Matrix Service Q1 2024 Earnings Call Transcript

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Provided by Quartr
November 9, 2023

There are 6 speakers on the call.

Operator

Good morning and welcome to the Matrix Service Company Conference Call to discuss results for the Q1 of fiscal 2024. Currently, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to today's host, Ms.

Operator

Kelly Smythe, the Senior Director of Investor Relations for Matrix Service Company.

Speaker 1

Thank you, Josh. Good morning, and welcome to Matrix Service Company's 1st 20 24 earnings call. Participants on today's call will include John Hewitt, President and Chief Executive Officer and Kevin Cavanagh, Vice President and Chief Financial Officer. The presentation materials we will be referring to during the webcast today can be found under Events and Presentations on the Investor Relations section of matrixservicecompany.com. Before we begin, please let me remind you that on today's call, we may make various remarks about future expectations, plans and prospects for Matrix Service Company that constitute forward looking statements for the purposes of the Private Securities Litigation Reform Act of 1995.

Speaker 1

Actual results may differ materially from those indicated by these forward looking statements because of various including those discussed in our most recent annual report on Form 10 ks and in subsequent filings made by the company with the SEC. To the extent we utilize non GAAP measures, reconciliations will be provided in various press releases, periodic SEC filings and on our website. Before I turn the call over to John Hewitt, I'd like to share information about several upcoming investor conferences and corporate access opportunities. On November 14, we will hold the Matrix Service Company Virtual Annual Stockholder Meeting. You can register to attend as instructed in the proxy or via the Events tab on our Investor Relations website.

Speaker 1

We will present at and fold 1 on 1 meetings at the Sidoti MicroCap Virtual Conference planned for November 15 16. And finally, we will hold a virtual non deal roadshow hosted by Rose and Company in December. If you'd like additional information on any of these events, I invite you to contact us through the Matrix Service Company Investor Relations website. I will now turn the call over to John.

Speaker 2

Thank you, Kelly, and good morning, everyone. Here at Matrix, we continue to pursue and expect 0 injuries across our platform. Broadly, our focus is around accountability, communication and training to drive better outcomes. Each of us need to be accountable to ourselves and each other As we think about our behaviors, decision making and risk awareness and not only our professional lives, but at home as well. We need to communicate our expectations, why safety is important and support each other.

Speaker 2

As a learning organization, training is critical to improve awareness, decision making and ultimately outcomes. Above all, each employee has the authority and the obligation to stop work when they see or feel uncomfortable with the task they or a co worker are about to perform. Three simple questions, what am I about to do? How can I get FERC? What am I going to do about it?

Speaker 2

A key to keeping yourself and your coworkers safe. Turning to the quarter, We're pleased to update you on the continued momentum in our business and our end markets. We generated awards of $497,000,000 in our fiscal Q1, surpassing our Q4 of fiscal 2023 awards of $464,000,000 This is our highest project award total in 5 years. Project awards resulted in a book to bill ratio of 2.5. Our Storage and Thermal Solutions segment was the standout in the quarter, recording a book to bill of 4.6 on the back of a large capital project award.

Speaker 2

This award is a midsize LNG liquefaction and storage facility in the Eastern U. S, similar to previous small to midsize LNG projects completed in the past. This is a project for a client we've done a good deal of work for over the years, which is a testament to our ability to deliver complex projects safely, on time and with high quality. In our last earnings call, we referenced another LNG project we were awarded in the Q4 of fiscal 2023, at LNG Peak Shaver in our Utility and Power Infrastructure segment. Together, these projects align with our strategy of leveraging our strong cryogenic storage brand and our capabilities in engineering, fabrication, procurement and construction.

Speaker 2

Our strategy to offer complete solutions to the growing small to midsize LNG facility market is creating awards and growth for the company as we expand our brand and capture market share. This market covers a range of uses such as peak shaving units, backup power plant fuel supply, ship bunkering, rocket fueling and export facilities. Our teams have a great reputation These types of projects and have built strong client relationships over the years made clear by continued awards like the most recent one I mentioned above. The pipeline for opportunities in the small to mid scale LNG market remains strong with both new and repeat clients. Atri's capability to wrap the complete facility around the storage is unique in our markets and among our competition.

Speaker 2

Considering our current position in a robust market and with the numerous project proposals and bids in progress as well as the ongoing FEED studies, We expect to keep adding similar projects to our backlog over time. Adjacent to this strong position in the small and midsize LNG market, Our strategy extends to other specialty vessels and facilities for ammonia, ethane and other natural gas liquids. In addition, our brand and skill sets extend to hydrogen storage facilities as well as development of large scale storage solutions for various clients. We have several clients that are part of the 7 Hydrogen UP teams recently selected by the Department of Energy to receive funding under the bipartisan infrastructure of law. We are in discussion with these clients on how we can assist them in these programs.

Speaker 2

We believe there will be significant opportunities for our company and not only these hubs, but also a variety of other projects that are taking advantage of the change in energy mix and federal clean energy funding and tax credits. As we look out into the future, we fully expect our backlog and specialty vessel storage and related facilities to continue to grow with the diversified mix of energy projects. In addition to our storage market strategy, The vision for the rest of the business creates opportunity for growth, expansion and sustainability and revenue. For example, our position for electrical infrastructure services from substations to transmission and distribution and other industrial electrical work presents a strong growth potential for the company in a market that has significant demand of expansion, upgrades and repair across the country. We are working with technology providers on an increasing number of project opportunities across the country for carbon capture.

Speaker 2

We continue to be a leading contractor in traditional energy for refinery maintenance and repair, turnarounds and projects, many of which are focused on lower carbon process improvements such as renewable fuel refining. We remain active in crude and refined product storage tanks and terminals, both new build and repair and maintenance. And finally, midstream gas compression, mining and minerals, chemical and petrochemical and aerospace projects on an E only, C only or full EPC basis leverage our engineering capabilities, project skills and construction experience. These service lines, offerings and skill sets complement each other and support the growth aspirations of the entire business, market capture and geographic diversity of our operations. All of these end markets continue to be supported by the strong tailwinds and macroeconomic drivers We have discussed before, which include global energy security, domestic energy supply assurance, clean energy transition goals, commodity demand to support renewables and infrastructure upgrades and industrial restructuring of manufacturing as well as federal infrastructure investments that will start to meaningfully flow into the project phase during calendar year 2024.

Speaker 2

I can confidently say that we're executing our strategy from a position of strength. Our backlog has grown by 27% from the end of the Q4 of fiscal 2023 and 126% from a year ago. At $1,400,000,000 our backlog is at its highest level since June 30, 2015. Even with $1,600,000,000 of awards these past 4 quarters, our opportunity pipeline remains steady between $5,000,000,000 to $6,000,000,000 providing a strong indication of the potential in our markets and ability to continue our long term trend of backlog growth. Organization has been meaningfully transformed over the past few years.

Speaker 2

We are focused on the end markets that present the best opportunity For us to leverage our decades of experience, we have restructured our organization to be more cost efficient while maintaining our skills, expertise and strong brand. We're positioned to safely execute projects with improved operating processes, while continuing to deliver best in class quality for our customers. And we continue to invest in digital solutions to improve our administrative and project execution performance. While the company is well positioned with a high quality backlog that contains larger long term capital projects, it is important to note that our traditional small cap projects and recurring repair and maintenance work, which is strategic to our overall portfolio come in and out of backlog in a shorter timeframe. And this work has historically represented on average over 50% of our annual revenue.

Speaker 2

So to be clear, our strategic market focus and positioning, The macroeconomic and industrial drivers and the steady opportunity pipeline combined with our transformed organization We'll continue to build on our diversified backlog portfolio, which will lay the foundation for the business to grow and be sustainable well into the future. With that, I'll hand the call over to Kevin to review the results.

Speaker 3

Thanks, John. Overall, the Q1 of fiscal 2024 was in line with our expectations highlighted by the strong project awards John previously discussed. Revenue of $198,000,000 during the first in the Process and Industrial Facilities segment, which I will discuss shortly, as well as seasonality in our business. The contribution of revenue of newly awarded projects is beginning to benefit the Storage and Terminal Solutions segment, but is still currently limited as the projects progress through engineering and planning stages. Gross margin was 6% in the Q1 of fiscal 2024 compared to a gross margin of 7.1% in the Q4 of fiscal 2023.

Speaker 3

Despite generally strong project execution, gross margins in the Q1 experienced a 4 70 basis point impact from the under recovery of construction overhead cost. Some of these construction overhead resources have been more actively involved in the pursuit and planning the future work. With the improved backlog, more resources will now shift to the execution of projects. On a consolidated basis, we expect to achieve full recovery of construction overhead costs on higher revenue volumes in the second half of fiscal twenty twenty four. Consolidated SG and A expenses were $17,100,000 in the Q1 compared to 17,000,000 of SG and A expense in the Q4 of fiscal 2023.

Speaker 3

The first quarter expense includes an additional accrual of $1,600,000 associated with the variable accounting for cash settled stock based compensation, which increased due to a significantly higher stock price. The improved stock price is obviously a positive we have all been working to achieve, but it does increase expense related to certain stock based awards that are subject to variable accounting. This increase was offset by various other lower costs as we manage our cost structure, which includes our continued streamlining of the business as well as delaying certain costs based on the timing of revenue. Other income during the Q1 included a gain of $2,500,000 on the sale of a previously utilized facility, which was no longer strategic to the future of the business. This transaction is just one of many steps we have taken as we focus the business to its core offerings, improve efficiency and manage our cost structure.

Speaker 3

As expected, the effective tax rate for the Q1 was 0 and we expect the effective tax rate to be around 0 throughout fiscal 2024. So for the Q1 of fiscal 2024, we had a net loss of $3,200,000 or $0.12 per share compared to a net loss of $300,000 or $0.01 in the Q4 of fiscal 2023. Now let me briefly discuss the operating segments. In the Storage and Thermal Solutions segment, revenue increased to $90,000,000 in the Q1 as compared to $64,000,000 in the Q4 of fiscal 2023. Revenue for this segment was positively impacted In the Q1 by the procurement of materials and components for capital projects awarded in the prior fiscal year.

Speaker 3

We expect revenue to significantly improve and the second half of fiscal twenty twenty four. Gross margin of 5.5% improved over the Q4 of fiscal 2023 due to strong project execution, but was still negatively impacted by the under recovery of construction overhead costs. We have allocated additional resources to this segment to support recent awards and additional revenue in the second half of fiscal twenty twenty four. As these revenues increase, we expect to eliminate the under recovery of construction overhead costs in this segment. In the Utility and Power Infrastructure segment, revenue was $32,000,000 in the Q1 compared to $39,000,000 in the 4th quarter due to lower volumes of power delivery work during the summer months.

Speaker 3

LNG peak shaving work added to backlog over the past year is expected to positively impact revenue as we move through fiscal 2024. Gross margin of 11.4% was positively impacted by strong project execution, which led to favorable project closeouts, as well as LNG peak shaving 24. In Process and Industrial Facilities segment, revenue decreased to $75,000,000 in the first 2024 compared to $103,000,000 in the Q4 of fiscal 2023, primarily due to the completion of certain gas processing work, lower refinery volumes during the summer months and the sale of a non core business during the Q4 of fiscal 2023. Despite generally strong project execution, 1st quarter gross margin of 6.8% was negatively impacted by low revenue volumes, which led to the under recovery of construction overhead cost. Now let's move to the balance sheet.

Speaker 3

During the Q1, we utilized $28,000,000 of cash for working capital purposes. This was expected and primarily related to the timing of cash flows on projects. We ended the Q1 with total liquidity of $80,000,000 $10,000,000 in debt. Our liquidity is comprised of $27,000,000 of unrestricted cash and $53,000,000 of borrowing availability under the credit facility. We also have $25,000,000 of restricted cash to support the facility.

Speaker 3

We expect to see cash and liquidity increase as we move through the rest of the fiscal year. In fact, an event subsequent to the end of the Q1 also benefits In October, we reached a favorable resolution on a long standing legal dispute with an iron and steel customer that resulted in the receipt of $16,800,000 The amount collected represented the full amount owed under a reimbursable contract, which the company had pursued for a number of years. Another subsequent event that warrants mentioned is that with the improving financial position of the company, we repaid all outstanding borrowings under the credit facility in early November. We will continue to proactively manage the balance sheet to support the improving business. On our last call, We provided an outlook for fiscal 2024, which is substantially unchanged.

Speaker 3

Overall, the results for the Q1 were in line with our expectations. We now expect revenue to be at a similar level in the second quarter and then show strong growth in the second half of the fiscal year as a result of the improved backlog. For the full year, this will create significant year over year revenue growth. The bottom line results will follow a similar pattern as the revenue with significantly stronger results in the second half of the fiscal year. We also anticipate accelerated movement toward the longer term financial targets in the second half of the fiscal year.

Speaker 3

This concludes my prepared remarks. I'll turn it back to John. Thanks, Kevin. Before we open for questions,

Speaker 2

I'd just like to reiterate some key takeaways for today. First of all, our strategic approach to the energy and industrial end markets we serve is being validated given the strength of our awards and ultimately backlog. This is supported by a steady opportunity pipeline across these markets. The timing and volume of project awards will not be linear and there will be some wider award quarters. But overall, we believe our strategic approach will lead to further backlog growth and strong performance into the future.

Speaker 2

In the long term, the reshaping of global energy markets, energy supply, security, push towards lower carbon activity and industrial reshoring, All create opportunities that we expect will drive our business for years to come. We are well positioned and structured to maximize our profitability and generate value and growth and stakeholders. With that, I'd like to open the call

Operator

Our first question comes from Brent Thielman with J. Davidson. You may proceed.

Speaker 4

Hey, great. Thanks. Good morning, John, Kevin, Kelly. I guess, first off, John, I wanted to get just your feel for, look, higher cost of capital environment looks to be sustaining going forward. You're still Booking work at an elevated pace, maybe your customers' reaction to that, how that might be impacting the overall kind of business or Bookings pipeline, I imagine maybe the 50% of the business with smaller project work could potentially be susceptible, but love to get your sense on

Speaker 2

Probably two comments there. One is that we do hear from some customers That they have that they're relooking at their portfolio of projects, capital projects that they're doing based on the cost of debt. But I would say that's a pretty small percentage of our entire client base that we're kind of hearing those things from. And a lot of that may be mixed up with individual things that they've got going on within their organization of how they have spent or overspent Their capital in the past year or 2. So we're not hearing a lot of that.

Speaker 2

2 is, is that it's probably not a great market right now for a developer led project because of the cost of capital. But the majority of our clients and the clients that we're seeing a lot of our backlog growth From our more blue chip companies that they've got a heavy piece of their personal balance sheet and their own cash flows that are funding the projects And they have a those companies have a tendency to look much longer term on interest rates, the Price of energy demand in the market and then appreciating that some of these larger projects take upwards of 3 years to get put in place. So currently, I would say we're not seeing a major effect on our business from this award cycle.

Speaker 4

Okay, great. That's encouraging. I guess second question was on LNG peak Shading projects, you've been really active there. It sounds like the pipeline is pretty busy there with maybe some forthcoming opportunities as well. I think you mentioned the margin profile attached to these is pretty attractive.

Speaker 4

I was wondering if you could just kind of give us a sense what those look like maybe Relative to kind of the long term averages you expect from the business from a gross profit perspective, can these be sort of accretive beyond those Targets as you kind of get deeper into execution on them?

Speaker 2

Those projects certainly support our consolidated long range forecast for gross margins in the as we've said in the past in the 10% to 12% range. I think one of the things that support that for those projects is it's a smaller competitive set for us and the risk and margin profile embedded in Entire entirety of the project gives us an opportunity to deliver on the margins we need to support the Consolidated margin profile of the business. So the levels of contingency and escalation projects We're these are projects are getting to be more repetitive. So we're able to appreciate the risks better and to manage the execution better that we're able to deliver on those margins. So I think those are a couple of reasons that help us drive the overall business to this more of a consolidated margin profile.

Speaker 3

Yes. And I think what's key here is the consolidated margin profile. As John said, these projects have good margins, One of the other added benefits is that we've talked about under recovery of construction overhead has been a big driver toward Our margins not being where we want them to be and so the volume from these projects will benefit us on that recovery of overhead.

Speaker 4

Great. I appreciate that. I guess the last one, I'll get back in queue. Kevin, I think you sort of indicated, look, as you start ramping up on these projects, you should see increasing cash generation potential. You're essentially debt free at this point.

Speaker 4

It seems like you could be building some cash on the balance sheet. I guess 2 part question would be, What do you start to think about doing with that cash, John or Kevin? And 2, how do we think about kind of the conversion to cash The cash conversion is, again, you're still ramping up on these projects, just to get a feel for the cash potential this year.

Speaker 3

Yes. So I do believe that our balance sheet position is going to improve as we move through the rest of the year. I think that's going to come from a couple of places. Number 1 is the improved financial results just producing positive earnings is going to produce positive cash. Secondly, if you look at The mix of work we're going to do, certainly there'll be increases in repair and maintenance work that's Reimbursable that we'll have to fund, but I think that'll be more than offset by just the timing of cash flows on the capital projects.

Speaker 3

So I think that we'll be able to build cash and I think our initial focus on The use of that cash is going to be more internal, making sure that we've got the right equipment needed for that to support that business. And as we've said before, we've been focused on Really returning the company to profitability before we get too aggressive on either any other actions such as M and A, stock buyback, dividend, any of that stuff. So those will be things we consider in the future, but focus this year is really about Rebuilding the company's profitability, getting back to the financial targets that we've set.

Speaker 4

Okay, great. Thank you.

Operator

Thank you. One moment for questions. Our next question comes from John Franzreb with Sidoti. You may proceed.

Speaker 5

Good morning, everyone, and thanks for taking the questions. John, congratulations on another great bookings quarter. I want to start right there. You mentioned in your prepared remarks that you relocated reallocated our resources from procurement to execution. Does that kind of suggest that we should think that The incoming booking profile will be a little bit more muted in the next quarter or 2 as you move to execution, Especially in light of the fact that you also mentioned there's some large projects out there you think that are certainly near term opportunities?

Speaker 2

Yes, I don't think we have not taken our foot off the gas pedal as it relates to continuing to book projects and awards. These things have a tendency to come in like waves on the ocean And we've certainly had a strong wave here in the past couple of quarters and we've seen it coming, right. So we appreciate the timing of when our clients are going to be making decisions on some of these larger projects. And so, We're not taking our foot off the gas pedal, right? We're continuing to pursue projects to build backlog.

Speaker 2

We're looking out into the future, How we're going to continue to take a bigger share of that market related to our storage brand and position in that market. And but we took to effectively chase Some of that work, we do engage our project teams and to not only to help Plan and create the estimates and the budgets for that work, but also to talk to our clients, our potential client About the projects, about how we're going to execute it, very important for us to put our project and field management in front of our clients. But yes, they will they are starting to transition over into the execution phases. We continue to have proposal specific people that that's what they do for the organization. And That doesn't change.

Speaker 2

And so they will combined with our business development teams are continuing to pursue projects to build backlog out in the future.

Speaker 5

Got it. Thanks for the clarity there. And Clearly, the under absorption issue has been a problem for some time. Kevin certainly said that the second half of the year is where we'll probably Migrate to a much better situation. It seems to me that's largely going to be led by storage and to a lesser extent the utility business, but the process will be lagging a bit.

Speaker 5

Can you kind of review the outlook on the process side? When do you expect that business maybe to turn the corner? I know the expectation is for it to be down this year, but What's the depth and duration of that?

Speaker 3

Yes. So first thing, I think we'll see pretty good growth in both storage and the Utility segments. For Process Industrial Facilities, we've got a number of things that are impacting The top line for that segment, we've completed some work that we previously have been trying to get done, That was pretty significant for the company, important step. We did sell a non core business that In the Q4 of last year, that impacts that segment. But we've also had some good bookings in that segment.

Speaker 3

If you go back to, I think it was the Q3 of Fiscal 2023, we booked a large capital project. That project is a little unique. It's got a There's a longer runway before we really start seeing revenues on that project. It won't really start benefiting us till the Q1 of fiscal 2025. So we have visibility to see these revenues increase, but most of that will happen in the very first part of fiscal 2025.

Speaker 5

Got it. And in regards to your long term financial targets, I'm most interested in the 4.5% operating margin target. What kind of Revenue profile and gross margin profile are you using to get that 4.5% op margin target? It's certainly better than what I was Expecting by the end of next year?

Speaker 3

There's a number of things that are going to that will go into us getting to that target. So We need to get revenue volume up and we've talked previously that to get to where we're fully recovering our We probably need at least $250,000,000 of quarterly revenue to get there. But we also want to get The SG and A percentage down to 6.5% or lower. So in order for that to happen, we probably need that revenue to be even higher than that, getting it up to 2.75 or so in a quarter. So those are 2 big drivers.

Speaker 3

And then the third one is just What's the margin opportunity in the full backlog of the business between the capital projects And the repair and maintenance projects and that needs to be north of 10%. So the combination of those three things or what's going to get us to the 4.5%. And as I said in my comments, All three of those areas are going to improve and be helping us move toward that make a significant step toward those financial targets as we complete the fiscal year.

Speaker 5

Great, Kevin. Thanks for that. And I guess one last That's a good question. Regarding the tax rate, you mentioned that you expect it to be approaching 0 this year. How does that look in 2025?

Speaker 5

What's the step function up? Yes.

Speaker 3

So I think it will be near 0 this year. I mean, there's always unique Tax issues that could adjust that, so it could be 0% to 5% somewhere this year. Next year, we'll still be utilizing A lot of reserved tax assets. So I'm currently backlog projecting that to be somewhere around 10% Next year, that's my best guess at this point.

Speaker 5

Okay. That's fair enough. Thank you everybody and congratulations again on that strong bookings number.

Speaker 3

Thanks, John.

Operator

Thank you. I would now like to turn the call over to John Hewitt for any closing remarks.

Speaker 3

Couple of things real quickly. First of

Speaker 2

all, I want to thank all of our employees for your hard work, for your dedication to quality and the teamwork that's gone into delivering on the not only on the strong awards, but also to our execution strategy and improvement in the business overall. Certainly want to thank our shareholders for your support through this period. And we believe everybody again with a reminder on your personal safety awareness to ask those three questions. What am I about to do? How can I get hurt?

Speaker 2

And what am I going to do about it? And to remember for our employees that you do have the authority to stop work and you have the obligation to do that

Operator

Thank you. This concludes today's conference call. We thank you for your participation. You may now disconnect.

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Matrix Service Q1 2024
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