Q2 2024 Mistras Group Inc Earnings Call
[music].
After managements prepared remarks participating on the call permission will be managed <unk>. The Companys chairman of the board and interim President and Chief Executive Officer, and Ed <unk> Senior Executive Vice President and Chief Financial Officer.
Want to remind everyone that remarks made during this conference call will include forward looking statements that 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.
Unnamed Speaker: The discussion in this conference call will also include certain financial measures that were not prepared in accordance with U.S. GAAP. A compilation of these non-U.S. GAAP financial measures to the most directly comparable U.S. GAAP financial measures can be found in the tables contained in yesterday's press release and in the company's related current report on Form 8K.
The discussion in this conference call will also include certain financial measures that were not prepared in accordance with U S. GAAP.
Unnamed Speaker: and remains on pace for fiscal 2024 adjusted EBITDA, which continues to guide us forward, on revenue that was up nearly 8% in the second quarter, which we believe is a key to creating shareholder value, and oil and gas up 3% on the strength of an anticipated robust spring turnaround cycle. We grew in revenue in each of our segments, North America, International, and Products, for the first time since Q1 of 23, which was implemented late in 2023.
Speaker Change: Revenue in the second quarter reflected growth across all industries with a double digit increase in aerospace and defense of 17, 5%.
And the oil and gas up 3% on the strength of an anticipated robust spring turnaround cycle.
We grew in revenue in each of our segments North America International and products for the first time since Q1 of 'twenty three.
Speaker Change: I am, particularly enthused with the continued progress achieved by our enhanced commercial function led by our Chief commercial officer, Jerry del Terrio.
Speaker Change: Which was implemented late in 2023.
Unnamed Speaker: Our enhanced commercial function has helped refine our go-to market approach, pricing strategies, contract management, and other key initiatives, which have provided a meaningful benefit to our operations and will continue to do so. Gross profit dollars and gross profit margin were also up in the second quarter across all segments, as was operating income, which was an increase of over 200%. Selling general and administrative expenses were down compared to both the year-ago quarter and year-to-date period, and the company is creating strategies for ongoing cost monitoring to further improve our operating levies. Management is intently focused on improving this performance during the remainder of the year through various actions, which Ed will cover later, and to run through 2025. And then there was still work to do.
Our enhanced commercial function has helped to refine our go to market approach pricing strategies contract management and other key initiatives, which have provided a meaningful benefit to our operations and we'll continue to do so.
Speaker Change: In the first quarter of 2024.
Speaker Change: And who is creating strategies for an ongoing cost monitoring.
Speaker Change: Further improve our operating leverage.
Speaker Change: Despite the significant achievements and most financial measures during the quarter.
Speaker Change: I would like to note that cash from operations and free cash flow performance for the quarter and year to date period significantly lags that of prior year and the company's expectation.
Speaker Change: Management is intently focused on improving this performance during the remainder of the year through various actions, which Ed will cover later.
Ed: A few additional comments on the second quarter are as follows.
Ed: Our aerospace and defense business returned double digit revenue growth with North America back to pre pandemic levels.
Ed: And international quickly headed in that direction.
Unnamed Speaker: The second quarter of 2024 was our third consecutive quarter of strong top and bottom line results, coinciding with the formal institution of the various Project Phoenix initiatives as our new standard operating procedure. As such, we remain on target to achieve one of our all-time high-performance adjusted EBITDA years. Both gross profit and margin expanded again in the second quarter, primarily attributable to a favorable sales mix change and lower health care claims expense, as well as due to the favorable impact of Project Phoenix actions realized in 2024, including pricing increases achieved.
Ed: Yeah.
Ed: Revenue in the second quarter was up meaningfully for the third consecutive quarter, increasing nearly 8%.
Ed: Consistent with the first quarter about one quarter of our overall growth was attributable to price increases wherever.
Ed: Where we have taken pricing pricing actions, starting primarily the smaller or mid sized customers.
Ed: In addition growth was net of certain work that we vacated because it did not meet the new profitability benchmarks established by our commercial function.
Ed: Aerospace and defense continued its strong growth trajectory with revenue being up 17, 5% in the second quarter on the heels of having been up 18, 9% in the first quarter, making this its third consecutive quarter of favorable results.
Ed: Commercial aerospace continues to be extremely strong and we are also generating significant growth in the private space industry as well as a result of the increase in number of launches.
Ed: We are channeling incremental capital into our aerospace and defense business in order to capitalize on what we see is a unique window in the market to accelerate growth.
Unnamed Speaker: For the quarter, our SG&A was 21.6% of revenue and was 22% of revenue for the six months ended June 30th. However, this change has no net impact on our outlook for adjusted EBITDA for fiscal 2024. After rising 55% in the first quarter, adjusted EBITDA was up 44% to $22 million in the second quarter and stands at $38.3 million for the first half of 2024, both adversely impacted by an increase in receivables and unbilled receivables in progress.
Ed: It is an incremental year over year gross profit benefit of $3 million in SG&A benefit of $12 million due to project fenix initiatives.
Ed: Based upon our implementation of project Phoenix, we have validated this cost savings of $15 million in aggregate. However.
Ed: However, this benefit is now revised to be $7 million of cost of revenue reduction and $8 million of SG&A reduction savings in fiscal 'twenty. Four therefore, although we will still realize a $15 million aggregate improvement to adjusted EBITDA in 2024 attributable to these items there will be a change in the distribution of savings.
Ed: I mean, the cost of revenue and SG&A line, respectively. However, this change has no net impact on our outlook for adjusted EBITDA for fiscal 'twenty four.
Ed: Nevertheless, the Companys primary objective is to create shareholder value by improving our bottom line profitability.
Ed: And in the second quarter, we made significant progress on this front with GAAP net income of $6 4 million or <unk> 20 per diluted share up from <unk> 3 million or <unk> <unk> per share a year ago.
Ed: And after rising 55% in the first quarter adjusted EBITDA was up 44% to $22 million in the second quarter and stands at $38 3 million for the first half of 'twenty four.
Unnamed Speaker: This should lead to a gradual decrease in interest expense over the second half of 2024. This is the lowest this ratio has been since the third quarter of 2018. Based on our current projections, we anticipate further reductions to our leverage ratio throughout 2024 due to the anticipated increase in our trailing 12-month EBITDA and debt reduction.
Unnamed Speaker: The second quarter represented another sequential strong top and bottom line quarter for Mistras, providing evidence and confidence for our future performance, given our newfound discipline, processes, and approach. Accordingly, for 2024, we are reaffirming our previously announced guidance and other strategic investments within data analytical solutions and the aerospace industry. I am extremely proud of our nearly 5,000 employees that believe in our plan and are working hard every day to achieve our goals and objectives. At this time, I'd like to ask the operator to open the call for your questions.
Ed: It is nevertheless, still work to be done.
Ed: To achieve our long term aspirations and goals and we are confident in our model heading into the second half of the year.
Ed: Accordingly for 2024, we are reaffirming our previously announced guidance.
Ed: Our full year revenue between $725 million and $750 million.
Ed: Adjusted EBITDA between $84 million and $89 million and free cash flow generation of between 34% and $38 million. This is an exciting time to be leading mistras.
Ed: And I'm confident in the execution of the company's long term vision.
Ed: I believe that achieving both our short and longer term goals is attainable.
Ed: Due to our strategic investments being made to improve our sales and commercial functions and other strategic investments within data analytical solutions in the aerospace industry.
Ed: Since my time as interim CEO. The company has approved improved its strategic vision.
Ed: Via an energized and motivated senior leadership team working towards the common goal of rewarding shareholders with meaningful returns.
Ed: I am extremely proud of our nearly 5000 employees. They believe in our plan and are working hard everyday to achieve our goals and objectives.
Ed: You can feel that level of energy throughout the organization.
Ed: And our customers are responding in kind as well with increasing levels of ROI recognition for the value that mistras employees bring to the equation and delivering our mission to maximize safety and operational uptime for our customers vital assets.
Speaker Change: At this time I'd like to ask the operator to open the call to your questions.
Operator: Thank you. At this time, we will conduct the question-answer session. As a reminder, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A list.
Mitchell Pinheiro: Hey, good morning; I had a couple questions for you. That's a nice change of pace.
Mitchell Pinheiro: The question that I have, my first question is on revenue and your guidance.
Speaker Change: Of that happening and why would that happen or why wouldn't you have raised the bottom end of your guidance.
Speaker Change: To reflect a more or whatever whatever you expect in the second half.
Speaker Change: Alright, Thank you Jake.
Speaker Change: Let me take that many great.
Speaker Change: Great Sorry go ahead.
Speaker Change: Real quickly.
Speaker Change: As we've been saying all year the spring turnaround season was extremely robust the downstream sectors up.
Speaker Change: 18% in the first six months of the year as we've said all year. The fall turnaround season is going to moderate back to a more normal level. So that piece is not can continue in the second half. So yeah, what you're observing is correct. That's been our position from the beginning or for the year that you know that that second path for all turnaround would moderate somewhat down from.
Speaker Change: The extremely high first quarter level of activity all the other sectors are good everything else is growing but that one sector will moderate in the second half so that.
Speaker Change: That is what we anticipated and what we're seeing happening as the year develops.
Speaker Change: So would it moderate those helpful does it moderate to the to the extent that.
Speaker Change: What we saw in the first half.
Speaker Change: It was sort of pent up demand and not a true sort of run rate or.
Speaker Change: Are there is there conservatism in that number and I'm just picking on the bottom end of the range.
Speaker Change: I realize the top end of the range is a different story, but.
Speaker Change: Is there anything is it was it really robust in the spring where you know maybe you know.
Speaker Change: You know it was sort of just well above.
Speaker Change: Above the average is that.
Speaker Change: Is that I would say Mitch the way to look at it is the two half's make our average maybe in the fall and the spring combine the schedule was set by our customer well in advance. So you know we expected that some of the work in the fall got pulled into the spring that was their design to have a heavier testing cycle in the spring more moderate in the fall cycle again that was their their plans.
Speaker Change: And we.
Speaker Change: Playing around that accordingly, so yeah, I would say if you averaged out the two halves of the year on the downstream side, where turnarounds here.
Speaker Change: Some of that is some pent up demand I guess in the past you had always spoke to that business being I guess, what high single digit low low double digit kind of growth rate and is that sort of is that still what you see or.
Mitchell Pinheiro: or are the recent results reflecting maybe an uptick in the growth in aerospace and defense above and beyond what, you know, the historical rate?
Speaker Change: Where is the recent results, reflecting maybe an uptick in the growth in aerospace and defense above and beyond what you know the historical rates.
Unnamed Speaker: A great question, Mitch. I mean, it's not really pent-up demand. It was for my customer. They had supply chain challenges delivering final components, reassembled parts for final assembly. We're helping them catch back up by, you know, this additional additive manufacturing. We're doing mechanical steps in our shop labs, helping them get parts faster through the supply chain. But we believe it's real.
Speaker Change: Yeah.
Speaker Change: A great question, Mitch I mean, it's not really pent up demand.
Speaker Change: It was for my customer they had supply chain challenges delivering final componentry assemble parts for final assembly, we're helping them catch back up by.
Speaker Change: This additional attitude manufacturing, we're doing mechanical steps in our shop labs, helping them get parts faster to do the supply chain, but we believe it's real it's commercial aerospace is extremely strong right now private space is also up very well are very strongly year over year defenses in there too and that's a solid business as well, but we keep investing in our shop labs.
Unnamed Speaker: Its commercial aerospace is extremely strong right now. Private space is also growing very well, very strongly every year. Defense is in there too, and that's a solid business as well.
Unnamed Speaker: But no, we keep investing in our shop labs. You know, we did open up a new facility last year that's really ramping up nicely this year. So there's more we can do there.
Speaker Change: We did open up a new facility.
Speaker Change: You know last year, that's really ramping up nicely. This year. So theres more we can do there.
Unnamed Speaker: If anything, we can move faster there because there are more and more steps our customers want us to do for them. We're going to keep partnering with them and lean into our investment to really grow this piece of our business. So yeah, we think that growth will continue here. We're very optimistic because all sectors are doing very well, the commercial side, the private side, and the defense side. So we like this sector, and we see it's an area where we can continue to grow.
Speaker Change: Anything we can move faster there because there is more and more steps our customers want us to do for them, we're going to keep partnering with them and lean into our investment to really grow this piece of our business. So yeah. We think that growth will continue here, we were very optimistic.
Speaker Change: Because all all sectors are doing very well in the commercial side, the private side and the defense side. So we like the sector and we see it it's an area where we continue to grow.
Unnamed Speaker: And by doing more for the customer, taking more market share, and taking on more capabilities for our customers to help them with their supply chain constraints, we're more than happy to do it. It's nice long-term relationships, and we deal with the principals in many cases. So that's, you know, a sector we really like.
Speaker Change: And by doing more for the customer taking more market share and taking on more capabilities for our customers to help them through their supply chain constraints.
Speaker Change: We're more than happy to do it it's nice long term relationships and we're dealing with the principals in many cases, so that's a sector we really like.
Speaker Change: And so with.
Speaker Change: With that.
Mitchell Pinheiro: Is, so do you think, like, aerospace and defense, if you look longer term, is more of a double-digit type of grower for you? Is that a fair statement? Or, not to put words in your mouth, but is that...
Speaker Change: Is so do you think.
Speaker Change:
Speaker Change: Aerospace and defense. If you look longer term is more of a double digit type of grower for you.
Speaker Change: Is that is that a fair statement or not to put words in your mouth, but is that is that.
Speaker Change: Something that you think you can achieve.
Speaker Change: With reasonable you know.
Speaker Change: Confidence.
Speaker Change: Mitch we've identified.
Speaker Change: That sector as well.
Speaker Change: One that we want to continue to grow.
Speaker Change: We'll be investing in that sector.
Speaker Change: We have some strategic plans to increase our business in that sector. So that's an area that we believe we're going to be creating a much.
Speaker Change: Better growth than we have in the past. So our goal is to continue to grow that in double digits.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: And then.
Speaker Change: And then I may actually.
Speaker Change: Question for you on the CEO search.
Mitchell Pinheiro: So you, I think I missed what you fully said about it. You think you'll have someone identified by the end of the third quarter and then on board by the fourth quarter? Is that it?
Speaker Change: So you I think I missed what you fully said about you think you'll have someone identified by the end of the third quarter and then onboard fourth quarter is that is there.
Speaker Change: Right.
Speaker Change: What I heard or.
Speaker Change: Yes.
Speaker Change: It could we could have them onboard sooner but.
Speaker Change: Once you identify a candidate you've got to deal with what they have to Oh cleaned up before they can make a move so.
Speaker Change: We're confident we will identify somebody by the end of the third quarter and we will have and should have them on board before the end of the year that that's been the goal all along we.
Speaker Change: We do have some good candidates that we have identified.
Speaker Change: We just need to go through the process and make sure we get the right person.
Speaker Change: Okay.
Unnamed Speaker: And then, moving back sort of to the numbers a little bit, on the gross margin, the detail that you put in around the mix between gross profit benefits and SG&A benefits.
Speaker Change: <unk>.
Speaker Change: And then moving moving back sort of two to.
Speaker Change: The numbers a little bit on the gross margin.
Speaker Change:
Speaker Change: And I'm sort of curious.
Speaker Change: Your the detail that you put in around the different the mix between gross.
Speaker Change: Benefits in the SG&A benefits.
Speaker Change: What was driving that could you be a little more detail as to your revisions there.
Unnamed Speaker: Well, first, I mean, you have the Phoenix benefits, obviously, there's overheads up in cost of goods sold just as much as down in SG&A, so that's a part year-over-year that we're definitely benefiting from. The pricing is helping us, too, as we mentioned, you know, a significant amount about, you know, one-quarter, 2% of our pricing of our revenue increase was due to pricing, so that's certainly helping margins as well, the uplift there from the pricing side, coupled with the overhead of Project Phoenix, you know, going even further there, and, you know, the mix of business is also starting to work in our favor as well, so they all combine there for that, you know, significant improvement you saw in margins, you know, in the quarter, 140 basis points.
Speaker Change: Well first of all I mean, you have the Phoenix benefits, obviously, theres overheads up in cost of goods sold just as much as down in SG&A. So that's a part year over year that we're definitely benefiting from.
Speaker Change: The pricing is helping us to as we mentioned you know a significant amount about one quarter or 2% of our pricing of our revenue increase was due to pricing. So that's certainly helping margins as well the uplift there from the pricing side, coupled with the overhead of project Fenix.
Speaker Change: Going even further there and you know the mix of business is also starting to work in our favor as well so they all kind of combined there for that you know significant improvement you saw in and margins in the quarter of 140 basis points. So combination of all activities are really starts with the pricing lift goes a long way and then locking down.
Unnamed Speaker: So, the combination of all activities there really starts with the pricing, lift goes a long way, and then locking down the, you know, the overheads is the other big piece of that, but, you know, you also have a little bit of a favorable mix of business. I think the diversification where all land markets, all industries are up helps as well, where everybody's contributing. Aerospace, certainly, aerospace and defense has a nice margin profile to it.
Speaker Change: The you know the overheads is the other big piece of that but you'll also have a little bit of a favorable mix of business I think the diversification. We're all main markets. All industries were up helps as well where everybody's contributing aerospace certainly aerospace and defense has a nice margin profile to it. The fact that it was the highest flyer pardon the pun in the quarter goes along way as well.
Unnamed Speaker: The fact that it was the highest flyer, pardon the pun, in the quarter goes a long way as well. That helps drive up the favorable mix comment that we made, so it's a combination of each of those factors leading to that gross margin improvement.
Speaker Change: That that helps drive up the that favorable mix comment that we made so it's a combination of each of those factors leading to that gross margin improvement.
Speaker Change: Okay. Okay.
Speaker Change: Okay, and then as you.
Speaker Change: As you based on your guidance.
Speaker Change: It was going to be a good gross profit benefit of 3 million now I forget what you said, it's going to be maybe $8 million is that in SG&A, a little lower is that just.
Speaker Change: Is that a mix business mix.
Speaker Change: Based on what you see for the rest of the year or was there less available in like SG&A savings.
Speaker Change: I mean it.
Speaker Change: Just didn't quite understand that Oh, sorry, sorry, yeah, I, probably said that rapidly on the script, but yeah. It's it's a re class essentially not not a b class of re categorization.
Speaker Change: $15 million of EBIT benefit that we expected full year is being realized and that's been confirmed it's just where it's going to materialize on the P&L is a little different than our outlook assumed so there's about a $4 million benefit now that we see coming through the cost of goods sold line not through the SG&A line. So we had we had the aggregate.
Speaker Change: Or is correct EBIT is not affected by any of that but some of that savings that we initially anticipated coming through the SG&A line is actually going to be up in the cost of goods sold line. So there was about a $4 million were $1 million a quarter benefit now that's going to be up in Cogs not down in SG&A is what it comes down to the aggregate number is whole been confirmed and it'd be realized but.
Speaker Change: It'll just be awful line as to where it is again no no effect on EBITDA.
Mitchell Pinheiro: I'm just a couple more questions and then you know yeah I didn't quite I noticed as you had talked about maybe the conversion to free cash flow this quarter wasn't you know what you wanted and you know you see the accounts receivable up about you know whatever 17 million dollars from year-end I didn't I don't have the I don't have the first quarter level but what what what specifically was sort of missed or not followed up on to cause the rise in accounts receivable and is it is it any one segment or is it broadly across the business
Speaker Change: Yes.
Speaker Change: Just a couple more questions.
Speaker Change: And then.
Speaker Change: I didn't quite I noticed.
Speaker Change: As you had talked about maybe the conversion to free cash flow this quarter wasn't.
Speaker Change: What you wanted.
Speaker Change: And Youll see the accounts receivable up about you know.
Speaker Change: Whatever $17 million from year end I didn't I don't have the.
Speaker Change: I don't have the first quarter level, but what what specifically.
Speaker Change: It was sort of missed or not followed up on.
Speaker Change: To cause the rise in accounts receivable.
Speaker Change: And is it is it any one segment or is it broadly across the business.
Speaker Change: Yeah, Great Great question, Mitch the the it's just our our lack of intensity lack of focus on it is the is the blunt answer there and unfortunately, that's the one management and we will put more focus or putting more focus on that to give you a scale is sort of universal but it is largely.
Speaker Change: Concentrated in our field business to give you a scale of that accounts receivable all open trade. They are and with was almost 150 million to 30. It was barely over 130 billion at the end of the year. So you have a significant buildup in that number that's on us and we need to run that back down and we are going to refocus on that but just putting more intel.
Speaker Change: City on it but it's not a collectability concern it simply we didn't invoice timely enough now some of that's the nature of the work turnaround work is you know which is that a big piece of the growth in Q2 is a little slower to get collected and other work so a little bit of the nature of the work led to the delay, but it's more on the management, we really need to double down on our focus there.
Speaker Change: With better discipline, and we will and we expect to make a meaningful impact on that in Q3 and Q4 to work that back down so not a it's not a concern from the customer side is just our lack of making that the top priority gets what it came down to so we own that and we will refocus on that.
Speaker Change: Okay.
Speaker Change: Then.
Speaker Change: On the data analytics side.
Speaker Change: I.
Speaker Change: I understand that youre going to have a stronger second half you have the new.
Speaker Change: EMS contract coming online.
Speaker Change: Is it.
Speaker Change: Yeah.
Speaker Change: So is the outlook are you still confident that the data analytics with further investments is.
Speaker Change: Can it be a meaningful driver of not only that revenue, but also just driving.
Speaker Change: Other other revenue other other maintenance and and and.
Speaker Change: And sort of upkeep type of revenue that goes along with the P. C. M S.
Unnamed Speaker: We still believe that data analytics is going to really be a major driver moving forward and are developing strategic plans to ensure that happens. We will be investing in that sector even more. The fact that we have a platform that is capable of collecting data digitally is really important and meaningful. This is something a lot of our customers want to see, that they can get their testing and integrity data electronically, and we have that with our customers.
Speaker Change: At least we still believe that data analytics is going to really be.
Speaker Change: A major driver moving forward and our.
Speaker Change: And our developing strategic plans to ensure that happens we will be investing in that.
Speaker Change: Sector, even more.
Speaker Change: The fact that we have a platform that is capable of collecting.
Speaker Change: Data digitally is growing is really important and meaningful this is something a lot of our customers.
Speaker Change: Want to see that they can get their testing and.
Speaker Change: Integrity data electronically and we have that with arch.
Speaker Change: P CMS mobile so this.
Speaker Change: This is a big part of our future.
Speaker Change: You'll be hearing more about that were in the building process now.
Speaker Change: And we'll be enhancing that entire segment of our business.
Mitchell Pinheiro: Okay, that's about it for me. I will get back in the queue. Thank you.
Speaker Change: Okay. That's about it for me I will I will get back in the queue. Thank.
Speaker Change: Thank you thank.
Operator: Thank you, and our next question comes from the line of Chris Sakai from Singular Research. Your line is now open.
Mitch: Thank you Mitch.
Speaker Change: Thank you and our next question.
Speaker Change: Comes from the line of Chris Sakai from singular research. Your line is now open.
Chris Sakai: Hi, good morning.
Chris Sakai: Hi, good morning.
Chris Sakai: What what were the main drivers there in North American Aerospace and defense revenue growth and can we anticipate those continue on into the remainder of the year and in the future.
Speaker Change: Yes, Chris the yeah, the aerospace and defense business as you're pointing out are up significantly in the in the quarter and the first half. It's really two factors, it's North America back to pre pandemic levels International quickly heading there. It's it's really our expansion into commercial aerospace.
Speaker Change: <unk> side, taking on more steps again, we have a new facility online.
Speaker Change: Or do you mean more mechanical work more attitude manufacturing for our customers' private space is also doing very very well and defense is also very stable as well so all sectors of aerospace and defense were doing well North America, primarily the strength international is up not quite to the level of North America, but yes, it's a very strong market.
Speaker Change: There's lots of growth there we believe there's lots of upside there, we're still not back to prepaid debt pre pandemic levels overall for aerospace and defense. So we believe there's more upside there.
Speaker Change: And he said earlier that we do believe we can grow double digit there like continuing to do more work for our customer taking on more and more share doing more steps for the customer there. There's a real need there and we will continue to invest our capex to fuel that piece of our of our growth in aerospace and defense. So I think as Manny said, it's one of our high growth sectors that we've identified.
Manny: And yes, we believe that'll be a recurring theme here, where that's one of our high growth opportunities.
Speaker Change: Okay. Thanks.
Speaker Change: Or international oil and gas it looks like there was a pretty sizeable increase year over year.
Speaker Change: What was the main drivers there and can we anticipate something like that in the future.
Speaker Change: A great question, Chris Yeah, our international definitely had some great oil and gas business. Some a few large extended turnarounds were happening for them just as just as it was in North America. So yeah that that was again they had a very good spring robust spring turnaround season that that will moderate for them in the fall but.
Speaker Change: But I will say that they've got other very balanced it's a very balanced portfolio in international they have a very strong aerospace business, which is a which is growing so again net net we think international will stay strong that one sector oil and gas was particularly strong in the first half so that make moderate for them in the second half, but I know international is doing very well and lots of good growth in <unk>.
Speaker Change: Profitability. So we do expect that to continue but they had an extraordinarily good performance there with some good turnaround work in the first half.
Speaker Change: Okay, Thanks, and last one for me.
Speaker Change: As far as the accounts receivables are concerned in our Unbilled services.
Speaker Change: Can we expect those to decline.
Speaker Change: Next quarter.
Speaker Change: Right.
Speaker Change: Absolutely Yeah key intent focus we're putting there to drive that back down and we do expect you know favorable.
Speaker Change: Changes with significant free cash flow in Q3, where we're putting a lot of focus and attention on that so absolutely. We do believe Q3 and Q4 for that matter to come back to our initial outlook for the year for free cash flow, we do reaffirm that and we are going to focus very hard on improving that metric in Q3.
Chris Sakai: Okay, great. Thanks for the answers.
Speaker Change: Okay, great. Thanks for the answers.
Operator: Thank you. And now for our next question.
Speaker Change: Thank you.
Speaker Change: Thank you and our next question.
Speaker Change: Comes from the line.
Speaker Change: Of John friend threat of Sidoti and co. Your line is now open.
Chris Sakai: Good morning guys, and thanks for taking the questions. I'd like to start with the pricing initiatives. Can you give me a sense of how far along you are in that process, and how long do you think it will take to fully realize the pricing strategy that you want to achieve?
John Friend: Good morning, guys and thanks for taking the questions.
Speaker Change: I would like to start with the pricing initiatives can you give me a sense of how far along you are in that process and how long do you think it will take to fully recognize the pricing strategy that you want to realize.
Andy: Sure John Thanks for the question I can start and Andy can maybe add to that but what we really did was we we we've we were challenged historically I think on pricing with customers. So project Fenix kicked off this whole commercial function, which is very vital to how we go about pricing going.
John: Going forward, we started really John in the lower size smaller customers call out work the onetime purchase here and there of our services started there have made very good traction what we're doing now is moving up sort of the trade to a larger customer sizes. Many of our customer pricing agreements and whatnot are governed by multi year.
Speaker Change: Msas that only get reset every two or three or four years. So as they come up we're taking a hard look now that you know what is the pricing what is the ROI in negotiating as we go we didn't have the ability to sort of steadily this in across the board upfront, but we are as contracts renew having good discussions good healthy discussions on the ROI of the valley.
Speaker Change: Do we add and what the pricing should be so you know we've always gotten pricing before now it's much more of a methodical way of going about it.
Speaker Change: With a commercial function with the deal desk with things that have this thing through you know the cost structure and getting in mechanical ways and contractual ways of making sure. There's there's cold was built in there with customers, where we're getting value for all the great investment we're doing in value add we offer to the customer. So I don't know a baseball analogy we're probably.
Andy: <unk>.
Andy: Third fourth fifth inning, we've got many many through now but there is still some upside here and we expect that to continue to see have come into the mix as the next renewal comes up for that multi year contract, we'll have that healthy negotiation with the customer and negotiate.
Speaker Change: A better strategy going forward on the pricing side, so thats our approach there so.
Speaker Change: Much of it's been achieved now and as we said a good.
Speaker Change: A portion of our revenue growth right now is coming from pricing and that's a change over the last year or so from our more recent history and you know there is we believe there is still more upside to come.
Speaker Change: Great.
Speaker Change: And let me add to that.
Speaker Change: Certainly it's not just it's not just about.
Speaker Change: Revenue growth, it's about margins and our focus is to improve our margins.
Speaker Change: There was some revenue that is.
Unnamed Speaker: Very low margin; we need to change that. As Ed talked about, some of the MSA agreements are for multiple years, to three and up to five years. Historically, those contracts needed improvement. We are now reviewing every single MSA that comes up to make sure that we have the ability to pass through cost increases, force majeure issues, and so forth. So I think over time, you're going to see our profitability increase on the lower margin businesses with a focus on revenue, but profitable revenue.
Speaker Change: Very low margin, we need to change that as Ed talked about.
Speaker Change: Some of the MSA.
Ed: <unk> agreements are multiple year two.
Ed: <unk>, three and up to five years historically those contracts.
Ed: They needed improvement we are now reviewing every single MSA that comes up to make sure that we have the ability to pass through cost increases force majeure issues.
Speaker Change: And so forth. So I think over time, you're going to see our profitability increasing on the lower margin business.
Speaker Change: With a focus on revenue, but profitable revenue.
Chris Sakai: Okay, so these contracts...
Speaker Change: Okay.
Speaker Change: These contracts.
Speaker Change: The low end of the price spectrum, they're still profitable unprofitable contracts is that correct.
Speaker Change: Yes, yes, any unprofitable contracts, we will be looking at whether we even want to renew those.
Chris Sakai: Fair enough. And regarding the deferred revenue in the data, I may have missed this, but can you tell me, put it in context, how much has been deferred from the first half into the second half and will be an equal split between Q3 and Q4, or is it back-end weighted?
Speaker Change: Fair enough fair enough.
Speaker Change: And regarding the deferred revenue and data I may have missed this but can you tell me.
Speaker Change: Put it in context, how much has been deferred from the first half into the second half and will be equally split.
Speaker Change: Between Q3, and Q4 was a backend weighted.
Unnamed Speaker: It's a combination, John, of a couple of things there. There's some work that, you know, did get pushed out, and some work that didn't quite ramp up as fast as we wanted to, so there's a mix of that. So some of that got pushed out in 2, 3, and 4. Some of it could have gotten pushed into 25 at this point.
Speaker Change: I did want to take that yeah, I think that make sure. It's a combination John of a couple of things here or there. There's some some work that did get pushed out and some work that didn't quite ramp up as fast as we wanted to send in a mix of that so some of that.
Speaker Change: Got pushed out into Q3 and for some of that could have gotten pushed into 'twenty five at this point. It's a question of when you can get back.
Unnamed Speaker: It's a question of when you can get back, you know, the implementation plan done. So, you know, there is growth coming from that overall, you know, group in the second half. How much of it exactly gets recaptured in the second half from the first half is yet to be determined, but, you know, as Manny elaborated on the call, there is some new work we're winning there, some new contracts that, you know, weren't in our forecast.
Speaker Change: Limitation, playing done so there is growth coming from that overall group in the second half.
Speaker Change: How much of it exactly gets recaptured in the second half from the first half yet to be determined but you know as many of you know elaborate it on the call. There is some new work, we're winning there some new contracts that werent in our forecast those are going to start to recover some of that deferral. We had and then you know there we are trying to ramp up that piece of the business with new resources.
Unnamed Speaker: These are going to start to recover some of that, you know, deferral we had, and then, you know, we are trying to ramp up that piece of the business with new resources, new implementers to expand there. So I can't give an exact answer there.
Speaker Change: New implementers to expand there so.
Unnamed Speaker: We do expect to recover, you know, much of that miss that we had in the first half, but, you know, some of it could slip into the following quarter and might be early in the 25, but, you know, they're back online. They are growing, and, you know, those projects, you know, will be implemented. They just weren't canceled. They just simply got pushed out in time. Can't quite control when we'll be able to reset and get that work done, but, you know, we have every expectation of having growth in the data solutions group in the second half.
Speaker Change: So I can't give you an exact answer there we do expect to recover.
Speaker Change: Much of that Miss that we had in the first half, but you know some of it could could slip into the following quarter. It might be early 'twenty five but they are back they are back online dating that they are growing and and you know those projects.
Speaker Change: Will be implemented they just they weren't canceled they just simply got pushed out in time can't quite control when we'll be able to reset and get that work done but done it but we have every expectation of having growth in the data solutions group in the second half.
Speaker Change: I was just just considering the margin benefit of the business I was just curious if it's just a couple of million dollars or is it.
Unnamed Speaker: in excess of that kind of a threshold.
Speaker Change: In excess of that kind of a threshold.
Unnamed Speaker: Oh yeah, no. We're talking about millions of dollars of deferral. It's not bigger than that.
Speaker Change: Oh, yes.
Speaker Change: We're talking about millions of dollars of deferral, it's not bigger than that so yeah. It was not an outsized kind of deferral that was it was fairly modest in terms of revenue again. They were up very you know they they dug a hole in Q1 Q2, they actually had some modest growth. So they are on the right trajectory now, though they just have to kind of grow even greater in the second half and they will they they kind of just.
Unnamed Speaker: So yeah, it was not an outsized kind of deferral. It was fairly modest in terms of revenue. Again, they were up very, you know, they dug a hole in Q1. In Q2, they actually had some modest growth. So they're on the right trajectory now, though, you know, they just have to kind of grow even greater in the second half. And they will. They kind of just got back to even here in Q2 with modest growth. Now they're going to lean in and, you know, kind of recover that year-to-date deficit they have right now from six months. They will recover that in the, you know, in the second half.
Chris Sakai: Okay.
Speaker Change: Got back to even here in Q2 with modest growth now they've got to lean in and and you know kind of recover that year to date deficit. They have right now through six months they will be cover that in the.
Speaker Change: In the second half.
Speaker Change: Fair enough and not to beat a dead horse on this receivable issue.
Speaker Change: But is it something to do with a change orders too.
Speaker Change: Some of the projects.
Speaker Change: It took a lot of it captured invoice.
Speaker Change: Something as simple as that.
Speaker Change: More to it.
Speaker Change: Is that kind of thing John its very I mean, we are building a lot of labor hours, so when where and how they were reapproved and you know the customer are proving all of that there. There's all there's a lot of spinal be amazed at the level of documentation to get our invoice through to the customer. So that's an excuse though we have to be better than that and persevere and get.
Speaker Change: The approvals timely so that it is queued up and Invoiced and collected per terms. So that's on US. It is a little more complicated than it needs to be so we're in the process now of working on the low hanging fruit to improve that metric in Q3, and four period, and then think about longer term, how can we sort of simplify the process, where it's not such an extended.
Speaker Change: Delayed processing tie in with the customer find ways to improve that cycle time is what we're also looking at job one is to simply improve that metric, but yes. It is that type of thing we're staying in front of that don't go over the customers P. O limit getting amendments sooner than later, if you see that happening is a lot of those kind of basic blocking and tackling that we have to make front and center is a big.
Speaker Change: Priority to avoid kind of this this sort of delay and underperformance that we experienced in the first half.
Speaker Change: Okay fair enough. Thanks for taking my questions.
Speaker Change: Thank you.
Speaker Change: Thank you. This does now conclude the question and answer session I would now like to turn it back to Manny <unk> for closing remarks.
Manny: Thank you operator, and thank you everyone for joining this call today and also for your continued interest in Mistras I look forward to providing you with an update on our business and progress achieved towards our ongoing initiatives on our next call everyone. Please have a safe and prosperous day.
Speaker Change: Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Uh huh.
Chris Sakai: Okay.
Chris Sakai: [music].
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change:
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Okay.