Ladies and gentlemen, thank you for standing-by and welcome to the Matrix Service Company Conference Call to discuss results for the Second Quarter Fiscal 2021. At this time, all participant lines are in a listen-only mode. [Operator Instructions] After the presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to hand the conference over to your host today, Ms. Kellie Smythe Senior Director of Investor Relations. please go ahead.

Good morning and welcome to Matrix Service Company’s second 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 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, 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. I'd like to open with a thank you to our employees for continued strong performance and safety through the first two quarters of fiscal 2021. Even with the increased pressure protecting our employees from the COVID-19 pandemic. Our Total Recordable Incident Rate through these first six months is 0.19. This outstanding performance is truly a testament to the strong leadership and focus by our teams. Now turning to our business discussion, as we communicated on our last earnings call, we expected second quarter results to further -- to be further affected by the continued impact COVID-19 has had on health and safety protocols, energy demand and global economies. These impacts resulted in reduced revenues disrupted the timing of awards from what we consider to be a strong opportunity pipeline. Our direct operational results have been strong across the business with bottom line results weighed down by lower volumes under absorption of construction overheads, additional restructuring costs and a challenging storage project which is now materially complete. I do want to make the point that while we have made significant cuts in SG&A construction overhead, the level of those cuts that have been made to support the conversion of the extensive opportunity pipeline into backlog and then revenue. We expect both awards and revenue to improve as we move through the balance of fiscal 2021. Therefore we will also see improvement in overhead absorption as revenues return. This imbalance between construction overhead and current revenue creates some short-term pain, but it's critical to generate much improved earnings in the future. And in the long-term, the earnings potential the business has been greatly improved. Related to our award cycle, our consolidated book-to-bill for the quarter and year-to-date remains below 1,…

Thanks, John. During the second quarter we implemented additional planned actions related to reducing our cost structure. As John mentioned these actions included targeted headcount reductions, full and partial furloughs, salary reductions and the reduction in size or closure of our office facilities. As a result, the company occurred approximately $5 million of restructuring costs in the second quarter. The table presented provides a reconciliation of earnings for the second quarter and first six months of fiscal 2021. The earnings per share for the quarter was a loss of $0.17 which included the impact of the restructuring costs that reduced earnings by $0.14 per share. Excluding the restructuring cost, the quarterly adjusted earnings per share was a loss of $0.03. For the six months with fiscal 2021 the earnings per share was a loss of $0.29, which included the impact of the restructuring costs that reduced earnings by $0.13 per share. Excluding the restructuring items, adjusted earnings per share for the six months was a loss of $0.16. Over the last year the company has reduced its cost structure in excess of $60 million or approximately 25%. With a third of those reductions related to SG&A and the rest related to construction overhead, which is included in cost of revenue on the income statement. As John noted, even with these dramatic reductions in construction overhead revenue levels will not allow for complete recovery, which reduces the gross margin. However, based on our opportunity pipeline and the strength we see returning to the business in the near-term, the current adjusted overhead levels are appropriate. While the company will continue to manage your cost structure, we're now focused on rebuilding our backlog and revenue volume. Our backlog at December 31 2020 is $623 million, a decrease of $56 million in the quarter.…

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

Good morning, John, Kevin and Kellie. I actually like to start with the storage business. I was kind of surprised by the revenue level and also surprised by the charge that was taken in the quarter for that one project. Could you talk a little bit about I guess, first in the revenue side, the cadence going forward on that business because you Kevin you just alluded that you expect revenues to improve going forward? If so, is it been improving in storage. And secondly, I wonder -- I'm curious about what was unique about this project that resulted in the roughly 9.2% hit to the gross margin?

So all handled the revenue cadence. The segment has been impacted by the -- by this market environment and project awards being delayed. As a result, revenues have decreased, I would expect that the third quarter we might see a little bit of improvement, but it's going to be depending on the time in a project awards. But we currently see in the pipeline, the expected award dates, we would expect a more -- much more significant improvement in the fourth quarter.

And as it relates to that specific project, John, I can't give you a lot of details about that, because we're not having reached final completion yet and working through some details with our client. But it's not unusual even in storage where we can have a project that's got some challenges for a lot of reasons, sometimes they don't always come to light in an environment where revenues are really high and -- are high and our storage segment. Margins, they're usually always strong as they were here with work other than this project. So sometimes those -- these kinds of projects don't identify themselves in the mix of work within our storage segment. I can't tell you to keep in mind that this project was heavily in the middle of the COVID environment, had a lot of weather impacts as we move through the year. And so those are things that that we need to work through as we bring the project to a close.

So John, is it fair to assume that storage margins will return to normal next quarter?

Yes, I mean, I think if you, we had some, which is fairly typical for our company as we work through backlog where we will find a lot of times the performance is there and we'll find opportunities to bring adopt size or margins because of that performance. And so as we're in this swing from my declining backlog to an increasing backlog there will be more new projects starts as we move through the course of the year and the opportunity for contract, strong contract close outs maybe won't be as much there is, as you know would have been in this quarter. So all the back and forth there, I think we will -- we are continuing to think that our performance in the storage segment will operate at the gross margins that we have indicated. And so for now, it's just going to be for us, we battle backlog.

Yes. So when you think about the order, specifically, John, the level of revenue, won't support full recovery of overhead. So that level still have some impact on gross margins. As we get into the fourth quarter if everything falls like we expect then we'd be back in the range.

Well, I'm just, I mean, the whole revenues flattish that would still suggest a gross margin roughly 12% for the segment is that not unfair to assume?

Well, so I would say the direct margin that would be, be fine to assume but what we do $64 million of revenue this quarter to do something similar or a little better, we're still going to have under recovery that'll bring that direct margin down below our normal range.

And John, regarding the Chart Technologies memorandum, you mentioned that this already been some discussions about potential orders, somewhere that 6 to 12 month time range, could you put the size of those orders? Are they small jobs? Are they big jobs, getting some sort of context of, what you're looking at as far as project activity?

I think to be similar to our mix of work in our current business, so we're -- so for instance, we're -- the hydrogen market is not completely new to us. So we're currently are constructing a sphere for a hydrogen -- for hydrogen application in the Western U.S. And so that, that project, I think is in the kind of the team's sort of size range. So I would expect projects in this hydrogen market to be projects, in the 10 million, 100 million and 150 million kind of range, individual projects, dependent on the size and scope of the, app and what the application is.

That's a pretty wide range for the bigger projects compared to the smaller ones?

It's hard for me to -- it is hard for me to handicap that. I mean, we're -- like I said we're, we've opened up the business development book between ourselves and Chart and we're looking at the projects that we're going to chase jointly. And I don't have a clear list in my mind here, what the value of all those projects are.

Okay. And just on the turnaround season, how is it shaping up for the spring season versus the fall?

Last fall?

Yes, the last fall. Correct.

So our interest is to -- we've got three fixed base maintenance operations currently and those have fundamentally returned to let's say normal kind of services. And so we're also expecting a stronger turnaround cycle this spring, then certainly last fall and for sure, last spring and so it will be at a “normal level” for us, I don't think so. But it's going to be -- certainly going to be better than we've seen for 12 months.

Got it. Thanks, guys. I'll get back in the queue.

Thank you.

[Operator Instructions] Our next question comes from Zane Karimi with D.A. Davidson.

Hey, John, how are you?

Hi, good. Thank you.

So my first one here is, some of the small and midsized LNG peak shaving facilities that are in the product pipeline and do you have any sense of timeline for those can we realistically see one or more of them move forward in your fiscal 2H?

I would based on what we're looking at what we have in our pipeline and things that we have been working on over the past three or four months. It's entirely possible that one or two of those would move forward and to contract within this fiscal year.

Okay. And then a little bit more detail on the hydrogen opportunity there. But have you guys looked at around like a 12 to 24 month plan? Or have you comment on targets around that for the hydrogen opportunity?

So couple things are the market, we think the market is an expanding multibillion dollar annual market that's going to continue to grow as you move out of the time. We are working with our partner technology partner here on developing that plan and strategy for the -- for where we see the opportunities where we see our strengths in that opportunity pipeline. And so we have not set a revenue goal against that opportunity pipeline, I can just tell you that the opportunities that we're seeing today would lead us to believe that the within three years, this could be a pretty substantial market for our business flowing through on an annual basis.

Okay, that makes sense there. And then on to the utility segment real quick. So with regard to the power delivery portion of the utility segment, we were seeing capital plans, the customers and then also your efforts to extend your service territory either organically or through M&A?

Right, so right now we've been focused on improving the performance, which we've done, our direct margin performance in that business over the past couple of quarters has been really strong. That environment is exceptionally robust. And from an organic basis we have moved into what I call the Ohio Valley area with some new clients. We've expanded some of some of our clients. We've been able to get to MSA agreements with some clients we had worked with in the past. So we're continuing to do things we need to do to expand that we've been very active with storm response throughout the Northeast and so we're from an organic basis from a performance basis, from our ability to expand our client base where we're not satisfied and where we are today, but we're pretty satisfied with the progress that we've made. And that continues to be an area for the company where we want to grow that service offering and make it a larger part of the company's overall portfolio and ultimately to make that a coast-to-coast delivery.

Okay. And last one for me then would be more on cash flows. I'm just hoping to hear your thoughts and expectations around sustaining positive cash flow in the next couple of quarters, even as revenue and earnings might remain relatively speaking like under pressure?

Yes, so, I think there's a couple things there. First of all, the fact that we entered this COVID period with a very strong balance sheet was a significant asset to us. And I think we've done a good job of maintaining a good strong financial position over the last year. And so we're kind of set up for growth, that tends to support the growth as it as it returns over the next couple of quarters the fact that we've reduced so much cost out of our company. We're able to even in a quarter we have slightly negative earnings still be positive to neutral on cash flow. And I'd expect that to continue as we work through the third quarter and then when we return to stronger performance, we might have short-term impacts to working capital needs. When revenue comes, it'll depend on the mix of revenue, how much is reimbursable type work that is built in arrears versus lump sum works that could work that could have some down payments. So I think we're positioned to cover that. And in addition to what we're also in position to cover the letter of credit requirements that some capital projects could have.

Got you. Appreciate the color. Thanks, Kevin.

We have a follow up question from the line of John Franzreb with Sidoti. Your line is now open.

Yes, John, just on the mining market with commodities prices improving? Can you give us a sense of scale for your business? How big of a business that you see and what the opportunity pipeline looks like in a business in the [Ohio]?

Yes, so we just, a little history there. We got into that business about nine years ago with basically the -- we did that organically by hiring a group of managers opened up an office in the Arizona region started servicing fundamentally copper mines. And for about three, four years, we had some really good success there was really one of the main revenue and margin drivers in our industrial segment. And then the bottom fell out of the global commodities market and really for the last five years that business has been very flat. Now the resources associated with that are also resources that we move around other projects. So it isn't like there's a unique specialty there. Certainly the client relationship pieces specialty part but the actual services we're providing are very similar to the other construction services we provide. So a little background there so. Over the probably the last five, six months I think you've seen global commodity prices start to tick up, copper for instance, general rule of thumb is coppers trading at anything less than $2.70 a pound, they're not spending, the clients are not spending any money on production expansion. And significant maintenance in their operations. So copper is hovering at [$3.50] to [$3.60] and so you take that and you think about the all the other basic minerals that are going to be required as the North America and then frankly the world moves to a, like electrified cars, more renewables, more solar panels and just a basic infrastructure spending that's pent up in the market because of the pandemic. We think you're going to see a huge demand on metals and minerals. And that there's going to be a lot of opportunities domestically, for mining companies that are going to want to, that are need to increase their production in their facilities. And so pick a metal whether it's copper or lithium or Boron which is not a metal but it's a mineral. And so our bidding environment right now is very, very full. And so we think that, in over the future here, over the next two, three years, we're going to see some really good increases in our backlog and revenues across the business. That -- in that sector, what could it be? I think, in the next couple of years, we could be seeing the kind of $50 million, $100 million kind of revenue levels , within our money segment that we saw six years ago.

Is that limited to North America because lithium I thought was largely a South American mining operations?

Currently, I mean, our focus currently is on North America. We have aspirations and are working on projects in the Caribbean that's more related to LNG related infrastructure maybe some hydrogen infrastructure. And so we'll watch how that expansion goes. And if opportunities present itself out -- way out into the future, into -- maybe into Mexico or Central America we might consider those. But right now that's not on the table.

And you said sensitivity in copper spendings below the $2 threshold?

So yes, John, that is -- if the price of copper is below $2.70, $2.60 per pound, then usually the -- for a contractor the work kind of drives up.

Got it. Guys, thank you for that color. I appreciate you.

You are welcome.

I’m showing no further questions in queue at this time. I'd like to turn the call back to John Hewitt for closing remark.

Yes, well, thank you everybody, for being with us today. I'm hoping to take away from the call today was appreciation that we think our future is very bright and our vision is very clear on where we are going. We're very excited about our role in the strong infrastructure spending that we see is on the horizon. I really want to thank our employees for their hard work in these extremely challenging times as we transition to a much more improving business and pandemic environment. So thank you to our investors too for supporting our business. And we look forward to talking with all of you in the near future and I encourage everybody to please stay healthy and safe.

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