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Mistras Group Inc (MG -3.35%)
Q1 2020 Earnings Call
May 19, 2020, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Thank you for joining Mistras Group Conference Call for its First Quarter ended March 31, 2020. My name is Gigi, and I'll be your event manager today. We will be accepting questions after management's prepared remarks. Participating on the call for Mistras will be Dennis Bertolotti, the Company's President and Chief Executive Officer; Ed Prajzner, Executive Vice President, Chief Financial Officer and Treasurer; and Jon Wolk, Senior Executive Vice President and Chief Operating Officer.
I want to remind everyone that remarks made during this conference call will include forward-looking statements. The Company's actual results could differ materially from those projected. Some of those factors that can cause actual results to differ are discussed in the Company's most recent Annual Report on Form 10-K and other reports filed with the SEC.
The discussion in this conference call will also include certain financial measures that were not prepared in accordance with 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 M. Bertolotti -- President and Chief Executive Officer
Thank you, Gigi. Good morning, everyone. As with last quarter, let me first begin with some comments on the current state of the market and what we've seen so far and briefly update you on the actions that Mistras has taken to keep our employees, customers and partners safe while simultaneously mitigating these challenging conditions.
First, let me say that I'm extremely proud of how our team has responded to current conditions. They have remained focused on the safety and well-being of our associates, clients, and partners. They are continuing to deliver outstanding services which is helping our clients best manage through these unprecedented times, all the while positioning Mistras to emerge from this global pandemic stronger and better prepared to further our industry leadership.
In the first quarter, we posted solid operating results with revenues better than forecasted and our asset-light business model has continued to generate positive cash flow for which we have become well-known. We have achieved this despite a quarter that experienced the dual impacts of a weak energy market continuing from late last year and the global pandemic that began to take root toward the end of the first quarter. As it became clear that we were entering a period of incredible uncertainty, we took immediate action to adjust to these new realities. The immediate focus was on things that we could control, with our goal being to preserve and protect our reputation and to reinforce our position as our customer's preferred partner. So we doubled down our efforts to provide our customers with the high quality of service in which they have come to rely upon from Mistras.
We found innovative new uses for our technology. MISTRAS Digital to help customers lower their cost and this is currently getting a high level of interest. We believe this dedication to the needs of our clients not only enhances our franchise today but establishes a solid foundation on which to build upon the market’s eventual recovery.
At the same time, we took decisive actions in response to this new business environment. We have significantly reduced cost, we've cut capex in line with revenue expectations and are more effectively managing working capital to maintain and enhance our positive cash flow. We have accelerated some of the structural changes to improve margins while deploying technology to further improve productivity.
I and other members of the executive team along with nearly all salaried employees have taken pay cuts and our Board has also forgone some of their compensation. Additionally, we have made adjustments to our variable headcount and broadly rationalize our assets to align with anticipated future levels of activity. We are taking these actions while maintaining our commitment to delivering superior services which help our customers increase their efficiency, reduce their costs, and improve their outcomes.
Consequently, we continue to forge ahead in areas that offer the greatest returns. For instance, customers are anxious to adapt digital technology that will help them improve efficiencies, as well as transition to more predictive solutions. In this respect, we continue to work with our customers to leverage our MISTRAS Digital solution that helps reduce non-productive time and improve labor and asset efficiency.
Complementary to MISTRAS Digital is our industrial Internet of Things offerings such as remote sensor monitoring where we are having great success as our MISTRAS Digital ruggedized tablets are that are revolutionizing field reporting and we are seeing a steady increase in our mechanical work. All of these actions and initiatives are helping diversify our revenue streams and significantly strengthen our foundation for long-term growth and profitability.
And while our customers in the energy industry are trying to stretch their dollars just like everyone else's, they nevertheless have an obligation to keep their facilities in compliance with regulations and operating at top efficiency. So we are sensing new opportunities in even this environment of demand contraction.
We do acknowledge that some work is either being pushed out or canceled. We believe the second quarter should represent the largest deviation with our revenues potentially down as much as the high 30% range from a year ago. April looks like it should be a peak revenue decline as we are already sensing that May will be better and June could potentially see further improvement if oil prices continue to recover and states continue to relax shelter-in-place orders. The third quarter and fourth quarter will then be expected to rebound nicely.
Given the impact of COVID-19 to our business, we did perform an assessment of the carrying value of goodwill and other intangibles in the first quarter of 2020 and the result was that we recorded non-cash impairment charges of $106 million. Ed will go through the details.
With our expectation of positive operating cash flow, each quarter this year, limited capital expenditure needs and our amended credit agreement, we have sufficient liquidity to support our operations and this would be while simultaneously reducing outstanding debt by the end of the year, including $4.5 million already paid down in the second quarter. Our job is to build on the legacy Mistras has created over the years and it is our vision to take Mistras to the next level through more integrated programs and more predictive intelligence that will define our industry in the future.
Let me now turn the call over to Ed for a detailed review of the financials.
Edward J. Prajzner -- Executive Vice President, Chief Financial Officer and Treasurer
Thank you, Dennis. First quarter revenues were somewhat better than expected, down a little less than 10% from a year ago. As anticipated, our oil and gas revenues in our Services segment saw the largest decline, which was somewhat offset by nearly $2 million improvements in domestic aerospace and defense.
Conversely, revenues in our International segment were impacted by a decline in European aerospace revenues where production at our large facility in France was hampered by that country's complete shutdown, as well as a continued run-off of the staff leasing business in Germany.
Gross profit for the quarter was $40.6 million or 25.5% with margins down from a year ago, mostly due to underutilization resulting from the decrease in revenues. To a much lesser extent, margins reflected a somewhat tighter pricing environment. On a segment basis, both Services and International revenues were down. Services primarily due to the weakness in energy markets, while International experienced a decrease in aerospace revenues, driven by the wind-down of staff leasing and the adverse foreign currency translation impact. Gross margins were also down from a year ago, consistent with the decrease in revenues.
Selling, general and administrative expenses decreased from a year ago despite the addition of New Century's overhead to this year's cost. Early in the second quarter of 2020, we initiated a cost reduction and efficiency program, which should reduce the run rate of overhead by approximately 10% beginning in the second quarter, a reduction we believe is consistent with our outlook for the year. This program includes temporary adjustments to capital spends, reduction in travel and certain R&D, limiting of new hires, and the scaled reduction for salary expenses for essentially all overhead positions. Also, note that all non-employee members of our Board also took a reduction in their compensation during the second quarter.
We typically review goodwill for impairment each October 1 or whenever events or changes in circumstances indicate that the carrying value of goodwill and intangibles may not be recoverable. COVID-19 and the related impact to crude oil prices was deemed to be a triggering event requiring us to perform an interim assessment.
As a result, we recorded a non-cash charge of $106.1 million for permits in the first quarter of 2020, comprised of $77.1 million related to goodwill and $29 million related to primarily intangible assets. On an after-tax basis, this was $92.1 million or $3.18 per diluted share exclusive of a $0.02 per diluted share benefit from other special items or $3.16 per diluted share on a net basis for all special items.
Although we were in compliance with our bank covenants as of March 31, 2020, we nevertheless executed an amendment effective May 15, 2020, to gain additional covenant flexibility. We maintained the remaining maturity of our existing credit agreement through December 2023, including a $93.75 million term loan, but we reduced our revolving credit line to a maximum of $175 million to save cost related to the unused commitment, while ensuring a sufficient level of liquidity to fund our business. We additionally maintained a $100 million uncommitted accordion within the amended credit agreement for potential expansion in the future.
Our net debt, total debt less cash, and cash equivalents was $241 million at March 31, 2020, compared to $239.7 million at December 31, 2019. Gross debt increased by $3.3 million during the first quarter of 2020 from $254.7 million at the end of the year to $258 million at March 31, 2020. As Dennis mentioned, we have already paid down an additional $4.5 million of debt in the second quarter of 2020.
Reiterating one of our key themes. Our business has historically generated strong cash flow. In the first quarter of 2020, we further enhanced that reputation with cash from operating activities of $6.1 million. We did utilize a little over $4 million for capital expenditures in the first quarter, in line with our goal to reduce total capex this year from our typical run rate, in line with revenue expectations. We recorded a net loss of $98.5 million for the first quarter of 2020 compared with a net loss of $5.3 million in the prior-year period, due primarily to the aforementioned non-cash impairment charges. But we did nevertheless generate adjusted EBITDA of $5.4 million for the second quarter of 2020 and our goal remains to maintain adjusted EBITDA as well as positive operating cash flow in each quarter of this year.
Ongoing macro concerns attributable to the impact of COVID-19 coronavirus continue to put crude oil prices under intense pressure. Given the continuing economic uncertainty, we are not providing guidance for the full year of 2020. We do anticipate revenues for the second quarter of 2020 to decrease up to a high 30% range from the prior-year period level although cash from operations and adjusted EBITDA are expected to remain positive. While it is extremely difficult to forecast with any degree of certainty at this time, we are optimistic that consolidated revenue in the second half of 2020 will be higher than that of the first half of 2020 with corresponding improvements in both cash flow and adjusted EBITDA.
This outlook is contingent on continuing macroeconomic improvements, including stabilization in crude oil prices and relaxing of certain stay-at-home mandates. We are confident in our sustainable business model and we remain firmly committed to carrying on our strategy today and over the long term.
And with that, I will now turn the call back over to Dennis.
Dennis M. Bertolotti -- President and Chief Executive Officer
Thank you, Ed. Mistras is essential to global energy infrastructure as well as to the aerospace, alternative energy, and other industries whether at our facilities or those of our customers' our teams are hard at work ensuring the safety and security of valuable assets, while observing today's coronavirus inspired rules of engagement. We are far from out of the woods. We intend to keep a consistent eye on our expected revenues and be sure we match our resources accordingly. The crude oil prices have recently stabilized and are beginning to improve and more states around the country are beginning to relax some stay-at-home restrictions.
Conversations with our customers have become more constructive. These are all positive signs and much different than the signals we were hearing in mid to late March. Mistras intends to emerge from this pandemic stronger, determined and prepared to capitalize on the opportunities, which we believe exist within our industry. Customers know they can count on Mistras to be there when they need us. We have deep relationships built over years of dedicated service delivering on time and on budget and we are developing new age tools that customers know they're going to need as budgets shrink and we all have to learn how to do more with less.
We are excited about Mistras's future and are committed to our success. Our industry is under intense pressure to optimize the efficiency of their assets and to continue to comply with increasingly complex safety, environmental, and other regulations. This is creating a growing demand for our services. In the short run, that trend may be disrupted, but over the long-term, we think these factors will drive growth in our markets and we intend to outpace that growth. Our utmost concern remains safety of our employees as well as those of our customers and the many other Mistras associates.
Let me again state my deep appreciation for the hard work all the Mistras technicians and professionals are doing to keep our customers' assets safe while facing all the challenges, they must endure to get the work done. Let me also commend all the administrative and management Mistras folks for finding a way to make this new normal work for us. Our focus on cash generation, collection, and normal administrative processes has not diminished one bit and we are as strong and nimble as we ever have been. I also want to sincerely recognize the patience of our long-term shareholders who continue to support us through this journey.
Thank you. Now with that, we'll now take your questions. Gigi, please open up the phone lines.
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from the line of Edward Marshall from Sidoti & Company. Your line is now open.
Edward Marshall -- Sidoti & Company, LLC -- Analyst
Hi, guys. How are you, Dennis, Ed, Jon? Hope you and your families are doing well.
Dennis M. Bertolotti -- President and Chief Executive Officer
Good. Thank you.
Edward Marshall -- Sidoti & Company, LLC -- Analyst
Thank you. Thank you. So I wanted to talk about the operating expense reduction of 10%. First, I wanted to understand is that corporate level, it sounds like it a lot of it might be versus maybe what run through the segments and I want to understand, are you through, or do you anticipate additional revisions. And then finally, as I look at these revisions, are they additive to the bottom line, or are they just simply offsetting the topline reduction. I just wanted to get a sense as to where you are there.
Edward J. Prajzner -- Executive Vice President, Chief Financial Officer and Treasurer
Sure, I'll take that, Ed. This is Ed. Yeah, so that total 10% run rate that we're referring to, that’s total overhead savings. So of course, that's referring to SG&A as well as the indirect overheads up in SG&A. It's about an equal number, actually, there is about as much of fixed overheads up in SG&A, as there is SG&A below. So it's spread across both of those. So it is a run rate. We did have, we did announce the nature of those charges earlier. It's salary reductions, it's combining facilities, it's lease savings, you name it, some of that is temporary in the form of the salary reductions, other is more permanent.
But I mean it is additive and incremental as we -- capex is a big piece of that as well minimizing the overhead from that as travel, you name it, all the activity that happens relative to the revenue stream. It goes in unison with it as revenue comes back, some of that would come back. That is a run rate, it's virtually equally split between SG&A and the other piece up in the indirect COGS line is where you'll see that savings come through. We did mention earlier in the year, we had some savings initially contemplated. We've doubled down on that to a higher level at this point, but you will see it really hitting SG&A as well as up in the indirect COGS line.
Edward Marshall -- Sidoti & Company, LLC -- Analyst
Got it. Understanding that maybe it's a difficult environment especially just coming out of April, maybe the beginnings of May. But as you talk to customers and I'm wondering what they're telling you and give you an opportunity to kind of talk about maybe some direct conversations. But when I think about the embedded personnel that you have at the sites, I assume that the kind of order of progression would be emergency call-out work would probably come first. Secondly would be your embedded solutions or your embedded product, your embedded people in the facilities, and third maybe project work. Where are you in the discussion, I'm assuming the call out is probably pretty sound, but I wanted to get a sense of maybe how the embedded is working and ultimately your outlook for the project work?
Dennis M. Bertolotti -- President and Chief Executive Officer
Thanks, Ed. I'll start, I'll probably let Jon add to my thoughts, but our projects have basically kept folks at every site. For the most part we've had reductions of zero to a large percentage of people due to the COVID. Our customers are trying to get the work done, but there are really reducing the amount of outside people that are coming in, they are reducing the amount of hours. So while we do have a large group of about 88% of our billable employees are on furlough because of this, the other 80% some, 81%, 82% are actually still out there doing work. They’re just doing it at a much lower percentage of hours a week. Typically, you'd be working six days or seven days a week at 10-hour or 12-hour days, where now they're working three days and four days and sometimes five days at eight hours or less, right. So the customers are all trying to get the work done. They've just kind of not been in a rush to get themselves offline and come back online if that answers part of it. Jon is there anything else you think you could add.
Jonathan H. Wolk -- Senior Executive Vice President and Chief Operating Officer
Yeah. The other thing Dennis, agree with everything you said, but it depends which continent you're on to. So I think Dennis's comments ring true really everywhere, but if I think about some of our shop-based businesses, we've been very steady on shop based businesses here in the United States and in Canada. But then again, in Europe, it's been spotty depending upon the degree to which country is shut-in. So for instance in France, the shut-in was much more severe throughout that whole economy. So only just now are we sort of getting some of that personnel back to speed, so it really depends, and it's a little bit choppy.
Edward Marshall -- Sidoti & Company, LLC -- Analyst
Got it, got it. And a final one for me is kind of future-looking when I think about your Digital, and I think about maybe how that might impact reduced staff across not -- not just at Mistras, but at your customer level too because of the efficiencies and the productivity enhancements that may bring. I want to get a sense as to is the current environment helping your customers embrace this digital platform easier and have you seen more implementation of the digital platform into your day-to-day work.
Dennis M. Bertolotti -- President and Chief Executive Officer
So a couple of things, and not even just in MISTRAS Digital, but we're getting a lot more inquiries about bridges and online monitoring of things of that. In one of our instances where we had the digital standing up already in an aggressive beta version, they started out small, but they added more people to it. One of our customers is working from home, made a comment that they've seen more data now than they usually see when they're at site trying to do it the old fashioned way with paper and pen. So I think a lot of customers are doing what we're doing. They're working from home and try and find ways to be more involved in the business and thinking about anything from online single points of data to multiple networks of data and everything else and then these data gathering at MISTRAS Digital where you can go out and whatever you're doing and you get it by the end of the day. We've got turnarounds that are getting data in much quicker now as you're playing with us, but they're not, we haven't gotten turnarounds using it completely across the board. So we see signs that there is a lot of activity, getting ready thinking about it. It's just in this COVID environment, not a lot of people are ready to be able to get with IT and make all those things work together. Jon any other thoughts.
Jonathan H. Wolk -- Senior Executive Vice President and Chief Operating Officer
Yeah. Thanks, Dennis. Agree with what you said and Ed it's a great question. It's something we're actually in discussions with several customers precisely for the reasons that you described and what Dennis just said. It's an opportunity to reduce -- to increase productivity to either do an additional amount of work with the same size staff or to reduce the size of the staff into the same amount of work, but we see tremendous opportunities here and we are in discussions with several customers to do precisely that to bring them more productivity. They need it, we need to deliver it to them and we're I think uniquely positioned to really deliver it.
Edward Marshall -- Sidoti & Company, LLC -- Analyst
So I guess there is silver lining in all of this, it may be assistance into your growth within digital. So good job, guys, I appreciate all the time. Thanks for the response.
Dennis M. Bertolotti -- President and Chief Executive Officer
Thanks, Ed. We've been talking online for how long, it only took a global pandemic to get people to think about it, right.
Edward Marshall -- Sidoti & Company, LLC -- Analyst
Have a great one, thanks.
Dennis M. Bertolotti -- President and Chief Executive Officer
Great. Thank you.
Edward J. Prajzner -- Executive Vice President, Chief Financial Officer and Treasurer
Thank you.
Operator
Thank you. Our next question comes from the line of Andrew Obin from Bank of America. Your line is now open.
David Ridley-Lane -- Bank of America -- Analyst
Thank you. This is David Ridley-Lane on for Andrew. What do you expect from your aerospace and defense business in the second quarter? And we've also heard anecdotally that the airframers are being helpful to the supply chain on working capital. So would you expect any above-average free cash flow benefit in 2020 from that?
Jonathan H. Wolk -- Senior Executive Vice President and Chief Operating Officer
This is Jon. I can take that. Good question, it's interesting. For instance, during the first quarter, our aerospace business held up remarkably well. It was just about even with last year, even as the effects of shutdowns were beginning to be felt. Aerospace for us is an essential business, it is deemed an essential business and we as a service provider to that industry are deemed essential as well.
For the second quarter, I think we will be down modestly in aerospace in North America, we will be down to a larger extent, as Ed alluded to in Europe because of the effect of the shut-ins and so forth. But in general, the aerospace business is down by a lower percentage than we expect the Company will be overall. In terms of the free cash flow benefit, I'm not aware of anything specific that we're expecting there unless you are Ed.
Edward J. Prajzner -- Executive Vice President, Chief Financial Officer and Treasurer
No.
David Ridley-Lane -- Bank of America -- Analyst
And other vendors in the oil and gas space argue that refineries perhaps cut too deeply into maintenance spending back in 2015, 2016 and now have a more cautious stance around cutting those budgets now. Are you seeing any differences among your refinery clients versus how they acted in 2015? Thank you.
Jonathan H. Wolk -- Senior Executive Vice President and Chief Operating Officer
Sure, this is Jon, I will start with that.
Dennis M. Bertolotti -- President and Chief Executive Officer
Go ahead.
Jonathan H. Wolk -- Senior Executive Vice President and Chief Operating Officer
Yeah, absolutely. So back in 2015, 2016. I think that the decline in the price of oil caught everyone by surprise, and I think it was kind of a new playbook as customers and suppliers try to grapple with that. This time around we've seen this movie once or twice before. So I think that the effect, the impact has been much more coordinated. I think that scopes have been reduced because people just weren't out of their homes. They were, sorry they were literally at home and they weren't at work, so scopes have necessarily come down. Certainly, we are expecting a bounceback in the second half from first half levels because of that impact. There has been work that is absolutely been deferred because of people not being on the job and we do see that recovering somewhat.
Dennis M. Bertolotti -- President and Chief Executive Officer
Yeah, David, it's Dennis, I will add, when this first started, I don't remember the exact date, but everyone remembers the different days when they thought this was a real lock-in. I remember that one week and I spent a whole weekend talking to folks. We are getting letters together to let authorities, whoever that may have been, know that we are an essential worker because we weren't sure if our employees were going to be even able to go out there and travel, there is always Internet rumors of the National Guard doing lockdowns at highways and all that. So I think initially Jon is right, this hit and no one knew what was essential.. We were having a look up the references and that they were using the national standards, sea surfer, what made us essential. And after a while, people learn to get used to what it was and what is like. But in the beginning, I think a lot of work just fell off because nobody knew what was going to happen in the next week or the next day, right.
I do see right now as an early indicator. And I don't know how much -- I can't guarantee how much work will be confirmed. Our bidding activity for the fall has been surprisingly normal and I say that midstream and some of the other things we're seeing now, again, it's somewhat anecdotal from what we're seeing across the business, but I don't, I sort of expected a bidding activity that is much more subdued for the fall than what we're seeing. So that's a good sign.
Oil prices can change dramatically and people can expect to pull off capital if that's the case or keep it where it is at. But right now, it seems like, I think people are in the industry -- in the energy industry are getting used to what this is and trying to figure out a way to spend less work, it's slower but keep it going. So I mean it's kind of strange and how fast it fell off and how now is trying to get back to a normal. By June we think we're going to get back to close to what we are expecting when COVID first started hitting now when it really got going.
David Ridley-Lane -- Bank of America -- Analyst
Good to hear. Thank you very much.
Dennis M. Bertolotti -- President and Chief Executive Officer
You got it.
Operator
Thank you. Our next question comes from the line of Tate Sullivan from Maxim Group. Your line is now open.
Tate Sullivan -- Maxim Group -- Analyst
Hi, thank you. And a couple of follow-ups on the 1Q. Can you break down gross profit by Services, International, Products, and Systems? Can you, I think the gross profit margin in Products and Systems declined meaningfully year-over-year? Was there a one-time factor in that may help that bounce back in the current quarter?
Edward J. Prajzner -- Executive Vice President, Chief Financial Officer and Treasurer
This is Ed, Tate. No one-time factor. But again, we really got the overheads out effective April going forward, so we didn't have enough time to react if you want to get some of the cost out. As I mentioned, there is a big piece of sort of relatively fixed overheads up on indirect hubs, effecting services, so we get those costs out effective April 1 and forward. So you will see that positive run rate going forward. Now that we've kind of scale the overheads till the revenue level, there is a lagging effect of that where that wasn't quite in place for the first Q1 entirely whereas it is in place fully for Q2 and forward.
Tate Sullivan -- Maxim Group -- Analyst
Thanks. And on that, I mean on your earlier comment on 10% reduction in SG&A. Can you give more background on arriving at the minimum EBITDA requirement for this current quarter? I mean, does it come down to the confidence were our baseline can be based on where you cut costs already in the quarter in a period of limited visibility too.
Edward J. Prajzner -- Executive Vice President, Chief Financial Officer and Treasurer
Yeah. We began Q2 with the full run rate in place across the board. Again it was delaying hirings, it was freezing merit increases, salary reductions, suspending the 401(k) match. Obviously we're minimizing hours for the hourly technicians, their rates were not adjusted. So there’s a whole series of things that were put in place. And of course we stress test the outlook, the forecast to a closed scenario as you went through the bank process. So, yes, I'm very comfortable, we hit that, and then we'll hit the floor of the minimum EBITDA requirement because all of those costs were in place beginning of Q2, and there's more levers to pull. We'll continue to sort of constantly recalibrate a cost structure of the Company to the revenue at hand as we go forward in the year through the ebbs and the flows of the volume. But yeah, we believe the measures were fully in place for all of Q2 on the cost outside.
Dennis M. Bertolotti -- President and Chief Executive Officer
Yeah, Tate, it's Dennis. We've been doing a lot, I mean salary reductions start at 2.5% for the lowest level, up to 45% for myself. And all of that started essentially I think in the first payroll of April, so like April we caught maybe one day of March, but most of April. We've even gone back to our landlords and talked to our landlords at a lot of locations where we're getting some reductions, who are graciously taken off for the quarter, almost through the end of the year. We've gone back to our -- just to our top 20, and top 30 spend in AP and looking at all of our cost coming in and send them letters and asking for what they can do.
So I mean we're trying to do a lot of this, and most of it started close to April 1 and some of it's been coming in now in May and such with the landlords and all that. So we're continuing to adjust to whatever we have to do to make this right. We're watching our revenue, we keep reforecasting all the time, making sure that the reforecast is as accurate as possible and then looking at what resources and cost we have to do to match it up.
Tate Sullivan -- Maxim Group -- Analyst
Thanks, Dennis. And one more follow-up to me. Can you give some more comments on the onstream where the exposure was when you bought it and an update on the midstream market in Canada? I mean the COVID impacted different countries differently. So, just can you give more comments on the midstream market currently as well real quick.
Jonathan H. Wolk -- Senior Executive Vice President and Chief Operating Officer
Yeah sure. About 85% of their business was in Canada at the time we purchased the company. The Canadian economy has been hit hard by this and by the volatile oil and gas prices as well. So the impacts on midstream companies I think are pretty well known. Onstream business continues to grow in the United States, it's had sort of a, it grew in the first quarter in Canada. It will contract in the second quarter as a lot of things have contracted in the second quarter or will contract in the second quarter, but we expect them on balance, to have a good year.
Tate Sullivan -- Maxim Group -- Analyst
Okay, thank you for all those follow-up details. Have a good rest of the day.
Jonathan H. Wolk -- Senior Executive Vice President and Chief Operating Officer
Thanks, Tate.
Dennis M. Bertolotti -- President and Chief Executive Officer
Sure.
Operator
Thank you. Our next question comes from the line of Sean Eastman from KeyBanc Capital. Your line is now open.
Alex -- KeyBanc Capital -- Analyst
Good morning, guys. This is Alex [Phonetic] on for Sean. Thanks for taking my questions.
Dennis M. Bertolotti -- President and Chief Executive Officer
Good morning.
Alex -- KeyBanc Capital -- Analyst
Sorry, I got disconnected, I apologize if these questions have come up already. But my first one is, I guess on the comments about the cost reduction steps you guys are planning on taking, I'm just curious on how you're thinking about labor in anticipation for the work coming back in the second half of 2020. I guess overall, how you guys plan to balance your cost control while still best positioning yourself for the recovery that could come about this year.
Jonathan H. Wolk -- Senior Executive Vice President and Chief Operating Officer
This is Jon, I'll take that. So from a labor perspective, we have led very, very few technicians leave the company. We've had extremely high retention of our technicians. Hours, of course, have been reduced as workloads have necessarily been reduced and in some cases, some pay rates have been adjusted as well. But what we expect for the second half, is that as the workload comes back, which we've got very good indications that it is. These people are still employees, they are raring to go, they are looking to get those hours and looking to get back on the job to the fullest extent possible. So we feel very good about our capability to deliver to customer demand in the second half.
Alex -- KeyBanc Capital -- Analyst
Thank you. And then my next question, I just wanted to try to understand what you're seeing internationally versus domestically, a little bit better. So it seems like the Services segment in the US, held out a little bit better than International and I know you talked about the France and aerospace last quarter with the headwind there and then maybe just talking 3Q and on and assuming the continued relaxation of stay-at-home orders and oil prices stabilize. I just want to get a sense of which end-markets or sub-sectors should recover relatively quickly and which ones might take a little bit longer to recover.
Jonathan H. Wolk -- Senior Executive Vice President and Chief Operating Officer
Yeah, sure, it's Jon. I'll start. So, oil and gas obviously has been the heaviest impacted in the end of the first quarter and certainly in the second quarter. It's also the one that we think will ramp back up, the quickest in the third quarter and beyond. And of course with the oil price trending better to as Dennis said in his comments this morning it's up over $32 per WTI. That's a very good benchmark in terms of our customers' willingness and ability to resume normal activities especially as that price continues to trend back up to where we would all expect it to be.
Aerospace is a little bit of a tricky call. Certainly, Boeing has had its challenges with the 737 Max program that impacted us early in the start of the calendar year, but not to the extent that perhaps others might have expected, because we have a pretty diverse portfolio within aerospace. Certainly for Airbus it's also had a number of cutbacks and plane deliveries are expected to be lower. So I think that the aerospace sector will definitely snap back, but it may take some more time for it to reach pre-COVID levels.
Alex -- KeyBanc Capital -- Analyst
Thank you.
Operator
Thank you. [Operator Instructions] Our next question comes from the line of Mitch Pinheiro from Sturdivant & Company. Your line is now open.
Mitchell Pinheiro -- Sturdivant & Co,. -- Analyst
Hi, good morning. Hope everybody is well.
Dennis M. Bertolotti -- President and Chief Executive Officer
Good morning, Mitch.
Mitchell Pinheiro -- Sturdivant & Co,. -- Analyst
Most of my questions have been asked and answered, but I do have a couple, a couple of thoughts. One, in terms of your confidence level for the second half, what is -- so what's that based on, is it, is there any, do you think about perhaps in the fall, if there is a second wave or a second shutdown. Is that sort of factored into your thinking at all, but just curious how you build your confidence for the second half?
Dennis M. Bertolotti -- President and Chief Executive Officer
It's a great question, Mitch. It's Dennis here. We don't build our second-half forecast with a huge increase in the barrel price, but at the same time, if it were to cave from the $30 back down to $20 or below or something like that, that could affect. We're expecting it to be at $25 to $30 or the better barrel price you hear about, much better later in the year. But we think at this rate, like I was saying earlier, we're still seeing a lot of bidding activity, a lot of work. That means that the purchasing side of our customers are still saying put it out there. It doesn't mean that the capital may not get pulled back later. But right now we see it being out there, we see the customer is still talking about a lot of this. Although it's still dampened because of worrying about spacing and all the health risks that come with the virus out there, COVID is still going to have an effect on the second half, because I don't see it being the high-density populations coming out the refineries working shoulder to shoulder and doing all those things like that.
So I do think there's still going to be some effect on that. But as far as what we have is the barrel price has been steady. The expected -- we believe that there could be some balances here and there. We did build into another 50 state-wide type of shelter in place scenario for sure, but we do think that even if there are some small changes to the freedoms that some of the states are enjoying, we believe that our fall forecast is fairly close within the realm of certainty to any time you're going to bid on something like this, right. But there is nothing out there that we need to happen, that isn't going on now to make our fall, look like it should be, I guess is the short answer. Okay.
Mitchell Pinheiro -- Sturdivant & Co,. -- Analyst
And then, and within the Energy segment, how much of the business, would you describe that's been lost here in the first half were anticipated for the second quarter as well? How much of that is simply work that is deferred? That's going to have to get made up within the next six months to 12 months versus how much is lost sort of permanently? Any feel for that?
Jonathan H. Wolk -- Senior Executive Vice President and Chief Operating Officer
It's Jon, let me try. Well, first I'd say permanent is a long time. So I don't know that I'd say that work that was not performed or is not being performed now in the second quarter was a permanent loss. These are all facilities that have to be maintained that have inspection requirements that are ongoing. So it's something that was deferred now is going to have to be done. The question is when and to what degree. And pacing, as we've seen during the second quarter during emergency situations can be moved. And so, for that reason, you always want to kind of gauge your response with that context in mind. You almost feel like you want to hedge your bets, even though you're not doing that, you're just trying to be cognizant of the fact that schedules move all the time and for various reasons. But I think having said all that, our expectation is that as we've said is that the second half should be a decent second half, we see a pretty good rebound certainly off of the second quarter levels. We originally came into the second quarter thinking it could have been a record second quarter for us, believe it or not. And now, of course, it's going to be what it's going to be, but it does bode for a good rebound in the second half at a minimum.
Dennis M. Bertolotti -- President and Chief Executive Officer
Yeah, I think Mitch, I guess...
Mitchell Pinheiro -- Sturdivant & Co,. -- Analyst
And I guess what we're out...
Dennis M. Bertolotti -- President and Chief Executive Officer
Yeah, go ahead.
Jonathan H. Wolk -- Senior Executive Vice President and Chief Operating Officer
I'm sorry, I was just going to say, I think, the work that was in the springtime, for the most part, got pushed to the fall. Could it get pushed again possibly but more probably you might have some fall things go further out each quarter, there was a smaller percent, probably less than 25% to be sure I don’t know if we categorize it, but it was a small percent that pushed out of the spring into 2021. So for the most part at the time customers are just reacting to, we can't get people to come in and work together closely. So we had to push out. There’s small like in Europe and other places where they still have these countrywide lockdowns, that's where a lot of the things even happen in the spring because you had vendors that were not just the entire turnaround couldn't be done within the country and then they had to find ways to either find someone within the country to do the work that they had planned for somebody else or find a way to bring them in. So as long as the borders are opened up both here and internationally, Canada as well doing that same type of thing, I think fall is probably going to have less chance of having this huge lockdown like you've seen in the spring.
Mitchell Pinheiro -- Sturdivant & Co,. -- Analyst
Okay. And then one last question is sort of from an intermediate-term and longer-term perspective. How has – has your thinking changed about the business, whether it's capital allocation, the way you're going to focus on various end markets, is there any, or even the way your working capital usage and the capex needs? Has anything changed from like an intermediate-term, a year or two-year to a three-year to five-year outlook? Have you learned anything yet, I was just curious for your thoughts?
Dennis M. Bertolotti -- President and Chief Executive Officer
Yeah, it's a good question. I mean, while we try to be insightful right now, we’re reacting to what's going on. We do see the advantages of increasing our diversity and our end markets. We do see the advantages of increasing our ability to do things remotely. While working from home everyone is trying to figure out how to do things remotely. So like I said earlier, I see customers may more bridge quotes and all these other things where customers are starting to see the advantages and doing it. And it's not going to replace bodies completely, but it will definitely supplemental the inspection programs you have so that you can be doing things with people out there with their eyes on equipment knowing what they're looking at, as well as always having some online data coming in.
So I do think what we're going to be doing is really redoubling our efforts on our diversification, on our digitization and those things that we knew was a good idea. But I think what we're starting to realize now, when you see times like this and they create all the need for invention and innovation and it's going the way we are talking about. We just, I think we got to start trying to push it and I think customers will see it. So outside of that capital and things like that, basically that's just every time we reforecast we look at it and say, what do we have. We don't see anything different, that the gas and oil market is going to need because it is other than they're always going to need online stable customers and vendors. And I'll tell you, you hear about all the possibilities of bankruptcies in the oil and gas space from the customers. The service folks are going to have that too. So there is some -- probably going to be a lot of companies that are affected by this. And we see ourselves coming out the other side of this and being strong. And I think our customer is going to look at who is going to be a long-term vendor for them and what is the right way to go price versus stability as well. So that might play into it as well.
Mitchell Pinheiro -- Sturdivant & Co,. -- Analyst
Okay, thank you. That's all from me.
Dennis M. Bertolotti -- President and Chief Executive Officer
Thanks, Mitch.
Jonathan H. Wolk -- Senior Executive Vice President and Chief Operating Officer
Thank you.
Operator
Thank you. At this time, I'm showing no further questions, I would like to turn the call back over to Dennis Bertolotti for closing remarks.
Dennis M. Bertolotti -- President and Chief Executive Officer
Great, Gigi, thank you.
I'd like to once again thank all the Mistras employees for their service and dedication. I'd also like to thank our investors for understanding that while the energy market suffered a setback in the second quarter here and we could take some time, but it will get back to the new normal. The entity industry continues to provide great value to the world's economies and Mistras will continue to not only serve the energy market but increasingly a number of other industries, as well, as we adapt to this new landscape. The whole Mistras team would like to thank everyone for joining the call today and we wish everyone a safe, prosperous, and healthy future. Thank you.
Operator
[Operator Closing Remarks]
Duration: 48 minutes
Call participants:
Dennis M. Bertolotti -- President and Chief Executive Officer
Edward J. Prajzner -- Executive Vice President, Chief Financial Officer and Treasurer
Jonathan H. Wolk -- Senior Executive Vice President and Chief Operating Officer
Edward Marshall -- Sidoti & Company, LLC -- Analyst
David Ridley-Lane -- Bank of America -- Analyst
Tate Sullivan -- Maxim Group -- Analyst
Alex -- KeyBanc Capital -- Analyst
Mitchell Pinheiro -- Sturdivant & Co,. -- Analyst
