Matrix Service Co (MTRX) 2018 Q2 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 second quarter of fiscal 2018. (Operator Instructions)

I would now like to turn the call over to Kevin Cavanah, Chief Financial Officer. Please go ahead.

Thank you. 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 disclosed in our annual report on Form 10-K for our fiscal year ended June 30, 2017, 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, and thank you for joining us. This quarter, I want to highlight the work of one of our subsidiary presidents, Jim Ryan, who will be retiring at the end of this fiscal year. His leadership of the Matrix Service Inc. subsidiary as well as his work as part of my leadership team has been invaluable to the growth of the organization as well as our safety culture. Jim joined Matrix in 1999 and was promoted to President of Matrix Service Inc. in 2005. Under his leadership, this subsidiary has transformed itself to one known for the construction of aboveground storage tanks and refinery maintenance to an industry leader in full terminals and complete life-cycle solutions across the energy and industrial markets. When Jim joined Matrix Service Company, our consolidated revenue was $211 million. Jim has been instrumental in helping grow and diversify our business to the $1.2 billion company we are today, a sixfold increase.

While I think we would all agree these career achievements are significant, none are more significant than the impact Jim's leadership has had on the safety culture of our organization. As you know, our goal each year is to achieve 0 incidents and maintain and improve our premier safety culture.

The total recordable incident rate, TRIR, for the Matrix Service Inc. subsidiary has improved from 1.4 in 2005 to 0.29 in 2017, an achievement that ranks this organization alongside other world-class Construction Industry Institute member companies. This demonstrates significant improvement in our total recordable incident rate that could not be achieved without the strong leadership provided by Jim throughout his entire career at Matrix Service. I want to thank Jim, and we appreciate his outstanding service to the company, our employees and our shareholders.

Moving on, last quarter, we began our call by reviewing 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. The same is true in this quarter.

In our second quarter, revenue in our Oil Gas & Chemical segment increased 59%, while revenue in our Industrial segment more than doubled. In Storage Solutions, while volume has been impacted on delayed project awards associated with full terminal work, our traditional and new tank erection, combined with specialty vessels has been strong with an expanding slate of opportunities over the same period last year. In this segment, we achieved a second quarter book-to-bill of 1.8.

Volume in the high-voltage portion of our Infrastructure segment was lower than our expectations due to reduced client spending and changes in their procurement methodology. Because of our concentrated northeastern geographic service territory, we can be materially impacted by our client's spending priorities. That said, our strong brand position in this territory, along with the infrastructure needs that exist across all of North America for substation, transmission and distribution, create not only the strategic need but also a significant opportunity for Matrix to grow in other geographic regions. Volumes in this segment compared to previous quarters were also impacted by our strategic shift in power generation away from large EPC projects to smaller work packages where we continue to find success. Representative examples include the center line installation, stacks and selective catalytic reduction system for general power at the Exelon West Medway Facility and the aboveground electrical balance of plant for PSEG's new combined cycle power facility, Sewaren 7. With continued demand for gas-fired power generation, we expect our work in this market to grow.

We're also happy to report that our consolidated book-to-bill in the first 6 months was 1.1. And that since the close of the second quarter, this trend has accelerated with additional significant and strategic project awards. Many of these are the first in a number of delayed awards we had discussed on past earnings calls, and we expect this upward trend in project awards to continue based on customer confidence on the improving market conditions and the strength of our opportunity pipeline.

However, let me caution that these recent capital project awards will not have a major impact on revenue and earnings until our fourth quarter. We expect our third quarter to reflect the lowest results of the year based on a mix of work that is principally made up of low-margin maintenance services and SmallCap projects. That said, the improving market conditions that began in early calendar 2017 are finally impacting our project awards.

According to the World Bank, global growth in 2018 is expected to improve to 3.1% after a stronger-than-expected 2017 on continued recovery in investment, manufacturing and trade. This is supported by the Institute for Supply Management's most recent consolidated purchasing managers' index of 59.1%, which has been on a growth trend for 17 consecutive months and supports the typical late cycle improvement in our maintenance and capital projects business that we are beginning to see. Commodity prices are also improving, with the majority of the 16% increase in the spot energy index in 2017 occurring in the second half of the year and the industrial metals index improving 32% overall.

Global energy demand continues to rise on growing population and urbanization, and the business-friendly U.S. regulatory, tax and policy agenda supports U.S. investments in industrial and energy infrastructure as well as the overall economy. I will share more on the outlook within our end markets in a few minutes.

But before I do, I'll ask Kevin to review our second quarter results.

Thank you, John. Before we get into specifics, I will give a high-level overview of our quarter. Our results for our second quarter were mixed. We had strong results in both our Oil Gas & Chemical and Industrial segments. The Oil Gas & Chemical segment had good revenue volume throughout the segment, combined with strong project execution. The Industrial segment had significant revenue growth, resulting in noteworthy operating income improvement. In Storage Solutions, revenue continued to be impacted by delays in project awards but at the same time, we recorded the largest volume of awards in this segment in 10 quarters.

Volume in the high-voltage portion of our Electrical Infrastructure segment was lower than expected as a result of reduced client spending and our strategic shift in power generation away from large EPC projects to smaller work packages. Solid project execution, along with year-over-year improved construction overhead cost recovery, resulted in a consolidated gross margin of 9.4%. The company continued our focus on balancing overhead cost levels while making sure we maintain the infrastructure needed for the project opportunities we see ahead of us. SG&A costs were higher this quarter than the same period last year as a result of our engineering acquisition for mid-fiscal 2017. Legacy SG&A costs are flat quarter-over-quarter.

Our tax expense was lower than originally forecasted as a result of the passage of the Tax Cuts and Jobs Act. I'll discuss this impact in more detail later in the call. The bottom line is we delivered earnings per share of $0.17 in the quarter.

Now let's move on to discussing more specific results. Our consolidated revenue for the quarter was $283 million as compared to $313 million in the prior year, a decrease of $30 million. The decrease in revenue on a year-over-year basis was primarily due to our Storage Solutions and Electrical Infrastructure segments, which was partially offset by higher iron and steel work in our Industrial segment and higher volumes in our Oil Gas & Chemical segment.

We produced a consolidated gross profit of $26.7 million for the quarter compared to $28.2 million in the prior year quarter. The decline in gross profit was a result of lower revenue volume that was partially offset by improved gross margins. Strong project execution as well as improved construction overhead cost recovery allowed us to achieve consolidated gross margin of 9.4%. In the prior year, consolidated gross margin was 9%.

Consolidated SG&A costs were $21.5 million in the second quarter compared to $20 million in the prior year. The increase was primarily due to overhead and amortization of intangible assets associated with an acquisition that expanded our engineering business.

In the second quarter, the company earned pretax income of $4.3 million as compared to $7.8 million in fiscal 2017.

As a result of the recently enacted Tax Cuts and Jobs Act, the company recorded a $1.9 million positive tax adjustment to our second quarter results.

In summary, the changes are as follows: first, we reduced our effective tax rate to 32% from fiscal 2018 based on a blended federal statutory rate of 28%. This resulted in a $700,000 tax benefit related to reducing the first half of the year income tax expense on the new reduced federal 2000 -- or fiscal 2018 effective tax rate of 32%.

Second, we recorded a $1.2 million tax benefit related to the remeasurement of the domestic deferred tax assets and liabilities. After tax adjustments, the company recorded net income of $4.5 million or $0.17 per fully diluted share in the second quarter of fiscal 2018 compared to $5.3 million or $0.20 in the prior year.

Now let me talk about our second quarter segment performance. In our Electrical Infrastructure segment, revenue of $65 million was a significant decrease versus the prior year of $103 million, primarily due to the expected wind-down of work on a large power generation project as well as lower volumes in our high-voltage business. The decreases were partially offset by spending on other power generation work packages. Electrical Infrastructure gross margins of 8.5% were up from 7% achieved in the same period last fiscal year. Our long-term margin goal for this segment remains at 11% to 13%. However, given current 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 59% to $88 million in the quarter, up from $56 million in the prior year period. The increase was driven by increased capital project work, increased engineering work in the gas market and higher volumes of refinery turnaround and maintenance work. Gross margins were 13.3% in the quarter versus 4.4% in the same period last year. The current year margins benefited from strong project execution and improved recovery of construction overhead costs. Despite the strong margin performance in the quarter, our long-term margin goal for this segment remains unchanged, as we continue to target sustainable margins in the 10% to 12% range.

Quarterly revenue for Storage Solutions was $71 million as compared to $129 million in the prior fiscal year. The higher volumes in the prior year were primarily driven by the work performed in connection with the construction of 6 crude-gathering terminals for Dakota Access Pipeline. In addition, fiscal 2018 revenue has been impacted by continued delays in expected large capital project awards. As a result of the lower revenue volume, we under-recovered our construction overhead costs in the quarter, with gross margins falling to 7.5% in the quarter from 13.3% in the year-ago period.

As indicated earlier, we achieved a strong book-to-bill of 1.8 in the quarter for this segment, indicating a return of strength to this market. As a result of recent awards, we are increasingly confident that the volumes in this segment will improve significantly as we move into the fourth quarter of fiscal -- of the fiscal year. This improvement should result in recovery of overheads and improve the margin profile of our work mix resulting in an improvement in gross margins more in line with our normal expectation of 11% to 13%.

Moving on to the Industrial segment. Revenue more than doubled on a year-over-year basis to $59 million, an increase in volumes from iron and steel customers compared to revenue of $25 million last year. Gross margins were also up 6.9% compared to 5.9% for the same period in the prior year. The current period saw improved margin performance due to higher volumes of work, which led to increased recovery of construction overhead costs. The market environment for our Industrial segment has been difficult the last couple of years, largely due to price weakness in many of the commodities that are critical to our customers' businesses. Commodity prices have improved, and as a result, our customer spending has increased, as evidenced by year-to-date awards of over $200 million in the Industrial segment. Additionally, we continue to see robust bidding activity and believe we are in the early stages of a multiyear upturn in activity.

Increased revenue volume and an improving mix of work should allow us this year to expect a gross margin range of 7% to 10% as we move through fiscal 2018.

Now I'll briefly discuss our 6-month results. On a consolidated basis, revenues for the first half of fiscal 2018 were $553 million as compared to $654 million in the prior fiscal year. Gross profit for the 6-month period totaled $56 million versus $60 million in the prior year. Our margins were higher year-over-year due to stronger project execution and improved construction overhead cost recovery, but this improved performance was not enough to overcome the effect of the lower revenue volumes. Consolidated SG&A expenses were $43 million and $38 million for the 6 months ended December 31, 2017, and 2016, respectively. The variance was primarily due to overhead and amortization of intangible assets associated with an acquisition that expanded our engineering business. We continue to balance our cost structure against the future opportunity pipeline and are currently looking at other structural changes to maximize business efficiency. Net income for the first 6 months of fiscal 2018 was $8.4 million as compared to prior year net income of $14.6 million, with fully diluted EPS of $0.31 and $0.54 in the same periods.

Moving on to backlog. We are encouraged by the continued upward trend in awards and a book-to-bill of 1.1 for the first 6 months of this fiscal year. The backlog balance at December 31, 2017, stood at $725 million. The pace of new awards is continuing to trend upward as supported by the strong post-second quarter awards discussed previously.

Moving on to liquidity. At December 31, 2017, the company's cash balance was $74 million, with debt outstanding of $51 million. The cash balance, along with availability under the senior credit facility, gives the company a liquidity position of $100 million at December 31, 2017.

Since the end of the quarter, the company has repaid $35 million of debt while maintaining a cash balance in excess of $60 million, further strengthening the company's liquidity. Our solid liquidity position should strengthen further by the end of fiscal 2018 third quarter as the facility-constrained calculation will no longer include the financial results of the third quarter of fiscal 2017. As a reminder, availability under the credit facility is based upon performance of the company over the most recently completed 12 months.

The company's liquidity continues to support execution of our strategic plans, funding of working capital, letters of credit required to support and expanding backlog and funding capital expenditures with a target below 1% of annual revenue.

Finally, let's discuss guidance. As we see the rest of the year unfolding, third quarter revenues will be consistent with the first 2 quarters with less margin opportunity because of the mix of work. However, we expect fourth quarter revenue and mix of work to improve significantly as we begin work on the project awards previously discussed. Taking this all into consideration, revenue guidance is being reduced from between $1.225 billion and $1.325 billion to between $1.15 billion and $1.225 billion. Our company is maintaining its fiscal 2018 earnings guidance of between $0.55 and $0.75 per fully diluted share.

I'll now turn the call back to John.

Thank you, Kevin. Before we open for questions, let me share with you more about our market outlook and opportunities that exist as end markets continue to improve.

In energy markets, as the U.S. develops its shale resources, its ability is not only to supply its own energy but play a significant role in global energy markets, is creating billions of dollars in new infrastructure construction, maintenance and repair opportunities across North America, Mexico and the Caribbean. As a top tier EPC contractor with an industry-leading position in storage tanks, specialty vessels and associated terminals as well as a strong brand in refinery maintenance and turnarounds and gas-processing systems, Matrix will earn its share of this business.

Our Storage Solutions segment will not only benefit from continued crude oil and natural gas pipeline buildouts, which will require storage and terminal infrastructure, but also the extensive buildout of energy export infrastructure to meet global demand. Our Oil Gas & Chemical segment will benefit from gas pipeline expansion with the capital construction of new gas-processing infrastructure as well as the maintenance and repair of gas-processing assets.

Additionally, in North American refineries, where a substantial part of Oil Gas & Chemical work has been generated, positive market dynamics as well as compliance with environmental regulatory requirements are driving significant capital spending. At the same time, the typical cycles for heavy and mechanical turnarounds all point toward improving market conditions in the spring of our fiscal 2018 and a busy fiscal 2019.

We have also established union offices in California to meet the requirements of the state's Senate Bill 54 and the needs of our refinery customers in this state who choose union solutions. In the chemical industry, our market segment in which Matrix has not previously held a material position, the abundant low cost of natural gas and other feedstocks is driving new capacity investment. This creates a substantial strategic opportunity for Matrix to transfer the skills we have honed in refinery work for maintenance, turnarounds and small capital projects in this strengthening market segment. Both the Storage Solutions and Oil Gas & Chemical segments will greatly benefit from our strategic decision to expand Matrix PDM Engineering in order to provide earlier and alternative points of project entry, additional capacity and expertise to execute multiple projects, combined with larger scopes of work on storage terminals, including marine structures, leading expertise in design and construction of gas-processing infrastructure and experience with international projects to our offerings.

Across North America, billions of dollars in planned project spending exists in both power delivery and generation, despite the fact that demand remains fairly stagnant. This spending is driven by an aged infrastructure in need of great modernization, interconnects and repairs and desire for cleaner energy and the opportunity to take advantage of substantial supplies of domestic natural gas. This outlook offers significant opportunity in high-voltage work in our electrical infrastructure segment to further develop and expand our market-leading position in the Northeast as well as expand our geographic markets through a combination of organic and selective M&A transactions. Doing so will allow us to take advantage of spending on high-voltage substation, transmission and distribution work as well as unanticipated storm work, day-to-day life extension, system hardening and emergency maintenance and repair demands. It also allows us to continue to target specific smaller construction opportunities through newbuild gas-fired-generating facilities.

We also see improved -- improvement across the industrial markets we serve, specifically with improvement in commodity prices in industrial metals, maintenance and capital spending in the iron and steel business has increased as demonstrated by the results in our Industrial segment. With improvement in copper pricing, our key mining customers are also beginning to plan for increased maintenance spending and capital projects.

Because of our expanded engineering capabilities, we've seen more opportunities in other industrial terminal markets, including cement and bulk material handling. And finally, with niche expertise in the design and construction of thermal vacuum chambers, which are used for the testing of satellites and other space-related equipment, we are uniquely positioned to expand our current vacuum chamber work with new opportunities that exist in the marketplace.

So in summary, as we have discussed on earlier calls, we have a vision, strategy and plan to build on our already strong foundation. The improvement in our end markets is finally beginning to have a positive impact on our business. The long-term outlook across all the end markets is strong. We are well positioned to take advantage of these end markets. We have a world-class storage brand. We have a full terminal EPC contractor for liquids, gas and solids. We have broad engineering know-how and depth. Our power generation and delivery skills are sharp. We are laser-focused on people and our culture, our brand in ferrous and nonferrous metals is strong. We have top-tier safety performance, which is a continuous focus, and the strength of our balance sheet supports our strategic vision. As a result, we expect to capitalize on the significant opportunities ahead and achieve our long-term strategic goals.

I'd now like to open the call up for questions.

(Operator Instructions) Our first question is from Tahira Afzal with KeyBanc Capital Markets.

This is Patrick on for Tahira. I guess, first looking at Oil Gas & Chemicals. How much of the work this quarter was related to storm work versus reoccurring work? And then, I know you mentioned a little bit about turnaround activity, but how robust do you see the spring turnaround season being? And maybe, any additional color around this year's spring and fall turnaround would be appreciated.

So I'll answer the first part and then turn over to John for the turnarounds. The storm work in the quarter was really not material. I don't think it had a significant impact on revenues, at least as for -- related to work for our customers. Now there was a decrease in spending in the Northeast and that could have been partially the result of resources being allocated down to the Caribbean, taking some of that revenue volume away from -- that could have had some impact, but it definitely wasn't a positive impact in the quarter.

As it relates to the refinery turnarounds, we're seeing a trend from a year ago of continued improvement and higher spending by our refinery clients on our turnarounds. There is more turnaround, both heavy and mechanical, and the size of the turnarounds have also cropped up. So we're expecting this spring's turnaround cycle to be greater than last year's. And that moving into our fiscal, 2019, we're expecting next fall's turnaround cycle and the spring of 2019 to be better than this year. We, like a lot of turnaround contractors, were able to get out in front with our refinery clients and start doing planning and scope development with those clients, and that gives us some foresight into the future of what looks like what their spending patterns are going to be.

Okay, great. And then, I guess, as we've seen the continued softness in the Electric segment, do you think you will have to peel back any portions of that business to bring gross margin back to double digits? Or I guess, what initiatives or plans would you have to consider to improve that segment?

So the strategic thing -- first of all, we've got -- again, we've got a great brand positioning in Northeast. There continues to be opportunities for us to spread our client base out in -- within the Northeast and we're continuing to do that to make investments in people and equipment to expand those services, and we're also -- currently and organically moving westward into western Pennsylvania, Ohio, Chicago area as we sign MSAs with local power generating companies to provide similar services that we provide in the Northeast. And then we are -- we will be actively looking for acquisition targets where we can also expand our Electrical Infrastructure business. So we're -- the issue for us is while we got a great brand position in the Northeast, a couple of our clients there are key pieces of our business. And if they, for whatever reason, happen to change their spending priorities either to support storm repair and emergency services into areas of the country that have got -- that have been affected by a hurricane or if they are managing their own capital spending plans, that could have an effect on our performance. And I think that's principally what you're seeing and what we've seen in the first 6 months of this fiscal year. The spending volumes were down for what is a historical run rate in projects and revenue spending that we see in this period of the year.

One other thing to add onto that, if you'll recall, we're still completing work on the power generation facility up in Canada. And that -- we restructured that contract in mid calendar 2017, and as a result, all the work we're completing is now on an effectively reimbursable basis, it -- lower risk to us but also low -- we're not making a lot of operating profit because of that.

Our next question is from John Franzreb with Sidoti.

John, it sounds like you're ready to do work with SpaceX (inaudible) your commentaries.

Yes, we were -- we were curious if they were going to put the Tesla in one of those vacuum chambers before he shot it off.

I just want to check on your most recent commentary about the spring turnaround season. Did you say the fall is looking better than the spring as being sized up right now? And remind me if you still feel that the spring is a fully-booked, really healthy turnaround season for you?

We're expecting this spring that we're entering here in another month will be stronger than last year based on what we -- the bookings that we have for turnarounds, and we're anticipating the fall of this calendar year to be even stronger, not only than the spring but also the fall of last year. So yes, we're seeing strength return in that -- in the refinery turnaround cycle. We actually had a fortunate -- or unfortunately, we had a fairly large turnaround from one of our key refinery clients move out of the spring because they were having some problems getting their equipment available and move into next fall. So that's just compounded for us the amount of work that we're going to have next fall.

Got it. And when you lower your revenue guidance, I assume it's the deferrals of some of these large projects, you alluded to the storage side of the business, maybe that's most of it or not. But I guess, my question is, is that (inaudible) seen sort of deferrals or is it in other segments and there'll be some sort of catch up effect in the year or so?

So with the big revenue volumes are associated with some of these larger terminal projects that we have been bidding and talking about for some time, we're starting to see those come through actually. As Kevin had -- one of us had noted earlier that in the -- since the close of the quarter, we've had some uptick there on some of those projects. And so we're starting to see those things actually come through to the organization. And so while that's good news on an awards cycle, it does take some time for the heavy revenue of those projects to start to impact your bottom line of the business because a lot of those initially -- initially are -- a lot of engineering work (inaudible) activities before we can get to the field and start heavy construction. So that's why we're advising these that as these awards start to come in, it's not an immediate next-day impact to the bottom line of the business.

And when we started the year, we thought that these awards would start happening in the first half, and we would start seeing revenue volume really pick up in the third quarter. So the awards haven't happened quite as quickly as we anticipated, and so now that revenue uptick has now shifted from the third to the fourth and even revenues that basically has been shifted out to fiscal '19 and beyond related to those because really, we haven't seen the anticipated awards go away at this point. It's just slower awards than anticipated.

So is the backlog sufficient now to hit the low end of your revenue guidance?

Yes, I think that we feel -- we spent a lot of time looking at where we stand for the rest of the year, and we feel good about the revenue guidance coming in. We've adjusted it because of the awards. So I don't think we've -- there's always risk and uncertainty in forecasting revenues, but we feel like we've accounted for the delays that have happened.

Got it. And despite the lower revenue profile you maintained EPS outlook, I wonder if you could kind of quantify how much of that is the effect of the lower tax? Or how much is that maybe on a somewhat higher margin expectations? We've certainly seen it in the oil and gas side of the business maybe someplace else or maybe (inaudible) a little bit further down the line.

Yes, so you're right. We left the EPS guidance unchanged. And the Tax Act helped us do that. Obviously, we're -- with revenues being pushed out, margins being pushed out, and you also have an impact on recovery. So we had the $1.9 million positive benefit in the first 6 months from the Tax Act. A big piece of that was a onetime impact. But our effective tax rate going forward, we previously forecasted a 38% effective tax rate. Now we're looking to something like 32%. So that's going to have -- that's going to add a few cents to the back half of the year, maybe $0.03, $0.04. So your -- we would have been toward the lower end of the range on EPS. We would have had to consider taking that down without the Tax Act.

And I'm currently showing no further questions. I would now like to turn the call back to John Hewitt for any further remarks.

So I want to thank everybody who attended today's call, and we look forward to talking to you sometime in the near future.

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