Matrix Service Co (MTRX) 2007 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Matrix Service Company first-quarter fiscal year 2007 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 your host, Mr. Mike Hall, President and Chief Executive Officer of Matrix Service Company. Thank you. 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.

I will let Les discuss in detail the financial results for the quarter, although I would like to comment briefly on our overall results. Consolidated revenues totaled $126.9 million for the first quarter of fiscal 2007, versus $109 million for the same period last year. Net income was $3 million or $0.12 per fully diluted share, versus $400,000 or $0.02 per fully diluted share last year. Consolidated gross margins were 10.5% this year versus 9.3% last year.

We are extremely pleased with our continued success in executing work with our core customer base, and look forward to new opportunities in expanding markets. Our project mix continues to be heavily weighted to the downstream petroleum industry, which represented approximately 81% of our first-quarter revenues and accounts for more than 72% of our record $307.2 million in backlog.

As I mentioned, we were pleased with the financial results for the quarter. I will now turn the call over to Les, who will provide more color on our financial results.

Thanks, Mike.

I would like to discuss the specifics in the first quarter and the performance for each of the operating segments. As Mike stated earlier, total revenues for the quarter were $126.9 million, compared to $109 million recorded in the first quarter a year ago. Net income for the first quarter of fiscal 2007 was $3 million or $0.12 per fully diluted share, which included pretax charges of $180,000 or $0.01 per fully diluted share for the adoption of fair value recognition provisions of FAS 123R, accounting for stock-based compensation. These results compare favorably to prior-year first-quarter net income of $375,000 or $0.02 per fully diluted share.

Construction Services revenues for the first quarter of fiscal 2007 were $76.8 million, compared to $62.2 million in the same period a year earlier. The increase was a result of higher construction work in the downstream petroleum industry, where first quarter revenues increased 7.5% to $54.4 million from $50.4 million in the first quarter of fiscal 2006, by other industries' revenues which improved 113.4% to $17.5 million from $8.2 million for the year-earlier period, and by power industry's revenues, which increased 40% to $4.9 million versus $3.5 million a year earlier. Construction Services gross margins were 11% versus 10.4% in the first quarter of 2006.

Repair & Maintenance Services revenues advanced by $3.3 million or 7.1% in the first quarter of fiscal 2007 to $50.1 million from $46.8 million in the same quarter in fiscal 2006. The increase was primarily a result of higher downstream petroleum industry revenues, where first-quarter revenues rose 11.8% to $48.3 million from $43.2 million a year earlier. This increase was somewhat offset by a decrease from the power industry revenues, which were $1.2 million versus $2.9 million in the first quarter of fiscal 2006. Gross margins were 9.7% in the quarter, versus 8% in the first quarter a year ago.

SG&A expenses increased to $7.7 million in the first fiscal quarter of 2007, versus $7.2 million in the same period last year. This increase of $500,000 was primarily related to employee-related expenses resulting from additional staff hired to take advantage of a strong market and the stock-based compensation mentioned earlier. Partially offsetting this increase was a decline in legal costs, although the Company continues to aggressively pursue the collections on its contract dispute receivables. SG&A expense as a percentage of revenue decreased to 6.1% in fiscal 2007 compared to 6.6% in the prior fiscal year.

Matrix has provided the necessary reconciliation in our press release to disclose a non-GAAP financial measure in this conference call. In addition, a reconciliation of EBITDA, earnings before net interest, income taxes, depreciation and amortization to net income, is available in the Form 10-Q and in the investor section of the Company's Web site at www.Matrixservice.com. EBITDA is provided, as we believe the financial and investment community utilize this measure to assess our performance and evaluate the market value of companies considered to be in a business similar to ours. For the first quarter of fiscal 2007, EBITDA was $7.2 million, compared to $4.8 million for the same period last year.

The Company again had no bank debt at August 31, 2006 with a cash balance of $4.4 million. Matrix has utilized $11.1 million of the three-year, $40 million revolving credit facility for outstanding letters of credit.

Capital expenditures during the three months ended August 31, 2006 totaled approximately $3.3 million. The Company also acquired approximately $135,000 of equipment under capital leases.

Backlog at August 31, 2006 stood at $307.2 million, versus $248.4 million on May 31, 2006. Additions to backlog for the first quarter ended August 31 were $145.1 million. Matrix currently has a bonding capacity of $54 million in aggregate bonded work, which should continue to increase during this fiscal year.

I will now turn the call back over to Mike, who will discuss the prospects for the remaining three quarters of fiscal 2007.

Thanks, Les.

Due to the continued strength in the downstream petroleum industry, which continues to fuel our earnings growth with additional planned expansions to terminal facilities like the Plains All American Pipeline expansions announced in our September 19, 2006 press release, we see strong and growing backlog into the future.

We are raising our revenue guidance for the full year, for the full fiscal year to 510 million to 540 million from $480 million to $520 million previously disclosed. We will leave targeted consolidated gross profit margins unchanged at 10.5% to 11%.

We also announced this morning that Mike Bradley will be joining Matrix Service has President and Chief Executive Officer. Mike is currently President and Chief Executive Officer of DCP Midstream Partners, LP, a publicly traded natural gas and natural gas liquids midstream business headquartered in Denver, Colorado. Prior to his current assignment, he spent about 11 years with Duke Energy Field Services in a variety of senior management positions. Mike brings to Matrix Service a demonstrated ability and success in building, leading and motivating an organization. He has successfully developed and implemented business strategies in a number of different businesses. He will relocate from Denver to Tulsa and plans to start in early November, at which time I will succeed Ed Hendrix as Chairman of the Board. Ed will remain on the Board and continue to chair the audit committee.

I would like to thank everyone in the organization for all of their hard work and dedication which made the turnaround at Matrix Service possible.

And with that, we are now ready to open it up for questions.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS). Rich Wesolowski, Sidoti & Company.

Mike, could you break down the backlog of work, maybe R&M versus construction, and also detail what types, sizes of projects went in there?

Okay.

Okay. Well, as we said previously, about 70% of the backlog is in the downstream petroleum area, which would consist mostly of tank construction work. The repair and maintenance continues to be a small piece of the backlog. Let me see if I can get it for you here. Repair and maintenance is about 26.6 million of the backlog. Construction services is 280.6 million of the backlog.

Were there any scrubber projects put in there in 1Q?

There continues to be some scrubber projects in the backlog. It's not -- you know, obviously, LNG represents a significant portion of the other 30%, and then the balance is going to be in other small power projects like the scrubber projects we're working on.

Okay. How much of the Valero maintenance work that was curtailed contributed to the year-ago quarter? Or not even a number but just was it seasonally weighted last year where we can see some fluctuations in revenue growth based on that?

We did about $55 million of maintenance and turnaround work for Valero at the Delaware City plant in the first three quarters. We did 0 in Q4 and Q1 of '07.

I think the first quarter, if I remember correctly, it was really all maintenance and the turnaround was really in the second and third quarter. I believe that the maintenance was in the 10 to $15 million range.

Okay. Is the other revenue all LNG?

It's predominantly LNG, yes.

Okay. Is the progression, the profitability on that job, how does that compare to what you guys had modeled?

We don't ever give specific margin guidance on any one particular project, so we are probably not going to comment on that.

Okay, but you would comment that the project is progressing as you had hoped?

Yes, it's on schedule and we are meeting the schedule and we feel pretty comfortable where we are right now in terms of meeting the schedule and attaining reasonable margins on the projects.

Okay. Finally, you guys had commented previously that you had the labor capacity to do about $550 million in annual revenue and the financial flexibility to do a lot more. However, your guidance range is sneaking up towards that point. Is that still a limiting factor or would you expect to continue to grow next year if the bidding activity remains as strong as it is today?

I think those conversations we had, Rich, were probably back in the spring and early summer, and obviously we talked about the recruiting initiatives and personnel initiatives that we had in place. As you can see from our SG&A creep that we had of about $7.7 million in the first fiscal quarter, we started to address some of those personnel issues. I think, with that, we will be able to exceed those original numbers that we had talked about.

Great, thank you.

John Flanagin, First Analysis.

Good morning, guys. Great quarter. Following up on the signing of the guidance change and the announcement of the Plains All American Pipeline win, that was September 19. Does that mean there's no Plains revenue in the August 31 backlog number?

No, we do a number of work for Plains and had a number of projects for Plains in backlog prior to that announcement.

I'm sorry, I met revenue from the new work.

There should be not any significant revenue from that announcement in the Q1 quarter.

Thank you. Second, I noted that the repair and maintenance gross margin was a bit below the target range in your guidance. Is that an anomaly or is there some news there that we should be looking at?

If you look at repair and maintenance revenues relative to our guidance, our annual guidance, originally the low end was 480 million. If you said 50% of that revenue on the low end was for maintenance and repair, you get 240 million. A quarter of that would be 60. The revenue in the first quarter was below 60, so there's an absorption factor going on that is causing repair and maintenance margins to be below the low end of our guidance. The guidance that we gave of 11 to 14% is an annual number. Because of the seasonality in the maintenance and repair, any one quarter may fall below or above that particular revenue or margin guidance range that we give. But on an annual basis, we still expect it to be in that range.

Thank you. Finally, looking at the power side of construction services pick-up there, do you think there's some sustainable growth in that segment?

There really is, and we are being very careful about the types of projects that we're taking on in the power industry. It's obviously a different industry than the downstream petroleum industry and the customer base is different. We are being fairly selective about the type of work we do and very focused in the type of work and it has to meet our margin expectations. But we do see what that is a growing industry, and we believe we will continue to add to backlog in the power industry in the months to come.

Just to follow up on that, can you describe some of the projects that seem to be more appealing in power for you these days? Somebody mentioned scrubbers; I think it was Rich before me.

A lot of the work that we have in backlog currently is in the scrubber market on the fabrication side. Sometimes, we will do just the fabrication component, the [plate] fabrication component of the scrubbers. Sometimes we will do the fabrication and the field direction component of the scrubbers. You know, obviously, we haven't done a full-blown scrubber project for awhile, so the project size and range is anywhere in the 2 to $5 million range of the projects that we're doing currently.

The type of work and the opportunities we are looking at include the scrubbers, ducking, stack, stack liners, hoppers, bins and landfill energy systems. That's the kind of work we are focusing on. It's not building a power plant like we had built a couple of them back in 2002 and 2003, those large projects, the 100, 200, $300 million size. These are much more focused and much smaller.

Thank you, that's helpful. I'm done.

Tyson Bauer, Wealth Monitors.

Good morning, gentlemen. Another great quarter. A couple of quick ones. On the SG&A line, Les, could you give us a little insight on what our expectation should be going forth? And kind of break down a little bit -- you mentioned there is additional recruiting in that number in Q1. Will we also see additional one-time costs associated with the hiring of the new CEO?

Well, the guidance that we had given for SG&A originally was about $30 million or $7.55 million a quarter. On a normalized run-rate, we think we will be in that same range on a go-forward basis. We were 7.7 million for the first quarter, so I think we will still be in that range.

As far as any one-time costs associated with the hiring of the CEO, we will be filing an 8-K later today with some of that disclosure information, so you're going to have to wait until that gets filed.

Okay.

Some of the recruiting costs-you know, human resource costs are actually just recruiters looking for craft. We have put on a number of people around the country in Southern California, up in the Northwest, in Houston and in Tulsa to really focus on various levels of recruiting, the project management, the field supervision, and then a whole different group focusing on the craft. And we've been pretty successful over the last three months or so. We've added about 10% to our workforce.

Oh, very well. Mike, obviously being on the Board and involved in the replacement of your own position, you obviously had to have your blessing or at least your input on who would replace you. Your directive obviously was to get this company turned around, and you've done an excellent job of doing that. What directive does Mr. Bradley have? What expertise is he bringing to bring the Company to the next level? Can you describe what that next level is?

Yes. He is a different type of person than I am. And we are, as a Board, we looked for a number of factors in selecting a CEO. We were looking for leadership, a demonstrated ability for motivating an organization and building an organization. I think very important was his experience in developing strategy and in being a strategic thinker. We were also looking at a person that had financial acumen to be a CEO of a public company, and he has experience as a CEO of a public company and has demonstrated seasoned business judgment. We were also looking for somebody that demanded excellence throughout the organization, that demanded accountability and had a very high energy level to grow a mid-sized -- (technical difficulty). He's been very successful in growing smaller businesses to larger businesses. We are primarily, as a Board, now focused on taking the Company to the next level and developing a strategy for growth while maintaining good margin levels and improved profitability. We want to take advantage now of our financial position and our financial condition, and grow the business significantly in the markets that we are in. We're not looking to take the Company international; we're not looking to diversify into areas that are dramatically different than we are currently in. We're looking at the oilsands in western Canada; we're looking at expanding our LNG and our cryogenic tank; we're looking to capitalize on our ability to build terminals; and we are looking at expanding in the power industry.

He brings an extensive background in the power industry, and right now, when you look at our backlog, a significant portion of the backlog is in the downstream petroleum and LNG. We need to expand into the power industry. We know that industry and he has extensive contact in that industry and we're going to take advantage of those.

Very well. A couple of real quickies here. The update on Canaport and do you increasingly, because of the delays, become ambivalent of whether you are involved in that project, given the robustness of your other sectors?

In some degree, yes. With respect to Canaport, we received notice that they have decided not to use us to build the tankage. Now, we haven't heard who they are building, who is building the tankage or whether they are even going forward with that project. With the price of gas today, LNG is kind of in the lack of availability of liquids at the other end is really there isn't the same flurry that there was six months or a year ago. But I will have to say that, based on the type of projects we are seeing in the other parts of our business that are much less risky, we are becoming somewhat ambivalent and we are being much more selective in the types of risks we would take with LNG.

One of the reasons we did not get the project Phase II down in Sabine Pass was that we were unwilling to take some of the risks they were wanting and requesting the contractor to take, and we just didn't think that was prudent to take on some of those kind of risks.

I would concur. I'm almost glad you [did] win it, given the other opportunities that you have on your pipeline, no pun intended.

The Plains Pipelines project, is that part of a larger capital plan, expansion plan by them? When do we start seeing the next phases come to fruition?

It is part of their bigger capital plan, and they are constantly looking at new opportunities for terminal expansion and tankage expansion. We would hope and expect that we would be able, with our relationship, to continue to do a lot of their work.

The last one, did you recoup, in Q1, some of the LNG change orders that you described in the last quarter's conference call that would have helped out your revenue and also your margin?

Not really, no.

Okay, thank you, gentlemen.

Andrew O'Connor, Wells Capital Management.

Nice quarter. You know, I think you've already stated this but just to clarify, where is the extra income in the 25 million in additional revenues to come from for full year '07? Is this all from Plains?

I don't think it's really from, you know, I don't think you can, it's really easy to sit there and say, well, we signed a $48 million project, therefore that's our revenue increase. I think our expectations were that we were going to do some additional work in our plan from Plains. That helped it. It's going to make that part of the plan realized, but I think that, coupled with all of the other work we're looking at and projects we are evaluating and bidding now, really is the reason that we are increasing our revenue guidance.

Okay. Then can you say what would the breakout of total revenues 510 to 540 million be between construction services and Repair & Maintenance Services then for this year?

We're still anticipating that we will hit a 50-50 mix between the two.

The turnaround schedule in the second quarter and the fourth quarter really looked pretty positive. The turnaround we are in a number of turnarounds right now, and that's going to have a substantial impact on our volume in the second quarter. So we still anticipate a 50-50 mix.

Okay, so what revenue growth, then, does that give for Repair & Maintenance Services this year versus last?

Well, last year's repair and maintenance were close to 250 million, so depending on where we got to on the high end of the guidance, what would that be? 270 million?

Okay.

Yes, but don't forget we are having to replace the 50 to $55 million in Delaware City, which all went into the maintenance and repair side of the equation.

Okay. Then just a couple more things. In the current backlog, how much would be LNG-related?

I think, right now, it's about $75 million of the backlog.

Okay. Then going ahead, I mean, your balance sheet is in good shape. Can you discuss the philosophy in managing your balance sheet going ahead? Thanks so much.

Well, we're going to continue to manage our working capital as best that we can. We're looking at our senior credit facility currently. Obviously, with the stronger balance sheet, we feel like we can get a little better pricing on the facility than we got last year, so taking a look at that and possibly expanding the size of that facility, depending on our working capital needs.

Is there a target debt-to-equity range, Les, which you would regard as optimal or achievable?

I don't know that there's a specific range that I'm looking for. You know, obviously we want to invest in the projects that make the most sense for in the Company, and if at any one particular time that ratio of debt-to-equity is higher because we are needing to invest based on the projects. You know, if you look at the risk profile we're taking on the project, a lot of these alliance projects, cost-reimbursable type projects, there is an investment of working capital on the front end because we are financing part of those projects. But if the return on that type of project, based on the risk profile, is better, we're going to do it.

Okay, thanks very much.

Ross Taylor, Caxton Associates.

Gentlemen, great quarter. Mike, I'm going to miss having you around. You've done a great job basically pulling this company back from the abyss that you inherited hovering over.

Thank you, Ross.

Real quick, you, in the past, have talked about the idea that, in some way, you know, Matrix is a relatively small company in a very large industry. I think everyone has looked at the negative side of that as to how you compete. But looking at this market now running pretty close to capacity, what are the advantages that your size gives you guys in here, beyond making you an acquisition target? (LAUGHTER)

Thanks for your observation! (LAUGHTER). I think, being the size we are, we can and we have done this selectively, allocated and devoted resources to key clients and that our clients and Matrix have developed an alliance and partnerships, and we focus our resources. And being smaller, we don't have the bureaucracy and our safety record is very good. We can be an attractive place for the Craft to work and project management to work because we give them a lot more responsibility earlier in their career than they may get with a larger company. I think the ability to recruit and attract key people is a real advantage we have, and our client base knows that. We have been successful in not shotgunning our resources but really focusing on our key clients. We're doing that more and more and not taking on work that we have not done before, which increases our risk profile.

So I think being this size has its advantages. It obviously has disadvantages also, in terms of being a public company at our size. I mean, there's a lot of additional costs. But I think that the advantages far outweigh that in our current situation.

Also, looking at how the business side or the ability to get orders, it seems one of the things you and I have talked about in the past is the fact that there are now, with the industry pretty near capacity, there are a lot of smaller orders in there that the bigger players just don't have a desire to pick up.

Right.

How does that play out? Is that a marketplace that you guys have the ability to penetrate and would that be business that gives you better than average margins because -- (multiple speakers)?

It really does, and particularly when you start getting into some of the repair and maintenance work, tank repair and maintenance work, I mean, there aren't that many players anymore that really want to focus on that. As I mentioned, the type of work we're doing in the power industry in how we are focusing on the 5 million, $10 million projects, that does not interest a lot of the bigger players. The key is trying to contract those with the owners and not be a subcontract of a general and (indiscernible) second or third-tier subcontract. If we do that, we really try to protect ourselves with better Ts and Cs so that we're not just the tail wagging the dog. So there are some advantages in focusing on the size of projects that we do focus on.

Okay. Also, looking at Valero the other day made comments about effectively seasonal shutdowns last year and no one shut down any refining capacity. Looking at crack spreads having fallen substantially from where they were even just a few months ago, are you looking for your repair and maintenance business to see a pick-up, perhaps a lot of the deferred maintenance that we haven't seen in the last two years?

You know, we are really doing a number of turnarounds right now, and we are seeing those expand in scope. Part of it is that there's more work to be done because they have delayed it in others, and I don't know this. It would be more attractive to say stay down and get all the work done when crack spreads are down from what they were. But I do think that that's going to have a positive impact on repair and maintenance.

Great. My last question is it seems that, per my first comment, Matrix is a company which has a tremendous amount of public company costs, generating nice EBITDA and your great outlook going forward. What's the strategic environment look like? Do you have people in and around? I mean, we are seeing WG has announced they are selling their overseas business and looking at coming into the -- or building up their business in the U.S. How do you see things playing out. Should, now that you're going to be Chairman of the Board, should we expect to see you explore the strategic alternatives that might be available to this company?

Well, I think, at this time, it's premature to be evaluating strategic alternatives. You know, as a member of the Board, we've always evaluated strategic alternatives that are in the best interests of the shareholders. If somebody came in and offered us $30 a share, the Board would have to evaluate that period. (LAUGHTER). We don't want, you know, we are not soliciting strategic alternatives. Right now, we are focusing on growing the business and generating a significant return for our shareholders. We believe we can do that, and we can do that as a public company.

Good. If somebody offers you $30 a share, this is one shareholder who would say I hope you do more than just evaluate it. Thanks again. Good luck.

Thanks, Ross.

(OPERATOR INSTRUCTIONS). J.D. Padgett, Boston Company.

A couple of questions. The most recent win from Plains, that's in backlog I presume, right? That 48 million?

That's correct. We were, the lion's share I believe it's about 44, $45 million that was in backlog at August 31.

Okay. Is all the 48 million available to you or that's your component of it?

That's our component of the 48.

Okay. The other question, the construction services gross margin was obviously pretty strong this quarter and kind of well above I guess the range that you had framed for the year. Any reason we would expect that now to drift down or is this something you could sustain with good project execution looking forward?

I think, you know, Construction Services margins have been lumpy at best, based on the performance we had in our first quarter. We had excellent execution on the projects and probably some of the best execution that we've seen in the last eight to ten quarters. If we are able to sustain that improved execution on the Construction Services side, is possible that we need to take a look at that range of guidance. We might move up off of the 9.5 to 10.5% that we've typically quoted.

Okay. Then the flip side on the repair and maintenance to get up to the guidance range now, does that imply maybe it would be it more likely be Q2 and Q4 with the good turnaround work that margins could be higher than the 14%, or how do you look at that?

Well, I think that anything is possible depending on the mix of revenue that we have and the absorption that we get on our projects in a particular quarter. If we got significantly above the high end of our guidance and the absorption was favorable, you might see margins exceeding the 14% in any one particular quarter. We're still comfortable with the range of 11 to 14 for the full fiscal year.

Okay. The turnaround work, is that typically something that is higher-margin just because that leads to improved utilization?

Yes. That's really the reason.

Okay. So Q2 and Q4 would be your best opportunities for gross margin in that business for the year?

That's correct.

Okay. The other question is when we go through the EPS calculation, walk me through the math again on how much interest expense we are adding back.

Well, let me see. In Q1 (technical difficulty) like our weighted shares in the calculation are 26.5 million, and we are adding back interest net of tax of $262,000.

That's after-tax?

After-tax.

Okay. The pre-tax number is just using the 40% tax rate?

I think our effective rate is about 40%. That's correct.

Okay. The other question, is this the first quarter you've seen stock-comp impact?

This is the first quarter that we've adopted the provisions that require us to record the expense in the physical financial statements themselves. We have always had the disclosure requirements under FAS 123 in a footnote disclosure that gave you a pro forma impact of the effect on EPS. The current quarter expense is pretty close to what we've discussed previously on a pro forma basis.

So would it grow from here slightly, or kind of consistently be around 200,000 a quarter?

It will increase slightly but I don't think there will be any significant increases over what you saw in the first quarter.

Okay, and that was kind of already baked into your $30 million a year kind of target, or should we be thinking about adding this to that?

I think that you can consider that baked into our $30 million that we've given in guidance before.

Okay, nice job, guys. Thanks a lot.

A follow-up from Rich Wesolowski from Sidoti & Co..

Thanks, I just had one follow-up, a corollary to a previous question. You mentioned the (indiscernible) profitability crack spreads were down significantly and that would be ultimately beneficial to the repair and maintenance. How bad do you think things would have to get for the refineries in order for that to curtail some of the momentum in the construction side of the business?

I really don't know. I mean, there is such a backlog and in terms of projects, I really couldn't answer that.

Something that's not even on the board right now?

No.

Great, thank you.

Gentlemen, I'm showing no further questions in queue. Do you have any closing comments?

Well, I'd just like to thank everyone for participating in this call, and I wish everybody continued success in the months and years to come. Thank you.

This concludes today's teleconference. Thank you for your participation.