Good day, ladies and gentlemen, and welcome to the Matrix Service Company conference call to discuss results for the third quarter ended March 31, 2016. [Operator Instructions] I would now like to introduce your host for today's conference, Mr. Kevin Cavanah, Chief Financial Officer. 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 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 fiscal year ended June 30, 2015, 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 Web site. I will now turn the call over to John Hewitt, President and CEO of Matrix Service Company.

Thank you, Kevin and good morning everyone. I just want to start the call with a little discussion on safety. We have talked in the past about total recordable incident rate or TRIR and why at Matrix we measure ourselves against this standard as it is a better representation of overall safety performance. For the first nine months of this fiscal year, our TRIR stands at 0.60 and we remain vigilant in our pursuit of zero injuries across all of our company. Next month, June, marks National Safety Month where the National Safety Council encourages all companies and individuals to focus on reducing their leading causes of injury and death at work on the roads and in homes and communities. Among those causes are transportation related incidents, falls, choking, suffocation and fire. They, like Matrix, believe safety is no accident. It's a choice determined by our behaviors, attitudes and mindset. Across our company, we will be joining the National Safety Council in elevating safety awareness even more during the month of June and I encourage each of you to do the same. Before we discuss quarterly results, I would like to spend some time, as always, on current market dynamics. I want to do so within the context of our vision, strategy for growth and long-term sustainability. First, some historical perspective. Fiscal 2011, just five years ago, the company closed its books with a consolidated revenue of $627 million and backlog of $405 million. That same year we set our sights on becoming a top-tier multibillion-dollar diversified EPC contractor. Since then we have more than doubled and diversified of revenue to $1.3 billion, achieving a compound annual revenue growth rate of 21% from fiscal 2011 through fiscal 2015. We more than doubled our backlog to over $1 billion and strengthened…

Thank you, John. Consolidated revenue for the for the quarter was $309 million, which compares to $314 million in the prior year. Revenue in the electrical infrastructure segment almost doubled year-over-year and we also experienced significant increase in our storage solutions segment revenue on a comparable basis. However, these increases were offset by decreases in the oil, gas and chemical and industrial segments. Consolidated gross profit of $27.3 million in the quarter is up from $2.6 million in the same period the last fiscal year. For comparative purposes, the third quarter of fiscal 2015 was negatively impacted by a $28.5 million charge on the joint venture project, of which $10 million was our partner's share. Consolidated gross margins were 8.8% and 0.8% for the same periods respectively. In this quarter, we recorded $2.8 million in project reserves, in our oil, gas and chemicals and industrial segments. Combined with $0.8 million of one-time acquisition cost, these charges reduced fiscal third-quarter earnings per share by eight cents. On a segment basis, quarterly revenue for storage solutions was up 24% to $133 million. The increase is primarily associated with the six terminal projects for energy transfer Dakota Access Pipeline, which has transitioned from an engineering and procurement base to field construction. We expect our revenue run rate will continue to increase as we move into the fourth quarter. Gross margins were 11.4% for the quarter, up from 10.5% a year ago. Margins for this segment were in line with our projected range of 11% to 13%. In our electrical infrastructure segment, revenue of $94 million increased by approximately 96% versus the prior year as volumes increase in both our power generation and power delivery businesses. Gross margins of 11% moved in to our expected range of 11% to 13% on improved project execution.…

Thank you, Kevin. Before we open the call for questions, I would like to remind you that significant infrastructure needs in our primary segments as well as the inevitability of required work in the oil, gas and chemical segment, combined with our strategic focus on operational performance will lead to overall improvement in financial results. While there is no question that low commodity prices are impacting results, we remain confident in our vision for the future even in the dynamic environment we are currently experiencing. With that, I would like to open the call up to questions.

[Operator Instructions] Our first question comes from the line of Martin Malloy from Johnson Rice. Your line is now open.

On the industrial side, it sounds like you are still pretty cautious in our outlook near-term, but some of the metals prices have increased here in recent months. Is there any signs of improvement in terms of customer discussions?

Yes. A couple of things there, Martin. And actually this doesn’t necessarily make a trend, but over the past few weeks we have seen an uptick in maintenance demand with some of our clients. Right now we don’t have any long-term visibility on what that means for capital projects. We are currently in a small turnaround for one of our clients in the Midwest on one of their iron making facilities. And so we think maybe we might have hit the bottom here and that with the tariffs, the price increases in flat-rolled and hot band, that there is an opportunity here that the market maybe on an uptick going forward but we are continuing to be cautious and make sure we are being as efficient as we can with our cost structure.

Okay. And then could you maybe update us on the progress on the Napanee station. How the execution is going thus far?

Yes. I think we are coming out of the winter. Progress is on our plan. We are closing up a lot of the underground [indiscernible]. Providing more clean and free access to the site. We have completed the concrete work on both combustion turbine foundations. We have all the main project pieces assembled. We are in the process of the final core of the table top on the steam turbine. Building structural steel is 50% complete in round number as our warehouse building and control building is well in progress. We started work on the substation and switchyards, I think within the week. And so, overall, like I said we have come out of winter, I think progress is accelerating as we had anticipated. We are working very closely with our client as we move down the road.

Our next question comes from the line of Matt Duncan with Stephens. Your line is now open.

So, John, your two biggest segments seem to be performing, really quite well. But the two smaller ones, oil, gas and chemical and industrial are weighing you down and performing poorly. And it appears as though the metal prices are up some but on the short term, the outlook for both of those pieces is not all that great. So I am curious sort of how you guys are thinking about attacking the cost side in either of those segments to improve profit and whether or not you may be giving any thought to whether it would make sense to divest either of the two and focus on what's good in the business. You guys have always been really great storage company, electrical is really coming on strong. So it's unfortunate that these two are weighing on you right now. So just sort of curious how you are thinking about all that?

Well, I will take them a piece at a time. So the oil, gas and chemicals side has been -- is nearly a long-term legacy part of our portfolio as a storage part. Dating back into the 90s. So while we think we have got opportunities from some operational improvement in our oil, gas and chemicals segment, we think on the union side we are actually opening up more opportunities there for us in some of the Midwest and East Coast refineries. And then on our non-union side, where we have got a very great plant position, where there is opportunities to move geographically into the Gulf Coast. We frankly have made some management reorganizational changes there. So we are pretty comfortable where we are. I mean the market is not as strong as we would like it and things are not coming to fruition as quickly as we would like. But we essentially have been fairly flat over the last five years in that segment. And we are just not getting the growth out of it and it had trouble a little bit on the bottom line on some of the earnings. This quarter was affected by this project that we had in our upstream segment, actually, that we have had. As Kevin mentioned, we had to take a reserve on. So that’s had a little bit of a weighing down the quarter. So oil, gas and chemicals still on the long-term future part of our business. We still think there is growth opportunities there for us. On the industrial side, we have got, basically got three components of that that’s been driving that segment over the last two to three years. You have got mining in their [indiscernible] which has weighted the copper industry, you have got iron…

All right. So as we look at margins then, on a short-term, what should our gross margin expectations be for both of those segments. And then in oil, gas and chemical more specifically, you said that you still think you can get into the target range there. What kind of revenue is it going to take on annual basis to get there?

So I think first of all for oil, gas and chemical, we have been running, I will say averaging 8% capacity a quarter and we would have been slightly below that this quarter excluding the [indiscernible] charge John mentioned. So if we can increase volumes 10% to 20%, we will get to where we are fully recovering and get back to that level of full absorption and that would get us back in that range of 10% to 12%. So we just need more turnaround activity to materialize. That’s been slower than we have expected and that will help us get there along with the proactive cost measures that John talked about. On the industrial segment, right now majority of the work is maintenance work. So we are probably at the lower end of the range we gave at the beginning of the year which was I believe 6% to 8% and that’s the range we are probably looking at for the near-term. If we can get some free up of money that goes towards capital projects, that’s when you will see us get back to 10% in that segment that we have performed at the past couple of years.

Okay. That helps. And then last thing, just on the storage work that you are doing for Dakota Access. It sounds like we have entered the construction phase there just give us an update on how that’s progressing and sort of how should we think about your quarterly revenue run rate, Kevin, in that segment as that job ramps up to sort of full production. And I guess my recollection is there is a completion date of year-end there. So I am assuming there is going to be a big revenue jump. I just want to make sure we kind of think about that right.

Yes. So if you look at the first couple of quarters of this year, we were in low 120s, I believe, in the segment. We bumped up to above 130 quarter. I think that will continue to increase. I think we should get up to 150 plus a quarter for at least the next three quarters.

Our next question comes from the line of Matt Tucker with KeyBanc Capital Markets. Your line is now open.

I had to join the call a few minutes late, so I apologize if you have addressed some of this. But I wanted to follow up on the guidance reduction. You cited the low commodity price environment. Although oil prices have rallied quite a bit since the last call. So I guess is it fair to say customers, you are not really seeing customers react to the improvement in prices or even have they become more cautious over the past few months.

I don’t think. We have had some of the tranches in storage side of our business. Specifically in the flat-bottom tank, have had some of the heaviest bidding environment and RFP environment that we have had in the year. So I think our clients are just being more deliberate about where they are spending. We still see some very large tank terminal opportunities in the market place. But again, the deliberation to get those into the activated is just taking a little bit more time than normally what happened a couple of years ago. And we are, as we said, we are active in sort of this gas liquids and LNG market. And we are doing a lot of feed work, looking at a lot of projects. The small, the mediums, which really fit our sweet spot probably more so than these big LNG export terminals where there we are going to be a subcontractor that builds the tanks. On these smaller facilities we can provide the terminal capability and not just the storage. And where the bigger EPC guys have really got biggest step down to get to be in a more competitive mode against some of these smaller gas related projects. So bidding activity is very strong in really in the storage and electrical segment. In electrical in both on power gen and in product delivery. In storage it's just taking a little bit longer trying to get that stuff into that backlog.

And one thing you ought to consider here is that if you think about a project lifecycle, it takes a period of time from the time a customer decides, I am going to go forward with this project till the time that project gets awarded and work actually starts on that. So there is always a delay there.

Got it. So I guess with respect to kind of what changed relative to the prior guidance, it sounds like the bidding activity has been strong but things have just been moving more slowly than you would expect. Is that fair?

Yes, I think so. And I think what we are seeing, if you think about big chunks of backlog coming in and out of the business, certainly one of those would be in power generation. A lot of what we are looking at right now are not the full general construction opportunities. We are looking more at specific packages on those facilities whether there are all the mechanical work, [indiscernible] correction, the electric piece. So those projects, we are all moving down their timeline but again, as Kevin said, in the power generation market it takes months to get those projects bid, negotiated and into the backlog. Developers and clients have to win their ability to enter into a power district and they have to win those awards and they have got to award the projects to their contractors. So it just takes time to get that in. I mean we are very confident in that segment. Not only in our ability to continue to build some backlog on the generation side but frankly on our delivery side what we do, substation work, transmission and distribution. It's not transparent to you guys on the phone but we are having a very very strong year there. And there, frankly, over achieving on that piece of our business compared to what we have thought going in. Plus there is a lot of growth opportunity for us to move that model as we said, not only expand our market share in the northeast but move into the Midwest and up into Ontario. So those are focus areas for us for growth and we see those opportunities are out there.

Got it, thanks. And then with respect to the kind of the portion of the guidance reduction that relates to the fourth quarter. How much of that reduction in EPS expectations is driven by lighter expected workload than you were previously thinking versus maybe lighter margins on work that you were already expecting to do.

So I would say that, if you would look at that change in EPS guidance, 25% to 35% of that change is just related to the third quarter, the $0.08 of charges that we talked about. A little bit of under recovery. And the other portion relates to, while volumes will be higher, they weren't going to achieve as high a level as we thought they would previously.

Got it. And I guess what I am kind of getting at is the portion that relates to the fourth quarter, is the lighter outlook more due to just lower utilization, lower top line you are expecting or are there some maybe jobs where you are seeing lighter margin or some execution issues in the fourth quarter.

It's fundamentally top line which also has an impact on the bottom line because of the potential under absorption issues. And so we have got -- and it's a combination of a lot of things. So we have got projects that we had high like -- that we thought we had a high likelihood to win and start working off in the fourth quarter, that we either didn’t win or the projects were delayed by owners. Or we had an assumption, for instance in our industrial segment that there was the opportunity for improvement in some of those businesses that we are just not seeing at the rate that we thought they would come back. So there is a combination of a lot of different things but it's primarily a top line driven issue, not a know performance issue that we are having on anything of our backlog work.

Our next question comes from the line of John Rogers with Davidson. Your line is now open.

I guess, John, just going back to your comments on the electrical power business. When do you expect these opportunities to materialize? I mean I know the business is going well now but looking at the backlog run off here and just trying to think about when do you need to be able to bring some more work on.

So when we came into the new year, we had anticipated adding on the electrical generation side additional work that would be booked and worked off in the back half of fiscal '16 that didn’t happen. And that wasn’t necessarily because the projects went away, which was either they moved or we were not successful in that bidding. So there still is plenty of opportunities out there. We are actively bidding today as we speak. Specifically two, three projects on the East Coast that we have built very good that we are going to be able to add pieces or portions of those projects under our backlog in fiscal 2017 but they just didn’t materialize in this year like we had expected.

Okay. I mean is that a competitive issue, or your capabilities, or new competition coming into that market.

No. I think, again, some of it is the dynamics with the client base on when they are taking projects to the market. Some of it is a little bit of dynamics change in the execution of these projects with the major EPC contractors that they are looking at -- instead of being a partner, taking more of a subcontractor relationship with folks like us. And so it doesn’t change the competitive dynamics. It does change the execution dynamics for us on how they think about some of these projects. So you have some owners like a TransCanada for instance, that wants to play the EPC contractor. They will go hire the engineers. They will go do the procurement on the major equipment and they will go hire the general contractor. And then you have other clients and developers in this market that want, fundamentally because they need the third party non-recourse financing support. They want to go to a full EPC contractor as a single source of supply to them. So depending on what type of those projects are that are coming to the market at the time that we are ready to bid them, can have an impact on our ability to win. How big a piece of a single project we can win and the timing of when that gets into our backlog and when it can start to roll out depending on the lifecycle of the projects. So those dynamics that move around through that industry, I would tell you are pretty normal. And it's just something that we as a service provider there that we have got to deal with on a month over month basis.

Okay. And then if I would just follow up again on the oil, gas and chemical business and the lower outlook there. Is your sense that your customers are deferring maintenance that needs to be done or is this truly all tied to reductions in capital spending which then would suggest that in this market this segment is going to be under pressure for years.

Well, I think probably a little bit of everything depending on who the client is. The turnaround of what we are doing, so you are talking about turnaround market. I think we had told you guys in the last call that we had 23 turnarounds that we are contracted for through the course of this year. I think the majority of those, were still tending to happen within 10%. But the size of them have been not as big as what we have done traditionally. So I think our clients want to get back online quicker that they are holding down their spending on the repairs where they may, or do in what they need to do but not what they like to do. So we still fundamentally believe in our turnaround and the plant maintenance teams think that they are pushing a lot of the maintenance work up. But we don’t see this work as going away, it's just a timing issue. So we have got to make sure we stay in position with our relationships with our clients that we are there when that happens. So it's just something again that we are going to have to deal with in this market environment. So I think you saw probably Frontier with their earnings, end of last week and they didn’t have the best quarters and a lot of that's driven by, for them anyway, in their markets that they serve, was driven by an oversupply in refining products. So naturally, of course, that’s probably affecting it. Some of it -- we had some turnarounds with them. We do maintenance work with them. So that of course is going to drive an impact into their spending plans.

[Operator Instructions] Our next question is from line of Dan Mannes with Avondale. Your line is now open.

I had a follow-up as it relates to the two charges you are talking, and I apologize if I have missed this in your prepared comments. Can you walk me through what the charges were that you talked both in industrial and oil and gas? Just so I have a better flavor for what the issues were.

Yes. So it was two projects, the combined charge was $2.8 million in the quarter. These were -- both were reserves on projects that are still open. So we are not going to get into the point where we are talking about the individual charges just because we are still negotiating the final closeouts on those projects with the customers. The one in oil, gas and chemical was an upstream related project. So that’s probably not to unexpected, tough environment there. And on the industrial, that reserve, we are hopeful that we can improve that but that's our best estimate that this point.

Got it. And then as it relates to the turnaround, you talked about the 22 turnarounds you are expecting. How much of the, I guess scope change occurred in Q3 and how much is just your expectation of smaller scopes in Q4 versus actually notification of smaller scopes.

We don’t project into our forecast increased scope on our turnarounds. We have got majority of all our turnarounds we were involved in planning with our clients on what the scopes are going to be. Those are the main forecasts we use to feed our forecast. And so if there is an opportunity for turnarounds to grow, we really won't know that won't take account of that until it actually happens that we are in the middle of it. So in the third quarter, while we had some turnaround activity, there wasn’t really any kind of great growth rate in this turnaround.

And then again, because it sounds like -- it sounds like even more of a meaningful takedown on the fourth quarter you are already anticipating. Since you don’t include growth in the turnarounds in your guidance, does this then suppose that the refiners have come to you and even where they previously planned has already been reduced for the fourth quarter.

Right. So this is probably less about the refinery turnarounds and more about -- so there is a lot of things that are in there, oil, gas and chemicals segment. So there is also work that we do and some work we actually do in chemical plants and some processing facilities that there is capital work for all that I had mentioned earlier. That we had a high percentage in our forecast that we were going to be able to win that work and begin to execute it. So for instance, on in east coast, one of our clients on the east coast, they are spending a tremendous amount of money. We had a couple of key projects in our [gap] [ph] that we thought we would win and begin to start working some of that off in late third or early fourth quarter. And those projects, those two or three of them, one of them got pushed out, just because of timing of execution in the overall facility. The other ones we didn’t -- two we didn’t win. They went to the -- as we like the successful low bidder. So that person might have wanted the work but they may not make any money on it and we are not in the business to chase numbers. So we are still on -- you know it's supposed to be a profit making operation, so we are not -- we won't go do the work for nothing. So I don’t want to mislead you. They are all the changes in the top line oil, gas and chemicals. All related to light turnarounds. So there is other things in there besides turnaround market that can restrict our revenues.

No. That actually really helps clarify. Lastly, I would just ask about capital allocation. Obviously, you started to work a little bit more in the buyback. Given the decline in the stock price, does this change the [calculation] [ph] at all for you in terms of how much more you want to allocate to the buyback as you have spoken pretty openly about your desires to do M&A and diversify the business even a little bit more.

So we are still actively looking at M&A opportunities both with things that we would pay with cash, as we have traditionally don, and those opportunities where we might have to take a different position on that. So there is something very strategic to build our business. Plus we have got, especially through the first half of '17 and frankly the fourth quarter, we are really ramping up on our two major projects. We want to make sure that we are in a good liquidity position to provide the working capital we need for those projects. And so to some extent that also shift our desire to go invest a lot of money in the repurchase of stock. So, again, as Kevin said in his opening remarks, we are going to be opportunistic about when and how much stock that we will repurchase and so there is no reason to believe that we wouldn’t get back into the market at any time to go back and purchase some stock if we thought we were excessively undervalued. So we will watch that.

Our next question comes from the line of John Franzreb with Sidoti. Your line is now open.

Just sticking a little bit to the last topic. You talked a little bit about the Baillie acquisition, how smoothly that’s going. Should we expect any other cost associated with the purchase in the coming quarters?

No. I think the costs are primarily in. I don’t expect any additional lagging in acquisition cost. And the acquisition has gone very well. The products have been very well received in North America. So we are maintaining the initial short-term strategy there as to maintain the legacy company's international marketing presence and bring them into North America where we can take our, leverage our brand and our market presence and our client contacts and bring these, what we think are some of the highest quality products in the industry, into the North American market. We are finding a really great acceptance by our clients, both existing and frankly some new clients that are really interested in our products within their storage facilities. So we have been within the last two months, we have bid over $40 million in taking the products into the market. So I would say it's exceeding our expectations to date. The individuals that we have added on to the team through the acquisition are excellent. I have personally visited our engineering group in Australia and our manufacturing group in Korea in March. Exceptional people, very bright, great systems and very focused on being part of the Matrix organization and in delivering great results. And have the capacity for us to plug in additional sales opportunities.

You will also see the disclosure in the 10-Q that will be filed today or tomorrow that provides more information on Baillie. Just a little tidbit from that disclosure, the revenues recognized on that acquisition in the first couple of months were $3.5 million, producing operating income of $0.7 million. So definitely off to a good start here with us.

Got it. And will M&A continue to focus maybe on overseas opportunities similar to Baillie or are you still looking here in the States?

No, I think we are still -- the Baillie thing wasn’t necessarily an international focus. It was just that that’s where we found the best product provider. We are going to be more focused in the U.S. and Canada here in the short term. And that’s not to say that we would not look for a or be interested in a company that’s U.S. based that might not be doing some work outside the United States and Canada. But as far as going into a foreign country to look for an acquisition, I would say today that’s not on our list.

And we do have a follow up question from Martin Malloy with Johnson Rice. Your line is now open.

Just on the storage side, the above ground storage tanks. Any interest from your customers in expanding capacity at Cushing given that it's not that far away from operational full capacity?

Yes. So we actually in the quarter had an award with one of the midstream companies there to add, I am not sure of the quantity of the barrels but I think it was 3 or 4 tanks into their terminal lot in Cushing. We are doing some other work out there for a few other clients. We have actually got a couple of proposals in house for some major additions into Cushing by both existing and some startup midstream companies. So there is still people interested in adding storage capabilities and blending capabilities out in the Cushing storage depot. So we are pretty upbeat about that opportunity.

Okay. And then regarding '17 guidance and when you might issue that. Is the intention to, like last year, issue forward your guidance around mid-July?

Yes. We will do that sometime earlier than what we had traditionally done it once we get through our budget cycle here and get this year to close. But probably sometime in July.

At this time I am showing no further questions. I would like to turn the call back over to Mr. John Hewitt for closing remarks.

Thanks, everybody for listening in, for the great questions on the business. We continue to be extremely bullish on our markets and our business in general. We think we are doing some really great strategic things with the company. Very exciting time to be at Matrix and additionally we would encourage everybody to take notice about June being National Safety Month and think about that, both in your work and in your professional lives. So thank you everybody and we will talk to you next quarter.

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