Mistras Group - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered record Adjusted EBITDA of $24.1M with margin expanding 130 bps to 13.0% on improved mix and efficiencies, while revenue fell 2.3% y/y to $185.4M and was effectively flat after lab consolidations.
• Non-GAAP diluted EPS was $0.19 vs S&P Global consensus of $0.205*; revenue was $185.4M vs $186.4M*; GAAP diluted EPS was $0.10, reflecting $3.0M reorganization costs and FX loss. Values retrieved from S&P Global.
• Free cash flow was -$16.0M for the quarter, driven by ERP-related invoicing delays and working capital timing; management expects normalization in H2 2025 and targets year-end leverage below 2.5x (TTM leverage just under 2.75x at 6/30).
• Outlook: No formal FY25 revenue guidance; company now expects FY25 Adjusted EBITDA to exceed FY24 (raised from “meet/exceed” in Q1), supported by robust fall turnaround backlog and continued Data Solutions growth (PCMS).

What Went Well and What Went Wrong

What Went Well

• Record Q2 Adjusted EBITDA of $24.1M (+8.9% y/y), with gross margin expanding 200 bps to 29.1% on improved business mix and operating efficiencies.
• International segment showed strong organic growth, and aerospace & defense and industrials grew mid-single digits y/y; PCMS within Data Solutions grew ~30% y/y in Q2 per management commentary.
• CEO emphasized structural cost actions and operational discipline: “These are not just short-term cost calibrations, they are structural improvements… and help ensure operating leverage through all business cycles”.

What Went Wrong

• GAAP net income and GAAP diluted EPS declined y/y ($3.0M, $0.10 vs $6.4M, $0.20), impacted by $3.0M reorganization costs and a $2.8M FX loss in SG&A.
• Oil & gas softness (customer deferrals/project delays) and continued pressure in midstream; management replaced leadership and is pursuing a turnaround, but acknowledged recent competitive pricing challenges.
• Free cash flow and operating cash flow were negative in Q2 due to ERP cutover-related invoicing delays; unbilled/billed AR increased with expectation of second-half normalization.

Transcript

Speaker 5

Good day everyone. My name is Leila, and I will be your conference operator today. At this time, I would like to welcome you to Mistras Group Incorporated Q2 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, and if you have joined via the webinar, please use the raise hand icon, which can be found at the bottom of your webinar application. At this time, I would like to turn the call over to Thomas Tobolski, Senior Vice President of Finance and Treasurer.

Speaker 3

Good morning everyone, and welcome to Mistras Group's second quarter 2025 earnings conference call. I'm joined today by Natalia Shuman, President and Chief Executive Officer, and Ed Prajzner, Senior Executive Vice President and Chief Financial Officer. Before we start, I want to remind everyone that remarks made during this conference call, as well as supplemental information provided on our website, contain certain forward-looking statements and involve risk uncertainties as described in Mistras Group's SEC filings. The major actual factors that can cause Mistras Group's 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 non-GAAP financial measures that we believe are useful to investors evaluating the company's performance, but that were not prepared in accordance with the U.S. GAAP. Reconciliation of these non-U.S.

GAAP financial measures to the most directly comparable U.S. GAAP financial measures can be found in the tables contained in yesterday's press release and in the company's related current report on Form 8-K. These reports are available at the company's website in the investors section and on the SEC's website. I'll now turn the conference call over to Natalia Shuman.

Speaker 0

Good morning everyone. Thank you for joining us today. It is my pleasure to be providing you with an update on our progress to date and report on our second quarter and first half results. I'm very pleased to report on our second quarter performance, which resulted in a record adjusted EBITDA of $24.1 million, up nearly 9% year over year, reflecting significant improvements in our operating leverage as a result of effective execution of our strategic priorities, diversifying our business, building scale and efficiencies, and engaging with our customers, all while leading with technical innovation. In Q2, we strengthened our performance across several key areas as compared to the prior year's comparable quarter. Most notably, we demonstrated organic growth of over 14% in our international segment, primarily within our European operations, and growth of over 30% in our PCMS service offering within our data solutions business.

Within our end markets, we delivered growth of 7.4% in aerospace and defense and 7.2% in industrials. These gains were offset by softness in our oil and gas end market, largely due to macroeconomic volatility in the beginning of the year and subsequent customer deferrals and project delays. We do expect a stronger second half in oil and gas, largely due to our strong fall turnaround season. The majority of this work has been awarded to us and is hence in our backlog. I'm also very bullish on the overall energy market. I had the honor to present at New York Energy Week 2025 back in June, discussing the future of energy and the role we play in enabling this progress.

From extending asset life and supporting that energy transition to rapidly growing demand for the new infrastructure assets, the way we inspect, monitor, and analyze the grid has never been more important. At Mistras Group, we are proud to help customers do just that with data-driven solutions that improve safety, performance, reliability, and uptime, which we believe will help us grow both top line and bottom line for the remainder of the year and into the future. Aerospace and defense is our second largest end market, and we delivered 7.4% revenue growth in the second quarter, following a slow start to the year in Q1.

The momentum we've seen in this market gives me confidence in our growth prospects within this end market going forward, as we continue to expand and leverage the capabilities in our aerospace and defense platform, supporting both Boeing and Airbus supply chains, as well as private spacecraft customers. Given the attractive margin profile in this segment, we believe this growth will produce a meaningful impact on our financial performance in the second half and beyond. As further evidence of the evolution of our platform is our recent National Aerospace and Defense Contractor Accreditation Program (NADCAP) certification for welding services, which adds to our aerospace quality system certifications previously achieved. NADCAP certifications ensure that companies meet specific industry standards and requirements, enhancing product quality and reliability, and safety standards are adhered to. This certification reflects our dedication to precision, consistency, innovation, and meeting the highest standards required by leading aerospace manufacturers.

Over the past quarter, as part of our efforts to restart our growth engine, I have established a key strategic initiative for myself, as well as the Senior Leadership Team, both at the corporate level and in the field, to improve customer engagement. The voices of the customer are crucial to us. We have been actively listening in order to better understand our customers' evolving needs, as well as their current assessment of our services level. My executive team and I have met with over 100 customers during the first half of 2025 alone, and the message being received is crystal clear. Our customers value our trusted relationships, and they are also asking for a more proactive partnership with integrated, agile, customizable solutions while maintaining cost efficiency.

As an example, we've learned that our customers are going through their own management consolidation, restructuring, and reorganizations, specifically in the oil and gas industry. During these conversations, we continue to showcase our differentiation and value proposition to our customers, especially when it comes to our integrated digital offerings, predictive analytical tools, and breadth and depth of our global footprint and coverage, which we believe will greatly assist them in reducing their maintenance costs while improving their reliability. In certain cases, we also learned that we have not connected closely enough to our customers. This input we received is invaluable to us, and our recent actions will be internalized as we continuously and proactively seek feedback moving forward. This dialogue is shaping our capital investment and our R&D roadmap and reinforcing our role as a long-term strategic partner for our customers.

With respect to our data solutions business, this business is a key pillar in our forward strategy, where we deliver tailored, high-value solutions that integrate our proprietary software and advanced analytics. We recently held our PCMS users conference in Orlando, Florida, in June. This conference was once again attended very well, with over 110 participants representing over 40 customers. The content was focused on the upcoming release of PCMS and the recently launched mobile version. We also showcased case studies highlighting real-world customer successes through the use of 3D modeling and digital twins. These case studies were developed based on customer feedback gathered during last year's conference and refined over the intervening period.

In a similar manner, our PCMS customers simultaneously expressed their current challenges and needs and shared within a network of industry peers, while at the same time actively engaging in the development of the roadmap for future PCMS software updates and upgrades. Many of our customers also shared that digital transformation is a top priority for their organization and that they have allocated budgetary spending in this area to improve asset performance and uptime, which we are well positioned to capitalize on. Again, our primary objective is active engagement and seeking real-time input from customers in order to evolve our solutions for them collaboratively, addressing their needs, at the same time maximizing our ROI while maintaining leading-edge innovation.

As part of our end market diversification efforts, we have experienced an increased level of overall commercial bid activity, which has resulted in recent wins in other end markets beyond our core in oil and gas. This diversification helped contribute to our 30 basis point improvement in gross profit margin in Q1 of this year, which greatly expanded to a 200 basis points increase in Q2 of this year, which increased margins across all segments as compared to the prior year comparable periods. We are focusing on areas such as new construction projects related to data centers, AI, and other high-margin infrastructure and power generation projects, in addition to opportunities in the industrial and other process industries. We have already made good progress in the power generation and transmission end market, as evidenced by our quarterly revenue growth of over 30%.

As we retool, reshape, and reinvigorate our business, we have taken many decisive steps to enhance profitability and sharpen our focus. This reflects the strengths of our operating model, disciplined cost management, and continued focus on driving efficiencies across the business. These results demonstrated our ability to deliver value despite market volatility, positioning us well to restarting our growth engine. We have adjusted our company's organizational structure, delayered the organization, reinforced performance management at each lab, and implemented clear KPIs, which are used to continuously manage performance and control our costs. These are not just short-term cost calibrations, they are structural improvements designed to improve and expand decision-making capacity, reinforce the field organization, and help ensure operating leverage through all business cycles.

As a result of these efforts, in 2025, we decided to close and consolidate several underperforming offices and lab operations, effectively exiting several unprofitable businesses and eliminating operations that had negative income and unclear paths to sustainable returns. The revenue loss tied to these labs amounted to approximately $3 million in Q2 and $5 million in the first half, which drove a portion of our 2.3% year-over-year reported revenue decline. Excluding those exited revenues, our overall revenue base was effectively flat in Q2 as compared to the prior year comparable period. At the same time, these actions have contributed to EBITDA improvements in the first half of the year and will positively reflect in our overall 2025 results and beyond.

Ultimately, while these labs' closures are short-term revenue drag, the strategy to reduce underperforming assets and projects will be an evergreen effort, while focusing on profitable growth to drive margin expansion. We have remained focused on the development and retooling of our in-lab services business, a process that began with an appointment of a new Senior Vice President of In-Lab Services in April. Since then, we have integrated and standardized operating protocols across all of our lab facilities, hired a new divisional sales leader, secured additional accreditations, and expanded our portfolio of service offerings. Customer conversations have reinforced that the industry continues to face near-term inflationary pressures and supply chain constraints. Having said that, we believe our integrated approach, coupled with the most comprehensive suite of services in this market, positions us well to create meaningful value for our customers via offering premium services and expanding our capacity.

Looking ahead, we will continue to invest in this business through strategic and focused capital expenditures and a sharpened focus on growth over both the near and long term. Overall, despite this performance of flat revenue in Q2, we significantly improved profitability. We have increased our adjusted EBITDA by 8.9%, driven in large part by a gross profit margin expansion by 200 basis points, with expansion across all segments due to diversification efforts and improved operational efficiencies. Our balance sheet also remains strong as we continue to manage our working capital and control discretionary spending while making continuing investment in our capabilities. Our leverage ratio still remains slightly below 2.75 and well below our permitted ratio of 3.75. Our goal is to finish 2025 with a leverage ratio of below 2.5.

To conclude my opening remarks, I would like to say that we are not just managing quarter to quarter, we are building for the long-term future. We have restarted the growth engine in our industrials, aerospace, and defense end markets and are keenly focused on improving our performance and capabilities in oil and gas and diversifying to other industries such as infrastructure and power generation end markets, all of which will drive long-term growth. We are also reassessing our portfolio through the lens of return on invested capital and alignment with current and future market trends. Our strategic objective is to become an agile, client-focused, innovative, asset integrity, and testing market leader and ready to scale as demand expands. In short, we are staying close to our customers, changing what no longer fits, improving our bottom line, and investing in what is needed for our customers.

As the market continues to evolve, we are focused on aligning our capabilities to meet increasing demand for more integrated and data-enabled solutions. By combining advanced technologies with deep operational expertise, we are positioning Mistras Group to lead in high-growth sectors and provide critical support where reliability, safety, and performance matter the most. With that, I will turn the call over to Ed for more financial details on the second quarter and first half results.

Speaker 3

Thank you, Natalia. As shown on slide 8, revenue for the second quarter was $185.4 million, in line with analyst consensus and consistent with the prior year comparable period, after adjusting for the business we voluntarily exited related to lab closings and consolidations. While the reported decline in second quarter revenue was modest and not related to any market share loss, we are monitoring trends closely and remain focused on returning to growth in the second half year over year. In spite of the consolidated shortfall in the first half revenue, there was strong growth within certain businesses, such as within our PCMS offering, aerospace and defense, industrials, and power generation and transmission end markets, and our international segment. Gross profit increased by $2.6 million in the second quarter versus prior year, which represents a 200 basis point expansion year over year to 29.1%.

This improvement was attributable to an improved business mix and operating efficiencies. We improved adjusted EBITDA to $24.1 million, an all-time high second quarter record, resulting in an 8.9% increase from the prior year quarter. This reflects our proactive cost management, operational efficiencies, and leverage, and a shift towards higher margin offerings. Our adjusted EBITDA margin increased to 13.0% from 11.7%, an expansion of 130 basis points. As noted in our press release, our results reflect certain overhead and personnel expenses, which have been reclassified from SG&A to cost of revenue, as we determined this reclassification would be preferable as it provides greater transparency regarding the true cost of the company's revenue and aligns with how our business is managed.

These overhead and personnel costs, which were determined to be directly related to the company's delivery of services, are generally variable to revenue being recognized and result in gross profit that fully encompasses all costs necessary to generate such revenue. This reclassification recorded within our financials was $4.8 million for the three months ended June 30, 2024. The impact of this reclassification for full year 2024 was approximately $20.9 million from SG&A to cost of revenue. This redistribution of overhead and personnel cost has no impact on operating income, net income, or adjusted EBITDA comparability. Selling, general and administrative expenses in the second quarter were up $3.6 million, or 10% from the prior year comparable period, due primarily to foreign exchange loss within our SG&A of $2.8 million.

For the second quarter of 2025, the company recorded $3 million of reorganization and other costs related to our continuing initiatives to reduce and recalibrate overhead costs, in addition to incremental costs of other related actions. Our effective income tax rate was a benefit for the first half of 2025, whereas we anticipate an effective income tax rate of approximately 25% for the full year 2025, as we experienced in the second quarter of 2025. Interest expense was $4.2 million for the second quarter, decreasing by $0.2 million, or 4.5% from the prior year, due to a lower interest rate environment. For the second quarter, we reported GAAP net income of $3 million, or $0.10 per diluted share. Excluding special items, non-GAAP net income was $5.8 million, or $0.19 per diluted share for the second quarter, compared to $6.8 million, or $0.21 per share in the prior year.

Operating cash flow was negative $3.5 million in the first half of 2025, down from $5.1 million in the prior year, largely due to working capital timing. Specifically, in the second quarter, we had a buildup in unbilled receivables and a delay in invoicing related to our conversion to a new ERP effective April 1 of this year. Although our unbilled and billed receivable balances were up as of June 30, 2025, we expect a significant reduction over the remainder of the year. Free cash flow was negative $16.2 million in the first half of 2025 compared to negative $6.9 million in the prior year comparable period, attributable to the same factors impacting operating cash flow. On a trailing 12-month basis, which better normalizes year-to-year differences, our free cash flow was $17.8 million, despite the first half 2025 year-over-year lagging results compared to the prior year period.

We expect normalization in the coming quarters and remain committed to strong free cash flow generation over the second half of 2025. Our trailing 12-month bank-defined leverage ratio was just under 2.75 times as of June 30, 2025, which is up slightly from year-end, but still well within allowable permitted ratio of 3.75 times. We expect to finish 2025 with a leverage ratio below 2.5 times. We continue to emphasize debt reduction as our priority use of free cash flow. However, we will also continue to invest in capital expenditures and other resources that support our organic growth strategy while providing solid returns. As our leverage ratio is in line with our expectations, we do currently possess optionality as it relates to free cash flows, so we will be balancing these two priorities to maximize shareholder value.

We will not be providing full-year guidance for fiscal 2025, as our CEO and renewed senior management team are still reviewing our entire portfolio of business. We are also continuously assessing market volatility, including the impact of recently enacted tariffs on our business and results for fiscal 2025. Having said that, we nevertheless expect our 2025 adjusted EBITDA level to exceed the adjusted EBITDA level achieved in 2024, which had been the second highest annual level achieved all time. We appreciate your continued support, and at this time, I would like to turn the call back over to Natalia for her closing remarks before we move on to take your questions.

Speaker 0

Thank you, Ed. First, our Senior Leadership Team and I, in coordination with our Board, are highly engaged and increasingly excited as we continue to develop our five-year strategic roadmap, Vision 2030 for Mistras Group. We plan to share the details of this plan as we finalize our go-to-market strategy to capitalize on significant opportunities to enhance growth and profitability in a more holistic way across the entire organization. Second, we believe demand in our key asset integrity end markets is accelerating and broadening. Secular trends in both energy and aerospace and defense markets require deeper integration, high-technology expertise, and meaningful data capabilities. Mistras Group is uniquely positioned with our current portfolio of assets, technology, and services, and is poised to become a large asset integrity and testing market leader with increased coordination and synergy of these integrated offerings.

Third, as we spoke to this quarter, Mistras Group is committed to profitability as a key North Star in our strategic decision-making. In both the short term and long term, each decision we make, whether it be operational or through the deployment of the capital and resources, will require improvements in our return. This will be critical on how we measure our people and hold our company to a higher level of accountability. Finally, I would like to extend my sincere thanks to our customers and our dedicated employees. Your continued dedication, collaboration, and focus on results have been instrumental in building the momentum that is driving us forward in a stronger and promising future. It is an exciting time at Mistras Group, and I will end by thanking all of you again for your support. We'll now ask the operator to open the call to your questions.

Speaker 5

We will now begin Q&A. For today's session, we will be utilizing the Raise Hand feature. If you would like to ask a question, simply click on the Raise Hand button at the bottom of your screen. Once you've been called on, please unmute yourself and begin to ask your question. Thank you. We will now pause a moment to assemble the queue. Our first question will come from Mitchell Pinheiro with Sturdivant & Company.

Speaker 4

Hey, good morning.

Speaker 0

Good morning, Mitch. Yes.

Speaker 4

Yeah, good. A couple of questions. First, just on guidance or the lack thereof. EBITDA, I got that part. I'm curious about revenue. Is that also going to be above last year, or are there puts and takes in that? I see, from foreign currency to things like that, will there be puts and takes that drive it lower than last year?

Speaker 0

Right. Mitch, yes, EBITDA is clear. We exceed the last year results, but revenue, it's hard to tell. We are still continually reviewing our portfolio. As you've seen in the first half, you know, we did exit a few operations, right, a few labs. That's resulted in a decline in revenues. On top of that, there is a market volatility continues, right, tariffs again, you know, additional uncertainties. That's hard for us to control on the revenue side. We are laser-focused on what we can control at this time and really focus on the EBITDA improvements. You know, oil and gas is still volatile. It's very hard to predict what our customers will do. The first half was tough, right, with delays and deferrals of the projects and work. We'll see how it will end up in the second half.

Speaker 4

Okay. I mean, within that, you did say you expect a strong fall turnaround season. I guess you had good visibility into that. Is that correct?

Speaker 0

That's right. That's right, Mitch. Exactly. That's what gives us line of sight that we will be having a good second quarter. It's really the turnaround. We have a robust backlog of turnaround work. That's number one. Obviously, the large portion of our business is nested, sort of embedded teams at our customers that do run and maintain work. We have a line of sight to that. Of course, incremental revenue, right? As you can see, our data group is doing really well, especially, in particular, PCMS, right? We're using this time to really connect with customers and look at the incremental opportunities. As they're looking at digital transformation, we're right there for them. It might not come from the services in particular, but we see that we have a line of sight for other incremental revenues.

Speaker 4

Let me ask, just staying on the oil and gas for just a second, is midstream, which I thought would be more of a regular, steady, predictable revenue stream, has been down for, I don't know, six quarters or so. I think we're doing $100 million back in 2023, and we're run rating somewhere in the $70 million area. What's happened with the midstream? I thought it was sort of temporary, you know, but it seems to be a little more than temporary.

Speaker 0

Yes, we have some challenges. That's right. You're correct in that. We have some challenges in the business that particularly service midstream end market customers. That challenge has continued through the beginning of this year. Most of it is increased competition, increased price, and lower price, sorry. We have addressed that. We changed the leader of that particular business. We're looking to turn around this business. I believe that the prospects are there because midstream has great opportunities, especially with the demand for natural gas, the data centers explosion, and so on. We believe that we're well positioned to capitalize on these opportunities in the future. We continuously invest in this business. Again, that has been quite challenging in the last couple of quarters.

Speaker 4

Okay, thanks. That's helpful. I was sort of pleased to see and hear your comments about your customer engagement, meeting with, you know, your customers. I'm curious, like, as you guys get together for, I think you said, you know, like a more proactive relationship. I mean, what does that mean? You know, how's that different than your, you know, relationship now? Was it all like a bid relationship and now it's more of a partnership? Can you give a little more color into what that meant?

Speaker 0

Absolutely. It's been great to really engage with the customers on all kinds of levels. What we are doing here, Mitch, is we're really shifting from transactional relationships to strategic partnerships, right? What does it mean? It's really three things. It's a strategic alignment. As we're looking at building the roadmap for our investments, for our innovation, for our R&D, we want to be very aligned with our customer needs. PCMS is a great example. They've been doing it for a number of years already. We've got to get better in other businesses as well. The second one is really lead with technical innovation. Mistras Group has historically been really, really good in innovating and leading with new technologies. That's what we continue doing, really leading with that. The third is really get customers to understand our full portfolio of services and the entire suite of our integrated solutions.

We're not just field services. We're not just data. We really have the data analytics solutions. We have field services. We have in-lab solutions. We have product and monitoring technologies. What I've learned from my conversations with customers is that they did not necessarily be aware of all of our breadth and depth of our service offerings. That's what we mean by those integrated solutions, right? If today maybe they are all very focused on operational efficiencies, we're right there to deliver at low cost, to meet them where they want to be. That's what we mean by that kind of stronger partnership, stronger relationships with customers. It's been exciting because feedback was really, really good. We're doing the right things, the right quality. It's just the customers are not fully aware of our full suite of services.

Speaker 4

How long does it take, you think, to sort of convert this new relationship and their awareness of your one-stop shop and your robust services? How long does it take before you see that creeping into the actual revenue line?

Speaker 0

Yes, we expect, first of all, we're already seeing it, right? Little by little, we're seeing that. We have already increased that cross-sell kind of when customers are using, you know, not just one service, but two. We continue, we're seeing it now. It will take time, but again, we have now consolidated our sales approach, right? We hired new salespeople. We are training the entire sales team on all our services, right? It will take time, but we believe that, again, we're starting that engine growth now. We've seen it in aerospace and defense. We've seen it in industrial. Look at our power. Yes, it's very small, but again, increased double digits. Very pleased with the efforts of our sales team, of our operational folks, but it will take a little time.

Speaker 4

Okay, just if I could sneak in one more, I was very pleased to see the, first you talked about increased commercial bid activity, which is nice. I'm curious on that. One, is that, do you have a different sales force or a different sales approach, or is there so much demand out there that you're just getting this bid activity just because you're there? Second, is the power generation, you know, was up 31% or so. It's small, but it's very nice growth. Is that something, is that going to be sort of the growth engine, you know, of all the smaller segments, you know, among your smaller segments?

Speaker 0

Okay, let me address the sales question first, and then I comment on power because it's one of my really exciting topics to talk about. The commercial team definitely strengthened the team, right? Hired just in this quarter alone, we hired seven additional salespeople, so sales executives. We continue to focus on the commercial discipline. Yes, revenue is important to us, but we do not compromise on profitability. That discipline that was instilled by many in Q, in the last year, we continue with that. That's number one. Number two, again, strengthening the training machine of our salespeople. That continuously keeps happening. The third one, we really rebuilt our lead generation platform. Huge improvements there with the arrival of our Chief Marketing Officer, and they're working very closely with our commercial officers. That's been done, and that's already generating that sufficient amount of bid activity.

We're really working on maximizing our brand impact. You will see more coming from us in this third quarter when it comes to our brand, because again, Mistras is a great brand. We are not leveraging it just enough. We got to do more on that front. Now moving into power. Yes, power is definitely one of the items where I would like us to diversify to, because the demand for power is unprecedented, right? Look at AI. It's a huge consumer of power. There's obviously now natural gas, the energy infrastructure. Mistras, this is our core, right? Data centers, this is our core applied to the new use case, right? That's where we feel very strongly, where we can contribute right away. We have already great success this quarter with data centers. The feedback from the customers was excellent.

We helped them to avoid very, very costly repairs and delays in going live with the data center. Very encouraging feedback, and we believe the opportunity is just great in power generation and transmission.

Speaker 4

Okay.

Speaker 0

Thank you for the time. Just to your question, really, on the midstream. Midstream will play an excellent, very critical role when it comes to the natural gas distribution to data centers. We believe again, we're going to turn around that business that serves midstream customers, and they have tremendous opportunities. That's another point that I just wanted to make on the energy infrastructure.

Speaker 4

Okay. All right, thank you. Thank you for the questions.

Speaker 0

Thank you, Mitch.

Speaker 5

Your next question will come from Chris Sakai with Singular Research. Chris, your line is now open. Feel free to unmute and ask your question.

Hi, Chris.

We can go to our next person and Chris can re-enter the queue. Our next question will come from John Franzreb with Sidoti & Company.

Good morning. This is Justin on for John. Can you hear me?

Hi, Justin. Yes.

Great. Good morning. It was great to hear about the strong attendance at the PCMS users conference. Can you share some of the key takeaways from your customer conversations there? Secondly, following the Q1 rollout of PCMS Mobile, how is customer adoption trending?

Speaker 0

Thank you. Thank you for that question. Yes, the PCMS conference is usually the hallmark of our year, and the team has been having those conferences on an annual basis. It has had great attendance, and the customer feedback is very favorable. The development and upgrades and new versions of software work very well. We did include additional modules to the new offering. This was based on the customer feedback from the last year conference. For example, Digital Twin, right? The modeling of the assets virtually is being adopted, and a few of our customers already have implemented that Digital Twin in their operations. That allows them to really kind of play with the asset, changing different parameters and seeing how it will influence their lifecycle. We did also introduce additional services when it comes to the risk-based inspections. That business is reflecting in the revenue stream as well already.

We just mentioned that PCMS alone was 30% up versus prior year. Feedback has been very, very important to us and very favorable. Moving forward, there's already an R&D sort of pipe when it comes to the software. We're also adding AI capabilities, which is very exciting. The team is very excited about that, how that will allow the customers to implement it sooner and faster and also introduce it to their value chain. Especially oil and gas, as PCMS is servicing predominantly our oil and gas customers. All oil and gas customers are going through their own digital transformation as they're looking for operational efficiencies. We're right there for them, allowing them to manage their data and capture it and use it. Very favorable feedback.

Speaker 4

You mentioned PCMS Mobile as well. Same point there: quicker, faster, collect data at the point, do a calculation in the field. Data is king. The faster we get it up into the IBMS workhorse database, more analysis can happen quicker. PCMS Mobile is being adopted very rapidly. It's another extension. It's easier to use. With PCMS, we've been going after that. It's a SaaS service. It's a very quick, easier adoption for the customer, and it keeps us very connected to them. PCMS Mobile is our newest launch there, and we feel very good about the adoption rate of that. That'll help increase that connectivity Natalia talked about with the customer, that integrated value-add stream. This data piece is important because it can pull service through. Service can then use the data.

They go hand in hand as a great cross-selling opportunity and a leverage for the customer to get much more information actionable for them. The faster we can do it for them all, the better. I hope that helps, that answers.

Speaker 0

Yeah, as you can hear, we all love the PCMS story here. It's a recurring revenue. You know, one, we are at the customer, so it's a revenue that is going to recur and reoccur every year, right? We're now servicing half of U.S. oil refineries, so that's kind of now we're expanding it as well. It's a great story.

Speaker 4

Very helpful. I really appreciate the color there. Secondly, can you speak to the demand you're seeing from data center customers and how your services are positioned to support their needs in the back half of the year?

Speaker 0

Data centers is another exciting story, right? As I just mentioned a few minutes ago, it's certainly a great consumer of power and the demand grows exponentially with those data centers. For us, we are well positioned from two different ways. First is we serve data centers directly, meaning that this is our core capabilities. You know, when you look at the systems being used in data centers, they need non-destructive testing services. It's a cooling, it's making sure that there's no failure, it's making sure there's predictive maintenance, predictive analytics. All of that is our core. We've been doing it all along with Mistras Group, and now we're just applying it to data centers. We are tracking very well. It's one of our top strategic priorities in order for us to diversify the company. That's one thing, servicing data centers.

Also, then look at the energy infrastructure, how the power gets to data centers. That's another opportunity for us to service those midstream customers that are very excited about data centers as they're delivering natural gas to them. For us, it's a tremendous opportunity. We're yet to capture it fully. We made great strides this quarter, received very favorable feedback. That's encouraging, and we will report on our progress moving forward.

Speaker 4

Very exciting. Thank you for answering my questions. I'll turn it back.

Speaker 0

Thank you.

Speaker 5

For our next question, we'll go to Chris Sakai with Singular Research. Please go ahead.

Speaker 4

Yes, hi. Good morning. Can you hear me?

Speaker 0

Yes. Hi. Good morning, Chris.

Speaker 4

Okay, great. I just wanted to ask about the gross profit margin improvement for the quarter. Is this something that we can expect going forward, or is this a one-time mixed shift? Can you give us some more color there?

Speaker 0

Absolutely. Yes, very happy with the progress. The drivers behind gross profit expansions are really three. One is diversification that we just talked about, right? It's focused on that high-margin business. Secondly, it's operational efficiencies. When you think about managing bill rates, build, unbuild, training costs, our operation is doing a really good job in looking at how to generate those operational efficiencies. That is something that we believe that we can do a better job. The third one, if we're looking at moving forward, we've done a pretty good job, I would say, in the second quarter. We most likely will moderate off here and there a little, but we expect that level of our gross margins to sustain itself in the second half and beyond.

Speaker 4

Okay, great. Can you talk about the new ERP system? What can we expect as far as the improvement there goes in the second half as far as unbilled and billed accounts receivables concerned?

Speaker 3

Sure, Chris, thanks for the question. Yeah, we went to April 1 adoption of, it's a cloud SaaS version of our prior system. We went to the latest version of our incumbent. As expected or as is normal, we had some learning curve, growing pains there as we cut over. Obviously, we had the delay itself in cutting over the data. Yes, admittedly, we fell behind on generating WIP into billed AR and invoicing customers timely. That delay we talked about in the script did cause the buildup. That WIP value went up in April. It's back down in June. There was a much higher, healthier level of AR to collect during the third quarter. We have confidence that free cash flow does get better over the second half, significantly better. Going forward, we're now coming up the learning curve, getting more efficient.

There's more workflows built in and efficiencies in the new ERP, but it'll take a little time to extract out the full benefits there, again, getting through the learning curve. It was a significant change, new reports, new process flow. The good thing is it's very standardized. There's one way of doing it, one process, one chart of accounts. There is a great way to standardize, regionalize, and centralize and standardize how we're thinking and how we're operating. Benefits to be had going forward. Think of it as leveraging the footprint. We can grow the company now on this better backbone we built, where we're not adding people as we expand. We'll be able to leverage the system going forward and grow the company on top of it. We're looking at other related systems, all workflow related, data flows, reports, and systems that run the operations.

We're looking at all of that now as well to really enhance and speed up decision-making going forward. That's the benefit. All these cost efficiencies, Natalia talked about efficiencies, will come from working all eyes in one place, working on a very common platform. There are still opportunities in front of us to maximize the dashboard and the decision-making and speed it up from the new system. It'll take a few more months to really ideally maximize that. We're in a good place right now, and we'll take full advantage of that. We will absolutely get the billed AR back on cycle here and flip the cash flow in the second half. We're very confident about that.

Speaker 4

Okay, sounds good on that. Lastly, can you give an idea about any sort of extra reorganization costs in the second half of the year? Are we going to see something similar to the second quarter, or how should we go about that, looking at that?

Speaker 0

Yeah, maybe Chris, I'll start on that, and Ed will add additional details on what to expect. As I took over at the beginning of the year, we are continuously recalibrating our structure. We continue to assess our portfolio, our teams. We are, as I mentioned before, making it a more integrated company. We're breaking those silos that we had before. We layered the organization. That's helping us with this going as a one-stop shop to our customers, as a one single front solution. For us, it will continue. It will be an evergreen effort to make the organization more agile, more efficient, more kind of more changing as we need to change. Having said that, we do not expect large restructuring charges or cost moving forward. There will be some, but it's going to be sort of moderate, let's put it this way.

We continue to assess and calibrate the organization for sure, our structure and our kind of our costs as well. Do you want to?

Speaker 3

Yeah, no, absolutely right, Chris. I'm sorry, I'll moderate. Chris, to your point in the second half, we go after a rather rapid, you know, return and payback for the actions we take. You know, continuing to balance headcount and facilities, we had the lab closures we talked about. That will continue. We'll continue to recalibrate as we go. There were a few one-time charges in the first half that won't recur in the second half. That number will drop back off. Again, we're going to continue to make sure that the overhead footprint is supportive of the current run rate of revenue and the business. We're in a good place right now, but that number will definitely drop off. It is significantly higher than last year at this point through six months, but it will drop back off in the second half and moderate as we go forward.

We will continue to make this an important priority here to make sure that we're continuing to keep the footprint ready to flex and leverage up with volume, and you know, it's keeping it balanced.

Speaker 4

Okay, great. Thanks for the answers.

Speaker 3

Thank you.

Speaker 0

Thank you.

Speaker 5

At this time, I see no callers in the queue, so I will hand the call back to Ms. Shuman for her closing remarks.

Speaker 0

Thank you, operator, and thank you, everyone, for joining this important call today and for continued interest in Mistras Group. I look forward to providing you with an update on our business, Vision 2030 strategic plan, and progress achieved towards our ongoing initiatives on our next call. Thank you very much. Have a good day.

Speaker 5

This ends today's conference call. You may disconnect at this time.