Matrix Service Q3 2023 Earnings Call Transcript

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May 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 Q3 of fiscal 2023. 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, Senior Director of Investor Relations of Matrix Service Company. Please go ahead.

Speaker 1

Good morning, And welcome to Matrix Service Company's 3rd quarter fiscal 2023 earnings call. Participants on today's call will include John Hewitt, President and Chief Executive Officer and Kevin Cavanoff, 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. Actual results may differ materially from those indicated by these forward looking statements as a result of various factors, including those discussed in our most recent annual report on Form 10 ks and in subsequent filings made by the company with the SEC.

Speaker 1

To the extent we utilize non GAAP measures, reconciliations will be provided in various press releases, periodic SEC filings and on our website. I will now turn the call over to John Hewitt, President and CEO of Matrix Service Company.

Speaker 2

Thank you, Kelly. Good morning, everyone, and thank you for joining us.

Speaker 3

I'd like to open

Speaker 2

the call with a congratulations to our operations teams for being recognized for contract safety achievement at 5 separate refineries by the American Fuel and Petrochemical Manufacturers Association. These safety recognitions represent Strong commitment and leadership our people bring to the workplace every day. Thanks to all our employees for making safety a critical part of your mission. On our business update, we continue to see very strong award momentum as reflected in total project awards of $309,000,000 in the 3rd quarter. This resulted in a book to bill of 1.7, our 7th consecutive quarter at or above 1.0.

Speaker 2

Year to date, we have been awarded 8 $62,000,000 in projects, up 35% over the same period in the prior fiscal year. This has resulted in a book to bill of 1.3 in each of our segments and consolidated book to bill 1.5. We are seeing positive trends in our business as we plan projects, Build backlog and execute with our transformed organization. Bidding activity remains robust across all segments And we're confident the strong award cycle will continue. At the end of the quarter, project backlog was $832,000,000 a 42% increase from the start of the fiscal year with backlog up across each of our segments.

Speaker 2

Timing of awards aside, Our proposal activity suggests that we will return to a more normalized backlog of more than $1,000,000,000 in the near term. Keep in mind that many of the larger projects we are putting into backlog may take upwards of 6 months before they have a material impact on revenue and in rare instances perhaps longer. In any case, as this improved quality, size and growing backlog flows more steadily through the business, Financial results will improve along with higher and more stable revenues. From a segment perspective, Storage and Terminal Solutions, Our Q3 book to bill was $1,300,000 on awards of $66,000,000 This segment includes significant near term opportunities for storage infrastructure projects Related to LNG, ammonia, hydrogen and NGLs, we believe specialty vessel and terminal projects in LNG and NGLs And hydrogen will be key growth drivers for this segment. In our Utility and Power and Infrastructure segment, Our book to bill was 0.7 on awards of $26,000,000 primarily comprised of power delivery maintenance and smaller capital projects.

Speaker 2

Power delivery bidding is very active and the opportunities are expanding as we grow our core utility electrical business through market capture, Client expansion and geographic reach for LNG peak shaving projects also part of this segment. The market opportunities continue to be strong Our proposal teams are very busy. These projects have a long proposal process, but much larger in size on an individual basis and less frequent, but provide a much longer sustainable backlog for the segment. We expect to expand this part of the segment backlog and the next two quarters as we convert opportunities to live projects. Finally, in the process in Industrial Facilities,

Speaker 1

Our book

Speaker 2

to bill was exceptionally strong at $2,200,000 on awards of $217,000,000 which include a large construction project to upgrade a natural gas Other construction projects of a similar size in nature are currently in the proposal process. We also continue to see demand for refinery maintenance, Tura work as well as increasing opportunities at mining and minerals, chemicals and renewables processing facilities. Over the past year, our project opportunity pipeline has stabilized and now consists of $5,600,000,000 in projects greater than $5,000,000 This pipeline does not include our normal day to day and recurring maintenance and small project activities, which represents approximately a third of our business revenue across all three segments. We continue to actively support and pursue work with our clients in the traditional energy and chemical space, which represents approximately 26% of our consolidated opportunity pipeline. We are also supporting many of these same clients As they invest in projects that deliver on or support the delivery of low carbon energy and industrial infrastructure, These represent 72% of our pipeline.

Speaker 2

The skills and expertise that Matrix offers as an engineering and construction contractor Position us well to bid and win our fair share of this work and more so will provide us for long sustainable runway of quality projects. This runway is supported by key market drivers that provide strong tailwinds as client spending decisions are made based on concerns by energy Security globally, aging infrastructure, energy reliability domestically, the clean energy transition and the need for commodities to support these investments. As it relates to the federal infrastructure investments, the Inflation Reduction Act is forecast About $3,000,000,000,000 of infrastructure investments over the next decade with the large commitment from the government expected to bring springboard for private sector spending. Dubbed the 3rd great energy revolution, this will significantly accelerate upgrades to electrical infrastructure as well as growth across the hydrogen ecosystem the U. S.

Speaker 2

And internationally. From a services and expertise perspective, Matrix has a significant role to play across nearly every aspect of these infrastructure investments, which impacts all three of our segments. With respect to hydrogen specifically, this is a mid- to long term opportunity given the market is effectively in the first inning What will be a multi decade investment cycle. While several companies in the U. S, including Matrix, have built cryogenic storage spheres for butane and propane, only 2, one of which is Matrix, have engineered and constructed cryogenic hydrogen spheres, considering the massive investment to build out the hydrogen infrastructure, Both domestically and globally, today the bidding environment for hydrogen sphere storage is very active and we expect it to be added to our backlog in the coming quarters.

Speaker 2

We are working on pre FEED studies with several energy majors to help them develop high strength storage solutions, both domestically and abroad. Additionally, in support of growing opportunities abroad, we have just signed an exclusive relationship with France based Tassos Indeci to offer total engineering, procurement and construction solutions for liquid hydrogen storage across the United Kingdom, Norway, Switzerland and the European Union. Expect to see a press release about this relationship later today. As I said earlier, we are in the early innings of an energy revolution, one that will occur globally. Matrix has positioned itself with technology, business partners, key employees, strong brand awareness and blue chip clients to play a very active role bringing these Overall, in both the short and long term, the market supports our vision for the future, A growing award and backlog position and a return to normalized financial performance as this backlog flows through the business.

Speaker 2

I'll now turn the call over to Kevin to discuss our results and then we'll open for questions.

Speaker 3

Thanks, John. Overall, the operating results for the 3rd quarter We're in line with our expectations except for some additional cost growth as we move towards completion and close out of our midstream gas processing work, More on this shortly. Our 3rd quarter revenue of $187,000,000 was in line with our expectations as certain projects awarded in prior periods Continue to work off while the contribution to revenue of newly awarded projects is still limited as they progress through engineering and planning stages. We anticipate higher revenue volumes in the 4th quarter as the newly awarded projects enter the revenue stream. The added revenue of these newly added projects will also have a positive impact on our gross margins.

Speaker 3

Our gross margin in the 3rd quarter was 2.4% as a result of under recovery of construction overhead costs on lower revenue in some parts of the business. This impacted the gross margin by approximately 400 basis points. The company also incurred an additional $3,300,000 In the quarter related to forecasted costs complete and close out certain midstream gas processing work, which we expect to be mechanically complete By the beginning of July 2023, this additional cost negatively impacted the gross margin by 180 basis points. Gross margins for the remainder of our work improved as we move toward historical margins. The margin profile of our backlog Also continues to improve as we book new projects in line with previously stated rates.

Speaker 3

Consolidated SG and A expenses or $16,900,000 in the 3rd quarter, which is consistent with the 1st 2 quarters of the year. The company continued our focus on cost control and expects to leverage the cost structure as revenues improve beginning in the Q4. During the 1st two quarters of the year, our effective tax rate was 0. That continued in the Q3 with one positive exception. Interest of $200,000 received tax refunds with recorded as tax benefit in the quarter.

Speaker 3

We continue to place valuation analysis on newly generated deferred tax assets and we'll realize the benefit associated with the reserve deferred tax assets as the company returns to profitability. For the 3 months ended March 31, 2023, we had a net loss of $12,700,000 or $0.47 per fully diluted share. On an adjusted basis, we had a net loss of $8,900,000 or $0.33 The primary difference between unadjusted And adjusted earnings in the quarter relates to the valuation allowance placed on deferred tax assets. Now turning to our segments, starting with Utility and Power Revenue for the segment decreased to $35,000,000 in

Speaker 1

the 3rd quarter compared to

Speaker 3

$51,000,000 in the 2nd quarter following the completion of peak shaver work included in the first half of the year. Revenue from the awarded peak shaver project added in the 2nd quarter will not begin to benefit revenue until late in the Q4 of fiscal 2023. 3rd quarter gross margin was 8%. This margin was driven primarily by good execution on a mix of reimbursable power delivery work. As the volume of LNG peak shaving work increases in this segment, We'll be able to sustain and exceed this gross margin level.

Speaker 3

In Process and Industrial Facilities, revenues increased 23 percent to $100,000,000 in the 3rd quarter compared to $81,000,000 in the 2nd quarter. The increase was primarily related to refinery turnarounds and maintenance. The 3rd quarter gross margin of 3.2% was negatively impacted by increased forecasted cost to complete Distributed gas processing work discussed previously, which reduced gross profit by $3,300,000 per quarter. Other work in the segment, including refinery turn Maintenance, Aerospace and Mining and Minerals, which amounted to approximately 80% of segment revenue, produced a gross margin of approximately 10% on strong project execution. And finally, in Storage and Terminal Solutions, revenues decreased to $52,000,000 in the 3rd quarter as compared to $62,000,000 in the 2nd quarter.

Speaker 3

While project awards have been strong for this segment with the year to date book to bill of 1.6, These awards will not begin to generate additional revenue until the Q4. The 3rd quarter gross margin for the segment was a negative 1.6% As the low revenue volume resulted in substantial under recovered construction overhead costs, the under recovery impacted gross margins by 9.50 basis points. Revenue volume is expected to significantly increase in the 4th quarter as awarded work accelerates on projects that have a higher gross margin profile. This added revenue will virtually eliminate under recovery of construction overhead costs for this segment. Now turning to liquidity.

Speaker 3

During the Q3, our liquidity increased to $11,900,000 as a result of expected decrease in working capital investment and the receipt of tax refunds. Liquidity of $92,400,000 is comprised of $48,200,000 of unrestricted cash and $44,200,000 of borrowing availability. The company also has $25,000,000 of restricted cash to support the credit facility and borrowings of $15,000,000 The company's financial position is sufficient to support the needs of the business and pending growth that will come from the strong award activity achieved throughout fiscal 2023. I'll now turn the call back to John.

Speaker 2

Thanks, Kevin. Before we open up for questions, just some closing thoughts here. So I want to make sure that it's clear that the business is making progress toward normalized levels of operations with many parts of the company on plan. While getting there has taken longer than we expected and by the end of this fiscal year, we have worked we will have worked through substantially the lower margin projects that were awarded and impacted during the pandemic period. We've also transformed our organization We strategically focused the company's business development approach and services platform on a narrower list of existing and new markets with opportunities for sustainable growth now and into the future and significantly improved our project awards and backlog in terms of both size and margin profile, which we expect to continue.

Speaker 2

As we move into our Q4 of the fiscal year and toward fiscal 2024, we are positioned to continue our business improvement progress by reaching $1,000,000,000 plus in backlog, achieving our revenue expectations and returning our margin profile to more historical ranges. With that, I will

Operator

open up We ask as well that you wait for your name to be announced before you proceed with your question. One moment while we compile the Q and A roster for questions. The first question will be coming from John Franzreb of Sidoti. Your line is open.

Speaker 4

Good morning, guys, and thanks for taking the questions. I'd like to start with, John, something that you just closed out with regarding the low margin business or Unprofitable business that is still running through the P and L. Can you quantify how much that impacted 3rd quarter results? And If I heard you correctly, you expect that to be completely done by the Q4?

Speaker 2

Yes. So the one specific job I think Kevin said in his notes It was a little impacted margins by around $3,300,000 $3,200,000 And that project, we are focused on mechanical completion probably sometime within the 1st 2 weeks of July, At which time a couple of weeks after that, we'll be turning it over to the client. So the material spending related to the project would be over in that timeframe.

Speaker 3

And John, as far as it goes, if you look at it on a consolidated basis, I'd say we're probably in the 15% to 20% Our revenues at the lower margin type work in the 3rd quarter that percentage should decrease in the 4th quarter and be Down in the single digits, low single digits and as we move into fiscal 2024.

Speaker 4

Okay, got it. And specifically on, let's call it the 2 weaker segments on the quarter, Storage and Utility, you indicated you expect storage to bounce back sizably by the Q4. Just Walk us through what's going on in storage and utility that we should think about as the puts and takes as far as the revenue profile and for the balance of the year fiscal year?

Speaker 2

Some of the larger storage awards that we received in Q1 and Q2 Just took more time than was usual to get those into a position where we could start spending more material money from those contracts. Each one had its own story of all of it. Some of them was some regulatory issues that our clients had to get through to allow us to start. Some of them was finalized Contract negotiations, some of the process around those facilities and then there's engineering upfront for us in order for us to Order materials and get ready to put the foundations in place. That's a low piece of the revenue with those.

Speaker 2

So We're on a couple of those awards, our expectation is and where our plan is going, we'll be moving into the field on those projects here And be busy in fabrication and construction. So those two things those two projects alone will have an Impact on revenues started in the 4th quarter, plus we've been pretty active with some other awards and bookings For various storage projects that We're going to get started in a more earnest fashion in the Q4. On the utility and power infrastructure side, Again, I think we're finding it's very active on the power delivery side with our bidding environment. We're expanding our Client based on a little bit of our geography, organic perspective, we are our revenues in that space include more transmission Work than they have historically for us. That's been helping to drive revenues and margins.

Speaker 2

And so we expect that trend to continue. And then we did put in a relatively smaller peak shaving facility into backlog In the first I think it was the Q1, Q2. And again that had some upfront engineering work and things that had to get done we can start placing orders for equipment and move into the field and so that activities will start here later in Q4.

Speaker 4

Got it. And I guess

Speaker 2

one last question and then

Speaker 4

I'll let somebody else take over. Regarding the bookings that you're doing today, How close are they to being back to your normal historic gross margin profile? And if some businesses or segment are not up to that level yet, what's the resistance in getting there?

Speaker 2

So Kevin can pile on here. I would say the majority of the larger project work We've been booking here this fiscal year are in our historical gross margin profile and with I think you're right risk profile associated with those. And so those awards have been Pretty well spread across all the segments. Probably UPI has probably got the today has got the smallest volume, But it also has some of the largest opportunities out in the near term to turn that around. So I think Those projects that have been we've been putting in backlog this year, all of them are in that historical profile.

Speaker 1

Yes.

Speaker 3

I would just add on that the larger projects are definitely in that double digit gross margin profile. If you get to smaller projects, a lot of times those are bid more competitively against No more contractors and the margin opportunity of those projects may not be as high.

Speaker 4

Okay, guys. Thanks. I'll get back to the queue. Thank you.

Operator

Thank you. One moment while we prepare for the next question. And our next question will be coming from Brett Thielman of D. A. Davidson.

Operator

Brett, your line is open.

Speaker 5

Hey, great. Thanks guys. John or Kevin, I guess with these magnitude of large Projects, I guess, picking up here or ramping up. Do you think you can get to that $1,000,000,000 kind of annual revenue run rate in the 4th quarter?

Speaker 3

Hello?

Operator

One moment please.

Speaker 1

Can you hear us?

Speaker 5

Kelly, it's Brent Thielman. Can you hear me?

Speaker 1

Hi, Brent. We can hear you. Can you hear us okay?

Speaker 5

I can hear you. Yes.

Speaker 2

Okay. Okay, great. So let me finish Jim, so your question was, do we think we'll when will we get back into the $1,000,000,000 kind of annual revenue run rate? And so based on where we see the opportunities in front of us and the award timing, that should be somewhere in the second or third Quarter of 2024 is where we believe we'll be getting into that range.

Speaker 5

Okay. Okay. I guess maybe off of that, do you still expect an acceleration from here? I think there was some anticipation that might come this quarter.

Speaker 2

Yes, I think we're going

Speaker 3

to see you're going to

Speaker 2

see some Acceleration in our revenues in the Q4 and into the Q1, it's going to be it's probably going to be if you look at it As a graph, it's going to be a rise, plateau, a rise, plateau. And so we think that's kind of a That progress step process will occur as we move into fiscal 2024 and through and work through those quarters.

Speaker 5

Okay. And then John, I've heard some other companies talking about sort of future pipeline prospects With hydrogen kind of more beyond this year, you mentioned hydrogen storage projects as an opportunity. Is that something you See as early as this year or it's going to be things that are a little further out?

Speaker 2

Yes. I mean, we're bidding the overall hydrogen infrastructure build out We think it's a fairly early innings, but there is still a lot of opportunities domestically and Internationally for individual hydrogen storage spheres into existing either industrial facilities or into some of the early regional hubs that are getting built. And so we're fielding a lot of those Projects now, we're picking a fair amount of them that are both domestically. With this new relationship with Dassault, we mentioned, We hope to start providing engineering and procurement services to support their efforts in Europe. And so So fairly confident in saying as we move into fiscal 2024, we should start adding some hydrogen more hydrogen Projects into our backlog.

Speaker 2

Right now, we're doing some feed work for some clients on some Hydrogen facilities, we're doing some study work to upscale the size of hydrogen storage for a couple of energy majors. But those are not certainly not big revenue dollars, but they position us very well for what we see to be a pretty large investment cycle moving outside.

Speaker 5

Okay. Okay. And then just I mean given that you guys have sort of maintained maybe Added the headcount last few years in anticipation of a better market, which seems to be here now, obviously pretty good The pipeline in front of you, when you look at the sort of current position of the company, your overhead, I mean, what level of revenue are you prepared to take on an annual basis knowing that we're working our way back towards $1,000,000,000 run rate

Speaker 3

Yes. Good question. I think overall, I think our headcount has we've kept our headcount pretty flat the last couple of years. We might have added a few positions as it relates to specific project needs, would be fully placed with really Grown. We've probably decreased some headcount administratively offsetting that.

Speaker 3

As we look at the cost structure today, it probably supports somewhere around $1,000,000,000 $1,100,000,000 of annual revenue. There'll be some select positions we'll need to add depending on which projects make up that revenue stream. But I think one of the important aspects of our financial improvement is We've talked about a lot on this call, revenue volume increasing, margins improving, but I think the third component is leverage of the cost structure, Eliminating the under recovery construction overhead costs, getting our SG and A percentage Down to a lower level. Those are important aspects. So as a company, we're going to be doing all we can to Kind of hold the cost structure, while still having the infrastructure we need to execute on the project.

Speaker 3

Now as we return to profitability, there'll be some variable costs to come back in. But on an overall basis, we're planning on holding that cost structure to get the leverage.

Speaker 5

Okay, very good. Thanks. Thanks all.

Operator

Thank you. And I would like to turn the call back over To John Hewitt for closing remarks. Thanks

Speaker 2

20

Operator

Thank you all for

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Earnings Conference Call
Matrix Service Q3 2023
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