Good morning, ladies and gentlemen, and thank you for joining MISTRAS Group's Conference Call for the Second Quarter of Fiscal 2022. My name is Kurt Wright, and I will be your event manager today. We'll be accepting questions after management's prepared remarks. Please press star one one on your phone to join the Q&A roster. 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 John Wolk, Senior Executive Vice President and Chief Operating Officer. I want to remind everyone that remarks made during the conference call will include forward-looking statements. The company's actual results could differ materially from those projected.
Some of those factors can cause actual results to differ, are discussed in the company's most recent annual report on Form 10-K and other reports filed with the SEC. The discussion in this conference call will also include certain financial measures that were not prepared in accordance with U.S. GAAP. Reconciliation of these non-U.S. GAAP financial measures to the most directly comparable U.S. GAAP financial measures can be found in the tables contained in yesterday's press release and in the company's related current report on Form 8-K. These reports are available at the company's website in the Investors section on the SEC's website. I will now turn over the conference to Dennis Bertolotti.
Thank you, Kurt. Good morning, everyone, and thank you for joining us today. I am continually excited about the future of MISTRAS, and I wanna thank our employees for their efforts as they continue to serve our customers and exceed their expectations. This quarter was extremely busy as we closed a new credit agreement, we experienced continued recovery in our end markets, and expanded the growth of our strategic initiatives in data and digital solutions. Revenue this quarter was up year-over-year for the eighth consecutive quarter. We have continued to see strong demand in our key end markets, and we are optimistic for the second half of this year. Our aerospace and defense business was up nearly 33% in the second quarter as the commercial aerospace market surged forward as we had anticipated.
This rebound in commercial aerospace, coupled with strong growth in both the private space and defense markets, gives me confidence in this industry's ongoing recovery and expansion and validates our ability to meet and exceed customers' needs. I am also optimistic for strong third quarter results which would keep us in line with our full year expectations. Adjusted EBITDA for the second quarter was $18.3 million, down from a year ago, where a favorable sales mix was more than offset by gross margin pressure due to inflation. We expect gross margin to improve as we move through the remainder of the year, primarily by maintaining a favorable sales mix and taking proactive measures such as selective pricing adjustments in line with the inflationary cost pressures we have mostly been absorbing.
Consequently, with the expectation of continued growth in the third quarter and confident in strong fourth quarter results, we reaffirm our 2022 full year guidance. While we are showing progress with our diversification initiatives, energy remains our dominant market. The second quarter got off to a good start with strong April results, but as we moved through the quarter, we began to experience delays and deferrals concentrated once again in the downstream business, where near record crack spreads have refineries targeting high utilization rates. In our midstream business, Onstream had record revenues in the second quarter, and we see this trend continuing into the latter half of 2022, given market demand projections. In contrast to our downstream business, high production levels and the corresponding transportation and distribution activities are increasing demand for pipeline inspections.
Consequently, we expect a strong recovery in our energy business in the third quarter and a return to historical patterns in the fourth. As I mentioned earlier, and as we had anticipated, our aerospace and defense business has strengthened in the first half of 2022, and in fact, is up over 28%, and we expect this positive momentum to continue through the remainder of the year. Private space remains strong, and we believe our focus on reducing the production cycle time for parts will continue to drive faster growth in that market. While the supply chain remains a challenge to this industry, it has created an opportunity for MISTRAS to leverage the solutions business we develop by alleviating supply chain issues as we had done previously for our customer, Safran, in France.
We are quite excited that the expansion and installation of a new machining equipment and capabilities at our Georgia aerospace facility is nearly complete. Now we can perform adjacent value-added services such as machining for inspection procedures, saving cycle time and reducing transportation which reduce production time and cost for our customers. We are excited to get this operation running so that we can further leverage our capabilities in private space, aerospace, and defense industries. As part of our aerospace and defense growth strategy, I'm very pleased to announce that the Honorable Jay M. Cohen has joined the MISTRAS team as an advanced technical solutions consultant. Retired Admiral Cohen will help MISTRAS expand its footprint in the military and defense, maritime, and marine sectors, leveraging his extensive knowledge of the naval industry, catalog of high-level contracts, and experience navigating government procurement procedures. In our renewables business, Sensoria continues to grow.
Many of our ongoing pilots and demonstrations are quickly scaling up to full commercialization, with approximately 50 wind turbines now being monitored. This puts us well on the way to achieving our goal of monitoring up to 100 wind turbines by the end of 2022, with the prospect of greater growth in 2023 as we rapidly expand our capacity. Our continued focus on renewables includes penetrating the wind farm market and building relationships with OEM manufacturers. Our attention remains on both large and small wind farms, including the market for massive offshore turbines. Finally, our data solutions business, especially PCMS and New Century Software, had a strong quarter. OneSuite adoption continues to increase as its integrated applications, now standing over 90, have been installed at nearly 40 unique customers spanning over 150 sites with close to 900 individual subscriptions.
That is considerable growth in the last 90 days. OneSuite remains on track to double its revenue this year and enter 2023 with strong momentum for continued growth and expansion. The other process industries markets also had strong growth in the second quarter, which further illustrates the benefits being realized in our non-energy business and our push for greater diversification in our end markets. Continuing to increase revenue diversity should also benefit gross margin going forward, as virtually all these industries carry an above corporate average gross margin. Ed will go through the details in a minute, but gross margin in our energy business should also begin to benefit from pricing actions we are taking due to rising labor costs. Recently, we have seen more acceptance from a market that has been historically resistant to price increases.
As we continue to implement our pricing strategy, we expect to see this gradually increase our gross margin over the next few quarters. Also, I would note that overhead today is little change from what it was three years ago in the pre-pandemic 2019. Despite current inflationary pressures, we believe we have a great opportunity to improve operating leverage and grow the bottom line faster than revenues. Additionally, I am pleased to announce a new credit facility which provides us with much greater flexibility and liquidity to fund our growth initiatives, particularly our strategic initiatives in data solutions and renewable energy. It will enable us to both enhance our organic growth initiatives as well as accelerate the pace at which we consummate strategic acquisitions, thereby creating value for our shareholders while investing in our employees and infrastructure.
It also demonstrates the strong confidence in MISTRAS exhibited by a supportive consortium of seven strong financial institutions led by the two largest financial institutions in the U.S. Ed will provide additional details shortly. I'm looking forward to the second half of the year, where we could have our strongest ever quarterly services segment revenue in the third quarter, achieve a full year doubling of OneSuite revenues, monitor up to 100 wind turbines, benefit from an expected rapid recovery in the commercial aerospace market, and launch our new supply chain service for the aerospace, defense, and private space industries, effectively transcending the lingering effects of the pandemic and energy market volatility. Inflation remains an ongoing challenge, but we are making progress on that front.
Our improved financial flexibility, as Ed will discuss during his comments, the cost reduction initiatives we are initiating, and our pricing actions will help partially offset these impacts. As the year progresses, our new credit facility provides flexibility to increase our investment in both organic growth initiatives and more closely evaluate acquisitions that meet our strategic objectives. I'm optimistic about the prospects for growth in both our existing and new markets in 2022 and beyond. I would now like to turn the call over to Ed to give you more detail on our financial results for the second quarter.
Thank you, Dennis, and good morning, everyone. Revenue in the second quarter was up year-over-year for the eighth consecutive quarter as we continue to extend our record of consistent growth. Results were once again a mix of strength in key markets that continue to recover from the pandemic, offset by the continuing challenges in the energy market, which is operating at peak capacity utilization. Our efforts to diversify away from an energy concentration have been progressing, and as Dennis just mentioned, many of our new growth initiatives are meeting expectations. Turning to results for the second quarter, consolidated revenue increased approximately 3% on a constant currency basis to $179 million. Nominally, revenue was up approximately 1%, with growth driven primarily by strong performance in oil and gas, aerospace and defense, and other process industries.
Oil and gas was up overall on the strength of up and midstream. However, as the quarter progressed, we experienced pushouts and deferrals in our downstream business. It's clear these were mostly deferrals as we've already seen a rebound early in the third quarter in our services segment. Hence, as Dennis said, we anticipate a strong third quarter and we expect to be on pace to achieve our original 2022 revenue growth projections. Gross profit for the quarter was approximately $54 million, with gross margin 29.9% compared to 31.1% a year ago. Gross margin continues to reflect higher healthcare costs in North America and the lag in price increases in response to inflationary cost increases. In addition, gross margin in the year ago quarter benefited from pandemic triggered Canadian wage subsidies, which have since expired.
Beginning in the third quarter, we will be comparing against a year ago quarter in which almost all of the pandemic related benefits had expired, so we will have a truer, cleaner apples to apples comparison for all future periods. This will more clearly demonstrate the progress being achieved on gross margin, which we expect to trend significantly higher over the balance of the year from increased volumes, improved sales mix, efficiency improvements and pricing increases. Selling, general and administrative expenses in the second quarter were $40.7 million, which is down sequentially from $42 million in the first quarter, although up 2.4% from a year ago, much of which relates to inflationary pressures. Despite these ongoing pressures, we expect to maintain overhead at the current level over the remaining quarters of this year, and it's also one of our keys to increasing operating leverage.
Interest expense for the quarter was $2.1 million, down from $3.2 million in the same quarter of last year, as we have reduced both our operating debt or our outstanding debt balances as well as the associated interest rate via improved leverage and strong free cash flow generation. Under our new credit agreement, we expect quarterly interest expense to remain in this same range. For the quarter, we reported net income of $4.7 million or $0.15 per diluted share. Adjusted EBITDA for the quarter was $18.3 million. For modeling purposes, we would anticipate an effective income tax rate of approximately 30% for the remainder of 2022, exclusive of any discrete items.
Free cash flow for the quarter was $9.3 million, up from $8.5 million a year ago, and in line with our typical free cash flow conversion of approximately 50% of Adjusted EBITDA. We expect free cash flow for the year to approximate 50% of our Adjusted EBITDA, except for the payment by the end of the year of $4.5 million in payroll taxes that had been deferred earlier under the CARES Act. This payment will be the second and final installment associated with this CARES Act benefit. Capital expenditures were $3.9 million for the quarter and $7.1 million for the first half of this year. We expect capital expenditures to be in line with our expectations and to be under $20 million for the full year.
As of June 30, 2022, we had gross debt of approximately $200 million, down from just under $203 million at the end of the year, and net debt of $181.8 million, compared to $178.5 million of net debt as of year-end. Given that our primary use of cash flow continues to be the reduction of outstanding debt, we believe our forecasted full year free cash flows will enable us at the end of the year to be at or below our targeted leverage ratio of being equal or less than 3x, which remains our goal, even though our new credit facility provides quite a bit more flexibility. Once that level is achieved, we intend to evaluate our use of cash flow as a means to accelerate growth and build shareholder value.
Let me quickly recap the highlights of our new credit facility that was announced under a separate release earlier this week. The new credit facility consists of $315 million of aggregate credit, including a funded $125 million five-year Term Loan A and a committed $190 million five-year revolving facility. The new credit agreement matures July 30, 2027. This facility significantly expands the unused yet available revolving credit by almost $100 million at closing. The arrangement also includes significant reductions in required term loan amortization, specifically decreasing the required payments to $1.6 million per quarter for year one and two, replacing a facility that had been requiring $5 million per quarter, improving available cash by nearly $15 million per year.
The amortization schedule does increase in years three through five, but remains well below the level of the prior facility. The new facility also provides leverage flexibility by increasing the maximum allowable total funded debt to 4x Adjusted EBITDA from the third quarter of 2022 through the second quarter of 2023 measurement periods, with a step down to 3.75x for the Q2 2023 measurement period and for all periods thereafter. This compares to the prior allowable funded debt level of up to 3.5x for the June 2022 period and all measurement periods going forward per the previous agreement. The company has also retained a $75 million uncommitted accordion. The syndication of the facility was oversubscribed by $100 million and includes seven banks, all of which are included within the top 35 financial institutions in the United States.
Since upsizing our credit facility in December 2018 to finance the Onstream acquisition, we have repaid nearly $80 million of debt over a period of unprecedented weakness in two of our largest markets. This new credit agreement provides us with ample liquidity to fund our growth initiatives, as well as the flexibility to more immediately consider strategic acquisition possibilities. Despite rising rates and overall credit concerns, this facility clearly illustrates the confidence of the financial markets in our strategy, recovery plans and in management. As Dennis mentioned earlier, we expect a strong recovery in our energy business in the third quarter and a return to historical patterns in the fourth quarter.
Consequently, with the expectation of continued growth in the third quarter and confidence in strong fourth quarter results, we reaffirm our previously announced outlook for the full year 2022, that being revenue between $695 million-$715 million, Adjusted EBIT between $65 million-$69 million, and free cash flow between $27 million-$30 million. While the second quarter results were below our expectations, we are confident in the level of work expected for the second half of 2022, given strong energy markets, improving commercial aerospace demand, robust industrial manufacturing, and a rapidly developing data solutions offering. With that, I will now turn the call back over to Dennis for his wrap-up before we move on to take your questions.
Thanks, Ed. As we move into the second half of the year, I'm optimistic that we will improve our gross and operating margins by implementing higher prices in partnership with our customers to offset the increased cost of our business. This recovery of labor cost increases has been dragging on our results due to the lagging impact of increasing our prices. We will also continue to look at all overheads and constantly calibrate our cost footprint with our current revenue level to help ensure that we can maximize our returns as revenue continues to rebound. We are focused on optimizing our efficiency, improving the operating leverage in our business, and generating increased shareholder returns. As our newer growth areas such as wind, private space, and digital take hold, we will improve our results and gain market share.
Our core legacy markets are certainly recovering, most notably the commercial aerospace market, and we believe this is a transformative year for all our growth initiatives. We expect to exit the year with a strong foundation of renewable energy growth via Sensoria, which will create monitoring as well as inspection and repair opportunities, along with our continued commercial aerospace recovery, our private space growth, and last, but certainly not least, with data solutions expansion via OneSuite. Government entities continue to impose new and more restrictive compliance and safety standards in both North America and Europe. There has been significant public interest and investment in much of today's critical industrial infrastructure to ensure they operate at peak efficiency. When coupled with global supply chain issues that demand new innovative thinking, a strong market offers many opportunities that will support long-term growth.
Our crossover mechanical offerings are very well positioned to serve this niche. Our focus remains on developing new and innovative solutions that help our customers meet these challenges and improving their productivity. We're finding success in serving more customers with what we believe is the best digital offering available. Before taking your questions, I'd like to thank all MISTRAS employees for your continuing dedication to constantly evolving customer needs. I'm proud of the team and the way we've executed on our strategic plans for the future while continuing to focus on serving our customers in the present. Your focus on caring for the safety and well-being of everyone that we interact with is at the core of MISTRAS' vision.
By sticking to the tenets of our Caring Connects initiative, we provide a better workplace, not only for the current MISTRAS family, but for all those who will join us in the future to add to our legacy. Kurt, please open up the phone lines.
Thank you, Dennis. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you'll need to press the star one one on your telephone and wait for your name to be announced. Please stand by while we complete compiling the roster. Our first question comes from Brian Russo of Sidoti & Company. Thank you. Please, your line is open.
Hi. Good morning.
Morning, Brian.
Hey, just on the project delays in the downstream end market of energy. You know, clearly that kind of triangulates with, you know, some of the, you know, the relatively historically high utilization rates. You know, what types of projects are being delayed? And what gives you the confidence that, you know, that's the third quarter could be your highest quarter historically in that sector? You know, even though the third quarter tends to be a period where refineries run at the highest utilization rates, you know, given that it's a heavy, you know, air and ground travel season and demand for the byproducts.
Sure. Good point. The summer driving season pushes utilization, right? To answer the first part of your question, the delays were inside the capital turnarounds of the spring, going back to late 2021, when we were putting together our budget, we had forecast an extremely aggressive spring, which to your point is in line. The spring lately has been the stronger of the two seasons. What happened is as the year started getting into January and February, you start hearing about ahead of time where a couple of them pushed out into later in the year. I think only one or two actually pushed out of 2022, but most of them pushed out and a lot of them shortened.
The start would be reduced by a couple days, and then what you thought was the peak would be sooner and the end was also reduced. Basically that was driven by the historic crack spreads, right? I mean, 50% higher than they've seen in the last 40 years. The customers would even tell us, you know, there's really no mechanical problems. Sometimes you hear about not enough material at site or something else going on. It's like, "Look, we're just trying to reap a little bit of what's going on." Plus, they're under hard pressure to keep up demand. The gas prices are going up and, you know, there's only so many refineries for the demand as it's sprung back. They're under pressure to keep it out there. They mostly got pushed into the third quarter.
To the second part of your question, it's not that something could happen, a hurricane could come through or something could be unexpected, but we haven't been hearing about the pushes yet. It's still only early August. It'll be, you know, by end of August and into September, October, that is when it's peaking. Typically, if you're gonna start moving things around or pushing out, you'd be hearing about it pretty soon. While we can't foretell who's gonna do what and where, we haven't been hearing about it, plans are still going on. It's still just a lot of the turnarounds that we're expecting. Again, maybe a couple pushed into 2023, but it was small number in dollars on that we've seen.
Okay. Got it. Great. Switching to aerospace and defense. To just summarize your comments, you're starting to see true evidence of the commercial aerospace recovery while the defense side has been strong all along. The 2Q revenue of $22 million, you know, that gets you pretty close to that, you know, $90+ million pre-pandemic run rate in 2019. I'm just curious, how soon do you think you'll get there given, you know, latest developments in the space?
The $90 million you mean for the aerospace run rate?
Correct.
Is that what you're referring? Yeah. You know, annual. From what we see, Brian, the demand is there. The supply chain is a little bit of a hindrance to them, and it's not so much on our part. We're doing what we can to work out the middle, but a lot of it's coming from the castings and forgings and the speed that things are being delivered. We're still seeing some problems there, and they're experiencing higher than normal quality issues with that. The things that we're doing about trying to keep those moderate steps in between the initial material going out and then being finalized as a finished product, we're trying to take on more and more of those steps so that you don't have as much trucking and queue time all around the country, and that's saving time and money.
I think we're doing better on that. To your point, will 2022 be at that same run rate? No, it won't. We're catching up. We would expect 2023 to be looking like that as long as everything can, the raw materials and all that can keep up with it. Outside of the only place where we're seeing issues truthfully is like in one of our facilities has a lot of composite work, and that composite work is focused more on the wide bodies, where those are using more of the composites for trying to keep it lighter. That part of the business we haven't seen the demand coming back there yet. Those that are on the normal structures and especially on the engine components, we see that's trying to get back to a normal in 2023.
Okay. Great. Then on the Sensoria, how is that rollout meeting expectations or exceeding expectations? I assume just renewable type monitoring or maintenance and repair work is still, you know, less than 5% of the overall revenue mix. When do you think we might see an acceleration of that as it relates to your 100 turbines of capacity to monitor going into 2023?
Right. I'll answer. I'll give you one comment and throw it to John. I would say that the important thing for us to think about is the monitoring's important, but it's also given us that ability to go out there and do the inspection and the repair. The revenue we're gonna see isn't just a monitoring increase, it's really just a function of we wanna be more of the folks that are helping them keep their, like we're doing for assets and power and energy and everything else, trying to help them plan when to do turnarounds and not find out that something's at a critical junction. I'll throw it to John to give you more color on that, though.
Yeah. Hi, Brian. Thanks, Dennis. I think Dennis is right. You know, we routinely inspect and repair several thousand wind turbines per year. Monitoring, you know, 50-100 obviously doesn't sound very much in comparison. But the exciting thing is that we're in a lot of discussions with customers and trialing with a number of customers and receiving, you know, we're very enthused about the results of those trials, and I think our customers are enthused as well.
The volume of conversations is increasing and, you know, we're looking for a higher, certainly a higher, range of turbines that we'll be talking about in 2023 than we are in 2022. You know, to your question about when will that sector be 5% of revenues? That's a great question. I think we've got a bit of a ways to go until we hit that. We're very excited about the progress of where the wind turbine monitoring and the wind turbine business in general for us is heading.
Well.
We'll be a little cautious on that date, but we expect it to get to 5% for sure.
Okay, great. Then just, you know, bigger picture, you guys are generating a lot of cash. You've got more financial flexibility with the new credit facility, you know, and leverage seems to be declining quicker than originally anticipated, like you said, under three times, by the end of this year, I believe. You know, despite the max that you have under the new credit facility, I mean, how comfortable are you with increasing leverage, you know, for acquisitions, and how do you balance that with maybe utilizing cash to buy back stock?
You know, at this point, we think our best use of cash is to keep pushing it into our growth. What we'd like to see is first, like you said, in 2022, get ourselves to or below the 3.0, and that means we've been out looking in the market right now to see what's out there, but we won't pull the trigger on anything until in 2023 when we're below. I would like to stay below 3.0, even with acquisitions perspective or just straight up otherwise. We're not gonna get too crazy on how big they are in the beginning, but they can play into diversity, and they can play into strengthening like our last few have been.
They strengthen our offerings across all the way out with IT and other solutions that help us in all of our channels. We do believe that acquisitions and funneling more things like paying for expanding into machining in places where we do the aerospace and machining ahead of time and all that. We do believe we're gonna do a lot more of that because, you know, there's nothing wrong with paying down the banks and getting below the 3.0, but after that point, we wanna start doing things that are gonna be more accretive to the whole business. To your question, though, I would like to keep it below three as a general rule because there's just so many investors out there that think of small-cap above three as being a higher risk than what they want to their appetite is.
Okay, great. Thank you very much.
All right. Thanks, Brian.
Thank you very much, Brian. Our next speaker will be Christopher Sakai with Singular Research.
Hi. Good morning.
Good morning, Chris.
Just had a question. I know, you're saying gross margins will improve in the second half. Can you give us an idea, as to the level of improvement?
I'll let Ed answer that, but what I will say on that is we've always been targeting to get to a 30% and above. When you look at it, we're close. Even in the second quarter, we were just at 29.9% or something like that. We were just under. We believe we'll be over 30% as the quarters go for at least the third, and we'll see how the fourth goes. For the full year, we won't make that 30%. That's our goal, is to get there full year, going this point out. Ed, I'll throw it to you.
Yeah, that's about right, Dennis. I mean, the first half was, you know, 27.5%. The second half could be, you know, 200 basis points higher than that. I mean, you know, it's significant with mix benefits, with, you know, offsetting some of the inflationary pressures definitely helps. Yeah, we, you know, Q3 would be higher than Q4. Yeah, we see it significantly higher in the second half.
Okay, thanks. Then can you shed some light on revenue from your downstream section? It looks like it's in a little decline, but can you shed some light on how that is and why?
John, if you want, you could.
Yeah. Yeah, this is John. That's exactly where the turnarounds that Dennis was referencing earlier were getting pushed out. We expected to be busier in the first half of the year, in particular the second quarter, based on the original schedules that our customers made us aware of. You know, because the work got pushed, because refineries had more uptime and they were with the record crack spreads, I think they were. We feel they were reluctant to, you know, to actually undertake the turnaround and forgo operating in that very profitable environment for our customers. They seem to have moved to more of a second half, in particular Q3. There's still a turnaround or two that may be on the bubble in terms of are they Q3 or Q4? That's really what's going on there.
Okay, thanks. Lastly, you know, are you seeing any signs of recession on your end? You know, what are you seeing there?
I can tell you that right now our bigger fight, Chris, is just keeping up with the inflation on some of the skill sets. You know, it's certain areas there's a high amount of pressure on some of the skills and people are able to get increases. So right now our fight is, not so much a fight, but our issue is we're going back to the customers and getting increases from them. You know, maybe a little delayed from the time you got to pass out the difference for the hourly rates to the folks. But we haven't seen anything in a recession. Our markets, you know, we're strong in aerospace, we're strong in gas and oil. To everyone's comments, everyone's still out there driving, everyone's flying.
As long as those things are happening I think we're gonna be outside of some of the things that you're seeing in some of the other sectors. I mean, if it got really bad, it's definitely gonna affect us at some point. Right now, the simple answer to your question is no, we haven't seen anything this early yet.
Yeah.
Okay. Thank you, Chris.
This is John. Just to add on to what Dennis is saying. We are in, you know, discussions with several customers on pricing, and the focus is not so much, gosh, we are trying to keep gross margin at some certain level. Our focus is really on making sure that our technician pool, you know, feels like we and our customers have their back from an inflationary perspective because so many people, including all of us on the phone, are experiencing the effects of the inflationary environment. We're really just trying to make sure that these technicians, you know, are whole and with our customers, trying to work together to have that ability to provide increases to them to make them feel that way.
That's really the effect of that. I agree with what Dennis said in terms of demand. Demand is not waning for our services at all. If anything, if we had more employees that were you know on the rolls right now, we'd be able to put them to work.
Okay, great. Thanks for the answers.
Thanks, Chris.
Thank you, Chris. Our next caller is Mitchell Pinheiro from Sturdivant & Co. Go ahead, Mitchell. You're live.
Yep. Can you hear me?
I can hear you, Mitch.
Hello?
Yes.
Okay, good.
Yes, we have you.
Hey, I jumped on late juggling a bunch of calls today. I was curious in your oil and gas segment. Can you talk about any nuances between upstream, midstream, downstream for the second half? I mean, I just heard you answer about, you know, obviously, you think you're gonna have some stronger demand, you know, with some turnarounds in the second half. Anything unusual going on, positive, negative in upstream or midstream in terms of, you know, second half revenue generation?
I guess, and I'll throw it to John, my comment would be for us, when we say upstream, it's a lot more of the land-based larger facilities. We have a little bit of money into fracking, but not a lot. We're seeing an uptick in that, but we're not as volatile by barrel price $140 or $100 or what have you on that. Our land-based upstream side has been pretty good. It's Canada, Alaska, you know, there's some certainly some Gulf and Gulf of Mexico in there too, but it's a lot more land-based even in California places, and that part hasn't been bad. The midstream stays pretty insulated from the volatility, and it's really, you know, people ask what's the right dollar amount for barrel price and crack spread.
When it's low, they're watching their costs and when it's really, really high, they're watching their profit, right? For us, that is really where the volatility comes in. I think as the prices are going down and what is it, 50 straight days of gas prices decreases and things like that, I think you know, I think what we're gonna see is our downstream sectors getting closer to a normal. I could say that and tomorrow things could push, but we haven't seen anything like that. I think what we're expecting is all three running closer to normal in the second half where it was really two out of three. John, I'll see if you got any other thoughts on that.
Dennis, I agree with everything you just said. In terms of, the downstream is where we'll be busier in the second half compared to the first half. Upstream and midstream, I think it'll be, you know, essentially what we saw in the first half.
In fact, midstream might even get a little bit better for us.
Can you remind me?
It could.
I'm sorry to interrupt, but could you remind me about, like, the size of downstream relative to up and midstream in like a normal year?
Yeah.
Whatever that was?
It's a great question. We always talked about the segments as being 54% most recently, and I'm not sure if we have the numbers for Q2, but as of Q1, we were 19%, 18%, 17%. Downstream. They're very close, right? To create that 54%. 19% was the downstream, the largest segment, and I believe it was upstream and then midstream for 18% and 17%. When you look at it as a whole, they're big numbers, but when you break them out, we're starting to break them out because people might think we're all of one and nothing of the others. We're pretty well balanced between the three.
Right. Is downstream up, I mean, how far, you know, doing a $29 million run rate in this quarter, where did that stand three, four years ago? What type of, you know, sort of average quarterly revenue and in the second quarter, would you expect out of downstream? Like, what kind of revenue, you know, opportunity?
Give exact. What I can tell you, in spring, typically in the last five, six years, it turned out to be the stronger quarter because in the fall they decide that they've already outspent their budgets and that's when they look for the cost saving. It was untypical for us to see this type of cost saving drive in the spring. John or Ed, I don't know if you guys got a percentage or numbers that might give Mitch a little bit more on that.
Yeah, I don't have the numbers at my fingertips, but I'd say that it's not. Yeah. The spring has been the busier time the last number of years. I think to the point of Mitch's question, the spend levels have not returned to pre-COVID levels yet. For us generally. It feels at least this year, like we might be starting to be on the way back.
Yeah, we believe.
Yeah,
Q3 isn't that because, you know, 'cause of the push? Go ahead.
Well, sorry, Dennis. Just to add to that, Mitch, we've only started disclosing upstream, downstream, and midstream, you know, bifurcation this year. We've only done it annually up to the end of 2021. This year is a quarterly new thing we're doing. But if you look for the third quarter in the press release, page 11, the downstream is the smallest of the three this quarter. In most other periods in the past, it would've been the larger of the three in this given quarter. Yeah, it's significantly off the pace right now, and that upside is what we you know feel good about why we have confidence in Q3 coming up.
It's you know, they've been you know, they're all balanced, all three are solid, but downstream is definitely off the pace, and it would've been. Again, I don't have the numbers either handy. We can pull that together, but it would've been significantly higher in you know, Q2s and prior periods, bigger than the other two sectors.
Well, I'm not sure, you know, it helps me understand anything more, but I do appreciate the quarterly breakdown of the three sub-segments there. Much appreciated disclosure. Probably can confuse things sometimes. I had a question for, you know, Dennis also. You talked about, you know, your confidence sort of in the second half, and at the same time, you mentioned digital solutions service offerings which quarterly breakdown of the three sub-segments there. Much appreciated disclosure. Probably can confuse things sometimes. I had a question for, you know, Dennis also.
You talked about, you know, your confidence sort of in the second half, and at the same time, you mentioned digital solutions service offerings, which will be a driver. Can you explain that?
Yeah. I'll tell you, I think we may not have been messaging always great. I think people were thinking this digital as some new segment in some industry we don't have. A lot of we talked about the 90 different applications that we have now, and every quarter you'll notice them going up. We're not creating new ones as much as we're just taking ones and bringing them up to the forefront and getting them turned on more and more. A lot of them started from our legacy businesses and PCMS digital as some new segment in some industry we don't have. A lot of we talked about the 90 different applications that we have now, and every quarter you'll notice them going up.
We're not creating new ones as much as we're just taking ones and bringing them up to the forefront and getting them turned on more and more. A lot of them started from our legacy businesses and PCMS and acquisitions of New Century that are a lot more gas and oil in all three of those sectors, right? A lot of what we're doing is delivering a stronger data message to our customers that comes back quicker instead of just a piece of paper that comes back slow. We give them a digital solution that tells them the readings the same day. We're turning these things into actionable items. We're giving them these red amber green reports that tell them the conditions of their assets as all these readings combined.
Because a lot of times you're looking at hundreds of readings on one asset. Looking at them individually, you don't get any trending idea or information. We're putting that all together. Then we're also starting to incorporate a lot of the engineering calculations and capabilities we've always had using the API, ASME, and other codes and standards that are out there. As we bring that in there, we're now also giving them an actionable thing that they can or should do to get that yellow or red back to a green condition. A lot of the data solutions we're doing, Mitch, is really strengthening the core things that we've already got in our industries. At the same time, this data is part of really what's been driving Sensoria, right? The monitoring in the renewable and the wind blade.
It's technology that we've used on bridges and other assets for years. We're just now deploying that technology with the same acoustic sensors in a different way of monitoring a turbine blade, right? That's driving a new market for us. A lot of the data apps that we have now are gonna make us stickier, smarter, and better for the customer inside the core businesses we have, up, mid, and downstream inside gas and oil. It's helping in power. It's even helping in aerospace and especially the space market. They're really trying to show the differentiating of how we can add value to a customer that we've already got. Certainly, they're gonna help us grow into new customers, but initially, they're gonna help us really grow in where we already are. Does that help you?
Yeah, it does. I mean, I was just looking, you know. As it relates to the third quarter, you call out the digital solutions being a you know, part of your you know, what's driving your rapid growth for the third quarter. I was just curious whether you were like signaling that you know, that you're getting you know, either new customers through these digital solutions that'll be online in the third quarter or why are digital solutions gonna be a driver of the third quarter? Is it just. It's been a driver of your business and you know. I was just curious whether there was something specific when you call that out.
You know, it's a good question because the things that we're doing inside PCMS and such, one of the things we're seeing, a lot more growth in the chemical industry because a lot of those customers are under pressure to put in what they call these mechanical integrity programs, which is a more formal way of understanding your assets and how they age and what to do to look at it. Everyone's had a program out there, but these mechanical integrity programs and risk-based inspection programs and all that are the next step up. You're starting to see a lot more chemical customers jumping into that methodology. Everything we're doing inside the OneSuite, which starts with a lot of what the PCMS applications have, but not every customer has or wants to go into PCMS or has something else.
We used to get stopped there if they had something else and we had PCMS. Now we take all the attributes of PCMS, put it into OneSuite, and we still give them better data, even with whatever systems, homegrown or competitive or through wherever they're getting it, we're giving them more actionable items all the time. We are signaling that OneSuite revenue, which is starting at low multiples, will be doubling and getting to be bigger and bigger. We are saying that the data will be breaking out as a, you know, now it's in a mid-single digit kind of range, and we expect to really be driving that. To your point, it's really gonna help us differentiate inside a market that's just looking for the lowest rate. What they're really looking for is the best value.
By showing the customer the data quicker and showing them how we can help them get less spend and get more done and do more things for them, that's why we don't mind less spend in NDT if we're doing all these crossover services and everything, 'cause we're getting a bigger share of the total, what they're doing on that project, but yet we're saving them more money. It's a win-win. We are signaling that the data is gonna be driving how we grow into our markets.
Okay, good. Thank you. Last question just relates to, you know, acquisitions and, you know, I heard your answer, you know, you get down below three leverage and, you know, I certainly understand why that's important. But from an acquisition point of view, why, you know, given what you have, your infrastructure, your digital solutions and, what appears to be a growing, you know, you'll get a growing share of your customer, you know, opportunities. Couldn't you just grow through, you know, hiring more technicians as demand merits? Is there some need? Is it capabilities that you'd be acquiring?
Cause I would think where you stand in the industry, you certainly would be an attractive employer, because you're growing and you're gaining share among, you know, these very, you know, large and, you know, quality accounts. As a technician, you feel like you'd have, you know, stability of income and working for, you know, a company that knows how to, you know, manage their cash in difficult times, et cetera. Why, I would just think that you could grow because you're slowly, you know, becoming, you know, the leader in the industry, thought leader, you know, innovation leader. Why do you have to buy your growth, you know, is really what the question would be, cause you have such a great-
Yep.
free cash flow, capital-light model.
I get you. Actually thank you for some of the comments about helping us where we're at and what we're looking at. Thank you for that. I don't think we have to buy our growth, but I think to your earlier points, you know, we want to faster increase our diversification of industries. You know, right now, you know, we have much bigger contract potentials in gas and oil than we have in other ones. You know, trying to get below 50%'s another thing that some investors say gas and oil too high is can be a you know, an issue as well. We're looking at our diversification.
The whole IT thing, we've got companies that we've been, you know, owning PCMS that's been doing the data management for refineries for, I don't know, we bought them in 1991, and they were running like 10 years before that. We've been doing that for a long time. The IT skills and all that, there's other things that we could be looking at that would be IT-centric that could help us in our core markets as well as maybe moving us faster into some of these other markets. Like when we bought New Century, to give you a quick idea, not to say that what New Century didn't do was very good, but we knew it was good, and we knew we could replicate it.
The one thing we couldn't replicate is they've had 25 years in that market that we weren't in, and they had 25 years of, you know, folks going to them as a leader to take their data and make it actionable. Sometimes if you're getting into a new market, you gotta look to see, you know, how can you increase that. We don't believe we need to buy growth in where we are, but if we wanna make ourselves smarter in this evolving IT, what you thought was great today may not be as good tomorrow and all that, we gotta be out there looking to keep pushing that innovation edge because that's really where we're gonna differentiate all the way through. I think that's our answer. For joining our conference call today.
All right. Well, thank you. Thank you for the questions.
Thanks, Mitch.
Thank you very much, Michael. That will be our last question. I am turning it back over to, Dennis Bertolotti for our closing.
Great. Thanks, Kurt. Thank you to everyone for your continued interest in MISTRAS and for joining our conference call today. Please have a safe, productive day, and we look forward to updating you on our next earnings call. Have a good day.
Thank you all for your participation in today's conference. This concludes the program. You may now disconnect. Thank you.