Matrix Service Co (MTRX) 2010 Q3 法說會逐字稿

Greetings. And welcome to the Matrix Service Company third quarter fiscal year 2010 results 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, Thomas Long, CFO for Matrix Service Company. Thank you Mr. Long, you may begin.

Thank you and good morning everyone. I'd like to just take a moment to read the following. Various remarks that the Company make, may make about the future expectations, plans and prospect for Matrix Service Company constitutes forward-looking statements for the purpose 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'll now turn the call over to, to Mike Bradley, President and CEO.

Thank you, Tom, and good morning, everyone. We appreciate you joining us today to discuss our recently completed third quarter of fiscal 2010. Before I turn the call back to Tom to review the financial results, I will discuss the operating performance and outlook for the Company. This morning we announced our earnings for the quarter, excluding non-routine charges of $0.10 for fully diluted share, which were below our expectations. The primary driver impacting our third quarter results, the much lower volume of reoccurring repair and maintenance activity than we had expected. As stated in our April 23, press release, we had anticipated that business activity would pick up in the second half of the fiscal year.

While earnings for the first half of fiscal 2010 were in line with our plan, our clients are still experiencing a challenging economic environment, which has resulted in continued delays of capital projects and lower repair and maintenance spending. We see this continuing into the fourth quarter, which coupled with a very competitive environment has resulted in a reduction to our EPS guidance for the fiscal year to $0.55 to $0.65 for fully diluted share. This guidance excludes the impact of non-routine charges related to acquired claim receivables and other legal matters. Having said that, though, we remain confident in our long-term strategy and believe our strong balance sheet has positioned the Company to grow as our markets improve.

As I will discuss in a few minutes, we are seeing more encouraging signs as we move into our fiscal 2011. Additionally, as we announced in April 23, press release, we continue to manage the Company's cost structure in response to the challenging economic environment. In addition to previously reduced administrative costs, a $6 million per year, the Company took difficult but necessary actions during the third quarter to further reduce overhead costs. We expect the third quarter costs reductions to total $6 million annually. Our plan going forward is to maintain an appropriate cost structure and level of talent to ensure we execute our project safely and effectively and allow us to grow and expand our business both domestically and internationally.

Despite the challenging environment, we are pleased with the performance of the Matrix team and remain optimistic about our growth prospects. Project execution continues to be strong and safety performance is excellent. As I, I mentioned earlier, the Company's financial position remains strong, with over $50 million in cash. Positive cash flow, and no bank debt. We have added bonding capacity to grow our backlog and encouraged by numerous opportunities across our markets. Many of these opportunities are the result of our expanded and diversified capabilities, gained through recent acquisitions and additions of business development and project personnel. Our project funnel continues to grow and we are tracking several billion dollars of projects. Overall, the bid activity remains strong with opportunities in power, electrical instrumentation, aboveground storage tanks and terminals and alternative energy. While recent awards have been slowed to develop, we believe that project awards will increase as we move into fiscal year 2011 based on client indications.

Regarding backlog, our backlog declined by $22 million in the third quarter. However, we did sign two contracts totaling $40 million shortly after the end of the quarter, which we had expected to be in our March 31, backlog. One of the contracts, the thermal vacuum chamber was announced this morning in a separate news release and demonstrates our continued diversification efforts and our ability to leverage our engineering capabilities. The other contract is a multiple tank package in our aboveground storage tank business. We have received several letters of intent and verbal awards on additional projects. The recent contracts and favorable indications of project awards lead us to be more optimistic about our backlog going forward.

Looking ahead, we remain excited about our future, and believe Matrix is well positioned to grow as the economy improves. Our expanded engineering and construction capabilities have enabled us to pursue a broader range of turn key terminal, high voltage power, industrial and renewable energy projects. Our increased scope of engineering has provided the opportunity to perform front end engineering and design studies. We are now capable of self-performing a larger scope of engineering procurement fabrication, construction, and the United Services which has expanded our client base both domestically and internationally. We believe our continued emphasis on strengthening our business development efforts will lead to an even broader range of project opportunities.

Our operations outside of the US are getting traction. Annual revenues in Canada have more than doubled since fiscal 2008 and we have a number of encouraging opportunities. We continue to pursue international expansion in select countries with a focus on turnaround, specialty and steel plate structure projects. We have a dedicated team in place assessing geographic markets, identifying viable opportunities and currently bidding projects. We have seen an increase in bid activity on smaller aboveground storage tank projects. With larger projects emerging, and several projects in active negotiations.

Repair and Maintenance business however, remains challenging and highly competitive. Although inquires are beginning to pick up a little. The timing of awards in the downstream petroleum market remain uncertain as refiners continue to be cautious with their capital spending and new environmental regulations remain unclear. However, we are seeing some positive indications that this market is improving, based on projects emerging in our bid funnel. The fiscal 2011 outlook for the turnaround business is looking more favorable, and our expanding capabilities and solid project execution allow us to pursue a broader scope of turnaround projects.

As previously stated, our E&I business is expanding with a strong long-term outlook. Our E&I backlog is growing and we are pursuing numerous opportunities in this market. For example, our backlog increased quarter over quarter and is up over 80% from the beginning of the fiscal year. The combined capabilities of SM Electric and our legacy E&I business have allowed us to expand or geographic reach and customer base.

We're also developing contractor-of-choice relationships with several customers. Our expanded E&I capabilities will allow us to capitalize on the expansion improvement of high-voltage infrastructure and capture renewable energy projects, which require the design and construction of new power delivery systems. As we look forward, we remain committed to the growth of our core AST and downstream petroleum businesses in North America. Additionally our strength and capabilities in engineering procurement, fabrication and construction for AST and terminals have positioned us to move into select international markets. We continue to leverage our capabilities to further diversify and expand our power, E&I, specialty structure, renewable energy and industrial construction. The adding engineering and construction capabilities enable us to execute large scale turn key projects, complex steel plate structure projects and alternative energy projects.

We continue to take a disciplined long-term approach to our business and remain selective on project pursuits. We're committed to a strong safety culture, and high quality project execution for our clients. Our financial strength, capabilities, and talent position us to grow our business as market conditions improve. While we remain cautious in the near-term, as reflected in our earnings guidance, we are encouraged with what we see developing as we move into fiscal year 2011 and now I'll turn the call over to Tom to discuss our financial results.

Thanks, Mike. In the third quarter, net income was $0.1 million on total revenues of $122 million. Third quarter operating results included non-routine charges of $0.10 per fully diluted share related to write offs of $2.9 million on acquired claimed receivables, a charge of $0.7 million related to a legal matter and a charge of $0.6 million related to collection costs on claims acquired in a recent acquisition. While we do not discuss this, the specifics of any collections or legal matters, the significance of the charges are important to understanding our results for the quarter.

Quarterly revenues for construction services were $76 million as compared to $80 million in the third quarter last year. Repair and Maintenance Services revenues were $46 million this quarter, compared to $66 million in the prior year. As Mike discussed, revenues for both of our segments continue to be negatively impacted by the economic downturn, which has slowed capital spending and impacted the timing and scope of maintenance and construction work in the markets we serve.

Consolidated gross profits, profit was $13 million in the quarter, versus $18 million in the third quarter last year. While we have maintained effective project execution, our gross margins decreased due to lower business volume, lower direct margins, and a non-routine charge related to a legal matter. Our gross margins were 10.9% in the quarter as compared to 12.3% a year earlier. Consolidated SG&A was $13 million this quarter, compared to $11 million for the prior year. The change in the SG&A expense is due to current period write offs of $2.9 million on the acquired claim receivables, and a charge related to the cost, collection cost on the claims acquired in a recent acquisition of $0.6 million partially offset by cost reductions.

For the nine months, net income was $9 million or $0.34 per fully diluted share on total revenues of $410 million. The nine-month operating results include non-routine charges of $0.15 per fully diluted share related to write offs of $2.9 million on acquired claims receivables, and a charge of $2 million related to a legal matter and a charge of $1.5 million related to collection costs on claims acquired in a recent acquisition. This compares to nine-months prior year results, which revenues of $510 million in net income of $24 million or $0.90 per fully diluted share.

As Mike mentioned our liquidity and financial position remain strong since the end of fiscal 2009. We have increased our cash position by $18 million to $53 million and we have not borrowed against our $75 million revolving credit facility during the fiscal year. capital expenditures for the nine months were $4 million and we now forecast capital spending for the year to be approximately $6 million. And with that, we will open the call up for questions.

Thank you. (Operator Instructions). One moment please while we poll for questions. Our first question comes from the line of Rich Wesolowski of Sidoti & Company. Please proceed with your question.

Thanks and good morning.

Hey Rich.

Good morning.

Which of your end markets or customer groups would you expect to be the first to award new work or a stream of new work and conversely which would you expect to be the last to revive their spending?

That's a good question. Regarding the Electrical Instrumentation business, as I stated, our backlog has grown quarter over quarter since the beginning of our fiscal year and we can continue to see good opportunities in that market. Also as I mentioned, we're starting to see more activity in the aboveground storage tank business so at this point and time we are expecting that to pick up. I think the downstream petroleum business on the capital side remains a little slow, but as I also stated, we're starting to see much more encouraging activity for our fiscal 2011 turnaround activity. We are starting to see some other power projects come into the fold. And we also see numerous alternative energy projects that range from wind to biofuels to geothermal to solar. I think those are -- have always been slow to develop, but we do see several now that we have been actually pursuing.

Okay. Thank you. That's helpful. And number two, are you approaching you a level of backlog at which you would be forced to turn aggressive in bidding with your margins in order to keep some of your more valued personnel in the field if some of these customer groups delay spending for a few more quarters?

We view our current backlog, and again as he mentioned, we've booked $40 million right after the end of the quarter, which is not show up in the third quarter results. But we currently view ourselves as appropriate from a cost structure stand point, a talent base stand point with the backlog we have in place and with what we see developing.

Great thank you.

Our next question comes from the line of Matt Duncan of Stephens Inc. Please proceed with your question.

Good morning, Mike and Tom.

Hi Matt.

Good morning.

The first question I've got is how did the weather impact you guys this quarter? Obviously you play an outdoor sport, and I would think the weather has been negatively impact your business this quarter, could you give us any, any sense in terms of both revenue and margins what the impact was?

Matt, we don't have a precise number on that and we really haven't, included that as adverse impact to the quarter. Although, we do a lot work in the northeast and west coast and you had had heavy rains and numerous snow storms. So did it have an impact? Yes. But we don't have a precise number on that.

Okay. And then Mike, when you look at, I, I guess you said you guys have reached some verbal agreements and some LOIs for additional contracts, I would assume that those are not in backlog until you sign the contract, can you talk about sort of how much revenue those situations would represent if you were to be able to get those contracts signed, how big are those projects?

Well, number one, you're correct is we do not put anything into backlog until we have signed contract. I would say that some of the projects that we are in discussions with, are material in size and we're very encouraged. So --

Okay. And then what types of projects, is this really kind across all of your different businesses or is there any one category that may be over represented?

It's really spread out at this point in time. I think the, what we're seeing is more activity in terminals and, and storage than we have seen, so that's encouraging. But we also have some other projects that are outside of the AST business that look promising as well. And that would be a material size.

Okay. And then as far as the Tesoro incident, my understanding is that you guys had been working on the turnaround project there at the Tesoro facility the Pacific Northwest that had a explosion recently, did you work on the unit where the, where the incident occurred?

Well, I think, number one, Matt, I think given the situation and the investigation going on, it's not appropriate, appropriate for us to comment on Tesoro's -- what's going on there. What I can say is that we have done work in the Tesoro Refinery, we continue to do work in there and we will obviously cooperate in any way with the investigation as it proceeds.

Okay. And then last thing I've got is with regard to your balance sheet, obviously you guys still have a very strong balance sheet, strong cash position. Talk about how you sort of balance out your thoughts, between acquisitions and stock buyback, your stock is awfully cheap here in our opinion and just trying to get a sense for how you think about a stock buyback versus acquisitions right here with your cash?

We continue to look pretty active on some acquisition opportunities, right now, Matt, obviously our stock is cheap and we have to factor that in terms of how we use our cash as well. We did not buy back any stock in the quarter, but again, we, we take -- we're taking a balanced look at the best way to utilize our cash and increase shareholder value.

Okay. Thanks for the answers.

Your next question comes from the line of Michael Harrison of First Analysis, please proceed with your question.

Hi, good morning.

Hi, Michael.

I was wondering if you could give us an update of getting the end stamp certification.

Sure. That process is moving well, and we do expect to have that finalized by the end of our fiscal year, so everything's moving along as we expected.

And is it a situation where you can pursue nuclear projects before you have that certification and you just can't sign anything, or do you kind of have to wait to pursue until you have the stamp in place?

We can discuss, but we really -- until we get the final end stamp, there's really nothing we can sign. But again we're pretty encouraged, so.

Got it. And then other question I had is related to this thermal vacuum chamber contract, I was wondering if you could talk about how that's structured, the contract itself and what the risks might be as you see them?

In terms of the type of contract we have? I, I mean, Matrix is, the overall general contractor on this particular project. Dynovac is our partner, a sub with us. I think that in terms of the risks of this project, both the engineering group that we acquired through CB&I a little over a year ago, plus some of the people we have already in the organization have experience in design and construction of these facilities, so we don't see any unusual risks associated with that.

All right. Thanks very much.

Our next question comes from the line of Fred Buonocore of CJS Securities. Please proceed with your question.

Yes good morning.

Good morning.

First question relates to where you're starting to see a pick up, better signs of life in the aboveground storage market, can you point to anything in particular that's going on for your customers in that area that may be driving such a pick up and kind of what we can look at in the macro picture or look at your customers that may help us understand if that momentum is going to ten to improve for you?

Sure, I can give you some high level perspectives on that.

Great.

I think first of all, we see a lot more activity or discussions on, on import terminals.

Yes.

And expansion of import terminals. I think with the continued progress with moving some of the Canadian crude into the US is creating opportunities or the need for additional storage. Again, as you get different blending requirements, particularly with ethanol, create some opportunities for storage. So I they in general, it's just, we've just seen some, little more activity that we're encouraged about there.

That's very helpful. And then on the backlog, how do you look at it in terms of maybe timing as to when you think based on what you're seeing based on the two contracts you just signed, or subsequent to the end of the quarter, as well as these LOIs and other indications that you're getting, do you think backlog may have now bottomed and can start going up or do you think we have a little bit more to go downward?

I think that our expectation going into Q3 was that or backlog would increase, again based on the discussions, and as we stated, the $40 million projects occurred right after the end of the quarter, and we anticipate those being in, so that was kind of factored into our thought process that backlog would increase in Q3.

Yes.

We're seeing, it's hard to predict the timing on some of these, but, we kind of view right now that Q3 was, was a trough, so --

Yes. Okay. Then on gross margin, you talked about you're expanding capabilities both, you know what you've developed organically and through the acquisitions that you made, enabling you to self-perform more aspects of the projects that you're working on, and do you view that as over time having some sort of beneficial impact on your margins so that, maybe over the next couple of years you could reach all time high margin levels?

Well, he think a couple things -- I think a couple things, one, you I they -- think that will position us very well to expand the scope and scale of projects that we take on. And you I think that it will definitely help support, you know, strong margins going forward. I would say, right now the biggest challenge in our margins is two things. One is just the really turn down in Repair and Maintenance business, right now. Is much lower than we expected, and we continue to carry a level of overhead that's, that is under absorbed, and we're doing that consciously, again, based on what we see going forward. I think the other thing that's impacting our gross margins today is, there is very legal emergency work, and so and you still have a very, very competitive environment in the repair and maintenance business.

So I think those are really the factors impacting our margins, but I think the positioning and, on the EPC side of the business is going to help us a lot going forward in terms of growing and expanding our business.

Great. And then just a quick one for Tom. Was the legal charge related to one segment or another?

As far as the, the legal charge is really more tied in with the Repair and Maintenance. Specifically in the construction overhead.

Okay. Very good. Thank you so much.

(Operator Instructions). Our next question comes from the line of Martin Malloy with Johnson Rice, please proceed with your question.

Good morning.

Good morning.

I wanted to talk a little bit about some of the international opportunities and you said that Canada has doubled since 2008 in revenues, to what level roughly has it doubled on an annual basis?

Today, it's, it's starting to exceed 5% of our revenues, so it's we're, still small, but it's from zero. So we're encouraged by that, and seeing some, some good opportunities.

Okay. And on the Latin American, South American side, can you give us an update on opportunities in the bidding environment down there may be the size of some of the opportunities you're pursuing?

Yes, the size of the opportunities are really varied at this point in time. Some of the bidding we, we're really targeting a project size that we believe that Matrix Service can be competitive as well as you know generate decent gross margins. Kind of what we see on the very large scale projects, the competition is pretty strong. On small scale projects, the few million dollars worth, or $5 million, there's a lot of competition out there, so we're trying to find that sweet spot that, that fits us well, and we see, again, we're tracking several opportunities and actually bidding on a few as we speak.

Okay. Thank you.

Our next question comes from the line of Tahira Afzal from KeyBanc Capital Markets. Please proceed with your question.

Good morning, gentlemen.

Hi Tahira

Good morning.

Just to start off, we talked about these storage tank projects and some of your large projects be in pipeline and how they have got deferred in the past and it seems now they're finally being released, in term of the drivers for the release that we discussed previously and what you think might be leading to their release, is it a sense that customers feel commodity pricing are bottoming or do you think it's more so just an improvement in the macroeconomic outlook?

I think it's probably a combination of things. I think, one, an improvement in the economic conditions, but also the balance sheet, and of a lot of clients today have much improved from where they were a a year ago, so you I think that that financing is opened up, with crude oil back up where it was a year ago, I think everybody's just really taking a long-term view and again as I mentioned with the, some of the pipelines an expansions in terms of moving more crude, it's creating opportunities to, to expand storage. And I also think that a lot of the projects that we are seeing today open up and have been in the pipeline for some time. And so when we put together our view, really before the end of the calendar year, we had anticipated some of these projects really getting released after the first of the year but they continue to be delayed. So I think we're starting to see some of those projects get released and as I mentioned, we got a pretty sizable storage project right after the end of the quarter.

Got it. Again. Thank you. That was helpful, and most of my questions have been answered, but I did have one other question, and that was in regards to the cost you're seeing out there. As you go out to procure some of the costs, the more costly items, materials for yourself, and as you look at the labor costs on the welding side et cetera, any color on how those are trending now and what you're outlook is at this point versus where it was at the beginning of the year?

Well, I think in terms of steel prices, we have continued to see increases in steel prices. As we stated before, we don't speculate on material prices and if we book a job, we either buy the steel immediately or we have some sort of escalation cost, we have seen steel prices raise. Labor, I just they in general in the construction industry right now and engineering business, it's still pretty soft, so we're haven't seen any upticks in that regard.

Got it. And just a follow-up on that. The oil side projects ramp up and potentially on that you have an overlay of, perhaps a nuclear cycle which is a little bit more far out, it seems like the feedback I'm hearing is that the cost of welders will potentially go up, and I would like to get a sense of the the longer-term if that happens, does that help you or hurt you in terms of your revenues and then you're general profitability?

Well, I think Tahira, as costs go up, obviously that impacts revenue. I think that we've been very careful on lump sum projects to, to avoid long-term projects where we don't have protection on escalation because as you know, if the market turns and activity picks there will be some escalation. So we try to manage our projects such that we manage the risk of escalation and labor and materials, but again, as costs go up revenues go up and we saw that happen a couple years ago.

Got it. Okay. Thank you very much.

Our next question is a follow-up question from Rich Wesolowski of Sidoti and Company. Proceed with your question.

Thanks again. As I read about various quarters of the energy infrastructure market, US Natural Gas Transmission Distribution comes up again and again as a big growth area. I know you do some of this work but you still seem to keep it on the back burner, am he I right thinking the build out of US nat gas infrastructure is a big opportunity for Matrix and if so could you comment on the timing of construction work for gas processing, compression facilities, et cetera.

Yes, we see it a long-term big opportunity for Matrix Service. And we have been discussing with potential clients and looking at, at opportunities relative to that, so Rich we're definitely not ignoring it and we see it as a big opportunity for Matrix going forward

But I gather that you would sense that some of the E&I work, some of the AST work some of that may be grabbing the headlines for your company before the natural gas would?

I think that's a I fair -- a fair statement.

Okay. Thanks.

Once, again, ladies and gentlemen if you would like to ask a question, press star one on your telephone keypad. There are in further questions in the queue at this time. I would now like to turn the floor back over to management for closing comments.

Well, again I appreciate everybody joining us on the call this morning and I think as we stated that, even though the markets and customers are still experiencing the effects of recession, our financial position is strong and is not limited our ability to pursue new awards or execute projects safely and effectively. We feel like we have excellent talent and capabilities within the Matrix team and we are still very excited about our long-term strategy, and look forward to building on our business as we go forward. So with that, everybody have a good day and thanks again for joining us.

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