Mistras Group Inc

Thank you for joining Mistress Group's conference call for its second quarter, ended June 30th, 2024. My name is Brianna, and I'll be your event manager today. We'll be accepting questions after management's prepared remarks. Participating on the call for Mistress will be Manny Stamatakis, the company's chairman of the board and interim president and chief executive officer, and Ed Preisner, senior executive vice president and chief financial officer. I want to remind everyone that remarks made during this conference call will include forward-looking statements. The company's actual results could differ materially from those projected. Some of those factors that can cause actual results to differ are discussed in the company's most recent annual report on Form 10-K and other reports filed with the SEC. The discussion in this conference call will also include certain financial measures that were not prepared in accordance with the U.S. GAAP. Reconciliation of these -U.S. GAAP financial measures to the most directly comparable U.S. GAAP financial measures can be found in the tables contained in yesterday's press release and in the company's related current report on Form 8-K. These reports are available at the company's website in the Investors section on the SEC's website. I will now turn the conference over to Manny Stamatakis.

Good morning, everyone.

Thank you for joining us today. MISTRUS reported strong top and bottom line growth for the third consecutive quarter and remains on pace for fiscal 2024 adjusted EBITDA that will be one of our all-time high performances years. This coincides with the formal implementation of the initiatives identified by Project Phoenix which continues to guide us forward. Results continue to reflect the improved discipline and the overall benefits of our key financial, operational, and strategic initiatives with the goal of continuing to improve overall profitability. Consequently, you can understand why I am very pleased with the significant improvement in our operating leverage which enabled us to increase the adjusted EBITDA by nearly 45%. On revenue that was up nearly 8% in the second quarter. Adjusted EBITDA growth this quarter is sequentially in line with the first quarter and demonstrates the consistency and predictability of our performance which we believe is a key to creating shareholder value. Revenue in the second quarter reflected growth across all industries with a double-digit increase in aerospace and defense of .5% 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. I am particularly enthused with the continued progress achieved by our enhanced commercial function led by our chief commercial officer, Jerry Delterio, which was implemented late in 2023. 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. On the top line, our focus on enhancing our commercial function is contributing to our success. We are achieving better sales cycle conversion and efficiency. Pricing discipline in particular is gaining significant traction and is making a meaningful contribution to the improvement in our gross profit margin. About one quarter of the revenue increase in the second quarter of 2024 was attributable to price increases realized as an outcome of successful negotiations with our customers. Gross profit dollars and gross profit margin was also up in the second quarter across all segments as was operating income. On a consolidated basis, operating income was $12 million for the second quarter of 2024, 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 periods. For the second quarter, SG&A was .6% of revenue, which is down sequentially from the first quarter and directionally oriented to our overall 21% of revenue goal for the year. However, I will note we have not yet achieved the total reduction in overhead, which I anticipate for the full year. I am excited for the renewed level of cost discipline under the direction of our Chief Transformation Officer, Haney Hammond, who was hired late in the first quarter of 2024 and who is creating strategies for an ongoing cost monitoring to further improve our operating leverage. Despite the significant achievements in most financial measures during the quarter, 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. Management is intently focused on improving this performance during the remainder of the year through various actions, which Ed will cover later. A few additional comments on the second quarter are as follows. Our aerospace and defense business returned double digit revenue growth with North America back to pre-pandemic levels and international quickly headed in that direction. For that reason, we will continue to increase our investment in this industry where we are extending our service offerings to include more additive manufacturing and mechanical work beyond just inspection testing. We are also expanding our scope of work in the private space industry. We expect continued strong performance in this industry over the balance of the year. Data analytical solutions revenue for the quarter was 18.3 million. While this is a slight increase over the prior year quarter, it did not meet our growth expectations as some scheduled jobs pushed out beyond the second quarter and there were some unanticipated delays due to new customer implementations. We anticipate the second half to be much stronger than the first half. As support for this, PCMS was just awarded a significant new contract of nearly $7 million scheduled to kick off in the fourth quarter of this year and to run through 2025. The PCMS contract awarded was bundled with inspection services as well. The most exciting part of this award is that PCMS acted as the architect of this customer's mechanical integrity program and the MISTROS services not only include a full data service component hosted in our SAS environment, but also include consulting, engineering, field baseline inspections and most importantly, MISTROS will be collecting all test and inspection data electronically through our PCMS mobile solution. This bundled software and service solution is something that none of our competitors can offer as a complete package. In addition, we were recently awarded multiple PCMS contracts with international customers in geographic regions in which we previously had little presence. In addition to PCMS, we are expanding our global footprint with a series of new contract awards which utilize our state of the art automatic RT crawlers to inspect pipelines around the world outside of North America. We expect this geographic expansion to continue. The search for a permanent CEO remains on track and my goal is to have our next CEO identified by the end of the third quarter. Once in place, I will remain active as the chairman of the board and look forward to working closely with the CEO not just during a transition period, but also on a recurring basis going forward. Last quarter, I noted we were still early in the project Phoenix process and that there was still work to do. Although we have taken great strides, I still see tremendous opportunity for additional growth and profitability. And lastly, once again, I want to note the renewed sense of commitment and dedication being demonstrated throughout the entire organization. Now I would like to turn the call over to Ed for a more detailed update on our recent results.

Thank you, Manny and good morning, everyone. 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. Given this new focus and enhanced processes, we once again met or exceeded our outlook in the second quarter. And as such, we remain on target to achieve one of our all time high performance adjusted EBITDA years. This was the ultimate objective of project Phoenix, leveraging our core competencies to unlock our inherent value. Revenue in the second quarter was up meaningfully for the third consecutive quarter, increasing nearly 8%. Consistent with the first quarter, about one quarter of our overall growth was attributable to price increases, where we have taken pricing actions starting primarily with smaller or midsize customers. 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. Aerospace and defense continued its strong growth trajectory with revenue being up .5% in the second quarter on the heels of having been up .9% in the first quarter, making this its third consecutive quarter of favorable results. Commercial aerospace continues to be extremely strong. We are also generating significant growth in the private space industry as well, as a result of the increase in number of launches. We are channeling incremental capital into our aerospace and defense business in order to capitalize on what we see as a unique window in the market to accelerate growth. Capital funds are going primarily to our shop laboratories where we are expanding the services that we offer to help de-bottleneck our customers' supply chain constraints. As Manny indicated, we expect strong performance from the higher margin aerospace and defense industry throughout the year. Our oil and gas industry revenue has also continued to be very resilient in the second quarter of 2024, up 3% over the prior year quarter after having been up .7% in the first quarter on the strength of a robust spring turnaround season. Actually, all of our end markets were up in the second quarter compared to the prior year quarter, demonstrating the diversity of the industries that we serve. Both gross profit and margin expanded again in the second quarter, primarily attributable to a favorable sales mix change and lower healthcare claims expense, as well as due to the favorable impact of Project Phoenix actions realized in 2024, including pricing increases achieved. Selling general and administrative expenses were down both sequentially and year over year, although admittedly somewhat modestly and less than expected in light of our cost reduction plan. For the quarter, our SG&A was .6% of revenue and was 22% of revenue for the six months ended June 30. As Manny mentioned earlier, we remain committed to achieving our goal of reducing SG&A to approximately 21% of full year 2024 revenue. Note that our original EBITDA outlook for 2024 anticipated an incremental year over year gross profit benefit of 3 million and SG&A benefit of 12 million due to Project Phoenix initiatives. Based upon our implementation of Project Phoenix, we have validated this cost savings of $15 million in aggregate. 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 24. 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 between the cost of revenue and SG&A line respectively. However, this change has no net impact on our outlook for adjusted EBITDA for fiscal 24. Nevertheless, the company's primary objective is to create shareholder value by improving our bottom line profitability. And in the second quarter, we made significant progress on this month with gap net income of 6.4 million or 20 cents per diluted share up from 0.3 million or 1 cent per share a year ago. 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 2024. With regard to cash flows, net cash provided by operating activities was 5.2 million and free cash flow was negative 6.9 million for the first half of 24. Each of these metrics were well below the prior year comparable metrics. And both were adversely impacted by an increase in receivables and unbilled receivables in progress. This was primarily due to a lack of prioritization and focused by management, along with the timing of invoicing associated with customer projects and the nature of some of the work that was completed in the second quarter. As Manny mentioned earlier, cash from operations and free cash flow performance for the year and year date periods did not meet the company's expectations. The company is intently focused on improving this performance over the remainder of the year. Specifically, we will work with operations management via additional oversight and attention by senior management to drive down both accounts receivable and unbilled work in process. Our goal is that together with earnings over the second half of the year to generate over 40 million in free cash flow, which will enable us to meet our reaffirmed free cash flow outlook of 34 to 38 million for the whole year. Interest expense was 4.4 million for the quarter up from a year ago, but essentially unscathed from the first quarter. We expect to reduce interest expense for the remaining quarters of 2024 in two ways. First, by reducing leverage, which will lead to a lower interest rate. And second, by decreasing the amount of outstanding borrowings. This should lead to a gradual decrease in interest expense over the second half of 2024. Our trailing 12 month bank defined leverage ratio on our credit facility dropped to below three times during the second quarter of 24, and it was 2.78 as of June 30. This is the lowest ratio, this is 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 reductions. Over the past few years, we have primarily used our free cash flow to pay down over 90 million of outstanding borrowings. As we approach our year end 2.5 times leverage ratio goal, we now believe that capital expenditures that support our organic growth and supply for turnover returns may at times may be a superior use of our free cash flow. Again, each of these uses would be considered as we move forward. Our overall effective income tax rate was .5% in the second quarter, which benefited from a discrete benefit recognized during the second quarter. We expect our full year effective income tax rate to be in the low 20% range for the full year. There is a true sense of pride at Mishra's like never before, and it has led to the vigor with which teams have attacked their various project Phoenix initiatives and market opportunities. These efforts are being rewarded with tremendous results. I'm extremely optimistic not only about this year, but about 2025 and beyond as we continue to implement initiatives that leverage the unparalleled talent, experience and capabilities and knowledge that has made Mishra a leader in the industry for over 40 years. We sincerely appreciate your continued support and expect to reward your patients with significantly improved results over a major of 2024 and for the longer term. At this time, I'd like to turn the call back over to Manny for his closing remarks before we move on to take your questions.

Thanks, Ed. The second quarter represented another sequential, strong top and bottom line quarter for Mishra's, providing evidence and confidence for our future performance given our new found discipline processes and approach. While we have optimism in our outlook, we know that there is nevertheless still work to be done to achieve our long-term aspirations and goals and we are confident in our model heading into the second half of the year. Accordingly for 2024, we are reaffirming our previously announced guidance of full year revenue between 725 million and 750 million adjusted EBITDA between 84 million and 89 million and free cashflow generation between 34 and 38 million. This is an exciting time to be leading mistress and I'm confident in the execution of the company's long-term vision. I believe that achieving both our short and longer term goals is attainable due to our strategic investments being made to improve our sales and commercial functions and other strategic investments within data analytical solutions and the aerospace industry. Since my time as interim CEO, the company has improved its strategic vision via an energized and motivated senior leadership team working towards the common goal of rewarding shareholders with meaningful returns. 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. You can feel that level of energy throughout the organization and our customers are responding in kind as well with increasing levels of ROI recognition for the value that mistress employees bring to the equation in delivering our mission to maximize safety and operational uptime for our customers' vital assets. At this time, I'd like to ask the operator to open the call to your questions.

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 one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Mitchell Pinheiro of Sturdivant and Co. Your line is now open.

Hey, good morning. Had a couple questions for you. So first, and congrats on stringing together three quarters here of solid results. It's a nice change of pace. The question that I have, my first question is on revenue and your guidance. I was not obviously surprised, but I'm just curious. At the bottom end of your revenue range for your outlook would suggest the second half decline, you know, in the low single digits, maybe minus 3%. And I'm curious, is that a realistic possibility of that happening and why would that happen? Or why wouldn't you have raised the bottom end of your guidance to reflect a more, or whatever you expect in the second half?

Hey, Mitch, I can take, let me take that Manny. Yeah, great question, Mitch. Real simply, that's, as we've been saying all year, the spring turnaround season was extremely robust. The downstream sector's up, you know, 18% in the first six months of the year. As we said all year, the fall turnaround season is gonna moderate back to a more normal level. So that pace is not gonna 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 second half fall turnaround would moderate somewhat down from the, you know, extremely high first quarter level of activity. All other sectors are good, everything else is growing, but that one sector will moderate in the second half. So, you know, that is what we anticipated and what we're seeing happening as the year develops.

So would it moderate, that was helpful. Does it moderate to the extent that what we saw in the first half was sort of pent up demand and not a true sort of run rate or are there, is there conservatism in that number? And I'm just picking on the bottom end of the range. You know, I realize the top end of the range is a different story, but is there anything, was it really robust in the spring where, you know, maybe, you know, it was sort of just well above of the above the average? Is that, is that?

I would say, Mitch, the way to look at it is the two halves make our average, maybe the fall and the spring combined. The schedule was set by our customer while 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 plans and we, you know, plan around that accordingly. So, yeah, I would say if you averaged out the two halves of the year on the downstream side where turnarounds hit, you know, would be a, you know, good growth here, but ordinary cycle combined the two. But again, the spring was stronger than average, the fall being weaker than average, blend the two together year on year. You know, the turnaround activity would be as expected in a normal steady state where it is now. It's just that you had much more work done by design in the first half of the year in the spring versus what's planned in the fall turnaround.

Got it. Helpful. And then, you know, when I look at the only thing that I saw in the oil and gas side was, I noticed midstream was down year over year. It wasn't particularly strong in the first quarter. And I was wondering if you could just speak to that.

Sure, that's really some smaller accounts. That's where onstream falls in the midstream primarily. They're very solid. They had good performance here every year. We have some other midstream activity in the central region and elsewhere that was not on pace with last year. So that's not a trend there. We like that sector. Onstream is very solid, but we just had some other smaller accounts that weren't in the right direction year over year that led to that softness in the midstream. But we do like that sector and we see that having a better second half than it did in the first half. But all was well in that sector, but onstream is doing very well.

Okay. And then, I mean, aerospace and defense had some terrific performance. And I presume it's sort of running at sort of, when you're running at 18, 19% year over year growth, 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 double digit kind of growth rate. And is that sort of, is that still what you see or is the recent results reflecting maybe an uptick in the growth in aerospace and defense above and beyond what the historical rates?

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 componentry assembled parts for final assembly. We're helping them catch back up by, 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. It's commercial aerospace is extremely strong right now. Private space is also up very well, very strongly year over year. Defense is in there too and that's a solid business as well. But we keep investing in our shop labs. 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. If anything, we can move faster there because there is more and more steps our customers want us to do for them. We're gonna 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 the sector and we see it's an area where we continue to grow. 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. And we're more than happy to do it. It's nice long-term relationships and we're dealing with the principles in many cases. So that's a sector we really like.

And so with that, so do you think, 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 something that you think you can achieve with reasonable confidence?

Mitch, we've identified that sector as one that we want to continue to grow. We'll be investing in that sector. 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 better growth than we have in the past. So our goal is to continue to grow that in double digits.

Okay, okay. And then, and then we actually, question for you on the CEO search. 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 fourth quarter? Is that what I heard or?

Yes, we could have them on board sooner, but once you identify a candidate, you've got to deal with what they have to clean up before they can make a move. So we're confident we'll identify somebody by the end of the third quarter and should have them on board before the end of the year. That's been the goal all along. We do have some good candidates that we have identified. We just need to go through the process and make sure we get the right person.

Okay. And then moving back sort of to the numbers a little bit, on the gross margin, and I'm sort of curious, your, the detail that you put in around the different, the mix between gross profit benefits and the SG&A benefits. What was driving that? Could you give a little more detail as to your revisions there?

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, a significant amount about one quarter, 2% of our revenue increase was due to pricing. So that's certainly helping origins as well. The uplift there from the pricing side, coupled with the overhead of Project Phoenix, going even further there. And the mix of business is also starting to work in our favor as well. So they all combine there for that, a significant improvement you saw in margins, in the quarter, 140 basis points. So combination of all activities there really starts with the pricing lift goes a long way and then locking down the overheads is the other big piece of that. But you also have a little bit of a fable mix of business. I think the diversification where all nine 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 a long way as well. That helps drive up the fable mix comment that we made. So it's a combination of each of those factors leading to that gross margin improvement.

Okay, okay. And then, but as you, based in your guidance, what was gonna be a gross profit benefit of three million now, I forget what you said, it's gonna be maybe eight million. Is that, and SG&A a little lower, is that just, is that a mix, business mix, based on what you see for the rest of the year or was there less available in like SG&A savings? I mean, I just didn't quite understand that.

Oh, sorry, yeah, I probably said that rapidly on the script, but yeah, it's a reclass, essentially, not a reclass, it's a recategorization. The 15 million EBITDA benefit that we expected full year is being realized and that's been confirmed. It's just where it's gonna 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, the aggregate number is correct, EBITDA is not affected by any of that, but some of that savings that we initially anticipated coming through the SG&A line is actually gonna be up in the cost of goods sold line. So there's about a $4 million or 1 million and a quarter benefit now that's gonna be up in COGS, not down in SG&A is what it comes down to. The aggregate number is whole, been confirmed and being realized, but it'll just be off the line as to where it is, again, no effect on EBITDA.

I'm just, a couple more questions. And then, I didn't quite, I noticed, as you had talked about, maybe the conversion to free cash flow this quarter wasn't what you wanted. And you see the accounts receivable up about, whatever, $17 million from year end. I don't have the first quarter level, but what specifically was sort of missed or not followed up on to cause the rise in accounts receivable? Is it any one segment or is it broadly across the business?

Yeah, great question, Mitch. It's just our lack of intensity, lack of focus on it is the blunt answer there. Unfortunately, that's on management and we will put more focus or putting more focus on that to give you, and it is sort of universal, but it is largely concentrated in our field business. To give you a scale of that, accounts receivable, all open trade AR and WIP was almost 150 million through 30. It was barely over 130 million 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 gonna refocus on that, but just putting more intensity on it. But it's not a collectibility concern. It's simply, we didn't invoice timely enough. Now, some of that's the nature of the work. Turnaround work is, which is a big piece of the growth in Q2, is a little slower to get collected than 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 just double down on our focus there with better discipline and we will, and we expect to make a meaningful impact on that in Q3 and in Q4 to work that back down. So it's not a concern from the customer side. It's just our lack of making that the top priority is what it came down to. So we own that and we will refocus on that.

Okay. And then on the data analytics side, I understand that you're gonna have a stronger second half. You have a new PCMS contract coming online. So is the outlook, are you still confident that the data analytics with further investments is gonna be a meaningful driver of not only that revenue, but also just driving, other revenue, other maintenance and sort of upkeep type of revenue that goes along with the PCMS?

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 going, 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 PCMS mobile. So this is a big part of our future. You'll be hearing more about that. We're in the building process now and we'll be enhancing that entire segment of our business.

Okay, that's about it for me. I will get back in the queue. Thank you.

Thank you,

Mitch.

Thank you. And our next question comes from the line of Chris Sakai from Singular Research. Your line is now open.

Hi, good morning. What were the main drivers there in North American aerospace and defense revenue growth and can we anticipate those to continue on into the remainder of the year and in the future?

Yes, Chris. Yeah, the aerospace and defense business, as you're pointing out, up significantly 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 really our expansion in the commercial aerospace side taking on more steps. Again, we have a new facility online. We're doing more mechanical work, more additive 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 are doing well. North America, primarily the strength international is up not quite to the level of North America. But yes, a very strong market. There's lots of growth there. We believe there's lots of upside there. We're still not back to pre-pandemic levels overall for aerospace and defense. So we believe there's more upside there. As Manny said earlier, that we do believe we can grow double digit there by continuing to do more work for our customer, taking on more share, doing more steps for the customer. There's a real need there. And we'll continue to invest our CapEx to fuel that piece of our growth in aerospace and defense. So as Manny said, it's one of our high growth sectors that we've identified. And yeah, we believe that'll be a recurring theme here where that's one of our high growth opportunities.

Okay, thanks for that. And for international oil and gas, it looks like there was a pretty sizable increase year over year. What was the main drivers there? And can we anticipate something like that in the future?

Great question, Chris. Yeah, international definitely had some great oil and gas business. A few large extended turnarounds were happening for them just as it was in North America. So yeah, that was again, they had a very good spring, robust spring turnaround season. That will moderate for them in the fall. 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 growing. So yeah, net net, we think international will stay strong. That one sector, oil and gas was particularly strong in the first half. So that may moderate for them in the second half. But no, international is doing very well in lots of good growth and 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.

Okay, thanks. And last one for me, as far as accounts receivables are concerned in unbilled services, can we expect those to decline next quarter?

Absolutely, yeah. Key intent focus we're putting there to drive that back down. And we do expect favorable changes with significant free cashflow in Q3. 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 cashflow. We do reaffirm that, and we are gonna focus very hard on that. We're gonna focus very hard on improving that metric in Q3.

Okay, great. Thanks for the answer. Thank you.

Thank you. And our next question comes from the line of John Fransrap of Sudodi & Co. Your line is now open.

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 recognize the pricing strategy that you want to realize?

Sure, John, thanks for the question. I can start, and Manny can maybe add to that. But yeah, what we really did was we were challenged historically, I think, on pricing with customers. So Project Phoenix kicked off this whole commercial function, which is very vital to how we go about pricing and going forward. We started really, John, in the lower size, smaller customers, call out work, the one-time 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 tree to larger customer sizes. Many of our customer pricing agreements and whatnot are governed by multi-year MSAs that only get reset every two, three, four years. So as they come up, we're taking a hard look now at what is the pricing, what is the ROI, and negotiating as we go. We didn't have the ability to sort of feather this in across the board upfront, but we are, as Contracts Renew, having good discussions, good healthy discussions on the ROI, the value we add, and what the pricing should be. So we've always gotten pricing before. Now it's much more of a methodical way of going about it with a commercial function, with a deal desk, with things that have us think through the cost structure and getting in mechanical ways and contractual ways of making sure there's colas built in there with customers where we're getting value for all the great investment we're doing and value add we offer to the customer. So in a baseball analogy, we're probably in the third, fourth, fifth inning, we've gotten many through now, but there is still some upside here. We expect that to continue to 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 a better strategy going forward on the pricing side. So that's our approach there. So much of it's been achieved now. And as we said, a good 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 we believe there is still more upside to come.

Great.

And let me add to that.

Certainly. It's

not just about revenue growth. It's about margins. And our focus is to improve our margins. There are some revenue that is very low margin. We need to change that. As Ed talked about, some of the MSA agreements are multiple year, two, three, and up to five years. Historically, those contracts, 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, and so forth. So I think over time, you're gonna see our profitability increasing on the lower margin business with a focus on revenue, but profitable revenue.

Okay. So these contracts at the low end of the price spectrum, they're still profitable. They're not unprofitable contracts, is that correct?

Yes, yes. Any unprofitable contracts, we'll be looking at whether we even want to renew those.

Fair enough, fair enough. And regarding the deferred revenue in 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 it be equal split between Q3 and Q4, or is it back-end

weighted? It's

a combination, John, of a couple things. There's some work that 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 into Q3 and Q4. Some of it could have gotten pushed into 25 at this point. It's a question of when you can get back the implementation plan done. So there is growth coming from that overall group in the second half. How much of it exactly gets recaptured in the second half from the first half, yet to be determined, but as Manny elaborated on the call, there is some new work we're winning there, some new contracts that weren't in our forecast. Those are gonna start to recover some of that deferral we had, and then 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. We do expect to recover much of that miss that we had in the first half, but some of it could slip into the following quarter and might be early 25. But they're back online, they are growing, and those projects will be implemented. 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 we have every expectation of having growth in the data solutions group in the second half.

I was just considering the margin benefit of the business. I was just curious if it's just a couple million or is it in excess of that kind of a threshold?

Oh yeah, no, we're talking about millions of dollars of deferral, it's not bigger than that. So yeah, it was not an -of-bys kind of deferral. It was fairly modest in terms of revenue. Again, they dug the hole in Q1. Q2, they actually had some modest growth. So they're on the right trajectory now. 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 gonna lean in and kind of recover that -to-date deficit they have right now. From six months, they will recover that in the second half.

Fair enough, and not to beat a dead horse on this receivable issue. But is it something to do with like change orders to like some of the projects that took a while to be captured or to invoice? Is it something as simple as that or is there something more to it?

It is that kind of thing, John. It's very, I mean, we are building a lot of labor hours. So when, where, and how they were approved and the customer approving all of that, 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 the approvals timely so that it is queued up and invoiced and then collected for 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, that metric in two, three, and four period. And then think about longer term, how can we sort of simplify the process where it's not such an extended delayed processing time 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 where, stay in front of it, don't go over the customer's PO limit, get an amendment sooner than later, if you see that happening. It is a lot of those kinds of basics and blocking and tackling that we have to make front and center as a bigger priority to avoid kind of this sort of delay and underperformance that we experienced in the first half.

Okay, fair enough. Thanks for taking my questions. Thank you.

Thank you. This does now conclude the question answer session. I would now like to turn it back to Manny Stamatakis for closing remarks.

Thank you, operator. And thank you everyone for joining this call today and also for your continued interest in Mistress. 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.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.