Matrix Service Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 8, 2024

There are 6 speakers on the call.

Operator

Good morning, and welcome to the Matrix Service Company Conference Call to discuss results for the Q2 of Fiscal 20 24. 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 your host today, Ms.

Operator

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

Speaker 1

Thank you, Valerie. Good morning, and welcome to Matrix Service Company's 2nd Quarter Fiscal 2024 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 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 factors, including those discussed in our most recent annual report on Form 10 ks and in subsequent filings made by this company with the SEC. To the extent we utilize non GAAP 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 that Matrix will be presenting at the upcoming Sidoti SmallCap Virtual Conference on March 13 14. If you'd like additional information on this event or would like to have a conversation with management, I invite you to contact me through Matrix Service Company Investor Relations website. I'll now turn the call over to John.

Speaker 2

Thank you, Kelly, and good morning, everyone. When we think about the safety risks present in the construction industry, we often think about the physical risks to people. There are equally significant risks that have to do with mental health and well-being. Mental health issues arise for a variety of reasons, loneliness, High pressure work environments, seasonal layoffs, loss of a family member or friend and can manifest in different ways, including loneliness, anxiety, depression, suicidal thoughts and substance abuse. The construction industry has one of the highest suicide rates of any industry and when compared to all other construction fatalities, suicide occurs 5 times more often.

Speaker 2

This is why the construction industry is taking a collaborative approach to better understand mental health issues by providing research based solutions. Through our participation in the Construction Industry Institute and Construction Safety Research Alliance, Matrix is directly involved in this effort. Matrix is also committed to doing all we can across our job sites and office locations and we're doing so through a cross functional internal initiative Matrix Cares. We believe that together we can make a difference for our own employees and others across our industry. And I believe the mental and physical safety of our employees as well as those visiting our offices or job sites is the most important thing we can do as coworkers and leaders.

Speaker 3

Now let's talk about the business.

Speaker 2

I'm proud to announce that with awards of $233,000,000 in the quarter, We have achieved a record backlog for Matrix of $1,450,000,000 This is an all time high for the company in its 40 year history and is an achievement that is a result of the hard work of our people and our focused strategic approach in our core markets. We have transformed our organization to more cost efficient while ensuring our skills, expertise and strong brand are aligned with our core markets. We are positioned to safely execute projects with improved operating processes while continuing to deliver best in class quality for our customers. As you will see when Kevin walks through our results, Matrix has resolved the primary issues that have plagued us the last few years. We have completed projects that were bid into highly competitive pandemic environment, which resulted in limited margin opportunity.

Speaker 2

We also streamlined and refocused the company, restored our direct gross margins to our historical double digit range, rebuilt our backlog to historic levels to support higher revenue volumes in the coming quarters and improved our liquidity position and reduced our debt to 0. The dramatic improvement in both the volume and quality of the projects in our backlog, we expect revenue volume to grow and as such leverage our streamlined cost structure, which will resolve our final issue. Now I want to spend a few minutes on our work in the energy markets. Recently, President Biden paused pending and future permits to export LNG to the non free trade agreement countries. Generally, we do not expect this pause to impact our opportunity pipeline or backlog.

Speaker 2

Small to mid scale LNG Facilities we have won and are pursuing are domestic in nature, right back up fuel supply, peak shaving or ship bunkering. Any LNG tank projects that are related to large scale export facilities that might be associated with the current White House permit position are more of an opportunistic pursuit for Matrix. We have significant opportunities in the small to mid scale LNG market I just described, as well as NGLs, ammonia and hydrogen and expect these opportunities to continue contributing to backlog. While the transition to a low carbon energy mix has been a focus on global energy policy, the world is still heavily dependent on fossil fuel and will be for the foreseeable future. At the same time, energy companies are actively at work developing longer term, more sustainable energy solutions.

Speaker 2

For Matrix, our expertise in both the traditional and emerging energy markets together with our long standing reputation for safe quality delivery positions us as a leading contractor across the entire industry and puts us in an advantageous position. Our opportunity pipeline remains steady at $5,000,000,000 demonstrating the strength of our markets and our ability to continue our long term trend of backlog growth. We remain a contractor of choice for work in traditional oil and gas, including the engineering and construction of crude storage tanks and terminals, ongoing maintenance repair work, refinery turnarounds, retrofitting for renewable fuels and the installation of natural gas processing infrastructure. With increasing use of LNG as a low carbon solution for ensuring reliable and affordable power, electricity, heating and cooling and also an alternative fuel for high horsepower applications, Matrix has emerged as a leader in the design, construction, maintenance and repair of LNG storage tanks and balance of plant facilities. Major energy companies also rely on us for NGL storage tanks terminals such as ethane, ethylene, propane and butane that feed the global marketplace because of our country's vast, safe and dependable natural gas availability.

Speaker 2

Looking forward, the transition to sustainable energy is a broad initiative and will include among others hydrogen. This is a market that while not presently a significant revenue driver for us, will be as we assume a major leadership role and fulfilling the significant infrastructure needs that will evolve. Vista's creation of our strong market position in LNG was made possible because of our specialty vessel and cryogenic capabilities. The hydrogen market requires these same specialized skill sets. It is not a market will develop overnight nor is it one that any contractor can simply step into once it's developed.

Speaker 2

Same is true for ammonia and methanol as energy carriers and a means transporting hydrogen. Drawing on our extensive cryogenic engineering and construction expertise, Matrix is already at work laying the foundation needed to ensure We were at the forefront in providing the needed solutions in this space. For example, we have completed construction of a hydrogen sphere In the southwestern U. S, I'm now beginning the engineering for a liquid hydrogen storage sphere for a client on the West Coast, which we will also construct. We're also actively at work on a feed study for our hydrogen production and distribution facility and working on a feasibility study a global energy company to develop large scale liquid hydrogen storage solutions.

Speaker 2

With an increasing number of hydrogen and ammonia opportunities internationally, We're building strategic relationship with construction organizations like that recently announced with TESO Industries and other European partners, which provide the ability to offer complete EPC solutions across the European Union, United Kingdom, Norway, Switzerland and elsewhere. As shared last quarter, we are in communication with several of our long standing clients who are also part of the hydrogen hub teams identified to receive funding under the Bipartisan Infrastructure Law. Of course, we continue to be active in our other end markets with robust opportunities growth potential across each of our reporting segments. As I've said before, our organization has been meaningfully transformed over the past few years and that transformation is showing up on our performance. We continue to fine tune the organization and are investing in the technology, systems and personnel needed to execute our strategy and grow the business.

Speaker 2

I'll hand the call over to Kevin to give you the thoughts.

Speaker 3

Thank you, John. The overall results for the Q2 were in line with our expectations. While revenue was a bit lower than expected, Direct margin performance, cost management, bottom line performance, backlog and liquidity We're all at or above our expectations. We generated awards of $231,000,000 resulting in a book to bill ratio of 1.3, our 10th consecutive quarter atorabove1.0. With these awards, we have increased our backlog to 1,450,000,000 the highest in company history.

Speaker 3

Backlog has increased 95% in the last year and 33% in the first half of fiscal twenty twenty four. Revenue of $175,000,000 in the 2nd quarter was on the lower side of our range of expectations. The decline compared to 1st quarter revenue of $198,000,000 related primarily to the normal timing of project execution On storage construction projects, with the 1st quarter benefiting from a high level of project procurement, As I mentioned last quarter, our backlog contains larger long term construction projects. There is an inherent lag between the time when a project is awarded and when it begins to have a material impact on revenue. In some cases, this lag can be between 3 6 months or longer.

Speaker 3

The contribution to revenue from these projects has been minimal thus far as each moves through scope finalization, engineering and planning stages at its own pace. We expect revenue from these projects to increase modestly in the Q3 and then pick up meaningfully in the 4th quarter and remain at elevated levels throughout fiscal 20252026. In the meantime, we are encouraged that direct gross margins return to historical double digit levels in the first half of twenty twenty four. Project execution was strong once again, but was offset by under recovered construction overhead resulting from the low revenue volume that impacted gross margins by almost 500 basis points. The result was a gross margin of 6%, which was consistent with the Q1.

Speaker 3

We expect to see improved overhead recovery in the 3rd quarter and to achieve full recovery in the 4th quarter as a result of the revenue ramp we previously discussed. Organizational efficiencies achieved over the last several years continue to benefit our cost structure. Consolidated SG and A expenses were $15,700,000 in the Q2, which is the lowest level since the Q1 of fiscal 2014. This compares to $17,100,000 in the Q1. The decrease in Sec4 was primarily attributable to a reduction in expense associated with the variable accounting for cash settled stock compensation and lower project pursuit cost.

Speaker 3

The company will continue to control costs in order to leverage SG and A and expects to see modest targeted increases to support revenue growth as the year progresses. Other income during the Q2 included a gain of $2,000,000 on a $2,700,000 sale of a facility in Catoosa, Oklahoma. The facility was previously utilized for our industrial cleaning business, which was sold during the Q4 of fiscal 2023. This completes the divestiture and closure of non core service offerings as part of our strategy to focus the business on our core markets. As expected, the effective tax rate was near 0 for the 2nd quarter and we expect the effective tax rate to be around 0 throughout the remainder of fiscal 2024.

Speaker 3

For the Q2 of fiscal 2024, we had a net loss of 2,900,000 or $0.10 per fully diluted share, which was similar to the net loss of $3,200,000 or $0.12 per share in the Q1. Moving to the operating segments. In the Storage and Terminal Solutions segment, revenue was $62,000,000 in the second quarter as compared to $90,000,000 in the Q1 of fiscal 2024. 1st quarter revenues for this segment were positively impacted by the procurement of materials and components for construction projects awarded in the prior fiscal year. We did not have a similar level of procurement in the Q2.

Speaker 3

We expect higher revenue volume as we move through the remainder of fiscal 2024 and into fiscal 2025 as large specialty storage project awards transitioned through contracting, project planning and mobilization and into field construction. Gross margin was 2.9% in the 2nd quarter as strong project execution was negatively impacted by 770 basis points from the under recovery of construction overhead costs due to the lower revenue. We have allocated additional resources to this segment to support recent awards, a significant opportunity proposal pipeline and the related additional revenue that we expect in the coming quarters. With revenue increases in this segment, we expect to reach full recovery of construction overhead cost in the Q4. In the Utility and Power Infrastructure segment, revenue was $40,000,000 in the 2nd quarter compared to $32,000,000 in the 1st quarter as revenue begins to benefit from peak shaver projects previously awarded.

Speaker 3

We expect LNG peak shaving revenue to continue to increase as we move through the second half of fiscal twenty twenty four. Gross margin was 3.5% in the Q2 of fiscal 2024 As good project execution in this segment was offset by almost 600 basis points from under recovery of construction overhead cost. We've allocated additional resources to this segment as well to support recent awards, a strong bidding environment and related anticipated revenue growth. As revenue continues to increase in this segment, we expect to reach full recovery of overhead costs in the Q4 of fiscal 2024. And finally, in the Process and Industrial Facilities segment, 2nd quarter revenue was $71,000,000 which slightly lower than the $75,000,000 in the Q1.

Speaker 3

We expect revenue to remain at similar level as we move through the remainder of fiscal 2024 and then increase in fiscal 2025 related to previously awarded construction work. The segment gross margin was 9.4% in the 2nd quarter compared to 6.8% in the Q1. With project execution strong in both quarters, We also reduced construction overhead costs in the 2nd quarter by allocating resources to other segments as I noted previously. Now let's discuss our financial position. Liquidity increased to $106,000,000 an improvement of $26,000,000 in the quarter.

Speaker 3

Positive net cash inflows of $30,000,000 from operations allowed the company to repay all outstanding borrowings on our credit facility of $10,000,000 and increase our cash balance by $20,000,000 We expect to see cash and liquidity also improve in the second half of fiscal twenty twenty four. We'll continue to proactively manage the balance sheet to support the improving business and believe we have the liquidity to support our financial needs, including funding working capital for the normal spring peak and reimbursable work, funding construction projects that are in a prepaid position and targeted capital expenditures to support operations. As we move forward and continue to strengthen our balance sheet, we will evaluate our approach to capital allocation to ensure we are creating value for our shareholders. That concludes my prepared comments. I'll now turn the call back to John.

Speaker 3

Thank you, Kevin.

Speaker 2

Before we open for questions, I'd like to reiterate some key takeaways for today. 1st, With record high backlog, we expect to see a marked improvement in revenue volumes in the near term. Those higher revenue volumes will provide for better construction overhead absorption, leverage of and A and improved bottom line performance. While difficult in our business to accurately predict the timing of awards, starts and backlog conversion to revenue, We are highly confident in this outlook. 2nd, we believe our strategic approach to our strong end markets, clients and services help us maintain a sizable opportunity pipeline and lead to further backlog growth and strong performance well into the future.

Speaker 2

3rd, organizationally, we are leaner and more efficient. We will continue to invest in the process, processes and systems and people needed to drive performance improvement and deliver strong project execution. In conclusion, there's a lot of positive momentum in the business and we are well positioned to maximize our profitability and generate value and growth for our stakeholders. I'd like to open the call for questions and then come back to you for some closing thoughts.

Operator

Thank you. Our first question comes from the line of John Franzreb of Sidoti and Company. Your line is open.

Speaker 4

Good morning, everyone, and thanks for taking the questions. I'd like to start with The gross margin profile in the second quarter, considering how much revenue was down and we look at it versus a year ago, It was sizably better. How much reflects the absence of unprofitable jobs and how much reflects new jobs that are priced appropriately in that mix. Can you give us a sense of what drove the margin in the quarter?

Speaker 3

So as I talked about on the call, the direct gross margins in the quarter We're strong back in the double digit area that we've been striving to get to. That's The result of the quality of bookings that we've had over the last year, year and a half. If you look at The same period last year, the direct margins were extremely low single digits And that was because of the combination we were still working off the COVID backlog. We were still continuing to work on a project that was very difficult for us to complete in a profitable manner. So when you look at the margin performance quarter over quarter, It's an extremely big improvement.

Speaker 3

I don't have the split between what's related to new projects versus the old, but suffice it to say the margin performance is back where we need it to be on these projects. Now what's left is to get the revenue volume up to where we want it, so we can fully recover our construction overhead.

Speaker 4

And Kevin, just for clarity sake, what's your definition of direct gross margins?

Speaker 3

So when I think about direct gross margins, it's the actual margin that I'm earning on each individual job. And when I think about gross margin, it's the combination of those direct margins on jobs, combined with The recovery of our construction overhead pool of costs that we utilize to manage all those projects. So when we get to a period where We've got the right volume. We're fully recovering those overheads. And Therefore, the direct gross margins is fairly equal to the gross margin.

Speaker 3

In a period where our revenue volume is low And we're not fully recovering that under recovery can have a very significant impact on our margins as it did this quarter, almost 100 basis points. So that's something that's extremely important for us to manage and It's the one item that John noted in his comments that we've still got to finish getting that completed. We've completed everything else. We've just got to get that strong backlog we've booked the last year plus to convert to revenue, which we think is coming.

Speaker 4

And John, regarding the awards cycle, what inning do you think you're in? Is it unreasonable to assume that you can persist at the current rate of awards?

Speaker 3

No, I don't think that's unreasonable.

Speaker 2

I mean, the Again, timing is everything. And whether quarter after quarter It's going to be above 1 or not, but we certainly think we're in a position to exit the year with 1 plus on awards And our book to bill and projects that are in our pipeline, a variety of sizes, We think we'll continue to contribute to backlog well out in the future. So we think we're in early innings in our ability to continue to and saw good projects to backlog and continue to build and grow the business.

Speaker 4

Okay, got it. That sounds great. And one last question. If I heard correctly in the prepared remarks, it sounds like that the revenue outlook is strong through fiscal 2026 based on the current bookings profile that doesn't assume any incremental new awards. Is that the proper understanding?

Speaker 3

Well, so we always have a portion of our revenue that's what we'll call book and burn that We'll get awarded and we'll burn it off in the next quarter or 2. And then we have the larger projects that are have a 2.5, 3 year construction period. So when we make comments like that With these larger projects we've added to backlog, we've got much better visibility into the total revenue stream for 2025 and 26 that gives us the confidence to make that statement. If I add on

Speaker 2

to that, Joe, I would say the backlog in place now, it helps us lay a foundation for the future and then overlay what we see in the opportunity pipeline gives us confidence that we're going to be able to have a strong revenue stream here out over the next couple of years.

Speaker 4

Great. That's great, John. I appreciate it. I'll get back into queue and let somebody else go. Thank you.

Operator

Thank you. One moment please. Our next question comes from the line of Gene Ramirez D. A. Davidson.

Operator

Your line is open.

Speaker 3

Hi.

Speaker 5

This is John Ramirez for Brent Thielman at D. A. Davidson. Hi, Jim. Hi.

Speaker 5

I'll start with the revenue question. Should we see some revenue progression from fiscal quarter from the 2nd fiscal quarter to the 3rd? It seems like this should be sort of a trough for revenue given the

Speaker 3

Yes, we would agree with that. I think this will be the low point of the fiscal year. You'll see Some decent growth here in the 3rd quarter and then should be higher growth in the 4th.

Speaker 5

Okay. Thank you. Just any views on the refinery turnaround season and activities you performed there? Just want to see if it's better or worse relative to the past few years?

Speaker 2

I mean, we're entering our Refinery turnaround cycle, basically now we're sort of in it. Majority of our refinery turnaround work is located in the Pacific Northwest. And I don't know if there's anything unusual this year versus Last year, I would say, I'd probably point it as sort of an average turnaround cycle for us in facilities that we work.

Speaker 5

Thank you. And one more question. So You mentioned some favorable direct margins. Are those continuing to get better with New York with the work award in New York? Or I guess in other words, Do the bit margins keep moving higher because the market is so busy right now?

Speaker 3

I think what I would the way I would look at it is, When we look at the margin performance in the first half of fiscal twenty twenty four, we've had some good project closeouts On completing some projects that have moved that margin up, really overall strong execution by our field that has helped that. I think that'll be replaced by the quality backlog that we've got those projects should lend themselves to a similar level of margin. So I wouldn't expect we'll continue to strive to maximize the direct margin performance, I wouldn't expect direct margins to go significantly higher than our the 10% to 12% range that we've talked about being the normal range of the business. And you also need to remember that 30%, 40% of our business is reimbursable and a lot of maintenance activities. That type of work, really good work for us, But it lends itself to a lower margin profile.

Speaker 3

So instead of double digit margins, We're in the high single digits for that type of work.

Speaker 5

Perfect. I appreciate the color. I'll hop back in and let someone else have some questions. Thank you.

Operator

Thank you. One moment please. Looks like we have a question from John Franzreb of Sidoti. Your line is open. Mr.

Operator

Franzreb, your line is open.

Speaker 4

Thank you. John, just back to the hydrogen discussion. I might have missed this. You said it was small, but put it in context how much business you do in the hydrogen market, what you think maybe the potential is and the timeline for realizing that kind of a potential?

Speaker 2

So I think obviously it's about How fast the at least the U. S. Transitions to A higher percentage of hydrogen in the energy mix, I think we feel pretty comfortable long term that hydrogen will take a larger position in the U. S. Energy mix, Whether that's for certainly in industrial processes, but for, say, fuel for transportation fuel and for some kind of a mix or blending for power generation.

Speaker 2

I think what you're seeing, what we're seeing right now is a lot of kind of foundation for us laying the foundation for that future where A lot of time spent on marketing, time spent on providing feasibility and feed studies to various clients Help them with their decision making profile on what their next steps are, picking up an occasional story sphere or an occasional, maybe smaller hydrogen processing facility. So I think it's going to continue to grow for us. So but I think we're probably a couple of years away from a hydrogen from a material impact on our backlog and revenues from hydrogen. That said, I would expect here over the next 12 to 18 months and we'll continue to add small hydrogen related projects into our backlog and that should continue to grow over the subsequent years.

Speaker 4

Understood. And just a little bit about the leverage discussion. Kevin, you suggested that the second quarter SG and A was artificially low due to timing of, I guess, bonus accruals and other items. But you also said that you expect to leverage the SG and A line rather significantly in the year ahead. So how should we think about SG and A on a go forward basis, similar to maybe the Q1 with the Marginal increase, just any color around that line would be helpful.

Speaker 3

I think the second half SG and A will probably be higher than the first half was. Variable accounting on cash settled stock based compensation will have a higher expense. We also anticipate increased project pursuit cost as we continue to work to build the backlog and then just Some other targeted increases that we'll need just for the added revenue volume that comes. The way I think about SG and A is We've got a target out there we're trying to get to SG and A to 6.5%. I think we'll make a significant move toward that And especially in the Q4, I'm not sure we'll get all the way there, but we can definitely get much closer hopefully get to 7% or lower.

Speaker 3

And then I think that's an achievable mark in fiscal 2025.

Speaker 4

And when you talked about asset relocations, just about moving guys from personnel from process into utility and stores, not adding additional personnel. Am I understanding that properly?

Speaker 3

Yes, there's really two aspects of the construction overhead. So first of all, when we talk about reallocating resources, we've talked about The fact that our staffs can work in multiple segments and If you look at the volume of revenue that was flowing through the Process and Industrial Facilities segment last year, it was definitely a higher percentage We completed some of that work and I mentioned that we're kind of in a long period here before additional work kicks in. So Those resources are being allocated toward the other two segments. And when we try to put a little more color on those resources, what those are, that's all The project management, the quality, the safety, all that infrastructure we have in place to execute the projects will be more focused on those other two segments in the second half of the year than they were in say the prior year. Okay.

Speaker 4

And just lastly, on the long term financial targets, any kind of update when we would Expect to realize those targets, is that an exit philosophy in this 2025 or what are your thoughts there?

Speaker 3

I think again, it's similar probably to the answer on SG and A. I think you see significant movements toward those targets at the end of the in the Q4. Will we get there all the way? I'm not sure about that, but I do think those are achievable in fiscal 2025.

Speaker 4

Great, guys. Thank you for taking my follow ups.

Operator

Thank you. One moment please. It looks like we have follow-up questions from the line of John Ramirez D. A. Davidson, your line is open.

Speaker 5

Hi. Just thinking about CapEx, Can you give us a sense of how we should be modeling CapEx for the year or the next couple of years? Just should we think of that is it tied to revenue growth, presuming there are some cost to support over this growth, right?

Speaker 3

It is tied to revenue growth and it's also tied to the fact that as we've been trying to control costs the last few years, We've held our capital spending pretty low. So I'd expect it to increase. We've put a long term target out there at 1.5% of revenue. I think we'd probably be around that level for the second half of the year or potentially a little higher as we kind of almost ramp up some of that CapEx for the revenue volumes that are coming. And I haven't done don't have a fiscal 2025 CapEx But at this point, but I would expect we'd probably be at least at the 1.5% next year or potentially a little higher.

Speaker 5

And for fiscal year 2025, when you say a little higher, is that compared to The second half of the fiscal year 'twenty four or just in general a little higher than 1%.

Speaker 3

I'm talking a little higher as a percent of revenue. Okay. So when I talk about the 1.5% of revenue, It could be 1.8% or 2%. But again, I don't have a developed CapEx forecast yet. I'm just anticipating that there will be needs for portions of the business that are growing.

Speaker 5

Perfect. Makes sense. I appreciate the follow-up. Thank you so much.

Operator

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to John Hewitt for any closing remarks.

Speaker 2

Yes. I want to thank everybody for being on the call today. I hope it's clear that there are a lot of great things happening in the business and that we are positioned for significantly improved bottom line profitability as we look out into the short term here. So thank you very much for your time today and everybody please be safe.

Operator

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect.

Powered by Quartr
Earnings Conference Call
Matrix Service Q2 2024
00:00 / 00:00