Matrix Service Co (MTRX) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Matrix Service Company conference call to discuss the results for the fourth quarter and fiscal year end.

(Operator Instructions)

As a reminder, today's conference is being recorded. I would now like to turn the call over to 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 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 vary -- may differ materially than those indicated by these forward-looking statements, as the result various factors including those discussed in our annual report on Form 10-K for our fiscal year ended June 30, 2014, 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, and good morning, everyone. We prepared our usual remarks for the business, which are focused on the exceptional year Matrix Service Company had, while highlighting the significant strength in our markets. The stock market today seems to be demonstrating a different view on this record performance, and the guidance that we have laid out. I hope that we will be able to clear up any misconceptions on the Company performance in 2014, and growth expectations for 2015 relative to 2014.

As we closed out FY14 and our 30th year in business, I want to take a moment to reflect on our growth, from a small tank repair company to who we are today, a top tier engineering, construction and maintenance company that designs, builds, and maintains infrastructure critical to North America's energy, power, and industrial markets. When our Company was founded back in 1984, we had 14 employees. Today, we employ nearly 5,000 people across the US and Canada, and service our customers through more than 30 regional offices.

Just this year, we were named one of Forbes 100 Most Trustworthy Public Companies, and Fortune's Top 100 Fastest-Growing Companies. We are also ranked 56th on Engineering News-Record Annual Top 400 Contractors List, the seventh consecutive year that we have been named within the top 100.

We have experienced a record-setting year in revenue, backlog, and earnings per share, which we will talk in more detail about in just a moment. And with the opportunities across our markets, we are very excited for the future and position of Matrix Service Company.

Critical to our success has been the solid execution of our five-year strategic plan. This plan, which focuses on a Zero-Incident safety performance, growing and diversifying our business, building the internal infrastructure needed to meet the market opportunities before us, is what will ensure a long-term stability, and enhanced value for our employees, customers, and shareholders.

Our number focus will always be our commitment to safety, and our goal of creating an injury-free workplace. As we have stated in previous calls, achieving an injury free workplace is a journey, which at times can be challenging. FY14 was no exception, as our total recordable incident rate was a 0.85.

While this performance above average, against the construction industry in North America, it falls short of our expectations. We know an injury-free workplace is an achievable goal, because safety is a choice, and therefore incidents are also a choice and preventable. No one sets a higher standard for us than we do, and we know each employee can make a difference.

Progress continues to be achieved in the development of our zero-injury culture, one that demands the leadership, energy and focus of every employee every day. That said, I also encouraged each of you on the phone today to contemplate your own personal commitment to safety, and that of your family and coworkers.

From a growth and diversification perspective, we have made significant progress, growing our business across the four reporting segments. Matrix continues see excellent organic growth, much of which is attributed to the strength of our markets, quality of our services, leadership of our people, and the key strategic business relationships we cultivate every day. We also continue to pursue acquisitions in support of our strategic objectives, and have completed two in the past eight months.

The first, which we have discussed on previous calls is that of Kvaerner North America Construction now Matrix NAC, which has further diversified our offering, [by the] substantial expertise in the construction of natural gas-fired power plants and large capital construction projects, expanded our geographic footprint, and strengthened our position as a North American union contractor. The second acquisition, which closed in late August is Bakersfield-based HDB Limited, a premier provider of construction, fabrication, and turnaround services to the oil and natural gas producers located throughout California's Central Valley. This acquisition lays the foundation for our leadership team to advance our expansion into the upstream and midstream markets, while strengthening our geographic footprint in this critical oil and gas region.

With our growth, expansion in our key leadership is critical to our success. We have added key talent in areas such as Western Canada, the US Gulf Coast, and California to support our strategy, and bring greater expertise and bench strength to our teams in these key market areas.

Both organic and acquisitive growth is clearly evident in our financial results, with FY14 revenue up nearly 42% to $1.26 billion, and earnings per share up 46% to $1.33. Backlog at the end of June 2014 is also up 46% to nearly $916 million on project awards of $1.3 billion. Even with the tremendous growth and investment this fiscal year, the Company liquidity position is even stronger, with our cash position up 21% year-over-year, and our credit facility expanded to $200 million.

When we initiated our five-year strategic plan in 2012, we were a $730 million Company. At that time, we ranked in the lower quartile for working capital, free cash flow, operating margins, and ranked average for return on invested capital against our peer group.

Today, we have grown to a $1.3 billion, and ranked in the 90th percentile for return on invested capital, free cash flow, and the 70th percentile in working capital. Total shareholder return translated to among the highest in our peer group for 12 months ending June 30, 2014.

We have achieved tremendous business success in many of the strategic of focus areas of the Company, growth, geographic expansion, diversification, total shareholder return and balance sheet strength. Besides safety, we recognize that we have more work to do on gross margins, and EBITDA, which have improved at a slower rate than desired.

There is no question, we have an opportunity to leverage our business to improve efficiencies and effectiveness in our work, which in turn will be reflected in more positive results in these areas. During so, however, also requires we make investments in our own internal infrastructure, in our people, processes, and technology to ensure Matrix is well-positioned to deliver on the short- and long-term opportunities that exist across the energy, power, and industrial markets we serve.

In closing, I would like to take this opportunity to thank the employees of Matrix Service Company for a record-setting FY14 It is through their continued dedication and commitment to leading our core values that we succeed, and we will continue to achieve the goals we have established for the coming years.

Once Kevin completes his review of our FY14 financial performance, I will share more about our view of future market opportunities, and our related strategies. I will also provide us FY15 guidance, and then open the call for questions. Kevin?

Thanks John. Our fourth-quarter revenues were $344.4 million, compared to $235.6 million in the fourth quarter of FY13, an increase of 46.2%. The electrical infrastructure, storage solutions and industrial segments provided strong growth, while the oil and gas and chemical segment was down as compared with the prior year.

Our fourth-quarter net income was $7.6 million, and our fully diluted earnings per share was $0.28, as compared with the fourth quarter of last year, when the Company produced net income of $7.4 million and EPS of $0.28. While the quarter results helped us achieve a record year in FY14, they were dampened by a charge of $3 million on a storage solutions project. While we can't discuss the specifics of the project, we are confident that the challenges of the project are in hand, and major construction completion is scheduled for the end of this calendar year.

We also incurred approximately $1.3 million of integration costs in the quarter, including severance and system migration costs. These two items reduced our earnings per share by $0.10 per share.

Consolidated gross profit was $36.9 million in the three months ended June 30, 2014, versus $27 million in the three months ended June 30, 2013. The performance of our overall business produced 10.7% consolidated gross margins, as compared to 11.5% in the fourth quarter of FY13, as the project charge negatively impacted 2014 gross margins by 0.9%.

SG&A expenses were $22.7 million in the three months ended June 30, 2014, compared to $15.4 million in the same period last year. The increase was the result of the addition of SG&A costs related to the acquired business, higher amortization expense related to intangibles, as well as increased incentive accruals, recorded in connection with the strong performance of the Company, and the other costs required to support the growth of our business. The $1.3 million of integration costs I mentioned earlier increased SG&A as a percentage of revenue by 0.4% to 6.6%, compared to 6.5% in the fourth quarter of FY13.

Moving on to segment performance. The storage solutions segment once again produced significant revenue growth over the prior-year, as quarterly revenues increased 45.5% to $140.4 million, as compared to $96.5 million in the fourth quarter of FY13. The increase resulted from higher levels of work in our domestic and Canadian above ground storage tank business, in addition to significant balance of plant work.

During the quarter, the Company completed a major balance of plant project work for a key client that had significant impact to the quarter, and full-year revenues and earnings. Gross margins increased to 11.8% in the three months ended June 30, 2014, despite the project loss I mentioned previously. Last year, our fourth quarter gross margins were 11.3%.

The storage solutions market remains strong, and based upon the opportunities we are pursuing and our backlog of $482.6 million, we expect that this [strength] to continue in the next few years, and should be able to produce gross margins in the upper end of our 11% to 13% range. The industrial segment also continued its impressive growth [string], as revenues tripled from $26.5 million in the fourth quarter of FY13, to $78.5 million in the recently completed quarter.

Our mining and minerals business, continued growth in fertilizer, and the addition of services provided by Matrix NAC to the iron and steel industry have contributed to the growth. We produced gross margins of 9.6% in the fourth quarter, which is within our expected range of 8% to 10%, and above our prior year fourth quarter margins of 6.5%.

A significant portion of projects in this segment are reimbursable work for the iron and steel industry. While these projects are important to the portfolio of our business, the lower margins produced for this work is consistent with the associated risk profile. As a result, we expect to continue to produce gross margins of 8% to 10% for the industrial segment in FY15.

The electrical infrastructure segment produced 59.2% higher revenues in the fourth quarter of FY14 when compared to FY13, as the result of Matrix North American Construction acquisition which added power generation work to our service offering. Revenues in the fourth quarter were $73.4 million, as compared to $46.1 million in the fourth quarter of FY13.

The gross margin of 10.2% in the quarter was lower than the 11.8% produced in the fourth quarter of FY13, and lower than we normally would expect. Through improved utilization of our cost structure, and execution of a higher volume of new construction projects, we believe we can achieve 11% to 13% gross margins.

The oil, gas, and chemical segment once again suffered from a tough comparison. Revenues of $52.1 million in the fourth quarter of FY14 were lower than the $66.5 million produced in the fourth quarter of FY13. In addition, gross margins were only 10.2% in the quarter, as compared to 13.5% in the fourth quarter last year.

FY13 margins were significantly higher, as the higher volume of work produced better leverage of the cost structure, in addition to a better mix of project margins. While the quarter margins were lower than our normal expectations, we continue to believe the business volume in this segment will increase, and allow for gross margins in the range of 11% to 13%.

Moving on to the full-year results, consolidated revenues were $1.263 billion, an increase of 41.5%, from consolidated revenues of $892.6 million in the prior fiscal year. The acquisition of Matrix NAC in late December 2013 added revenues of $154.8 million to FY14. The remaining increase of $215.7 million or 24.2% is attributable to the legacy business.

On a segment basis, storage solutions, industrial and electrical infrastructure segment revenues increased significantly. Consolidated gross profit increased from $94.7 million in FY13 to $136.5 million in FY14. The increase of $41.8 million or 44.1% was primarily due to higher revenues.

Gross margins were 10.8% in FY14, as compared to 10.6% last year. Consolidated SG&A expenses were $77.9 million in FY14, compared to $58 million in FY13. The increase was primarily related to second-quarter acquisition of Matrix NAC, higher costs to support the organic growth of the business, and higher short-term and long-term incentive costs as the result of the improved performance of the Company.

In addition, we have continued our efforts to improve our systems, our processes, and employee development. SG&A expenses included approximately $10 million of direct acquisition cost, and $1.8 million of integration costs, which increased our SG&A percentage -- SG&A as a percentage of revenue by 0.3% to 6.2% in FY14, as compared to 6.5% in FY13.

Net income for FY14 increased 49.2% to $35.8 million, as compared to prior year net income of $24 million. Earnings per share increased 46.2% to $1.33 per share, as compared to $0.91 in the prior year.

As John mentioned, our backlog at June 30, 2014 is up to $915.8 million, which is an increase of 46.1% over June 30, 2013 backlog of $626.7 million. This increase was achieved on over $1.3 billion of project awards in the year, and we also have $355.1 million in the fourth quarter.

Storage solution projects accounted for $209.1 million of the awards in the quarter, included individual awards for [accrued] storage, a balance of plant project in Texas, a LNG project in Louisiana, [accrued] storage project in Illinois, and LPG and natural gas storage project in Texas. Also in the industrial segment, we were awarded additional scope on the fertilizer project in Iowa, in excess of $30 million.

Looking at the balance sheet, our cash balance stood at $77.1 million at June 30, 2014, as compared to $63.8 million at the beginning of the fiscal year. During FY14, the Company produced $77 million of cash flows from operations through strong operating results, and improved working capital management.

This allowed us to fund Matrix NAC acquisition, $23.6 million of capital expenditures, as well as the significant growth in the year. During the year, the Company also executed an amendment to our credit facility, which increased the revolver from $125 million to $200 million.

As of June 30, 2014, the Company's liquidity has increased $242.5 million, based upon the year end cash balance of $77.1 million and availability in the revolver of $165.4 million. Our strong financial position allow us to continue to pursue our growth strategy, including funding the recent acquisition of HDB.

I will now turn the call back over to John to provide an update on our strategic plan, and our outlook for FY15.

Thanks, Kevin. So I want to spend a few minutes on our overall strategy, and the market opportunities before us. It is our vision to be the best of the best, be respected by our peers, wanted by our clients, and viewed as employer of choice by our current and future employees. Matrix Service Company is a value select company, and our goal is to deliver great results for our shareholders for many years to come.

We refreshed our five-year strategic plan this year, which runs through FY17. This plan continues to be focused on the following overarching elements, continuous improvement to achieve Zero-Incident safety performance, capitalize on our market position, brand strength, and service quality to achieve continued growth and diversification, focus on people and organizational development with an emphasis on structure, leadership involvement, training, and recruiting and retention, business value enhancement through process improvement, goal setting, key strategic acquisitions and earnings consistency. And employee engagement to the plan through active communication and change in leadership.

Some of the key strategic and tactical focus areas are to achieve a reputation as a premier provider of EPC solutions for the next-generation of gas-fired power plants in North America; transform our ASP brand from tanks to a full terminal provider; elevate and expand our large capital construction brand to cover major elements of the gas value chain, such as LNG, fertilizer plants, gas-to-liquid export facilities and transportation fuels to name a few; leverage the brand and skills of our Matrix PDM engineering group in all aspects of storage and terminals in both standard and cryogenic services; with a strong position in the downstream, the midstream energy markets move upstream through a combination of organic and acquisitive means; remain flexible to changing market conditions through a diversified service offering and a solid geographic platform; and as a company, that at its core is a people business, invest and actively work in the industry, community and academia to recruit, retain and develop the best field and management workforce.

These topic areas represent but a few of our key strategic tactics that we are focusing on as we build and grow Matrix Service Company. Behind all this, is the fundamental technology and process foundation that it is an ongoing investment.

For instance, by the end of our five-year plan, we will be complete --we will complete development and integration of a common control system that will bring efficiencies to every aspect of project work, from bidding to scheduling, project controls, supply chain and equipment management. We are also upgrading our CRM system, implementing mobile field delivery, technologies and more.

Furthermore, we continue to invest significant resources in our most valuable assets, our people.

We are committed to attracting and retaining top talent across every level of our organization, and to invest ongoing training, development to ensure our people are well-equipped for the opportunities in front of us. These strategic and tactical actions will prepare us take full advantage of the extensive opportunities that we see in the marketplace, and across all our business segments.

Not including the estimated growth on the power demand curve over the next 20 years, the US Energy Information Administration is predicting up to 60 gigawatts of coal capacity to be retired by 2020, the majority which is within the geographic footprint of Matrix NAC, which positions Matrix as a leading contractor of choice for replacement of those assets. In addition, North American utilities are expected to make extensive infrastructure investment over the next 20 years, projected at nearly $880 billion in the US and $100 billion in Canada, to replace, upgrade and expand electrical transmission and distribution infrastructure with a significant portion of that spend focused in key population areas. In response, we have expanded our union delivery across the Midwest and Canada, as well as into the New England area, Long Island and the West Coast.

In the oil and gas market, North America is still in the early stages of building out the infrastructure needed to keep up with the demand from new and currently producing areas, such as the Eagle Ford, Permian Basin, the San Joaquin Valley, Marcellus, the Bakken, and the Canadian oil sands. Matrix has a legacy reputation of providing safe and quality services for the oil and gas industry, and our subsidiaries are very active in this market.

Our work now spans the market from upstream oil and gas, through midstream storage terminals, downstream refining, chemical facilities to export terminals for crude, refined products, LNG and NGLs. Generally, as the North American economy strengthens, and domestic energy sources come online, industrial markets in the US will continue to grow, creating additional opportunities for Matrix Services.

In summary, we are looking forward to the future, and opportunities for growth across all of our operating segments are significant. Combined with our continued investment in our own infrastructure, I have every confidence we will build long-term value for employees, our customers and our shareholders. Based upon our FY14 performance and our outlook for the coming year, our revenue guidance for FY15 is in a range of $1.425 billion to $1.525 billion, with an anticipated EPS range of $1.40 to $1.60 per fully diluted share.

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

(Operator Instructions)

Matt Duncan, Stephens.

Good morning.

Good morning, Matt.

So I want to start by talking about guidance for the second. Kevin, you gave us segment gross margin guidance for the year. What do you expect quarterly SG&A costs to look like?

It sounds like there was some one-time stuff with the severance and integration at Kvaerner there in the fourth quarter, so just helping us know what the go forward run rate there is would be helpful.

Yes. The SG&A was a little bit higher in the fourth quarter than we probably would have expected. I think we are still looking at 21% to 22%, when going into FY15 for the quarter.

Okay. So if I used that number, and I go to the midpoint of your revenue guidance, and the midpoint of segment margin guidance for each of the segments, I am getting an earnings number closer to $1.70. And the guide is a $1.40 to $1.60. So what am I missing? And it may be something as simple as you are just trying to be a little conservative to start the year, and hoping to do better. But I am curious, if there is something I am missing there.

Well, I don't have all the -- the model that you have got there. I don't know what your growth expectations are for each of your four segments, and the mix is different. So it is hard for me to answer that question without seeing the model.

I can tell you we have gone through a lot of review of our prospects, our budgets, our funnel of projects, and feel like we have done a thorough job in budgeting FY15 and setting the guidance.

So another way to look at this Kevin, might be if you look at the fourth quarter gross margin, and you back out the $3 million expense for the charge you took -- I think you said it hurt gross margin by 90 basis points, so it would have been 11.6%. I don't know if that is a little higher than what you might expect going forward. But again, using that number and applying it to the revenue guidance range, and using the SG&A number you just gave, that also implies something like $1.65 to $1.85. So again, above the range.

So I am just -- I guess, what I am getting at, is it feels like -- and correct me if I'm wrong -- but it feels like you are being a little conservative with the first pass. And I get it, because project charges happen from time to time in your business. But I just want to make sure there is not any other expense that we don't yet know about that may be coming?

So Matt, let chime in here a little bit, from a non-numbers perspective. So we are integrating Matrix NAC and Matrix SME through the course of this year. We are bringing together those businesses into a full union delivery.

We have not consciously built any conservativeness, either into the outcome of that or into other parts of our business. You know that the growth in our business is dependent very much on the timing of our awards. We see the -- how we see the market, and how we see the timing of those awards can impact the outcome of the year for us.

So there has been no conscious building of conservativeness into the numbers. We have been through the numbers quite a bit, and laid out how we see the revenue coming in, and how we see the gross margins on certain pieces of the revenue coming in.

Okay.

I appreciate you trying to tie the dots together, and Kevin can do some homework here, when we get off the call, and maybe try to help you with -- to comment on your view of the numbers. But we have not taken a -- come up with one number, and said, okay, we are going to haircut that by a certain percentage to be conservative.

Okay. Fair enough. The other thing I wanted to talk about, is this whole balance of the plant work opportunity, and you mentioned this in your prepared comments, John. And going from just doing tanks to doing the entire terminal, I think you wrapped up the big job you were doing in Cushing there -- in roughly the month of May.

How did the performance turn out on the job in the customers eyes? And are you guys booking more of that work into your backlog at this point?

So we -- so that, just to give a little perspective there, and maybe we weren't as -- we thought we transparent as we could be and needed to be, but on that project, when it entered the company, but late last fall, we get a phone call from a key client that says, hey, we have got a project that is in trouble. We are not happy with the existing contract construction team that is there. Will you guys step in and take it over?

And they gave us a representation of what they thought the volume of that was going to be. And that turned out to be significantly bigger than what we stepped into. And so, it has done a lot of things for us. One, is it drove a very strong top line and bottom line year for 2014. It further strengthened our relationship with this client, because we stepped in, and really helped them considerably on getting this project done, and for them to meet their delivery guidance. And it has improved our reputation, and our resume in the business.

So one of the backlog projects that Kevin mentioned to you is a full tank and terminal project for this particular client in Houston. And so, it is opening up doors for us to provide full terminal work, and potentially on a EPC basis in other parts of North America. So it was a key project for us a lot of ways.

It unfortunately, probably created a top comp on some cases for us coming into 2015. But we think that is -- long-term, that is a momentarily tough comp, as it builds our brand and allows us to move and other aspects of the market. I mean, that terminal business, the tank business for us we see, has continued to be very strong over the next three to five years.

What is the timing of the job in Houston, and how does the size relate to the one in Cushing?

So it is a -- with the tanks and the terminal, it is sub $100 million project. We have already have been -- we have started the dirt work down there in fourth quarter of 2014, and the majority of that work will be done in 2015.

Okay. And the last thing for me, and I will hop back in the queue, just on Kvaerner. What was the revenue from Kvaerner this quarter? And can you break that out, Kevin, by segment, and how much did it contribute to your earnings in the quarter?

So the acquisition of Kvaerner continues to -- in our eyes, be a very good acquisition for the Company. We are pleased with the integration of that business with our legacy union business. And as I mentioned on the -- in the comments, that is progressing well, and probably quicker than we had probably initially anticipated. The revenues for that business were strong.

It contributed about $85 million in the quarter, and that is kind of split 60% industrial, the majority, the rest of it, is in electrical, just a small amount in oil, gas, and chemical. But I don't think that is probably going to be representative of long-term split of their business. It is probably going to be higher on the electrical side, and a little bit less on the industrial going forward. That as you recall, that business brings power generation to our portfolio, and we are pursuing a lot of projects related to power generation right now.

And the earnings contribution, Kevin?

Oh, so it has been accretive. It was -- it added about $0.04 for the quarter to our EPS.

Okay. Thanks.

Mike Harrison, First Analysis.

Hello, good morning.

Good morning.

Looking at the backlog as it stands today, what can you tell us about the contract structure of some of the projects you have in there? How much risk you are taking on? And are the direct margins implicit in those contracts, are they better than FY14 or worse, assuming that the execution is where you want it?

So when we look at the backlog I think, first of all from a contract structure perspective, I don't think we are taking on undue risk in those projects. We have got a pretty diligent risk management process that we go through, to try to make sure we are understanding the risk of the projects we are taking on, and mitigating risk as we go through the estimation and bidding process. So I think the risk profile is fine.

And when you look at the margin perspective of those, those projects and backlogs, I think it does support the margin guidance that we have provided in each of the segments. And, it is not worse -- it definitely has not gotten worse from the prior year. So we feel like the backlog is a good indicator, with strong growth there throughout the year. And we feel good about the prospects we have already booked.

Maybe if I can just kind of ask in a different way, or a different twist. How much of an increase in labor costs are you expecting in FY15? And how much of that can you pass along to your customers based on the contract structure, and how much of it should we see pressure margins?

So I think -- we have talked before on previous calls that there is, over the next 2 to 3 years, is we expect to see continued pressure on labor availability, that labor availability will have a tendency to drive up costs. For the most part, we, in our contracts either through providing -- on a fixed-price contracts providing escalation, negotiating in escalation values, or negotiating out escalation responsibility, we are -- have been pretty effective at doing that.

Certainly, on a lot of our reimbursable work that is in the [Merrick] area, we have the right in general under our contracts to raise our rates, as the market forces drive that. On the union side of our business, the labor increases are preset by those contracts. So we know, in some cases, two to three years out in the future what those labor rates are going to be.

Now saying all of that, in both cases, there is going to be -- there will be points in time where we may have to do -- either provide travel or subsistence or other living expenses or other incentives, in certain areas of the continent to bring people to our -- to attract people to our job sites.

All right. And then, just looking at the revenue guidance for next year, you are looking at mid to high teens growth overall. Which segments are you most confident that you are going to see strong growth kind of above that average rate, and where are you maybe expecting more moderate growth?

I think a lot of it depends on, as I mentioned before, on the timing of awards. I would say coming out of the box, we would expect storage solutions to be a strong growth area, if you make it relative to the project we talked about within -- that happened this year, the [source surprise] project. Electrical infrastructure, we would expect to be a high growth area, again depending on the timing of awards, particularly on our next large power project.

And, I think oil, gas, and chemical will be -- could be a little flat to up depending on scope growth on our projects. And, industrial, we expect some strong growth in industrial.

All right. Thanks very much.

Martin Malloy, Johnson Rice.

Good morning.

Good morning.

With respect to the guidance that you have provided, if I take the midpoint of the revenue range, it looks like it's about 17% growth from FY13 to FY14.

Yes.

And I look at the midpoint of the EPS guidance range, and it is about 13% growth. What would be the reasons behind having a lower earnings growth rate than a revenue growth rate? Why would you have negative leverage off of SG&A?

It is not a matter of negative leverage off of SG&A, it is a matter of which segments are growing. And one of the large growth areas, as John mentioned, will be the industrial segment.

As I mentioned, the -- with a high amount of reimbursable, low risk work we have in that segment, we don't expect that segment to be over 10%. It is going to be 8% to 10% next year, so gross margin. So that has an impact on the operating, overall operating margins.

Okay. With respect to the bidding environment on the storage solution side, is there any qualitative or quantitative way that you can help us with just the size of the bid funnel maybe, and how it has changed over the last 6 to 12 months?

I don't have that number specifically, but I would tell you that the bid funnel has not decreased. So we are still seeing extremely strong activity from all of our major clients. We are also booking some projects with some -- not necessarily new clients to us, but clients that we have done work for in the last 12 to 18 months. And so, for us, we still see a lot of extremely strong activity throughout North America.

If you look at the book-to-bill, the fourth quarter for that segment, it was about 1.5. So we had almost $210 million of project awards for the group, and it is a variety of projects. It just wasn't above ground crew takes.

We had balance of plant terminal work. We had natural gas. We had LNG in that, in those awards. So I would agree with John, it looks like a strong environment right now.

Thank you.

Tahira Afzal, KeyBanc.

Thank you very much. I guess, the first question is on just midstream, timing, and competitive dynamics you might be seeing. The earnings season, we have seen a lot of your peers on the larger side, really cautioning on how some of the cycle is playing out. So I would like to get your thoughts and how you baked that into your outlook?

So, we just commented on the midstream piece, which we would say is tanks and terminals. We continue to see that strong. We don't see any softening there.

The downstream markets in, say, refining, we don't necessarily see any weakening there. Again, it is all timing for our key clients, and when they are going to do their turnarounds or their repairs. And so, there can be flat spots in the growth of that market from quarter to quarter. But there is nothing that we are seeing there, that has given us any cause for pause.

Got it. So I guess, what I am asking is, if you rewind back, let's say six months ago versus today, what has changed in terms of the timing of your end markets? Would be fair to say maybe some of the [follow] awards based on your commentary today, are taking a little longer to come through? And if that is the case, are you seeing a more competitive environment in the near-term?

I don't think it is the timing of awards and how long it takes to get from proposal to contract. I don't think there is any significant change there one way or another. I think it is -- our clients are continuing to behave, as they have behaved over the last 12 to 18 months.

I would tell you that we are, because of our push to take -- as we said in the prepared remarks, larger capital construction positions on some of the bigger jobs in NGL and power, those things have added a different -- a different sort of timing complexity to our estimated portfolio, where those projects were much more permit-driven will have a tendency to drive out the amount of time between proposal to award.

But even on those, we are seeing opportunities for us where we can sole-source those. And on other ones the, where we are on a competitive basis, where the opportunities have a, what I would say an acceptable amount of competitors, there is not an excessive amount of competitors on those jobs.

Got it. Okay And then, second question, is in regards to pricing. And again, folks, I know you have kind of talked about this -- but since I am at a trade show where in fact, a lot of your clients, and a lot of your peers, and some Matrix folks are here as well. And the big debate is on really welding costs, and how much they are going up. So can you tell us, you have charted out how your contractual structures work, but in terms of your guidance, in terms of the margin guidance you have now provided, can you talk a bit about what type of inflation you are baking in for welders as well?

I don't know that we have baked in any inflation, to be honest with you. Because most, the majority of our contracts position us into a no-risk a situation, where if the -- if we have a reimbursable project, or a --with a client, or even on some lump sum projects where we have excluded escalation, those costs will be borne by our clients under those agreements. So we will pass those costs on.

And I can't speak from contract to contract. Some of those contracts will have the ability for us to mark those up, those costs up. Some of those, maybe not, and then, everywhere in between. So but we have not baked the growth in labor costs into our pricing.

And when you look at lump sum projects, whenever we are doing a lump sum bid, we are considering the risk in all the various costs that hit those jobs, and we will factor in a contingency in our estimates to cover those unknowns or uncertainties related to each of the various cost line items, which would include this item that you referenced.

Okay. Got it. That's very helpful. Last question is on the electric infrastructure side, outside of power [gens], looking at transmission, et cetera which you have built out in the past Is that still an area that you folks are looking at in terms of in organic growth, and, could you talk a bit about how the valuations are shaping up? I know we have had a couple of transactions recently in this space. So I would love to get your thoughts?

So as we said in our prepared remarks, we still see strength in that market. We still see opportunities for us to grow our business. We are actively moving into -- we have had a strong position in sort of the New Jersey, Eastern Pennsylvania area. We are actively moving to have a more presence in Long Island. We are moving to have a more active presence up in New England. We are -- have opened up last year, about 16 months ago an operation in Southern California to service the Southwest.

Our move with Kvaerner, which opens up the door for us into Ontario and strongly into the Midwest, Chicago region, provides us a platform to expand our electrical services. So we still see that as a growth area for us, an opportunity.

So, whether we are going to do that through acquisitions which we are actively continuing to actively look for, or do that organically, it is a focus area for us. And we continue to have a desire to grow that and we will. Just we will do that as a -- in an appropriate and measured way, so we don't change the risk of the operating margins, what we see in that business.

Along, since you opened the door to acquisitions, like we said we completed the HDB acquisition business HDB, for us, while it is a relatively small acquisition, creates a foundation for us in the central valley of California to move more upstream. And then, once building our reputation with us clients, take those services into other upstream locations throughout the US. And so, we, and while that acquisition was small and nature, it's our intention to add our leadership and financial strength there, as well as knowledge of the clients and customer base with our leadership teams, to joint leadership teams to expand that business.

So we are actively continuing to look at acquisitions throughout North America and throughout all of our segments. And, we still expect acquisitions to be a key part of our growing the business.

Got it. Thank you very much, folks.

Thank you. Tristan Richardson, D.A. Davidson.

Hey, good morning.

Good morning, Tristan.

Most of my questions have been answered, but I am just curious about the schedule on backlog, in terms of your visibility, with backlog where it is now, pretty elevated levels. Can you see beyond 2015? Is there some work in hand now that is executed in 2016, or is most of this 2015 work?

I would tell you, it is probably -- 80% of the backlog is worked off within a year, 75% to 80%. So we have got some visibility. We have also, we got a lot of visibility into the projects we are tracking through our funnel. And a lot of projects we are pursuing right now will definitely be longer-term in nature, and will impact FY15 some, but also FY16 and FY17.

And on your exclusive agreement on the tank side, are you sort of constantly in discussion and sharing information about what the customer is seeing for 2015 and beyond? Or is it more sort of a as these projects come up, and more just kind of normal project type of discussion?

No, we have a -- and specific -- so we have a couple of clients, midstream clients that we work in partnership with. One of them, that I can speak personally about, which I am on the steering committee for, with the client's executive team, is that we have visibility out five years on their spending plans for their infrastructure in the US and Canada. So we have some pretty long-term visibility there. We know what they are going to put in place, and, it's pretty extensive.

Okay.

So these aren't projects that are -- they woke up one morning and had a great idea, and decided to go put some tanks in North Dakota, or into Saskatchewan. (Laughter). They know what they are going to do, and where they are going to spend their money, and what year they are going to do it in.

So it is fair to say, that you have visibility beyond just the work in hand, in the posted backlog number?

Absolutely.

Okay. And then, I guess, just a little bit on the electrical business, and sort of the margin assumptions that you have there. How do you plan for storm work? I know that it is highly unpredictable, but do you include some normalized level of the storm work in your outlook? Or is it, any storm work would be entirely incremental?

We include a very small, very small amount of storm work in our numbers. That is a feast or famine kind of business. And so, we have seen -- you have been tracking us long enough -- we had a couple years ago, Hurricane Sandy had a huge impact on the quarter. But this year, we had minimal storm work. So we take a pretty conservative view on how potential storm work will affect our year.

Okay. That's helpful. And then, just lastly on HDB. I mean, it seems like dipping a toe into the upstream side of things. I am curious sort of, what does that become longer-term for Matrix? How quickly does that grow, and I mean, and does that go into other areas, North Dakota or West Texas? Share a little bit on what you see longer-term for HDB?

So we have a -- whether it is through HDB, HDB will become and immediately became Matrix Service Company. So we rolled it immediately into our organization. So we think what that does, is gives us instant resume with the upstream clients, clients that are operating in the Central Valley there, like [Oxy] are also operating in the Permian in West Texas.

So we see our ability here over time, as we, as they gain comfort with us, as they are able to give, they would give us larger projects than they would give HDB, just because of our size and bench strength, and we have [skill] on those projects, that will open the door for us to move into some of the other areas with, say that client.

So we see that as, certainly as a springboard into other areas where those clients are working. All the major clients are there, like I said Oxy, Chevron. And so but, we would also -- I would also say, we are continuing to look for acquisitions in those other regions that would accelerate that springboard.

That's helpful. All right. Thank you very much.

Robert Connors, Stifel.

Good morning.

Good morning, Robert.

If I exclude the charges taken in FY14 from the stored solutions segment, I calculate that -- [it did about] gross profit margin of about 12.6%, versus the reported 11.2%. So I am just wondering, if you are seeing the opportunity for margins to sort of step up in the segment, not necessarily in the 15[%] but as we step out further and get past probably some of these problem projects for right now?

As I said in my comments, I believe we can achieve the upper end of our 11% to 13% range. Going above that, I don't want to, at this point, I am not ready to say we are going to hit above that. It is possible, with good execution.

The market is definitely strong as we have said. So I am not saying, it is out of the realm of possibility, but we feel good forecasting it, at the upper end of the range.

And then, it sort of strikes me too with, given the revenue guidance, and fairly decent margins in the quarter with what you see in 2015 earnings, but is there anything below the operating line that could pop up as a surprise? I mean, I know that over the past couple of quarters, maybe minority is -- tended to spike upwards in the past, it has never been an issue with you guys?

The minority interest relates to one joint venture project, and we have a pretty good handle on what that is going to be. I don't think there is really anything below the line other than tax. Tax can create a bit of volatility. You may notice this quarter, the tax rate was a little bit higher than it had been. It was still less than 40%, but it was above our guidance of 37%.

So it is-- depending on when tax legislation get approved, if assuming R&D gets renewed at the end of December again, that will have an impact. It could -- and that would be positive, depending on the mix of work we have on -- how much of our work is new construction versus repair and maintenance. If it is more new construction, that can have a positive impact on the tax rate.

So and, plus, how much is in Canada versus the US can also have an impact. So we forecast 37% on the tax rate. I think that is a good forecast, but it does have a risk for variability. That is the only thing below the line I think that has a big risk because we don't a lot of debt outstanding.

The other thing I would add to Kevin's comments there, is that during the course of any year, and into the budgets of our following year, we don't add in any improved performance on any of our projects. So we don't make any assumptions going in that, we are going to have a massive overall absorption of one of our operating units, or that we are going to convert a lot of contingency into margin.

And so, those can have a tendency to skew the gross margins positively, but they are all -- they are not a slam dunk. I mean, those are dependent very highly our performance. They are dependent very highly on the amount of extra work a client give us. And so they can have tendency to move those gross margins around, inside the -- inside that range we gave you.

And I guess, how is your outlook for contingency? Are there quite a bit of opportunities for it, to roll it back into the numbers in 2015?

So it depends on who you talk to. If you talk to our project managers they would say no. (Laughter). If you talk to the guys sitting in this room, we would say yes. So I don't think we can comment on that.

I mean, it is -- our markets and our construction work has got a lot of variables in it, and there is a lot of things that can happen. So we don't count on that happening. We go into year. So as we closer to closing jobs out, and understand where the progress has been made on the sites, against the budgets, then we are able to make a determination whether a contingency can be converted.

Okay. And then, just real quick, you mentioned that on minority, what would be the run rate on that on a quarterly basis?

Let me think about that a second.

Okay.

It is probably, it is going to be less than $2 million a quarter I would think. It is, like I said, it's one project. I don't -- I think it is probably going to be $1.5 million to $2 million a quarter.

Okay. For the minority line?

Yes.

Okay. Thank you.

[Mike Schlitsky], Global Hunter Securities.

Good morning.

Good morning.

So most of them have actually been answered already, but a few questions earlier were about constraints on the labor force. I was just kind of wondering, especially in the Gulf area, do you see constraints on obtaining trucking services, or obtaining trucks as well, as any constraints on obtaining the -- actual like cranes and things like equipment to get the contracts done, or is that still currently not an issue for you?

I can't say that you are -- that that is right or wrong. That has not bubbled up to me, that that is an issue. I have not heard that any of our project reviews or operation reviews. That is not to say, that is not an issue and our guys are doing a phenomenal job of working through it and planning ahead. So I cannot tell you whether that is right or wrong.

So, if that were to take place in 2015, in your contract structure, is it similar to the labor where you could put in an escalator or other cause to kind of insulate you from any increased trucking costs? (Multiple Speakers). Or that could be an issue, if it -- if it were to actually take place?

So a lot of our trucking, for instance in our storage business, we don't own our own trucking to truck our fabricated parts. We go by truck or rail. And we have got long-term agreements with those transportation companies to provide us that service. So I am not sure how much risk we have there.

And then, a lot of our other projects, the delivery of the key pieces of equipment to the site is by the vendor. And so, I don't know that that is a huge risk for us, trucking.

Great. Thanks so much for your help.

Okay.

And John, while we got this quick break, I want to go back to the previous question. I have just been informed I was in error in my forecast. I gave an annual forecast of $1.5 million to $2 million on the minority interest that was a quarterly forecast. That was really the annual amount. So the quarterly is $0.5 million a quarter

Fran Okoniewski, Friess Associates

Yes, I just wanted to circle back to the Q4 project charges. Is there any possibility for any recourse or negotiations for any potential reversal of the charge, given that you guys, I guess at least in my impression, were brought on -- brought in by the customer to fix infrastructure related issues? Is that possible?

No, those are two separate projects. So the project was at the -- that was associated with the charge is a project totally unrelated to the extremely large balance of plant project we talked about. So there is two different projects.

To answer your question, is that we assumed -- and while we are not talking a lot about it -- but we assumed within our development of the project forecast that there would be some change orders from the client that we would recover. And that those, I would say are conservative assumptions, but they are assumptions on how we think that those negotiations or those change orders will go. And that they are -- would not be our expectation to have windfall recovery beyond those expectations.

Okay. Thank you.

Mike Harrison, First Analysis.

Sorry, I did have another clarification on the noncontrolling interest, but you cleared it up. So maybe just wanted to ask, with everything that we are hearing about rail capacity, and some of the difficulty that people are having getting crude oil transported from where it is produced, to where it is needed, is that helping or hindering your business right now in terms of projects moving forward?

I think, the overall jam in the logistics in moving oil from relatively new producing regions to the users, and the distribution networks is a positive thing for us. We are -- I think that is one of the reasons what is driving -- one of the things that is driving demand.

All right. Thanks very much.

Thank you.

(Operator Instructions)

Matt Duncan, Stephens.

Hey, Kevin. I think you clarified the issue on the minority interest, but just how much longer is that project going on? So it is $1.5 million to $2 million a year, for how long?

Well, I think that is completed in this fiscal year, is it not John?

Yes, well, it is going to be -- the majority of the heavy construction we are anticipating to be completed in this calendar year, with other elements of the project continuing on into next spring. But what we would consider the higher risk elements, to be completed this calendar year.

But John, the FY16 year, then we shouldn't be modeling anything for the noncontrolling interest, it is gone by then?

Yes.

Okay. And the last thing for me, on the M&A funnel, what is that looking like at this point?

So the M&A funnel looks pretty strong. We have got -- continue at all times seem to have three or four companies that fit our strategic goals in-house, that we are churning through. We are not -- we are not looking at any -- currently have any transformative or large deals. Most of them are -- would be of the smaller nature, maybe not the HDB size. But we got, what we think is a very good pipeline, a very good identification going of client -- of contractor opportunities that fit our profile.

And so, we are pretty excited about where we are at on that, and our ability to -- as we, everyone of these we do, we get better at it. And we have the financial resources to close those deals. And so again, we think that will continue to be part of our growth and diversification strategy.

Okay. Thanks, John.

Thank you.

And I am showing no further questions at this time. I would like to turn the call back over to management for any closing remarks.

This is John. I would like to thank everybody for participating on this call.

As we close the call out, I would leave you with this. So we are very confident in our strategy. It has proven to be effective. We have demonstrated our ability to deliver on that strategy, and we are going to continue to make the necessary investments in our own infrastructure to support the current and future growth.

So Matrix Service Company is a solid investment opportunity, and one that will continue to deliver long-term sustainable and strong shareholder value. So we look forward to talking with all of you in the future. Thank you.

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