Matrix Service Co (MTRX) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Matrix Service Company conference call to discuss results for the first quarter fiscal 2018 conference. (Operator Instructions)

I would now like to introduce your host for today's conference, Kevin Cavanah, Chief Financial Officer. Sir, you may begin.

Thank you. We appreciate everybody's patience. Sorry for starting the call a little late. Before I begin, please let me remind you that on today's call, the company may make various remarks about future expectations, plans and prospects for Matrix Service Company that 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, 2017, and at 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, and thank you for joining us this morning. As we open the call, I want to congratulate 2 of our Matrix NAC teams. First, our infrastructure team in Rahway, New Jersey. They won the 2017 Board of Directors Safety Award. This award is the highest award given by Matrix Service Company. Under the leadership of Pete Cheche, this team's commitment to training and education exemplified the highest of standards. Among their many accomplishments was 0 recordable incidents in fiscal 2017.

I would also like to congratulate the construction services unit operating out of Eddystone and Canonsburg, Pennsylvania. This team received our 2017 CEO Safety Award. Under the leadership of Dave Kazokas, they maintained an emphasis on safety excellence across a multitude of projects. And among other critical accomplishments, they also achieved in 0 recordable incidents.

It should be noted that while we're highlighting these 2 operations for safety excellence, across our entire business, our employees continue to drive a culture of safety, which is demonstrated by our record-low recordable incident rate of 0.49 in fiscal 2017.

Our teams also recently worked around-the-clock for 17 days without injury or incident as they restored power for millions in the wake of Hurricane Irma. We are extremely proud of our employees for this achievement given the environment and hazards they face in such situations. Their work demonstrated their focus on performing the tasks they were given with a commitment to keeping each other and those around them safe. Congratulations to all of our employees for a job well done.

Before we turn to our first quarter results, I'd like to take a few minutes to review our diversified business model and how it contributes to the strength of our overall business and also allows us to proactively navigate the cyclical nature of the end markets we serve. For those of you who have followed us for some time, you know that Matrix has historically been viewed as having only 2 key focus areas: above-ground storage tanks and refinery maintenance. These are, in fact, the core operations that formed our foundation and continue to be a significant part of our business.

That said, several years ago, our management team implemented a strategic plan to strengthen and diversify the business by extending our geographic reach, adding to our skills and expertise and expanding our end markets. As the business environment changed due to class of oil and other commodity prices in 2014, the value of this diversification was demonstrated. With significant project awards achieved in our Storage Solutions and Electrical segments in 2014 and 2015, these 2 segments supported the business during a period when many of our other end markets were softening and project awards were being pushed into the future. Now as project awards in Storage Solutions have lagged during the past 12 to 18 months, work in our Oil Gas & Chemical and Industrial segments is taking the lead as all of our end markets continue to recover.

It's also important to note the awards in our Electrical Infrastructure segment that have been impacted by our strategic shift away from large EPC generation projects. However, our high-voltage electrical work, which represents a significant portion of this segment's revenue, has maintained steady performance and been generally unaffected by commodity issues.

In Oil Gas & Chemical, beyond our traditional refinery maintenance work, our expanded service offering helped us achieve record-high backlog levels in Q4 fiscal 2017. Capital projects in the refinery and chemical business as well as incremental revenue associated with the expertise gained in our most recent acquisition has contributed to this growth. In addition, the opportunity pipeline for replacement projects remained strong. At the same time, after a long period of minimized discretionary spending on maintenance and turnarounds by our refinery customers, we're seeing signs of improved spending and expect the next 18 months to trend up, with the spring turnaround season being one of the strongest for Matrix in 2 years.

Over the past 24 months, our Industrial segment has been significantly impacted by low commodity prices in ferrous and nonferrous metals. As you may recall, this segment traditionally contains the work we do in the iron and steel industry, copper mines, thermal vacuum chambers and fertilizer markets. We are now experiencing a strength in unit maintenance and capital project spending in the iron and steel business as evidenced by the first quarter award of 2 blast furnace repair projects as well as a substantial capital construction project. Further, with the improvement in copper pricing, our key clients in this market are starting to plan for increased maintenance spending and capital projects to meet their customer demands.

Additionally, as a result of our expanding engineering capabilities, we are seeing more opportunities in other industrial thermal markets such as cement, grain and miscellaneous bulk materials that we support with our material handling capabilities and marine structures expertise.

And finally, we are very active in the engineering and construction of 2 thermal vacuum chambers. It's because of these improvements in the market and our strategic position in the segment that we have been able to achieve a segment book-to-bill of 5.5 in the quarter.

Within our Electrical Infrastructure segment, our business is split between 2 primary types of work: power delivery and select work in power generation. In power delivery, our work is focused on servicing the immense infrastructure needs for substation, transmission and distribution work. It is important to note that even during the downturn in commodity pricing, this part of the business remained strong, demonstrating the value of our diversified portfolio of services.

Other opportunities in this segment reached beyond the larger projects to request for system maintenance with major private and public utilities. These customer requests encompass unanticipated storm work as well as day-to-day life extension, system hardening or emergency maintenance and repair demands. This work may not be material on an individual project level or from a volume perspective. It's indicative of the industry's trust in our people and results into work that contributes to a significant part of this segment's bottom line. We also continue to focus on specific targeted construction opportunities from new-build gas-fired generating facilities as we shift away from EPC to go to large-scale, full-scale responsibilities. This shift is yielding a strong opportunity pipeline of smaller projects that provide a better risk profile.

In our Electrical Infrastructure segment, we currently hold a market-leading position in these and expect to expand beyond this area through organic growth and selective M&A transactions. Our Storage Solutions segment has broadened and diversified its base to include full terminal and other capabilities that allow us to offer complete life cycle solutions. While awards segment has been slow to recover, especially with large terminal projects, we remain confident that substantial project work, much of which comes through our ongoing engineering feed services, is on the horizon. Many of these projects, which include tank and terminal work for crude, refined products, natural gas, NGLs and LNGs across North America, the Caribbean and parts of Latin America, are essential infrastructure. There remains some uncertainty around the timing of these awards as you move through this cycle, but we remain confident that calendar 2018 will be a strong award period. We have seen a substantial uptick in bidding opportunities and awards on smaller balance of plant work and tank-only projects, which has contributed to the 0.9 book-to-bill in the segment during the quarter.

Overall, Storage Solutions between pending project awards, current bidding activity and opportunities, our project pipeline is valued at nearly $5 billion. In addition, due to diversification of our business in terms of operating segments and related services, we have also diversified and expanded the services offered by our engineering subsidiary, Matrix PDM. Through our most recent acquisition, this subsidiary has more than doubled in size and, along with increased capacity, now offers significant, multi-disciplined engineering process integration and consulting services for existing and new markets, among them: above-ground and cryogenic storage tanks and terminals; cement and grain facilities; marine structures; bulk material handling; gas processing, sulfur recovery process and handling; and electrical instrumentation and controls. These services are already benefiting our Storage Solutions, Oil Gas & Chemical and Industrial segments.

In summary, based on our project pipeline, improving market conditions and our strategic positioning, we expect measured but continued improvement throughout the business as you move through fiscal 2018.

As I turn the call over to Kevin, there are a few things I want to keep in mind. First, some of the markets in which we work can be cyclical. In order to sustain and grow our business across these cycles, we have taken important steps to continue to diversify our business within the energy, power and industrial markets. The value and benefits of this diversification underpins the long-term strength of the business.

Next, because of our diversification and the strength of the foundation we've built, we are well positioned to respond to customer needs across all of our operating segments as markets continue to improve.

Lastly, our financial strength, organization structure and value-centered employees allow us to execute our strategic initiatives in order to build sustainable and long-term shareholder value.

I'll now turn the call over to Kevin who will review our first quarter results. Kevin?

Thank you, John. Before we get into the specifics, I will give a high-level overview of our quarter. As John indicated, we are generally pleased with the results for our first quarter. Revenue volume was in line with our expectations. Our project execution was strong with consolidated gross margin at 10.7%, which is our highest since the first quarter of fiscal 2016. As planned, SG&A costs were higher than the same period last year as the result of our engineering acquisition from mid-fiscal 2017. Our tax expense was higher than normal, which I'll discuss in more detail later in the call. The bottom line is: We produced good EPS in the quarter and have a solid start to the year.

The quarterly results are marked by higher levels of project awards and, as a result, growth in overall backlog.

Now let's move on to discussing specific results. Consolidated revenue for the quarter was $270 million as compared to $342 million in the prior year, which, as expected, was a decrease of $72 million. The decrease in revenue on a year-over-year basis was primarily due to a revenue decline in Storage Solutions that was partially offset by higher revenue in the Industrial and Oil Gas & Chemical segments. We produced a consolidated gross profit of $28.9 million for the quarter compared to $32.3 million in the prior year quarter. The decline in gross profit in the quarter was the result of lower revenue volume that was partially offset by improved gross margins.

Strong project execution and close-outs, the inclusion of higher-margin engineering work as well as improved construction overhead cost recovery allowed us to achieve consolidated gross margin of 10.7%. In the prior year, consolidated gross margin was 9.4%.

Consolidated SG&A costs were $21.6 million in the first quarter compared to $18 million in the prior year. The increase was primarily due to overhead associated with our expanded engineering business, including associated amortization on intangible assets and higher project pursuit costs.

In the first company -- in the first quarter, the company earned pretax income of $6.9 million as compared to $14.1 million in fiscal 2017.

Our effective tax rate for the 3 months ended September 30, 2017, was 44.5% compared to 33.6% in the same period last year. Both periods were impacted by stock compensation tax adjustments that resulted in tax rates different than our normal tax rate of 38%. The bottom line results for the company were net income of $3.8 million or $0.14 per fully diluted share in the first quarter of fiscal 2018 compared to $9.3 million or $0.35 in the prior year.

Now let me talk about our first quarter segment performance. In our Electrical Infrastructure segment, revenue of $80 million represented a slight decrease versus the prior year of $88 million due to the expected wind-down of work on a power generation project. Electrical Infrastructure gross margins of 10.3% were up from 6% achieved in the same period last fiscal year. The year-over-year increase of margins was due to improved project execution and recovery of construction overhead costs. In addition, our people provided restoration services in the Southeast related to the electrical infrastructure damage from Hurricane Irma. These services bolstered the solid margins produced in the segment. Our long-term margin goal for the segment remains at 11% to 13%. However given the market conditions and our mix of work, we do not anticipate achieving this range in fiscal 2018.

Revenue for the Oil Gas & Chemical segment increased 161% to $86 million in the quarter, up from $33 million in the prior year period. The increase was driven by work on the ultra-low-sulfur gasoline relocation project, additional higher-margin work provided by Matrix PDM Engineering and higher volumes in refinery turnaround and maintenance work. Gross margins were 12.9% in the quarter versus breakeven in the same period last year. The increase in gross margins was largely due to strong project execution, project close-outs and higher-margin engineering work and improved recovery of construction overhead costs. Our long-term margin goal for this segment remains in the 10% to 12% range.

Quarterly revenue for Storage Solutions was $71 million as compared to $200 million in the prior fiscal year, which was abnormally high due to work performed in connection with the construction of crude-gathering terminals that support the Dakota Access Pipeline. In addition, fiscal 2018 revenue has been impacted by continued delays in expected project awards. As a result of the lower revenue volume, we under-recovered our construction overhead costs. During the past fiscal year, we have made decisions to reduce certain overhead costs while balancing the infrastructure needs related to the expected increase in work as we move through fiscal 2018. The timing of awards remains an uncertainty. But given significant future opportunities, we will continue to proactively manage our cost structure to be efficient yet prepared for the expected demand for our services. The under-recovery of overheads weighed down strong project execution in the quarter, which resulted in gross margins of 10.6% compared to last year's figure of 13.3%.

Moving on to the Industrial segment. Revenue increased on a year-over-year basis to $33 million compared to revenue of $22 million last year. Gross margins were up to 6.1% compared to 2.6% for the same period in the prior year. The current period saw improved margin performance due to higher volumes of work, which, combined with previously executed targeted cost reductions, led to increased recovery of construction overhead costs. As John discussed, the market environment for this segment was difficult the last couple of years, partially attributable to price compression of many commodities. However, the booking of projects in fiscal 2017 and in the first quarter of fiscal 2018 is a very good indicator of recovery for much of the segment. Increased revenue volume and an improving mix of work should allow us to achieve our expected gross margin range of 7% to 10% as we move through fiscal 2018.

Moving on to backlog. The September 30, 2017, backlog balance grew by $46.5 million to $728.8 million compared to $682.3 million at June 30, 2017. Project awards in this quarter, including a large iron and steel award in the Industrial segment, produced a consolidated book-to-bill of 1.2. This growth in backlog demonstrates a reversal in the trend in total backlog levels that we experienced throughout fiscal 2016 and 2017.

What we regard as the more relevant indicator of future revenue is the pace of new awards. These awards have trended up throughout fiscal 2017 and continue in the first quarter of fiscal 2018. In addition, we are encouraged by robust bidding activity we are seeing across our business. Project awards in 3 months ended September 30, 2017, totaled $316.4 million compared to $259.7 million during the same period a year ago, an increase of almost 22%.

To support the growing business, as evidenced by this backlog, the company continues to maintain a strong balance sheet. At September 30, 2017, the company's cash balance was $46.1 million, up from the June 30, 2017, cash balance of $43.8 million. The cash balance, along with availability under the senior credit facility, gives the company an increased footing position of $131.8 million at September 30, 2017. The financial strength and liquidity continue to support execution of our strategic plans, funding working capital and funding capital expenditures with a fiscal 2018 target below 1% of annual revenue.

I will now turn the call back to John.

Thanks, Kevin. Before we open for questions, I just want to restate that we are pleased with the results for our first quarter. We believe it represents a really good start to the new fiscal year. Further, we are confident the markets we serve are in the early stages of recovery. However, timing concerns related to awards and subsequent starts of large terminal and specialty vessel projects in our Storage Solutions segment dictate that we continue to maintain a cautious outlook. Therefore, we are maintaining our 2018 guidance of full year revenue of between $1.225 billion and $1.325 billion and earnings per share of $0.55 to $0.75.

And with those comments, I will now open the call up for questions.

(Operator Instructions) Our first question comes from the line of John Franzreb of Sidoti & Company.

I actually want to start with the gross margin profile. We benefited from -- a little bit from higher engineering, better execution. Can you talk a little bit about how much you think is sustainable or maybe some of it was a bit more onetime-ish? It certainly sounds like you expect a little pushback in some of the Storage gross margin going forward. Can you just talk about the puts and takes that's going on right there?

So I'll start, and then John can add on. But just -- I think if you look at the first quarter, it demonstrates very strong execution throughout all of our segments. We also had the quarter bolstered by project close-outs, and that impacted a couple of our segments, including Oil Gas & Chemical. We have a little bit of that in storage. We also had a little bit of storm work that helped with the electrical segment. So overall, we produced a really good margin profile. Now going forward, I think when you look at this, I think the industrial margins, we would like to see them continue to trend upward as we see volumes increase. Storage, it will be hard to repeat the first quarter this next quarter or 2 until we get these project awards across the finish line and get executing on those projects. So I still think we're confident in that long-term 11% to 13% range, but volume may not be there to support that in the near term. But I think that will return as we move through the fiscal '18 here. Oil Gas & Chemical, we're maintaining that 10% to 12% normal range. Definitely, project close-outs helped that outperform this quarter. And then electrical, as we're completing the work on the generating station, we're going to be replacing some of that. I think we'll officially get back to 11% to 13% range, but it may be a few quarters before we get there. Overall, I feel like the margins are trending in the right direction, and we want to get to work, consistently achieving this type of margin performance.

Okay. John, anything to add?

The only thing I would add is in the storage segment that while we're seeing delays in these big -- bigger terminal projects, which are both crude related and specialty vessels for gas-related products, that our tank business -- our fundamental flat-bottom storage tank business, the bidding environment is very, very strong. We're winning our fair share of those. They're across the -- really across the Gulf Coast into the central part of the country. And so from that perspective, we feel very good about our, call it, sort of our legacy tank

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piece of our business is operating very well. It has very good margins by the time you pull all the -- everything goes into Storage Solutions together because some of these larger terminal projects are getting pushed out as we tend to see those slow or depress the overall outlook for that segment. But as Kevin said, we're able to stand with a variety of projects that are related to Storage Solutions. And so we think through the back half of this fiscal year, we're going to start to see some very good awards.

Great. That's very helpful. And just on the industrial side of the business. Could you talk a little bit about maybe size up maybe the blast furnace opportunity and how we should think about it as far as it progresses through the balance of the year?

Yes. So the glass furnace work are -- they're essentially the steel industry's version of a turnaround. So the blast furnace work is generally of short-duration, high-volume projects. They last anywhere from 30 to 90 days in general, and there are multitude of trades that we go in on a shutdown basis and do a planned repair scope for those clients. Very often, there is some discovery work like there is in a refinery turnaround, and there are opportunities for the scope to increase. And so we're in that market where we are one of the premier contractors who provide those services.

John, the other project we've referenced on this call that our iron and steel project it's not a blast furnace project, just to be clear. And it's a longer-term project, but we're looking to get into being real specific about that project at this point.

Okay. And I guess, just one final question is, when would you be completely out of the power-generating project?

Probably we had anticipated being out at the end of this calendar year. But the transition and some of the things that we're doing to support our client are taking a little bit longer. So we may be up there until the end of the third quarter, our third quarter.

(Operator Instructions) Our next question comes from the line of Tahira Afzal of KeyBanc.

Pretty decent quarter given all the moving parts. I guess, if I look at the lower end of your EPS guidance and sort of create alignment with 3 quarters, it doesn't really obviously reflect on an improving EPS line. And I was wondering, I mean, given you feel better about how the end markets are shaping and your execution and your cost realignment efforts, is that a slight bit conservative? Or is there something happening on the mix side that I should take into account?

I think as we said in the notes, Tahira, so we feel very good about our project opportunities across all of our segments. We're just concerned -- continue to be concerned about some of the larger projects that are going to help to -- for us to drive to the top end of our guidance range, the timing of those awards and when we'll be able to get those started. And so we've got an extremely strong pipeline of projects. Some of them are with what you would consider blue-chip clients that are -- would perform those projects off their balance sheets. Some of those are with more developer-related people that require a little bit more the i's and t's to be crossed before those projects get awarded. And so there's a lot of movement in and around those awards, permitting issues, offtake agreements and that rights of way and some other things that we feel that are getting closer to fruition. And in some cases, we're competing, so we got to win the work. So we're taking, as we said, kind of a cautious approach as to how those awards are going to affect us over the full year.

Got it. Okay. And then, I guess, let's say -- I mean, if you look at that awards prospect, is -- are these still some of the projects could they hit by the end of this year? If that's still a probability and if that happens, could that notably impact your guidance?

Yes. We got a number of projects that are -- we're anticipating sometime in the next 3 months where we'd start to roll in if we win today. And I think we have to evaluate that. Even when we win, there may be a delay in the start for some reasons. So as we get to the end of the second quarter, we'll evaluate those awards versus the starts and see how that affects our full year guidance numbers.

Got it, John. And I assume most of those are sort of -- or the material -- more material ones would be in storage, and that's what we should be focusing on?

Yes. So we've got a great opportunity pipeline really across all of our segments and projects ranging from $10 million, $15 million to projects in the $280 million range. But the larger projects that we are currently actively bidding and winning awards on are in the Storage Solutions segment.

Got it. Okay. And the last question for me. With your commentary on the turnaround season and spring being potentially the best you've seen in a couple of years, how should we think about that in margins? I know you don't expect margins to really stay beyond that range that you said in the past. But what if one day if you're going to see a record turnaround season?

So I think the key will be how big it is. Remember, it's still reimbursable work, so it doesn't always lend itself to high margin. But if there's good execution and we have the big volume, we could -- maybe we could outperform what we think we can do. But based on what we see right now, we think we've got a reasonable forecast.

And I'm showing no further questions in the queue this time. I'd like to turn the call back to John Hewitt, Chief Executive Officer, for closing remarks.

Thanks to all of you who joined our call today, and we look forward to seeing you in future investor conferences and on our next call. Thank you.

Ladies and gentlemen, thank you for participating in today's call. This does conclude the conference. You may now disconnect. Everyone, have a wonderful day.