Ladies and gentlemen, thank you for standing by, and welcome to the Matrix Service Company Conference Call to discuss results for the Fourth Quarter Fiscal 2020. At this time, all participants’ lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Kellie Smythe, Senior Director of Investor Relations. Thank you. Please go ahead, ma'am.

Good morning, and welcome to Matrix Service Company's fourth quarter and fiscal 2020 year-end 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 referring to during the webcast today can be found under Events and Presentations on the Investor Relations section of the matrixservicecompany.com 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 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, 2020, 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. Before I begin, I would like to once again express my thanks to all of our employees. This has been a very tough environment to work in, and our team has truly outperformed. Our project execution has not suffered, and our strict adherence to health and safety protocols has ensured our first priority, the wellbeing of our employees. We reacted quickly to the health and safety conditions brought about by COVID-19 to protect our employees, suppliers, and clients. We also made significant changes to our organizational design and cost structure to improve our business performance. And finally, recognizing the generational transformation that pandemic has and will continue to have in our markets, the economy, and our lives. We began to reshape our end-market strategy to find growth opportunities, sustainable work activity, and improved bottom line results. I am exceptionally proud of our leadership teams and diverse employee base as they demonstrated flexibility, resolve, innovation, and foresight in the face of the most challenging global market conditions of our time. While Kevin will review the details of our fiscal 2020 fourth quarter and full-year financial results, I would like to share my perspectives on the year as well as more about what we see for the future. Fiscal 2020 was a challenging year for Matrix Service Company, our industry, and our clients. Throughout the year and despite significant challenges, Matrix Service Company achieved strong direct margin performance across most of our operating segments. We grew our market share in LNG peak shaving facilities and bunkering, natural gas processing and renewable energy like hydrogen and ethanol storage, strengthening the Matrix brand in these markets. Further, we continue to dominate in crude-related storage and terminal markets. We also made important business…

Thank you, John. Before I discuss the operating results, I would like to cover a couple of unusual items included in our income statement. As John discussed, fiscal 2020 has been a turbulent year for the business. Through the first half of the year, much of our business was performing well. However, in the middle of the year, we announced our exit of the domestic iron and steel business due to a downturn in our outlook for that business, which led to an impairment of $13.6 million. We also announced an impairment of $24.9 million related to the underperforming power delivery business within the Electrical Infrastructure segment. At that time, we commenced a business improvement and restructuring plan to address the operations of the power delivery business and to adjust our cost structure related to the exit from the iron and steel business. Late in the third quarter, as COVID-19 escalated and impacted our entire business, we expanded our cost reduction efforts to cover the entire company. We are substantially complete with these restructuring activities. During the year, we incurred $14 million of restructuring costs, including $7.5 million in the fourth quarter. To help understand the impact of the impairments and restructuring to the operating results, we have provided this table that reconciles between our reported GAAP EPS and our adjusted EPS. For the fourth quarter, we produced a diluted loss per share of $0.22. Excluding the restructuring cost, our adjusted loss per share was $0.01 on revenue of $196 million. Considering the significant reduction in revenue volume in the quarter as the result of COVID-19 environment, producing near breakeven results was a significant achievement. That was the result of strong project execution and significant cost reductions. For the year, we produced a GAAP EPS loss per share of $1.24.…

Thank you, Kevin. Before we open the call for questions, I’d like to be clear on three points. First, our people focus will be strong and intentional as we continue to be relentless about the health and safety of our employees, clients and business partners. Our diversity, equity and inclusion initiatives will set the standard in the industry, creating not only lasting impact and the success of the company, but in the communities in which we work. Next, our streamlined business structure, reduce costs and strong balance sheet will set the foundation as we navigate these challenging markets. It will also be our foundation for growth and expansion across our new operating segments. And finally, despite the significant challenges we have encountered in the uncertain market ahead, we are confident that Matrix will exit this period stronger, strategically focused, and successful on our ability to achieve long-term growth objectives. With that, I’ll open it up for questions.

[Operator Instructions] Our first question comes from Brent Thielman with D.A. Davidson. Your line is open.

Great. Thank you. Good morning.

Good morning.

Good morning.

John, Kevin, I'd be interested to hear your thoughts around the competitive bid environment today, presuming bid margins are under some pressure a bit. I think it'd just be helpful to hear you put it in context of what you've been through during prior down cycles? And then also, what you all are doing to ensure your teams are also after the right work?

Yes. I think, like, most of the activities in our portfolio, the smaller projects generally collect more competition, and when there's a limited amount of maintenance and project opportunities that has a tendency to drive not only the competitive pressure up for reduced margins, and those margins are usually not necessarily the gross margins that we might sell a job for, but the ability to carry more contingency and other risk items in those projects. And so from that perspective, the competition right now is pretty stiff. Our clients are both on the smaller projects, maintenance opportunities on larger projects, or in some cases taking advantage of that situation by trying to move the pendulum on the commercial terms and conditions, put more risk down on their contractors. And so we have those two things that were – that I’m fighting with. It's not something that's unusual. I think that those – both those things happened and sort of downward – when there's downward trends in our industry and things that we're used to dealing with. We've got a very good risk management process, especially on the larger contracts where there's less contractors involved, where – on the larger contracts, we've got – we're competing against other big contractors. They got the same risk policies and practices that we have and aren’t willing to do what we say foolish things. And so, we manage that pretty well I think as an organization. We’re not willing to chase projects, especially high-risk projects to the bottom. So, I think we've done a pretty good job of managing our way through those commercial drivers as a business.

Okay. I appreciate that. The electrical business and the efforts you made, I guess, starting 2Q to improve the performance of the business, it seems like a pretty good market out there in that segment. I mean, would you expect to see bookings and backlog start building in that business from these levels with the new team you've got in place now?

Yes. So we've got – the fourth quarter was – like a lot of our businesses, the opportunity pipeline fundamentally shutdown, particularly where our service territories are in the Northeast. And our clients for the most part are pretty either distracted on their own pandemic relief efforts or we had – projects were delayed because clients didn't want to put too many people onto a restricted site. But we – as we moved into Q1 of fiscal 2021, we started to see a lot more bidding activity and we're winning more work at good margins. And so, I would expect to see as you move through the year, not only the environment getting a little better in our territory, but also the business development and management changes in that section of our business start to bear some fruit.

Okay.

Long-term, we do want to grow that business, and so we are going to be actively looking for acquisitions in that market both in our current service territory, but more specifically outside of that territory to gain more scale in that business.

Okay. Great. The push on the renewable side, any set targets you're looking to get to for that is a portion of Matrix? I hear a lot going on, on that side of the business, but just thinking about that over the course of the next few years, just wondering how large that can be for you.

Yes. So I mean, when you talk renewables, it spreads across a bunch of different things. So it's renewable generation, electrical generation, it’s renewable interconnectivity, it is renewable energy and hydrogen and biofuels. And so there's a lot there and so I think what we're trying to let you guys know today is that directionally that's an area where we're headed. And we think that to some extent the pandemic has accelerated what was eventually going to be a bigger market in North America. And so we want to get out in front of that curve a little bit. And so as we work through specific plans and investment opportunities there, we'll give you guys kind of a better feel for what that could look like within the organization, but the segmentation change we made and what's going to go into those segments is meant to give you some perspective directionally where we're headed.

Okay. Maybe just one last one for me. As you think about – once again, you come into this cycle with great balance sheet. Can you talk about your views on stock repurchases versus thinking about some inorganic opportunities out there? I know you suspended that repurchases back in March, but the stock below book value here, just curious what your thoughts here are? Thank you.

I mean, as we continue to – we suspended stock repurchases fundamentally because we are trying to manage our cash. And we didn't know, like a lot of people didn't know what this pandemic was going to look like, how badly it was going to impact the economy. And so as that starts to improve, we get more visibility, we're going to weigh those purchases against acquisition opportunities that are out in the marketplace. And so we'll make that decision out there in the future. But it's certainly – I mean it's on our radar screen. We appreciate the fact that where the price of the stock is, and we're going to balance that against the other things that we have gone.

Okay. Thank you, guys.

Thank you. [Operator Instructions] Our next question comes from John Franzreb with Sidoti. Your line is open.

Good morning, Kevin and John. Guys, I wanted to touch up based on the cost saving actions that you have taken. A couple of questions actually. How much of it's variable? How much of it is dependent on a revenue rebound and how much do you expect to realize in the first quarter of 2021?

So we've talked about this – we go about $45 million out of the cost structure. Those actions to achieve that savings, we’re substantially complete by June 30. So, we should be – we saw a lot of benefit in the fourth quarter. It helped us achieve near breakeven on that low revenue volume. I think as we move into fiscal 2021, those cost savings initiatives are fully in place. Now there is split between SG&A and construction overhead activities. So it maybe harder for you to see the full amount in the income statement that you can see from the anticipated revenue for SG&A run rate, there's a pretty significant impact in SG&A, but the bigger impact is in construction overhead activities. I really wouldn't – we consider most of these reductions as permanent and not really variable. Now if you looked at SG&A and you compare it to the fourth quarter to the four quarter of the prior year, you're going to see that it's down like $7-plus million. Now we did not expect $7 million reduction in SG&A every quarter. The variable component of SG&A is, as we talked about it, it could be strategic activities such as M&A, but probably the biggest variability is related to incentive compensation, which is largely tied to operating results. So as operating results are improving, then the amount of incentive compensation improved. If we're not making money then the amount of incentive compensation is extremely small. So that's the variable component of our SG&A.

I think, John, a couple of points there. On the construction overhead side, as work starts to pick up and where we see opportunities, where we're going to add project management, more estimating health, quality, safety, whatever, you would start to see those costs that you – as Kevin said, are tough to see within our balance sheet, but we'll start to add some people back here and there as the work starts to pickup. On the SG&A side, short of us doing an acquisition and adding a walk of revenue and the SG&A required to manage that revenue. I don't – the way we're laid out now from an SG&A perspective, both from a corporate and in our subsidiaries, there isn’t a lot we need to add. And even if we – even if our revenues become better than what we have planned for this year, there’s not a lot of additions that are going to be required in our SG&A.

So as long as I understand this properly, John, at the current revenue level, okay, in the first quarter, you're not going to receive the full benefit of, say, $11 million of cost savings?

Yes. Our SG&A run rate.

And construction overhead.

And construction overhead is at the reduced level right now.

Okay. One more question, I guess, regarding the cost savings. Are some segments more impacted than others? As far as what you've taken out of the cost on the new segmentation profile, so?

On the new segmentation profile, I would say that the biggest impact was obviously to industrial, so that's not existing anymore. So it's probably spread out pretty evenly between the three segments. And we looked at the – it was company-wide review and there were cuts on just about every level of cost throughout the company. So it's pretty segment wide.

Okay. And on the new segmentation, could you just talk a little bit about what businesses went where? Especially in light of the fact is – that it looks like you clipped about 100 basis points from your previous gross margin expectations in storage. So I assume there's some shuffling going on that we don't really see.

Yes. So there's some big changes in the segments. When we started talking about – looked at the new segments, it was – we started out with – we have the small industrial segment that was left and needed to do something with that. But as we’ve looked at what our segment should be, we made some other significant changes. One thing is that John talked about it, about 40% of our businesses probably related to crude. But if a reader looked at our financial statements and said, okay, what's the crude percentage. They could very easily have taken all of the Storage Solutions segment and the Oil, Gas and Chemical segments that most of that is related to crude. So the company is 70% related to crude or 80% related to crude, and that's not the case. A lot of the growth we've seen in storage over the last few years is LNG-related of peak shavers. And so we've moved those peak shavers over to be combined with our power delivery and power generation. I'd say that's probably the most significant change. I would say that the – a lot of the process-type businesses that were included that were left over in the Industrial segment got moved over into and combined with the old Oil, Gas and Chemical segment. It's probably the biggest couple of changes. Oh and then I guess, the third change is, I mentioned it was – we previously allocated our corporate costs to the three segments. We did a review of our peers and 75% of our peers do not do that. And so we decided to make sure that our segmentation is consistent with our peer group and we are not allocating out the corporate costs to the other three segments. They'll be presented separately. You'll be able to see them. I think it increases transparency of our cost structure, like I say, consistent with industry practice, and I think it will be an improvement to the segment presentation.

Thank you. Actually, we do have a question from Noelle Dilts with Stifel. Your line is open.

Hi. Good morning, John and Kevin. I just had one quick question, which is – I was wondering if you could just go a little bit deeper into how you're thinking about the refinery services market. Obviously, it's been a really tough year. We have some players in the market that are a little bit more optimistic on the spring turnaround coming up, others less optimistic. Could you just delve into how you're thinking about the outlook as we move into next calendar year and even a little bit longer-term? Thanks.

Sure. So Q4 was pretty much a blood bath, I think for us and for a lot of people. And work was stopped, moved out, canceled. Our maintenance – our fixed based maintenance operations were, in some cases, reduced by 25% of manpower. And so we are – as we move into the summer months, we're starting to see our maintenance operations come back, we're seeing our planning and bidding opportunities and discussions with refinery clients on turnarounds is coming back. And so our expectation is the – this coming fall cycle will be stronger than what we just went through in the fourth quarter, which wouldn't take much, but it was going to be stronger. And that the opportunities there for next spring's turnaround cycle to be very, very heavy. A lot of work, a lot of opportunity, a lot of work has been – had been put off by our clients. It’s going to get more in line for them and they'll be able to get prepared for next spring. So we really think that the back half of the year in our refinery-related businesses will be very strong.

Thank you.

Thank you. I am showing no further questions at this time. I’d like to turn the call back over to John Hewitt for closing remarks.

I want to thank everybody for sharing time with us today. I encourage everybody to be safe and to be careful to take care of yourselves in this COVID environment that we're all working in. And probably more importantly, let's all be nice to one another. So good day, and thank you for listening in.

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