Matrix Service Company (MTRX) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to your Matrix Service Company Conference Call to discuss Results for the First Quarter of Fiscal 2018 Conference. At this time, all participants are in a listen-only mode. Later we'll have a question-and-answer session and instructions will be given at that time. [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 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 constitutes 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 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 morning. As we open the call I want to congratulate two of our Matrix NAC teams, first our infrastructure team in Rahway, New Jersey; the won the 2017 Board of Directors Safety Award. This award is the highest award given by Matrix Service Company. Under the leadership of [indiscernible] this team's commitment to training and education exemplified the highest standards. Among the many accomplishments was zero recordable incidents in fiscal 2017. I would also like to congratulate the construction services unit operating out of Eddystone in [indiscernible] Pennsylvania. This team received our 2017 CEO Safety Award under the leadership of Dave Kazokas. Dave maintained an emphasis on safety excellence across a multitude of projects and among other critical accomplishments Dave also achieved zero recordable incidents. It should be noted that while we're highlighting these two operations for safety excellence across our entire business our employees have continued to drive a culture of safety which is demonstrated by record level of 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're extremely proud of our employees this achievement given the environment and hazards they faced in such situations. Their work demonstrated their focus on performing the tasks they were given with the commitment to keeping each other and those around them safe. Congratulations to all of our employees for a job well done. Before returning 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 major [success] historically have been viewed as having only two key focus areas above ground storage sales and refinery maintenance. These are in fact the core operations that formed our foundation and continue to be as an interesting part of our business. With that said several years ago our management team and will have strategic plans to strengthen and diversify the business by extending our geographic reach adding to our sales and expertise and expanding our end markets. As the business environment changed through the class of oil and other commodity prices in 2014 the value of this diversification was demonstrated. The significant project awards achieving our storage solutions intellectual segments in 2014 and 2015 these two segments reported their business during the period when many of our other end markets were softening and project awards were being pushed into the future. Now that projects awards and storage solutions have lagged during the past 12 to 18 months work in our oil and gas and chemical and industrial segments has taken the leave as all of our end markets continue to recover. It's also important to note that awards in our electrical infrastructure segment that have been impacted by our strategic shift away from large ETC generation projects however our high bolt-each in intellectual work which represents a significant portion of this segments revenue has maintained steady performance and been generally un-attracted by commodity issues. In organic and chemical beyond our traditional refinery maintenance work our expanded service offering helped us achieve record high backlog levels in Q4 of fiscal 2017. Capital projects in the refinery and chemical business has loss incremental revenue associated with the expertise gain in our most recent acquisition has contributed to this growth. In addition, the opportunity of pipelines for replacement projects remains strong. At the same time after a long period of minimized discretionary spending on maintenance and turnarounds by our refinery customers we are seeing signs of improved spending and expect the next 18 months to trend-up with the [screen] season being one of the strongest for major into the years. Over the past 24 months our industrial segment has been significantly impacted by low commodity prices in ferrous and non-ferrous metals. As you may recall this segment traditionally contains the work we are doing in the iron and steel industry, copper mines, thermal vacuum chambers and the fertilizer markets. So, we are now experiencing a strengthening and maintenance and capital project spending in the iron and steel business as evidenced by the first quarter awarded of two blast furnace repair projects as well as the 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 and other industrial thermal markets such as cement, grain and miscellaneous 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 two thermal vacuum chambers. It's because of these improvements in the market and our strategic positioning in this segment we have been able to achieve a segment book-to-bill of 5.5 in the quarter. Within our intellectual infrastructure segment our business has flipped between two primary types of work power delivery and selected work in power generation. In power delivery our work is focused on servicing the immense infrastructure needs to substation transmission and distribution work. It is important to note that even during the down turn in commodity pricing this part of the business remains strong demonstrating that value of our diversified portfolio of services. Other opportunities in this segment which 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 but from a volume perspective is indicative of the industry's trust in our people and results in the 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 or large scale full scope 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 the market leading position in [indiscernible] and expect to expand beyond this area through organic growth and selective M&A transactions. Our storage solutions segment has broadened and diversified it's base to include full terminal and other capabilities that allow us to offer complete life cycle solutions. While our award 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, MGLs 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 we move through this cycle but we remain confident that calendar 2018 will be a strong award period. We've seen a substantial uptick many opportunities and awards on smaller balance of plant work and tank only projects which has contributed to the 0.9 book to bill segment during the quarter. Overall storage solutions, between pending project awards, current biding activity and opportunities, our project pipeline is valued at nearly $5 billion. In addition to the diversification of our business in terms of operating segments and related services we've 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 multidiscipline engineering, process integration and consulting services through our 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, processing handling and electrical instrumentation and controls; these services are already benefitting our storage solutions, oil, gas and chemical and industrial segments. In summary based on our project pipeline, improving market conditions and our strategic positioning we expect measured but continued improvements throughout the business as we move through fiscal 2018. As I turn the call over to Kevin there're a few things I want you 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've taken important steps to strategically diversify our business within the energy, power and industrial markets. The value and benefits of this diversification underpins our long-term strength of the business. Next, because of our diversification and the strength of the foundation we built we're well positioned to respond to customer needs across all of our operating segments as markets continue to improve. Lastly our financial strengths, organizational structure and value centered employees allows us to execute our strategic initiatives in order to build sustainable 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 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 of 10.7% which is our highest since the first quarter of fiscal 2016. As planned SG&A cost were higher than in the same period last year. As the result of our engineering acquisitions committed fiscal 2017. Our tax expense was higher than normal which I'll discuss in more detail later in the call. The bottom line as we produced good EPS in the quarter and have the solid start to the year. The core results on Mark our higher levels of project awards ended the results growth in our overall backlogs. 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 the 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 volumes that was partially offset by improved gross margins. Strong project execution including [indiscernible] 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 cost 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 outstanding engineering business including associated amortization of intangible assets and higher project perceived cost. 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 three-month 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 the tax rates different than our normal tax rate of 38%. The bottom line results for discounting were net income of 3.8 million or $0.14 for fully diluted share in the first quarter of fiscal 2018 compared to 9.3 million or $0.35 in the prior year. As we talked about our first quarter segment performance. And our electrical and infrastructure segment revenue of 80 million represented a slight decrease versus the prior year of 88 million due to the expected wind down work on our 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 in margins was due to improved product execution and recovery of construction overhead cost. In addition, our people provided restoration services in the Southeast related to the electrical infrastructure damage from the hurricane Irma, these services bolstered the solid margins produced in this segment. Our long-term margin goal for this segment remained at 11% to 13%. However, given market conditions in our [indiscernible] we do not anticipate achieving this range in fiscal 2018. Revenues for the oil gas and 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 of 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 closeouts 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 a normal 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 and expected project awards. As a result of the lower revenue volume we under recovered our construction overhead costs. During the past fiscal year, we've made decisions to reduce several overhead costs while balancing 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 prepare 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 onto 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 improving 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 was last couple of years largely 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 from much of the segments. 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 onto 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 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 a 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're encouraged by robust bidding activity we're seeing across our business; project awards in three 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 increase liquidity position of 131.8 million at September 30, 2017. The financial strength and liquidity continue to support execution of our strategic plans funding of working capital and funding capital expenditures with a fiscal 2018 target below 1% of annual revenue. I'll 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 and we represents a really good start to the new fiscal year further we are confident in the markets we serve or in the other stages of recovery however timing concerned and later to awards and subsequent starts of large terminal and specialty vessel projects and our storage segment dictate that we would continue to maintain a conscious outlook. Therefore, we are going to maintain our 2018 guidance of full-year revenue of between 1.225 billion and earnings per share at $0.55 to $0.75. And with those comments we will now open the call up for questions.

[Operator Instructions] Our first question comes from the line of John Franzreb of Sidoti and Co. Your line is open.

Actually, I will start with the gross margin profile, you benefitted from a little bit from higher engineering better execution. Can you talk a little bit about how much you think is sustainable and maybe some of it was a bit more one times it certainly sounds like you expect a little push back in some of the storage gross margin going forward? Could you just talk about the puts and takes that’s going on right there?

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 and gas and chemical we had a little bit of that in storage. We also had a little bit of storm work that helped with electrical segments so overall it produced a really good margin profile. Now going forward, I think when you look at this I think the industrial margins we like to see them continue to trend upward as we see volumes increase. Storage it's a little bit hard to repeat the first quarter of this next quarter or two until we get these project awards across the finish line and get executing on those projects, so I still think we're confident we would be long-term 11% to 13% range but volume may not be there of that in the near-term but I think that will return as we move through the fiscal '18 year oil and gas and chemical remains we will maintain that 10% to 12% normal range definitely projects flows outs help that outperform this quarter. And then electrical now as we are completing the work on the generating station we're going to be replacing some of that, I think we'll eventually 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 towards consistently achieving this type of margin performance.

John anything to add.

The only thing I would add is in this storage segment, that while we're seeing delays in these bigger terminal projects which are both crude related and specialty vessels for gas related products that our tank business are fundamental flat bottom storage tank business, the bidding environment is very-very strong, we're winning our fair share of those, really across the Gulf Coast into the central part of the country and so from that perspective we feel very good about our call sort of our legacy tank [indiscernible] piece of our business is operating very well, it's very good margins by timing you call -- everything in the storage solutions together because some of these larger terminal projects are getting pushed out as you can see the sort of depressed the overall outlook for that segment but as Kevin said [indiscernible] with 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.

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 we think about it as far as it progresses through balance of the year?

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

And then John the other part we referenced on this call that our iron and steel projects it's not blast furnace projects just to be clear, it is a longer-term project but really being real specific about the project at this point.

I guess just one final question when will we 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, prior to third quarter.

[Operator Instructions] Our next question comes from the line of Tahira Afzal of KeyBanc. Your line is open.

Congrats pretty decent quarter given all the moving parts. I guess if I look at the lower end of your EPS guidance and sort of trade line it through three quarters it doesn’t really obviously they are flat 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 this something happening on the mix side that I should take into account.

As we said, so we feel very good about our project opportunities across all of our segments. We're continue to be concerned about some of the larger projects that they are going to help for us to drive to the top end of our guidance range. The timing of those awards and when we would be up we think those are started. And so, we've got an extremely strong pipeline of projects some of them are with what you would considered Blue-chip clients so we will perform those projects after balance sheets some of those are with more developer related people that require a little bit more the eyes and teeth if you cross before those projects get awarded. And so, there is a lot of movement in and around those awards permitting issues offtake agreements into that rise away and some other things that we feel that are getting closer to fruition and in some cases, we're competing so we get to win the work. So, we've taken as we said and kind of the across to surplus the how those awards are going to affect the full-year.

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

Yes, maybe we've got a number of projects there we are anticipating sometime in the next three months we will start to roll in if win today, and I think we are going to evaluate that even when we win, there may be a delay in the start to some reason so as we get to the end of the second quarter we will evaluate those awards versus the stars and see how that effects our full-year our full-year guidance numbers.

And I assume most of those sorts of more material ones would be in storage and that's what we should be focusing on?

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

Okay, and last question from 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've don’t expect margins to really stay beyond that range that you have set in the past. But when is they if you are going to see a record turnaround season?

So, I think the key would be how big it is, we remember it's still reimbursable work so it doesn’t always blend itself to higher margin but if there's good execution and we have the big volume we could outperform we think we can do but as far as you see right now I think we've got a reasonable forecast.

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

Thanks, and thanks all of you who joined our call today and we look forward to seeing in future investor conference 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.