Earnings Call Transcript - MG Q2 2020

Operator, Operator

Thank you for joining the MISTRAS Group Conference Call for its Second Quarter Ended June 30, 2020. My name is Tequila, and I will be your event manager today. We will be accepting questions after management's prepared remarks. Participating on the call for MISTRAS are Dennis Bertolotti, the 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 significantly from those projected. Some factors that could 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 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 measures can be found in the table in yesterday's press release and in the company's 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 Dennis Bertolotti.

Dennis Bertolotti, CEO

Thank you, Tequila. Good morning, everyone. As anticipated, second quarter revenue was down 38% as compared to the year-ago quarter. But thanks to our ability to quickly flex our organization in the face of rapidly deteriorating business conditions, and by flex I mean make extremely fast changes to our cost structure, we were able to maintain year-to-date gross profit margin and actually improve it in the second quarter. We also delivered significant improvements across a variety of additional key financial metrics. Cash from operations was more than double the year-ago quarter, and free cash flow was up nearly 300% compared to the same period last year, which enabled us to reduce debt at a record pace. Gross margin was 33.1%, the best quarterly level in over five years despite the lower revenue. And over the first half of this year, gross margin was approximately the same as in the first half of last year despite a 25% revenue decline. We also drove overhead down by over 10% in the quarter. The success achieved this quarter demonstrates MISTRAS' strong ability to adjust and pivot to sustain positive cash flow during challenging economic circumstances, while maintaining the high level of service on which our franchise is built. Having succeeded in one of the worst quarters in recent history, we are preparing for recovery in our end markets. We are also preparing to capitalize on any opportunities being created by the sweeping changes in the way we all work, which has been accelerated by the global pandemic. A bright spot in these difficult times is pressure being put on our customers to condense their supply chains to get more value from their integrated partners, essentially doing more with fewer, and we are quickly adapting to this change which we have anticipated for some time. We believe the current pandemic will serve to accelerate the adoption of this strategy. The market is definitely evolving from its traditional commodity service orientation to a value-added orientation. That is why we have been actively enhancing our service offerings and diversifying into new markets. In our traditional oil and gas market, we have added new capabilities that are adjacent and complementary to our traditional NDT work, such as mechanical services and Rope Access. We are also introducing time and cost-saving technologies such as ruggedized tablets, and we are bringing more intelligence to our customers under MISTRAS' digital umbrella. Already these capabilities are contributing to our success both tangibly and intangibly. For instance, anecdotally, we have heard that some of our customers believe they get better information using MISTRAS Digital at home than they did when they were on their own job site. We are also very involved in the emerging industrial Internet of Things market. For instance, we have been having success with various Departments of Transportation, where our sensors are being embedded in bridges. We are seeing this in the renewable power space as well. This represents growth opportunities where we can leverage our unique technology into markets that have tremendous potential. In aerospace, we are seeing the same trend of compression in supply chains. We are gaining valuable experience with our Airbus and similar contracts, where we are consolidating the number of tasks the owners used to have to have done individually by separate vendors, greatly reducing the time it takes to move parts through the supply chain in addition to offering substantial cost savings. Again, we believe there will be a growing demand for this ability to add value to their aerospace supply chain. Our efforts to enhance our service offerings and broaden our product portfolio is one area the global pandemic has not impacted. As budgets loosen and the transition to value-added services accelerates, we believe we are ideally positioned to help customers consolidate their supply chain, reducing costs while generating better business intelligence. Because we track headcount, technician hours worked, and billable hours, we saw conditions gradually improve as we went through the second quarter, and this continued into July. Reporting from the field complements these trends as activity levels are improving and bidding opportunities are increasing. For example, we were just awarded a large new contract in the North American oil and gas market, which is scheduled to start soon and ramp up over the balance of the year. We entered the second half of the year in a strong position, having successfully managed through what many believe will prove to be the most challenging quarter of 2020. With our strong cash flow and reduced Capex spending, we have the liquidity needed to fund our operations and remain well within the terms of our bank agreement. We are headed into the second half of the year with good momentum. Based on the activity level we have seen, the steady improvement in technician hours, and some recent new contract wins, we expect a high-teen up to 20% sequential improvement in revenue during the third quarter over the second quarter of 2020. This should lead to second half revenue that will be higher than the first half. We also believe this level of revenue will support an increase in adjusted EBITDA in the second half compared to the first half, as well as positive operating cash flow in the second half of 2020. This is why we believe we can further reduce total debt this year. The second quarter of 2020 was a challenging period for MISTRAS, and I am extremely proud of our team and how they continue to perform under these challenging conditions. By putting the safety of our associates, clients, and partners first, while continuing to deliver outstanding services, they are strengthening the MISTRAS franchise and our relationships with our customers. We are committed to continually improving the value we deliver to customers, and we are equally committed to improving the value we deliver to shareholders. I would now like to turn the call over to Ed to give you more detail on our financial results for the second quarter and the first half of 2020.

Edward Prajzner, CFO

Thank you, Dennis. Second quarter revenue was consistent with our revised outlook, coming in at slightly under $125 million, which was down 38% from the year-ago quarter. We believe that the second quarter will be the low point of quarterly revenue this year, and we exited June at a run rate which was much higher than we entered April. And this trend has continued into July and early August. Hence, we believe that our third quarter revenue will improve progressively over the second quarter. For the six months ended June 30, 2020, our revenue was slightly over 75% of prior year revenue for the same period. This is evidence of the high level of recurring work from our run and maintain business despite the extreme turmoil in our key end markets. Additionally, despite a revenue decline of 22% sequentially in the second quarter from the first quarter, we generated second quarter gross profit of $41.2 million and a 33.1% gross profit margin, which represented an increase of approximately 760 basis points from the prior quarter. Our second quarter gross profit margin is the highest quarterly gross profit margin level that we have achieved over the past five years and is attributable to favorable sales mix and lower pass-through costs, such as travel, as well as temporary cost reductions and government subsidies being realized. On a year-to-date basis, we have maintained our gross profit margin at approximately 29% despite the significant decline in sales level. This is a function of our conscious effort to offset fixed costs under absorption with lower variable costs, demonstrating our ability to rapidly flex our organization, as Dennis mentioned earlier. Second quarter's selling, general, and administrative expenses decreased by slightly over 10% as compared to the year-ago quarter. This decrease is despite the addition of New Century's overhead to this year's cost and incremental unfavorable FX translation, which combined added approximately $2.1 million or 5% to this quarter's expenses. Beginning in April 2020, we initiated a cost reduction and efficiency program in response to the global pandemic, which is reducing the run rate of overhead by approximately 10%. This reduction is expected to continue at least through the third quarter of this year. Due to the reduction in revenue volume in the second quarter of 2020, we recorded a net loss of $2.7 million compared to net income of $7.4 million in the prior year period. We generated adjusted EBITDA of $11.5 million for the second quarter of 2020 compared to $24 million in the prior year. We were in compliance with all of our bank covenants as of June 30, 2020. Specifically, we maintained liquidity of over $55 million versus a requirement of maintaining minimum liquidity of $20 million, with liquidity being defined as cash and cash equivalents, plus unused credit on our revolving credit agreement. Secondly, we exceeded minimum EBITDA for the second quarter of 2020 by $8.1 million, as the minimum EBITDA requirement was $3.4 million, and we generated $11.5 million for the quarter. Although the maximum funded debt leverage ratio is currently suspended until the fourth quarter of 2020, wherein it resumes at a level of 5.25x, we are, on a pro forma basis, already at 4.8x on a rolling 12-month basis as of June 30, 2020. Our strong free cash flow, cash on hand, and cost discipline give us the necessary levers to help achieve prospective compliance with our bank covenants. We generated $28.8 million of operating cash flow during the second quarter of 2020, and given our exceptional free cash flow conversion, we generated $25.5 million of free cash flow in the second quarter, enabling us to pay down $18.8 million of bank debt as well as build up $5.7 million of cash on hand since the end of last quarter. Free cash flow benefited from a reduction in cash paid for capital expenditures, interest expense, and income taxes. We only used $3.3 million for capital expenditures in the second quarter of 2020, a nearly 50% reduction compared to the same quarter last year. For the first six months of 2020, we've only spent a total of $7.6 million for CapEx. This is in line with our goal to significantly reduce total CapEx this year from our typical run rate. Accordingly, our net debt, defined as total debt less cash and cash equivalents, was $216.8 million at June 30, 2020, compared to $239.7 million at December 31, 2019. Gross debt decreased by $18.6 million during the second quarter of 2020 from $258 million at March 31, 2020, to $239.4 million at June 30, 2020. On a year-to-date basis, we have paid down $15.1 million of debt. Our effective income tax rate was a 21% benefit for the second quarter of 2020 compared to 37% expense in the prior year period. Our effective income tax rate was a 14% benefit for the first six months of 2020 compared to 45% expense in the prior year period. The effective income tax rate in 2020 was lower than the statutory rate, primarily due to impairments recorded earlier in the year, for which we will not or do not expect to realize income tax benefits. This unfavorable impact on the effective income tax rate in 2020 was partially offset by income tax benefits of the CARES Act. Whereas the effective income tax rate in 2019 was higher than statutory rates due to the impact of discrete items, the global intangible low taxes income, and other provisions from the December 17 Tax Cuts and Jobs Act. The effective tax rate for full-year 2020 is expected to be in the low to mid-teens. The ongoing COVID-19 pandemic continues to impact our two largest markets, that being oil and gas and aerospace. Nevertheless, we anticipate a high-teen up to 20% sequential improvement in revenue during the third quarter of 2020 compared to the second quarter but down from the year-ago quarter. While it is extremely difficult to forecast with any degree of certainty at this time, we believe that consolidated revenue in the second half of 2020 will be higher than the first half of 2020, with progressive improvement in adjusted EBITDA and continuing positive free cash flow in the second half of 2020. This outlook is contingent on continuing macroeconomic stability, including the recent recovery in crude oil markets and the ongoing relaxation of certain stay-at-home mandates. We are also confident in our sustainable business model and remain firmly committed to carrying out our strategy today and over the long term. And with that, I will now turn the call back over to Dennis.

Dennis Bertolotti, CEO

Thanks, Ed. It's been proven many times that necessity is a driver for dramatic improvements and innovation. We believe the current pandemic is one of those periods where industrial companies will look at new and innovative ways of performing their work. MISTRAS has long been at the forefront of improving technology and creating new and better instruments, which can monitor important operational data generated by various equipment such as turbines, transformers, and other critical machinery. With monitoring being done remotely, online, and in real-time across more and more assets, much more data is being collected as well as being more thoroughly analyzed, thus providing owners with smarter and more intuitive information, which they can use to improve the efficiency and safety of their equipment. This is the path of the future. We believe that a crisis such as the current world pandemic can be a catalyst that significantly moves owners forward to adopt this transition much more rapidly as they will recognize that it will allow them to more efficiently manage their assets. MISTRAS believes that our customers will be looking for partners such as us with a more sophisticated approach to assisting them in condensing their vendor lists and searching for better business intelligence. This is our strategy, knowing that we can apply these tenets not only into our existing customer base, but also new customers or market segments we target in the future. Before taking your questions, I would also like to thank all the MISTRAS employees once again for your dedicated customer service, dedication, and attention to safety which you have shown in these extremely trying times. Your practicing of care and connect is working. Tequila, please open up the phone lines.

Operator, Operator

Your first question comes from David Ridley-Lane with Bank of America.

David Ridley-Lane, Analyst

Good morning. This is David Ridley-Lane on for Andrew. What were the achieved cost reductions in the second quarter? And how do you plan on sort of potentially using furloughs and other temporary measures in the third quarter as you balance supply and demand?

Edward Prajzner, CFO

David, this is Ed. I'll take this one. Q3 is going to resemble Q2 in terms of cost reductions. We're continuously adjusting our cost structure to align with revenue. Travel expenses, for instance, will decrease if we're not traveling, and will return as work resumes. Essentially, we're maintaining a very similar estimate for Q3 compared to Q4. We're looking at a significant reduction, around 10% of SG&A, due to the current cost-cutting measures we have implemented.

David Ridley-Lane, Analyst

Got it. I have a quick follow-up. With improved visibility into clients' plans, what would you estimate the percentage of planned turnarounds that shifted from the first half to the second half? And what percentage possibly shifted into 2021?

Dennis Bertolotti, CEO

Jon, do you want to grab that one? Jon, you might still be on mute.

Jonathan Wolk, COO

Yes, sorry. Sorry about that. It's been an interesting time as we've been planning, working directly with every customer in every region. Some turnarounds have just been deferred into 2021, some have been deferred into the second half and some have been ongoing, but they've been ongoing without travelers. They've been elongated. They've been extended. And so it's been probably the weirdest turnaround season that we've seen in many years. I'd say it's sort of a mixed bag. It's tough to give a precise quantification. It's probably a 50-50 in terms of what got deferred into the rest of this year. And then the question will be at what scale and scope, and those are open questions as well.

Dennis Bertolotti, CEO

David, I'll expand on that. The turnarounds we have experienced so far, as John mentioned, have been occurring with significantly less hourly impact. Usually, a turnaround lasts six or seven days a week, with 10 to 12 hour days. However, they have largely been limited to five days a week with eight-hour days, and some are extending to 10 hours. We had one instance of overtime, but that has been quite rare. Most turnarounds are extending their schedules. Additionally, several customers have approached us to conduct fitness for service evaluations on their equipment scheduled for upcoming fall turnarounds. They've inquired about potential impacts if they need to postpone these due to COVID and asked if they could consider extending them based on our capabilities for online, on-stream inspections, as well as expedited service calculations. Customers are assessing the possible effects if delays continue into future quarters. To John's point, much of what we saw in Q2 has been moved to the second half of the year, a small percentage has been pushed into 2021, and only one or two have been postponed further.

Operator, Operator

Next question comes from the line of Sean Eastman with KeyBanc Capital.

Alex Dwyer, Analyst

Hi guys, This is Alex Dwyer on for Sean. Congrats on the strong results. Maybe just back off to the last question. As we look onto next year, 2021, with the revenue deferrals you've seen this year, I guess I just wanted to get a sense on what your outlook is for the potential for growth next year. And then what are the big swing factors you would call out next year and maybe what should we be tracking, whether it be like customer Capex budgets or Opex budgets or even some general economy metrics? Thank you.

Dennis Bertolotti, CEO

I'll start by addressing the first point before passing it to the others for further insights. Concerning 2021, we have not finalized our budget yet. We plan to work on it much earlier than usual due to the unique circumstances of this year. In fact, we adjust our forecasts almost every month to better understand our manpower and resource needs. Our aim is to make 2021 resemble 2019 as closely as possible. The seasonality and its effects are still uncertain. Currently, we are noticing an increase in hours and personnel returning. We monitor the number of employees affected by COVID and track the weekly billable hours compared to last year; both are on the rise. Though the return isn’t as swift as we would prefer, this is part of the careful approach everyone is taking regarding safety practices and the spending cuts being implemented. We believe that the fall turnarounds should align closely with initial plans, although there is no guarantee that they will reach full capacity. Some customers may try to economize. However, at this point, we anticipate that the fall period will show improvement, and we hope to adopt a perspective similar to that of 2019. Again, we haven’t progressed to that stage yet. Ed or Jon, would you like to add anything?

Jonathan Wolk, COO

Yes. Jon, here. Dennis, thanks. I'll tag on to that and just say, look, we believe the second half will be higher than the first half of this year. As Dennis was saying, as you go into next year, assuming a pattern that's at least fairly close to what 2019 was, you're going to see some pretty significant growth off of a very low '20 baseline, particularly in Q2.

Alex Dwyer, Analyst

Yes, that's very helpful. And my next question is regarding the competitive environment. Can you talk about some of the regions or sectors that gain share, or see the opportunity to gain share? And is there a point at which smaller competitors become the stress market positioning becomes incrementally better?

Dennis Bertolotti, CEO

Yes. I'll start. It's definitely put a lot of pressure on businesses like ours, as well as much larger and smaller ones. You can see it in communities with small restaurants, bars, and other local businesses struggling to cope. I believe there will be challenges for our smaller customers and competitors. Additionally, I think as we discuss technology, customers will seek out certain types of vendors. They will want financially stable vendors with whom they can establish three- or five-year contracts, ensuring their presence during tough times. Moreover, customers will favor vendors capable of handling more complex situations and taking on increased responsibilities. Ultimately, there’s only so much you can reduce costs through hourly or fixed rates. At some point, the approach has to become more effective and intelligent, often meaning fewer vendors managing various steps and more vendors focused on specific tasks or complete projects. Therefore, I think this will change how customers evaluate their vendor options.

Operator, Operator

Your next question comes from the line of Brian Russo with Sidoti.

Brian Russo, Analyst

So, the up to 20% sequential increase in the third quarter versus the second quarter, it still kind of implies a decrease of about 22% from the third quarter a year ago. Just curious to know what's driving the decrease? Is it what you referred to earlier, the delays in the turnarounds? Or is it cancellation of projects? I just want to get a little bit more color on the year-over-year revenue driver.

Dennis Bertolotti, CEO

Yes. I'll take first, and I'm sure Jon can back me up. But you're right. We're talking sequentially now because the truth is there's very few companies in our space, and I think that would compare 2020 to 2019 in these months. We're hoping to get closer to the run rate. Like I say, next year, I don't know if it'll be a flat repeat of 2019, but we're hoping to approximate it. But we haven't even gotten the budget yet. So when we see it, truly, Brian, right now, aerospace in Europe got hit early and quick. It's going to stay a decrease for aerospace in Europe. We're starting to see a little bit more of that in the United States. We can definitely change our load in aerospace and hold our margins, but you're going to be on lower revenue. The gas and oil spend right now for the rest of the year, customers, like I say, the turnarounds are being done at reduced levels. They may be being done at even just bare minimum. Sometimes, they'll make sure that the safety and compliance and what they need done. They may or may not spend their entire budget on the complete turnaround. So we're being cautious when we give guidance because we know those things could happen. And the truth is our folks in the Gulf are looking at these high contact rates and all the COVID, and they worry about it if customers will start to impose stricter mandates. And what happens is, you can only take the people that are local. You're not going to bring subject matter experts that we have around the country and bring them into those locations. The customers are not going to want to travel them. So they do things for reduction. So we worry about that as well.

Brian Russo, Analyst

Okay. Great. And just to clarify, the cost cuts in the second quarter, I think you said that can also be leveraged in the third quarter. Does that equate to similar type gross margins?

Edward Prajzner, CFO

No. Brian, it's Ed here. I would say that your year-to-date gross profit margin, the 29%, that's more what I would expect going forward. As one example, some of these cost outs, such as travel, are passed through with really very little or no margin on. So yes, we don't expect this quarter's 33% to keep continuing. As revenue comes back, some of your pass-throughs come back. So we believe the 29% through six months, that's more what you should be looking to expect in the back end of the year.

Brian Russo, Analyst

Okay. Great. And then one more question on the oil and gas contract that you mentioned earlier. Can you provide any details on that? Is that midstream, downstream or any other subsector of oil and gas?

Dennis Bertolotti, CEO

Yes. We're being a little cautious about it because it's still not fully operational, but we can say it pertains more to what you would refer to as upstream, not just typical refinery operations. It has a slightly different focus than that.

Brian Russo, Analyst

It appears that the Services segment performed better in terms of gross margin compared to the International segment and another sector. Can you explain the differences in margin between the Services, such as higher-margin product offerings or the ability to manage incremental costs effectively compared to the other areas?

Dennis Bertolotti, CEO

I’ll let Jon explain, but the quick answer, Brian, is that the difference lies in how the countries manage the pandemic. In the United States and to some extent Canada, we can quickly adjust our resource levels to match utilization. However, in Europe, the situation is more complicated because they kept everyone employed in various countries and within our facilities. We were able to recover funds rapidly, often getting the money back within five or six days after filing for it, which was advantageous. However, your pass-through is starting to resemble a pass-through arrangement since all the money is essentially just trading dollars. You're either paying a dollar for an employee or getting a dollar back, or sometimes a bit less, which results in money being somewhat washed. This will likely cause your margin to decrease as a result. Jon, do you want to add anything?

Jonathan Wolk, COO

Yes. I'd agree with Dennis. We have more flexibility in terms of being able to reduce hours in the United States and to reduce headcount, the cost of making those reductions and so forth. We have a lot more flexibility. The other thing is that we had in the United States and Canada, a very good sales mix. During Q2, the mix toward higher-margin pipeline work and aerospace tilted more in that favor. So that helped as well in a relative sense. And as Ed alluded to earlier, much less out-of-pocket cost, traveling costs associated with typically busy turnaround season. We certainly missed that work. But on the other hand, it did help margins by 1% or 2%.

Brian Russo, Analyst

Okay. Great. One last question, if you don't mind. Just bigger picture, MISTRAS Digital and the industrial Internet of Things. I mean, at what point does this become a revenue driver? You referenced tangible versus intangible right now. Just curious what your bigger picture and outlook is for that kind of industry innovation?

Edward Prajzner, CFO

Yes. John's running it, but I'll say one quick thing on that, Brian. I mean, we're actually looking at that as being more of a market driver for us than revenue. Certainly, it will bring some revenue with it. But especially in the days of COVID right now, trying to show a customer how you're going to save them money by charging them upfront has been a problem. Their budgets are slashed, and they have very little flexibility to spend outside of a reduced number. So for us, we believe that we have this technology that can really show a difference in how we get work done for our customers. So we see that the most important aspect is going to be the ability to retain and grow our market. But there always is going to be some revenue in there but truthfully, it's not our main goal. Jon, if you want to add on?

Jonathan Wolk, COO

Yes. Thanks, Ed. I completely agree. The two main benefits for customers are the improved visibility they gain regarding the status of their plants and the increased productivity on both their resources and ours. In the long run, streamlining operations will enhance the experience for them and our employees, while also helping us capture more market share. That is really our strategy for success.

Operator, Operator

Your next question comes from the line of Mitch Pinheiro with Sturdivant.

Mitch Pinheiro, Analyst

Yes, hi, good morning. I apologize if anything I ask is repeat. I lost my phone battery charge in the call. In terms of your business in this quarter, what percentage of this quarter was like a run and maintain revenue versus like Capex revenue? And where do you see revenues in the second half?

Jonathan Wolk, COO

Yes, it's Jon. I'll take it. I'll start. I mean, we don't typically break out those. And sometimes it's a little bit hard to tell. But I would say that anecdotally, there was a lot more typical run and maintain work than there was project work just because projects being discretionary in timing, many customers were just not looking to spend on projects during Q2. So the revenues that we did have were much more run and maintain-based than they would have been typically.

Dennis Bertolotti, CEO

Yes. Mitch, that's actually one of our strengths is that having as many sites as we do, we're near triple digits or at triple digits where we have more than a handful up to hundreds at a site. That's a big part of why we got through this a little bit less speedup than people would expect or others may have just because we're not as capital dependent on that. So our ability to have folks. Now albeit that said, they've reduced the number of folks at the site. They've reduced the number of hours at the site. So I mean you still had sites up and running. They just weren't doing the spend like Jon was saying that you would have seen in a typical year.

Mitch Pinheiro, Analyst

I mean, do we have to consider whether reducing the number of workers and hours on a run will lead to a lasting decrease in on-site maintenance hours? Is that going to be a challenge, or will things return to normal?

Dennis Bertolotti, CEO

Mitch, I’ll start with that. Essentially, what’s happening is that costs are being deferred. As Jon mentioned, there is a reduction in capital expenditure. This means that maintenance is being prioritized based on what is most urgent for safety and operations, while the rest is being postponed. If we can demonstrate how to operate more effectively and efficiently with digital tools, we can take on various services to support this and perhaps accomplish more with less of each service. Customers will be looking for ways to benefit from this approach. However, it's important to note that you can't truly benefit by neglecting maintenance, as issues will eventually arise. Even when we advise customers on using engineering and online inspections to extend the duration of a turnaround, the necessary work still needs to be completed; it’s just delayed for a bit.

Mitch Pinheiro, Analyst

Great. Yes. Looking at 2021, I understand you're not providing guidance, but I'm trying to gauge how customers view the year ahead. Are all the deferred projects expected to take place in 2021? Will there be any reduction in spending, or do these projects need to be addressed at some point? What’s your perspective on where your customers stand on this?

Dennis Bertolotti, CEO

Jon, do you want to take first shot?

Jonathan Wolk, COO

Yes, definitely. Mitch, it seems that, as Dennis mentioned, if work is being postponed at the moment, many customers have received temporary waivers concerning compliance with standard OSHA inspection levels. These deferrals are due to COVID and are not permanent. To Dennis's point, while work is being deferred now, it will eventually need to be completed. Therefore, there is a growing demand due to the current situation. Looking at the long term, as Dennis pointed out regarding digital processes, we expect to see ongoing efficiency improvements that will help customers minimize non-essential work. While the inspection requirements will remain unchanged, we can reduce the administrative tasks associated with those inspections. Overall, I believe the deferred work is likely to exceed the backlog and should contribute to growth next year.

Mitch Pinheiro, Analyst

In terms of SG&A, the team did an excellent job cutting costs this quarter. Is this a sustainable level, or have we found the right balance?

Edward Prajzner, CFO

You need to look back about three years to find the level we are at now. There are certainly some temporary cost reductions that will return when volume increases. However, we are continually reviewing our overheads and adjusting what we need. This is a sustainable level. We will be reducing fixed overheads going forward rather than increasing them. We are carefully examining this as volumes recover and will continue to adjust our footprint. To answer your question, the level we are at now is very sustainable moving forward.

Operator, Operator

Thank you. And there are no further questions at this time.

Dennis Bertolotti, CEO

Okay. So you turn it back to me then? Okay. Thank you. Okay. I'd like to close up by saying that our results thus far this year demonstrate our ability to quickly flex our cost footprint to maintain our gross profit margin, while we generate strong cash flow to fund our operations and deleverage our balance sheet. We will believe there will be a market recovery in the second half of 2020 with resumed revenue growth and adjusted EBITDA expansion. We are prepared to capitalize on the opportunities being created by the sweeping changes in the way we all work, which has been accelerated by the global pandemic, specifically the transition of value-added services where we believe we are ideally positioned to help customers consolidate their supply chain while generating better business intelligence. And we are bringing more and more intelligence to our customers under the MISTRAS' digital umbrella. Necessity is the driver for dramatic improvement and innovation, and we plan to stay at the forefront of leadership in our industry, pursuing growth opportunities where we can leverage our unique technology into markets which have tremendous potential. As always, I remain firmly resolved to the success of MISTRAS, and I am extremely confident and optimistic in our long-term prospect of increasing shareholder value. On behalf of the whole MISTRAS' team, I would like to thank everyone for joining the call today, and we wish everyone a safe, prosperous, and healthy future. Thank you.

Operator, Operator

Thank you for your participation. This does conclude today's call. You may now disconnect.