Matrix Service Co (MTRX) 2012 Q1 法說會逐字稿

Greetings and welcome to the Matrix Service Company conference call to review first quarter fiscal year 2012. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) This conference is being recorded. It is now my pleasure to introduce our host, Kevin Cavanah, Vice President and CFO for Matrix Service Company. Thank you, Mr. Cavanah, you may begin.

Thank you and good morning. I would now like 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 the 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, 2011 and in subsequent filings made by the Company with the SEC. I would now like to turn the call over to John Hewitt, President and CEO of Matrix Service Company.

Thanks, Kevin. Good day, everyone, and thank you for joining us to discuss the results of our first quarter ended September 30, 2011.

Results of the first quarter fiscal 2012 were in line with our expectations. Backlog has increased steadily in recent quarters and did [volume] strong across our key markets. As I mentioned in our last call, our quarter to quarter business can be seasonal due to various factors including weather, client spending patterns and energy demand, however, as we indicated in our earnings release yesterday, the outlook for our fiscal year is positive. The timing in project awards and commencement of field activities in July and August was somewhat slower than anticipated resulted in lower man hours and under recovery of construction of overhead costs in the quarter. Despite this relatively slow start to the year, revenues and man hours have increased every month and are trending in line with our expectations for the fiscal year.

As I mentioned, backlog continues to grow and was $426.6 million at the end of the first quarter, the third consecutive quarterly increase. Bookings for the quarter were on par with our best quarter in the last 2 years and proposal volume is robust in all of our business lines. We are particularly pleased with the business volume in the above-ground storage tank and high voltage electrical markets. Overall, our outlook for fiscal 2012 is very positive.

The repair and maintenance service segment achieved revenue growth of 28% in the first quarter compared to the same period last year with our above-ground storage tank, downstream petroleum, and electrical instrumentation businesses all providing double-digit growth. Construction services segment revenues increased slightly; however, above-ground storage tank revenues increased by almost 44% partially offset by lower revenue in electrical and instrumentation with the completion of a major contract in the last fiscal year. We are encouraged by a number of positive developments and emerging trends in our core markets. Many of our customers are planning significant projects that Matrix Service is well positioned to capture. Given the strength in our current business lines and strategic expansion opportunities, we are expanding our revolving credit facility from $75 million to $125 million. We have received commitments from our bank group and we expect to close on the new facility early next week. We believe this added capacity supports the Company's strategic growth requirements beyond fiscal 2012.

As for guidance, we are encouraged by the additions to backlog in the first quarter and to current bidding activity. In addition, our project model includes a significant number of material contracts in both the construction services and repair and maintenance services segments. As a result, we are increasing the lower end of our revenue guidance from $650 million to $675 million and we are increasing the lower end of our earnings guidance from $0.75 per fully diluted share to $0.80 per fully diluted share. We are holding the top end of our revenue earnings guidance at $725 million and $0.95 per fully diluted share respectively. With that, I'll turn the call over to Kevin to discuss the financial results.

Thanks, John. In the first quarter ended September 30, 2011, revenues were $169.3 million, an increase of 11.5% versus $151.8 million in the same period last year. We earned $0.13 per fully diluted share in the first quarter compared to $0.12 per fully diluted share in the same period last year. Repair and maintenance services segment revenues increased 28.3 % to $69.7 million in the quarter compared to $54.3 million in the same period last year. Construction services segment revenues increased 2.1% to $99.6 million in the first quarter compared to $97.5 million in the same period last year.

Consolidated gross profit was $18.1 million in the first quarter versus $15.7 million in the first quarter last year. Consolidated gross margins were 10.7% in the first quarter compared to 10.3% in the same period last year. Repair and maintenance services gross margins were 10.4% compared to 8% in the same period last year. Construction services gross margins were 10.9% in the first quarter versus 11.6% in the first quarter last year. As John mentioned earlier, the slow business volume in July and August, particularly in the electoral and instrumentation business, resulted in under absorption of construction overhead cost. While this impacted margins in our construction services segment in the first quarter, over the same time period we increased ENI backlog which should produce higher gross margins for the balance of the year.

SG&A expenses were $11.5 million in the first quarter compared to $10.6 million in the prior year. The increase is primarily due to strategic realignment activities that resulted in higher employee expenses and administrative costs. Other expenses in the first quarter include a loss of foreign currency related to an investment in working capital to support the growth of our Canadian operations. To mitigate future foreign currency exposure from our Canadian operations, our expanding credit facility will include the ability to borrow in Canadian dollars.

Our cash balance was $38.7 million at the end of the first quarter fiscal 2012 as compared to $59.4 million at the end of fiscal 2011. The decrease in our cash balance resulted from additional investment in working capital to fund the growth in business volume which increased significantly in September. In addition, since June 30, 2011, the Company purchased $6.3 million of Matrix Service Company stock at an average price of $9.25 per share, including $1.5 million in the first week of October.

Our overall liquidity remains strong and, as John mentioned earlier, we received commitments for a $125 million revolving credit facility to support the continued growth of our business. We believe our strong balance sheet, expanded liquidity and volume capacity provides the resources and flexibility to capitalize on emerging growth opportunities and also serves to differentiate us from many of our competitors. With that, I would like to open up the call for questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Matt Duncan from Stephen Inc.

You guys had another great quarter on an [AST] construction basis. Do you think you can sustain this quarterly revenue level for the balance of FY 2012 or was there anything unusual that maybe inflated this quarter a bit? Just help us understand sort of what we ought to expect there going forward.

I would say our expectation is that we will be able to maintain and be consistent with our revenues with AST for the balance of the fiscal year. The bidding activity is extremely strong, not only in Cushing but in a lot of other markets, western Canada, St. James region, up in the bakken, so we are seeing a lot of activity from many of our core clients to look to expand their storage facility. We are pretty positive about the balance of the fiscal year on AST.

John, as you look at the stuff that is going in to backlog, sort of how much is that Cushing versus other geographies?

I don't have exact numbers in front of me, but I would say it's not Cushing centric, I would say it was pretty fairly spread

Yes, and I believe a big portion of the increase in backlog was actually ENI construction services projects which, while that was low in the first quarter, that is one of the reasons we feel better about the rest of the year.

Okay. And then sticking with AST for just a second. The repair and maintenance business there improved sequentially by a pretty good amount yet, again, this is the first time you had year-over-year revenue growth in AST repair and maintenance since I think 2Q of 2009. Do you feel like that business has bottomed and can you sustain this momentum in quarterly sequential [more tier] there?

Yes. I think we are going to continue to perform well there. I think it's another sort of pent up demand thing. I think there were some repairs by some of our clients that were put off over the past few quarters and some of that is breaking loose now.

Last thing for me and I'll hop back in queue. The downstream repair and maintenance business had another strong quarter. Is that a good sign of things to come for the full turnaround season, and then how do you see the turnaround calendar shaping up in next spring?

Yes. We had an extremely strong, a little bit stronger than expected, turnaround for the fall season and we anticipate, right now we anticipate the spring to be similar.

Tahira Afzal from KeyBanc.

I guess my first question is in regards to the ENI bookings and the strength you are seeing. Could you first talk about whether your quarter benefited at all from Hurricane Irene. I know you have a presence in the northeast and that was fairly notably had, and if any of the bookings also relates to any sort of repair work that is tied to that as well. And then the second question I have is really if you look at your western Canadian opportunity, obviously there's a lot of storage tank work that is being proposed in regards to the Keystone Excel line and that would be in the [high density] area. I would like to get a sense of really how much is Keystone potentially versus outside of Keystone. Thank you.

Okay. First question, yes, we were involved in Hurricane Irene as we are currently today involved in repairs from the snowstorm up in the northeast. Nominally, the Hurricane Irene work was about $4 million in revenue, somewhere in that neighborhood, and so it certainly was helpful in the quarter.

As far as the bookings in our ENI business, we are seeing a lot of activity in our substation work, in our growth and distribution work and some nice projects that got booked their in sort of the northeast corridor where we kind of got an extremely strong presence and we would like to think of ourselves as number one in the substation business in that area. As for the tank business hardesty, we have several projects that we are looking at up there and that are currently in the bidding stages that we feel pretty good with. They are with some current clients that we do business with on a regular basis.

As it relates to the Keystone pipeline, I'm not sure of your question there whether that was going to have an impact on our business or not. A lot of that we think is going to be based on the timing of when it happens. The longer it takes for that project to complete the more storage growth there'll be over the next 2 to 3 years. So we are watching that right now. Right now whether or not that's having a significant impact on our bookings this year or not I can't respond to that.

If you look at both your -- if you look at your capabilities you are fairly well positioned for environmental work and utility [mack] crews might potentially be coming out in another month and a half. We've seen some of your large repairs getting some trickle in bookings, et. cetera. Are you starting to see any scrubber work proposals coming out or are you guys going to see something with a bit of a lag, first question. Second question, companies such as utilities such as [Dominion], et. cetera, indicated they are going to have to spend additional on electric transmission to really help keep up reliability as all the scrubber environmental work happens and coal power plants are taken off and switched out. So would love to get a sense of what you're really seeing as catalyst for your business in terms of potential environmental rules coming out.

On the back end work on the coal fleet in US and while the coal fleet year over year will pick up a smaller percentage of the overall generation sources for the US, they can't all be replaced overnight and we'll still be, as I said, as a country with a high dependence on the coal fleet. And as a result of that, the requirements to clean up the emissions from those coal fleets through [FDR], scrubbers, [FGT] systems, whatever is certainly we believe well be part of her business going into the future. I can't comment on whether we have any specific bids in house, but that is a target area for us, for our businesses, across our businesses and that we would hope to have some of those projects in our backlog over the next 18 months to 2 years.

On the T&D side, that is an area in our business where we believe there's going to be growth opportunities for us in the distribution and transmission area. We are going to continue to add resources, work with our existing clients who we are doing substation work with now and make appropriate capital investments and equipment and people to take a bigger chunk of that business.

Thank you very much and I'll hop back in the queue.

(Operator Instructions) Rich Wesolowski from Sidoti & Company.

Following up on the tank business, it seems very odd that you are bidding a very active slate of tank construction work but your tank repair business is barely half the size it was 3 years ago. Would you imagine that we are at the beginning of a favorable typical turn in the tank repair business and if that is the case, what would spark that investment?

Well, if you look at the numbers 3 years ago, if you recall that was a very robust time for tank building. One of the things that led to those our repair and maintenance units for AST revenues growing like they did was there was probably some small tank work, new constructions for small tanks that they did that helped kind of improve their margins and their revenue volume in that period So that's part of the reason. The other thing is, like John mentioned, there is some probably what we would call, pent-up demand on AST and repair and maintenance work.

So it's kind of just the passage of time and you have to undertake these projects at some point and why not start today?

I'm sure it's more complex than that, but that's probably a relatively good answer.

Is there anything different in your repair maintenance business today that would preclude you from reaching a 13% to 15% gross margin range at some point in the future if the demand for your services continued to improve?

No. I would say no. I would say there is nothing to prevent us from that happening.

And then you mentioned, John, a couple areas outside of Cushing where Matrix is bidding for tank work. We know that you have your best business in the tanks in Cushing and it is perhaps a little more competitive elsewhere or at least you don't have advantage you would have in Cushing elsewhere. If you succeed in winning more and more work, would you expect it would dilute the construction gross margin?

No, I don't think so. We are in a lot of cases we're following existing clients that are -- they know the quality of the service that we provide and so there is, in those cases, they may be either negotiated contracts or there is a much smaller bid list. So from that standpoint, I would say we would be able to provide similar Cushing-like services within a degree of materiality in other places that we are where the activity is strong.

Okay. It's good to see the Company buying back stock. I appreciate it. Best of luck.

Thank you. Our next question is coming from Martin Malloy from Johnson Rice. Please proceed with your question.

Good morning. Could you talk a little bit more about the strategic opportunities out there and the reasons behind increasing the revolve? Are you seeing some acquisition opportunities out there?

We have several parts of our business we think there is growth opportunities both in market share and in geography and certainly one of those areas would be our high voltage business. We are very extremely strong in the northeast and we believe we can take that business model into other parts of the country in to the Midwest and out in California and so some of that will be done organically, will be following clients, but some of that will be done through some strategic acquisitions to get into some regions and so that will be one of the areas that I would anticipate that we would be looking for an acquisition in.

Okay. The instrumentation business during the quarter, the slow start, was that weather or permitting or any issues particular that you can point to?

Some of it is weather, some of it is having a super hot summer that the country had delayed some of the start of some of the work that we did have back-logged in our substation work. When the electricity generators and public utilities are making money selling electricity to run air conditioners, they are not going to want to take down their facilities for any kind of upgrades or repairs or replacements. Some of it was that, a lot of it was that, but the up side was our ability to take a lot of our staff to do that work for us we are able to get them into the office and we saw probably a fourfold increase in bidding activity for that period year over year. So the good news, bad news was we had all those guys in the office and we were able to increase our backlog going forward by utilizing all the staff to bid the increased bidding activity.

Okay. And on the income statement the other line, negative $676,000, that was all foreign currency related and was it about $0.03 in EPS?

Yes, that was all foreign currency related. It's really close to $0.02 EPS. Obviously that related to the operations we got in Canada. We talked about some of the successes we had have up there growing that business. Most of the growth is AST work. Our operations here in Tulsa, both our engineering and fabrication operations, support those projects which creates a bit of a larger inter company balance and as a result with the Canadian dollar weakening at the end of the quarter it had a negative impact on us. It strengthened in October, so a lot of it has been recovered, but then we're also putting in a credit facility with the Canadian borrowing capacity so we will be able to mitigate that risk respectively.

Okay. Thank you.

(Operator Instructions) Our next question is coming from Mike Harrison from First Analysis. Please proceed with your question.

Good morning. It looks like crude inventory levels in Cushing have moved a little bit lower compared to where they were earlier this year. Can you talk a little bit about how much temporary swings in inventory levels factor in to your long-term outlook for tankage demand, particularly in Cushing?

I don't know that temporary swings we got a direct metric on that. I can tell you that the bidding activity over the last quarter has not gotten -- has not decreased so there is some direct connection to that. The amount of inventory changes hasn't affected potential clients, both existing ones and new ones, view on building more storage at Cushing.

We are also in constant contact with our customers so we know what their plans are. That's better information for us than to monitor that metric.

In terms of the opportunity for AST in the bakken, how big is that opportunity and how soon could we see a significant contribution from it?

I think there is a much, I'm not sure I told you the projected amount there, but I think there's somewhere in the neighborhood of 8 million to 10 million barrels of storage anticipated there over the next few years. I think that's one recent forecast that we have seen. A lot of our existing clients are already working in the bakken, so we would anticipate that we will be able to follow some of those clients into that area. We are already looking at some opportunities there, so we believe that will certainly be a part of our portfolio of AST business going to the future.

Just in terms of Canada I know in the past it has been sort of a 5% to 6% of revenues type number. Can you talk of little bit about the longer-term opportunities there? Obviously you are working to invest, to capture future growth. What share of revenues does Canada have two or three years from now?

I would say rather than giving you that number I would tell you that we believe that given our suite of services that we provide through all of our businesses and what we are now currently providing in Canada, we have a lot of room to grow. We work basically on the East Coast for a client there in their refinery and then we have got our Western Canada business where we are doing primarily AST business. We are not providing any services up there, we are not providing any overall construction services, refinery maintenance and turn-arounds has not been a big area, so there is a lot of opportunity for us to move in to Canada throughout the provinces besides where we are now. Certainly Ontario will be one of those areas for us where we would see an opportunity for us to bring our services in to.

Last question I had is just about the business mix in construction services. My sense from the way you are talking is that the slower ramp of ENI business sort of negatively impacted your margin, but can you talk about any other I guess mix factors that played into the gross margin weakness this quarter and also have your contracts in construction services been trending toward more fixed price contracts that maybe entail a little more risk?

I will take a stab at this. I was it was it the other objection was an issue. As you look at the quarter though, other things that impacted the margins was that we probably didn't have any big close outs of jobs where we had strong incentives at the end of jobs that we recognized and so that impacted the margins. Overall mix of work impacted margins. I don't think we have seen a significant change in the makeup of our contracts either in type of contract or in the pricing of our construction projects, especially in the AST business. So I think the gross margins for construction were, while they were low, I definitely don't expect them to see them at that level in the future.

All right. Thanks very much.

Thank you. Our next question is coming from Tahira Afzal from KeyBanc. Please proceed with your question.

Thank you for letting me take a followup. If I look at LNG opportunities in the US, this is a market metrics has played in before. You have the (inaudible) LNG project probably reaching [FID] early next year, you potentially have opportunities in Sabine Pass and Dominion just came out and said they are looking at converting their Gulf Pointe plant in liquefaction unit as well albeit would be with a bit of a lag. How should we think of this opportunity for you? I know it has been mix in terms of construction for you. Given you now also have a portion of (inaudible) business from [CBI], is this something fairly nice opportunity for we are going forward?

We are going to support all of those opportunities. We have been approached by some of the major ENC contractors on the [Kitamex] opportunities related to the tank and certainly we are interested in the Sabine Pass project. It has not really yet been determined whether they will have to add a sixth tank there. Given the state of the import that they are importing LNG into the US versus what they may be exporting, volumes don't necessarily add up to where they are going to have to add up to sixth tank. So that opportunity [Kitamex] talked about they are certainly on our radar screen we are watching them. We are going to be -- we will decide which projects we are going to bid, if any, depending on to state that our risk profile and our ability to be successful.

Just as a follow up to that then, if you do seek [Kitamex] as a potential opportunity, as of right now what would the timing of that be for metrics?

I'm guessing that would probably be bidding the latter half of this fiscal year and if we bid and we were awarded it I would not think it would not add substantively to fiscal 2012, it would be more of 2013 and 2014 job.

It appears there are no further questions. I would now like to turn the floor back over to Mr. Hewitt for closing comments.

Thank you everybody for your time today and well talk to on the next quarter.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.