Earnings Call Transcript - MG Q1 2023

Operator, Operator

Thank you for joining Mistras Group's Conference Call for its First Quarter Ended March 31, 2023. My name is Jada 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; and Ed Prajzner, Senior Executive Vice President and Chief Financial Officer. I'd like 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. This discussion in this conference call will also include certain financial measures that were not prepared in accordance with US GAAP. Reconciliation of these non-US GAAP financial measures to the most directly comparable US GAAP financial measures can be found in the tables contained in yesterday's press release and in the company's related current report on Form 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 Bertolotti, President and CEO

Thank you, Jada. Good morning, everyone, and thanks for joining us today. We continue to make significant progress capitalizing on our strong market position and innovative new technologies to grow Mistras and improve profitability. As evidence of this, in the first quarter, our revenue grew 5.5% in constant currency. Our gross margin expanded 270 basis points and we drove SG&A as a percentage of revenue down by over 40 basis points, resulting in an adjusted EBITDA of an 88% increase. These financial results were in line with our most recent outlook for the full year, which we are reaffirming today. And our overall financial condition also continued to improve, with our bank-defined leverage ratio reduced to just under 3.25 as of quarter-end, and we're well on our way to achieving our goal of being below 3.0 by year-end. We saw strength in our energy business in Q1, which is benefiting from the rapid growth of our data solution revenues. The organic growth in our business, in addition to lower healthcare expenses in the quarter, helped boost our gross profit margin by 270 basis points from the year-ago quarter. While reported SG&A was up on an absolute basis due to a few infrequent items during the quarter, we are working hard in making progress in fundamentally lowering our overhead towards our longer-term aspirational target of 20% of revenue. The first quarter represented a very solid start to a year in which we expect to drive growth, improve profitability, and continue to invest across the organization to unlock the hidden value of our strong brand, products, service line capabilities, and innovation. I'm particularly pleased with the growth of data solutions, which you can now see in the supplemental schedules included in our earnings release. Data Solutions includes our flagship OneSuite, PCMS, New Century, online monitoring, and the majority of our Onstream business, along with various other data monitoring services, including Sensoria. We were early to invest in this exciting area and data solutions permeates throughout all Mistras' geographies and industries. Data Solutions revenue grew by over 35% in the quarter and now represents 10% of our total revenue as compared to about 7.7% of our total consolidated revenue for the first quarter of 2022. We believe that Data Solutions will grow quicker than the other service offerings during '23 and over the longer term. Note that Data Solutions revenue is higher than we previously described it, which is due to the current inclusion of Onstream's customer reporting via its Streamview software within the data solutions roll-up. Nevertheless, the growth level of data solutions adds credence to and is a substantial reason why we are confident that we can achieve the significant bottom line increases we are expecting in our full-year guidance. We are continuing to see customers recognize the need to integrate data more fully to optimize their performance. Whether that involves getting data quicker or benefiting from the insights of data analytics, the markets have continued to increase their need to better capture and utilize the data generated by our facilities in order for them to stay competitive. Expect to see us continuing our investment in this area, responding to market demand and creating new growth opportunities by expanding within customers as well as new and existing customers. Similarly, our strategy to take on more of the machine, branding, and other activities complementary to our testing and inspection services, particularly in Aerospace, is driving growth. As we address online customer needs, supply chain issues continue to challenge the industry, forcing customers to seek new ways to move faster and to simplify their logistics. For instance, in the Aerospace market, we are opening a new 20,000 square foot facility adjacent to our Heath, Ohio operations to accommodate the increased demand for our solutions. In addition, other customers are supporting the installation of four new CNC machines in our Georgia location to expand capacity and increase the throughput for their products. We believe our continued ability to provide unique solutions will help alleviate some of the supply chain issues that our customers face, enabling us to grow and expand our solutions in Aerospace as well as other end markets. Note, there are still some isolated project delays in the Defense sector, which offset the progress being achieved in our overall Aerospace and Defense vertical. Nevertheless, we believe Defense is a large and growing opportunity over the long term, and we are aggressively seeking market share gains in this industry via our established relationships, utilizing our technical solutions consultants. Our Onstream in-line inspection testing business has continued its record growth of 2022 into the first quarter of '23. Onstream generates a considerable portion of its revenues from data solutions, and it serves both the upstream and midstream markets. This versatility is helping to generate robust growth and margins, which we expect to continue in '23. There was also significant progress achieved during the quarter, preparing for future growth towards improving operating leverage and profitability, such as investing in technology to digitize and standardize our processes. Finally, I would like to emphasize that our financial condition continues to improve with our leverage ratio at the lowest level since immediately prior to the Onstream acquisition in December of 2018. I would now like to turn the call over to Ed to give you more detail on our financial results for the first quarter.

Ed Prajzner, Senior Executive Vice President and CFO

Thank you, Dennis, and good morning, everyone. Results for the quarter met or exceeded our financial expectations. We continue to string together a record of consistent growth despite operating markets that continue to closely approach but have not yet fully returned to pre-pandemic levels while also working through significant foreign currency headwinds. Revenue growth was 5.5% on a constant currency basis in the quarter. This is a result of a combination of a stable and resilient oil and gas market, improving demand in commercial Aerospace and strong growth in private space in addition to significant growth of data solutions results across all markets. We are also benefiting from pricing actions initiated last year, which are now balanced with employee wage rate increases, whereas we had been lagging last year with a more pronounced inflationary pressure than we anticipate this year. Gross profit margin for the quarter increased 270 basis points compared to the prior year, primarily due to lower healthcare expenses and an improved sales mix, specifically data solutions. Selling, general, and administrative expenses in the first quarter were up $900,000 as compared to the prior year period due to a few infrequent items, but more importantly, down 40 basis points as a percentage of revenue. Cost containment remains a focus and is one of the main reasons we are confident that we can increase the operating leverage in our business model. Our North American segment, which was formerly called Services, generated significant operating income in the first quarter of $9.4 million, up from $3.8 million a year ago, with the operating margin expanding 400 basis points. As Dennis mentioned earlier, in addition to the absolute revenue growth, North America's operating margin is also benefiting from the rapid growth in data solutions. Adjusted EBITDA for the quarter was $10.4 million compared to $5.5 million a year ago, an increase of 88% due to the aforementioned gross profit expansion, and this was consistent with our most recent expectations. Our effective income tax rate actually a benefit for the quarter was 15.6%. For modeling purposes, we would anticipate an effective income tax rate of approximately 30% for the full year 2023. In an encouraging change from our historical trends, we saw a positive operating cash flow in the first quarter, primarily due to an improvement in DSO. Free cash flow was essentially flat in Q1 compared to a negative $8.6 million in the prior year period, which was a significant improvement year-over-year despite incremental CapEx spending of $1.5 million for new projects commencing in the year. For the full year, we still expect CapEx of less than $20 million. We paid down almost $2 million of debt during the first quarter, lowering gross debt to $189.3 million with net debt of $172.6 million. As Dennis stated earlier, this is a milestone event as we haven't been operating cash flow positive or paid down debt in the first quarter since pre-pandemic levels, specifically back to Q1 of 2019. Keep in mind as well that our bank group consists of some of the largest U.S. banks. This provides us comfort regarding both availability and access to liquidity, and we have ample access under our existing credit agreement, which does not mature until July of 2027. Despite the recent increase in reference rates, we still expect total interest expense of around $13 million for the full year due to the recent step down in leverage and continuing deleveraging throughout the remainder of the year. Given the solid results in the first quarter, we are reaffirming guidance for the full year 2023, that being revenue of between $710 million and $740 million, adjusted EBITDA between $70 million to $75 million, and free cash flow between $30 million to $35 million. Given stable and resilient energy markets, improving Aerospace demand, and continued data solutions growth, we are confident in achieving our outlook projections. Our business model is robust and sustainable through extremes of economic cycles, and we remain firmly committed to executing our plans while maintaining our intense focus on cost containment while continuing to prudently invest in our business. That is our strategy, both today and over the long term. And with that, I will now turn the call back over to Dennis for his wrap up before we move on to take your questions.

Dennis Bertolotti, President and CEO

Okay. Thanks, Ed. To summarize, we had a strong first quarter to kick off the year, and we continue to be optimistic about Mistras' future in '23 and beyond. Data Solutions now represents 10% of our business, and this will continue to provide top and bottom line growth. We're making tremendous progress preparing Mistras to improve productivity and efficiency to better leverage our inherent strength to capitalize in the sectors of our markets that are the fastest growing, so we can serve our customers in this ever-changing environment. Before taking your questions, I would like to sincerely thank all the talented dedicated Mistras' employees out there for their continued focus on delivering a safe and superior service offering while meeting our customers' highest demands. And with that, Jada, please open up the lines for questions.

Operator, Operator

Thank you. At this time, we will conduct the question-and-answer session. Our first question comes from Chris Sakai of Singular Research.

Chris Sakai, Analyst

Could you talk about the growth into 2023 of Onstream and data solutions, will we see something similar to this quarter?

Dennis Bertolotti, President and CEO

So we believe that both Onstream itself, specifically in the larger data solutions, are going to have a good growth year. We would think both of those should be in the double-digit range for the full year. Quarter-to-quarter, things will change obviously as projects move in and out. But there's a lot wrapped up in data solutions, the PCMS and New Century and Onstream and all those other ones, the online monitoring. So we believe there's enough of different service line offerings that as one goes up and down, the other more than make up for it. So yes, we see a good year for everything in there. Specific to Onstream, they had a great first quarter. Our growth as planned since the acquisition, they were a Canadian-based company and had a fairly strong representation in Canada before we acquired them. They're still doing well and growing in Canada. But the bulk of our growth has been in the U.S. as we had anticipated by leveraging off of our customers and things that we have as far as connections that we just didn't have that service line offer.

Chris Sakai, Analyst

Okay, sounds good. Can you discuss Sensoria this quarter and what the adoption rate was?

Dennis Bertolotti, President and CEO

The adoption rate hasn't been where we expected, but we've had as many, if not more, inquiries, and we're still doing tests. We still believe, for the full year, we'll be doing fine. It gets a little up and down on that quarter-by-quarter just because there's still some proof of concept out there. But we're not only doing much better on the proof of concept on the on-shore facilities or a piece of equipment. We're also getting the questions and inquiries about offshore as well. So we believe it's still on a very good trajectory. The full year for that should be good.

Ed Prajzner, Senior Executive Vice President and CFO

If I could add to that, Chris. Some of this just needs a little time to develop. As promised last year, we completed the installations of Sensoria, and it requires some time now. Certain conditions that Sensoria can detect on a blade need to occur naturally in the field. Keep in mind, this technology was installed on operational wind farms with actual turbines, where we have to wait for environmental factors to create the events that we can then monitor on the blade and assist our customers with. So, we need some time for that. There are many quotes being issued out there. It's similar to OneSuite. Last year, we shared numerous figures regarding customers, sites, and subscriptions, and we will do the same this year. We need some time for all those users to observe, learn, and expand their knowledge, form user groups, and then we'll actively pursue further expansion. Once we integrate both Sensorium into our data solutions, we will have a broader offering that is progressing as a whole and in incremental steps. However, it will ebb and flow, as Dennis mentioned, requiring the customers to absorb what they have received, learn from it, and work towards utilizing it more effectively. We'll navigate through this process this year. Nevertheless, as Dennis stated, Data Solutions will experience double-digit growth. Please don't project a steady 35% growth throughout the year; it might fluctuate somewhat but will certainly remain in solid double-digit territory, particularly in the low double digits.

Operator, Operator

One moment, while we look for our next question. Our next question comes from Mitchell Pinheiro from Sturdivant & Company.

Mitchell Pinheiro, Analyst

Just a clarification. So you talked about Onstream, I think, having a good quarter, but I'm looking at the overall Midstream revenue being down. How does that fit?

Dennis Bertolotti, President and CEO

Yes. And the easy answer, Mitch, is that there's two parts to that. One is that Onstream participates with its customers, both in mid and upstream depending on the customer; if it's coming from the gathering or going into the larger diameter, it could be a mid or an upstream. So while their quarter was good, it doesn't always flow only into Midstream. And the rest of Midstream for us is a lot of project-related things that just kind of vacillate with where to spend it. So for the rest of it, there's nothing really to be read there other than just capital projects coming in and out. But Onstream's revenue isn't just tied to one or the other of the two gas and oil, it is tied to the first two. We really don't see Onstream in refining. It's only the other two.

Mitchell Pinheiro, Analyst

Got it. As you look throughout the year, Midstream has been down for a few consecutive quarters, three quarters. What is the outlook for the year? Are we expecting a return to growth in Q2, or is there something else going on?

Dennis Bertolotti, President and CEO

There hasn't been any significant macro changes recently. On a micro level, we're focused on our capital projects. I don't have the Q2 data from last year to compare our performance, but I can say that the current projects are typical for us. Some areas have seen a decrease in work, while others have experienced an increase. Overall, it seems like the market is just fluctuating. Additionally, a lot of Onstream's growth is spread between different segments, so if Midstream gains more customers next quarter, we could see a shift in that direction as well.

Ed Prajzner, Senior Executive Vice President and CFO

There was a bit of timing in the first quarter. We experienced some permitting delays in the U.S. Midstream sector, and we also exited some Midstream operations in Canada at a lower margin. There are a few other time-sensitive factors at play, but we remain confident about the full year's performance in Midstream.

Mitchell Pinheiro, Analyst

Yes, it seems you have a challenging comparison. Last year's second quarter in Midstream was the highest, and you will be facing that this time. Therefore, we might see another decline in Midstream for Q2.

Ed Prajzner, Senior Executive Vice President and CFO

Yes, it's the CapEx, as Dennis mentioned. You've got some lumpy CapEx on the new stuff that happens over time, that can distort any given quarter. But over the longer term, we like that Midstream ILI, in-line inspection testing in Midstream. We like that, Mitch, and it's a good one.

Mitchell Pinheiro, Analyst

Okay. And then as you know, we're maybe five weeks into the quarter, what's the prognosis for the Downstream turnarounds and things? What's the outlook for that for the upcoming quarter?

Dennis Bertolotti, President and CEO

So I guess where I'd put it is it's always the most volatile of the three segments of our gas and oil. But this year, we haven't seen any reason that they've really come off of anything planned that much. There's certainly people that are moving around. There's a couple that had changes from two to three weeks on start times and things like that. But we haven't seen any major delays, nothing like if you go back to the years of '20, '21 or '22 or because of high price and barrel or because they didn't have access to folks, we don't see anything of that. So I think they're into a more normal gradual in planning. This span, we'll see how the full year goes. But we don't see any disruptions that we've seen in the past.

Mitchell Pinheiro, Analyst

Okay. And then another revenue question on Aerospace and Defense. I guess, Aerospace was up and Defense was down. Is that what happened in the quarter?

Dennis Bertolotti, President and CEO

Yes, it is. Our Aerospace really has seen a lot of growth for us in a lot of the individual labs back in the COVID days and the year or two after that were still suppressed. I will say we're still seeing supply chain issues. We've got customers who have tens of millions of dollars more of orders than they have capacity to get it done through the supply chain and materials and all these are things that the other customers that are always trying to get more through. So I think the demand, especially in the commercial and the space side of Aerospace, I think the demand is really starting to climb. I think there's a lagging in what the industry can get out from forgings and castings through all the other processes that it takes to get you there. But I think as far as the need for things to get done, yes, I think it's all there.

Mitchell Pinheiro, Analyst

As you assess margins, particularly the gross margin, I apologize for joining the call a bit late, so I may have missed some information. You mentioned that your pricing has now aligned with your labor cost increases. Should we expect the gross margin to begin normalizing in the vicinity of 30% for the remainder of the year?

Ed Prajzner, Senior Executive Vice President and CFO

I'll take that, Dennis. Mitch, yes, that's about right, yes. It does vacillate a little bit with volume. I mean Q1 is normally a little lower than the other three quarters. Q2 and Q3 can be a little higher, and then it might level back out in Q4. But 30 for the full year, yes, feels about right. You've got mix helping us now, data solution, strength of growth. They're certainly helping. We had some lower healthcare costs in the quarter, which certainly helped as well. But yes, that bigger topic you just raised, though, this lagging effect. Last year, we saw inflationary pressure of the pay rates going up faster than the bill rates, that did kind of normalize, did kind of level off. So thankfully, thus far and for the remainder of the year, we're not sensing that inflationary pressure we dealt with all last year. We kind of caught up and that kind of crossed over. So yes, it should be a very normal year and a solid year in gross profit margin. We might not go up 100 basis points here every year as we have done a couple of years ago, but we should definitely hold solid, and maybe ever so slightly bring it up. But yes, we feel very confident that there's not any real headwinds there hitting us and maybe a little bit of tailwind helps us from balancing out pay rates and bill rates at this point. So we feel pretty good on gross profit. And certainly, sales mix is going to help us too.

Mitchell Pinheiro, Analyst

Is there anything unusual happening with SG&A for the full year?

Ed Prajzner, Senior Executive Vice President and CFO

No, there should be pretty much, again, same as gross profit, normal year, no real headwinds, no tailwinds, all of our cost outs were recovered last year, and we were pleased. So yes, you have a pretty comparable year, normal year year-over-year, nothing unusually good or bad, it should be very comparable. And again, as we said earlier, in Q1 and Q4, we'll say it again, working very hard to keep overheads flat, if not lower. So we fully expect that for '23.

Dennis Bertolotti, President and CEO

There's a little noise like in Europe, our energy costs are up. We budgeted for it, it's exceeding a little bit over what we budgeted for. For instance, in some countries, they went back to the previous year and charged and added to what happened in '22. So there is a little bit there, but it's not so much that we called it out per se.

Operator, Operator

One moment for our next question, please. Our next question comes from Brian Russo of Sidoti.

Brian Russo, Analyst

I apologize if I missed this as I joined the call a bit late. Regarding the year-over-year revenue for oil and gas, it seems that Downstream and refining experienced an increase of about $3 million in revenue. Was this sector somewhat underperforming in the first quarter of '22? Is this type of quarterly year-over-year revenue growth something we can anticipate going forward? I assume the turnaround season didn’t really begin until late in the first quarter and would not have picked up until April and May.

Dennis Bertolotti, President and CEO

So you may want to talk a little bit about the restatement of some of the...

Ed Prajzner, Senior Executive Vice President and CFO

Yes. There was just one quick note, Brian. If you noticed on the press release, there's a footnote on that table. We had a small reclassification last year between Up and Downstream. We had an account that was misclassified, so we did restate the prior year breakdown of those three subsectors. Downstream was not as down as we initially thought it was last year. The benefit went into Downstream from Up. You'll see that your comparison is correct; it is up $3 million quarter-over-quarter. We did restate the prior year number for comparison purposes. So it wasn't down as much as we thought. But yes, that rate it is at now is ordinary. That increase you're seeing there, just under 10%, 9.3%, is a good comparison, and we're seeing a very solid, stable market in Downstream with some good growth.

Dennis Bertolotti, President and CEO

And to add a little color to that, Brian. There was more work in the January, February period this year than there was last. Again, typically, customers try to get a hold of a lot of the resources that are available in the market in the colder times because you don't have as many northern and colder facilities to try to take turnarounds then. So there was a little bit more work this year in January and February, which also helped the quarter-over-quarter for the year.

Brian Russo, Analyst

Okay. Great. And then on Aerospace and Defense, it's down year-over-year, which you discussed. But if I recall, there was one single Defense project that was delayed in the fourth quarter of 2022, and it was supposed to resume in the first quarter of '23. Did that actually occur?

Dennis Bertolotti, President and CEO

No, we're still in that situation and continue to work on it. There have been some changes, and I'm heading to conferences for the Defense sector today. There's a lot of ongoing activity, and we still believe in its potential. However, due to fluctuations in materials and government spending, results can vary. Overall, while we see significant potential, it's currently not performing as well as we anticipated, but we are still actively engaged.

Brian Russo, Analyst

Okay. So that might be a contributor later in the year. I guess...

Dennis Bertolotti, President and CEO

Yes, absolutely. I didn't do anything for us per se in this quarter, but we still believe it will come back up.

Brian Russo, Analyst

Okay. Great. I am trying to clarify your top line revenue guidance, which ranges from a low of 3 percent to possibly over 7 percent. What do you anticipate for the end market mix? Will it be similar to what it was at the end of 2022, or do you expect high single-digit growth in Oil and Gas and slower growth in Aerospace and Defense? I'm looking for a better understanding of what that mix might be and how it compares to pre-pandemic levels to ensure we feel confident that things have returned to normal.

Dennis Bertolotti, President and CEO

I believe the oil and gas sector is likely to show solid mid-single digit growth. For Aerospace and Aerospace Defense, we anticipate double-digit growth, particularly from the Aerospace segment throughout most of the year. The Aerospace and Defense sector may experience some fluctuations, but we expect Aerospace itself to achieve double-digit growth. When we are involved with Aerospace components, we often cannot determine how much is military-related, so we group everything together. Data Solutions is also expected to see double-digit growth. All these segments are influenced by customer demand, and larger projects can impact growth rates. This year, we might observe slightly more growth in the Upstream sector compared to the other two, primarily due to ongoing contracts. All three segments may see growth, but Upstream tends to be more stable with less revenue volatility, thanks to larger facilities that maintain consistent staffing. Growing in this sector is beneficial for us as it leads to more reliable sales.

Ed Prajzner, Senior Executive Vice President and CFO

Another important feature is the balance we have this year. Yes, oil and gas is strong. Yes, Aerospace will have another good year, perhaps not quite as good as last year's growth. Data is obviously affecting all end markets, which is a solid factor. However, the other positive aspect is that most of the other end markets, aside from a few larger ones, have shown improvement this year after mostly declining last year. This improved balance across our larger end market portfolio is a significant strength for us this year, with all geographies performing well. All service lines and non-core markets are also currently doing well, which was not the case last year. That is why I believe this year demonstrates notable strength and balance across all end markets, service offerings, and geographies. Defense will rebound, and Commercial Aerospace is performing very well, as is private space. Defense is likely the only sub-industry currently facing some delays, but it will get back on track. Overall, this year shows balance in various ways we present our revenue stream, all of which appear to be relatively balanced and robust, and we are pleased with that.

Brian Russo, Analyst

All right. Great. And then just one last question on SG&A. You said flat or down. I guess you mean flat or down on a full year basis relative to 2022, which was $166.5 million.

Ed Prajzner, Senior Executive Vice President and CFO

Yes. Pretty hard to keep it flat, yes.

Brian Russo, Analyst

Okay. So it's basically a $42 million or less run rate, regardless of what the percentage it is of revenue. Is that how we should look at it? Or are you still targeting kind of low 20%.

Ed Prajzner, Senior Executive Vice President and CFO

20% is a longer-term goal. Yes, it's not particularly affected by revenue volume, the SG&A. However, it will stabilize. The first quarter will show the highest number for the year. It will gradually rise throughout the year. We are committed to maintaining it flat or slightly down compared to last year's figure, absolutely. The rest of the year will remain relatively stable. It's not especially sensitive to revenue volumes.

Brian Russo, Analyst

Got it. And one last question, I apologize. But you're at 3.25x leverage now, well on your way to 3x. Maybe can you just remind us what the priorities and use of your sustainable excess cash might be once that 3x leverage is comfortably intact?

Ed Prajzner, Senior Executive Vice President and CFO

Certainly. I will begin with that, and Dennis can elaborate further. Right now, our primary focus is to reduce our leverage to below 3x. We will allocate our residual free cash flow accordingly until we achieve that goal. Once we reach that point, as we have mentioned in recent quarters, we will explore various investment options. One area for potential investment is enhancing our Aerospace shop labs, improving our additive manufacturing capabilities, and expanding our services for customers. This is an area where I would like to allocate more capital. Additionally, returning value to shareholders is also a clear option we can consider in the future. We might contemplate smaller acquisitions in the data sector at some point, but that is all on the table for future consideration. For now, we want to continue driving organic growth, focusing on maintaining our overhead costs, and selectively investing in our own capabilities. Our primary emphasis right now is on internal development for future growth. Acquisitions may be relevant again at some point, but not in 2023; our focus remains on what we are building and investing in internally.

Dennis Bertolotti, President and CEO

Yes, Brian, we are making solid long-term investments across all our segments, including adding another smaller facility and increasing our machining capabilities. We're taking a careful approach to ensure that our actions align with strong relationships with customers, particularly in the gas and oil sector. We want to avoid the pitfalls that others have faced in the past. Our goal is to reduce our leverage to below 3x, as we believe that will appeal to a certain group of investors, and ideally, we want to be in the 2x range. Until we achieve that, our focus will remain on paying down debt. We expect to be below 3x this year, which will give us more flexibility and make it more exciting to explore market opportunities.

Operator, Operator

I will now like to pass it back to Dennis Bertolotti for closing remarks.

Dennis Bertolotti, President and CEO

All right. Thanks, Jada. I'd like to thank everyone for joining the call today and for your continued interest in Mistras. Everyone, please have a safe and prosperous day. Thank you.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.