Ladies and gentlemen, thank you for standing by, and welcome to the Matrix Service Company conference call to discuss results for the first quarter fiscal 2020. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your host, Kellie Smythe, Senior Director of Investor Relations. Thank you. Please go ahead, madam.

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 website. 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, 2019, 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, periodic SEC filings, 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, Kellie. Good morning, everyone, and thank you for joining us. Historically, we have started our calls with a safety topic. Beginning with this call, we are expanding the topics we will discuss to include a broader focus on environment, social and governance topics, which includes safety as well as other areas of importance to long-term sustainability. On this call, I'd like to highlight the obligation that I believe we as business leaders have to ensuring that those around us feel safe, both physically and psychologically, in the environments in which they work. In the past week, I was honored to join the CEO Action for Diversity & Inclusion initiative, the largest CEO-driven business commitment to advancing inclusion and diversity in the workplace. In doing so, we have pledged to cultivate a workplace where diverse perspectives and experiences are valued, expand education about unconscious bias, learn from and share both successful and unsuccessful practices aimed at creating an inclusive work environment, and engage our board of directors in the development and implementation of strategic action plans that drive accountability around inclusion and diversity. Across our organization, and in keeping with our core values, we are committed to ensuring an environment where our people feel safe and empowered and can openly address challenges, present opportunities and share perspectives. Doing so will not only fuel innovation, it will enrich our individual and collective experiences and drive success in every aspect of our business. Turning now to our business discussion, we were generally pleased with our first quarter results and, in particular, the strong performance and opportunity pipeline in our storage solutions segment. The performance of storage solutions this past quarter is a great example of the benefits we derive from our diversified business platform. This diversity is an asset that helps…

Thank you, John. In the first quarter, we produced revenue of $338 million, which was a modest increase of 6.2% over the first quarter revenue of $319 million last year. Our gross margin in the quarter was 9.6%, as compared to 7.4% in the first quarter of fiscal 2019. Overall, project execution was strong, but the consolidated gross margin was impacted by lower-than-expected margins on 2 projects as well as under-recovery of construction overhead costs in a couple of segments. Our SG&A costs were $23.7 million in the quarter, as compared to $21.2 million last year. The increase resulted from personnel investments to support our growing business as well as higher incentive compensation costs resulting from the improved operating performance. As a result of the revenue increase and the higher gross margins, pretax earnings improved 222%, from $2.8 million in the first quarter of last year to $8.9 million this quarter. Our tax rate this quarter of 30.6% was higher than the 27% we normally expect as a result of excess tax expense related to divesting of stock-based compensation. We still expect our fiscal 2020 tax rate to be 27% for the remainder of the fiscal year. Fully diluted -- the bottom line is the Company produced net income of $6.2 million, compared to $2.3 million in the first quarter last year. Fully-diluted earnings per share improved 175%. Our EPS was $0.22 this quarter, as compared to $0.08 last year. EBITDA for the quarter was $14 million, or 4.1% of revenue, and the prior year, our EBITDA was $7.6 million. Our backlog performance in the quarter was in line with our expectations. We had $322 million of project awards, which produced a book-to-bill of 1. We ended the quarter with backlog of 1.1. We have continued to capture a good…

[Operator Instructions] Our first question comes from the line of John Franzreb with Sidoti & Company. Your line is open.

I want to start with the storage side of the business, 2 consecutive great gross margin quarters. Can you talk a little bit about what's driving that and the sustainability at above the target range?

We've got a very good workload flowing through storage solutions currently, and it's a mix -- coming from a mix of a variety of different things and markets. So it's not only EPC work on full terminals, but it's also individual tank packages and maintenance and repair work and primarily includes storage tanks, which has really picked up over the last couple of quarters. So it's a combination I think of all those things coming together, and based on the pipeline of opportunities in front of us, we think we've got a good shot of that kind of level of performance to continue for the rest of the fiscal year.

And you kind of alluded to the fact that you expect to exit fiscal 2020 with backlog similar to where you began the year. Given your commentary about what's going on in the industrial side of the business and the recent results we're seeing in electrical infrastructure, that would kind of suggest that storage and oil and gas and chemical would have to pretty much carry the backlog bookings profile from now to then. Is there enough demand out there? What are your thoughts, John, about the opportunity pipeline now versus a few months ago? Has it firmed up in those 2 segments?

I think really the -- so storage and oil, gas and chemical certainly will provide good backlog growth. We believe storage will provide some of the larger project awards that are going to build in the backlog and provide more long-term visibility. But I think electrical has got -- I wouldn't sell electrical short. I think that we have a good run of opportunities there to have some good awards in electrical, both on the project -- on the power delivery side, but also on the power gen side. And industrial will be lighter for sure, especially for our mining and minerals and iron and steel clients, but we have some other things going on in industrial too. There are some fertilizer opportunities out there, and we're looking at working some for -- grain for export and some other things. But if you look through our business, storage and oil, gas and chemical will be good backlog builders for the organization, and electrical will come in behind them.

I guess one last question, on the share repurchase. Can you kind of talk about what your expected timing of the share repurchase is? And what does that say about the M&A pipeline? I know it doesn't take a lot of dry powder out, but is it saying that maybe just the multiples out there just aren't attractive? I guess address those 2 comments.

Sure. So we're -- as Kevin said, our intention is to purchase the $20 million worth of stock through the end of the second quarter. We do have limitations on how many shares we can buy on a daily basis, and -- but we think we can get to the total number of shares that the $20 million will provide us by the end of the fiscal year -- I'm sorry, by the end of the fiscal quarter. On the M&A front, we're continuing. This does not change our perspective on finding the right M&A targets. We've had -- this quarter, we've had a couple of deals that we've looked at, have done a bit of work on, but the -- either we did not like the pricing fundamentals or were unsure of the culture fit into our organization. So this doesn't change our desire to do that, but what it does say is we don't have anything imminent within the next quarter that we're going to have to go plop a lot of money down on. But we continue to be active, and we're continuing to look.

Okay, thanks guys. I'll get back in the queue.

Thank you. And our next question comes from the line of Bill Newby with D.A. Davidson. Your line is open.

Good morning thank you. I guess any more color on the -- I guess the capital project that caused the shortfall in oil, gas and chemical and industrial? Kevin, I think you said that oil, gas and chemical was kind of in the middle of commissioning, so maybe that one is completely behind us, but just I guess expected timelines in terms of finishing both of those projects?

This is John. In the oil, gas and chemical segment, the project that we're talking about, which we really can't give a lot more information on, but that -- we're going to be substantially complete by the end of this calendar year with that. So when we were in startup phase and commissioning, we had a piece of skidded equipment that had some technical issues, and I'll leave it at that, that we are working through, and so -- but the result of that caused us to take a charge on the project so that we could get that thing fixed and get the client up and running.

But I would like to add that that's still a good project for us.

Yes. Yes, still has double-digit margins.

Yes.

And on the electrical side, the transmission and distribution project as part of our organic expansion strategy, a project that we picked up, has had some challenges with weather, labor availability and some other things, and so it's caused pressure on the margin, obviously, that we had to -- felt as though we had to take a charge on. And that job is 60%-ish kind of completed, but it'll be continuing to work through the second quarter and I think partially into the third quarter.

John, does that -- I mean, just with the difficulties you guys have had on that project, do you re-think how you're approaching the organic expansion of that business?

I don't think so. I mean, when you're doing inorganic expansion for businesses and you're moving into service territories that maybe you haven't worked in before or with clients you haven't worked with before, they're going to create a little more challenges than you would if you're kind of a hometown contractor. So it's unfortunate and certainly is not what we want, but it's not something that changes our vision, long-term vision, for the business. It may heighten -- I mean, it heightens the need for acquisitions in that space to be able to attract labor, client, experience, geographic experience. So it highlights -- I think it highlights the importance of the M&A side of that expansion, but it certainly doesn't change our vision for what the future of that segment looks like.

And then just another one on the storage business, if I could. Is there -- I understand that execution has been great across the board over the last couple quarters, but is there maybe a pricing element to these margins? I mean, we've talked a lot about the competitive environment with some of the kind of issues that the bigger competitors in the space -- I guess I'm wondering if we're starting to see you guys benefit from kind of being the only ones in this space that haven't experienced issues.

I think that's part of it, right, and part of it, I think it's opened up some more opportunities for our business on some projects, small and large, that before we might not have gotten a second look from, from some clients. So I think that has benefited us. There's a lot of activity, which is helpful on the margins. You get -- especially on the tank work, you sort of get into a cadence and run when you're going from tank job to tank job to tank job. It keeps our people together, they continue to gain more experience, we can continue to look at better ways to do things, and I think that has a lot to help -- does a lot to help with the overall performance as well. On some of the larger capital projects, we're -- it's generally a shorter list of competitors, and many times we're involved upfront with the client on the feed work. We're doing the engineering, so we're able to kind of control our destiny a little bit better when we have control over the engineering, all the fabrication and all the equipment deliveries, and I think -- so when we do a very, very good job on the front end of those projects, they really help us perform well when we're in the field.

I also think this demonstrates why we held onto talent during the downturn and why we've been adding talent into the organization over the last 12, 18 months as we saw backlog increasing.

I guess just on that topic, one more, if I could. I mean, that business is expected to kind of keep growing here through the end of the year. Is there -- are you bumping up against capacity constraints from a labor perspective at all, or do you feel pretty comfortable about you guys' just capacity to keep growing that business?

No, we feel very good about where we are from a capacity standpoint. Plus, a lot of these projects, it's timing of how they all flow together. And as projects are -- or as pieces of projects are unwinding, our crews move from a project to a project where they're maybe winding up, and so, no, we feel very good about our capacity, and we're looking for more. So we've got plenty of people, and we want to keep them busy.

And our next question comes from the line of Noelle Dilts with Stifel. Your line is open.

So, John, I think you maybe talked about this with us when you reported the fourth quarter, but as you look at the higher end of your guidance versus the lower end, what are some of the things that have to come through to get to the higher end, and what are some of the concerns that are kind of built into the lower end of that guidance?

Concerns would be how is the current economic and political environment going to affect the spending plans for many of our key clients. And so we're in pretty good shape this year for -- as we move into the year from where we are from a backlog level, and for us to -- for this fiscal year. So the question really is how is that going to impact bookings and then those bookings going into our fiscal 2021. The upside of it is we need to not have a couple of margin fades on projects. Some of the projects out there that we see, actually their bookings accelerate where we're able to move some of those revenues into the back half of the year. That'll create opportunity on the upside of the guidance range. So it's really about -- it's probably really about the -- more than anything, it's about the timing of awards. So we're in good shape for the year, and we'll continue to have sort of what we like to call a ham-and-egg quarter, quarter-over-quarter, like we had this quarter. I mean, having a multiple of 1 in this quarter, there wasn't really a lot of big projects in that. It was just kind of smaller stuff and maintenance deals and expansion on some of our existing projects. So those would be the kinds of quarters I think we're going to have here until we get into the second half of the year. So then the timing of awards on some of the bigger projects we're tracking and bidding on and working with clients on, if that stuff comes sooner than what we currently are planning, it'll have a tendency then to drive up, of course, revenues and margins.

And then could you just expand a little bit in terms of what you're seeing around labor availability and any wage inflation and your ability to pass that through? Just trying to get a sense of what you're seeing generally in the labor markets.

We've been -- in general across our business, we've been pretty effective at attracting labor to all of our projects. With a national footprint, we're able to really draw labor from coast to coast. Wage pressure has been -- wages have climbed up, but they haven't been -- hasn't been extreme changes in wages that were unexpected. In general, we're either able to build escalation into our projects or we pass that escalation risk onto our clients in our contracts. And where we're probably having some of the most pressure on labor is related to linemen, and so that's some of the things this year that we've seen on this project in electrical infrastructure that we took a charge on, and linemen are a very scarce resource. In the country, the demand is very, very high with all the infrastructure needs. Again, when you move into a new service territory, the linemen that work in that area are pretty much wed to the local contractors that have a steady base of operations there, and that's what makes the acquisition piece of this so important. In our Northeast part of our business where we've got a steady presence, we've got steady crews, and we're able to combine our linemen with what we call inside electricians on a lot of our projects to get a kind of more robust labor pool. But I think it's something we're continuing to watch for -- across the entirety of our business, and we're -- to date, we've done a pretty good job of managing the -- our demands of labor.

Thank you. And I'm not showing any further remarks. I'll now turn the call over for closing remarks.

I want to thank everybody for joining us today, and I appreciate the good questions. And we look forward to talking to everybody at the end of next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.