Ladies and gentlemen, thank you for standing by, and welcome to the Matrix Service Company First Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to one of your speakers today, Ms. Kellie Smythe. Ma’am, please go ahead.

Thank you. Good morning, and welcome to Matrix Service Company’s first quarter of fiscal 2021 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 matrixservicecompany.com. 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. At Matrix, we are, first and foremost, a people business. And as such, everything we do begins and ends with a focus on the health and safety of our employees and everyone within our sphere of influence. The way our engineers design our clients’ infrastructure to the technology and other project elements we procure through construction, commissioning and maintenance in our offices, on our project sites and even while we’re away from work, we work hard to put health and safety front and center to ensure that no one gets hurt. We know achieving 0 incident safety performance is possible. In the first quarter of fiscal 2021, even with the burden of added protocols related to COVID-19, our employees have remained focused. And through their strong performance, we completed the quarter with a total recordable incident rate of 0. I’d like to thank and congratulate our employees for watching out for one another and achieving this important goal. Turning now to our first quarter discussion. The pandemic has continued to impact many of our clients, especially those in the energy industry, who were managing through low product demand and rigid health and safety protocols as well as political uncertainty, all of which has resulted in delayed and reduced spending priorities. In spite of reduced revenue volumes, our project execution and consolidated direct margins have been very strong. Overall bidding opportunities are improving and our project opportunity funnel is returning to normal. However, client decision-making in this environment may affect the timing of awards and starts. It is our expectations that bookings and revenue will improve as we move into the second half of this fiscal year. This improvement in business conditions, combined with our restructuring and continuing cost…

Thank you, John. Before I get to the quarter results, I want to elaborate on the cost reduction efforts John has, John just discussed. In the last half of fiscal 2020, the company took steps necessary to reduce our annual overhead cost structure by $45 million or about $11 million on a quarterly basis. The quarter we just completed is the first quarter in which those cost reduction efforts were fully in place. And the actual reduction in overhead costs was substantially higher than the estimated amount. SG&A in the quarter was $18.1 million as compared to $23.7 million in the first quarter of last year, a realized reduction of $5.6 million. Our construction overhead costs, which are included in cost of revenue, were $10.4 million lower in the first quarter of fiscal 2021 as compared to the first quarter of last year. This is a total reduction of almost $16 million or 25% on a quarter-over-quarter basis. These cost reductions include lower variable costs, such as incentive compensation. In addition to the actions taken in fiscal 2020, we have and will continue to look for opportunities to reduce costs further until we see project awards and revenue volume recover. Moving on to the quarterly results. Consolidated revenue was $183 million for the first quarter of fiscal 2021 compared to $338 million in the same period of the prior fiscal year. Revenue in all three segments has been impacted by the current market environment. Project execution was strong again this quarter as our operating personnel continue to work effectively in this tough environment. The consolidated direct gross margin earned was at the upper end of our normal gross margin expectations. As I just discussed, significant cost reductions were realized in the quarter. However, we still had significant under-recovery of construction…

Thank you, Kevin. The challenges of the pandemic and its effect on global energy demand and macroeconomics has certainly not been kind to our business. These challenges have tested us. But I want to assure you that their impact will pass and we will emerge as an even stronger company. We have been proactive and successful at protecting the health and safety of our most valuable resource, our employees and the people who work for our business partners and clients. We also continue to proactively review and adjust our cost structure in order to find the right balance between the available market and where we see the opportunities lining up across our operating segments. This is a time of transition for our markets, society and our business, and we are making that transition. It remains our goal to provide safe, high-quality services, grow the company, be thoughtful and conservative with our balance sheet, drive better and more consistent financial outcomes and create value for all of our stakeholders. These steps have are taken, these steps we have taken over the past few years are instrumental to achieving these objectives. Among them have been expanding our engineering capability with the acquisition of Houston Interests, which, among other things, accelerated our full tank and terminal growth and extended services in the midstream natural gas processing markets as well as the chemical and petrochemical markets; modifying our EPC power generation construction to package work, thus minimizing risk and increasing margins; exiting the domestic iron and steel market to improve our consolidated financial performance, safety outcomes, working capital demand and portfolio cyclicality; investing in our people and systems to ensure we are offering best-in-class people and to better focus business development efforts of the enterprise to the growth areas of the company. There’s no…

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

Good morning, gentlemen. I’d like to start with the quarterly results, first and foremost, a couple of quick questions there. How much of the revenue decrease year-over-year represents the exiting of the steel and iron business?

So our revenues were down about $155 million quarter-over-quarter. About half of that is related to our exit of iron and steel. We had a larger capital project going on in that piece of the business in the first quarter of last year. The other half is related to the current market we’re in.

Okay. And the utility business seems to be operating at the higher end of your gross margin bandwidth. Is there anything in particular that we should note there that why it’s doing so well?

Well, it’s a combination of things. So the peak shaving projects, we’ve really got a good reputation there for that type of work. And we’ve moved that into that segment now that we saw the work we’re doing there is producing a good, reasonable margin. The -- and secondly, the power delivery business, we talked last year or last couple of calls about what we’re doing there to try to improve operating performance. And so this is the second quarter in a row that, that piece of the business has seen good margins. So we’re continuing to see some benefit from the changes we put into the business. For that segment, we need to get the volumes up to make sure that we can consistently see that type of margin.

Okay. And on the quarter, you realized $16 million in cost savings relative to your run rate of $11 million. And you mentioned in your commentary additional cost cuts. How should I think about that $16 million going forward? Is that a one-time-only kind of affair? Or how should we think about that?

We’re going to do our best to keep it at that level or lower, looking for other opportunities until we see backlog awards start to hit, revenue volumes increasing, so we have more confidence going forward. The cuts we made last year were pretty significant. But I think our operations groups and our support groups are continuing to do a good job of looking for opportunities to further reduce costs. And another impact on the savings is, in an environment where operating results aren’t good, you’re not seeing incentive compensations. So that’s lower this year.

All right. And I’ll squeeze one last question before I get back in the queue. You said there’s an $8 billion opportunity pipeline. $4 billion, you think, would be realized in the, or awarded in the third and fourth quarter. John, what do you think is a good hit rate? I’m sure you want all of it. But what do you think would be a good target of that $3 billion to $4 billion?

Yes. That pipeline is, that $8 billion extends out probably 12, over 12 months. About half of that are projects that we have handicapped that could be awarded between now and the end of June of ‘21, so within our fiscal year. And our hit rate is usually anywhere between 20% to 30% on projects. Usually, the larger the project, the lower, the smaller the amount of competitors in those projects. And so that gives us an opportunity to amp up that hit rate a little bit. But thinking about 20% to 30% is probably pretty reasonable on average. And that, the other thing to think about, too, is that $4 billion is really probably more along the lines of kind of larger capital projects. When I say larger, like $25 million and up, and, but there’s the day-to-day stuff that kind of runs through the company. Some of it hits backlog, some of it never hits backlog because it’s in and out in the quarter. And so when you see the award cycle in Q1 of around $100 million, that’s, in this environment is kind of that normal sort of, what I’d call, ham and egg-ing our way through the quarter by picking up those smaller maintenance and construction projects.

[Operator Instructions] Our next question comes from the line of Will Jellison with D.A. Davidson.

Good morning, John and Kevin. Kevin, regarding the $18 million cash outflow this quarter, was all of it attributable to the milestone billings? And then how much of that could we expect to come back throughout the fiscal year?

Yes. So if you look at our working capital accounts, the net amount of the change in the quarter was, I think, $18.4 million. So that is the change in cash in the quarter. I would expect, based upon the jobs that those milestone billings relate to, that we would see that come back in the second and third quarters.

Okay. Great. That’s helpful. Thank you. And then looking at the Process and Industrial segment, as you’re exiting the domestic steel and iron business, do you plan to reallocate the resources freed up from that within the Process and Industrial segment or to other segments of the business?

The majority of those, some of those resources are reallocated to other project opportunities. A large percentage of those resources have been let go.

Understood. Okay. Thank you. And then lastly, you mentioned that some of the SG&A benefit came from lower incentive-based comp. I’m just wondering, at the manager level of your different operations, how are those managers incentivized? Is it based on revenue or profit or something different?

Fundamentally, it’s off of operating income.

And we do have a follow-up question from the line of John Franzreb with Sidoti & Company.

Yes. I just want to talk about the reset of the credit agreement. Can you talk a little bit about the Board’s appetite for repurchasing stock? It certainly, hopefully, can’t get much lower. But what are the thought, what’s the thought process there? That would be helpful.

Yes. So that was something we tried to achieve with the credit facilities to give ourselves the flexibility to repurchase stock. So we said we’re going to be opportunistic about that and we will consider it. We haven’t made a final decision about when and if and how much we’re going to repurchase. But it’s definitely something that we’re continually assessing. And we’ll continue to do that as we move through the rest of the fiscal year.

Yes. The flexibility there, John, I mean, the credit agreement, as Kevin said, has given us more flexibility. But there’s still a balance there between meeting some covenant ratios and operating income and all that ties together. And so as we get a picture, better picture on the year and start to realize the booking levels that we think are coming in the near term and then that will give us a better perspective on how we’re managing our cash overall and how we will be able to get in the market to repurchase shares. So we want to make sure we’re balancing all of those factors and, before we make a heavy commitment into repurchasing shares at this level. Certainly, we think that is, would be a capital allocation priority for us to do that. But we want to make sure we’re balancing that against our other demands for our balance sheet.

John, I just want to make sure I didn’t hear something improperly in that response. Are there still covenant restrictions based on operating income that prevents you from buying back stock?

No. No, there are not. We’ve, there was previously some restrictions under the old facility. Our primary purpose for the amendment was to extend the facility. But we also have altered the calculation of a couple of those covenants so that we have the flexibility to not even include share repurchases in the fixed charge coverage ratio under certain circumstances. And so it gives us the flexibility we need. So if we decided, tomorrow it’s time for us to start buying stock, we can do it.

And I’m showing no further questions at this time. And I would like to turn the conference back over to Mr. John Hewitt for any further remarks.

Thank you, everybody, for attending our conference call today, and wish everybody to stay safe and healthy in this environment. Thank you very much.

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.