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Operator
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. It is now my pleasure to introduce your host, Kevin Smith, Senior Director of Investor Relations. You may begin.
Kevin Smith
Thank you, Stacey. Welcome, everyone, to Team's second quarter 2021 earnings conference call. With me on today's call are Anne-Marie Nogatti, 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 Investors Relations section of our website at teaminc.com. Information recorded on this call speaks only as of today, August 4, 2021. Therefore, please be advised that any time-sensitive information is 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, teaminc.com. In addition, a telephonic replay will be available until August 11th. The information on how to access these 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 and 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 in any forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's annual report on Form 10-K and in 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. Ann Marino will begin by highlighting significant events in the second quarter and providing an update of our business. Susan will then detail our results, and before we take your questions, Ann Marino will discuss the company's outlook. I would now like to turn the call over to Ann Marino.
Stacey
Thank you, Kevin, and good morning, everyone. We remain cautiously optimistic on the strength of the global recovery. However, as the second quarter demonstrated, the recovery is proving to be uneven with disruptive stops and starts both domestically and internationally. Vaccine rollouts are gaining momentum and driving an overall increase in mobility and economic activity. Domestic petroleum demand has experienced a dramatic increase with recent levels that are in line or above the comparable weeks in 2019. In fact, US gasoline demand recently set a record as motorists were eager to travel during the 4th of July holiday. Likewise, the TSA reported new post-pandemic records in domestic air travel. While the recent emergence of COVID variants is concerning and requires close monitoring, the overall pace of the domestic recovery is strong. International is a different story. Business remains challenging with lower vaccination rates impacting teams' ability to travel and service our clients' assets. In these areas, the rebound in gasoline and air travel has been muted. After more than a year of operating in a pandemic with reduced global mobility, we have seen a step change in consumption demand for travel as COVID-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 in 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 of worldwide pandemic restrictions. The team was able to benefit from the backlog of delayed maintenance projects, reporting consolidated revenue for the quarter at the upper end of our expectations. Although second quarter revenue improved over 2020 levels, we continue to experience an uneven global recovery across segments with varying demand for our products and services. IHT and Quest are currently recovering at a faster pace than mechanical services. 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 in select international markets. Gross margin was 26.3%, below the prior year quarter of 30.3%. Gross margin was negatively impacted by underlying cost inflation associated with the ramp-up in economic activity and lingering COVID 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 in training certifications, completing more than 35,000 training hours when compared to the second quarter of 2020, an increase of more than $1 million. Turning to our segment overview, I will begin with mechanical services. Revenues were up 4.7% over 2020's depressed activity levels. MS completed work on several large turnarounds during the quarter, increasing revenue by 11.2% sequentially. MS 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. MS margins were also negatively impacted by inflationary cost pressures. MS experienced year-over-year growth in the areas of fabrication, pulp and paper, powering utilities, and renewable energy. As we reported yesterday, after three field tests, TEAM commercialized its new patent-pending SmartStop isolation technology. The latest test was successfully completed on a 16-inch flare line at a refinery. TEAM's proprietary SmartStop technology eliminates the need for complicated hydraulics or pivot points that are failure mechanisms in competitive line intervention tools. This new technology features a self-energized dual seal system within a single standard line stop fitting, reducing the number of pipe alterations required to perform an isolation. SmartStop will increase operational safety, further strengthening our competitive advantages in the hot tapping market. Now turning to our inspection and heat treating segment. IHT continues to perform well due to the run and maintain nature of the segment. Revenues were up 46% year-over-year. Similar to MS, IHT also realized inflationary cost pressures when coupled with the COVID price concessions negatively impacted IHT's margins for the quarter. IHT experienced year-over-year growth in 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 in demand for our nested technicians. During the quarter, we were awarded two embedded contracts, one at a refinery and the other at a petrochemical plant. Our nested operations utilization is currently running at approximately 93% of pre-COVID 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 mechanical integrity services. We will partner with the client to develop and implement a structured approach to asset integrity, supporting safer and more reliable operations across the client's 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 time. Quest Integrity's revenue realized strong sequential growth, up 50.7% over the first quarter, and 51.4% increase over the comparable quarter in 2020. Due to Quest's visible project backlog, 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 won a unique multi-year contract in Australia, which upon successfully completing the inspections, could open a new end market for Quest's integrated solution offerings. Quest continues to see strong demand in the offshore subsea market. During the quarter, Quest successfully completed an 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 uniquely capable of inspecting pipelines with these characteristics. Given Quest's success, we anticipate an increase in deep water activity in this region. From a geographic perspective, despite the COVID-related challenges that have limited our ability to travel to client worksites, 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 in Western Canada that limited further revenue and margin expansion. As vaccine rates increase, Canada's economic activity will grow which should bode well for our end markets. Our Canadian team received the Alberta Boilers Safety Association approval for composite alterations. Team is uniquely positioned as the only full-service provider that has been awarded this certification. Many European countries also implemented COVID-related lockdowns through April and May before opening up in 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 one of the highest in the world, allowing for more robust economic recovery, while other countries still have imposed quarantine restrictions, limiting travel in and out of the country. We were recently awarded a new five-year contract supporting on-stream leak-sealing call-out work with a large NOC client in Qatar. In addition, we were awarded a multi-year hot-tapping service contract for a multinational chemical manufacturing company in Saudi Arabia, helping build our market share in the kingdom. I will now turn it over to Susan for a more detailed financial review. Susan?
Kevin
Thank you, Amarino, and good morning, everyone. I will review our second quarter financial performance in quarter-over-quarter comparisons. As Amarino mentioned, our second quarter consolidated revenue of $238.9 million was up $49.6 million, or a 26.2% increase from the second quarter of 2020, representing the first year-over-year comparable with a full three-month COVID impact. This quarter's revenue reflects both increased turnaround activity and improved economic activity with the loosening of the COVID-19 related restrictions. For the quarter, all three segments had revenue growth over Q2 2020, with Quest having the largest overall percent increase at approximately 51%. IHT followed with just over a 46% increase and also having the largest revenue dollar increase of approximately $37 million. Mechanical services also showed a year-over-year revenue growth of 4.7%. Consolidated gross margin for the second quarter, 2021, was $62.8 million, a 9.4% increase over the prior year quarter of $57.4 million. Due to the direct cost inflation impacts, and the reinstatement of the temporary cost actions that were fully in place in the second quarter of 2020, the consolidated gross margin percentage declined to 26.3% compared to the prior year quarter of 30.3%, which was a record quarterly gross margin percentage. The second quarter was impacted by significant cost inflation, particularly in raw materials, which increased roughly 50%, were greater year over year. We also realized labor cost increases as the market for entry-level technicians is currently very tight. These cost increases were compounded by the fact that we still had some lingering COVID-19 pricing concessions. The second quarter net loss was $17.5 million when compared to a net loss of $13.5 million in the prior year quarter. An increase in interest expense of $2.3 million drove the increased net loss versus the comparable quarter. Adjusted net loss, a non-GAAP measure, was a negative $14.9 million, or a 48-cent adjusted net loss per diluted share, for the second quarter of 2021, compared to an adjusted net loss of approximately $9.5 million, or 31-cent adjusted net loss per diluted share for the same quarter. in 2020. Adjustments in the second quarter included approximately $2.3 million of professional and accrued legal fees and costs and just over $300,000 of severance charges, which were primarily associated with the operating group reorganization. Consolidated adjusted EVDA for the quarter was $9.1 million as compared to the prior year quarter of $12.7 million. are selling general and administrative expenses for the second quarter of 2021 with $68.5 million up $9.6 million from the prior year quarter. 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, training, and travel. The majority of the cost reinstatements were fully in place at the beginning of April. Additionally, we increased our investment in 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 costs to be in the range of $270 to $280 million. We remain diligent in 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 will be between $9 million and $10 million each quarter in 2021. Turning to our segment performance, IHT reported second quarter revenue of $117.5 million, up 46% from the $80.5 million posted in the same period last year. The growth reflects an increase in turnaround projects and associated activity, as well as increased hours associated with nested sites and technicians, and to a lesser degree, increases for call-out activities. Second quarter adjusted EBDA was $10.7 million, up $1.2 million over the prior year quarter. Adjusted EVDA margin decreased this quarter to 9.1% as compared to 11.8% in the prior year quarter. Mechanical Services reported second quarter 2021 revenue of $97.2 million, up 4.7% from $92.8 million in the second quarter of 2020. Adjusted EBITDA was $7.6 million in the second quarter of 2021, down from $16.9 million in the same period last year. Adjusted EBITDA margin increased this quarter to 7.8% as compared to 18.2% in 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 EBDA was $6.5 million, up from $1.7 million in the year-ago period. Adjusted EBDA margin was 26.6% compared to the prior year quarter of 10.7% and has reached the normalized levels expected of around 25%. We ended the second quarter With $18.4 million of cash, borrowings under our ABL facility were $49.3 million. We had total liquidity approximating $73.5 million at June 30. Cash interest for the year is expected to be approximately $26 to $28 million. 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. 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 in capital expenditures. Full year 2021 CapEx forecast has now been reduced by $5 million down to approximately $20 million. As activity levels continue to grow, we will see increased working capital demands having an unfavorable lag effect on our cash flow generation. Although the variability of working capital changes 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 the discipline that enabled us to overcome the many challenges of the past 18 months. This 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 now turn it back to Amarina.
Stacey
Thank you, Susan. Before we take your questions, I'll provide an overview of the macro market trends, an update on our technology and digital initiatives, and our business and operational outlook. Starting with the macro environment, as I mentioned earlier, we are in the middle of an uneven recovery and we're faced with certain headwinds during the second quarter that have impeded global growth, including COVID-related restrictions inflationary pressures and supply chain disruptions. Despite these headwinds, the IMF is forecasting global economic growth rates of 6% this year and 4.9% in 2022. This has led to a historic increase in global petroleum demand, which is expected to increase from approximately 85 million barrels per day in the second quarter of 2020 to 100 million barrels per day by year end. Following the prolonged weather-related refinery shutdowns along the U.S. Gulf Coast in February that led to high drawdowns of petroleum product inventories, refining margins improved in 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 in 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 petrochemical clients. Ethylene prices reached a multi-year high in April when the Gulf Coast facilities ramped up following the winter storms. Ethylene prices are once again testing multi-year highs, driven by two 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 in the energy sector with a renewed focus on the reduction of greenhouse gas emissions. While the infrastructure bill is progressing through the Senate, 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 in meeting their compliance-related and green energy goals. And now, an 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 we reported earlier this week, we entered into an agreement to become the exclusive provider of Credosoft integrity management platform in North America. The software enhances team's ability to monitor assets, ensure compliance, and provide inspection and repair solutions. The Credosoft service offerings provides team a stable subscription-based revenue profile. There are currently multiple clients utilizing the Credosoft platform for integrity 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 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 in our end markets over the next few years. 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 in the current market environment. Throughout the COVID pandemic, our global workforce management function allowed 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 in skilled technicians. At our peak activity levels during the second quarter, we added over 1,200 field technicians versus the comparable quarter last year. Teams' industry-leading training and certification programs, together with our strong recruiting capabilities in 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 top-line improvements from higher activity levels as worldwide COVID-related restrictions ease. However, like many other companies, TEAM faces an uncertain path related to the COVID recovery. which could potentially include additional government mandated shutdowns regionally in the US and internationally. We remain 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 in 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 price concessions. Then 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 costs 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 is committed to investing in our people, expanding our technology and digital portfolio, and delivering execution excellence. Most importantly, we have not lost sight of our number one core value, safety first, and remain dedicated to top quartile performance by operating in a safe and reliable manner each and every day. We will continue to demonstrate the same relentless discipline that helped guide us through 2020. Operator, I will now turn it back over to you for the question and answer session.
Operator
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. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Your first question comes from Stefano Christ with CJS Securities. Please go ahead.
CapEx
Good morning.
Stacey
Good morning. Good morning.
CapEx
First, can 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 in those gross margins going forward in the second half?
Stacey
Sure. Let me talk a little bit about the inflationary pressures, and then I'll let Susan touch on the gross margin. So I think, you know, overall, we've seen the 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. So, you know, from that standpoint, raw materials has had the largest increase, I think, as Susan mentioned in her prepared remarks. The freight, logistics, and just overall movement of goods and people was the second largest And then we've seen an increase in labor costs. Those ones we expect to further increase as we go through the year. Even though we do expect some of the lower skilled available labor to become more available over the short term as things change, especially in the U.S., we do see inflationary pressures tightening on the higher skilled labor as the market continues to tighten. So it's you know, starting with raw materials, followed by a lot of the freight, transport, logistics, and then labor cost increases. And Susan, maybe you want to touch on the gross margin?
Kevin
Yeah. With respect to the gross margin, as I've mentioned, for the quarter, it was about 24... 26.3% on a six-month basis, 24.6%. And... The increased, I would say, 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, in H2. But looking at it 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%.
Stacey
And maybe just add a little bit of color on some of the you know reasons for the range as mechanical services and quest integrity grow obviously that'll have you know what segment makes benefit to gross margin. As we're able to move pricing over the years, you know, starting with covert 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 will have a factor. So, you know, I think there's a segment mix, pricing, traction, and then inflationary pressures are the three levers, if you will, that will impact gross margin for us.
CapEx
Great. Thank you. And then, you know, you mentioned the outlook for fall turnarounds is positive. Could you maybe talk about what your visibility is there?
Stacey
Sure. We track, as you know, we track our turnarounds in 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 will start later in September. running through October, so an impact in the latter part of Q3 and into the early part of Q4. We do see the turnaround market still being a little bit unstable in the sense that there are some projects moving that could 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, you know, maintenance or turnarounds, some of them starting in 19 because of the higher utilization rates, especially in refining, and then because of COVID in 2020, and then, you know, cash management and CapEx in the first half. we are seeing that we're looking at a lot more pit stops to get them 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 an increase in some of the smaller pit stops, which aren't as big of a benefit as large turnarounds, but they definitely... are positive for us as you add up those pit stops. They're a good impact for our activity in the second half.
CapEx
Great. Thank you so much.
Stacey
Thank you.
Operator
Your next question, Sean Eastman with KeyBank Capital Markets.
Sean Eastman
Hi, team. Thanks for taking my questions. Morning, morning. So just in light of the gross margin swing factors highlighted around the second half. Maybe it would be helpful to just get a finer point on how that pricing traction and inflationary pressure trended exiting the second quarter. You know, just kind of where we're likely to fall out in 3Q based on what you've seen um in the early part of the third quarter and kind of exiting the second quarter would be a helpful discussion um you know is inflation getting worse are you getting traction on the pricing programs that type of thing would be really helpful to hear sure so i think first of all on the inflation sean the you know some of the inflationary costs are transitionary so we
Stacey
You know, as we kind of shift through it, we expect some of that to level off and be more transitory. But, you know, I think raw materials is one of those that as the year goes on and supply chain improves, you know, 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, you know, after September. You know, I think there will be inflationary pressures on labor, on the higher end, higher skilled technicians from that perspective. So, you know, I would say that we've made good progress on removing, you know, many of our COVID-related discounts and we're We're in the final stages with a few clients, you know, for a few of those to come off later this year, but the majority have been, you know, removed. When it comes to pricing traction overall outside of COVID, you know, 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 you know over the the latter couple weeks and you know time will tell how competitive the market is because that's obviously a quoting business but we're being aggressive on on moving there because that's step one we have started negotiations with our top 25 clients which I think will end up being more focused on the inflationary recovery and tying up resources as the market continues to tighten. So I think as things tighten, we'll 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 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 try to bring down the cost to serve to the best of our ability. I think it's a little bit of a three-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 that's the quickest to move, followed by the contractual negotiations, which would come later in the year.
Sean Eastman
Okay, thanks. And this CredoSoft rollout, are we seeing any traction around these types of initiatives in terms of pricing, Amarino, and maybe differentiation. Has there been a good customer response to these types of things? Is there sort of a good pipeline of work out there that... you know, these types of initiatives can help you guys, you know, kind of capture more share and get better pricing?
Stacey
Well, good question. So, you know, one of the reasons that we really felt, and vice versa, that it was a good partnership with CredoSoft is they've got a few large IOC clients, especially international clients, where 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 in a large market, which is why we selected North America, to be able to use our sales, 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 working on efficiency and working on compliance and documentation. The clients have their own asset management systems, which a lot of them have in place. And what Credosoft 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 client's operating, you know, asset operating models. And what it does for us is it starts moving the needle, Sean, around risk-based inspection, more predictive inspection, and utilizing data to start being more proactive. That starts with the inspection services. It also plugs in damage mechanisms like corrosion, for example. And the pull-through, the benefit, is really on the repair side. And so we expect, as the traction builds, that we'll move more to risk-based type inspection. and we'll get more pull through from mechanical services, which is obviously one of the ambitions for us is to continue to grow mechanical services. The bridge that that provides and the partnership that they've got and the platform that they've got is subscription-based, so we want to obviously be able to put it on and into our clients' facilities. We have currently five clients that are subscribed to the platform already. And, again, using our, you know, strong client base, that's where we feel that there's going to be upside in terms of deployment and implementation.
Sean Eastman
Okay. Thanks a lot, Ann Marino. I'll turn it over there. Thank you.
Operator
Your next question, Martin Malloy with Johnson Rice.
Martin Malloy
Good morning. Good morning. Kind of a similar question, except I wanted to ask about the smart stops. offering that you press release 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 the competitive advantage that is sure first of all you know when you look at the development Marty we've been working on this for about two and a half years so there's been a lot of field testing product development
Stacey
including, you know, manufacturing, the materials, et cetera. The benefits, really, when you speak to a client, you know, I think the first thing to put into context is it's an on-stream repair. And our clients, you know, 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 system is able to only penetrate the pipe or the line once versus multiple penetrations, which obviously is beneficial. We can set it in low volume fluid movement versus a clean dry line, which is beneficial. We're able to monitor pressure between the two seals without having to make a second break in the line, which is beneficial. Really, when you look at it, it's mechanically, for the client, it's a lot more reliable. Our clients right now are focused on safety, focused a lot on reliability. and turnaround time in terms of keeping their lines and their plants up. So we're changing the commercial model instead of going strictly labor rate buildup and parts. We're doing this more at a project-based pricing level with project management. Materials and traceability is an advantage for us. So leveraging some of the manufacturing investments we made over the last couple of years with our press cell You know the whole package is is what the clients like I was at a client meeting last week where our client was one of the ones that did the field test on and You know they very much like the fact that we don't have to a we can work on stream B. It's a very reliable system and and C is is that they don't have to change their line in terms of two or three fittings to do their operations. So I think there's a commercial model change for us. I think that the clients like the safety and operational part. And we've gone through pretty rigorous field testing, and now we're expanding the sizes and the ability for us to deliver it starting in the U.S. and then moving it international.
Martin Malloy
Okay. Thank you. My next question, kind of bigger picture, but you're seeing a lot of the IOCs and the petrochemical companies have improved results and cash flows and they're returning capital to shareholders, but they're in a much better position than they've been for the last couple of years, and it seems like for the past, two years or so, there appears to be some underinvestment in terms of into the type of turnaround projects and maybe some of the maintenance being deferred 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 of how they're looking at maintenance spending going forward?
Stacey
Sure. No, it's a very good question. And I would say, you know, a little bit of what I said with Sean applies. I think that the regulations, you know, there's no doubt, be it emissions or, you know, overall regulations continue to tighten. There's 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 their facilities and not invest big capital right now. All of those things I think we saw it in 20 through cash conservation We're seeing some of it in 21. So, you know, I think things like CredoSoft, the fact that one-third of our revenue is run and maintained based, and that's very regulatory driven. The fact that, you know, 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. We've built some good partnerships in our top 25 client base. We've had regular meetings with clients during COVID. And I can tell you that most of them are trying now to plan their CapEx planning for 2022. And they're going to do the pit stops. They're going to do the regulatory requirements. and they're going to do on-stream repairs to get through the year. And then 2022 and 2023, as we look out either our own data, client data, or third-party data, unit upgrades and CapEx investment, we expect that to kick in. So I think 2022 and 2023 look strong, and I think it's going to be more capital investment. In the meantime, though, I think The drag on our mechanical services segment, we expect that if the utilizations remain up, and generally we've seen a one to two-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 clients right now, their margins are starting to improve, Demand is increasing. We do expect call-out and OpEx spend to fill in the gap, if you will, between now and when CapEx starts to spend. I think most of our clients are planning their October-November CapEx plans, permitting and project planning for 22 and 23. Having said that, as I said earlier, we still expect our turnaround season in the second half you know, to be solid and we're planning labor and resources for it right now.
Martin Malloy
Great. Thank you very much.
Stacey
Thank you.
Operator
Your next question comes from Adam Tolheimer with Thompson Davis. Please go ahead.
Adam Tolheimer
Thanks, guys. Two quick questions. First, 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 in the back half?
Kevin
So, yeah, with respect to the EBDA, you know, we do expect H2 to be significantly improved over H1, and we would see You know, in line with what I said about gross margin with the inflationary pressures and other pricing with the results of Q2, and we would expect that, you know, while our percentage and our margin would be up for EBDA, it is going to be less than what we've been speaking to previously. So that, you know, again, up. significantly from the first half of the year, but down from the prior expectations. What I would say is it would be expected to be around probably just north of a 5% margin. And then as far as the free cash flow, as we mentioned, as the revenue is growing, the activity levels and expectations that is obviously 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, that increase or that improvement is really going to be driven by the fact we are bringing down the working capital needs. collecting on the revenue levels that were generated in Q2 and those increasing levels in Q3 and Q4. So it is a function of the improvements continuing to occur with really H1 being driven by generally in the first quarter, first half of the year, there's other cash costs that go out that we don't have in 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 to a much lower level.
Adam Tolheimer
Sounds good. Thanks. Thank you.
Operator
Once again, if you would like to ask a question, please press star 1 on your telephone keypad. Your next question comes from Brian Sedani.
Stacey
Stacey, are you still there?
Operator
Yes, we're up.
Brian
Yes, hello?
spk07
Hi, Brian. Good morning.
Brian
Hi, can you hear me? Yes, good morning. Yeah, hi, Brian Russo with Citote. You know, if maybe we could talk about your growth margin a little bit more. You know, the 400, you know, the 30% down to... about 26%. Can you break that down possibly by what price concessions drove the margin lower versus raw material, inflationary pressures versus labor cost pressure as well? Just trying to get a sense of the decrease in margin while you saw a nice top-line growth. you know, where we could see the recovery through the latter half of the year to get to your gross margin targets.
Stacey
So let me just start, and I'll have Susan add a little bit of color, Brian. You know, I think we're not providing the full color in terms of, you know, how much was pricing, because obviously there was COVID price discounts. But most I'd say that, you know, other than a few lingering ones going into H2, most of those have been removed. Inflationary pressures, as I mentioned earlier around raw materials and logistics and labor, you know, 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 the temporary cost reductions as we moved into the year. including training, which we highlighted was 35,000 hours actually above that and $1 million, which obviously goes into the gross margin impact as we recovered from the COVID period. So you're right that it is inflationary, it is pricing, and it also is the fact that we reinvested in things like trainings. The other factor is that, you know, our mechanical business and our Quest business, you know, have strong gross margins as well. And as the mix of segments changes, you know, it does impact things. So as we see mechanical and Quest continue to grow into the second half of the year in 22, that's where we'll get a positive mix as well because there is you know, some different margin-type performance from each of the groups. But I'll let Susan add a little bit more color around these.
Kevin
Yeah. Brian, as Amarino mentioned, we're really not providing the specific details to it, but I would say that, you know, it's more the increasing costs that we're seeing impacting the gross margin for the first half of the year. And as Amarino mentioned, While we rolled in the cost reduction to the temporary cost from 2020 by the beginning of this quarter, the second quarter, April, there are additional costs that do ramp up that you don't have throughout the year. As Amarillo mentioned, the training and other, I mentioned previously in the gross margin of free cash flow, additional costs that hit Q1, Q2 that really kind of get reduced for the second half of the year. So again, I would say it's mooring closer to the cost increases that really impacted it. But the mix, as Amarino mentioned, between the segments is what we're looking at as improvement, and as Quest has sequentially improved significantly. that base of their fixed costs, and they are covered by a lot more fixed costs, that base of fixed costs does help elevate that gross margin as we see the growth for them.
Brian
Okay, got it. That's helpful. Just on mechanical services, obviously you saw quite a bit of year-over-year top-line growth at IHT and Quest. But it just seems the revenue growth at mechanical services of only 4%, given the, you know, of last year, it just seems surprisingly low. Is that what you were referring to earlier on, you know, project delays and turnarounds being delayed? Or, you know, why wasn't that more in line with the other segments, given the year-over-year comp?
Stacey
Yes, good question. And a couple things I would highlight for Q2. You're 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 in the other two segments. And I referenced a little bit earlier the golf divisions, for example. So we are being, I would say, revenue growth mindful that 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 mechanical... has a bigger footprint, Brian, you know, international and into Canada. And we had some, you know, further COVID restrictions in some of the non-U.S. areas that impacted the growth rate. They still did well in those areas, but they didn't do as well as they could have had COVID restrictions not limited, you know, our ability to travel in and out of countries today. Their footprint is much broader than IHT, for example, when it comes to geographical coverage. So those are the big three. Historically, MS has generally lagged on a recovery. The IHT for regulatory-type driven reasons where clients have to meet their regulatory requirements, for example, inspection versus more call-out on mechanical requirements. 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, you know, we expect that to catch up. But those are the reasons that we're seeing a bit more of a lag on MS versus the other two.
Brian
Okay, got it. And then just, you know, clearly the energy industry is recovering. But, you know, it seems that – aerospace is lagging, and any comments on that end market, which I believe is your second largest market?
Stacey
Yeah, so I would say that we are seeing things being pushed in the aerospace for large engine teardowns, large-type projects. We are seeing some improvement in terms of inspecting new parts and working with some new clients But overall, yes, I would say it's lagging the recovery, you know, if you compare it to refining and petrochemical, which is one of the reasons, you know, we talked about last quarter is making our investments in our facilities and some of our expansion plans because we want to hit it, you know, on the upswing, which we expect would be 2022. So it is lagging. We're making, you know, some headway with new clients. but not recovering at the same speed, obviously, as you would expect to refining right now in petrochemical.
Brian
All right, great. Thank you very much.
Stacey
Thank you.
Operator
Thank you. Thank you. I would like to turn the floor over to Ann Marino for closing remarks.
Stacey
Thank you, Stacey. We remain optimistic about our outlook and team's opportunities to grow in the current environment as our clients place increased emphasis on asset performance optimization and reducing their carbon footprint. I'd 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.
Operator
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.
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