Matrix Service Co (MTRX) 2007 Q3 法說會逐字稿

Good morning and welcome to the Matrix Service Company third-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. If anyone should require (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

I would now like to introduce to you your host for the conference, Ms. Truc Nguyen, Investor Relations for Matrix Service Company. Thank you, Ms. Nguyen, you may now begin.

Thank you and good morning. I would now like to take a moment to read the following. The 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 for the latest financial year and in subsequent filings made by the Company with the SEC.

With us on the call is Michael Bradley, President and CEO; and Les Austin, Chief Financial Officer. Now I would like to turn the call over to Mike.

Good morning, everyone, and thank you for joining us on our third quarter earnings call today. Les will discuss in detail the financial results for the quarter, but first I would like to make a few comments briefly on the overall results and key takeaways for the quarter.

I am very pleased to report that consolidated revenues increased 41.1% in the third quarter of fiscal 2007 versus the same period last year. Net income was $6.2 million or $0.24 per fully diluted share, which was more than a 240% improvement over last year. Our backlog at February 28, 2007, stood at $314.4 million versus $248.4 million on May 31, 2006. Additions to backlog for the third quarter ended February 28, 2007 were $112 million and were $375 million for the nine months then ended. The recently announced awards that were in excess of $80 million are not included in these amounts.

We are 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 the detail on our financial results.

I would like to discuss the specifics of the third quarter and the nine month year to date and the performance for each of the operating segments. Total revenues for the quarter were $168.7 million compared to $119.6 million recorded in the third quarter of fiscal 2006. Net income for the third quarter of fiscal 2007 was $6.2 million or $0.24 per fully diluted share, which includes pretax charges of $500,000 or $0.01 per fully diluted share related to the fair value recognition provisions of FAS 123R accounting for stock-based compensation. These results show a 244.4% improvement from the prior year, when the Company reported third quarter net income of $1.8 million or $0.08 per fully diluted share.

Construction Services revenues for the third quarter 2007 advanced 90.6% to $103.3 million from $54.2 million in the same period a year earlier. This improvement included revenue growth of $46.3 million resulting from robust activity in the downstream petroleum industry. In addition, power industry revenues grew $1.8 million and other industries revenues increased $1 million. Construction Services gross margins widened to 10.4% from 7.2% in the third quarter of fiscal 2006, even though the fiscal 2007 third quarter gross profit of $10.8 million was partially impacted by weather and productivity-related costs overruns on a project. The performance improvement stems from a continued focus by the Company on managing its contractual risks while at the same time working with our customers to meet their strategic objectives.

Repair and maintenance services revenues of $65.4 million were essentially flat in the third quarter of fiscal 2007 versus the same quarter in fiscal 2006. A $1.3 million increase in revenues from other industries was offset by $1.2 million decrease in revenues from the downstream petroleum industry. Gross margins of 12.5% for fiscal 2007 were higher than gross margins of 11.9% in fiscal 2006 as a result of effective project execution.

For the nine months ended February 28, 2007, Matrix Service reported consolidated revenues rose 30% to $461.9 million from $355.3 million recorded in the year-earlier period. Net income for the nine-month period was $17.2 million or $0.67 per fully diluted share, which included pretax charges of $900,000 or $0.03 per fully diluted share resulting from the adoption of the fair value recognition provisions of FAS 123R accounting for stock-based compensation. These results significantly exceeded the prior-year nine-month period net income of $4.3 million or $0.21 per fully diluted share.

Revenues for the Construction Services segment rose 59.7% to $263.4 million from $164.9 million for the nine months ending February 28, 2006. This improvement resulted primarily from a revenue increase of $66.2 million from the downstream petroleum industry. In addition, other industries revenues climbed $27.9 million while the power industry revenues grew $4.4 million. Gross margins in the Construction Services segment widened to 10.8% from 8.8% a year earlier, even with the third quarter weather and productivity cost overruns discussed previously.

This improvement resulted from a robust market environment, effective project execution and a continued focus by the Company on managing its contractual risk while at the same time working with our customers to meet their strategic objectives.

Revenues for repair and maintenance services rose $8 million or 4.2% to $198.5 million for the nine-month period ending February 28, 2007, from a $190.5 million for the nine-month period ending February 28, 2006. This improvement resulted from increased revenues from the downstream petroleum industry, which grew $9.2 million. Partially offsetting this improvement were declines in the revenues from the power industry of $1 million and other industries of approximately $200,000.

Gross margins were 12.9% versus 10.7% a year earlier, primarily as a result of more effective project execution and higher revenue volumes relative to the segment's overall fixed cost structure. SG&A expenses increased to $8.3 million in the third fiscal quarter of 2007 versus $7 million in the same period last year. This increase of $1.3 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 5.3% for the nine months ending February 28, 2007, compared to 6.1% in the same nine-month period last year. SG&A expenses should range between 5% and 5.5% at year end.

Employment levels stood at over 3,400 employees at February 28, 2007, with man hours worked in the third quarter exceeding $1.5 million. We have filled nearly 150 staff positions with almost 60 positions hired in the third quarter alone. The doubling of our recruiting resources and additional staffing strategy should result in increased employment in the fourth quarter and into fiscal 2008.

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 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 website at www.MatrixService.com. EBITDA is provided as [we've realized] 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 third quarter of fiscal 2007 was $12.3 million compared to $5.8 million for the same period last year. EBITDA for the nine months ended February 28, 2007 was $34.4 million compared with $18.3 million for the year-earlier period.

The Company again had no bank debt at February 28, 2007, with a cash balance of $7 million. Matrix has utilized $10.6 million of the five-year $75 million revolving facility for outstanding letters of credit. Capital expenditures during the nine months ended February 28, 2007 totaled approximately $9.4 million. The Company also acquired approximately $400,000 of equipment under capital leases. The Company expects capital expenditures for fiscal 2007 to range from $13 million to $16 million.

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

I have a few final comments before we get into the Q&A session. We have significantly improved our balance sheet from the prior fiscal year. For the remainder of fiscal 2007, we expect to maintain liquidity from cash and cash equivalents and unused revolving credit capacity of at least $60 million. We will maintain adequate liquidity to fund capital spending needs and additional working capital requirements for future growth. We have made significant progress capitalizing on our competitive advantages and the strong market environment and will continue to focus, improving upon the operating performance achieved during the first nine months of fiscal 2007.

Our strategy, as we have discussed, is to continue to create value for our shareholders through operating excellence, organic growth and strategic acquisitions with a very disciplined approach. The market environments remain strong with the downstream petroleum industry continuing to fuel our Company's improving performance. We also plan to continue a disciplined contracting strategy aimed at improving profit margins and reducing risks. Because there will always be risks in the projects we execute, we are confident in our ability to manage those risks.

Based on the strong market environment, we are again raising our revenue guidance for the full fiscal year to the range of $630 million to $640 million from the previous estimate of $560 million to $580 million. We expect our gross profit margins to continue in the range of 11% to 12%; and, as Les mentioned, now expect SG&A expenses of 5% to 5.5% of revenue.

With that, we're ready to open it up for questions.

(OPERATOR INSTRUCTIONS). Rich Wesolowski, Sidoti and Company.

Les, how much did the weather and productivity issues [stop from] what looks to be a pretty good gross margin quarter in Construction Services?

Well, we're not prepared to discuss the specifics of the project impact, but suffice it to say that the margins were impacted to the tune of about what we would have had for margin guidance at the top end, which is the 10% to 11% for Construction Services. We would have exceeded that top end like we did in the second quarter.

Looking back a little while in the first half of nine months of FY '03, your construction gross margins were up in the 12-13% range and the one quarter even exceeding that. Do you think the current construction operations can approach those levels if demand continues as it is over the next couple years?

Well, we're still comfortable with the guidance that we've got out there. We will continue to assess that to determine if we want to move that, but right now we're comfortable with that range.

It seems as though better project execution has been the refrain in explaining the construction margin rebound this year. Is that going to continue to be the primary factor if margins fold and go up a little bit, or do you think that you can still get higher project pricing over and above any labor and material cost inflation of your own?

Let me answer. A couple things there. One is there continues to be very strong demand for our services in the downstream petroleum and, really, energy-related environment. We have been focused on improving our margins and reducing our risks with more effort towards cost reimbursable contracts; we have been very successful in that. Our focus is going to continue to be to bring in additional backlog with those two things in mind.

We're seeing demand for services in our Construction Services segment. Obviously, our revenue was very good in the third quarter. We're seeing additional types of projects come in with (technical difficulty) margin opportunity. So we feel very good about our future here.

Finally, the revenue -- the new point of current guidance is about 25% ahead of the new point of the initial 2007 guidance. Did you think at the beginning of this year that there was a possibility that you would reach this sort of revenue level? And now that you're there, how firm a handle do you think you have on the business even twelve months out?

Well, I want to take you back to where we were on June 15, when we gave the initial guidance of $480 [million] to $520 [million]. In the previous quarter we had just lost a customer that represented $55 million of our revenue from the previous fiscal year, so we had to replace that repair and maintenance revenue on a go-forward basis. At that point in time we were also working on our recruiting efforts and trying to make sure that we had enough personnel to take advantage of the market. I think you're seeing a situation when we raised guidance October 5th and when we raised it January 4th and again now, when we're raising it here in April, that we continue to exceed our expectations on the amount of resources that we can bring in, and that has enabled us to capture and execute more work.

Daniel Burke with Johnson Rice.

Quick follow-up to the last question. If you look at this quarter's results and the implied guidance for the fourth quarter on the topline level, do you feel like you have the manpower complement installed to support the $700 million per annum pipe revenue run rate?

I think that, first of all, we have been very successful in adding resources to support our growth and reach our range of $630 million to $640 million going into the end of fiscal 2007. We are continuing to focus on adding additional people. We've added recruiting staff, we have been very successful, and as I stated, our goal is to continue to grow this Company, increase value for our shareholders. We feel very good about the opportunities in front of us and our ability to bring in resources to accomplish that.

Just a couple more specific questions, then. Let's see. With regards to the backlog, it looked like you had pretty healthy additions during the quarter. We didn't see a lot of press releases. I guess that means you added a number of smaller projects to the backlog. Any color you could give in terms of what type of things you saw or were able to layer in to that $314 million end of quarter number?

Well, the additions to backlog, as you stated, were not of sufficient size individually to merit a press release other than the two releases that we put out in March. Obviously, those releases are in excess of $80 million. Mike has already stated those aren't included in our backlog numbers. But the additions that we did put in were pretty typical to the type of work that we've been doing. There is a diversification a little bit away from strictly aboveground storage tank construction. We continue to have a significant amount of replacement in that area, but we are also seeing other types of projects in the downstream petroleum industry.

Then, actually, a question about then the Motiva/TEPPCO job as well. As I understand it, the proposed refinery expansion at Port Arthur is still in the proposed (technical difficulty). Is it your understanding that, were Motiva to elect not to move forward with the full-scale refinery expansion, that your [light] product terminal project would move forward or would be completed?

The project that we're doing for them is intended to move forward. I don't have any information on it not. We're under contract, and we are purchasing steel for the construction now.

Then just one last question. We're hearing increasing chatter about potential pipeline reversals between Cushing and the Gulf Coast, potentially involving Seaway. That's likely a couple years out as far as opportunities could be, but would that present significant terminal and tank work, or is there enough installed infrastructure at both Cushing and the US Gulf Coast that maybe you wouldn't see as much work as you have seen with the recent Cushing buildout?

I don't know if I can address that specific project. What I can say is we are continuing to see strong demand for storage out beyond the next year or two whether these projects get built, but we can tell you that the demand remains very strong. I would anticipate continuing demand for storage as we bring in more Canadian crude, and there are hence some additional projects related to that. Whether or not this project could create additional storage -- I don't know that I can answer that specifically. It's an interesting project, and we're excited about that potential.

John Flanagin with First Analysis Securities Corporation.

Just to follow up on the announced storage project from mid-March, the natural gas liquids storage project, $21 million -- would that all be revenue for Matrix?

Yes.

Can you give us an update on the time horizon for that project, when that revenue would flow through?

That project is expected to be complete in, I believe, spring of 2008.

What about your assumed timing for the TE Products pipeline project that you said you're buying steel for?

That duration of that project is going to be in excess of twelve months, so it's going to be a longer-term backlog for us. I believe that we'll start fabricating on that in the late summer, early fall. The field construction will start in the winter of 2008, and it should continue through most of 2008. I don't know if there's a piece that goes into 2009 or not. But right now my understanding is construction goes in mostly of 2008.

Did you say the additions to backlog in the [3-14] number were 112? I didn't quite catch that additions number.

The additions to backlog in the third quarter? I believe that is correct.

And then last and at a higher level, what should we be assuming in terms of revenue mix going forward? I think I recall from the last call your indication that it would get into more of a sort of parity between Construction Services and repair and maintenance. But clearly, that's not the case at the moment with current demand and market tone.

Our current guidance is 55% capital and 45% repair and maintenance. We are not prepared to adjust that at this time. I think through the nine-month numbers it's about 57/43.

(OPERATOR INSTRUCTIONS). Rich Wesolowski from Sidoti and Company.

Can you give me a ballpark estimate of how much your backlog is specifically in storage, aboveground storage tanks?

Yes, I've got that number. In the February numbers the aboveground storage piece was somewhere in the $140 million range.

And how much of Sabine Pass is left in the backlog, and when is that expected to be complete?

About $60 million, and I believe the construction ready-for-cooldown date starts in the spring of early 2008.

Yes, throughout the spring.

What do you guys view as the biggest risk to your business right now?

I think our biggest challenge all along has been bringing in resources to support our growth and the work that we've got in backlog. We've been very successful at this point. That is a very strong area of focus for us, to continue to add recruiting staff. Our performance has been extremely well.

So I think, again, getting resources for continued growth is probably our biggest challenge. But again, we have been successful and continue to place a lot of effort in that area. There's always outlook down the road. We continue to see a lot of demand for projects coming through the door. So right now that appears to be very favorable.

Has there been a change, aside from your own accelerated recruitment efforts over the last six or nine months or so, that has enabled you to hire these people that you cited earlier in the call? Because it appears that some of the other downstream contractors are having a lot tougher time in doing the same thing.

I don't know that -- I think, a couple things. Again, focused effort in expanding our (technical difficulty) [staff] to do that. The Company is performing well, and that has been attractive. We are very pleased, and I think we have a -- Matrix is a great place to work, and we are very excited about that and we think we can offer employees a lot of potential and future. And those are the aspects that we continue to focus on in terms of bringing in new talent to this organization.

John Flanagin with First Analysis Securities Corporation.

Just following up on your repair and maintenance side, guys. Are there any changes in what you're seeing for your calendar since our last call in terms of pace of projects and orders?

I think on the repair and maintenance side we've said that the fourth quarter turnaround calendar still appears to be strong. We don't see it as strong as our second quarter was, but still a strong quarter. I don't see anything changing in the pace of orders that would lead to an adjustment to that.

Can you comment at all on Q1?

Of 2008?

Yes.

No. We're going to follow our standard protocol. We will put out annual guidance for fiscal 2008 sometime in June.

At this time there no further questions in queue. I would like to hand the floor back over to management for any closing comments.

Thank you. Again, we appreciate everybody participating and joining us on our call today. We are very pleased about our quarter and our performance year-to-date. We continue to have a very strong focus on growing and expanding our business with the ultimate goal of creating significant value for our shareholders.

I think we've got a great team in place at Matrix. The work continues to look very favorable, and we continue to focus on our strategy around three arenas -- improving our operating excellence, growing organically and (technical difficulty) approach to look at strategic acquisitions. So we're very excited about our future and our performance here to date, and we look forward to talking with you in about 90 days.

So with that, thank you, and if there's any other comments, Les?

No, I think that covers it.

Okay, we will sign off. Thanks, everybody.

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