Matrix Service Co (MTRX) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Matrix Service Company conference call to discuss results for the first quarter ended September 30. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions to follow at that time.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host for today, Mr. Kevin Cavanah, Vice President and CFO. Sir, you may begin.

Thank you. I would now like to take a moment to read the following. Various remarks 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, 2012, and the subsequent filings made by the Company with the SEC.

I will now turn the call over to John Hewitt, President and CEO of Matrix Service Company.

Thank you, Kevin, and good morning, everyone. We appreciate you joining us on the call this morning.

Before discussing our first quarter results, I want to provide some brief comments related to Hurricane Sandy and our operations on the East Coast. First of all, our best wishes, thoughts, and prayers are with our employees, family members, friends, and the local communities in which we work as they recover from the destruction caused by Hurricane Sandy. Many of our employees in the northeastern US have been working around the clock in response to Hurricane Sandy. The health and safety of those individuals and all our employees has been our top priority. All of our offices on the East Coast are up and running and many of our clients are beginning to return to normal operations. I want to thank our employees and all other storm response personnel in the area for their hard work and dedication to improving the condition of those impacted by the storm.

Regarding our operations, we continue to execute on our strategic objectives and are satisfied that the business is responding as we expected. The performance in the first quarter was strong and reflects the Company's hard work. Our strategic focus areas are beginning to gain traction, supported by continued strength in the markets we serve. Matrix Service Company booked nearly $250 million of new work in the first three months of fiscal 2013. Our consolidated backlog continues to increase and was $534.6 million as of September 30, 2012.

The Company continues to see a strong bid pipeline and new opportunities opening up in connection with our strategic objectives. We have laid the groundwork for this growth in several ways -- key talent additions throughout the organization, re-segmenting to improve both internal and external visibility of our business, and launching a new brand and corporate identity to better position the Company going forward. Regarding acquisitions, we are actively pursuing several opportunities as well as reaching out to potential targets on a consistent basis. We are committed to finding the right opportunities for the Company that will supplement our existing service offering and further strengthen our strategic growth areas.

Now a few words about our segments. The Electrical Infrastructure segment continues to see solid margins and consistent work in the Northeastern region of the United States. As mentioned on our last call, the Company's reputation for providing transmission, distribution, substation, and storm response work is growing throughout the Northeast due to our capable employees and quality work performed in a safe and professional manner. We continue to view our Electrical Infrastructure segment as a high-growth area within the Company and are actively looking for acquisition opportunities that complement the profile of our existing business.

I'm also pleased to announce that Matrix SME was recently awarded contracts in excess of $12 million for high-voltage transmission work throughout New Jersey. These awards further demonstrate the Company's capabilities in the transmission and distribution industry as well as our commitment to growth within our Electrical Infrastructure segment. In addition, we are currently pursuing opportunities for natural gas-fired combined cycle power generation projects on the East Coast, which we believe will add to the strength of this segment.

Our Oil, Gas and Chemical segment continues to see strong growth in turnaround maintenance and industrial cleaning spaces. The West Coast, Gulf Coast and Mid-continent states continue to represent areas of strength for our plant services work, although we continue to make steady progress in other areas throughout the US, including recent and planned projects in Hawaii, Alaska, Wyoming, and Utah. Also in the quarter we performed turnaround and maintenance work for the new owners of the refinery in Trainer, Pennsylvania, which represents an improvement in this area from previous quarters. Additionally, our industrial cleaning business is successfully bidding work alongside our plant maintenance teams, focusing on supplementing core services with higher-margin specialty work. This ability to cross leverage of our services was a key strategic objective and we are beginning to see results.

The Storage Solutions segment represented nearly 50% of consolidated revenue for the quarter. We continue to be successful bidding, winning, and executing work throughout the US and Western Canada and outside of our historical core geographic markets. During the quarter we were awarded sizable storage projects in Oklahoma, Alabama, Louisiana, Texas, New Mexico, and Western Canada. As a result, segment backlog increased to $264.9 million in the quarter, an improvement of 12% over the year-end June 30, 2012 results. In Western Canada our crews are busy with several large storage products in the region. The amount of work planned and in progress in Western Canada is significant. We are taking a very measured approach to each opportunity to assure we are able to support our brand reputation with safe, high-quality project executions combined with long-term client relationships.

The Industrial Operating segment continues to impress with a steady flow of project awards and a sizable bid pipeline. Backlog of $17.6 million represents a 15% improvement since our year-end June 30, 2012 results. The majority of this work is a product of our mining and minerals group operating in the Western and Rocky Mountain states. Our offices in Tucson and Salt Lake City are currently working for some of the top global companies in the mining and minerals industry. Subsequent to the quarter end we were awarded a $20 million project with one of our key mining clients, which highlights our growth in the mining and minerals industry. This project will be added to our backlog in the second quarter.

I would now like to turn the call back to Kevin to discuss details of our financial performance. Kevin?

Thanks, John.

The revenues for our first quarter were $209.6 million compared to $169.3 million in the same period last year. The 23.8% increase in revenues was due to strong growth in our Electrical Infrastructure, Oil, Gas and Chemical, and Storage Solutions segments. As a result of the higher business volumes, we increased our quarterly net income to $4.7 million and our fully-diluted EPS to $0.18, as compared to net income of $3.5 million and fully diluted EPS of $0.13 in the first quarter of prior year. As expected, first quarter earnings included $0.04 per fully diluted share for activity related to our strategic investments, including the rollout of our new brand and support of our startup businesses.

Consolidated gross profit increased from $18.1 million in the three months ended September 30, 2011, to $22.2 million in the three months ended September 30, 2012. The increase of $4.1 million, or 22.7%, was primarily due to the higher revenues in the first quarter of the current year. Gross margins of 10.6% were consistent with the prior year.

SG&A expenses were $14.3 million in the three months ended September 30, 2012, compared to $11.5 million in the same period last year. The increase of $2.8 million was consistent with our plan, with the exception of a $700,000 bad debt charge. SG&A expense as a percent of revenue remains unchanged at 6.8%.

The Electrical Infrastructure segment revenues increased from $22 million in the first quarter of fiscal 2012 to $33.3 million in the first quarter of fiscal 2013. The increase was primarily due to increased high-voltage work in the northeastern United States and unexpected storm restoration work in the aftermath of Hurricane Isaac. Our gross margins were 14.1% in the first quarter as compared to 12.7% in the same period last year. These margins are above our normal expectations of 11% to 13% for the Electrical Infrastructure segment.

Oil, Gas and Chemical segment revenues increased 46.5% to $67.1 million in the first quarter compared to $45.8 million in the first quarter last year. The increase was due to higher volume of turnaround work and capital construction projects. As a result of the increased volume of work, gross margins improved to 11.7% as compared to 9.5% in the first quarter of fiscal 2012. The margin performance was somewhat above our normal margin expectations for this segment of 9% to 11%.

The Storage Solution segment generated first quarter revenue of $104.2 million. The 9.8% increase over the first quarter revenues of $94.9 million in fiscal 2012 resulted from higher levels of workflow domestically and in Canada. As a result of geographic growth, expansion efforts, and a mix of smaller tank packages, our gross margins in this segment have slipped to 9.6% which is below our normal expectations of 11% to 12.5 %. Based upon recent product awards, we believe this trend will be short-lived, and we expect our Storage Solution gross margins will return to the normal range.

Revenues for the Industrial segment totaled $5 million in the three months ended September 30, 2012, compared to $6.6 million in the same period a year earlier. The decrease of $1.6 million, or 24.2%, was largely due to the timing of projects related to legacy Industrial work, offset in part by higher revenues in our mining and minerals and bulk materials handling businesses. Gross margins in the current quarter were negatively impacted by startup costs related to our entry into the bulk material handling and mining and mineral markets.

At September 30, 2012, our cash balance was $17.2 million, as compared to $39.7 million at the beginning of fiscal 2013. The decrease in cash during the quarter was a result of the timing of project cash flows including investments in working capital required to fund a 23.8% revenue growth. The cash balance, along with available availability under the senior credit facility, resulted in liquidity of $125.6 million as of the end of first quarter of fiscal 2013. Subsequent to the end of the quarter, our cash balance has increased to approximately $50 million as working capital invested during the first quarter turned to cash.

The management of our balance sheet is extremely important to the Company's success, as we believe the strong financial position allows us to capitalize on the strategic growth opportunities we have talked about during the last couple of quarters. The start of the year is consistent with our expectations, so we are maintaining our previous fiscal 2013 guidance of revenues in the range of $800 million to $850 million and EPS in the range of $0.83 to $0.98 per fully diluted share.

That concludes our prepared remarks and we would now like to open the call up for questions.

(Operator Instructions) Rich Wesolowski, Sidoti & Company.

When you look at the profitability for your oil and gas and the electrical business lines, they were comfortably above the average expected ranges, the long-term ranges offered by Management last quarter. Can we interpret these as seasonally strong results that are going to be watered down by other periods or will we look back from next year's September quarter and say that there were some great one-time jobs in there that shouldn't be expected to be repeated?

I think that when you look at the two segments, there's two different answers. So if you look at the Electrical Infrastructure segment, we talked about -- we mentioned the storm work from Hurricane Isaac. That had a positive impact. So depending upon what storm restoration work you might have a recurrence, but if we look long-term on our segment there, we've been operating in that 12% to 13% range for the last year, 1.5 years. So that's what our expectations are right now.

On the Oil, Gas & Chemical side, it was a very strong quarter from a man hour perspective. As we've grown geographically, we have seen our man hours increase during those summer months. We're doing a lot of work up in Alaska and that is contributing to better absorption in that segment. So if we can continue with those volumes, we'll be at the upper end of that margin range. And it could exceed it some quarters. I don't believe when you look at the -- for either segment, other than the storm work. If you look at any of the projects that we had, there was just some exceptional profits on really high-margin work. It was just large volume.

You mentioned on your tank margin, as you did last quarter, that the spread away from Cushing would ding it would -- and clients are still offering smaller tank packages. On the latter, where have you seen movement from customers toward larger tank packages? Have any been bid out and the Company has been unsuccessful or are most of them being pushed towards the right?

Maybe some clarity on those couple words is what we're seeing is a trend to smaller tanks and smaller collective packages. So what that's doing is, in some cases, in some of our markets, opening up the door for smaller local contractors, that they're able to bid those projects. And it makes those projects a little more competitive, but we are seeing in our pipeline many more large volume, multi-tank packages. And that's giving us some comfort that we think some of the margins will begin to return to more historic levels.

Does the Company already have bids outstanding for some of those larger packages?

Yes.

Okay. Last one, would you remind us where the mining and material handling business is included within your segments?

It's in the Industrial segments.

Right. And you mentioned the call -- a project that was run I think after the quarter. And last call you had mentioned $40 million to $60 million in revenue. Is that still valid or is that something that's maybe going to straddle fiscal '13 and '14?

I think we are still targeting that, that range of revenue is possible in this fiscal year. And we would hope that sometime within the next couple weeks we'll be able to provide a press release on the project we mentioned here on the call.

Excellent. Best of luck with the remainder of the year.

Mike Harrison, First Analysis.

Just building on the last question on the Industrial business. At a $40 million to $60 million revenue run rate, where would you guys expect operating income to shake out for fiscal '13?

For fiscal '13? I think at some point during the year when we ramp up the volume, we will flip to where we're earning profits in that business. For the full year, obviously we'll -- the operating income percentage will be low. It was at a negative number for this first quarter. So I think longer-term as we look at this segment, when we're at a volume where we're at that $60 million run rate for a full year, I think you would expect the operating margins to bump up to the 5% to 6% range.

Okay. And as I look at the implied SG&A costs in that Industrial segment, it looks like there really was quite a jump this quarter. Was that where the bad debt expense was or is that just the start up costs with some of the material handling business?

It's two things. One, it was were the bad debt charge was recorded. And secondly, when you're looking quarter-over-quarter, if you think about the first quarter of last year, we were just starting on material handling. And we didn't have anything on mining and minerals in there. We didn't have our Salt Lake office or our Tucson office in those numbers. But the $700,000 bad debt charge was in Industrial. It wasn't related to mining and it wasn't related to material handling.

Okay. And then in terms of the impact of Hurricane Sandy, glad to hear that everything is back up and running on your side. And that you're seeing customers return to normal. You've got obviously the negative impact of some downtime and then potential positive impact from the emergency repair business and storm related repair. Should we assume that the storm is a net positive for you? In the fiscal second quarter?

I would say obviously the assumption would be -- that'd probably be a good assumption, and -- at a minimum it would be maybe a neutral -- net neutral. Today, we're only a couple weeks into the cleanup from Hurricane Sandy. And so majority of our focus has been, as we had open the call up with the safety of our employees and those that are working to do that repair work, that we're making sure they are working in very safe conditions. As we get more visibility down through the months as the repairs start -- and the cleanup begins to get to an end, we'll have more visibility on the impact to our quarter. But I would say the assumption would be that this would at least be a neutral impact.

All right. And then last question for you is on the M&A front. Now that we have some certainty around the election results, are you expecting to see some M&A opportunities move forward before the end of the year given expected potential tax increase?

I will tell you that we've got a short list, a handful of M&A targets that we're in some discussions with now. And that has not been a priority for those businesses sellers to complete a transaction by the end of the year. So whether they are not concerned about it or realize that at this point in the year, they can't get it done anyway. So, we're not necessarily seeing that pressure by potential targets.

Tahira Afzal, KeyBanc.

Congratulations on the quarter. I guess, I just wanted to ask you a petro chem question. Several of your peers have talked about [good things] in particular. Number 1, potentially a lot of petro chem and possibly a very large gas to the liquid project being built. And if you look at the components there seems to be a lot of work both in that and on the petro chem side that a company like Matrix would take part in. So if you could first give me any color you can outside of LNG as you look at petro chem and you look at GPL. Are there any opportunities for you and whether you've been approached by sponsors or other E&P companies to joint venture with?

So we think the market -- in the oil and gas market, and NGLs, and in general, in chemicals, and refining is going to continue to be strong through the course of the year. There are project opportunities that we have -- we are bidding or have -- are in our pipeline, or in our radar screen. Related to those markets that we are tracking or that we are bidding. And so I would expect that all of those would have some impact on our revenue and backlog to go as we go through the course of the year.

Got it. Okay. And in the electric T&D side, clearly that market is heating up. Very close to your headquarters even in Texas. I know you've had more of a presence on the managed side, but any comments on whether you'd like to reach [really] through your footprint?

I think if I understood the question, we're continuing to focus our footprint for the high-voltage T&D work and substation work in a union environment. We want to continue to strengthen our market presence on the East Coast. And we are looking for opportunities in other union related areas within the country to expand our service area. At the moment, movement into Texas I think you asked about Texas or Oklahoma or Gulf Coast, for our T&D is not on our radar screen.

Martin Malloy, Johnson Rice.

In terms of the acquisition opportunities you mentioned you were actively pursuing, can you talk a little bit perhaps about what industries or geographic areas that they are in?

I will tell you that what we're pursuing is in two of our segments. One is Oil, Gas & Chemical and in Electrical Infrastructure. So they are both the acquisitions that we're looking at, will support either in providing more depth in our services or more geographic reach in either one of those two segments.

Okay. And then on the Storage Solutions side, I guess there's a lot of talk about pickup in the construction of liquids pipelines in '13 and '14. Can you talk a little bit about Storage terminaling opportunities that would maybe go along with those projects?

So like we said, the market there has been very strong for us outside of our traditional Cushing hub. Western Canada has been very strong. We are tracking and bidding several terminal opportunities. Some of them are just not only in Western Canada but in other parts of the US, so we are looking at not only the tankage piece but also in some cases the complete terminal. And they are areas in Louisiana, down in Texas, in Oklahoma as well up into Wisconsin and Western Canada. So the market continues to be very strong and we're seeing several other projects, we would call for us would be large sized tankage and multiple tank packages.

(Operator Instructions)

Matt Duncan, Stephens.

This is actually Steven, in for Matt this morning. Thanks for taking my questions. Just drilling back down on margins for a second, just want to make sure I'm understanding you. So out of the E&I and the Oil, Gas & Chemical side, I know you noted some benefit from Hurricane Isaac and some higher utilization of the workforce due to turnaround work at Oil, Gas & Chemical. I guess going forward -- so you expect those two segment gross margins to come back down to the normal ranges? I guess E&I was what, 11% to 13% and Oil, Gas & Chemical was 9% to 11%? Is that correct in my thinking? And how should we think about that progressing through the year?

When you look at the Electrical Infrastructure segment, we've consistently been in the 12% to 12.5%, 12.7% range. The last number of quarters, last five and six quarters in that segment. This quarter, we got some benefit. Our traditional business, the margins we expect from that business haven't changed. So short of anything unique, I would expect those margins to be back in that range of 12% to 13%. When you look at the Oil, Gas & Chemical, we had a range of 9% to 11%. If you'll recall, the 9% was when we had a low volume of work going through that segment. Our volume has increased significantly in that segment. And so in that, I would expect us to be operating at the upper end of that range going forward and that's something we'll be considering whether we need to move that margin guidance for that segment in the future.

Okay. That's helpful. And one other question, on the backlog, can you comment on the mix within that backlog? I think the Storage Solutions saw a nice sequential pickup in backlog. Are you seeing an improvement in mix there?

I think the backlog story was good for just about every segment. Both Electrical Infrastructure and Storage Solutions segment had a book-to-bill over 1.2. Oil, Gas & Chemical was pretty much flat for the quarter. And Industrial was up and as we mentioned on the call we've got a significant Industrial award that will basically double the size of that backlog. So the good thing about backlog story this quarter is that it was good for all four segments. So we're seeing positive trends throughout our business.

I'm showing no further questions in queue and would like to turn the conference back over to Mr. John Hewitt for any closing remarks.

I want to thank everybody for participating today, for the good questions. And we look forward to talking with you all in the future. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of the day.