Matrix Service Company (MTRX) Q1 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Matrix Service Company Conference Call to discuss Results for the First Quarter of Fiscal 2019. At this time all participants are in a listen only mode. Later we’ll conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the call to today's host, Ms. Kellie Smythe, Senior Director of Investor Relations. Ma'am, you may begin.

Thank you. Good morning, and welcome to Matrix Service Company's first quarter earnings call. Participants on today's call will include John Hewitt, President and Chief Executive Officer and Kevin Cavanah, Vice President and Chief Financial Officer. The presentation materials we will be using during the webcast today can also be found on the Investor Relations section of the Matrix Service Company Web site. Before we begin, please let me remind you that on today's call, the company may make various remarks about future expectations, plans and prospects for Matrix Service Company that constitute forward-looking statements for the 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, 2018, 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, Kellie, and good morning, everyone, and thank you for joining us. In this morning's safety moment, I'd like to remind our employees of a few things as we work through fiscal 2019. As you know, in fiscal 2018, for the second consecutive year, we issued a company-record safety performance with a total recordable incident rate of 0.49. In this fiscal year, we are currently on pace for continued improvement along our journey to 0 safety incidents. With an increase in current projects, a strong backlog and a robust opportunity pipeline, our workload has and will continue to increase. We have greater numbers of employees on our job sites and a greater number of hours being worked. It is imperative that we stay mindful of the fact that as our workload increases, so do the risks. As we move through what promises to be a very busy year and beyond, I ask that you lead by example. Put safety at the forefront of everything you do. Be accountable. Follow all policies and procedures in planning and executing work and come together to address and correct any issues that arise. Above all, stay focused. Don't allow yourself or others to be put in harm's way or to become complacent or distracted from the task at hand. Before we review our first quarter results, please join me in thanking retiring Chairman of the Board, Tom Maxwell, for his many years of leadership. Tom was first elected as a Director of the company in 2003 and retired as our Chairman on October 30, 2018. In his 15 years of service, Tom has served our company with great distinction, has helped guide Matrix through a number of noteworthy acquisitions and growth initiatives as well as challenging business issues and end-market cycles. His senior leadership expertise in the construction and energy industries including his experience as both a CEO and CFO have been invaluable. It has been a privilege to work closely with Tom. And on behalf of the entire board and our more than 5,000 employees, we thank him and wish him well on his future endeavors. We also look forward to the leadership of our new Chairman, Jim Mogg, who joined the board in 2013. Jim brings a long history of service as a Senior Executive, including as CEO, with significant knowledge of the energy industry and corporate governance through other directorships. Turning now to our first quarter performance and outlook. I want to pick up where we left off on our last call. We began fiscal 2019 with a much stronger market conditions and a healthy opportunity pipeline; a backlog of $1.22 billion, the highest in nearly three years; and expectation of a modest improvement in the first quarter with revenue volume and margins improving each quarter as we move through the year. Our first quarter results reflect those expectations for both revenue and earnings per share. Project awards for the quarter were lower than expected due to customer timing delays, which, as you know, are inherent part of our business. That said, our diversified business model continues to serve us well as the near-term and extended outlook across our markets remains strong. Our current backlog and near-term opportunity pipeline across the business supports our revenue guidance for this fiscal year, and we are confident that our year-end backlog will continue to support our long-term growth aspirations. In our Electrical Infrastructure segment, high-voltage and related electrical services are a priority with strong market dynamics nationally. Our organic growth strategy in this area is gaining traction, and bidding opportunities have improved significantly not only in our core markets, but in targeted expansion regions as well. We are also exploring potential acquisitions that will provide for faster growth in future periods beyond the Northeastern and Mid-Atlantic geography where our strong brand has made us a leading provider of high-voltage and related electrical services and a contractor of choice to both public and private utilities. We also continue to see our fair share of power generation packages that fit our legacy expertise and risk profile. In our Oil Gas & Chemical segment, our turnaround and plant services teams are seeing a strong fall season across the Gulf Coast, West Coast and Midwest. Execution teams are working to safely complete additional discovery work as the fall turnaround season comes to a close. We continue to see improved spending and have several commitments for large cycle ending events in the first half of calendar 2019. Ongoing planning efforts suggest an even stronger spring turnaround season with greater opportunity for scope and revenue growth. The rising global demand for natural gas, coupled with its abundance across North America shale plays, has led to a need for rewiring and expansion of infrastructure in order to move product to market. Growing brand awareness of our recently acquired engineering expertise in this area is allowing our teams to make inroads as we pursue the multitude of project opportunities available. Traditionally, our teams have provided engineering, procurement and project management services on gas-processing facilities and related balance of plant infrastructure, leveraging expertise in traditional and modular construction to meet increasingly aggressive project schedules. Most recently, we have provided these services on three facilities for Energy Transfer as a revolution plant supporting operations in the Marcellus and Upper Devonian production areas of Western Pennsylvania and its Arrowhead facility in the Permian. In addition, another midstream gas-processing company has contracted us for 200 million cubic foot per day cryogenic gas recovery plant located in the SCOOP play of Southern Oklahoma's Woodford and Springer Shale formations. Abundant natural gas has also led to continued revitalization and expansion of the U.S. petrochemical and chemical industry. This, coupled with EPC industry consolidation and structural changes in the competitive dynamic, creates significant opportunity for Matrix as we extend our expertise in capital construction, specialty vessels, turnarounds and plant maintenance to these industries. And our Storage Solutions. On our last call, I was asked about our project pipeline and what we're most excited about in fiscal 2019. My answer then and now is all things storage. This enthusiasm is supported by both recent project awards and a robust opportunity pipeline for crude oil, aboveground storage tanks and terminals; increased activity in spheres and other specialty vessels for LNG, NGLs, including butane, LPG, propane, ethane, ethylene tanks and related balance of plant. In the LNG space, specifically, our leading position in the engineering and construction of low-temp and cryogenic storage tanks, coupled with recent structural changes in the EPC competitive dynamic, has provided Matrix with significant opportunities. Matrix remains a strong contender for the storage tanks' emulated battery limit to plant on a number of a larger LNG export facilities currently proposed to be built. Based on our market and project assessment, the value of this work to Matrix could exceed 3.1 billion. We are also uniquely positioned as a leading contractor of choice for small- to medium-sized LNG facilities across North America and the Caribbean, which represent more near-term project opportunities. Unlike the large LNG export facilities, small- to medium-sized LNG terminals are being used for transportation fuels in Marine, part of addressing the mandates for IMO 2020 as well as the rail and truck. Facilities are also being constructed to provide feedstock for remote power gen facilities and to store backup fuel used by utilities during high-demand periods. Represented examples of this work include Eagle LNG's Maxville Terminal in Jacksonville, Florida, where Matrix provide EPC services for the 1 million-gallon LNG tank and constructed to provide Crowley Maritime with fuel for its LNG powered ships; JAX LNG's new liquefaction and storage facility at Dames Point, Florida where we completed an EPC of a 2 million-gallon LNG tank to support dual-fuel container ships and provide direct access to LNG fuel, eliminating the need for truck to ship bunkering; and lastly, Southwest Gas Corporation, where Matrix is the EPC contractor for an LNG storage and vaporization facility in Southwestern Arizona being built to improve gas supply reliability. Currently, in small- to medium-sized LNG facilities, our teams are pursuing more than 1.3 billion in project scopes with anticipated award dates in the next 12 months. We have a strong competitive position in this market, and the time line fits nicely with anticipated completion dates of current projects and backlog. In Industrial, where we hold a premium position as a leading contractor in iron and steel, both our current project workload and opportunity pipeline show significant strength for the foreseeable future as manufacturers upgrade and build new facilities to support growing demand dynamics. Beyond iron and steel, our Industrial segment also accounts for work in a variety of other areas, including mining and minerals and bulk material handling. In addition, Matrix holds the leading position in the engineering and construction of thermal vacuum chambers, with a legacy that reaches back to 1961 and a pedigree that includes more than 70 vacuum chambers today, far exceeding our nearest competitor's experience. In this area, we have also seen a significant uptick in request for bids, fueled by aerospace companies that are gearing up for the next generation of communication and GPS satellites as a result of increased use in telecommunications, military applications, transportation navigation systems and other sectors. With two currently under construction, our engineering teams are tracking four additional prospects, one of which is already in FEED. Additionally, as a result of our expanded engineering capabilities, we are seeing more opportunities in other industrial terminal markets, such as cement and miscellaneous bulk materials that we support with our material-handling capabilities and Marine structures expertise. In summary, we are pleased with our progress as we continue to recover from the projected downturn in the markets over the last few years. As we look forward, the opportunity pipeline is strong across each of our operating segments. And accordingly, we expect continued improvement in revenue, gross margins and earnings per share as we move through fiscal 2019. I'll now turn the call over to Kevin.

Thank you, John. I want to start with the significant takeaways from our first quarter. First, operating results this quarter are within the range of our expectations from both the top line and earnings perspective. As a result, we are maintaining our fiscal 2019 revenue and EPS guidance. Second, the revenue ramp that began in the fourth quarter of last year continued in this first quarter. Our quarterly revenue has increased over the last three quarters from a low of $246 million in the third quarter of fiscal 2018 to $293 million in the fourth quarter and now to $319 million in this quarter. This trend is the result of the increased backlog, which is up more than 50% from this time last year and overall improved market conditions. We expect the revenue trend to continue as we move through fiscal 2019. Third, the gross margin of 7.4% we produced in the first quarter is not indicative of the normal margin you should expect from us. This quarter's margin was impacted by the work-off of lower-margin work bid in a highly competitive environment in prior periods as well as lower than previously forecasted margins on some of those projects. As we continue to work off the lower-margin work and ramp up the revenue volume from the newer backlog, our gross margin should increase as we move through fiscal 2019. Lastly, our book-to-bill was 0.7. Backlog remains elevated at over $1.1 billion as compared to last year's backlog of $729 million. This 52% increase in backlog is the result of a strong award cycle in the back half of fiscal 2018. While our project intake was not as strong this quarter, it did include strategically significant awards such as projects supporting the gas value chain. We have also talked in the past that backlog should be viewed on a long-term basis. We will have a quarter -- a lower quarter now and then as projects then shift from one quarter to another. Over the last 12 months, we have had over $1.5 billion of awards, which is indicative of the strength of our markets, and as John mentioned, our markets continue to be strong and present significant opportunities for growth. Now I'll discuss specific results from the first quarter as compared to the same period last year. Consolidated revenue for the quarter was up 18% to $319 million compared to $270 million last year. Our Storage Solutions and Industrial segments saw significant improvement this quarter. This strength was partially offset by lower revenue in the Electrical and Oil Gas & Chemical segments. The company reported a consolidated gross profit of $23.4 million during the quarter compared to $28.9 million during the first quarter of the prior year. As I discussed previously, our overall gross margin for the quarter was 7.4% compared to 10.7% in the prior year, which benefited from closeouts on projects that we booked prior to the downturn. As we move through fiscal 2019, we expect gross margins to improve on higher revenue volumes, the improved margin profile of our backlog and the resulting improvement in construction overhead utilization. Consolidated SG&A during the period was $21.2 million compared to $21.6 million 1 year ago, basically flat on a year-over-year basis. We are focused on controlling our cost structure during the downturn, and we'll continue to do so as we grow our business. As revenues increase, certain overhead cost will increase as well. However, we expect to positively impact our bottom line by leveraging our overhead structure. Our effective tax rate in the quarter of 16.4% was lower than expected due to excess tax benefits related to the vesting of stock-based compensation awards that resulted from an increase in our stock price. We continue to expect normal effective tax rate to be approximately 27% for the balance of the fiscal year. Now let me talk briefly about first quarter segment performance. In our Electrical Infrastructure segment, revenue of $45 million was well below the prior year level of $80 million. The lower revenue was driven by the expected decline in EPC power generation work. Gross margins in the quarter were 7.6% as compared to 10.3% last year. Gross margins in the quarter were negatively impacted by under-recovery of construction overhead as a result of lower revenue volume. We've previously stated that we expect improvement in this segment, but that the timing of our core market recovery and the benefit of our geographic expansion could be slower to materialize. Based on the current market environment, our long-term margin expectations for this segment remains at 9% to 12%. In the Oil Gas & Chemical segment, revenue was $75 million compared to $86 million 1 year ago. The revenue variance was a result of lower capital work that was partially offset by higher volumes of maintenance and turnaround work. Current quarter gross margins of 7.5% were impacted by higher levels of lower-margin maintenance work, while prior year margins of 12.9% benefited from positive project closeouts and a favorable mix, including an increased level of engineering work. As a reminder, our expected margins for the segment are between 10% and 12%, and we expect to be in this range in the second half of the fiscal year. Storage Solutions produced revenue of $113 million compared to $71 million in the prior year. The 59% increase was driven by higher volumes of tank and terminal construction activity as well as tank repair and maintenance work. For the reasons discussed previously, gross margins in the quarter were 8.5% as compared to 10.6% in the prior year. We continue to expect margins to ramp to a normal gross margins range of 11% to 13% as we move through the year. The Industrial segment delivered yet another solid quarter. Revenue of $86 million was significantly higher than $33 million in the prior year. The increase was driven by the rebound in order from our iron and steel customers that began in early fiscal 2018. Gross margins of 5.7% compared to the margins of 6.1% in the prior year. This quarter margins were impacted by a project near completion that incurred some cost escalation. With that said, the majority of this segment is operating within our margin expectation range of 7% to 10%. Moving on to our balance sheet. During the quarter, we increased beginning cash balance of $64.1 million by $10.6 million, primarily as a result of cash generated from operations and from the disposal of noncore or excess assets. Our financial position is strong as we ended the quarter with $74.7 million of cash, only $1.5 million of debt and total liquidity of almost $130 million. With our current -- while our current liquidity is sufficient to support our business, we expect liquidity to improve through the course of the year, consistent with operating results. Finally, on guidance. Based on our first quarter performance, the improving earnings trend and our strong backlog, we are maintaining the guidance we previously provided. We expect full year revenue in the range of $1.25 billion and $1.35 billion and earnings per share of $0.85 to $1.15. We will now open the call up for questions.

[Operator Instructions] And our first question comes from the line of Tahira Afzal from KeyBanc. You may begin.

So as you had telegraphed earlier on, John, seems like a back-end loaded year. Just so that we don't get ahead of our skis, how back-end loaded should we think? If I look at my estimates right now based on all your commentary, it seems like we could be getting 65% to even 70% of -- the midpoint of EPS in the back half. So what -- would that be the right way to think about it?

Yes. Tahira, I'll take that question. I think that's right. I think we would expect the second quarter to be better than this first quarter. We're expecting continued growth in revenue as those projects and backlog ramp. But I think that will really peak in the last half of the year. So we see top line, gross margins and EPS all ramping through the year.

Got it, Kevin. And then just based on that and even just taking your midpoint, it seems you could be exiting the year with an earnings power of $0.40, even $0.50. Is that something based on your commentary it seems like you can maintain going forward?

It's -- yes. I think that your math is correct. And with these markets -- the big markets that we have right now, we feel good about the future. I mean, obviously, we're not giving any guidance on fiscal 2020, but there's no reason at this point to think that, that's a year that's going to retrench.

And John, I don't know if I'm reading too much to your commentary. You're all balance, and you sounded slightly more upbeat on maybe perhaps the LNG side. Some of your competitors are distracted right now. Is this an opportunity for you to grab shares?

I think saying some of our competitors are distracted right now is probably a good qualification on your part. So yes, I think that, that's creating opportunities for us to gain market share. I think some of the awards that we've seen over this last six months related to specialty vessels, whether those are spheres or some of the ethane tanks, I think, is partially related to that distraction by some of our competitors as well as just overall strength in the market.

And any sort of interest in pipe fab or tanks business? The tanks business is pretty awesome, but obviously, overseas it might be a little too much for you. We would love some thoughts.

Yes. I think our thoughts around the divestiture of the CB&I assets are probably in a couple of areas. First of all, our thoughts go to the employees. So they've been through a lot of instability over the last couple of years. And I'm sure that's something that they've got to be looking forward to as having a stable place, a stable home for their business that they've spent a lot of time working to build. So our thoughts go to that. Two is we talked about what that means from a market disruption to us and how that could possibly impact our business. And so we have to be thoughtful on how we would take advantage of that. And then three, honestly, we don't have really enough information, what it is in the assets of CB&I and of the tank business and in the pipe business. Certainly, we will want to investigate and understand what it is. But as of today, we have no definitive plans one way or another.

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

I guess, I'd like to start with the electrical business. The revenue profile in the quarter was a lot lower than I expected. But the gross margin profile was surprisingly strong, at least compared to the two prior quarters. Can you talk about what's going on in that business?

Yes. So from a margin profile, I'll start with that and then I'll turn it over to John. But from a margin profile, the biggest driver to the revenue decline is our exit from doing EPC power generation work. While a lot of those assets that were devoted to that we're able to shift to the other projects that are maybe in other segments. So it's not a situation where we have a bunch of stranded overhead as a result of that decline in revenue. And while we did have some under-recovery because of the low revenue, it kept us from having a huge under-recovery. And that would have had a bigger impact on the margins in the segment. So the margin performance in the mid-7s was okay for that segment.

Yes. And we're seeing increased activity in our core markets bidding activity in substations and our traditional related high-voltage electrical services. And so we feel good about that. And really, that really kind of really start to strengthen during the Q1. So some of the backlog and awards this quarter are related in the electrical segment, and we're expecting that strength and award activity to continue this year. And we'll start to see some of that start to flow to the business as we move into future quarters. And we've just kind of kicked off a couple of electrical package jobs that were going on some power generation facilities in the Northeast. And then our expansion west of the Allegheny Mountains per se is that we're actively bidding the work in the Midwest and down into Oklahoma and Texas with a couple of public utilities. And so that process, we're pretty happy about. That process is going, and the opportunities, those moves we're starting to forecast. But they have not hit the revenue line yet. We would expect the whole to start building into the revenues in the next couple of quarters.

So where did you reallocate those assets? And if you get those awards on your geographic expansion program, we have to bring it back -- do you have to -- what's your thoughts about it, addressing...

As Kevin had mentioned, some of those people who were working on some of our power generation work are now -- some of them are working in industrial, some are working in storage, so project management, superintendents, cost engineers, that's a very transferable skill set throughout the services that we provide. So they've moved from one project to another. So for instance, we -- last year, we had notified we've been awarded a big galvanizing line, steel job for a client in the Midwest. And as that job ramped up and the Napanee job started to close, a lot of those people went from that job to the next. And that's pretty common in our business. I mean our -- outside of some specialties that we have, but a lot of our skill sets are transferable between different segments.

That's good to hear. And John, you seem like you're suggesting that the spring turnaround season would be better than expected in Oil Gas & Chemical. Can you just talk a little bit about that and your confidence levels?

Yes. I think our teams are feeling pretty confident about that. We're already engaged with a number of clients, especially, our core clients that are doing planning and budgeting for those turnarounds. And those will convert into projects probably after the first of the year as they start to gear up to do those turnarounds. But based on what we're seeing, the expectation is the scopes will be a little bit larger than what we've had in the past. And the opportunity for scope growth, once we get into the actual turnaround, is probably higher. That opportunity is higher than it has been in the last couple of turnaround seasons.

And moving into Industrial. I guess, a couple of questions. What are your thoughts about -- just kind of round trip a little bit in some of the -- a lot of the commodities market? So how does that impact you, say, in copper? Also, what are your thoughts about spending in steel? And actually, I have a more granular follow-up when you're done with those.

Yes. So in copper, the price was above $3 a pound for a little while earlier this calendar year. And that was generating a lot of bidding activity. I think the copper miners were feeling pretty good about their markets. That since fallen off into the -- I haven't looked recently. I think it's around $2.75, $2.80. There's still heavy bidding activity and proposal activity. And so we're still cautiously optimistic that, that market is going to continue to improve for us. Our teams really in that, that would service that market are really busy right now with some other segment work, again, the transfer of assets. But we expect probably over the next 12 months that, that market will get stronger. The demand for copper, we think, long term on a global basis will continue to be there as the economies across the globe continue to produce. So it's a place we still want to be, and so we have -- we're optimistic about the long-term benefits there. And in iron and steel, I mean, obviously, the tariffs have been important to that, to keep steel prices up. The demand for steel with things that are going on in other segments of the economy is strong. And so we see a fairly long-term opportunity here in that business for us to continue to generate the revenues. We've worked with a number of clients to start up some of their shuttered pieces of their facilities. Some of that was what helped drive revenues in the first quarter here. We're bidding some larger projects with a couple of the integrated iron and steel producers for different pieces of their facilities where they're either adding capacity or upgrading their capacity that they have. And so we feel pretty bullish about our position there. And we've got a very strong position -- grand position with the integrated iron and steel producers.

And one last question. You talked about material handling as a subset of the Industrial segment. Are you just limited to the aggregates side of the material handling? Or do you do other aspects of it?

So we don't do -- and one of our engineers may come -- run down here after this call and correct me, but we don't do pneumatic-related material handling. But yes, it's more bulk material handling with conveyor-type applications.

Thank you. [Operator Instructions] And I'm showing no further questions at this time. I'd like to turn the call back to John Hewitt for closing remarks.

Thank you, everybody, for joining our call today. And I wish everybody a happy holiday season and -- a happy and safe holiday season. And look forward to speaking with all of you in the near future. Thank you.

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.