Matrix Service Co (MTRX) 2005 Q4 法說會逐字稿

Greetings, ladies and gentlemen and welcome to the Matrix Service Company fourth-quarter and fiscal year 2005 earnings results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce Mr. Michael Hall, President and CEO of Matrix Service Company. Thank you, Mr. Hall. You may begin.

Thank you and good morning. On the conference call today we also have Les Austin, Matrix's Chief Financial Officer. I would now like to take a moment to read the following. Various remarks that we may make about future expectations, plans and prospects for Matrix Service Company constitute forward-looking statements for 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 annual report on Form 10-K for our last fiscal year and in subsequent filings made by us with the SEC.

Before we get into the financial results today, I would like to discuss briefly the status of the restructuring plan that we began to implement four months ago. The first step was to assess all areas with the objective to eliminate unprofitable and marginal businesses and those that are noncore. As a result of this effort, we have sold our transportation and rigging assets and have signed a letter of intent to sell our aluminum floating roof business. We are also in the process of selling excess facilities or land in Tulsa, Oklahoma; Orange, California and Holmes, Pennsylvania. These liquidity events coupled with tax refunds should yield approximately $12 million in cash which has been or will be used to reduce bank debt and to improve liquidity. We have also exited a number of large routine maintenance contracts that we are utilizing valuable resources while providing little if any return. As these maintenance contracts wound down we are able to significantly reduce overhead and administration.

As a result of these efforts and other efforts to reduce costs we were able to reduce our administrative payroll and benefit costs by over $5 million on an annualized basis. Our liquidity has improved significantly. We completed a private placement of a $30 million unsecured convertible senior note on April 25, 2005. Bank debt has been reduced by $13.3 million from $42.7 million at the end of May, 2005 to 29.4 million as of August 12, 2005. At the same time we have been able to reduce payables 24.9% from 38.1 million as of May 31, 2005 to 28.6 million as of August 12, 2005 which went along way to improving vendor relationships.

Availability under our revolving lines of credit was $18.3 million on August 12, 2005. Despite the financial issues facing Matrix, our backlog increased from 150.2 million on February 28, 2005 to 215.5 million on May 31, 2005. The increase was primarily as a result of booking the $97 million LNG project which will be completed over a 35-month period. We expect to recognize approximately $49 million in LNG revenues in fiscal 2006 and anticipate total consolidated revenues of between $375 million and $425 million for fiscal 2006 which ends on May 31, 2006.

The fourth quarter came in similar to what we had expected. The restructuring effort did not get underway until April and the focus was on improving liquidity, restructuring the balance sheet and positioning the Company to take advantage of the many current business opportunities. I will now turn the call over to Les Austin who will provide more color on the fourth quarter and total year results.

Thanks, Mike. Turning to the fourth quarter ended May 31, 2005, total revenues were $129.2 million compared with $133.1 million recorded a year earlier. Net loss for the fourth quarter of fiscal 2005 was 3.8 million or $0.22 per fully diluted share versus a net income of 0.3 million or $0.02 per fully diluted share in the fourth quarter a year ago. These results included pretax charges and expenses of $5.1 million or $0.21 per share for impairment of a deferred tax asset related to net operating loss carryforwards, legal, Sarbanes-Oxley, fixed asset impairments, restructuring and refinancing activities. These amounts are approximately $1.5 million higher than projected in our April 11, 2005 press release due entirely to additional asset impairment charges.

Instruction services revenues for the fourth quarter 2005 were $51 million compared to $75.6 million in the same period a year earlier. The decrease was a result of significantly lower construction work in the power industry where fourth quarter revenues fell 92.4% to 3.5 million from $45.7 million in the fourth quarter of fiscal 2004 as a result of the completion of two large power projects performed in our eastern operations that year. These declines were partially offset by downstream petroleum industry revenues which climbed 60.6% to $42.4 million from $26.4 million a year earlier and by other industries revenue which rose 43.4% to $5.1 million from $3.5 million for the year earlier period.

Other industries consist primarily of wastewater, food and beverage, electronics and paper industries. Construction services gross margins were 4.4% versus 2.2% in the fourth quarter of 2004. Margins in this segment were depressed in the current quarter primarily due to three lost projects in the Western business unit. Last year's margins were also impacted by two low margin power projects completed at the end of fiscal 2004.

Revenues from repair and maintenance services advanced by $20.9 million or 36.3% to $78.3 million in the fourth quarter of 2005 from $57.4 million in the same quarter of fiscal 2004. The increase was primarily a result of higher downstream petroleum industry revenues where fourth-quarter revenues rose 30.3% to $64.9 million from $49.8 million a year earlier and due to higher power industry revenues which climbed 180.1% to $13.1 million from $4.7 million for the year earlier period. These increases were primarily driven by the additional maintenance contracts Matrix entered into in January 2005. Gross margins were 6.7% in the quarter versus 11.7% in the fourth quarter a year ago as a result of the inclusion of lower margin maintenance contracts primarily in the eastern operations.

On August 10th, the Company amended its credit agreement to extend the maturity date of its senior revolving facility to June 30, 2006. These facilities consist of a primary line of credit of $35 million and a secondary line of credit of $10 million. The amendment established certain covenants for maintenance of minimum levels of augmented consolidated EBITDA as defined in the agreement, minimum senior fixed charges and total debt service coverage ratios.

Cash interest on the revolver would continue to be payable monthly at a rate of prime plus 1% until December 31, 2005. Additional interest on the revolver will accrue at a rate of 3% for the month of August, 2005 and escalate 50 basis points each month until reaching 5% in December, 2005. This additional accrued interest will be payable on the maturity date for the revolver. Beginning January 1, 2006, cash pay interest converts to prime plus 3.5% with additional accrued interest of 3.5% on each line of credit. The rate of crash and accrued interest will escalate in February and March of 2006 and beginning in April, 2006 cash pay interest will be payable at a rate of prime plus 8.25% with no additional accrued interest. The term loan, which matures in March 2008, has a similar interest rate structure. The Company also obtained a waiver on August 10, 2005 of certain covenants that existed prior to the effectiveness of this amendment. We believe that fiscal 2006 cash paid interest should be approximately $3 million and total interest expense should be approximately $8 million assuming collection on the disputed contract does not occur until the end of the fiscal year.

For the fiscal year ended May 31, 2005, Matrix reported consolidated revenues of $439.1 million versus $607.9 million recorded for fiscal 2004. Net loss for the fiscal year 2005 was $38.8 million or $2.24 per fully diluted share compared to a net income of $9.5 million or $0.54 per fully diluted share for fiscal 2004. These results included pretax charges and expenses of $25 million or $1.44 per share for goodwill impairment, $10.3 million or $0.39 per share for an additional reserve on the previously disclosed disputed contracts, $2.5 million or $0.15 per share for the impairment of a deferred tax asset related to net operating loss carryforwards and a $8.2 million or $0.32 per share for legal, Sarbanes-Oxley, fixed asset impairments, restructuring and refinancing activities.

The amendment signed on August 10, 2005 also allows for up to $3 million of additional restructuring costs to be incurred in fiscal 2006. Revenues for the construction services segment were $204 million for the fiscal year ended May 31, 2005 compared with $429.6 million for the same period in 2004. The decrease was primarily due to a $261.9 million decrease in revenues from the power industry which resulted from the completion of two large power projects performed by our eastern operation in fiscal 2004. Partially offsetting this decline was revenue from other industries which increased $15.4 million and downstream petroleum industries which increased $20.9 million.

Gross margins in the construction service segment narrowed slightly to 6% from 6.4% a year earlier as a result of the sharp decline in revenues which led to a smaller base for fixed costs absorption and due to decreases resulting from the three lost projects in the Western business unit. Last year's margins were also impacted by two low margin power projects completed at the end of fiscal 2004. Revenues for repair and maintenance services rose $56.9 million or 31.9% to $235.2 million for the fiscal year ending May 31, 2005 from $178.3 million for fiscal 2004. This improvement resulted primarily from increased revenues from downstream petroleum industry which increased $46.5 million as a result of strong turnaround activity combined with the addition of maintenance contracts entered into the third quarter of fiscal 2005.

In addition, revenues from the power industry increased $11.8 million while other industries declined $1.4 million. Gross margins were 8% versus 10.5% for the year ended May 31, 2004 primarily as a result of lower margin maintenance contracts executed in the second half of the year.

Capital expenditures during the twelve months ended May 31, 2005 totaled approximately $1.8 million. The Company expects capital expenditures for 2006 to be approximately $7 million with $1.9 million of expenditures related to the LNG project. Total borrowings under the Company's $67.4 million senior credit facility stood at $42.1 million at May 31, 2005. These borrowings consisted of $22.4 million in term debt and $20.3 million in drawn debt on the Company's $45 million of revolving lines of credit. Additionally, Matrix has utilized $10.1 million of the revolving facility by outstanding letters of credit. These borrowings represent a $26.1 million reduction in debt from the May 31, 2004 level. On August 12, 2005, total net borrowings under the Company's 65.3 million credit facility stood at $29.4 million. I will now turn the call back over to Mike who will discuss the prospects for the remainder of fiscal 2006.

Thanks, Les. Fiscal 2006 will be a transition year with the emphasis on executing our work profitably, reducing our risk profile, improving our margins, increasing liquidity and completing the restructuring of our balance sheet. We're not in a position at this point of the Company's turnaround to provide meaningful guidance except to say that we anticipate a profitable year with results improving as the year progresses. We are hopeful that the disputed receivables will be resolved by the end of fiscal 2006 which when coupled with the planned liquidity events discussed earlier and cash flow from operations would allow us to be in a position to pay off most if not all of our bank debt.

Fiscal 2005 has been a difficult year and quite frankly one we would rather not repeat. Fiscal 2006 will be a major improvement but below expectations. The changes we have made in late fiscal 2005 and continuing in the first half of fiscal 2006 will however put the Company in a position to return to profitable growth. Thank you for your support and I look forward to updating you on our progress as we move through fiscal 2006. With that, we are ready to open it up for any questions.

(OPERATOR INSTRUCTIONS). John Flanagan (ph), First Analyst (ph) Corporation.

On LNG, can you provide any update on bidding activity or the partnership with MHI?

With respect to the bidding activity, we're still looking at a number of projects. Nothing is really firmed up right now in terms of bidding. We bid the obviously the Shinear (ph) project with MHI. We are looking at or have expressed interest in a number of other LNG tanks. We have also done -- bid one other project with MHI and we have done some preliminary work with them on several other projects. We will continue to partner with them when appropriate but we are also teaming up with other providers of LNG Engineering to broaden our opportunities at this point in time. We have nothing other than Shinear at this point in time that is firmed up and obviously that is progressing accordance to the schedule that we had established with Shinear and Bechtel.

And then on the overall pipeline, I'm sorry the backlog, if you take out the LNG, it looks like the sort of core or legacy business backlog is down just a bit.

Right. That is correct. And it's really a function quite frankly of some lost opportunities we had in the late spring when we got ourselves into a liquidity squeeze and our customers were very cautious about what we were being allowed to bid and the amount of work that we were having the opportunity to look at. So as a result, we did eat into some of the backlog. We are seeing a significant change in that and our bidding activity has improved dramatically and our customers are much more open to working with us in the future. But there was a period of time where our backlog was declining and I believe it was attributable primarily to the liquidity situation we were in.

Rich Wesolowski, Sidoti & Co.

At the midpoint, Mike, the revenue guidance ex the $50 million from the LNG is down a good bit. In what segments do you guys see the declines coming?

While obviously the repair and the routine maintenance work on those major contracts, that was a significant portion of our revenue last year, in excess of $60 million. And that is not to say we would not take maintenance contracts. We will but they have to be set up where we're going to be profitable with them and we are not entering into them just to cover a fixed cost structure. We have actually reduced the fixed cost structure. The bulk of the decline is really coming in the routine maintenance contracts. We are also looking at being much more cautious in the types of capital work that we're going to do on a go-forward basis and we are being much more selective in the types of work we're going to be doing and also the margins expectations have increased dramatically. We're not really out there looking for revenues to grow incrementally. We're looking for revenues to be able to provide a reasonable return for the risk that we are assuming on a particular job. And I think the focus next year is going to be on improving margins and reducing our risk profile. And if that means that we are going to lose and not have the opportunity to win some bids that are low margin and then so be it. We have sized the business during this whole restructuring, be able to be profitable at the revenue level that we are looking at for next year. If we get the opportunity to bid on more jobs provided they meet our risk profile and our margin requirements then obviously we have the capability of growing beyond that. But that is where we've really set the business plan for next year.

It looks like the margins in the repair and maintenance came down in the February and May quarters. Was that predominantly where those lower contracts were?

The routine maintenance contracts, that's correct.

Would you expect in F '06 for your segment profitability rates to approximate the long run ranges that you have provided?

I would say we will start to approach those and it is one of -- it is going to be a situation where we will get there over time but I can't say we are there right now and we're into August. So this whole restructuring in the change in how we are approaching business, it is just going to take some time to work its way through the entire organization and work through our backlog which still exists. Although the backlog that we currently have is reasonably profitable.

A quick mention in some project losses in the Western business unit, was that anything significant?

Yes, there were a couple of -- two of them were significant on both of those jobs. In fact all three of the jobs were offsite and those are behind us.

Okay. Moving to the finances, how did you get the cash to reduce the debt and take down the trade payables that was mentioned since the May quarter ended? It looked like about $25 million. You mentioned you sold --.

Well part of it is by pulling resources out of the business. I mean when we eliminated those routine maintenance contracts not only were they very low margin or zero margin in or losses at the gross profit but they took a substantial amount of working capital that we had been able to pull out of the business. That is one of the areas. The other is some liquidity events and of the 12 million that we mentioned we probably realized about 4 of that already. And quite frankly, with the administrative cost reductions, which would not only be administrative cost reductions but also what followed were some of the hourly employees also; we have made a substantial reduction in the workforce. So you are not sinking as much cash into the projects.

What do you view as the big pluses and minuses of the new credit agreement versus the last one?

The new credit agreement is existing and the existing credit agreement are identical in pricing structure all the way through January 1, 2006. And they have also extended both facilities, 10 million facility that was due to expire in October is now extended to June, 2006 and $35 million facility that was due to expire in March has been extended to June, 2006. So all of these events have allowed for this refinancing to extend the total facility out for another year with no pricing impact to the Company until January of '06.

And can you give us a couple examples of the types of proposals that you intend to execute or at least review as were mentioned in the press release?

Financing proposals?

Correct.

We are not at liberty to talk about financing proposals right now. We are under some confidentiality agreements with the lenders. But they will be -- I can say generally they will be proposals that will provide for a permanent solution to the ongoing credit needs of the Company and allow it to continue normal growth on a go-forward basis. So we are looking at proposals that are not short-term in nature that are going to require us to do another financing six months from now. So we're really looking for a permanent solution and it will be a much more traditional type of financing arrangement.

That sounds good.

At traditional pricing.

Finally, Mike, when you came on the job I think there was maybe a six-month or four to six-month timeline that people might be talking about. Can you give us an update on your perspective tenure with the Company?

Well, obviously this has taken a lot longer than I thought although I probably knew that going in. Six months is not even in the realm of possibility and in my guess is it's going to be closer to a full year or longer before we really get the Company in a position where I think it should be. I have committed to complete the turnaround, the restructuring, the refinancing before I would even consider leaving and we will just see what the time frame is down the road. So I hope that was vague enough for you.

Vague but still helpful. Thanks a lot.

Ann Silvatis (ph), (indiscernible) Company.

That's Ann Solgavitz. On the disputed contracts, I know you indicated in your comments that you would expect resolution before the end of the current fiscal year but can you give us an update on the timetable of either arbitration and/or trial dates on those?

The largest contract, the trial date has not been set yet and again, there has been very little change in that. We are waiting for the Judge to set the trial date. In the meantime we are having discussions with the Company for potential settlement. I have absolutely no idea where those are going to go and right now I think that we are preparing for trial and litigation and to take that one right through to ultimate conclusion. The second dispute is set for arbitration, binding arbitration, and I believe the dates on that our September 6th through the 11th or 12th and the arbitrator has indicated that he would make a final decision by the end of October and the third, which is the bankruptcy case, is -- again, we are waiting for the Judge to determine the size of the lien fund and that could happen tomorrow or it could happen next month. So realistically, I think that we will have the arbitration and the bankruptcy done by the end of this calendar year and I would expect the large one to go into next calendar year but hopefully be finally resolved by the end of our fiscal year.

And on the Hake operation, have there been changes made there and what are the business prospects for that group?

That is where most of the changes in the restructuring has taken place. There were some work in some restructuring in other parts of the Company but the bulk of it was in the East Coast. We have made some management changes there. The transportation and the rigging assets that we sold were both located in the East Coast and we have sized the capital work much smaller and are looking at much less risky projects and smaller projects, not to say we wouldn't do any, but we have substantially reduced the scope of that whole business. What we have there should be fairly profitable though.

Ross Taylor, Cox (ph) & Associates.

Mike, welcome back. I think the shareholders appreciate your return. A couple of quick questions. Obviously we saw Shinear filed for an upgrade of their Sabine Pass facility. What does that mean to Matrix?

It's interesting. Obviously, we are very pleased that they filed for it. That has to get through FERC and then I think the bigger issue is who are they going to name as the EPC to run those additional tankage. Whether it is Bechtel or not, we don't know. If it is, I think we're in great position. If it's not, I think we're still in pretty good position to team up with whoever that is to construct a tankage for that project. So we are pretty optimistic although very cautious now because it still hasn't been approved by FERC.

You are the incumbent on the current facility?

We are the ones doing the three tanks and the other three are right next to it. There is no promises, no guarantees and if they do change EPCs, which they may or may not do, we do not know. That's really between Shinear and who they choose and then we have to step in and then we have to step in either with or without MHI at that point in time.

Also looking at (indiscernible). Maintenance service kind of your core refinery business looked like it started to show some uptick.

Yes.

Can you comment on the outlook there going forward? That has been an area that that uptick has been a long time coming.

There are two pieces do that kind of repair and maintenance. There is the tank repair and maintenance which in many cases are in your marketing terminals, pipeline terminals, and not necessarily just the refineries, has really picked up over the last couple of months particularly in the East Coast and in the West Coast. It had been strong in our Midwest operations in Houston and Tulsa for probably the last six months but that has really improved considerably over the last couple of months and then the turnaround schedules for the year coming up, the summer we have limited work. I mean right now, July and August, the Fall looks very, very good. December, January not much and then the Spring again pretty significant. So we expect a good turnaround Fall and Spring season.

It looks like going forward you should be able to generate a substantial amount of free cash flow particularly if you're successful in -- or as you work these arbitrations on the accounts receivable issues passed you and are able to pay off your debt, what do you see the use of that free cash flow being?

You know, Ross, I haven't really given that a lot of thought right now to be perfectly honest with you. I think that we have been so focused on improving the liquidity and improving the profitability and the margins that obviously we have thought about it. I don't think we're going to run out and make an acquisition right now. That is not what we think is prudent but let's assume we get in a situation where we are fully out of debt, which we very well could be and that is a forecast so take that as it is, that we could be, if it works out with the disputed contracts, we could have very little debt if any. We do really need to review then how we want to look and what do we want to do with our excess cash flow and when we were in that situation before we bought back stock. We were in a situation before we made up an acquisition. So I think there is a number of alternatives we're going to look at but we have really not thought that through right now and we're not in a position to say what we are going to do or are not going to do.

But Mike if there's --.

We would be looking for your insight.

You know I always --.

I'm sure you'll give them to us.

I charge you nothing for them. That's often times what they are worth. I'm really glad having you back. I think it's nice having someone in control that really seems to understand the finances and the progress you've made in just a short period of time is truly staggering.

Thanks, Ross.

JD Padgett, Founders Asset Management.

A question on the 5.1 million and kind of special expenses, I was trying to get a sense for where that is in the P&L. I see the 1.2 in impairment and abandonment and the 3.5 in restructuring. So is the rest within cost of goods or within the tax line, or --?

There is a piece that would be in the tax line related to impairment of the deferred tax asset. That is a couple of hundred thousand dollars and then the remainder would be in SG&A.

Just in the recurring SG&A there?

That's correct. Sarbanes-Oxley cost for instance would be in the recurring SG&A.

How big was the Sarbanes costs this quarter?

It was not significant.

So in looking forward we shouldn't expect big fall off in that line item as you have completed most of that work?

That particular item is going to be a recurring item go forward in fiscal 2006 although we don't anticipate the same amount of cost in 2006. We should be able to reduce our Sarbanes-Oxley cost on a go-forward basis.

Help us understand a lot of this restructuring activity that you have been working through. Will that lower the SG&A base or cost of goods looking forward or have we pretty much seen a full quarter benefit from that in the May quarter?

No, I think you'll see a reduction on a go-forward basis.

Can you help size that at all?

We have given a disclosure of $5 million of administrative costs that was cut out of the business. That should be on an annualized run rate basis the equivalent you should see.

From the May quarter level?

Probably most of the SG&A reductions occurred in the months of May really. So there was some of it in May, some of it occurred in June. So the May quarter is probably a reasonable assessment. But you can't just make it exact. We are not going to get any more specific than that.

We got a third of a quarter impact and now we'll get a full quarter impact going forward.

Yes.

And that 5 million was all in SG&A or is that some in cost of revenue as well?

The lion's share of it was in SG&A.

Help us understand looking forward the pipeline of activity that you're bidding on. You mentioned that you seem to be seeing some noticeable improvement there. Is it enough do you think to be able to maintain backlog where it is now if you don't get the next round of LNG activity?

I would hope we would be able to grow our backlog.

So things are improving.

The general bid environment for tank and construction work is really pretty robust particularly in our West and Midwestern groups and the volume of small cap work for our key clients is high and we really expect that to remain high for the rest of the year. And we're seeing pretty good capital work on our East Coast union environment but we are being very careful and cautious on what work we are actually going to take there and make sure that we have appropriate margins. I think we're going to be much more margin-driven right now than we are just revenue driven.

Are you seeing a lot of these things you're bidding on now with margins that can be acceptable?

Yes. Absolutely.

One final question, I guess. What would you hope to be more normalized margins once you are able to replenish backlog with more better bid jobs? In each side of the business, what do you think is kind of a fair --?

Eventually I think you're really looking at the capital kind of work and gross margins in the 9% to 10% range and you're looking at repair and maintenance in the 9% to 12% or 13% depending on the turnaround activity. And I think that's a more normalized and what we have said is are the margins that we should achieve on a day in, and day out basis if we have our business affairs in order and that doesn't mean that some years we will exceed that and some years we will be lower than that, but that should be generally what we should be doing.

And in the past do you think it's just been a problem of bidding poorly versus a competitive environment that has prevented you from getting there?

I think in the last year or so it has been a combination of both. If you look historically at Matrix back four or five years ago or three years ago, we were getting those kind of margins and then we got into some of this power work that was really low margin with the acquisition of Hake and then when we actually finished that work, we didn't size the business appropriately and took on some low margin work to cover fixed cost and that's what we're really unwinding.

What would be a realistic time frame in terms of when you could purge backlog, replenish it with some better margin jobs?

I think we're doing that now but I think, and I don't know but I would hope that the backlog would probably be about where it is at the end of May until about now and it is at this point in time it should start growing.

This time next year?

No, right now, this year. I think we're going to start seeing some improvements in the fall of this year.

(OPERATOR INSTRUCTIONS). David Brutus (ph), Astudia (ph) Management.

Hi. It's Eric Brutus from Presidio (ph) Management.

Eric, how are you doing? I thought you changed your name.

A couple of quick questions. One, the LNG, the Shinear project, the magnitude of that project is 97 million. Is that correct I mean for the entire project?

That is our piece of it.

Right. That's your piece for doing the three tanks.

Right.

And then just to try to get a better understanding for the margin improvement from an exit standpoint sort of May '06, do you think you'll be at your normalized rate or do you think you'll still be looking for improvement at that point in both the -- (multiple speakers)?

I could not even speculate right now, Eric. All it would be would be pure speculation.

Okay. How about some color on the existing backlogs ex the LNG project? What is the length or the time frame that that backlog will come into revenue?

The existing backlog is primarily tank construction, new tank construction and related tank construction and it is going to be on average six to nine months but all of it generally 12 months or less.

Great. Thanks very much.

Good to hear from you again, Eric.

Gentlemen, there are no further questions at this time.

Okay. I appreciate all of your interest and I thank you for participating on this call and look forward to updating you as we continue through the fiscal year. Thank you very much.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.