Matrix Service Co (MTRX) 2011 Q1 法說會逐字稿

Greetings and welcome to the Matrix Service Company first-quarter 2011 results conference call. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Tom Long, Vice President and Chief Financial Officer for Matrix Service Company. Thank you. You may begin.

Thank you, Christine. I would now like just to take a moment to read the following. Various remarks that the Company may make about future expectations, plans, and prospects for Matrix Service Company constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various factors, including those discussed in our annual report on Form 10-K for our fiscal year ended June 30, 2010, and in subsequent filings made by the Company with the SEC.

I'd now like to turn the call over to Mike Bradley, President and Chief Executive Officer of Matrix Service Company.

Thanks, Tom, and good morning, everyone. We appreciate you joining us today to discuss the results for our first quarter ended September 30, 2010.

It's been only a month since our last earnings conference call, so our comments today will be relatively brief.

To begin, we are pleased to report that fiscal 2011 is off to a good start with solid backlog growth in both our construction services and repair and maintenance services segments.

Consolidated backlog has grown in both of the last two quarters and now stands at $395 million, a 20% increase over the prior year and the highest level since May 2009. The $42 million increase in the first quarter was primarily due to awards in the aboveground storage tank market where we are seeing renewed capital investment and a pickup in repair work.

In addition to the backlog growth, we are pleased with the overall operating results in the first quarter, which were driven by the aboveground storage tank and the electrical and instrumentation markets. Revenue from our electrical and instrumentation business more than doubled in the first quarter, compared to the prior year, and the aboveground storage tank construction revenues increased 30% over the same period a year ago.

Consolidated gross margins, while lower compared to the prior year, increased from the fourth quarter of fiscal 2010 to the first quarter of fiscal 2011, despite a slow start to the quarter as I mentioned during the last conference call.

We remain focused on project selection and execution in order to improve our gross margins going forward.

Cost reductions implemented over the past two years contributed to our improved operating results in the quarter. The aggressive changes in our cost structure in response to the economic slowdown have positioned the Company to better observe overhead costs and improve overall gross margins.

We will continue to manage our cost structure in response to ever-changing market conditions. However, improvements in our business segments may require us to add resources to address the opportunities we see developing.

As we look forward, we are encouraged by a number of positive developments in many of our businesses. This trend is supported by improvements in the economy and capital markets. Many projects which were delayed or canceled are now moving forward as the long-term outlook improves.

As we discussed on our last conference call, we continue to see opportunities across all of our core markets, but still remain cautious with regard to the timing of future awards.

Construction opportunities in the aboveground storage tank business are increasing as a result of ongoing development of the Canadian oil sands and related pipeline construction. In addition, we are bidding projects for a variety of companies that seek to expand their storage assets. Matrix Service is well positioned to respond quickly to these opportunities through the development of our key engineering and construction personnel and utilization of our fabrication facilities.

The AST repair and maintenance business is also showing some signs of improvement, which is encouraging.

As we stated on our last call, we continue to take a cautious view of the downstream petroleum market in general, as the near-term outlook really remains uncertain. The recent uptrend in refinery utilization rates and improving crack spreads suggests that the cycle of domestic turnarounds is likely to firm up during the course of calendar-year 2011.

While the current activity has picked up, the level of competition continues to make it difficult to capture work at attractive gross margins. We do believe the market conditions are likely to improve in the intermediate to long-term as the economy improves.

We continue to pursue opportunities in the upstream petroleum market, as we discussed on our last call, and have recently secured project awards. Our capabilities allow us to provide mechanical services and fabricated equipment to support new drilling programs and plant expansions throughout the western U.S. and western Canada. These opportunities represent significant revenue potential for the Company as we move into calendar years 2011 and 2012.

The power, electrical, and instrumentation market continues to represent a sizable growth area for the Company over the intermediate and long term as a result of our expanded operations in the Northeast corridor and mid-Atlantic states. We are positioned to capture a significant amount of work that is required to improve the reliability and efficiency of the nation's electric grid and to connect the growing number of renewable energy projects to the grid as well.

We're also positioned to capture opportunities associated with upgrades of transmission lines and high voltage transformers as a result of our contractor-of-choice relationships with many investor-owned utilities.

The emergence of new air quality standards will mandate the addition of state-of-the-art environmental control infrastructure at many of our customers' facilities. Another element of this market includes the Company's capability to deliver varying scopes in the design and construction of gas-fired generating stations, which we believe will result from the continued development of the natural gas shale reserves.

Our electrical, instrumentation, power, and mechanical construction capabilities have allowed us to bid on a number of emerging opportunities in the natural gas market. These opportunities are driven by the rapid exploration and development of the natural gas shale reserves in the United States.

Given our strong presence in the Northeast, we are well positioned to capture construction projects in the Marcellus shale. Matrix Service can provide construction services associated with gas compression infrastructure, including tankage, process vessels, gas, liquid processing facilities, and electrical substations.

We currently provide electrical and instrumentation services to some of the nation's nuclear generating stations in support of critical security enhancements that we expect to continue throughout fiscal 2011.

In addition, we are also capable of providing engineering, fabrication, and construction services with the addition of our N-stamp. Further, we expect to receive our NR-Stamp in calendar 2011, which will expand our maintenance service offerings to the domestic fleet of operating nuclear facilities.

As we have discussed previously, we continue to pursue opportunities to expand our steel plate structures business into Latin America. We were actively bidding projects in a number of targeted countries as we leverage our brand and reputation with select customers in these markets. We are enhancing our business infrastructure to support this effort to capture project awards in calendar 2011.

We are encouraged by the recent improvements in the markets and our operating performance in the first quarter of 2011. Our project funnel remains very robust with many construction and maintenance opportunities across all domestic and select international markets. As a result, we are reaffirming our fiscal 2011 guidance in the range of $0.60 to $0.80 per fully diluted share.

With that, I will turn the call over to Tom to discuss the financial results.

All right, thanks, Mike. I'll make a few comments before we open it up to questions.

In the first quarter, we earned $0.12 per fully diluted share on $152 million of revenue, which represented our highest quarterly revenue since the fourth quarter of fiscal 2009.

Construction services segment revenues increased to $98 million in the quarter, compared to $78 million in the same quarter last year, while our repair and maintenance services segment revenues decreased to $54 million in the quarter, compared to $60 million in the prior year. Consolidated gross profit was $16 million in the quarter versus $17 million in the first quarter last year.

In the first quarter of fiscal 2011, construction services gross margins were 11.6% and repair and maintenance services gross margins were 8%. Consolidated gross margins were 10.3% in the quarter, as compared to 12.7% in the prior-year period.

First-quarter SG&A expense was $10.6 million, as compared to $10.1 million in the prior year, with the increase resulting from the $500,000 charge for the cost of the internal investigation recently completed last quarter.

Our cash balance was $43 million at the end of the first quarter of fiscal 2011, as compared to $51 million at the end of fiscal 2010. This decrease in our cash balance resulted from increased working capital to fund the growth in business volume experienced during the first quarter. Our overall liquidity remains very strong, and we continue to fund the business with cash flow from operations.

We believe our strong balance sheet and bonding capacity provide significant financial flexibility to capitalize on emerging growth opportunities. It also serves to differentiate us from many of our competitors.

So with that, why don't we go ahead and open the call up for questions?

(Operator Instructions). Fred Buonocore, CJS Securities.

Nice improvement in performance from last quarter. Just wanted to quickly ask, it's great that you've reaffirmed your guidance for the year. Could you give us also a sense of what, maybe, Q2 should look like relative to Q1, given the trends that you're currently seeing?

Fred, we don't break out the guidance by quarter, but I will say that -- and this is really kind of repeating some comments of earlier in its playing out, is we're seeing a ramp up as we continue.

As you know, our guidance in general was more backend loaded, but even as we went through this quarter, we saw that same kind of trend coming up as we went through each one of the months. So, hopefully, that can kind of give you kind of a flow of how we see the earnings playing out through the year.

Sure, and would it be reasonable to assume that backlog could continue to expand over the next couple of quarters?

Fred, I would say that we are encouraged with the bidding activity that's going on and continues to go on. As you know, awards are always lumpy, so we really don't predict our backlog quarter by quarter. But obviously, we've had two strong quarters. Bid activity remains strong, but as always it will be lumpy.

Great. And then, just secondly, could you remind us what the total cost reductions were that you implemented, I guess, over the last year, and how much of that, maybe, do you think you see coming back in as you have to add more capacity?

Fred, what -- I think what we've been looking at from the SG&A standpoint is getting to this kind of $40 million run rate for the SG&A.

And if you look at what we achieved during the quarter, it came in right at the $10.5 million, which that included the entire investigation cost, so as you know that brings that back down, if you take that out, back to about the $10 million level. And that's more -- in line with what we're anticipating for the year.

Fred, I would add that we -- I don't think we've really disclosed, but on the construction overhead piece of it, the cost reductions have been fairly substantial over the past year. And again, that's to get our absorption back in line.

And did that -- would you say that continued into the first quarter or (multiple speakers)

Yes.

It did, okay. Great, thank you very much. I'll get back in line.

Matt Duncan, Stephens Inc..

Congrats on some nice progress this quarter. The first question I've got is, I want to look at the E&I segment a little bit more here. Talk a little bit more about what's driving that, that very strong growth there. Mike, you mentioned some contractor-of-choice type arrangements. How many of those do you guys have now and are those still growing? And just talk a little bit more about how you sort of see that E&I segment playing out going forward.

This is a business, Matt, we've been excited about, as you know, following our acquisition of SM Electric and combining it with the capabilities that we already -- already exist within Matrix.

And I see several things happening, is one, obviously as we had discussed probably more than a year ago, that the need to upgrade the infrastructure, particularly in the markets that we have targeted, and that a lot of the public utility commissions were approving rate increases for the utilities to start spending in upgrading facilities, and I think that's been one factor.

I think the other is just the grid in general and the need to begin to add capacity to the grid, connecting renewables, but also upgrading the grid in general.

Our strategy has been to continue to develop these contractor choice relationships with utilities whereby we are a recommended provider for services. Not necessarily a sole provider, but again, based on our capabilities, continue to develop those relationships which allow us to expand the service we provide, but also the geography in which we provide those services.

I think that -- we continue to see this going forward for several years. And I think the next phase is, as they start to upgrade the transmission facilities, will create opportunities for Matrix as well.

Mike, how many of those agreements do you have at this point -- the contractor-of-choice type agreements?

I'm going to probably guess around half a dozen or so, and we continue to work to expand that.

Okay. That's helpful. And then on the NR-Stamp, I think on the last call you had thought you might get that shortly after the first of the year. Can you update us on the timing of when you think you may get that?

I think at this point, we still expect to receive it shortly after the first of the year, Matt. As you know, we're dependent on the appropriate authorities to get in and review and approve things, but we expect shortly after the first of the year.

Revenues start shortly thereafter?

Pardon me?

Do the revenues ramp shortly after you get that stamp?

I would say it now positions us to expand the services we are already providing. (Multiple speakers) get into the mechanic repair and maintenance. So, obviously, that's a market we're working on right now.

Last thing, and I'll hop back in queue, on the acquisition landscape, what are you guys seeing out there right now? Are you seeing opportunities and are you still thinking about maybe putting some of your cash to work to make acquisitions?

Yes, we see -- we're seeing a lot of different opportunities today, and some that are probably starting to get more reasonable in terms of multiples for us. But yes, we want to put our balance sheet to work. We want to grow the business. And our focus right now is looking at acquisitions and the organic growth.

Mike Harrison, First Analysis Securities.

Everything sounds pretty positive right now, so I wanted to talk about the downstream petroleum business and maybe drag things down a little bit. You -- it seems like even there, though, even though things weren't going well this quarter, you're seeing signs that things are picking up. Can you just comment maybe in a little more detail on what kind of visibility you're getting in terms of the turnaround cycle and maybe downstream construction plans heading into calendar 2011?

I think looking at calendar 2011, we are, as I think I mentioned in the last call, starting to see more capital opportunities developing.

The turnaround business, again, but you have to focus on the services that we provide. I would say right now, it's more in what we would call a normal range. And I think 2011, we are encouraged, particularly in the second half of 2011, in terms of opportunities.

But it's just a business right now that I think is pretty dependent on the economy. And, so, we're just continuing to be a little bit cautious. It's also an extremely competitive business, and so we've been very targeted and focused on the types of opportunities that we go after.

All right, and then, on the AST side, can you provide any revision to the 9 million barrel of storage number that you noted last quarter?

No, I think we -- I think what we stated there in the last quarter was the 9 million barrels that we had booked following the -- our Q4.

And that number hasn't gone up?

We continue to receive some awards, but I don't have an updated figure for you on that, Mike.

And then, last question is on -- just on the international side. Can you give us a little bit more detail on maybe how many opportunities you're looking at? And also what kind of costs you're incurring as you're pursuing some of those opportunities in Latin America?

I think that -- the opportunities that we see in front of us right now are pretty significant. And that's part of our effort -- about a year ago is when we started to really focus and add the BD capabilities to go out and develop these opportunities. And so the bid funnel has really increased. We are seeing quite a few.

I don't think that our cost to pursue this business is really something that I would call material. It's really pretty small. We've got a lot of in-house resources in our specialty business that can be deployed. So, it's not a major cost factor to this business at all right now.

But in terms of -- I guess as you look into expanding into a new country -- I mean, what kind of infrastructure, personnel, equipment costs are going to be associated with that, or is it something you feel like you can handle from your current asset base?

That would be a project-by-project basis. So, that would be costs that we would include in the bid and in the execution of the project, not necessarily a bunch of costs we have to add into the Company.

Tahira Afzal, KeyBanc Capital Markets.

Morning, guys, and great quarter. The first question I had was, as you look at your pipeline and as you look at your backlog now, how confident are you about whether backlog has troughed for you guys?

I'm sorry, backlog has troughed?

Yes, do you think it has troughed and -- based on the visibility that you have as of right now?

Obviously, our backlog is up about $100 million from where it was at the low point, Tahira, in this past 12 months. And I think that we continue to see very good bid opportunities and we're more encouraged that projects are actually going to go to award and get constructed. So, we're definitely more encouraged by what we see today.

Got it. So, despite the lumpiness you talk about, you do feel that generally at this point, the backlog trend will likely be up versus down.

I can't predict quarter by quarter, Tahira. It just depends on the timing of awards, which still remains a little bit uncertain, but just based on the activity that we're seeing, we're a lot more encouraged than we were a year ago, for sure.

Got it, okay. Then if I look at your guidance as it stands right now, and then, number two, I know we were just -- you had your goal just a month ago, but really if you look at the first-quarter performance and where it's come out, and then, too, look at our guidance for the full year, do you feel more comfortable around the middle to upper end of the range versus what you did when you set the guidance?

I think we feel comfortable with the range and, again, our reason for reaffirming the range during this call.

Got it. And if you look at the first-quarter performance, would you say that it is in line with how things were looking when you gave guidance or would you say it might be a little better?

Well, I think when we gave guidance and during the last call, we stated that the summer was slow, and it was. And that we saw business picking up, and so I think that we are pleased with the results for the quarter. Obviously, the start, as I mentioned, was a little bit soft, but we're -- business has picked up and continues to pick up, so we remain encouraged.

Got it, okay. And last question is in regards to your quarterly revenues. If I look last year, you could do up to 12%-plus margins on $150 million in revenue. Now you have bookings coming in at a clip of well ahead of that, at least for two quarters. How do you see margins behaving on the growth side as you see utilization rates picking up perhaps above the $150 million mark?

I think that from a gross margin standpoint, we're continuing to focus on improving our gross margins as we go forward. I think utilization will help, obviously.

As we talked about the underabsorption that we incurred last year, we are getting more into a fully absorbed mode now, which is benefiting margins. I think the -- some of this can depend on the repair and maintenance business, and how competitive that market remains over the near term. But I think that the types of projects that we are winning and continuing to bid on have good margin potential for them.

Got it, okay. So if I look back at the second half of the year, your gross margins were between 12.5% to 13.5%. Granted your pricing is lower, but your utilization is picking up. Is there a chance we can reach 12.5%, assuming your execution, et cetera, is as per track? Can we see 12.5% being reached by the end of the year?

Well, I won't give you a timing on it, but I will tell you that we sure believe that can be reached and that our margins, particularly in a stronger environment, can improve.

(Operator Instructions). Martin Malloy, Johnson Rice & Company.

Congratulations on the quarter. Could you talk about some of the opportunities you're seeing on the upstream side? You cited in western U.S. and Canada mechanical and fabrication components. Are these going into gas processing plants or what exactly are you seeing there?

Currently, we are -- we have secured opportunities and are continuing to build a presence in the western U.S. supporting drilling operations that are going on at this time.

So we're working at the drill sites, we are doing mechanical work, fabrication, frack tanks, and other repair and maintenance services. We see this as an interesting market for us, and it fit very well with us. We have been successful at securing opportunities, and this is an area we continue to look at opportunities to expand our business further.

At the drill site, is this helping set up the rigs or -- ?

No, no, no. We're -- it's more the mechanical piping, frack tanks, repair and maintenance. We're not in the rig work stuff.

And then, in terms of tankage capacity, looking out over the next 12 to 24 months, there's some pretty significant plans for pipeline expansions coming down from Canada with what TransCanada has planned. Is there any help you can give us in terms of thinking about the potential opportunities associated with that?

What I can tell you is when you look at our bid opportunities and you include Canada, the storage numbers are pretty significant. I can't give you an exact number. Now, I could probably -- have to do that next call. But we have -- we do have a range of barrels that are currently -- we're looking at bidding on. But it's definitely picked up.

Fred Buonocore, CJS Securities.

Just following up on Tahira's questions about margin, as you look out through your backlog and kind of the timing of when you'll start to liquidate a lot of that work, are there any spaces or points in that backlog where you see you might be starting up on an excess of new projects versus, say, wrapping up on more mature projects that could result in a hiccup or like a pothole in margin as we progress through the year, or do you see things kind of evenly flowing with volume as we move through the year?

We don't see any hiccups in margins at this point, Fred. I think that I would say typically December is a light month for us because of the holidays. But I think we're -- right now, we're pretty encouraged with the backlog and how we see the year unfolding. So, I don't anticipate any hiccups. That doesn't -- so.

Okay. And then, just speaking a little more longer term, when you look at the E&I business, and perhaps you've disclosed this before, so forgive me if you have. But do you have a target for how large you think you can grow that business in terms of revenue, maybe over a three- or five-year period?

We've never disclosed a target, Fred, for that, so -- I mean, that's a good question and we haven't disclosed that. But I think that, as you can see from the first quarter, our revenues have grown significantly.

Our focus is to continue to expand the types of services we provide, relative to the electrical and instrumentation market, as well as the geography. And that's really been our focus is to continue to expand both of those concurrently.

Okay. Then just a final follow-up, just interested in some of your thoughts as it relates to the competitive environment in the downstream business. What types of competitors are you seeing most of the pressure from or the perhaps somewhat irrational pricing from? Are these larger global kind of guys or your smaller regional players?

And what point do we need to reach, in your view, whether it's refining margin or -- I'm not sure what metric you might think you might be looking at, but what point do we need to reach, in your view, that would really start to materially ease these pressures, if that can happen at all at this point?

I think a couple of things going on there is, one, that following the fallout from 2008 and 2009, there was such a reduction in work, and the result of that was a lot of excess capacity in the repair and maintenance and business associated with the refining markets. I don't think that excess has been worked out yet.

So, it's still pretty competitive. We compete with a lot of mainly regional players. When you look at our business, we're -- although we reach all over the U.S., we've got regional segments that we focus on.

And I think the second piece of it is, I think as refinery utilization picks up, I think the maintenance work will pick up. And that will lead to more business opportunities. And I think that, hopefully, we'll see some improvement in the margins as we go forward.

That makes sense. Thank you.

Tahira Afzal, KeyBanc Capital Markets.

Sorry, gentlemen, my questions were on the shale plays and upstream opportunity, and that question was asked. So thank you.

Mr. Bradley, there are no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Okay. Again, thanks, everybody, for joining us on the call today. I hope everybody has a good weekend, and we look forward to talking with you after we complete our second quarter. Again, thanks, and have a great weekend.

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