Earnings Call Transcript - MG Q1 2020

Operator, Operator

Thank you for joining Mistras Group Conference Call for its First Quarter Ended March 31, 2020. My name is Gigi, and I'll be your event manager today. We'll be accepting questions after management's prepared remarks. Participating on the call for Mistras will be Dennis Bertolotti, the Company's President and Chief Executive Officer; Ed Prajzner, Executive Vice President, Chief Financial Officer, and Treasurer; and Jon Wolk, 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 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 U.S. GAAP. Reconciliation of these non-U.S. GAAP financial measures to the most directly comparable U.S. GAAP financial measure 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 Investors section and on the SEC's website. I will now turn the conference over to Dennis Bertolotti.

Dennis M. Bertolotti, CEO

Thank you, Gigi. Good morning, everyone. As with last quarter, let me first begin with some comments on the current state of the market and what we've seen so far and briefly update you on the actions that Mistras has taken to keep our employees, customers, and partners safe while simultaneously mitigating these challenging conditions. First, let me say that I'm extremely proud of how our team has responded to current conditions. They have remained focused on the safety and well-being of our associates, clients, and partners. They are continuing to deliver outstanding services, which is helping our clients best manage through these unprecedented times all the while positioning Mistras to emerge from this global pandemic stronger and better prepared to further our industry leadership. In the first quarter, we posted solid operating results with revenues better than forecasted and our asset-light business model has continued to generate the positive cash flow for which we had become well-known. We have achieved this despite a quarter that experienced the dual impacts of a weak energy market continuing from late last year, and the global pandemic that began to take root towards the end of the first quarter. As it became clear that we were entering a period of incredible uncertainty, we took immediate action to adjust to these new realities. The immediate focus was on things that we could control with our goal being to preserve and protect our reputation and to reinforce our position as our customers’ preferred partner. So we doubled down our efforts to provide our customers with a high-quality service on which they have come to rely upon from Mistras. We found innovative new uses for our technology, Mistras Digital to help customers lower their costs, and this is currently getting a high level of interest. We believe this dedication to the needs of our clients not only enhances our franchise today but establishes a solid foundation on which to build upon the market's eventual recovery. At the same time, we took decisive actions in response to this new business environment. We have significantly reduced cost, we've cut CAPEX in line with revenue expectations and are more effectively managing working capital to maintain and enhance our positive cash flow. We have accelerated some of the structural changes to improve margins while deploying technology to further improve productivity. I and other members of the executive team, along with nearly all salaried employees, have taken pay cuts, and our Board has also forgone some of their compensation. Additionally, we have made adjustments to our variable headcount and broadly rationalized our assets to align with the anticipated future levels of activity. We are taking these actions while maintaining our commitment to delivering superior services which help our customers increase their efficiency, reduce their costs, and improve their outcomes. Consequently, we continue to forge ahead in areas that offer the greatest returns. For instance, customers are anxious to adapt digital technology that will help them improve efficiencies as well as transition to more predictive solutions. In this respect, we continue to work with our customers to leverage our Mistras Digital Solution that helps reduce non-productive time and improve labor and asset efficiency. Complementary to Mistras Digital is our industrial Internet of Things offerings such as remote sensor monitoring, where we are having great success as our Mistras Digital ruggedized tablets are revolutionizing field reporting. We are seeing a steady increase in our mechanical work. All of these actions and initiatives are helping diversify our revenue streams and significantly strengthen our foundation for long-term growth and profitability. And while our customers in the energy industry are trying to stretch their dollars just like everyone else's, they nevertheless have an obligation to keep their facilities in compliance with regulations and operating at top efficiency. So, we are sensing new opportunities in even this environment of demand contraction. We do acknowledge that some work is either being pushed out or canceled. We believe the second quarter should represent the largest deviation with our revenues potentially down as much as the high 30% range from a year ago. April looks like it should be at peak revenue decline as we are already sensing that May will be better and June could potentially see further improvement if oil prices continue to recover and states continue to relax shelter-in-place orders. The third and fourth quarter would then be expected to rebound nicely. Given the impact of COVID-19 on our business, we did perform an assessment of the carrying value of goodwill and other intangibles in the first quarter of 2020, and the result was that we recorded non-cash impairment charges of 106 million; Ed will go through the details. With our expectation of positive operating cash flow each quarter this year, limited capital expenditure needs, and our amended credit agreement, we have sufficient liquidity to support our operations, and this would be while simultaneously reducing outstanding debt by the end of the year, including 4.5 million already paid down in the second quarter. Our job is to build on the legacy Mistras that was created over the years, and it is our vision to take Mistras to the next level through more integrated programs and more predictive intelligence that will define our industry in the future. Let me now turn the call over to Ed for a detailed review of the financials.

Edward J. Prajzner, CFO

Thank you, Dennis. First quarter revenues were somewhat better than expected, down a little less than 10% from a year ago. As anticipated, our oil and gas revenues in our services segment saw the largest decline, which was somewhat offset by nearly $2 million improvement in domestic aerospace and defense. Conversely, revenues in our international segment were impacted by a decline in European aerospace revenues where production at our large facility in France was hampered by that country's complete shutdown, as well as the continued run-off of the staff leasing business in Germany. Gross profit for the quarter was 40.6 million or 25.5% with margins down from a year ago mostly due to underutilization resulting from the decrease in revenues. To a much lesser extent, margins reflected a somewhat tighter pricing environment. On a segment basis, both services and international revenues were down. Services, primarily due to the weakness in energy markets, while international experienced the decrease in aerospace revenues, driven by the wind-down of staff leasing and adverse foreign currency translation impact. Gross margins were also down from a year ago consistent with the decrease in revenues. Selling, general, and administrative expenses decreased from a year ago despite the addition of New Century's overhead to this year’s cost. Early in the second quarter of 2020, we initiated a cost reduction and efficiency program, which should reduce the run rate of overhead by approximately 10% beginning in the second quarter, a reduction we believe is consistent with our outlook for the year. This program includes temporary adjustments to capital spending, a reduction in travel, limiting of new hires, and a scaled reduction for salary expense for essentially all overhead positions. Also note that all non-employee members of our Board also took a reduction in their compensation during the second quarter. We typically review goodwill for impairment each October 1st or whenever events or changes in circumstances indicate that the carrying value of goodwill and intangibles may not be recoverable. COVID-19 and the related impact of crude oil prices was deemed to be a triggering event with requirements to perform an interim assessment. As a result, we recorded a non-cash charge of 106.1 million for impairment in the first quarter of 2020, comprised of 77.1 million related to goodwill and 29 million related to primarily intangible assets. On an after-tax basis, this was 92.1 million or $3.18 per diluted share, exclusive of a $0.02 per diluted share benefit from other special items or $3.16 per diluted share on a net basis for all special items. Although we were in compliance with our bank covenants as of March 31, 2020, we nevertheless executed an amendment effective May 15, 2020 to gain additional covenant flexibility. We maintained the remaining maturity of our existing credit agreement through December 2023, including a $93.75 million term loan, but we reduced our revolving credit line to a maximum of 175 million to save costs related to the unused commitment while ensuring a sufficient level of liquidity to fund our business. We additionally maintained a $100 million uncommitted accordion within the amended credit agreement for potential expansion in the future. Our net debt, total debt less cash and cash equivalents was 241 million at March 31, 2020 compared to 239.7 million at December 31, 2019. Gross debt increased by 3.3 million during the first quarter of 2020 from 254.7 million at the end of the year to 258 million at March 31, 2020. As Dennis mentioned, we have already paid down an additional 4.5 million of debt in the second quarter of 2020. Reiterating one of our key themes, our business has historically generated strong cash flow. In the first quarter of 2020, we further enhanced that reputation with cash from operating activities of 6.1 million. We did utilize a little over 4 million for capital expenditures in the first quarter, in line with our goal to reduce total CAPEX this year from our typical run rate in line with revenue expectations. We recorded a net loss of 98.5 million for the first quarter of 2020, compared with a net loss of 5.3 million in the prior year period due primarily to the aforementioned non-cash impairment charges. But we did nevertheless generate adjusted EBITDA of 5.4 million for the second quarter of 2020. And our goal remains to maintain adjusted EBITDA as well as positive operating cash flow in each quarter of this year. Ongoing macro concerns attributable to the impact of COVID-19 continued to put crude oil prices under intense pressure. Given the continuing economic uncertainty, we are not providing guidance for the full year 2020. We do anticipate revenues for the second quarter of 2020 to decrease up to a high 30% range from the prior year period level although cash from operations and adjusted EBITDA are expected to remain positive. While it is extremely difficult to forecast with any degree of certainty at this time, we are optimistic that consolidated revenue in the second half of 2020 will be higher than that of the first half 2020, with corresponding improvements in both cash flow and adjusted EBITDA. This outlook is contingent on continuing macroeconomic improvements, including stabilization in crude oil prices and the relaxing of certain state home mandates. We are confident in our sustainable business model and we remain firmly committed to carrying out our strategy today and over the long term.

Dennis M. Bertolotti, CEO

Thank you, Ed. Mistras is essential to global energy infrastructure, as well as to the aerospace, alternative energy, and other industries. Whether at our facilities or those of our customers, our teams are hard at work ensuring the safety and security of valuable assets while observing today's coronavirus-inspired rules of engagement. We are far from out of the woods, we intend to keep a consistent eye on our expected revenues, and be sure we match our resources accordingly. The crude oil prices have recently stabilized and are beginning to improve, and more states around the country are beginning to relax some stay-at-home restrictions. Conversations with our customers have become more constructive. These are all positive signs and much different than the signals we were hearing mid to late March. Mistras plans to emerge from this pandemic stronger, determined, and prepared to capitalize on the opportunities that we believe exist within our industry. Customers know they can count on Mistras to be there when they need us. We have deep relationships built over years of dedicated service, delivering on time and on budget. And we are developing new age tools that customers know they're going to need as budgets shrink and we all have to learn how to do more with less. We are excited about Mistras' future and are committed to our success. Our industry is under intense pressure to optimize the efficiency of their assets and to continue to comply with increasingly complex safety, environmental, and other regulations. This is creating growing demand for our services. In the short run that trend may be disrupted, but over the long term, we think these factors will drive growth in our markets, and we intend to outpace that growth. Our utmost concern remains the safety of our employees, as well as those of our customers and the many other Mistras associates. Let me again state my deep appreciation for the hard work all the Mistras technicians and professionals are doing to keep our customers' assets safe while facing all the challenges they must endure to get the work done. Let me also commend all the administrative and management Mistras folks for finding a way to make this new normal work for us. Our focus on cash generation, collection, and normal administrative processes has not diminished one bit. And we are as strong and nimble as we have ever been. I also want to sincerely recognize the patience of our long-term shareholders who continue to support us through this journey. Thank you. Now with that we will now take your questions. Gigi, please open up the phone lines.

Operator, Operator

Our first question comes from Edward Marshall from Sidoti & Company. Your line is now open.

Edward Marshall, Analyst

Hi guys, how are you? Dennis, Ed, Jon, hope you and your families are doing well.

Dennis M. Bertolotti, CEO

Good morning.

Edward Marshall, Analyst

Thank you. So I wanted to talk about the operating expense reduction of 10%. First, I wanted to understand is that the corporate level sounds like a lot of it might be versus maybe what runs through the segments, and I don't understand are you through or do you anticipate additional revisions? And then finally, as I look at these revisions, are they additive to the bottom line or are they just simply offsetting the top line reduction, just wanted to get a sense as to where you are there?

Edward J. Prajzner, CFO

Sure, I'll take that. This is Ed. The 10% run rate we are discussing refers to total overhead savings, which includes SG&A as well as indirect overheads within SG&A, both of which are approximately equal. We previously announced the nature of those charges, which include salary reductions, combining facilities, lease savings, and more. Some of these measures, like salary reductions, are temporary, while others are more permanent. This total is additive and incremental, particularly regarding capital expenditures and minimizing overhead related to travel and other activities associated with revenue streams. As revenue increases, some of these costs will also return. This run rate is almost evenly divided between SG&A and the indirect COGS line, where you'll see that savings reflected. Earlier in the year, we mentioned some savings, and we've increased our focus on that to a higher level now, which will be evident in both SG&A and the indirect COGS line.

Edward Marshall, Analyst

Got it. Understanding that maybe it's a difficult environment, especially just coming out of April, maybe the beginnings of May. But as you talk to customers and I'm wondering what they're telling you and give you an opportunity to kind of talk about maybe some direct conversations, but when I think about the embedded personnel that you have at the sites, I assume that the kind of order of progression would be emergency call out work would probably come first, secondly would be your embedded solutions or your embedded product, your embedded people in the facilities, and third maybe project work. Where are you in the discussion? I'm assuming the call out’s probably was pretty sound, but I wanted to get a sense maybe how the embed is working and then ultimately, your outlook for the project work?

Dennis M. Bertolotti, CEO

Thank you, Ed. I'll begin, and then Jon may want to expand on my thoughts. Our projects have maintained staffing at all locations. For the most part, we've seen minimal reductions in personnel due to COVID. Our customers are focused on completing their work but have decreased the number of outside workers and reduced hours. While we currently have around 18% of our billable employees on furlough, about 80% to 82% are still working. However, they are doing so at reduced hours; typically, staff would work six or seven days a week for 10 or 12 hours, but now they are working three to five days at eight hours or less. Our customers remain committed to getting the work done but are not rushing to resume full operations. Jon, is there anything else you’d like to add?

Jonathan H. Wolk, COO

Yeah, the other thing Dennis, I agree with everything you said, but it depends which continent you're on too. So, I think Dennis' comments ring true really everywhere, but if I think about some of our shop-based businesses, we've been very steady on the shop-based businesses here in the United States and in Canada. But then again in Europe, it's been spotty depending upon the degree to which countries shut down. So, for instance in France, the shutdown was much more severe throughout that whole economy. So only just now are we sort of getting some of those personnel back to speed. So, it really depends, and it's a little bit choppy.

Edward Marshall, Analyst

Got it, Jon. My final question is looking towards the future. When I consider your digital initiatives and their potential impact on reducing staff not only at Mistras but also at your customer level due to the efficiencies and productivity improvements they may provide, I would like to know if the current environment is making it easier for your customers to adopt this digital platform. Have you observed an increase in the implementation of the digital platform in your daily operations?

Dennis M. Bertolotti, CEO

We are seeing an increase in inquiries about bridges and online monitoring, not just at Mistras Digital but overall. In one case, with our digital solution already being tested in an aggressive beta version, a customer mentioned that while working from home, they are accessing more data than they usually would on-site using traditional methods. Many customers are looking for ways to enhance their involvement in the business while working remotely, considering everything from simple online data points to complex data networks. At Mistras Digital, we provide timely data gathering so users can get necessary information by the end of the day. Turnarounds are now receiving data much faster as they experiment with this, although we haven't fully implemented these solutions across all operations yet. There are strong indications of increased activity and interest in these digital solutions. In the current COVID environment, many are eager to collaborate with IT to integrate these systems effectively. Jon, do you have any additional insights?

Jonathan H. Wolk, COO

Thank you, Dennis. I agree with your points and Ed brought up a great question. We are currently discussing this with several customers for the reasons you mentioned. There's an opportunity to either increase productivity to handle more workload with the same staff or to reduce the staff size while maintaining the same output. We believe there are significant opportunities here, and we are actively engaging with customers to enhance their productivity. We are well-positioned to provide the solutions they need.

Edward Marshall, Analyst

So I guess there's a silver lining in all of this; it may be assistance into your growth within digital. So good job, guys. Appreciate all the time. Thanks for the response.

Dennis M. Bertolotti, CEO

Thanks, Ed. We've been talking online for how long and it only took a global pandemic to get people to think about it.

Operator, Operator

Thank you. Our next question comes from the line of Andrew Obin from Bank of America. Your line is now open.

David Ridley-Lane, Analyst

Thank you. This is David Ridley-Lane on for Andrew. What do you expect from your aerospace defense business in the second quarter? And we've also heard anecdotally that the airframers are being helpful to the supply chain on working capital, so would you expect any above-average free cash flow benefit in 2020 from that?

Jonathan H. Wolk, COO

This is Jon, I can take that. Good question. It's interesting. For instance, during the first quarter, our aerospace business held up remarkably well. It was just about even with last year, even as the effects of shutdowns were beginning to be felt. Aerospace for us is an essential business, deemed an essential business. And we, as a service provider to that industry are deemed essential as well. For the second quarter, I think we'll be down modestly in aerospace in North America, we'll be down to a larger extent, as Ed alluded to, in Europe because of the effect of the shutdowns and so forth. But in general, the aerospace business is down by a lower percentage than we expect the company will be overall. In terms of a free cash flow benefit, I'm not aware of anything specific that we're expecting there unless you are, Ed.

Edward J. Prajzner, CFO

No.

David Ridley-Lane, Analyst

And other vendors in the oil and gas space have argued that refineries perhaps cut too deeply into maintenance spending back in 2015-2016 and now have a more cautious stance around cutting those budgets now. Are you seeing any differences among your refinery clients versus how they acted in 2015? Thank you.

Jonathan H. Wolk, COO

Sure, this is Jon. I'll start with that. Back in 2015 and 2016, the drop in oil prices took everyone by surprise. It seemed like a new approach for customers and suppliers to manage the situation. This time, however, we've experienced similar scenarios before, so the response has been more coordinated. Scopes have been reduced because people were literally at home and not at work. As a result, scopes have naturally decreased. We do anticipate a rebound in the second half of the year compared to the first half due to this impact. Some work has definitely been postponed because people weren't on the job, but we expect to see some recovery in that area.

Dennis M. Bertolotti, CEO

Yeah David, it's Dennis. I will add, when this first started, I don’t remember the exact days, but everyone recalls when they thought this was going to be a quick situation. I remember one weekend when I spent the entire time talking to people, putting together letters to inform the authorities that we were essential workers, as we were uncertain whether our employees would even be able to travel. There were constant rumors about the National Guard implementing lockdowns on highways. Initially, Jon's right; this hit and no one was sure what was deemed essential. We had to look up the references and national standards that defined our status. Eventually, people got accustomed to the situation. However, at the beginning, much work dropped off because nobody knew what to expect in the coming days or even the next week. I currently see an early indicator, although I can't guarantee how much work will be confirmed. Our bidding activity for the fall has been surprisingly normal. I expected a much quieter bidding environment for the fall than what we are witnessing. This is a good sign. Prices can fluctuate dramatically, and people might decide to pull back on capital expenditures or maintain their current plans. But right now, it seems like people in the industry, particularly in energy, are adapting to the situation and trying to find ways to reduce spending while keeping operations ongoing. It’s odd how quickly conditions deteriorated and now there’s an effort to return to normal. By June, we believe we will be close to where we anticipated being when COVID began to escalate.

David Ridley-Lane, Analyst

Good to hear it. Thank you very much.

Dennis M. Bertolotti, CEO

You got it.

Operator, Operator

Thank you. Our next question comes from the line of Tate Sullivan from Maxim Group. Your line is now open.

Tate Sullivan, Analyst

Hi, thank you. I have a couple of follow-up questions regarding the first quarter. Can you provide a breakdown of gross profit by services, international products, and systems? I noticed that the gross profit margin for products and systems has declined significantly year-over-year. Were there any one-time factors contributing to this decline in the current quarter?

Edward J. Prajzner, CFO

No, this is Ed, Tate. There are no one-time factors, but we implemented the overhead changes effective April, so we didn't have enough time to adjust and reduce some of the costs. As I mentioned, a significant portion of the relatively fixed overheads in indirect services will be addressed from April onward, resulting in a positive run rate going forward. We have now aligned the overheads with the revenue level, but there was a lag during the first full quarter, Q1, which was not fully effective, whereas it is for Q2 and thereafter.

Tate Sullivan, Analyst

Thanks Ed. Regarding your earlier comment on the 10% reduction in SG&A, can you provide more context on how the minimum EBITDA requirement for this quarter was determined? I mean, given that we're at baseline, can it be based on your costs already incurred in a period with limited visibility?

Edward J. Prajzner, CFO

Yes, we started Q2 with everything prepared. We delayed hiring, froze merit increases, reduced salaries, and suspended the 401k match. We also minimized hours for hourly technicians, but their rates were not adjusted. I don't see any challenges with the strategies implemented, and we thoroughly assessed our outlook and forecasts during the banking process. I am confident we will meet the minimum required levels because all these essential steps were in place at the beginning of Q2, and we have additional support. We will continue to adjust the company's cost structure to match our revenue as we navigate through the ups and downs of volume throughout the year. Overall, we believe all cost measures were effectively implemented throughout Q2.

Dennis M. Bertolotti, CEO

Yeah Tate, it's Dennis. We've been doing a lot. I mean with salary reductions started at 2.5% for the lowest level up to 45% for myself. And all that started essentially I think the first payroll of April. So like April we caught maybe one day of March but most of April. We've even gone back to our landlords and talking to our landlords at a lot of locations where we are getting some reductions, who are graciously taking off for the quarter almost to the end of the year. We've gone back to our top 20 and top 30 spent in AP and looking at all of our costs coming in and sending them letters and asking for what they can do. So, I mean we're trying to do a lot of this and most of it started close to April 1st and some of it's been coming in May and such with the landlords and all that. So we're continuing to adjust to whatever we have to do to make this right. We're watching our revenue; we keep reforecasting a lot of time making sure that the reforecast is as accurate as possible and then looking at what resources and costs we have to do to match it up.

Tate Sullivan, Analyst

Thanks Dennis and one more follow-up, can you give some more comments on the stream where the exposure was when you bought it and an update on the midstream noted in Canada? I mean COVID can impact different countries differently, so just can you give more comments on the midstream market currently as well as 2Q?

Dennis M. Bertolotti, CEO

Yes, certainly. At the time of our acquisition, approximately 85% of their business was based in Canada. The Canadian economy has been significantly affected by this, along with fluctuating oil and gas prices. The challenges faced by these midstream companies are fairly well recognized. Meanwhile, the downstream business in the United States is continuing to grow. It saw some growth in Canada during the first quarter, but we anticipate a contraction in the second quarter, similar to several other areas experiencing declines. Overall, we expect to have a positive year.

Tate Sullivan, Analyst

Okay, thank you for all those follow-up details.

Dennis M. Bertolotti, CEO

Thanks, Tate, sure.

Operator, Operator

Thank you. Our next question comes from the line of Sean Eastman from KeyBanc Capital. Your line is now open.

Unidentified Analyst, Analyst

Good morning guys, this is Alex on for Sean. Thanks for taking my questions. Sorry, I got disconnected; I apologize if these questions have come up earlier. But my first one is, I guess on the comments about the cost reduction steps you guys are planning on taking, I'm just curious on how you're thinking about labor in anticipation for the work coming back in the second half of 2020. I guess overall how you guys plan to balance your cost control while still best positioning yourself for the recovery that could come about in this year?

Jonathan H. Wolk, COO

This is Jon, I will take that. So from a labor perspective, we have let very, very few technicians leave the company. We've had extremely high retention of our technicians. Hours of course have been reduced as workloads have necessarily been reduced. And in some cases some pay rates have been adjusted as well. But what we expect for the second half was that as the workload comes back which we've got very good indication that it is, these people are still employees, they are raring to go, they are looking to get those hours and looking to get back on the job to the fullest extent possible. So we feel very good about our capability to deliver to customer demand in the second half.

Unidentified Analyst, Analyst

Thank you. And then my next question, I just wanted to try to understand what you're seeing internationally versus domestically a little bit better. So it seems like the services segment in the U.S. held out a little bit better than international, and I know we talked about France in aerospace last quarter, with the headwind there, and then maybe just talking 3Q and on and assuming the continued relaxation of stay-at-home orders and oil prices stabilize, I just want to get a sense of which end markets or subsectors should recover relatively quickly and which ones might take a little bit longer to recover?

Jonathan H. Wolk, COO

Yeah sure, it is Jon. I will start. So oil and gas obviously has been the heaviest impacted in the end of the first quarter and certainly in the second quarter. It's also the one that we think will ramp back up the quickest in the third quarter and beyond. And of course with the oil price trending better too as Dennis said in his comments this morning it's up over $32 for WTI. That's a very good benchmark in terms of our customers' willingness and ability to resume normal activities especially as that price continues to trend back up to where we would all expect it to be. Aerospace is a little bit of a tricky call. Certainly Boeing has had its challenges with the 737 Max program that impacted us early in the start of the calendar year but not to the extent that perhaps others might have expected because we have a pretty diverse portfolio within aerospace. Certainly for Airbus has also had a number of cutbacks and plane deliveries are expected to be lower. So I think that the aerospace sector will definitely snap back but it may take some more time for it to reach pre-COVID levels.

Unidentified Analyst, Analyst

Thank you.

Operator, Operator

Thank you. Our next question comes from Mitch Pinheiro from Sturdivant & Company. Your line is now open.

Mitchell Pinheiro, Analyst

Good morning, everyone. I hope you're all doing well. Most of my questions have already been addressed, but I have a couple of additional points. First, regarding your level of confidence for the second half, what is that based on? Are you considering the possibility of a second wave or shutdown in the fall, and is that influencing your outlook at all? I'm curious about how you are forming your confidence for the second half.

Dennis M. Bertolotti, CEO

It's a great question, Mitch. This is Dennis. We don’t factor in a significant increase in barrel prices for our second half forecast. However, if prices were to drop from 30 down to 20 or lower, that could have an impact. We're anticipating prices in the range of $25 to $30 or better. There are indications that prices might improve later in the year, but currently, we're still witnessing substantial bidding activity, which suggests that our customers are actively pursuing projects. Although there could be a chance of capital being pulled back in the future, the current landscape shows customers are engaged. That said, concerns about spacing and health risks associated with the virus are still prevalent. COVID will influence the second half, as I doubt high-density work environments at refineries will be feasible anytime soon. We expect that there will continue to be some impact from this situation. Regarding barrel prices, we are closely monitoring them and anticipate some fluctuations. We have also accounted for a potential state-wide shelter-in-place scenario. Even if there are minor adjustments to current restrictions, we believe our forecast remains solid within a reasonable margin of certainty for bidding on projects. Overall, there's nothing that needs to happen beyond what is currently occurring for us to maintain our outlook for the fall.

Mitchell Pinheiro, Analyst

Okay. And then within the energy segment how much of the business would you describe that's been lost here in the first half? Were anticipated for the second quarter as well? How much of that is simply work that is deferred that's going to have to get made up within the next 6 to 12 months versus how much is lost sort of permanently, any feel for that?

Jonathan H. Wolk, COO

It is Jon, want to try it? Well first I would say permanent is a lot of time. So I don't know that I'd say that work that was not performed or is not being performed now in the second quarter is permanently lost. These are all facilities that have to be maintained, that have some special requirements that are ongoing. So something that was differed now is going to have to be done. The question is when and to what degree. And pacing, as we've seen during the second quarter during emergency situations can be moved and so for that reason you always want to kind of gauge your response with that context in mind. You almost feel like you want to hedge your bets even though you're not doing that; you're just trying to be cognizant of the fact that schedules move all the time for various reasons. But I think having said all that our expectation is that as we've said is that the second half should be a decent second half. We see a pretty good rebound certainly off of the second quarter levels. We originally came into the second quarter thinking it could have been a record second quarter for us believe it or not. And now of course it's going to be what it's going to be, but it does bode for a good rebound in the second half at a minimum.

Dennis M. Bertolotti, CEO

And Mitch I guess…

Mitchell Pinheiro, Analyst

Yeah, go ahead.

Dennis M. Bertolotti, CEO

I'm sorry, I was just going to say, I think the work that was in the springtime for the most part got pushed to the fall. Could it get pushed again? Possibly, but more probably you might have some fall things go further out each quarter. There was a smaller percent, probably less than 25% to be sure. I don’t know if we categorize it but there is a small percent that got pushed out of the spring into 2021. So for the most part of the time customers are just reacting to we can't get people to come in and work together closely, so we have pushed out. They are small, like in Europe and other places, where they still have these countrywide lockdowns. That's where a lot of the things even happen in the spring because you had gunners that were not just the entire turnaround couldn't be done within the country and then they had to find ways to either find someone within the country to do the work that they had planned for somebody else or find a way to bring them in. So as long as the borders are open up both here and internationally, and in Canada as well, doing that same type of thing, I think fall is probably going to have less chance of having this huge lockdown like you have seen in the spring.

Mitchell Pinheiro, Analyst

Okay, and then one last question, is there from an intermediate term and longer-term perspective, how has your thinking changed about the business whether it's capital allocation, the way you're going to focus on various end markets, is there any or even the way your working capital usage and CAPEX needs, has anything changed from like an intermediate term you know year or two, three to five-year outlook, have you learned anything yet? I was just curious for your thoughts?

Dennis M. Bertolotti, CEO

Yeah, it's a good question. I mean, while we try to be insightful right now we're reacting to what's going on. We do see the advantages of increasing our diversity and our end markets. We do see the advantages of increasing our ability to do things remotely while working from home, everyone is trying to figure out how to do things remotely. So, like I said earlier, I think customers might mean more bridge quotes and all these other things where customers are starting to see the advantages of doing it. And it's not going to replace bodies completely, but it will definitely supplement the inspection programs you have so that you can be doing things with people out there with their eyes on equipment knowing what they're looking at, as well as always having some online data coming in. So I do think what we're going to be doing is really redoubling our efforts on our diversification, on our digitization, on those things that we knew were a good idea. But I think what we're starting to realize now when you see times like this and they create all the need for invention and innovation, and it's going the way we were talking about. We just, I think we've got to start trying to push it and I think customers will see it. So outside of that capital on things like that, basically that's just every time we forecast we look at it and say what do we have. We don't see anything different that the gas and oil markets going to need because of this other than they're always going to need online stable customers and vendors. And I'll tell you, you hear about all the possibilities of bankruptcies in the oil and gas space from the customers, the service folks are going to have that too. So there is probably going to be a lot of companies that are affected by this, and we see ourselves coming out the other side of this and being strong. And I think our customers are going to look at who's going to be a long-term vendor for them and what is the right way to go: price versus stability as well. So that might play into it as well.

Mitchell Pinheiro, Analyst

Okay, thank you. That's all from me.

Dennis M. Bertolotti, CEO

Thanks, Mitch.

Operator, Operator

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Dennis Bertolotti for closing remarks.

Dennis M. Bertolotti, CEO

Great, Gigi, thank you. I'd like to once again thank all the Mistras employees for your service and dedication. I'd also like to thank our investors for understanding that while the energy markets suffered a setback in the second quarter here and we'll take some time, but we'll get back to a new normal. The energy industry continues to provide great value to the world's economies, and Mistras will continue to not only serve the energy market, but increasingly a number of other industries as well as we adapt to this new landscape. The whole Mistras team would like to thank everyone for joining the call today, and we wish everyone a safe, prosperous, and healthy future. Thank you.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.