Matrix Service Co (MTRX) 2014 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 of fiscal 2014.

(Operator Instructions)

As a reminder this call is being recorded. I would now like to turn the conference over to today's host, Mr. Kevin Cavanah, Vice President and CFO for Matrix Service Company. Thank you, Mr. Cavanah. You may now begin.

Thank you. 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 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 ended June 30, 2013 and in subsequent filings made by the Company with the SEC. To the extent the Company utilizes non-GAAP measures, reconciliations will be provided in various press releases and on the Company's website.

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

Thank you, Kevin. Good morning, everyone. Yesterday, Matrix Service Company released our fiscal 2014 Q1 results. These results are very strong and continue to demonstrate the progress we are making toward our long-term strategic objectives.

As we have stated on previous calls, our safety performance is driven by our culture and values. We encourage all of our employees to be safety leaders in all aspects of their lives. We call this a safe 24/7 lifestyle. We ask each employee to understand that their individual leadership and decision making makes a difference in the lives of the people that they come into contact every day. This aspect of our business is a key differentiator to our clients and builds shareholder value through repeat business and creation of new business opportunities. More importantly, by creating an attractive and safe working environment for our current and future employees.

We are very proud to report that our Industrial segment continues to gain traction with our clients. Backlog has grown over 300% since this time last year and gross margins achieved 7.8% in the quarter on revenues of just over $22 million. Our teams are doing a great job with executing projects and building brand recognition in this segment's key markets. Our leadership team in the mining and minerals portion of this segment has performed tremendously as they continue to gain market share.

Our Electrical Infrastructure business, while appearing to be flat from a revenue perspective as compared to last year, did not include any revenues from storm work in the first quarter of fiscal 2014 as it did in 2013. Backlog is lower from the same quarter of last year, but this is primarily caused by the timing of awards and the effect Hurricane Sandy had to the spending patterns of key clients in the region. Overall, the substation, transmission and distribution bidding activity remained robust and our position in the market is solid. This segment continues to be a key growth area for the Company and we are confident of its long-term performance.

Tank and terminal opportunities in our Storage Solutions segment continues to be very strong. Overall, backlog from Q1 2013 has increased by nearly $120 million, or 44%, and gross margins are achieving expectations at 11.9%. The majority of key clients continue with their capital investment plans, and we're confident in our ability to capture a significant amount of this spend. Expansion of our balance of planned services across the segment has strengthened, which is creating more opportunities. Were also pursuing more specialty industrial projects that would allow us to apply our cryogenic engineering and construction skills with transportation fuels, ethane and LNG peak-shaving tanks and terminals.

We continue to diversify our Oil Gas & Chemical client base. We have expanded our refinery reach and service offering while working with more clients throughout the United States. In addition, our ability to leverage the industrial cleaning portion of this segment and pad management activities is creating a big differentiator for the Business. Project opportunities remain strong and margins are consistent with our expectations.

Overall, the Business is performing as envisioned in our strategy and we see continued growth opportunities in all of our segments. The strong liquidity position of the Company, including a record cash balance of $80 million, allows us to focus on the critical personal and capital investments as well as strategic acquisition targets.

I will turn the call back to Kevin to discuss the details of our financial performance. Kevin?

Thanks, John. The revenues for our first quarter were $226.2 million compared to $209.6 million in the same period last year. The 7.9% increase in revenues was due to strong growth in our Industrial and Storage Solutions segments. As a result of the higher business volumes and improved gross margins we increased our quarterly net income to $6.6 million and our fully diluted earnings per share to $0.25. As compared to net income of $4.7 million and fully diluted earnings per share of $0.18 in the prior-year first quarter. Consolidated gross profit increased from $22.2 million in the three months ended September 30, 2012 to $25.5 million in the three months ended September 30, 2013. The increase of $3.3 million or 14.9% was primarily due to higher revenues and improved gross margins.

Gross margins increased from 10.6% in the first quarter last year to 11.3% in the first quarter of fiscal 2014. SG&A expenses were $14.7 million in the three months ended September 30, 2013 compared to $14.3 million in the same period a year earlier. SG&A expense as percentage of revenue was 6.5% as compared to 6.8% in the same period last year.

Moving onto our segments, the Electrical Infrastructure segment revenues were $32.9 million in the first quarter as compared to $33.3 million in the first quarter of last year. As John mentioned, the first quarter of last year benefited from storm restoration work in the aftermath of Hurricane Isaac. We did not experience any significant storm work in our recently completed quarter. The mix of work in the quarter combined with the lack of storm work contributed to the decline in gross margins from 14.1% in the prior year first quarter to 10.1% in the fiscal 2014 first quarter.

The Oil Gas & Chemicals segment revenues were $62.5 million in the three months ended September 30, 2013 as compared to $67.1 million in the first quarter of last year. Although our revenues were down slightly were able to improve our gross margins to 12.1% as compared to 11.7% in the prior year first quarter.

The first quarter revenues for the Storage Solutions increased from $104.2 million in fiscal 2013 to $108.1 million in fiscal 2014. In addition to growing revenues we improved our gross margins from 9.6% in the first quarter of last year to 11.9% in the first quarter of fiscal 2014.

Revenues for the Industrial Segment increased from $5 million in the first quarter of fiscal 2013 to $22.7 million in the first quarter of this fiscal year. The significant increase is a result of growth in mining and material handling projects along with the continued execution of the Orascom fertilizer project. Gross margins improved significantly from a negative 6% in the prior-year first quarter to positive 7.8% in the first quarter of fiscal 2014. The prior year was negatively impacted by startup costs related to our entry into the bulk material handling and mining and mineral markets. We are now focused on continuing to capture additional opportunities while enhancing our margin profile.

Backlog during the first quarter of fiscal 2014 was strong. Our book-to-bill was 1.2 as a result of $272.3 million in new projects. This performance, which was led by our Storage Solutions segment, increased our backlog to a record $672.8 million as compared to $534.6 million backlog at the end of the prior-year first quarter. At September 30, 2013 our cash balance was $79.8 million as compared to $63.8 million at the beginning of fiscal 2014. The cash balance along with availability under the senior credit facility resulted in liquidity of $188.7 million as of the end of the first quarter of fiscal 2014. The management of our balance sheet is truly important to the Company's success and we believe a strong financial position allows us to capitalize on strategic organic and acquisition growth opportunities.

We are pleased with the start of our fiscal year and with the overall performance of our business. The start of the fiscal year was consistent with our expectations, so we are maintaining our previous fiscal 2014 guidance of revenues between $980 million and $1.04 billion and EPS in the range of $1.00 to $1.15 per fully diluted share.

We have completed our prepared remarks, so we'll open the call up for questions.

(Operator Instructions)

Martin Malloy, Johnson Rice.

Congratulations on the quarter. Could you talk a little bit more about the areas where you are seeing bidding activity for the Storage Solutions side? Some of the sub segment that are stronger?

You mean geography?

Geography or types of projects?

A couple thoughts there. We continuing to see some small amount of bidding activity and project awards in Cushing, even though that certainly is not the big part of where our Business has been historically. Outside of the that we are seeing bidding activity throughout the US. Some of the stronger areas for bidding activity right now is in Western Canada, for us, and I would say in the Midwest.

We are doing you know some significant work up in the mid-western region on storage projects as well as some of the balance plant work. We are very busy right now on a balance of plant work, actually in Cushing, for a project that we got involved with here late in the quarter. Then, Gulf Coast bidding activity is very strong. We're seeing a lot of projects down there. It is a mix, but if you pin us down to where we see the biggest volume of work coming it's, right now, in Western Canada.

Marty, I think one of the other changes is, in the past when we were talking about Storage Solutions we were primarily talking about the tank portions of terminal builds. Today, we are seeing a lot more balance of plant, John mentioned a couple of those in this comments. That is contributing to a good portion of the growth in backlogs.

Okay. Just within Storage Solutions, do you all play a role in terms of LNG tankage for small to midsize local faction units or any of the dispensing stations for LNG?

We see that as, I think we've talked about on previous calls, where the large export terminals or the conversion of import terminals to export terminals would be opportunistic event for us. That a lot of that tankage had already been put in place. Yes, the transportation fuels for ships, for trains, for vehicles, whether that is at a port or at a logistics transfer station, we see that market becoming hotter. More opportunities are opening up for us, both in feed work through our engineering business in Pittsburgh as well as construction in EPC opportunities. We would see that growing and to become a bigger part of our Storage Solutions segment as we move forward.

Thank you.

Tahira Afzal, KeyBanc.

Congrats, great quarter.

Thank you.

First question is really in terms of EPS driver. The quarterly rates you're running at right now is, if I was to extrapolate that, obviously assuming earnings power to improve progressively during the year. Would you say that is broad based, as you look at your divisions? Or do you think it is little more skewed towards one segment in particular? I assume it's Storage Solutions to a greater extent, but would love to get your thought on that?

I think you've got multiple questions wrapped up in that question.

Probably. (laughter)

Certainly, the Storage Solutions segment, with the extended the backlog with the bidding activity there, we continue to see that as fairly strong throughout the course of the year. A lot of that work, our Electrical business and to some extent our Industrial segment, is going to be dependent on timing of awards, as we've talked about in the past. That's stuff that can move around -- when the start dates are, permitting, weather, those types of things. There can be some ups and downs through the course of the year. At this point though in the year, we've reaffirmed our guidance. We feel very comfortable that the guidance that we've provided here to start of the year will continue to be a good place for us to be.

Got it. Okay.

I'm not sure I answered your question exactly, but I'm not sure I understood your question.

No it actually does help with answer some of the question. In lieu of that, as you look at how the timing of these project are playing out to date, I know we are still early in the year, where would you think that the timing has been in line to better than expected? And where it's kind of slow, was it what you thought?

For instance in our Electrical segment, the timing of awards there have been a little slower than what we had expected. A lot of that has to do, I think to some extent, has got to do with the impact from Sandy on our client's spending patterns. They, fortunate or unfortunately, Hurricane Sandy demonstrated to them weaknesses in their system that they did not understand were there.

Areas where they thought they needed to make repairs and upgrades, that's scope, that focused areas for them have changed. It is taking them sometime to reorganize and refocus themselves. On that part of the business, I think we were a little bit off expectations on how the bookings and would flow through that. I would tell you we are continuing to be -- our teams are continuing to be very busy in what they are looking at from a bidding and proposal standpoint. As far as our other three segments, I would say they're, for the most part, are behaving as we expected.

Awesome. Okay, great. If you look, John, at your prospect list there, clearly your commentary and all your peers commentary feels positive. If you look at your prospect list today versus a year ago on the Electric side, would you say it is grown?

I would say that the project potential and proposals volume that we are shifting through today would be similar to what you have seen a year ago.

Got it. Okay, that is very helpful. I will jump back in the queue. Thank you.

Mike Harrison, First Analysis.

In terms of looking at revenue guidance, I'll try to ask maybe a similar question. You're at roughly a $900 million annual run rate. Was just hoping to get some sense of how you expect the revenue progression over the next three quarters in order to get that $980 million to $1,040 million revenue range? Should we modeling something like a gradual ramp over the next three quarters? Is it back-end loaded? Or are there some seasonal and timing bumpy factors we should be thinking about?

I do not know that it would be appropriate for us to say that we think it's going to be the same numbers quarter after quarter. Certainly the backlog is going to start rolling off at a faster rate through the next three quarters than it has to date. Work that we see we're going to be booking, or have booked, in Oil, Gas & Chemical segment we expect to be fairly strong on that piece to the back half of the year rather than the first half. I don't think we're looking at a hockey stick. I just think that as we move through the course of the year, the revenue burn will gradually improve.

Okay. In the Oil, Gas & Chemical area, we're hearing there's quite a bit of outage activity planned during the December quarter at refineries. Are you expecting your turnaround activity to be better next quarter?

I don't think -- we're pretty much expecting it to be -- I would say, probably for us, in our third quarter, which starts in January, and into the third quarter would be a little bit stronger for us than the second. Our guys are pretty busy. They're pretty active booking and winning work. The thing to remember in that segment, we've said before, is the revenue rolls off pretty quick in the quarter. Two is, it's tough to judge the overall revenue rate for that refinery business, especially the turnaround business, because we go into a project at a estimated X dollars amount.

Then, once we get in and start opening up pieces of the equipment, that scope could stay, it could grow, it double or triple or quadruple, which is some things that happened to us last year. That is very difficult for us, as a contractor and frankly I think our owners, to judge what that's going to look like once they shut their plant down. We could go into the quarter we're are in now or into the third quarter with an expectation of a certain level a refinery turnaround activity and it could double. Or one project could double, or they could stay totally flat, so it's tough for us to judge that.

Last question I have is on the TransCanada alliance. Any early wins or activity on that front that you can discuss?

We are continuing to work through that alliance and that relationship. We are actively bidding, planning and currently working on multiple projects for them, both in the US and in Canada. We are in the process of staffing and starting a project down in Houston ship-channel area. We are actively engaged with them on balance of plant work out in Cushing. They have asked us to step in with them from another contractor. So, the alliance is active, we are working through it. We are very pleased with that relationship.

All right. Let me sneak in one more. When you mentioned balance of plant work, what does that mean to you guys? Is that typically higher-margin work? Is it icing on the cake if you get the tanks and the balance of plants? How should we think about that?

Balance of plant work, we would -- and our preference would be to do that with the tank work. It gives us control over the site, give us better control over access, logistics, labor at the site. Our expectations as we move forward is that would have similar margins as our tank business.

All right, thanks very much.

Matt Duncan, Stephens Inc.

Question I've got, John, just a follow up on that last one. The balance of plant work for TransCanada, is the intention that you would do that for most of the projects to work on for them? For example, that Hardisty terminal, that I know you started working on up in Canada. Are you doing just the tanks there or do you have balance of plant work there as well?

No, we just have the tanks work there. Our relationship with TransCanada, as it related to balance of plant work, is more variable up in Canada than it is in the US. We do not have the self-perform skill sets built up in Canada that we do in the US. The Canadian opportunities, right now, are just all tank. In the US, our relationship, while it's focused on tank work, is optional, first right of refusal type of thing on the balance of plant work in the US.

Okay, that helps. Looking at gross margins, the last couple quarters you guys have had a pretty darn good performance there. It's been improving quite a bit, I think maybe back to where you had hoped it might go. Kevin, maybe coming at the guidance question a little bit differently here. It looks to me like anywhere in your revenue range, assuming that you can maintain these gross margins and probably improve them a little bit with more volume, that you're pointed towards the higher end of that earnings guidance. Is that a fair observation at this point?

I think when we gave guidance at the beginning of the year, of the $1 to $1.15, that was our best estimation. The first quarter came in really close to what we expected, so we -- the development of our backlog, the development of the year, hasn't changed significantly. We're sticking with the guidance we've provided.

Okay. Is there any reason why the gross margins would go down from here? It seems like there is certainly opportunity to continue improving them. As you look at it segment by segment for example, the E&I gross margin this quarter was below your targeted range, and I think you think you're going to get back into that range again. Should we expect to see you, at worst, maintain this gross margin, and maybe improve it for that reason?

Our expectations are that to continue with the performance we've seen in the Storage and the Oil, Gas & Chemical segments, the Industrial segment's already is starting to achieve the range that we were expecting. Electrical, yes, we'd like to see those margins a little bit higher. Overall, we're fairly pleased with first quarter margins.

Okay. Last couple of things for me. On the Industrial segment, are you seeing any additional opportunities, John, at the fertilizer plant that you started working on? I know you had thought previously there might be more for you to do there. Where are you at in terms of the bid process?

We are actively bidding other pieces and sections of that facility. Some of them are in the process of being proposed. One of them has been turned in, we're waiting to hear on whether we were successful or not. There are a couple packages that we have that are in bidding or have bid. All I can tell you today is we have a lot standing, so that's a good thing.

Are those competitive or are they giving you a first crack at them since you've already got people there?

No, they're competitively bid.

Okay. The last thing I've got is just on the M&A pipeline. Obviously, the cash balance continues to build. Your available liquidity is pretty hefty for you to be able to go out and do acquisitions. Talk a little bit about what you're seeing. What the process looks like right now? Do you have anything that feels like it might come out of the funnel sometime this fiscal year? Would your expectation be you can start closing some deals?

I know it probably doesn't look like it to you guys from the outside, because we have not done any big deals. It's kind of like tennis player Bjorn Borg when he was winning all kinds of championships and all of a sudden he dropped out and no one could figure out why. We're busy looking at acquisition opportunities. We are constantly sifting through those.

Some of the acquisition opportunities that occurred this year that popped up by other people were opportunities that we looked at. We decided for one reason or the another, either because of culture or because of pricing, that we wouldn't go forward with those. We are continuing looking at them. We've got three or four continually that we're looking at and studying. I can't promise you guys we're going to do a acquisition in this fiscal year. Certainly those opportunities are presenting to us and the pipelines been pretty strong.

Okay. Thanks for the insights.

Tristan Richardson, DA Davidson.

Love the Bjorn Borg reference. That is great. (laughter) On the Storage segment, obviously we have seen great margin expansion there. I'm curious how much of it is good execution and a lack of hiccup projects versus better pricing in the market?

Storage.

I think we are executing better we have not the hiccups we experienced at the first part of last year. I do not know the pricing in the market has change that much in our contracts. I think it's more execution.

Okay. When you look at last year, obviously very strong results out of Oil, Gas & Chem. That was the leading segment. Where are you seeing backlog going in terms of the mix? Kevin, you've talked about this on previous calls. Do you still see Storage Solutions being the growth leader in fiscal 2014?

My take on that is it's almost sort of mathematical. The Storage projects that we are looking at and seeing are individually larger-volume projects. They are, just by the mathematics of the size of the projects, it's going to lead on the backlog from a number standpoint. From a percentage standpoint, I think the Electrical business has an opportunity for some improvement there through the course of the year to pick up more backlog and certainly the Industrial part. The Oil, Gas & Chemical, like we've said before, is such a quick-turn type business. Growing that backlog quarter-over-quarter is a little more challenging, although it is not necessarily an indication that there is anything wrong in that segment.

Okay. Thank you guys very much.

(Operator Instructions)

Tahira Afzal, KeyBanc.

I just want to find out, we've start to see some of your peers talking about wage inflation, I just want to get a sense that, A, how much of that are you seeing right now? How are you really accounting for it or the potential of it going forward as you talk to your customers and really hedge yourself to some extent?

When we're contracting, we're trying to manage a risk, whether it be commodity prices or wage prices. We're trying to build into our contracts escalation provisions. We're not always successful. It's less of a issue on the short-term projects because, for example, the Oil, Gas & Chemical segment, those projects are in and out of backlog fairly quickly.

Right.

There may be pockets like up in Canada that we've talked about before where it gets a little tight on labor, but overall we have not seen a big impact on wages, so far.

Do you expect it to be on its way?

I think it's a question of when, not if. I think with the all the planned project in the Gulf Coast, Texas and Louisiana, will have a impact on wages everywhere. I think it's something that we're paying attention to. I do not know that we're being significantly affected by it today. I think we're going to see, over the course of the next 2 to 3 years, we're going to see some pressure on labor and wages.

Thank you very much.

I'm not showing any further questions at this time. I would now like to turn the call back to CEO, John Hewitt for any further remarks.

Thank you for everybody for your attention today. We look forward to seeing you at some of the future conferences that we'll be attending. Have a safe day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.