Matrix Service Co (MTRX) 2007 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Matrix Service Company fourth-quarter and fiscal year end 2007 results.

At this time, all participants are in a listen-only mode. A 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, Miss Truc Nguyen, investor relations for Matrix Service Company. Thank you. Miss Nguyen, you may begin.

Thank you, Claudia. 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 our annual report on Form 10-K for our last fiscal year and in subsequent filings made by the Company with the SEC.

I would now like to turn the call over to Michael Bradley, President and CEO of Matrix Service Company. Mike?

Thank you, Truc, and good morning to everybody. On the conference call today, we also have Les Austin, Matrix Service's Chief Financial Officer. Les Austin is going to discuss in detail the financial results for the quarter and the full year, although I would like to comment briefly on the overall results before we get into that.

The for physical year 2007, Matrix service was very successful in growing our overall company, expanding the revenue base of our core businesses, and achieving both record revenues of $639.8 million and net income of $19.2 million. Additionally, we ended the year with a record backlog of $356 million.

We have successfully achieved our plan of exiting the physical year 2006 turnaround situation, returning the Company to financial stability, and positioning Matrix Service to significantly grow our business. Matrix Service employees have performed extraordinarily this past year, and we're very pleased to have such a dedicated and talented team to support our strategy of continued growth going forward safely and with the high level of quality and services our customers expect.

We will continue to focus on our three strategy elements -- improving the efficiency and operating performance of our existing business, capturing opportunities to grow organically given the strong fundamentals surrounding our core business, and selectively looking at accretive acquisition opportunities to expand our capabilities and our core businesses. We have increased our hiring and capital spending expectations for [fiscal] year 2008 to support these strategies.

Reviewing the fourth quarter, we took a charge of $10.9 million related to an LNG construction project in the Gulf Coast region which adversely affected the otherwise-excellent performance in our underlying business which had an outstanding performance really all year. Excluding this charge in the quarter, our EPS would have been $0.32 per fully diluted share, which was a result of the clear focus and outstanding performance by the Matrix Service team.

Regarding the charge in the fourth quarter and as we disclosed in our press release, we have continued to see increased costs due to a very difficult post-Katrina labor environment and strong industry fundamentals along the Gulf Coast, along with productivity and absenteeism challenges which have caused us to significantly increase our labor costs for the remainder of the project. We have also experienced some design (inaudible) complexities which are leading to increased labor, material and equipment costs. These factors, combined with weather, have resulted in working under a more compressed schedule which is necessary to meet our customer requirements. We have performed a thorough review of our forecast and have added additional staff and processes to meet our completion (technical difficulty) and in a quality manner, and to effectively manage the costs for the remainder of the project.

This was a major lump sum project for Matrix Service entered into pre-Katrina, and we have been working through the challenges associated with that, but we have learned some lessons that we are addressing as we further complete this project. This project represents a significant portion of our lump-some projects, and we have been negotiating most ongoing work on a cost-plus or risk-sharing basis. We have no other pre-Katrina projects.

We have provided more transparency on this special project than has been typical of our past practice due to the magnitude of the charge, and to be upfront with the challenges we have faced and what we're doing to complete this project on time, manage our costs, and meet our customer expectations.

For the physical year ended May 31, 2007, our revenues were up 29.5% compared to fiscal year 2006, and net income was up 150.5%. Excluding the charge, our earnings per share would have been $0.99 per fully diluted share, which really indicates how well our underlying core businesses performed.

We enter physical year 2008 well positioned with record backlog and continued strong demand for our services and are very pleased with the overall progress achieved during fiscal year 2007. While the charge experienced on the LNG project is disappointing, the fundamentals of our business and execution remain strong.

I will now turn it over to Les, who will go through the financial details.

Thanks, Mike. I would like to discuss the specifics of the fourth-quarter and 12 months' year-to-date performance for each of our operating segments.

Total revenues for the quarter were $177.9 million, compared to $138.6 million reported in the fourth quarter of fiscal 2006. Net income for the fourth quarter of fiscal 2007 was $1.9 million or $0.08 per fully diluted share, which included the $10.9 million pretax charge or $0.24 per fully diluted share for cost overruns on the LNG project Mike discussed earlier. These results also included pretax charges of $500,000 or $0.01 per fully diluted share resulting from the adoption of the fair value recognition provisions of FAS 123R, "Accounting for Share-Based Payment."

Construction Services revenues for the fourth quarter of 2007 were $102.7 million compared to $78.9 million in the same period a year earlier. This improvement was primarily due to Downstream Petroleum revenues increasing $21.2 million but improvements were also seen in aboveground storage tank revenues of $9.5 million and Electrical and Instrumentation revenues of $5.9 million. These improvements were partially offset by a decline of $12.8 million in specialty revenues related primarily to the charge taken as a reduction in revenue on the LNG construction project discussed previously. The growth in Downstream Petroleum revenues was primarily due to the performance of work for two additional refinery customers, while the rise in aboveground storage tank revenues was driven by the strength of the market and capital spending from our core customer base. Construction services gross margins were 0.9% versus 7.6% in the fourth quarter of 2006. Absent the $10.9 million charge, margins would've been 10.4% in the current quarter.

During the quarter, repair and maintenance services revenues increased by $15.5 million or 26% to $75.2 million from $59.7 million in the same period in fiscal 2006. This improvement resulted primarily from increased aboveground storage tank revenues of $13.1 million and Electrical and Instrumentation revenues of $3 million. Gross margins were 14.4% in the quarter, compared to 10.6% in the fourth quarter a year ago.

For the fiscal year ended May 31, 2007, Matrix Service reported consolidated revenues of $639.8 million, a 29.5% increase, compared to $493.9 million recorded in the fiscal year ended May 31, 2006.

Net income for the fiscal year 2007 was $19.2 million or $0.74 per fully diluted share, which includes an $11.3 million pretax charge or $0.25 per fully diluted share for cost overruns on the LNG construction project in the Gulf Coast region. These results also included pretax charges of $1.5 million, or $0.03 per fully diluted share, resulting from the adoption of the fair value recognition provisions of FAS 123R, Accounting for Share-Based Payment. These results significantly exceeded our prior-year fiscal net income of $7.7 million or $0.35 per fully diluted share.

Revenues for the Construction Services segment rose significantly from $243.7 million in fiscal 2006 to $366.2 million in fiscal 2007, which represents an increase of $122.5 million or 50.3%. This improvement was primarily due to aboveground storage tank revenues increasing $70.9 million but improvements were also seen throughout the segment as Downstream Petroleum revenues grew $25.1 million, Specialty revenues rose $16.6 million, and Electrical and Instrumentation revenues climbed $9.9 million. The substantial growth in aboveground storage tank revenues was driven by the strength of the market and capital spending from our core customer base. The growth in Downstream Petroleum revenues was primarily due to performance of work for two additional refinery customers, while the rise in Specialty revenues was primarily related to the LNG construction project discussed previously. Construction Services gross margins were 8.1%, versus 8.4% in fiscal 2006. Absent the $11.3 million charge, margins would've been 10.8% in the current year.

Revenues from the Repair and Maintenance Services segment grew $23.5 million or 9.4% from $250.2 million in fiscal 2006 to $273.7 million in fiscal 2007. This improvement resulted primarily from increases in aboveground storage tank revenues of $28.1 million and Electrical and Instrumentation revenues of $14.2 million. Partially offsetting this growth was a reduction in Downstream Petroleum revenues of $18.8 million as turnaround work that occurred in fiscal 2006 was not fully replaced in fiscal 2007. Gross margins were 13.3% in the year, compared to 10.7% a year ago.

SG&A expenses increased to $32.8 million in 2007 versus $28.8 million in the same period last year. This increase is primarily attributable to the increased hiring Mike spoke of earlier which will position the Company for continued growth. Since June 1, 2007, we have added 38 staff positions organizationally.

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-K and in the Investor section of the Company's Web site at www.MatrixService.com. EBITDA is provided, as we believe that 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.

For the fourth quarter of fiscal 2007, EBITDA was $5.5 million compared to $6.7 million for the same period last year. For the 12 months of fiscal 2007, EBITDA was a record $39.9 million, compared to $25 million for the year-earlier period.

The Company again had no bank debt at May 31, 2007 and increased its cash balance to $9.1 million. Matrix Service has utilized $8.6 million of the five-year $75 million revolving facility for outstanding letters of credit. We anticipate that the cash utilized for the share buyback program announced this morning would be funded under the revolver.

Capital expenditures during the 12 months ended May 31, 2007 totaled approximately $13.1 million. The Company also acquired approximately $1.3 million of equipment under capital leases. Matrix Service expects that capital expenditures could exceed $30 million for fiscal 2008.

Backlog at May 31, 2007 stood at $356.4 million versus $248.4 million on May 31, 2006. Approximately $60 million of this backlog relates to our LNG project, $225 million relates to the construction of aboveground storage tanks, and the remaining backlog relates to other Downstream Petroleum projects. Additions to backlog for the 12 months ended May 31, 2007 were $550.3 million. Matrix Service currently has a bonding capacity of $90 million in aggregate bonded work.

I will now turn the call back over to Mike, who will discuss the prospects for fiscal 2008.

Thanks, Les.

Before we go to Q&A, again I want to reiterate that we have positioned the Company, both financially and operationally, to take advantage of the significant opportunities we continue to see before us. Even with the charge discussed, fiscal 2007 was a record year for revenues, net income, earnings per share and backlog. We continue our focus on expanding and growing our business while delivering high-quality products and services safely to our customers.

We're maintaining our fiscal year 2008 guidance of $700 million to $750 million in consolidated revenues, 11.5% to 12.5% in consolidated gross margins, and 5% to 5.5% in SG&A, which we anticipate will generate a record operating income performance for the third consecutive year.

I appreciate your support and look forward to continued progress as we move into physical year 2008. With that, we are 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 & Co.

There was evidently a big change in the project estimate between when you put out guidance in late June and now. Can you give us a little insight as to how you arrived at the new number and maybe talk about some of the riskier aspects of the job before completion?

Sure. You know, as I discussed earlier, we had continued to experience some significant issues related to labor productivity, which has really been around since the post-Katrina situation. On June 28, our forecast did not place the Company outside our guidance range and since that date, we have recognized cost increases really due to what I would call two main areas. In mid-June, we began a new phase of work activities during this time (technical difficulty) to be more complex than anticipated, resulting in higher labor, material and equipment costs.

The second thing is productivity, turnover and absenteeism continue to be a bigger challenge, which are requiring us to add more labor in our forecast to overcome the impact and, very importantly, meet our customers' schedule requirements. I will say that the inner tank work is going quite well.

Maybe looking ahead, the complex aspects of the project that didn't go as well as you had planned over the last couple of months, did those dominate the revenue mix going forward? Are they a smaller portion?

They are, in terms of the work activities, they are a smaller portion of the revenue. We have taken some actions to get our arms around it and are addressing it. Again, that's one of the reasons that we increased our costs associated with that work.

We are almost -- we are about 68% complete as of July 31, so a little over 30% remaining on the project. Most of the materials have arrived on-site. We're really -- I think we've got our arms around and did our best estimate of what's remaining on this project and what it's going to take to meet our customers' completion requirements.

I would say the biggest risk going forward obviously is weather. That hasn't been an impact. I'm talking about hurricanes. Hopefully, we don't experience that. You know, we continue to have challenges with labor, and we are continuing to add labor to address that.

The award that you had from Motiva that you announced earlier this year, I think in March or April, given you any rebuttal to the competing employers in the area that may have jobs extending out past the completion date you have for the Gulf Coast project?

I know that we've got that stream of work that will take our staff into fiscal '09 and beyond, which is obviously public knowledge to the craft on the site down there. So to the extent that will help with some of the turnover, we've used it.

I think again, in terms of staff turnover, staff turnover has not been a real issue. It's more labor turnover and attrition that we've had to deal with on that front, and bringing in skilled laborers, so we've had, again, a major focus on that.

Okay. Two questions related to the comments you made on the CapEx and the labor base you have -- can you detail what's going into that big, $30 million-plus CapEx number for F08, then talk about where the headcount is now? You might have given those numbers and I missed them. Where you expect them to be and the challenges in getting there?

Well, when you look at our capital budget for next year, there's a certain amount of CapEx that's replacement CapEx, and that's in the neighborhood of $12 million. That's what we are running to keep our business ongoing.

There's also an element of expansion CapEx for facilities, as well as equipment for some of the new projects that we've announced previously in our press releases back in March and June, to -- for instance to outfit a new tank construction crew is about $500,000 per crew. So, we've got a significant amount of expansion CapEx related to those new projects as we continue to expand. So facility expansion, crew expansion, and our ongoing replacement CapEx are the balance of what make up the $30 million.

As far as headcount, we still have a significant amount of open positions that we are recruiting for. As I mentioned, we have replaced or added 38 new positions since June 1 of this year, and we will be continuing to add to that as we move towards our projections for the fiscal '08 year.

Okay, good. Just finally, if you're using up all that you have right now, it's safe to say that if you aim to continue to grow and absorb the work that's in the market, you're going to have to continue spending a CapEx number that's closer to that $30 million than the $13 million or so that you posted in F '07?

I don't think that $30 million is the run-rate number. There is a significant amount of expansion related to facilities and fabrication equipment in that number that will enable us to grow past the revenue projections we have for '08.

Great. Thanks a lot.

Daniel Burke, Johnson Rice & Co.

If you look at your work along the Gulf Coast, excluding the LNG project, I think you are active in another area. How does your efficiency and productivity look at those sites?

Well, I would say, overall, that productivity has been a challenge for us in a lot of locations, again just getting an experienced workforce. But I think the remainder of our projects on the Gulf Coast are performing very well.

Fair enough. Going then to the LNG project, do you have any potential to go back to either the client or the contract you're working with to recoup some of these overrun dollars? Any potential you'll get some of this back?

There are some outstanding items that we will continue to negotiate on, Daniel. I'm not going to get into the specifics, but those are items we will continue to work through with our customers.

So doesn't it sound, though, as though any of that has to do with change orders that would have emanated, say, from a customer himself?

The additional costs?

Yes.

No.

Okay. Last one, on the LNG project -- I thought you had some potential sort of intermediate incentives or timeliness, or deadlines, that you had the potential to hit. As the contract stands now, is the only deadline you're facing that would influence I guess your ultimate result on the project the handover in early '08?

That's our focus, yes. You know, we have milestones we are targeting between now and the '08 completion date, but our focus is on meeting the request for (inaudible) down dates for our contract.

Where do you stand on getting the roofs up on (multiple speakers)?

All three roofs are up.

Okay, good.

Last question, and just to back up -- you mentioned the backlog could gain over $200 million in tank work and kind of cut it that way. I think, in the past, Mike, you talked about your backlog. Is there a way to look at it in terms of the percent that's under sort of cost-plus or alliance work, versus I guess other work where you have a little bit more risk embedded in the contract?

In terms of the tank?

In terms of, well, the whole backlog, excluding the $60 million LNG project, so roughly the remaining $300 million?

Yes. If you look at the total backlog, including the $60 million on LNG, it's about a 60/40 split, 60% being cost-reimbursable and alliance customers, and the other 40% being lump sum, which would include the LNG project, which is I believe about 15% of the 40.

Okay, great. I think that does it for me. Thanks, guys.

Rich Wesolowski, Sidoti & Co.

How really can you guys commit tank fabrication capacity for a new customer that is not in dire need for the project right away or is willing to pay some exorbitant price for it?

Well, we are selectively taking on additional work. We have and are completing some expansion capabilities in our fabrication facility. But I will say, in general, you know, '08 is pretty booked up and we are look booking pretty solidly into '09. We try to accommodate our customers where we can on one and two tanks that may be required. But again, as Les indicated, as part of our capital forecast, we are adding equipment and crews to take on additional work. I would say, in general, our fabrication capacity is in good shape, but we are solidly booked and continue to see that into '09.

If demand continues on this track for the next couple of years and assuming you're able to get better productivity out of the new workers you are hiring recently, would you see a potential for the construction gross margins to approach and reach the midteens level?

I think that potential is there, yes. Part of our strategy is to really focus on improving the efficiency and performance of our current business, again applying new technologies and efficiencies to bring those dollars straight to the bottom line. So, our focus is to do that.

Okay. (inaudible) you mentioned a couple of different uses for cash -- buying back the shares, CapEx number going up, still acquisitions on the board. It there a ceiling for the debt that you want to have on the balance sheet?

Well, right now, the debt is at $75 million under the revolver. There's a $25 million accordion feature that we will be looking at as we progress to the share buyback plan, which would up the facility size to $100 million. I think that there's still some capacity in the bank debt markets before we looked at other forms of debt that we would put on our balance sheet. But we're comfortable at those levels.

Does the expansion raise the price?

Excuse me?

I'm sorry. Does the expansion of the capacity raise the price of the money?

No.

Finally, just the $500,000 in charges in F '07 that were not in the quarter, those were in 3Q, correct?

That is correct.

Daniel Burke, Johnson Rice & Co.

Just a question -- I wanted to get an update on your thinking, or your interest in the power business. It's pretty conspicuously absent from the backlog; it's been a small part of the mix, and I know you've addressed it pretty frequently here over the last couple of calls. I wanted to get your updated thinking on the role power business can play or will play at Matrix over the next couple of years.

Yes. Part of our strategy, which we have talked about before, is to continue to look at ways to diversify our revenues in areas that we have strong capabilities. The power side is one of them, both in terms of the Electrical and Instrumentation work but also opportunities such as scrubbers, [vecting], stacks, stack liners, hoppers, bins, and landfill energy systems, which we are looking at. We also have some projects under contract and will continue to look at expanding as we go forward over the next few years. We see that growth in the power industry and additional investments which we are going to be continuing to pursue.

Are you more or less optimistic about the scrubber business, Mike, than you were, say, six months ago?

Yes, I think there's some opportunities.

Fair enough. Thanks.

(OPERATOR INSTRUCTIONS). There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Well, again, we appreciate everybody's participation this morning and some good questions. We know we had the charge we needed to address, but as I emphasize, we are very pleased with how we have positioned the Company this year and are very excited about 2008. Again, we look forward to working with you as the year progresses and talking about our opportunities to continue to grow and expand our business.

Thank you. Everybody, have a great day.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.