Good day, ladies and gentlemen, and welcome to the Matrix Service Company Fiscal 2018 call to discuss quarterly earnings. 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]. I'd now like to turn the call over to Mr. Kevin Cavanah, Chief Financial Officer. Sir, you may begin.

Thank you. Before I get started, I want to remind everybody that we have slides with today's call, which you can see by dialing into the webcast. So I will now start with the Safe Harbor statements. So please let me remind you that on today's call, the company may make various remarks about future expectations, plans and prospects for Matrix Service Company that constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various factors, including those discussed in our Annual Report on Form 10-K for our fiscal year ended June 30, 2017, and 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 very much for joining us. I've been reflecting on the business challenges our customers and Matrix have experienced over the last couple of years and how in times like these, it's easy to lose sight of safety. But the same thing is true as we see the end markets improve and workloads increase. In either case, at the end of the day, nothing in business is more important than the safety and health of our employees and those around us. It is also important to remember that safety extends far beyond just occupational safety. It also means making sure that people around us are safe from discrimination and harassment of any form and feel safe sharing ideas or speaking up about issues or concerns without fear of retribution. In every instance, our focus on safety has been unwavering regardless of the business background noise this world surrounds us. It is a social imperative that puts the safety and well-being of all people first. So as we enter into the last quarter this fiscal year and as we look forward to a much stronger fiscal 2019, I've asked our employees to further strengthen their resolve in taking personal responsibility for making sure they and everyone around them are safe. The individual choices we each make can and do make a difference please on safety for yourself, your loved ones, your coworkers, and the community. You can make an impact. As noted in our earnings release and as we discussed during our last earnings call, we expected our third quarter results to be the lowest of the year. Actual results proved even more disappointing relative to our earlier forecast and are primarily the result of low-revenue volume due to delays in new project…

Thank you, John. This quarter was disappointing from an operating results perspective, but also provided significant positive indicators for the future in the form of project awards and backlog growth. There are a few primary drivers to the third quarter operating results I'd like to discuss. The most significant issue in the quarter was low revenue volume that resulted in lost opportunity for direct profit as well as less recovery of construction overhead costs. The challenge has been to balance the negative impact of lower revenue volume on our construction overhead cost, while also ensuring we have the resources needed to fulfill our commitments as the markets improve and our revenue volumes return. In the quarter, we experienced a $30 million revenue shortfall as compared to our expectations. John has discussed the reasons for the shortfall. But the good news is that we are winning many of the key projects we are pursuing. In other words, the revenue is not lost, but it is simply been moved into future periods. In addition to lower revenue volumes, gross margins were also impacted by factors that limited our ability to earn new margins we traditionally expect. This was especially true for the Electrical Infrastructure and Storage Solutions segments. These factors include low-margin work bid in a highly competitive market with minimal project closeouts combined with lower project execution performance. Finally, our effective tax rate was only 14.2% as compared to our expected tax rate of 32%. Our effective tax rate was significantly impacted by a valuation allowance on a deferred tax asset during the quarter, which offset the tax benefit of the pre-tax loss recognized during the period. Now I will discuss specific results. Consolidated revenue for the quarter was $246 million, which compares to $251 million in the prior year. The…

Thank you, Kevin. Before we open to questions, I want to thank our coverage analysts, our investors, our employees, and all those listening to this and other calls. As the trough created by the various market conditions we've discussed extended, we stayed true to our values, stayed focused on safety, put people first, took a long-term view, and looked for opportunities to improve our business operations. Our objective over these challenging times has been to conservatively manage the business to ensure that we'd be well-positioned when the time came to execute in what we knew to be a wave of significant projects and a return to higher levels of spending. That time is now. Customer confidence is returning. The long-awaited release of project awards has begun. The opportunities in the end markets we serve are significant and will support additional backlog improvement. Over the course of the next few quarters, we expect to see margins return to our historical targeted levels. We have maintained our infrastructure, including our employees, who are the best in the business, to ensure we can successfully execute on our expanding backlog and we are confident in a much improved fiscal 2019. I'll now open the call for questions.

[Operator Instructions]. And our first question comes from the line of John Franzreb from Sidoti & Company. You may begin.

I guess I have to start with the third quarter and the $30 million revenue shortfall. I think you isolated the Storage and the Electrical Infrastructure business as the businesses that get the awards you're expecting. Firstly, was it heavily weighted on one segment versus the other? And what's the time and have you captured those awards? And what's the timing of you realized on those awards?

Yes. So the revenue shortfall of $30 million was, we saw that probably most significantly, first, in the storage section because of delayed project awards. We also saw it in the Industrial segment because of not a delayed award but a delayed start from what we expected. And I think that piece was really we had little bit lower volume in the high-voltage business of electrical. With the significant backlog awards in Storage and Industrial, we see volumes improving in Industrial starting in the fourth, but continue to accelerate into fiscal 2019. Storage will also improve, but just neither segment will probably be to the point we previously expected it to be. So, and then we've also adjusted the other segment revenue expectation based upon what we've seen as far as this last quarter.

Okay. And then on the storage side, as you were taking lower-margin business, how long does it take for that to wind through the P&L? And are you finished taking that low-margin business? You kind of implied you're going to be closer to historical margins next year. So can you just kind of walk us through what you're doing there?

So this is John. So, some of the competitive work that we have been addressing in the market is starting to wane. That work is unwinding as we move through the next couple of quarters. The one thing that really helps our margins is the complexity of the projects that we undertake and put in the backlog. We're in a tank sort of tank business, where we're getting maybe one or two tanks into an expansion of a terminal. And that opens the door for a lot of smaller contractors to be able to chase that same work. And they've got probably a lot less lower overhead we do. They provide a lower quality of service. Their safety is not as strong. But in a lot of cases, too, their pricing is lower, plus they're willing to take work for a breakeven basis just to keep food on the table as it were. But as we start looking at some of these larger tank packages and we get into tank only situation where you have five, six, seven, tanks that are being added into a facility when you have a full balance of plant EPC construction that really limits the amount of competition for us and puts us into a place where the value of our services can command a higher margin.

I think the other thing to think about on that is we did have more of that lower-margin opportunity work in the third quarter, but it definitely didn't give us the revenue volumes overall we expect. So there's still an impact of under-recovery impacting it’s the compounds of the issue. So I think that's something that, as we're thinking about the performance in Storage Solutions, we need to think about. So we get that volume back over $100 million, you're going to get to in a quarter, you're going to get to where you're --

[Indiscernible]

Yes, you're getting full recovery in storage.

The other thing to think about, too, in these large awards is that the first piece of these awards is engineering. And so that's a lower-volume piece of the entirety of the project. And so we can't -- it's obvious, I guess, but we can't put a shovel in the ground to hit far enough along with the engineering. The actual construction and the material procurement is dependent on that engineering. So the volumes start to get larger as we commence -- as we finish a percentage of the engineering. So that's usually which is always in these awards and for the first piece of those projects, it's going to be engineering work. That's why the impact of the third and into the fourth quarter is not as big as you would think relative to the backlog build.

Okay. And you kind of implied that the fourth quarter, that the order book is similarly strong. Is it also in the Storage and Industrial sides of the business? So is there a change in the balance of the incoming book?

I think it's probably more heavily weighted into the storage side of our business. What we're -- what's in the immediate near-term for the next three to four months, I mean, we're looking at some good awards, really, across a lot of our segments. But the big chunks of backlog, in our expectations, will come through storage.

And our next question comes from the line of Tahira Afzal from KeyBanc Capital. You may begin.

Hi good morning. This is [indiscernible] on for Tahira today.

Good morning.

Good morning.

So my first question, I guess, is regarding the bookings in the backlog. So I'm just wondering if, at least, the major ones there are fully permitted projects just basically wanted to get a sense of the expected ramp in the coming quarters.

Yes. The awards that we have in this -- the book-to-bill that we've announced, for the most part, I think they are all fully permitted, fully financed projects. Sometimes, what delays the starts of those projects after the awards may be final scoping decisions, finalization of contract terms and conditions? But then generally, the by the time it gets to an award to us, the permitting piece and the financial piece is completed and out of the way.

All right. Okay. That's helpful. And any color on the margin profile in the backlog? That would be helpful.

Yes. So I think the margin profile in the backlog is that the new awards definitely support the types of margins we've talked about from the historical margin range I gave in the script. There is some lower-margin work we continue to work on over the next couple of quarters, as John mentioned. But overall, the quality of the backlog is improving as we're going through the year.

All right. That's helpful. And I'm just wondering whether there was any weather impact for you guys this quarter on the margin. So it was just underutilization that makes -- particularly Storage Solutions, yes?

Yes.

It's fundamentally mixed. We got a higher which is a good thing. We got a high volume of maintenance work, which is generally lower margin, although it does have the opportunity to move overheads, and just a low volume of capital work, the timing of when those things got into the business to blend in and help support the maintenance activities just wasn't there, and the capital projects that we did have of multiple sizes weren't necessarily at the margins that we would like and, in some cases, at contingency levels that we would like that would create opportunities for great performance by our operating teams to drive margins up.

Yes. There may have been some weather impact in the job here and there, but I don't believe it was a significant driver to the overall results.

[Operator Instructions]. Our next question comes from the line of John Franzreb from Sidoti. You may begin.

All right. I guess a couple of quick follow-ups. Can you talk about the timing of revenue recognition on some of these projects, whether it falls proportionally into any quarter coming up? That will be helpful.

So I think on the, if you think about these projects, oftentimes, the first thing is, especially if we're doing the Engineering, is that Engineering worth? And that might be 5%, 10% of the contract. So usually, the first quarter or so after the award is a lower-revenue volume. And then you'll start hitting the field, and you'll slowly build up your team. So you may not hit full scale until the two or three quarters after a project award.

Okay. And can you talk a little bit about labor costs in some of your regions? Have you had difficulty bringing people onboard? Have you retained enough that it's not an issue for you?

I think it's continuing to be a competitive labor environment in specific spots around North America, but we have not had, we have not been challenged to-date to staff our projects with competent labor. I think that is certainly something that we and our peer group will wrestle with. As the market continues to improve here over the next 18 months to two years, that is something we have to be cognizant of when we consider the risks of the projects that we undertake. But to today, I would say that the labor any kind of labor restrictions we've had have been on us kind of a spot basis.

Okay. And [indiscernible] and maybe a longer-term picture here because I was wondering what you're thinking about the sustainability of some of the order book and what your overall overhead profile looks like in the different segments. Do you think that you're satisfied or that there might be a need to further rationalize some of the businesses based on some of the longer-term picture in some of the segments?

We've talked about in opening remarks. We've done some things over the last 12 months to try and streamline and provide some more efficiencies in the business. We have a few more of those, call them, internal projects that we're working on. I wouldn't say they're big, wholesale changes, but they're more kind of tinkering with the inner work into the organization, and those are things we're continuing to work on in spite of the increase in the backlog. Certainly, as the backlog builds, and we expect it to continue to build over the next and into the next fiscal year, there's going to be additional resources that, as an organization, that we'll have to look to bring in. We don't expect big changes in our sort of SG&A level costs. But certainly, in our construction overhead area, where the rubber meets the road with our employees that are executing the projects, there's going to be some additional costs there. But they're going to be into the projects and won't exasperate any kind of construction overhead recovery issues.

Yes. So while we may have some incremental cost addition to the overhead, I think it's you can feel pretty positive that it will be at a much slower rate than the revenue ramp rate.

Okay. Fair enough. And I think you mentioned earlier about an award in Mexico. Can you talk a little bit more about some of the international opportunity that you're seeing out there?

We're -- we had press released the Mexico award a month or two ago. So there's a tremendous build-out in the country in Mexico for liquid storage. They have about one to two days of storage capacity for the entire country as opposed to the United States, where it's more like 30 to 45 days. As they have privatized their energy industry, has created a lot of opportunity for not only companies that have energy assets in Mexico, but also other North American contract -- other North American energy companies that are wanting to build those assets. And so we see that as a significant growth area for us to take our premier tank brand into Mexico in the right projects with the right risk profile. In addition, there is opportunities for us in the Caribbean. We feel switching from coal and fuel oil into -- where power generating will be used with LNG and other natural gas liquids. So overall, our initial foray into international markets is going to be around our tank and storage and terminal brand, and it's going to be in some of that geographic region in south of Mexico and the Caribbean. But we are also looking for opportunities into South America as well, where we think there's opportunities for infrastructure expansion.

Would that necessitate some M&A or no?

Initially, no. Right now, we've got what we feel to be a very strong partner that we're working our first project with. I think we're going to kind of get delayed in the land down there. We don't have immediate intention to hire local labor. We're going to work with our partners on some of the labor piece and provide our expertise, engineering capability, in some cases, fabrication. And we'll take a look at that down the road as that market expands, whether we're going to continue to work in a partnership as a partnership or look for an acquisition opportunity.

And our follow-up question comes from the line of Tahira Afzal from KeyBanc Capital. You may begin.

Hi. I have couple of quick follow-ups. First one is regarding turnaround activity. Just going by the results of some of your peers, I have noticed that the traditional turnaround players, they have seen an uptick in the business, while for other players; it's been a bit mixed. So just wanted to know your thoughts based on your experience. Any thoughts as to why this discrepancy? And can you put things into perspective here?

So our turnaround activity has been on an upward trend over the last few quarters, and we expect that to continue into the fall turnaround season of our fiscal 2019. The number of turnarounds and the size of the turnarounds have gotten bigger. And we're very active right now and are pretty well engaged for turnarounds into next fall and, frankly, next spring. So there is strength returning there. I think there's some lot of wear and tear on our clients' systems that they have been minimizing those repairs over time. And so that is probably one of the factors, I think, that's leading to higher turnaround demand, plus the growth of off-shoring refined products from many of the key Gulf Coast refiners. Again, I think it's driving their demand to maintain their facilities and keep running.

All right. That's helpful. And last one on the LNG market, off late; we have seen a pickup -- a bit of a pickup in the activity levels there. I just wanted your thoughts on how Matrix is positioned to play in the next up cycle here, like the next wave of projects.

Right. So we're -- we've got sort of a two-pronged approach there. So on a large scale, LNG export terminals, we see our role there as a storage tank EPC storage tank provider into either direct to a client or to EPC -- large EPC contractors that don't have a tank storage solution. On a small to mid-scale facilities, they could be peak shaving. They could be small export facilities. We have the capability and capacity to provide that project on a full EPC basis. And so that's kind of our -- that's our two-pronged approach. I think our view is that the larger-scale export facilities' starts are probably still a year to two years away. That market that global market that global demand market is struggling between long-term supply agreements and spot market agreements. And with the spot market agreement -- spot market process, they -- it kind of shuts out the developers who require a large amount of third-party financing to get those projects put in place. And I think it opens up the door for more of the blue-chip energy companies that want to expand their LNG presence globally. But I think we'll have to wait and see how the supply agreements how that market kind of settles out here over the next 18 to 24 months. But we see a lot of activity in the small-scale, mid-scale and in peak-shaving opportunities.

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back to Mr. John Hewitt, President and CEO, for closing remarks.

Once again, thank you, everybody, for being on the call today and for being shareholders and certainly, to our employees, who are doing a great job out there to help build that backlog that we're enjoying today. So thanks, everybody. I look forward to talking to you in the next quarter.

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