectivity, allowing us to understand and illustrate the value we provide. Our data solutions aim to deliver real value to customers, ensuring that our KPIs reflect that accurately. While many of our price increases directly benefit our technicians, we recognize that our approach can't solely be driven by cost. We're investing in various capabilities for our customers, such as robotic crawlers and software, to enhance efficiency and safety in utilizing their assets. This initiative is about securing a fair return while fostering a more integrated partnership with our customers, where both parties benefit. Customers should experience increased effectiveness, efficiency, and productivity from our offerings, which necessitates investment and just returns. Our goal is to shift the narrative from reactive adjustments to a structured, transparent dialogue that becomes a routine part of our operations each year. This approach is vital for growth and investment, with significant returns anticipated from our efforts, which is why we're prioritizing this holistic view of pricing.

Okay.

And just to add to that, just to add to that, strategically we want to make sure that we are taking full advantage of the price increases that we’ve already agreed to. So many of our arrangements allow us to pass through certain costs as they increase. We want to make sure that we have a standardized, comprehensive approach to making sure we are taking full advantage of all of the increases that we’ve already – that have already been agreed to. And then secondly, we want to make sure we have a clear understanding of what our costs are as we sit down and talk to our customers and renew the business. It is a competitive business. There is no question about it. But we do provide value, and all we want to do is be paid fairly. So a lot of it is making sure we’re taking advantage of what’s already been agreed to. And I don’t think that’s going to be as problematic. So it’s not – I don’t want to give anybody the impression we’re just going to raise our prices across the board. That isn’t the intention here. The key word here is strategic. And our first and initial focus is to make sure we are taking advantage of all the price increases we’ve already agreed to and then take it beyond that.

Got it. Okay. And then maybe for Ed, given the reduced free cash flow outlook for 2023, are you unable to reach that three times leverage target that the market has been focused on this year?

Yes. That was – as we said that in the prepared remarks, yes. We’re right – we’re below a three-five now. We had hoped to get below a three by 12/31. That’s going to slip out maybe just one quarter due to that little relatively weaker free cash flow. But it got pushed out, we’ll achieve that in the early part of 2024. We will still get below a three, yes.

Okay, great. And historically, your cash conversion has been nearly 50%. Is that kind of a reasonable assumption in 2024?

Yes. I believe that it is. I mean, our CapEx for good reasons has been growing a little higher this year than a couple of past years. But, no, I think that 50%, not in every given quarter, but over the longer term, yes, we do believe a 50% conversion, but it is still a fair number to use going forward, yes.

Okay, great. And then I apologize if I missed this earlier, but what is the new CapEx run rate?

Well, I mean, this year we’re going to end up at probably 21%, 22%, which has been a little higher – million – which has been a little higher than the mid to high teens we’ve operated at the last couple of years. It’s to be determined. It’s really a function of how much more investment in our shop labs do we want to do going forward. We’ll have a little – if it’s value-add, and there is good ROI with quick paybacks, meeting our hurdles, we’ll expand up a little bit. So the 2%, 2.25% of revenue might drift up to 2.5% to 2% and 3.25% of revenue. So we’re leaving a little flexibility to spring that up next year. We have not yet locked in our CapEx plans for next year, but we’ll have a little more tolerance to invest in the business for the high-growth prospects. Again, this year was a little higher than last year. It may level right out at the same number next year, but we’ve yet to lock down our capital plans. But it may be modestly higher next year for good reasons for this expansion capital to grow some of our shop labs in particular and to invest a little bit in data solutions, we might go to go just a little bit higher here in 2024.

Okay, great. And you mentioned the delays in the defense contract as a driver of the reduced revenue guidance for 2023. I also noticed the power and industrials were weak, and I know you had that large nuclear contract that rolled off. Are you still looking to backfill that? And is that also contributing to the reduced top line?

Yes, that was expected on the Power Gen side. That was a known project roll-off, as you said. So that was expected. That was not affecting our guidance. That was anticipated to be rolling off. And we are looking at this area. That project work, although it’s not the biggest piece of our business, it’s mostly run-and-maintain and call-out work and whatnot, the new projects, new CapEx, brand-new projects is a nice 5.5% to 10% of our business any given year. We’re not excluding that. We’re not ignoring that. That’s a piece we are looking at. There is a lot of new construction going on throughout the U.S. and beyond: battery plants, EV plants, chip manufacturing, you name it, where we can do work. And we are taking a hard look at that because that’s nice, long, just like defense work, that’s a nice, long five- to seven-year kind of project that are a nice core to add to your base. So we are taking a hard look at that to replace some of that longer-term work that sticks around and repeats year after year on a long cycle there. So, yes, we are looking at that. There are some good opportunities there. So we do plan to replace that longer-term contract work that’s dropping off. Yes, we are looking to replace that in our mix of business.

Okay. And then just take that one step forward to 2024. What exactly does modest single-digit revenue growth mean? Does that mean less than 5%?

That’s how you should probably interpret that, yes. We are thinking maybe that’s 3% to 5%, it’s somewhere in that range, yes. We are looking hard at that now. We are well in the way with the budget, thinking hard about next year. But that’s the takeaway we would want you to have there. That’s kind of what we’re thinking at this point for next year.

Okay. And then lastly, and maybe for Manny, and this might even be a question for the permanent CEO, but where do you envision Mistras in maybe two to three years? I mean, is it increasing scale or is it diversifying the mix of business, maybe adding some other subsectors that you can leverage data solutions and even your Sensoria technology? And is there an inorganic growth component?

I think right now, our focus is organic growth. We think we have a lot of opportunities within that area to grow the company. And if there are inorganic growth opportunities that make sense, we’ll look at those. But our focus is going to be organic growth. We talked about strategic pricing initiative, but we are also looking very closely at how our entire sales process is working. We think we should be doing more organic growth. But a big component of our future is going to be Data Analytical Solutions. We think that’s the future. We have millions and millions of assets that we have tested. And we think the analytic component of that framework is going to be key to our future. It’s still going to be in Oil & Gas, as well as chemical, as well as other areas. Look, we can analyze data in a lot of different industries. But we have a wealth of data in Oil & Gas, and we should take advantage of that to the extent that we can. So, I think our focus is right now going to be organic rather than inorganic. We are not going to walk away from anything that makes a lot of sense. Every single initiative we undertake moving forward will go through a vigorous return on investment analysis. When it makes sense, we’re going to invest, and we’re going to just continue to work that way and improve our efficiency, improve our sales strategy, improve the pipeline of business that we would want to bring in. That’s all organic. I don’t know if that answers your question, but I hope it does.

Yes, it does very much. I appreciate it. Thank you.

Thank you. And I would like to turn the conference back over to Manny Stamatakis for any further remarks.

Well, first of all, thank you, operator. I do want to thank everyone for joining this call today. I want to thank you for your continued interest in Mistras. There is more to come, and I look forward to providing you with an update on our business and progress achieved towards our initiatives on the next call. So, everyone, please have a safe and prosperous day. Thank you very much.

This concludes today’s conference call. Thank you for participating. You may now disconnect.