Good day, ladies and gentlemen, and welcome to the Matrix Service Company Sets Date to Discuss Results for the Second Quarter Ended December 31, 2016 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time [Operator Instructions]. As a reminder, today's program may be recorded. I would now like to introduce your host for today's program, Mr. Kevin Cavanah, Chief Financial Officer. Please go ahead.

Thank you and good morning everybody. If you are joining us today via Webcast, you can access a slide deck we've prepared that goes along with this presentation, and as we go through this presentation, John and I may be referring to certain slides and we'll just let you know before we start that section. So now I would like to take a moment to read the following. Various remarks that the Company may make about future expectations, plans and prospects for Matrix Service Company constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various factors, including those discussed in our annual report on Form 10-K for our fiscal year ended June 30, 2016, 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.

Thanks Kevin. Good morning, everyone, and thank you for joining us. Turn your attention to our first slide in the deck, which is about our safety moment. Recently, I had an opportunity to participate with the executives from TransCanada in a Project Safety Stand Down at our jobs [indiscernible] Ontario to congratulate the site team on its excellent calendar 2016 safety performance and to reaffirm both companies' commitment to a safe work environment. Matrix Project Safety Manager, Gary Maher, opened our meeting with a safety moment about this director driving, and I wanted to share that message with you today. In a warehouse space with more than 650 people, Gary asked each of us to consider whether we had ever sent a text message while driving. I'd like each of you to consider that same question. Gary shared a video produced by AT&T a few years back called The Last Text. If you have not seen it, I would encourage you to search for it. It tells true stories about people who like all of us have sent or received a quick text while driving, and in a split-second put into motion an event that changed lives forever. It's clear that when you're driving, texting is a dangerous practice, but have you ever thought about a text you may have sent to someone you knew was driving. Think about that for a minute. If you have, you've put them in harm's way. Next time, please think before texting someone, whether you are behind the wheel or they are. I shared this video with my two children and I encourage you to find that video and share with your family and friends as well. Moving on to our discussion about our second quarter results, I'd ask you to flip the slide,…

Thank you, John, and you can view a summary of our 2Q results in the slide deck. Consolidated revenue for the quarter was $313 million, which compares to $324 million in the prior year. On a segment basis, revenue increased in the Electrical Infrastructure and Storage Solutions segments driven by continued work on Napanee Generating Station project in Electrical and the Dakota Access Pipeline project in Storage. The combined increases from these two large projects were offset by decreases in the Industrial and Oil Gas & Chemical segments, both of which have continued to be impacted by low customer spending caused by delays in project awards and starts as well as lower levels of maintenance spend. Consolidated gross profit was $28 million in the quarter, compared to $30 million in the same period last year. [Indiscernible] gross profit margins declined to 9% in the current quarter versus 9.3% in the same period in the prior year. The most significant impact to strong overall direct margins was the under-recovery of construction overhead cost that resulted from lower than expected revenue volumes. SG&A expenses came in just under $20 million in the quarter as the Company continues to manage overhead spending. SG&A also included approximately $700,000 of acquisition and integration related expenses for Houston Interests. The tax rate for the quarter was just under 32%, in line with the tax rate for the second quarter a year ago, but better than our effective tax rate guidance of 36%. We expect our effective tax rate to be around 36% for the balance of the year. For the three-month period ended December 31, 2016, net income and fully diluted earnings per share were $5.3 million and $0.20 per share, compared to $5.4 million and $0.20 per share in the same period a year earlier.…

Thank you, Kevin. As I mentioned in my opening remarks, while we believe market conditions are beginning to improve as it relates to project awards, timing of that improvement can be difficult to predict. As you know, our Storage Solutions segment this year was driven largely by the Dakota Access Pipeline project. It was our expectation at the beginning of the year based on the opportunity pipeline we had in front of us that we'd be able to bag the revenue associated with this project in the second half of the year. While many of these opportunities continue to exist, we anticipate the timing has slipped. In some cases, those projects have slipped into our fiscal 2018. If I could draw your attention to slide called 'Real world examples', let me give you a real world example. While I can't get into the details as to the client and location of the project, we are in a [indiscernible] position for the construction of a multimillion barrel crude oil terminal project. We've been working on the FEED since early calendar 2016 as well as planning and developing project budgets and providing permitting support. Based on intimate knowledge of the project, we expect a contract placement in the fall of 2016. Over the past few months, we have had multiple changes in the project award date, which is now currently expected to be late in our fiscal 2017. While this is a very real example of how revenue can shift from one period to another, and while our customers continue to take a cautious approach to the timing of their projects, the fact remains that projects themselves are not speculative. They are a fundamental part of our customers' long-term business plans and operational integrity. So, as the markets continue to recover, the…

[Operator Instructions] Our first question comes from the line of Matt Duncan from Stephens. State your question please.

Want to start on Napanee, can you just give us an update on how that project is tracking or when is it now supposed to be done, and maybe if you could talk a little bit more about what the resolution was that you guys reached with the customer on that project?

Project is tracking on plan with the client. Their COD date is mid-2018, calendar 2018. And so, we continue to work with the client towards that end. As far as the details of our resolution with them, I think that's something we wouldn't normally talk about.

Maybe if you take a little bit different angle on that then, John, and maybe Kevin, this is for you, you mentioned that it hurt your gross margin for the Electrical segment and your earnings this quarter. If not for that settlement, how much higher would earnings have been and what would gross margin for the Electrical segment have been?

I think the overall gross margins would have been closer to our normal range that we give. If you look at that settlement, we've got an agreement where we are going to be able to recover additional costs to complete the project with the customers. I think a favorable outcome from both sides. We are working well with that customer. But as a result, it makes the overall project a larger project. And so, you have a percentage of completion adjustment that gets booked in the quarter and where you're saying you are less complete on the project, and as a result, it took the quarterly gross margin percentage down from what we normally would see.

Okay. And Kevin, if I remember correctly, the historical range you guys are targeting in Electrical is 11% to 13%. Is that right?

It's 11% to 13% if we're getting full recovery of overheads. And while we've talked about overhead recovery in primarily the other three segments, there's been a small impact to the Electrical segment, but it's not significant.

Okay. So essentially you would have had 300 to 400 basis points better gross margins, is kind of how I bake that. So that helps. When we look at the guidance then, thinking about segment margins, when I look at what you guys did with guidance, the revenue cut versus the earnings cut, the earnings cut kind of stands out as being far more significant. So I'm trying to understand sort of what the delta is here between the revenue cut and the earnings cut. And I certainly get that there's an under-recovery of overhead and construction cost, and I'm sure that's a big part of the impact, but what is the assumed gross margin on a segment basis for your four segments for the back half of the year that would get us to the middle of your new earnings guide?

So if you look at the last half of the year – first of all, I want to make sure it's clear that we are not forecasting some problem project. The decrease in our EPS is directly related to our reduction of revenues, and this goes to the explanation I had in the script where we talked about you're not only losing the direct margins you normally make on a project, you're also losing now because you're not able to apply overheads. And so, it makes a project that you may have normally earned 10% on, now you are actually when you're not doing that work, you are almost losing 20% of that value because of the overhead application. And so, we've talked about that this is going to continue on, especially in the third quarter. So the normal margins we would expect in those segments, I don't think those ranges have changed on a full absorption basis, but we will see under-absorption. So, I think the consolidated gross margin in this quarter was 9% after that under-recovery, and I wouldn't expect it to be that significantly different in the last half of the year.

Okay. At what point then, Kevin, do we get back closer to the target ranges for each of these segments, and you may just remind us what those are?

So we talked about ranges for Electrical and Storage that are in the 11% to 13%. Here I think you saw that the Storage actually exceeded that this quarter even with some under-recovery, showed some pretty good execution. We have talked about 10% to 12% with Oil Gas & Chemical, but that segment has been impacted significantly with under-recovery. So, I think it's probably not until we see the volumes return in fiscal 2018 that we get back to that range for Oil Gas & Chemical. And then on Industrial, we talked about 6% to 8% margins. And I think when we gave that guidance the beginning of the year, we were assuming that we would have this low volume, and so we are already forecasting that in that range. Once we get to where we've got full recovery in the Industrial segment, we might be at, I don't know, 8% to 10% margins.

Okay, all right, very helpful. And the last thing for me and I'll hop back in queue, just on Houston Interests. How much revenue and EPS accretion have you included in the guidance for the year from Houston Interests?

So, as we talked about, they were about a $100 million revenue company and they are going to be in our results for six months basically. So you can just do the math there, $50 million or so. Now, the EPS impact, it's going to be negligible because of acquisition and integration costs and because of the amortization of intangibles.

Kevin, what are those acquisition and integration expenses, because I think what we're trying to see here is what the operating impact is on earnings, so how much additional integration expense do you have included in the guide for the rest of the year?

So we incurred about $700,000 in the second quarter, and we'll probably include or incur a similar amount in each of the next two quarters.

All right, perfect. I'll hop back in.

And the reason for that is we are doing a number of things. We're really integrating this acquired business with our legacy PDM business, including bringing those employees physically together in one location, and we're doing a lot of things to rebrand that company. So those are the types of costs that we're incurring. It's not employee turnover costs at all.

Great. Thanks guys.

Our next question comes from the line of Tahira Afzal from KeyBanc Capital Markets. State your question please.

So I guess first question is, we've seen two pretty big pipelines in Canada getting approved over the last few months, Line 3, which of course goes into the U.S. as well, and obviously one in Canada. So can you talk about what the Canadian market is looking like in terms of some of the terminal business coming back and growing? Are you seeing anything really loosing up or is it too early?

I think it's still a little too early for us. We are continuing to see some moderate bidding activity in Western Canada associated with both existing pipelines and some of the new ones that [are early] [ph] to talk about, but we're not anticipating converting any of that into actual projects with any significance over the course of the next four or five months. On the Eastern side, our tank work we have done there, we've been pretty busy there. Actually we've had a pretty good year there with some new tank construction and a fair amount of maintenance and repair work on the Eastern side of the country. The approval for TransCanada to resubmit their permit for Keystone XL will create project opportunities for contractors like us on both sides of the border, but of course the timing of that is we're just not sure how long that process is going to take.

Got it, okay. And it seems like it might be late 2018, 2019, so I guess you seem to be pretty right on it to fill out there. I guess the next question is, if I look at your Storage Solutions and Oil Gas & Chemical opportunities, can you talk a bit about the profile there, are they coming more from some of the integrated majors, the refiners or the midstream companies, because all of them are giving very different outlook and I'm trying to figure out where your business might be shifting from a customer perspective?

I would say, the preponderance of the opportunities are not necessarily with the refiner, with your traditional refiners. While we may have some opportunities for some new storage tanks or some maintenance and repair, a lot of our Storage opportunities are coming from midstream companies, both in crude and in gas liquids; significant amount of activity in small-scale, small to mid-scale LNG projects for export into the Caribbean; and as well as refined products and crude, both coming out of the Gulf Coast and projects for importing and storage within Mexico and some of the Caribbean islands.

Okay, that's actually very helpful. And I guess my last question is, given all the puts and takes in timing you've seen this year and even last year to some extent on when these projects really rollout, is your approach to when you said guidance is going to be any different, is it going to be some extra skepticism built into the schedules and is that something we should be thoughtful about?

Extra skepticism, I think we are doing what [indiscernible]. We stay close to our clients. We try to appreciate on each individual project where they are from a permitting, from a development, from a financial closure, their Board individuals for Board meetings, where they are in scope development. And so, we try as best we can to pick up our signals on the market from them. But unfortunately, there are things we can't predict. And so, I think for us – And I think our clients also, there is this whole presidential election cycle which has been kind of devices going through who was actually going to get into office and where their administration was going to head from an energy and infrastructure standpoint [indiscernible]. And I think all of us probably have underestimated what that impact is creating in the Board rooms of many of our clients and how that's affected their decision-making and what they're going to do. All that being said, our opportunity pipeline is continuing to tick up for projects that we see both [with our] [ph] existing client base and some new clients that are trying to get [into queue] [ph] of what they see for the next two, three, four years as some pretty extensive infrastructure buildout.

And I think there's also a change in the environment we're in with you've seen all these approval projects also then get stopped, and it's because of things happening out there. So I think our clients are being a little more careful and dotting a few more 'i's, crossing a few more 't's, before they award projects and before they have expended significant dollars on a project that they may incur some delays on.

So again, that's a good point Kevin brings up. So you can imagine, while we were fortunate to have essentially each mechanical completion on the Dakota Access terminals that we built, ready to transfer, you can imagine the Boardroom of other companies going, hey, wait a minute, the government is going to step in and stop a project that had already been approved and that already had billions of dollars invested in it, what does that mean for our projects and do we need to really think about and see where the head, where the administration's focus is turning. And so, like I said that I think we have underestimated the impact to this whole presidential election cycle. I think that is potentially one of the outcomes of that.

Given some uncertainty, and it might continue given how everything is unfolding, would you be more thoughtful and cautious and build a cushion into timing? It seems the pipeline is really good, and I guess my only concern is, I would hate to see you guys getting – the credibility getting hurt by something that's really not in your control when you're doing a good job.

So we felt good about going into this year. We were…

60% to 65% booked.

Yes, booked, and with that very strong opportunity pipeline. So that's probably above the normal range of how we enter a year. But we were mindful of what was going on in the markets around us. And so, we set a pretty wide range of revenues and outcomes for the Company when we set our original guidance, because we had some concerns there, and obviously it was not as good as even our worst case that we expected. So, I think we've tried to capture that hesitation and lack of clarity and confidence that we're getting, picking up from our client base and how we're seeing projects move around. And so, we have done the best job we can with the guidance we have established to get to the end of this fiscal year based on sort of the lessons learned from this first half of the year.

Got it. Thank you, both.

Our next question comes from the line of Stefan Neely from Avondale Partners. State your question please.

So I did have a question following up on the project awards and timings, and you mentioned the crude oil terminal and the delays there. Is there any detail you could give us about what has been sort of the catalyst behind that? Has this been, is the award delay due to something with the customer and economics or is this a permitting issue or what?

No, I mean the permitting is in good shape. There has been some movement on the [indiscernible] structure, there has been some movement on the land, and then there has been scope additions and changes. So as this project has moved in time and this client has taken a different view of their off-take agreements and what the demand is going to be, there has been pluses and minuses in the scope and the volume of the terminal and the type of products they're going to run through it. And so all those things have just been the changing market conditions and the potential change in regulatory environment has all created some ups and downs to this process.

Understood. Thanks. So do you feel pretty confident I guess in where the potential award date sits now then?

That's a very good question. Yes, I guess we feel confident based on the timing now, and what we know at this point what needs to get done between now and achieving their financial close and approval for the project. That being said, if there is some other disturbance in the oil markets or some other weird stuff that comes out of Washington that can stall it, but I would say at this point we feel pretty comfortable. We feel very comfortable this finally is going to happen, it's just this timing issue is difficult.

Sure. Okay.

And that now is forecasted to be awarded in the fourth quarter. So it's going to have not much of an impact on fiscal 2017.

Yes.

Okay, understood. My next question going over to Electric, we had talked about in previous quarters the potential for you guys taking up some more work there in the power plant side. Can you give us an update on what you are seeing in terms of the end markets, anything that you guys feel is imminent in your pipeline and whether you're still looking at full EPC are subcontracting work there, that would be great?

First of all, on the generation side, most of our focus over the past 12 months has been more related to packages related to ongoing, so existing projects, where we would either in the situations where our clients are acting as [indiscernible] general contractor or in situations where there is an EPC firm and we are bidding into them the electrical packages, the centerline erection, some of the piping services. And so, we have been pretty fairly busy there on that cycle. We have been sort of focused on the projects that fit our capacity based on the timing and when we think those awards are. While we have not announced it yet because of approval from the client, we did win an electrical – the approval of electrical aboveground package for a generation facility in the Northeast. We had bid more pieces on that project and were not successful. So there was an expectation in this fiscal year that we would have won more work associated with that project more than the centerline erection and the mechanical work. But we were pleased to get the award on all the aboveground electrical work.

Okay, perfect. Thanks for the color there. And lastly, looking at refinery maintenance, it seems that there has been a pickup in that so far in the first quarter. Are you guys seeing any of that at all or is it still mostly a fall 2017 event for you guys in your mind?

I think what our folks are telling us, and it was in our remarks, is that the work we are doing, that we do traditionally with a variety of our clients to provide planning and budgeting and scheduling and those kind of upfront turnaround services, we're very active. And the projects that they are focused on, they are starting to come to fruition in our fourth quarter. But we would say, based on that activity, we would probably confirm other people's comments that the fall of calendar 2017 and moving into 2018 will be much more activity than what we have seen over the past couple of years.

Okay, perfect. That's helpful. I'll get back in the queue now. Thank you.

[Operator Instructions] Our next question is a follow-up from the line of Matt Duncan from Stephens. State your question please.

Do you guys have anything either in your backlog or in the opportunity funnel of projects that you're looking at that will require a FERC commission order to be able to move forward, now that we are in a situation where there's only two commissioners there and there is kind of a little bit of a standstill? Just trying to see how that may impact you guys there in the short-term.

In the long-term, it's a longer list. In the short-term, it's really only one project that we are looking at that we think could be delayed a couple of months because it's waiting on its FERC approval. If we take a long-term view of some of the projects that we're looking at, for instance the storage tanks on some of the export terminals that we're bidding into don't have their FERC permits yet, but I don't see it as a delay of those jobs because the award and the timing of those jobs is far [indiscernible] the new FERC commissioner will get in place. So, there's only one project really of significance that's in our immediate gun sights that could experience a delay. But we are in early stages for that. We are assuming not being selected for that project. And so, there continues to be a lot of back and forth here between pricing and contracts and scope and that sort of thing. So hopefully, the timing of that activity will coincide with the appointment of a new commissioner for FERC, and all those sun and the moon will come in the line at the right place.

Got it. And not to get too much into politics, but I would think that with the mix-up at FERC, that's probably going to be generally a positive. What maybe has been a little bit of a headwind from regulatory environment, it feels like it's going to become potentially a little bit more of a tailwind. So, what kind of conversations are you guys having with your customers on that front? Is that maybe part of why you're seeing a little bit more positive attitude from them kind of looking forward?

So I don't have anything specific. I would think that our clients have got the same views that you just stated, that the expectation here is there is going to be a push by the new administration for FERC to speed up their approval processes. And I would say, based on the activity of our new President, it doesn't seem to be afraid to say what he's thinking. So, I would think that…

Understatement here.

Yes. So FERC Commission will certainly feel the point of that sword.

Yes, I would think so. Okay, and then last thing, obviously you've just got done with the Houston Interests deal, but you've also upsized your borrowing capacity. Are you still looking at other acquisitions, what sort of stuff interest you right now, kind of give us an update on what your thoughts are on M&A?

We are absolutely still interested in acquisitions. As Kevin had said, we have upsized our facility to handle not only the growth that we anticipate and expect in our business, but also to give us the capacity to handle that growth and to find acquisition targets. Probably our number one focus today is to expand capacity and geography in Electrical Infrastructure on the transmission and distribution side.

Perfect, all right. Very much appreciated. Thanks, guys.

And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to John Hewitt for any further remarks.

I want to thank everybody for being on the call today and some great questions, and we look forward to speaking to you all in the future. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.