Matrix Service Co (MTRX) 2007 Q2 法說會逐字稿

Good morning and welcome to the Matrix Service Company conference call for the earnings results for the second quarter ended November 30, 2006. 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. I would now like to introduce you to your host for the conference, Miss Truc Nguyen, Investor Relations for Matrix Service Company. Thank you, you may begin.

Thank you. I would now like to take a moment to read the following. Various remarks that the Company may make about the 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 the annual report, on Form 10-K or the latest financial year and in subsequent filings made by the Company with the SEC. I would now like to turn the call over to Michael Bradley, CEO and President of Matrix Service Company. Mike?

Thanks, Truc, and good morning to everyone. On the conference call today we also have Les Austin, Matrix Services Chief Financial Officer. I would like to start by saying really how pleased I am to be joining an excellent team at Matrix. This has been a very exciting time for the Company and the performance of the Company has been extraordinary, producing a 64% return to the shareholders over the past 12 months.

I'm going to let Les discuss in detail the financial results for the quarter; although I would like to comment briefly on the overall results and a few key takeaways for the quarter. To start consolidated revenues increased 31.2% in the second quarter of fiscal 2007 versus the same period last year and net income was $8.1 million or $0.31 per fully diluted share which is more than a 200% improvement over the last year.

Additionally, we expanded our senior credit facility to $75 million for five years from $50 million. We settled three of four remaining significant disputed contracts resulting in no significant P&L impact. And finally, we announced three significant new projects which total over $90 million in additions to our backlog.

We're extremely pleased with the financial results for the quarter and very proud of the accomplishments from our dedicated team at Matrix Service. I will now turn the call over to Les Austin who will provide more color on our financial results.

I would like to discuss the specifics of the second quarter and the six months year-to-date and the performance for each of the operating segments. Total revenues for the quarter were $166.4 million compared to $126.8 million recorded in the second quarter of fiscal 2006. Net income for the second quarter of fiscal 2007 was $8.1 million or $0.31 per fully diluted share, which included pretax charges of $300,000 or $0.01 per fully diluted share for the adoption of the fair value recognition provisions of FAS 123R accounting or stock-based compensation.

These results show a 368.2% improvement compared to the prior year when the Company recorded second-quarter net income of $2.2 million or $0.10 per fully diluted share. Construction services revenues for the second quarter of 2007 were $83.3 million compared to $48.4 million in the same period a year earlier. The increase was a result of significantly higher construction work in the downstream petroleum industry where second-quarter revenues soared 82.7% to $65 million from $35.5 million in the second quarter of fiscal 2006, by other industries revenues which gained 44.2% to $14 million from $9.7 million for the year earlier period, and by power industry revenues which increased 38.1% to $4.3 million from $3.1 million for the year earlier period.

Construction services gross margins were 11.3% versus 8.5% in the second quarter of fiscal 2006. The second-quarter margin improvement was attributable to a robust market environment, effective project execution and the Company's continued focus to manage its contractual risks while at the same time working with customers to meet their strategic objectives.

Repair and maintenance services revenues advanced by $4.7 million or 6% in the second quarter of 2007 to $83.1 million from $78.4 million in the same quarter in 2006. The increase was primarily a result of higher downstream petroleum industry revenues where second-quarter revenues rose 5.5% to $78.2 million from $74.1 million a year earlier, and by power industry revenues which increased 23.8% to $3.7 million from $3 million for the year earlier period. Gross margins were 15.1% in the quarter versus 11.3% in the second quarter a year ago. Repair and maintenance services gross margins benefited from the higher revenue volumes relative to its overall fixed cost structure.

For the six months ended November 30, 2006, Matrix Service reported consolidated revenues of $293.2 million versus $235.8 million recorded in the year earlier period. Net income for the six-month period was $11.1 million or $0.43 per fully diluted share which included pretax charges of $500,000 or $0.01 per fully diluted share for the adoption of fair value recognition provisions in FAS 123R accounting for stock-based compensation. These results significantly exceeded the prior year six-month period net income of $2.5 million or $0.13 per fully diluted share. Consolidated gross margins increased to 12% from 9.8% a year earlier.

Revenues for the construction services segment were $160.1 million compared to $110.6 million for the six months ending November 30, 2005. The increase was due to significantly higher construction work in the downstream petroleum industry where revenues for the six-month period increased 38.9% to $119.4 million versus $86 million for the same six-month period last year, to higher other industries revenues which jumped 75.5% to $31.5 million in the recent six-month period versus $17.9 million a year earlier, and to higher power industry revenues which gained 37.9% to $9.2 million in the recent six-month period compared to $6.7 million a year earlier. Gross margins in the construction service segment increased to 11.1% from 9.5% a year earlier as margins improved across all industry types from the factors discussed previously.

Revenues for repair and maintenance services rose 7.9% or 6.4% to $133.1 million for the six-month period ending November 30, 2006 from $125.2 million for the six-month period ending November 30, 2005. The increase was primarily due to significantly higher downstream petroleum industry work where revenues rose 8.1% to $126.5 million versus $117.1 million for the same six-month period last year. These increases were partially offset by lower power industries which fell 16% to $4.9 million in the six-month period from $5.9 million in the same six-month period last year and by lower other industries revenues which fell 24.2% to $1.7 million in the six-month period from $2.2 million in the same six-month period last year. Gross margins were 13.1% versus 10.1% a year earlier.

SG&A expenses increased to $8.7 million in the second fiscal quarter of 2007 versus $7.5 million in the same period last year. The increase of $1.2 million 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. SG&A expenses as a percentage of revenue decreased to 5.6% for the six months ending November 30, 2006 compared to 6.2% in the same six-month period last year. SG&A expenses should range between 5.5 and 6% per quarter for the balance of the year.

Matrix Service 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 income, income taxes, depreciation and amortization to net income, is available in the Form 10-Q and in the investor section of the Company's website at www.MatrixService.com. EBITDA is provided as we believe the financial and investment communities utilize this measure to assess our performance and evaluate the market value of companies considered to be in a business similar to ours. EBITDA for the second quarter of fiscal 2007 was $14.9 million compared to $7.6 million for the same period last year. EBITDA for the six months ended November 30, 2006 was $22.1 million compared with $12.4 million for the year earlier period.

The Company again had no bank debt at November 30, 2006 with a cash balance of $5.1 million. Matrix has utilized $11 million of the five-year $75 million revolving facility for outstanding letters of credit. The effective tax rate for the second quarter was 36% due to the utilization of credits related to the settled contract disputes Mike mentioned earlier. We anticipate the effective rate to be approximately 40% for the balance of the year.

Capital expenditures during the six months ended November 30, 2006 totaled approximately $6.8 million. The Company also acquired approximately $200,000 of equipment under capital leases. The Company expects capital expenditures for fiscal 2007 to range from $12 million to $15 million. Backlog at November 30, 2006 stood at $321.5 million versus $248.4 million on May 31, 2006. Additions to backlog for the second quarter ended November 30th were $118.1 million.

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

Thanks, Les. The market environment in the downstream petroleum industry continues to really fuel our Company's improving performance. Our backlog of approximately $322 million is about 80% within this industry. Based on these trends we are again raising our revenue guidance for the full fiscal year to the range of $560 million to $580 million from the previous disclosed range of $510 million to $540 million. We will continue a disciplined contracting strategy aimed at improving profit margins and reducing risk.

While there will always be risk associated with projects that we execute, we are confident in our ability to manage those risks going forward and therefore are also raising our gross profit margin guidance to the range of 11 to 12% and that's from the targeted range of 10.5 to 11% previously reported.

As you know, I've now been with Matrix Service for about two months. I've spent those two months focusing on two primary objectives. First, I wanted to get to know the organization and meet with the management team and all the employees. Secondly, I wanted to gather feedback from the management team, employees and customers relative to the business and opportunities. Going forward I'll be working with the management team to develop a longer-term strategy for Matrix Service to capitalize on the opportunities in front of us. Growing the business and maximizing profitability will be a primary focus.

Our current business environment provides us significant opportunities in the downstream petroleum industry, so our immediate focus is to really continue to position Matrix Service to capture these opportunities. 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're ready to open it up for questions.

(OPERATOR INSTRUCTIONS). Daniel Burke, Johnson Rice Co.

Excellent results. You've announced a handful of pretty large terminal tank construction projects over the last four months, but backing up and looking at it from perhaps more of a bids outstanding perspective, is the list of prospective work out there that you're evaluating as robust as it was four months, six months ago or have we seen some big near-term opportunity here announced in the last four months and will that sort of bid flow slow?

I think when you look at particularly the terminal and tank business in general, there's been a lot of pick up in that market and we continue to see a lot of activity going forward. We expect it to remain strong and are actively pursuing several projects in addition to the ones we've already announced.

Okay, thanks. Then switching gears to R&M. The revenue levels there continue to look particularly strong on a year-over-year basis backing out the ex Premcor Valero work. Just looking for any insight there. Is it really just that your existing customers are providing you with that much more work incrementally, or are you picking up some additional share out there?

I would say it's a combination of both. Obviously we've had to replace the $55 million of lost Premcor Valero work that you reference from the Delaware City area from last year, but we've also seen a very strong turnaround calendar in the second quarter and our customer base continues to provide us with new and expanding opportunities.

Okay, great. And then just one last one. With the slowdown in the housing market, does that make it any easier to add labor? Have you observed that or are they independent enough markets that the skilled craftsmen you provide remain very tight?

Well, the skilled craft related to our business continues to remain pretty tight. We have added several recruiters and have really picked up our activity in terms of looking for skilled labor as well as professional labor. But the market remains pretty competitive and pretty tight.

Okay, thanks for those answers.

Rich Wesolowski, Sidoti.

Les, in terms of the initial F'07 guidance versus the first-half results, would you say that the first-half results surprised you on the upside or did you guys just want to be sure that the ongoing first-half projects and bids went the way you expected to before raising the guidance?

Well, I think I'll go back to my original answer to the last question. When we went into the fiscal year we had that revenue from the $55 million of refinery and turnaround work that we had done that had to be replaced. And so when we gave the initial guidance we had that in mind. When we were successful in replacing that revenue and we got into the second quarter, I would say the only upside surprise was that the turnaround activity we experienced in the second quarter was stronger than our customers had represented going into that quarter.

Okay. And I assume the turnaround schedule for the fourth quarter is similarly strong?

It is similar, we don't know if it's going to be quite as strong.

Okay. Plains All American outlined a $500 million capital spending program for next year. Can you give us a ballpark figure of how much of that pertains to your capability and maybe discuss how their merger with Pacific affects the potential to get work from them?

We can't comment specifically on what projects might pertain to us. What I will say, though, is we have a very strong relationship and alliance with Plains. As we have announced several projects I think it's important to note that we continue to work very successfully with Plains and plan to continue doing so going forward. Obviously the Pacific work expands the opportunities with Plains and we'll continue to work with them as we have in the past in evaluating and capturing additional work as it becomes available.

How much of the second-quarter backlog was from Plains?

Well, the announced projects related to Plains totaled about $46 million that went into backlog in the second quarter.

Okay. Can you quantify how much revenue is left to be recognized from Sabine Pass and how much of that is going to fall into the second half?

There's about $61 million of backlog that relates to the LNG project and I would assume that we had about $28 million that went through the first six months; a similar number should be recognized through the second six months.

Okay. Finally, on the resolved contract disputes, it looks like there was about $10 million that was booked, did that go right into receivables?

Well, there was a contract receivable -- if you look in the balance sheet that was on the press release there was a little over a $10 million decrease in that receivable balance and that cash flow came straight into the Company -- that net cash flow came straight in.

So it was all collected?

Yes.

Okay, that makes it better. Thank you very much.

John Flanagan, First Analysis Securities Corp.

Good morning and congratulations on that great quarter. Looking at the guidance and the adjustment to the gross margin -- consolidated gross margin expectations for the rest of the fiscal year, what sort of revenue mix assumptions are implied there, can you comment, Les?

Well, right now we did about 55% construction services and 45% repair and maintenance through the first six months. We're making that similar assumption. It was 50-50; we've changed that assumption to more of a 55-45 split.

Thank you. Can you comment on how you've adjusted the segment gross margin assumptions? There must be some fine-tuning in there too?

Well, I think that we're still comfortable with the 11 to 14% annualized gross profit margin for the repair and maintenance segment. I think we said on a consolidated basis it was about 13% through the first six months. We're on track there, so obviously most of the margin pick up in the guidance that Mike had talked about would come from the construction services segment.

Thank you. Any updates on the LNG sort of opportunities that you guys are looking at in terms of maybe just volume size or your eagerness to be in that game?

I think we continue to explore some opportunities in that arena, but I will say that we have a very attractive and strong environment in other areas. And so we continue to focus on building our backlog in our tank business and construction services which offer some great opportunities for us. So we continue to evaluate those opportunities, but again, there are a lot of other attractive opportunities that we're pursuing also.

Thanks, that's it for me.

Tyson Bauer, Wealth Monitors Inc.

Great quarter, gentlemen. And actually a great run for the last six, seven quarters. A couple of quick questions I figured I'd post to you I've been getting asked this morning. And that is looking at how the stock is trading, the questions come in -- is this as good as it gets? Are they peaking out? Will we see greatly diminished growth rates going forward? Because we had a lot of pent up R&M business that was factored in, a lot of the construction activities, the constraints on capital resources. What's your public response to the concerns that Matrix has had a great run, but from this point going forward it's going to be at a much more diminished rate?

I think obviously we have had a great run. We went through a difficult period and a turnaround and have come out of that very successfully. We continue to strengthen our business as we have this past year. And going forward, again one of my primary focuses is going to be on a strategy and directing organizations to continue to grow this business and improve profitability.

We continue to see opportunities really closely related to our expertise and background and our focus is going to be on looking for ways to expand our capabilities, really a lot of organic growth opportunities. But while I can't give you specifics on where we're going to be, I think we've stated publicly our outlook over the next three, five years is to grow 8 to 12% and we're going to remain very focused on creating those growth opportunities for Matrix going forward. So that's really going to be my primary focus.

Do you have the resources to do that organically or now that you have an attractive piece of paper will that assist you in achieving those goals?

I think we've got, one, an attractive piece of paper that obviously helps facilitate that; two is we have really built up our recruiting efforts to bring in leadership and technical capabilities to support growth. So really combined with both of those we plan to elevate our capabilities to expand our revenue growth going forward.

And the last question, as you've secured some of these larger contracts with more on the come, has the profile or the characteristics of those contracts changed in which there's a lot more risk sharing and a lot more protection for you as the vendor?

I would say that our percentage is shifting definitely in that direction. Less risk, more alliance type contracts.

If you look at the backlog absent the LNG, the non LNG backlog is in the 64% range for cost reimbursable and alliance type contracts.

And give us a reference point of how much that's changed say from four years ago?

I would say that four years ago we were closer to 80% range of lump sum type of work or higher type risk work in the backlog.

Okay, very well. Thank you, gentlemen.

(OPERATOR INSTRUCTIONS). Andrew O'Conor, Wells Capital Management.

Congratulations on your quarter. Just to clarify, the quarter ending backlog, $322 million, dose this include the more than $90 million in additions to backlog mentioned at the beginning of your press release?

It does.

Okay. And then, Les, I may have missed this -- has there been new business won by Matrix since the end of the second quarter?

Well, obviously we're only a month into the end of the second quarter, so we continue to replace backlog obviously on a monthly basis, though. We haven't had anything that's press releasable.

Okay. And then at this point is there a -- would there be a stated goal for new business to be won in fiscal '07 or perhaps a range of new business that you hope to win?

I think the stated goal we had is the 8 to 12% growth rate and whatever means if that's through backlog additions in the capital construction side or advancing maintenance and repair work that doesn't run through backlog, I don't know that there's a specific captured work goal that we're going to publish.

Okay, and then -- thanks for that. And then lastly, Mike, congratulations on your appointment as the new CEO of Matrix. But I wanted to know if you would have some more explicit comments regarding your top few priorities for the first few months in your new position at Matrix? I heard you say that it's your intention to grow the business and maximize profits, but can you be more explicit in terms of project management, balance sheet management or perhaps other items that you'd care to speak to? Thanks very much.

Sure. As I mentioned, really the first couple months I've spent really focusing on meeting management, employees, getting feedback, meeting with customers to really assess the Company, the business and the opportunities. I've gotten a lot of good feedback, a lot of good ideas and will be working with the management team going forward on laying out a longer-term strategy to grow the Company and achieve our objectives of at least 8 to 12% annual revenue growth over the next three to five years.

Obviously coming out of the turnaround situation, establishing a strong balance sheet and good liquidity was very critical. And I think as demonstrated in the second quarter with the refinancing of our senior credit facility we've got a strong balance sheet and the capability to support that growth. I think secondly is we obviously need a strong leadership team and technical capabilities and human resources to be able to capture the growth and grow the Company successfully. And we'll be looking at various parts of the Company where we need to expand those capabilities so that we are in a good position to continue to grow the Company over the next three to five years.

So I feel good about the financial situation and the balance sheet of the Company. We've got a strong team, we've got good recruiting going on and we've got a very strong business environment. So it's really pulling all those three together and working to develop that plan and continue to capture the opportunities that are out in front of us.

I think that my focus is really on three things. First of all is assuring that we are maximizing the efficiency and productivity of our current organization and business. And while you like to think that you're doing as good as you can, there are always opportunities to extract more productivity or efficiency out of the organization. I never want to lose focus on that and that includes managing the balance sheet as well as how we manage our work.

The second thing is the organic growth. I mean, that's the things that we're good at, the capabilities we have and really focusing on expanding our capabilities either geographically or vertically. And I think there are numerous opportunities, but organic growth is obviously the areas where I think you achieve the highest returns.

And the third thing that we'll continue to look at would be strategic acquisitions. And I'm not prepared to comment on where, when or what types of acquisitions, but I can say that that will play into our overall strategy. So I don't know if that answers your question or gives you any further guidance, but please come back to me if that's not.

I appreciate your comments. That's all we have. Again, nice quarter.

Rich Wesolowski, Sidoti.

I'm sorry, I got confused there. Did you say that the contracts that you've announced recently are in the third-quarter backlog?

That's correct. The three releases that we did in -- one was on October 10th for $26 million, Plains St. James is in backlog; one was on December 13th Plains Patoka, $40 million is in backlog; and then on December 21st the [SIM] Group release for $27 million is in backlog.

Okay, thank you. Can you quantify the number of people that you added this year and maybe give some expectations about how many you expect to add in '07?

I think at last count we've added about 90 administrative positions in the organization over the last six months. I think we've still got about 45 open positions that we're recruiting for actively. I know that our headcount at the end of the second quarter was a little over 3,000 and that's up from about somewhere in the neighborhood of 2,200 at the same time last year.

Okay. So this base of SG&A between 8 and $9 million, that's a solid base upon which you would expect to grow over the next couple years?

I think that percentage that we gave you, the 5.5 to 6%, should be adequate as the revenue base grows over the next couple of years.

Okay, great. Thanks a lot.

(OPERATOR INSTRUCTIONS). Ross Taylor, Caxton Associates.

Great quarter, great year, great recovery. The question I have -- several questions, the first is operating margins. How high should operating margins grow to be in this business as you go forward?

I think we've raised our guidance, as we mentioned, to 11 to 12%.

The question is, is that the best you think you can do or do you think beyond the 12% range is there more that you can squeeze out of this company as you grow the revenue base?

Well, I think going forward obviously a strong market and continued solid execution of our projects will allow us to maintain that level. I think at this point in time we're comfortable laying out the increase of 11 to 12%. Our margins can be lumpy. As you've seen with the repair and maintenance, we had a very strong quarter, exceeding 15%. Obviously our absorption was very favorable during that time frame. The good execution on our projects allowed us to increase our percentages for the quarter and we'll continue to focus on that. But I think going forward we're still comfortable staying in the range of 11 to 12%. Will we try to beat that? Obviously.

Okay, another question. Anyone with an intermediate-term history with Matrix is familiar with the difficulty the Company had in its last acquisition. Obviously it brought about the demise of a gentleman who proceeded you to fold into this job and led to the stock running into some pretty hard times. What kind of assurances can you give to people on the call that any acquisitions that you're looking at going forward would not have the same type of result? Would they be significantly smaller acquisitions, fill ins, specific technical capabilities you'd be buying? What kind of dollar size would we be looking at? Would they entail the need to put a substantial amount of debt on the Company? All that type of financial background to them.

Well, I'm not going to comment specifically on acquisition types or dollar range, but what I will say -- that our strategy will be to look at acquisitions that I think have -- fit well with our capabilities and our strategic approach. Obviously companies and acquisitions that can create synergies or really expand the capabilities that we have. I think it's very important -- I've been involved in a lot of acquisitions over my career, you always hope they're all successful.

I think it's important that we fully understand and I've spent a lot of time understanding the previous acquisition at Matrix and that we have a good solid approach to assure that, one, it fits our strategic needs and capabilities and, two, we have the capability to absorb it successfully in the organization and really capture the value and synergies that that acquisition brings.

So without getting specific on acquisitions, we will take a very disciplined approach and really focus on opportunistic types of deals that really fit well with our strategy going forward.

Great to hear. And one last question is can you comment on the macro outlook for both natural gas and oil storage? With the involvement of more and more hedge funds and financial players in those commodities it seems that there could be an argument made that demand for storage should grow substantially in the coming years as those people that frequently like to, quite honestly at times, buy the commodity and hold it on the side?

Yes, I think that if you look at the -- and this is my opinion. Obviously people have different opinions, but I think that we are seeing an increase in demand for storage in general, both on the gas and on the crude and liquid side of the business. We're seeing a need to import more product into the U.S., whether it's LNG, whether it's refined products or whether it's crude oil. I think there will be a continued need to expand terminal and storage capabilities in the U.S.

Additionally, you've not the Canadian crude coming in which is a heavier crude. And so there would be need for storage and blending capabilities to handle that product as the flow continues to increase over the next few years. I think there will continue to be a very strong demand in the storage business.

So basically in other words it's really the -- the short-term price outlook for oil or gas is really not the relevant driving factor to your business. What you really are seeing is more of a longer-term macro play in here that's going to help you guys stay in the sweet spot for an extended period of time?

Yes, that's our outlook.

Great. Thank you very much, gentlemen.

At this time there are no further questions in queue. I'd like to turn it back to Michael Bradley for closing comments.

Thank you again for your questions and interest in the Company. I'm very excited about being a part of the Matrix team and look forward to a very exciting future. With that I'll just say thank you and hope everybody has a very happy and prosperous New Year. Look forward to meeting you here -- some of you in the next week or so. Thank you.

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