Q2 2021 Team Inc Earnings Call

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Greetings and welcome to the team incorporated second quarter earnings Conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded and is now my pleasure to introduce your host Kevin Smith Senior director of Investor Relations you may begin.

Thank you Stacy welcome everyone to team second quarter 2021 earnings Conference call with me on today's call are and Marino Garcia, our chairman and Chief Executive Officer, and our Chief Financial Officer. Susan Ball. This call is also being webcast and can be accessed through the audio link under the Investor Relations section of our website at <unk> Dot com.

Information recorded on this call speaks only as of today August 4.2021, and therefore, please be advised that any time sensitive information may no longer be accurate as of the date of any replay listening or transcript reading there will be a replay of today's call and it will be available via webcast by going to the company's website <unk> dot com.

In addition, a telephonic replay will be available until August 11, and information on how to access these.

A replay features was provided in yesterday's earnings release before we continue I would like to remind you that this call contains forward looking statements made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995, including statements of expectations future events or future financial performance forward.

Looking statements involve inherent risks and uncertainties and we caution investors that a number of factors could cause actual results to differ materially from those contained and any forward looking statements. These factors and other risks and uncertainties are described in detail and the Companys annual report on form 10-K, and and the company's other documents and reports filed or furnished.

With the Securities and Exchange Commission the company assumes no obligation to publicly update or revise any forward looking statements, except as may be required by law and.

And Marina will begin by highlighting significant events and the second quarter and providing an update of our business. Susan will then detail on our results and before we take your questions and Marina will discuss the Companys outlook I would now like to turn the call over to Amrita.

Thank you Kevin and good morning, everyone. We remain cautiously optimistic on the strength of the global recovery. However is the second quarter demonstrated the recovery is prudent and proving to be uneven with disruptive stops and starts both domestically and internationally.

Vaccine rollouts are gaining momentum and driving an overall increase and mobility and economic activity.

Domestic petroleum demand has experienced a dramatic increase with recent levels that are in line or above the comparable weeks and 2019 in fact U S. Gasoline demand recently set a record as motorists were eager to travel during the fourth of July holiday like.

Likewise, the TSA reported new post pandemic records and domestic air travel while the recent emergence of Covid variance is concerning and it requires close monitoring the overall pace of the domestic recovery a strong.

International is a different story.

Business remains challenging with lower vaccination rates impacting team's ability to travel and service our clients assets in these areas.

The rebound and gasoline and air travel has been muted.

After more than a year of operating and a pandemic with reduced global mobility, we have seen a step change and consumption demand for travel is COVID-19 related restrictions were lifted causing cost inflation in raw materials transportation and labor.

Team was not immune from the underlying inflationary pressures and higher costs associated with the ramp up and overall economic activity.

The second quarter started strong in April.

With activity levels benefiting from several large turnaround projects may and June also realized improvements from increased economic activity with the easement a worldwide pandemic restrictions.

Team was able to benefit from the backlog of delayed maintenance projects reported consolidated revenue for the quarter at the upper end of our expectations.

Although second quarter revenue improved over 2020 levels, we continue to experience and uneven global recovery across segments with varying demand for our products and services IHT and quest are currently recovering at a faster pace and mechanical services now.

Now turning to our financial performance consolidated revenue for the second quarter of 2021 was $238.9 million.

Up 26, 2% from the same quarter in 2020, marking the first full year over year quarterly comparison of the Covid impact the revenue increase reflects the opening of the U S economy, as well as growth and select international markets.

Gross margin was $26, 3% below the prior year quarter of 33%.

Gross margin was negatively impacted by underlying cost inflation associated with the wrap up and economic activity and lingering COVID-19 pricing concessions.

Adjusted EBITDA for the quarter was $9.1 million or 3.8% margin. There was a year over year margin decline driven by the inflationary cost environment and the reinstatement of the 2020 temporary cost initiatives.

We also increased our investment and training certifications completing more than 35000 training hours when compared to the second quarter of 2020 and increase of more than $1 million.

During sorry, turning to our segment overview.

I will begin with mechanical services revenues were up 4.7% over 2000, twenty's depressed activity levels.

<unk> completed work on several large turnarounds during the quarter, increasing revenue by 11, 2% sequentially and.

And that continues to experience large project deferrals and a competitively priced market during the quarter. Many large turnaround projects were delayed until later this year or pushed into 2022.

Margins were also negatively impacted by inflationary cost pressures.

MFS experienced year over year growth in the areas of fabrication pulp and paper power and utilities and renewable energy.

As we reported yesterday after 3 field tests team commercialized its new patent pending smart stop isolation technology. The latest test was successfully completed on a 16 inch flare line at our refinery.

Yes.

Teams proprietary smart stop technology eliminates the need for complicated hydraulics or pivot points that are failure mechanisms and competitive line intervention tools. This new technology features a self energized dual seal system within a single standard line stop fitting rich.

<unk> the number of pipe alterations required to perform and isolation <unk>.

<unk> will increase operational safety and further strengthening our competitive advantages and the hot tapping market.

Now turning to our inspection and heat treating segment.

<unk> continues to perform well due to the run and maintain nature of the segment revenues were up 46% year over year similar to MFS IHT also realized inflationary cost pressures when coupled with the COVID-19 price concessions negatively impacted iht's margins for the quarter.

IHT experienced year over year growth and the areas of refining chemical and petrochemical pulp and paper and power and utilities.

As the economy continues to open and plant Utilizations rise, we have seen a steady increase and demand for our nested technicians. During the quarter. We were awarded 2 embedded contracts wanted a refinery and the other at a petrochemical plant.

Our next debt operations utilization is currently running at approximately 93% of pre COVID-19 levels.

In addition team was awarded a long term asset integrity program with a large investment grade midstream company.

The scope of the project includes pipeline and facility and mechanical integrity services.

We will partner with declined to develop and implement a structured approach to asset integrity supporting safer and more reliable operations across the clients large distributed pipeline infrastructure.

IHT continues to diversify its end markets. As an example, we were recently awarded a nested contract to provide radiography and phased array ultrasonic testing for a private space flight company team has technicians on site, providing services and we expect the scope of the project to grow over.

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Quest integrity revenue realized strong sequential growth up 57% over the first quarter and 51, 4% increase over the comparable quarter in 2020.

Due to quest visible project backlog, and we began to more aggressively recruit globally in order to proactively manage the anticipated increase in demand.

Quest was recently awarded several large full service pipeline inspection projects at domestic oil and gas production facilities midstream assets and refineries. In addition quest want a unique multi year contract in Australia, which upon successfully completing the inspections.

Could open a new end market for quest integrated solution offerings.

Quest continues to see strong demand and the offshore subsea market during the quarter Quest successfully completed and offshore inspection project in West Africa. The client's pipeline had significant internal diameter changes, making the inspection extremely challenging quest proprietary high resolution tools are used.

<unk> capable of inspecting pipelines with these characteristics given quest success, we anticipate an increase and deepwater activity in this region.

From a geographic perspective, despite the COVID-19 related challenges that have limited our ability to travel to client work sites, we realized year over year growth in many parts of the world.

In Canada, we experienced year over year growth and the focused efforts to improve workforce utilization and drive down indirect costs allowed us to expand gross margin and deliver a higher year over year adjusted EBITDA.

During the quarter, Canada was particularly affected by Covid outbreaks, forcing project delays and Western Canada that limited further revenue and margin expansion as.

As vaccine rates increase Canada's economic activity will growth, which should bode well for our end markets.

Our Canadian team received the Alberta boiler Safety Association approval for composite alterations team is uniquely positioned as the only full service provider that has been awarded the certification.

Many European countries also implemented Covid related Lockdowns through April and May before opening up and June despite the challenging environment teams European operations realized incremental year over year revenue and adjusted EBITDA growth.

The middle East remains volatile as some countries have struggled with vaccine Rollouts. For example, UAE has the highest vaccination rates in the middle East and 1 of the highest in the world, allowing for more robust economic recovery, while other countries still have imposed quarantine restrictions limiting travel and.

And out of the country.

We were recently awarded a new 5 year contract supporting on stream leak sealing callout work with a large and well see client and Qatar. In addition, we were awarded a multiyear hot tapping service contract for a multinational chemical manufacturing company and Saudi Arabia, helping build our market share and the kingdom.

I will now turn it over to Susan for a more detailed financial review Susan Thank you and Marino and good morning, everyone. I will review, our second quarter financial performance and quarter over quarter comparison is an Marino mentioned, our second quarter consolidated revenue of $238.9 million.

<unk> was up $49.6 million.

And we're at 26, 2% increase from the second quarter of 2020, representing and first year on year comparable with a full 3 months COVID-19 impact.

<unk> revenue reflects both increased turnaround activity and improved economic activity with the loosening of the COVID-19 related restrictions.

For the quarter all 3 segments had revenue growth over Q2, 2020 with quest, having the largest overall percent increase at approximately 51% IHT followed with just over 46% increase and also having the largest revenue dollar increase of approximately.

<unk> $37 million.

Panicle service services also showed a year over year revenue growth of 4.7% and.

Solidago gross margin for the second quarter 2021 was $62.8 million 9.4% increase over the prior year quarter and $57.4 million due to the direct cost inflation impacts and the reinstatement of the temporary cost actions that were fully in place.

And the second quarter of 2020, and consolidated gross margin percentage declined to 26, 3% compared to the prior year quarter of 33%, which was a record quarterly gross margin percentage and the.

The second quarter was impacted by significant cost inflation, particularly in raw materials, which increased roughly 50% or greater year over year.

And so realize labor cost increases as the market for entry level technicians is currently very tight.

Cost increases were compounded by the fact that we still have some lingering COVID-19 pricing concessions.

Quarter net loss was $17.5 million when compared to a net loss of $13.5 million and the prior year quarter.

And increase in interest expense of $2.3 million drove the increase in net loss versus the comparable quarter.

Adjusted net loss and non-GAAP measure was a negative $14.9 million on a 48 adjusted net loss per diluted share for the second quarter of 2021 compared to an adjusted net loss of approximately $9.5 million or <unk> 31, adjusted net loss per diluted share for.

The same quarter.

And 2020 adjustments and the second quarter included approximately $2.3 million of professional and accrued legal fees and costs and just over $300000 and severance charges.

Which were primarily associated with the operating group reorganization.

Consolidated adjusted EBITDA for the quarter was $9.1 million as compared to the prior year quarter of $12.7 million, our selling general and administrative expenses for the second quarter of 2021.

And $68.5 million up $9.6 million from the prior year quarter the.

The increase in SG&A reflects the impact of the reinstatement of the temporary cost reductions that were implemented at the inception of the pandemic such as salary reductions furloughs and training and travel and <unk>.

Juruti and the cost reinstatement and we're fully in place at the beginning of April.

Additionally, we increased our investment and our sales force as I mentioned on our prior call more than half of the SG&A savings. We realized in 2020 were permanent in nature. We expect our full year 2021, SG&A cost to be and a range of $270 million to $280 million we remain.

Elegant and managing costs through the recovery with a focus on optimization of our SG&A cost structure.

Interest expense was approximately $9.6 million up $2.3 million and we continue to expect that interest expense growth.

Between $9 million and $10 million each quarter and 2021.

Turning to our segment performance <unk> team reported second quarter revenue of $117.5 million up 46% from the $85 million posted and the same period last year and growth reflects an increase and turnaround projects and associated activity as well as any.

Kris hours associated with nested sites and technicians and.

And lesser degree increases per callout activity.

Second quarter, adjusted EBITDA was $10.7 million up $1.2 million over the prior year quarter.

Adjusted EBITDA margin decreased this quarter to 9.1% as compared to 11, 8% and the prior year quarter.

And mechanical services and reported second quarter 2021 revenue of $97.2 million up 4.7% from $92.8 million and the second quarter of 2020.

Adjusted EBITDA was $7.6 million.

Quarter of 2021 down from $16.9 million and the same period last year adjusted EBITDA margin increased this quarter to 7.8% as compared to 18, 2% and the prior year quarter.

Quest integrity revenue of $24.2 million was up 51, 4% from the prior year period revenue of $16 million second quarter. Adjusted EBITDA was $6.5 million up from $1.7 million and the year ago period, adjusted EBITDA margin.

And was 26, 6% compared to the prior year quarter at 10, 7% and has reached the normalized levels and expected of around 25%.

We ended the second quarter with $18.4 million of cash borrowings under our ABL facility were $49.3 million net.

Total liquidity approximately approximating $73.5 million at June 30 cash.

Cash interest for the year is expected to be approximately $26 million to $28 million as.

As expected during the second quarter 2021.

Cash flow from operations was down significantly as we funded the working capital demands associated with our revenue growth and increased activity levels and cash flow from operations for the quarter was a negative $17.6 million free cash flow was negative $23.4 million.

Which included $5.8 million and capital expenditures full year 2021, Capex forecast has now been reduced by $5 million down to approximately 20 million and.

As activity levels continue to grow we will see increased working capital demands, having and unfavorable lag effect on our cash flow generation, although the variability of working capital change is difficult to forecast, we expect to be free cash flow positive for the full year, we will continue to actively manage.

Capex and discretionary spending accordingly to align the business.

Throughout the year and adjust as necessary.

We will maintain our focus on on the discipline that enabled us to overcome the many challenges and the past 18 months.

Includes the focus on returns and cash flows enhancing synergies and greater efficiencies across our segments.

Working capital management, and generating free cash flow to pay down debt remains our priority that completes the financial review I will announcement and back to Amarin and them. Thank you Susan before we take your questions I will provide an overview of the macro market trends and update on our technology and digital initiatives and our business and.

On a outlook starting with the macro environment as I mentioned earlier, we are in the middle of and uneven recovery and we're faced with certain headwinds during the second quarter that have impeded global growth, including COVID-19 related restrictions and inflationary pressures and supply chain disruptions. Despite these head.

Winds the IMF is forecast and global economic growth rates of 6% this year and 4.9% and 2022. This has led to a historic increase and global petroleum demand, which is expected to increase from approximately 85 million barrels per day and the second quarter of 2020 to 100.

<unk> million barrels per day by year and.

Following the prolonged weather related refinery shutdowns, along the us Gulf Coast and February that led to high drawdowns of petroleum product inventories refining margins improved and the second quarter, which incentivized higher refinery Utilizations U S refinery run rates are now back to pre.

Pandemic averages, but margins have since pulled back as the market awaits further demand increases and gasoline and jet fuel.

Driven by strong demand for plastics U S exports of ethylene to Asia and other parts of the world have increased significantly benefiting our petroleum and petrochemical clients ethylene prices reached a multiyear high and April when the Gulf coast facilities ramped up following the winter storm.

Ethylene prices are once again testing multiyear highs driven by 2 Gulf coast plants that are undergoing maintenance, reflecting a tight market. We continue to monitor proposed government policies and spending plans and anticipate increased regulations and the energy sector with a renewed focus on the reduction of.

Greenhouse gas emissions, while the infrastructure Bill is progressing through the Senate and the recently proposed clean energy standard plan would include provisions such as penalties for greenhouse gas emissions and larger tax breaks for wind and solar developers.

These government mandates can create opportunities for team to assist our clients and meeting their compliance related and green energy goals.

And now and update on our technology and digital initiatives, we remain focused on technology and innovation to improve our top quartile safety record and increase our product and service offerings to our clients as.

As we reported earlier this week, we entered into an agreement to become the exclusive provider of Credo soft integrity management platform and North America. The software enhances team's ability to monitor assets ensure compliance and provide inspection and repair solutions the credo soft service offerings.

<unk> provides team a stable subscription based revenue profile. There are currently multiple clients utilizing the credo soft platform for Inc.

Tegra and monitoring services in North America.

Team is also making strong progress on scaling our digital job platform. This tablet based solution allows our technicians at the work site to optimize data collection and documentation for the project driving greater work efficiency and time on tools the.

And the software provides our clients scheduling and real time information about the work being performed on their assets and Standardizes invoicing and billing processes.

Turning to our business and operational outlook, given the large number of aging assets and increasing regulatory requirements across the industry. The postponement of facility maintenance deferrals of plant turnarounds and the delays of new capital projects, we expect global growth and our end markets over the next few years.

And the depth and breadth of our operational and technical capabilities positions us well to support the client's asset performance optimization requirements. Furthermore, our balanced operating models evenly split across nested project and turnarounds and call out allows team the agility to successfully compete.

And the current market environment.

Throughout the Covid pandemic, our global workforce management function allows team to flex our resources to match market activity and enable better forecasting and planning for our clients' future demands. In addition, our decision to pay benefits and maintain training certification during the pandemic has allowed.

For a more rapid and effective increase and skilled technicians at our peak activity levels. During the second quarter, we added over 200 field technicians versus the comparable quarter last year.

Teams industry, leading training and certification programs together with our strong recruiting capabilities and the military technical schools and colleges will provide an opportunity to continue expanding our workforce to meet market demands in the second quarter, we achieved workforce utilization rates greater than 90%.

As we look forward to the third quarter, we anticipate sequential topline improvements from higher activity levels as worldwide Covid related restrictions ease and however, like many other companies team faces and uncertain path related to the Covid recovery, which could potentially include.

Government mandated shutdowns regionally and the U S and internationally we remain.

And cautiously optimistic that our revenue for the remainder of the year will reflect increased economic growth and given the outlook for the second half of 2021, we maintain our full year revenue expectations to be 10% to 15% higher than 2020.

As previously mentioned team experienced an increase and operating costs, resulting from the current inflationary environment with this in mind, we began a proactive contracts review process to offset margin pressures.

First we focused on rolling off the lingering COVID-19 price concessions than we started discussions with clients to progressively move prices to reflect the current market conditions and ultimately improve margins. It is important that we offset cost increases related to inflationary pressures tightening labor.

Market and other higher cost to serve.

As reflected this quarter there is typically a delay between recognizing increased costs and negotiating price improvements with clients. We anticipate second half 2021, and 2022 will allow team to deliver margin improvement and solid free cash flow generation.

In closing with the post pandemic recovery upon us our teams throughout the world are acting with a sense of urgency focused on capturing available growth opportunities, while driving profitability through disciplined pricing and cost management team.

<unk> team is committed to investing and our people expanding our technology and digital portfolio and delivering execution excellence and most importantly, we have not lost sight of our number 1 core value safety <unk> and remain dedicated to top quartile performance by operating in a safe and reliable reliable.

And are each and every day.

We will continue to demonstrate the same relentless discipline that help guide us through 2020.

Operator, I will now turn it back over to you for the question and answer session.

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star 1 on your telephone Keypad, Inc.

Information tone will indicate your line is and the question queue. You May Press Star 2 if you would like to remove your question from the queue.

And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Your first question comes from Todd.

And with Christ with C. J S Securities. Please go ahead.

Good morning.

Good morning, good morning.

First could you just give us a little more detail on the inflationary pressures you're seeing and then how that's affected your gross margin and what you're expecting.

And those gross margins going forward and the second half.

Sure, let me talk a little bit.

The inflationary pressures and then I'll, let Susan touch on the gross margin. So I think overall, we've seen the.

Gross margin sorry, the ramp.

Raw materials impact on inflationary pressures, which has impacted our mechanical services segment.

The biggest because they have the most products in terms of manufactured goods.

And that standpoint raw materials has had the largest increase I think as Susan mentioned in her prepared remarks.

On the freight logistics and just overall movement of goods and people was the second largest and then we've seen an increase and labor costs.

And those ones, we expect to further increase as we go through the year as you know, even though we do expect some of the lower skills available labor to become more available over the short term as.

And as things change, especially in the U S. We.

We do we do see inflationary pressures tightening on the higher skilled labor as the market continues to tighten and so it's.

Starting with raw materials, followed by a lot of the freight transport and.

Logistics, and then labor cost increases and Susan maybe you want to touch on the gross margin yeah.

<unk> gross margin as I mentioned for the quarter. It was about 24.

26, 3% on a 6 month basis $24.6.

And.

The increased I would.

St pressure with the inflationary costs and what we've seen in Q2 as we look forward to our gross margin on a full year basis.

We are anticipating improvements, obviously and HQ that linking at on on a full year basis.

We're estimating it would be between 27% to 28%, so probably closer to the lower end of that but north of the 27.

And maybe just to add a little bit of color on some of the.

Reasons for the range as mechanical services and quest integrity grow obviously that'll have a segment mix benefit to gross margin.

As we're able to move pricing over the year, starting with Covid discounts as I mentioned, and then price increases to offset some of that inflation that obviously has a factor and then depending how those inflation.

Increases or pressures continue throughout the year, we will have a factor. So I think there's there's a segment mix pricing traction and then inflationary pressures are the 3.

Levered, if you will that will impact gross margin for us.

Great. Thank you.

And then you mentioned the outlook for fall turnarounds is positive.

And maybe talk about what your visibility is there.

Yeah.

Sure.

And we track as you know we track our turnarounds and a half years, we are seeing.

Right now clients, obviously, starting to man up in terms of labor requirements and equipment requirements for turnarounds that at this point. We expect we will start later in September and running through October so and impact and look a lot.

Part of Q3 and into the early part of Q4.

We do see the the turnaround market.

Still being a little bit on stable in the sense that there are some projects moving.

Debt potentially slide out of.

The year, but overall, we expect the second half of the year turnaround to be slightly stronger than the first half.

We are seeing as well a lot more pit stop and smaller projects that are popping up as clients have delayed.

Maintenance or turnarounds.

Some of them, starting and 19 because of the higher utilization rates, especially in refining and then because of Covid in 2020 and then.

Cash management, and Capex and the first half we are seeing that.

And we're looking at a lot more pit stops to get.

And then through the year, if you will from a higher utilization and asset management standpoint. So.

I think we anticipate a higher second half turnaround season, overall and and increase in some of the smaller pit stops which.

Arent as big of a benefit as large turnarounds, but they definitely are positive for us as you add up those pit stops there they're a good impact for our activity and the second half.

Yeah.

Great. Thank you so much.

Thank you.

Your next question, Sean Eastman with Keybanc capital markets.

Hi team thanks for taking my questions.

Good morning, good morning, so.

So just in light of the gross margin swing factors highlighted around the second half maybe.

And maybe it would be helpful to just get a finer point on how that pricing traction and inflationary pressure trended exiting the second quarter.

Just kind of where we're likely to fall out.

And <unk> based on what you've seen.

And the early part of the third quarter and kind of exiting the second quarter would be a helpful discussion.

And it was inflation getting worse are you getting traction on the pricing programs.

And that type of thing would be really helpful to hear.

Sure. So I think first of all on the inflation, Sean the some of the inflationary costs are transition area. So we.

As we kind of shift through it we expect some of that to level off and be more transitory, but.

I think raw materials is 1 of those that as the year goes on and supply chain improves.

We expect that to level off or come back down a little bit on the flip side I think as I mentioned earlier as the labor market tightens for skilled higher skilled labor maybe not as much on the entry level, because I think that will open up after.

After September.

I think it will there will be inflationary pressures on labor on the higher and higher skilled.

Technicians.

From that perspective, so I would say that we've made good progress on removing.

Many of our Covid related discounts and where we're in the final stages with a few clients.

For a few of those to come off later this year, but the majority are have been.

Remove.

When it comes to pricing traction overall outside of Covid.

The easiest move for US is call out work because it's really quoted more on a job by job basis, we've increased transfer prices and.

Implemented surcharges that was done.

Over the latter couple of weeks and.

Time will tell how competitive the market is because thats, obviously, a quoting business but.

And we're being aggressive on on moving there because thats step 1 we have started negotiations with our top 25 clients, which I think will end up being more.

Focused on the inflationary recovery and.

And and tying up resources as the market continues to tighten so.

And as things tightened and we will get more traction with our top 25.

And some markets that maybe are less competitive on quoting we've already seen some movement other markets like the Gulf regions right now as an example are still very competitive and I expect that that'll take a little bit longer on.

On the flip side, we're doing a lot on the supply chain side to secure raw materials look at our supply chain overall.

Look at our manufacturing.

Capacity and also trying to bring down the cost to serve to the best of our ability. So I think it's a little bit of a 3 pronged approach.

But overall, we expect to get pricing traction over the year.

But it's going to be starting with call out I think because thats the quickest to move followed by the contractual negotiations, which would come later in the year.

Okay, Thanks and.

Okay.

Credo soft.

<unk> rollout.

Okay.

Are we seeing any traction.

And these types of initiatives in terms of.

Sure.

Pricing and Marina and maybe.

Yes.

On.

Differentiation.

There been a.

A good customer response to these types of things.

Is there sort.

Have a good pipeline of work out there.

These types of initiatives can help you guys.

And kind of capture more share and.

And get better pricing.

Well good question. So 1 of the reasons that we really felt and vice versa that it was a good partnership with Credo salt.

Is they've got a few large.

Yossi clients.

Especially international.

And they've gotten very good traction on pipeline and mechanical integrity.

And what they were really looking for and vice versa. We were looking for was to partner.

And a large market, which is why we selected north America to be able to use our sales and some of our engineering support their platform and expand their footprint into a new market. So it was a good fit because of our size and scale.

We've got as I've talked about over the last few years, some very good digital tools and working on efficiency and working on.

Compliance and documentation and the clients have their own asset management systems, which a lot of them have in place and what credo soft allows us to do is really bridge our activities from inspection.

Some of the mechanical repair et cetera into their asset management system. So it's a very good bridge from our services into the clients' operating asset operating models and what it does for US is it starts moving the needle Shawn around risk based inspection.

And more predictive inspection and utilizing data to to.

To start being more proactive.

That starts with the inspection services.

It also plugs and damage mechanisms like corrosion for example, and the pull through the benefit is really on the on the repair side and so we expect as the traction builds.

Net.

We'll move more to risk based type inspection and we will get more pull through from mechanical services, which is obviously.

1 of the ambitions for US is to continue to grow mechanical services.

There's a bridge that provides and the partnership that they've got and the platform that they've got is is subscription based so we want to obviously be able to put it on and into our clients' facilities. We have currently 5 clients that are subscribed to the platform already.

And again using our strong client base, that's where we feel that theres going to be upside in terms of deployment and implementation.

Okay. Thanks, a lot and marine and I will turn it over there.

And you.

Your next question Martin Malloy with Johnson Rice.

Good morning.

Morning.

And similar question, except I wanted to ask about the smart stuff.

Offering that you press released last night, and if you could maybe help us with.

Try to quantify how important that is in terms of the market opportunity addressable market and.

How meaningful of a competitive advantage and that is.

Sure.

First of all when you look at the development Marty we've been working on this for about 2 and a half years. So theres been a lot of.

Field testing product development.

Including.

Manufacturing the materials et cetera.

Benefits.

Really when you speak to a client I think the first thing to put into context as it is on on stream repair and our clients.

And as they want to obviously keep their utilizations up either in plant environments or even more specifically this addresses midstream and pipeline, where you have flow in the lines.

More often.

It's a big benefit so our systems able to only penetrate the pipe or the line once versus multiple penetrations, which obviously is beneficial we can set it in and low volume fluid movement versus.

And clean dry line, which is beneficial.

And we're able to monitor pressure between the 2 steels without.

And without having to.

And make a second <unk>.

Break and the line, which is beneficial and really when you look at it it's mechanically for decline, it's a lot more reliable and our clients right now are focused on safety.

You focused a lot on reliability and turnaround time in terms of keeping their lines and their plants up so.

And we're changing the commercial model instead of going.

Strictly labor rate buildup and parts, where we're doing this more at a project based.

Pricing level with project management.

Materials and traceability is an advantage for us leveraging some of the manufacturing investments we made over the last couple of years with our press cell.

And the whole package is what the clients like I was on a client meeting.

Last week, where our client was 1 of the ones that did the field test on.

And.

And they very much like the fact that we don't have to.

We can work on stream.

It's a very reliable system and see is that they don't have to change their their line in terms of 2 or 3 fittings to do their operations. So I think there is a commercial model change.

For us I think that the clients.

Like the safety and operational part and we've gone through a pretty rigorous field testing and now we're expanding the sizes.

And.

And the ability for us to deliver it starting in the U S and then moving and international.

Okay.

My next.

<unk> kind of bigger picture, but youre seeing a lot of the iOS season, and the petrochemical companies.

And have improved results and cash flows and there were.

Turning to capital to shareholders, but there and a much better position than they've been for the last couple of years and it seems like the past.

2 years or so.

It appears to be some underinvestment in terms of.

And.

And to the type of turnaround projects and maybe some of the maintenance being deferred.

And that you would do and then I don't know if you can maybe talk about as you look forward to 2022.

When do those conversations with your customers start or if you've had any that might be indicative of.

Now theyre looking at maintenance spending going forward.

Sure no. It's a very good question.

And I would say a little bit of what I said was Sean applies I think that the regulations. There is no doubt be and emissions or.

Overall regulations continue to tighten that.

There is no doubt that the run and maintain.

Requirements in terms of regulatory inspections, either risk based or annual based.

And the use of ways for our clients to continue to monitor their assets to prevent environmental.

Issues or maintain high utilization rates to maximize margin.

Stretch out.

There their facilities and not invest big capital right now all of those things I think we saw it and 'twenty through cash conservation, we're seeing some of it and 21, so I think things like credo soft. The fact that 1 third of our revenue is run and maintain.

Based on and Thats, very regulatory driven and the fact that our asset integrity and digital and quest groups are focused on mechanical integrity and pipeline integrity. These are all regulatory.

Driven product and service lines and we continue to feel that that is going to be priority for our clients.

Built some good partnerships and our and our top 25 client base we've had regular.

Meetings with clients during Covid and I can tell you that most of them on.

Are trying now to plan their capex planning for 2022, and they are going to do the pit stops theyre going to do the regulatory requirements and theyre going to do on stream repairs in order to get through the year, and then 2022 and 2023 as we look out either our own data client data or a third party.

Data unit upgrades and Capex investment.

We expect that to kick in.

So I think 'twenty, 2 and 'twenty 3 looks strong and I think it's it's going to be more capital investment in the meantime, though.

The drag on our mechanical services.

Segments, we expect that if the utilizations remain up and generally we've seen a 1 to 2 quarter type of delay between inspection and mechanical services recovery, we expect that to be driven more by opex spend and call out work and because our.

Right now their margins are starting to improve day.

Amanda is increasing we do expect call out and opex spend to to fill in the GAAP. If you will between now and when Capex starts to spend I think most of our clients are planning their October and November Capex plans.

Permitting and project planning for 'twenty, 2 and 'twenty 3 having said that as I've said earlier, we still expect our turnaround season and the second half to.

To be solid and and we're planning labor and resources for it right now.

Great. Thank you very much.

Thank you.

Your next question comes from Adam <unk> with Thompson Davis. Please go ahead.

Thanks, guys 2 quick questions.

First.

And the guidance you gave for the back half of the year does that imply EBITDA growth for the full year.

And second Susan on the free cash flow expectations is that.

When you say positive for the full year is that mostly driven by working capital swings and the back half.

So, yes with respect to the EBITDA and we do expect.

Due to be.

Significantly improved over each 1 and.

We would see.

And in line with what I said about gross margin with the inflationary pressures and and other pricing.

And.

The results and Q2 and.

We would expect that while our percentage and our margin would be up for EBITDA, and it's going to be less than what we've done and.

And speaking to previously said that you know again.

Significantly from the first half of the year, but down from the prior expectations.

And what what I would say is that it wouldn't be expected to be around probably just north of 5%.

Margin.

And.

And then as far as the free.

Free cash flow.

We mentioned.

As the revenue is growing and activity levels and expectations that is.

Asleep using working capital and we did expect that we wouldn't have positive free cash flow for the first half of the year as we look to the second half of the year.

And that's going to net increase of that improvement is really going to be driven by the fact.

We are bringing down the working capital needs were collecting on the revenue levels that were generated in Q2, and those increasing levels in Q3 and Q4.

And so it is a function on the improvements.

Continuing to occur.

And with really H, 1 being driven by <unk>.

Generally and the first quarter first half of the year Theres other cash costs and go out debt that we don't have and the second half of the year.

We also will have a very focused effort on cash collections to be able to.

Drive down our receivables.

Yeah, and much lower level.

Sounds good thanks.

Thank you.

Once again, if you would like to ask a question. Please press star 1 on your telephone keypad.

Your next question comes from Brian singer.

Yeah.

Stacy and are you still there.

Yes.

Yes Hello.

Hi, Brian Good morning, Jeremy.

Yeah, Hi, Brian Russo.

And Tony maybe.

Maybe we could talk about your gross margin a little bit more.

400.

The 30% down to.

About 26% can you break that down.

Possibly.

And what what price concessions.

Through March and lower versus raw material.

Inflationary pressures.

So labor.

Cost pressures as well.

Just trying to get a sense of.

The decrease in margin, while you saw a nice top line growth.

Where we could see the recovery through the latter half of the year to get to your gross.

Gross margin targets.

Let me just start and I'll have Susan and add a little bit of color Bryan.

I think where we're not providing the <unk>.

And for color in terms of how much was pricing because obviously there was a COVID-19 price discounts but.

I would say other than a few lingering ones going into age to most of those have been removed.

And inflationary pressures as I mentioned earlier around raw materials and logistics and labor.

Led by raw materials.

As Susan said over a 50% increase.

Had a factor and then the third factor was the fact that we reinstated.

And the temporary cost reductions as we moved into the year.

Including training, which which we highlighted was.

35000 hours actually above that and $1 million, which.

Obviously goes into the gross margin impact as we recovered from from the Covid period. So.

You're right that it is inflationary it is pricing.

And it also is the fact that we reinvested and things like training.

The other factor is that.

Our mechanical business and our quest business.

And have have strong gross margins as well and as the mix of segments changes.

It does impact things so as we see mechanical and quest continue to grow into the second half year and 'twenty, 2 that's where we'll get a positive mix as well because there is.

Some different.

Margin type.

Performance from each of the groups, but I'll, let Susan add a little bit more color around these yes and.

And Brian as Andrea mentioned, and we're really not providing the specific details.

I would say debt.

It's more of the increasing costs that we're seeing impacting the gross margin for the first half of the year and as Henri mentioned.

While we rolled in debt.

And the cost reductions and the temporary costs from 2020 by that by the beginning of <unk>.

On this quarter the second quarter April.

And there are additional costs that do ramp up that you don't have throughout the years and Ram mentioned and the training and and other high and mentioned previously and the gross margin and free cash flow additional cost that hit Q1 Q2, the net really kind of get reduced for the second half of the year. So.

And again I would say its mooring closer to the cost increases that really impacted the.

And mixes and Rina mentioned with between the segments as well as what we're looking at is as improvement and its quest.

Has has sequentially improved and.

Significantly.

And that base and their fixed costs and and they are covered by a lot more fixed costs that base of fixed cost and help elevate that gross margin and as we see the growth for them.

Okay got it that's helpful and I oppose.

Just on mechanical services, you know, obviously, you saw quite a bit of year over year topline growth.

And IHT and quest, but it just seems the revenue split and mechanical services with only 4% and given the comp.

2.

Q2 of last year.

And it just seems surprisingly low.

Would you were referring to earlier on project delays and and turnarounds being delayed or why wasn't that more in line.

And with with the other segments, given given the year over year comp.

Yes, good question and a couple of things I would I would highlight for Q2 you are right in terms of some of the project delays that I referenced in the prepared remarks, we are seeing more competitive pricing pressures in mechanical services than we are at this time and the other.

2 segments and I referenced a little bit earlier, the golf Division. For example, so we are being I would say our.

Revenue growth mindful that debt, we do it profitably.

So we're not chasing every quote.

We're trying to be.

I would say calculated if you will right now as we get through the recovery phases. So call out was impacted due to competitive pressures.

Also on mechanical has a bigger footprint Brian.

International and into Canada.

And we had some <unk>.

Further COVID-19 restrictions and some of the non U S areas.

And that impacted the growth rate, they still did well and those areas, but they didn't do as well as they could have had COVID-19 restrictions not limited our ability to travel in and out of countries. They are their footprint is much broader than IHT and for example, when it comes to geographical coverage. So those are the big.

3.

And historically.

And as has generally lagged on a recovery.

IHG for regulatory.

Driven reasons, where clients have to meet their regulatory requirements for example inspection versus more callout on mechanical but what we're seeing now is.

Some good movement on leak repair, we're seeing some good movement on call out Hot tapping both pipeline and plant based so we expect that to to catch up but those are the reasons that debt.

We're seeing a bit more of a lag on MFS versus the other 2.

Okay got it and then just.

And just.

Clearly the energy industry is recovering but.

At aerospace.

Aerospace is lagging and any comments on on that end market, which I believe is your second largest market.

Yes so.

I would say that.

We are seeing things being pushed in the aerospace for large.

Engine tear downs large type projects.

We are.

Seeing some improvement in terms of inspecting new parts and and working with some new clients, but overall.

Yes, I would say, it's lagging the recovery if you compare it to refining and petrochemical.

Which is 1 of the reasons, we talked about last quarter is making our investments in our facilities and some of our expansion plans because we want to hit it on the upswing, which we expect would be 2022.

So it is lagging.

And we're making some headway with new clients, but not recovering at the same speed, obviously as you would expect to refining right now and petrochemicals.

Alright, great. Thank you very much.

And thank you. Thank you. Thank you I would like to turn the floor over to Anne Marino for closing remarks.

Thank you Stacy we remain optimistic about our outlook and teams opportunities to grow and the current environment as our clients place increased emphasis on asset performance optimization and reducing their carbon footprint.

Like to thank all of our employees for their dedication to operational excellence and health and safety. We remain excited about our growth opportunities in 2021 and beyond Thank you for joining us on this call and your continued interest and team and we look forward to speaking with you again next quarter.

Ladies and gentlemen, thank you for your participation. This does concludes today's teleconference. You may disconnect your lines and have a wonderful day.

Yeah.

Yeah.

Okay.

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