Matrix Service Company (MTRX) Q1 2022 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Matrix Service Company Conference Call to discuss Results for the First Quarter Fiscal 2022. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I’d now like to hand the conference over to Kellie Smythe, Senior Director, Investor Relations. Please go ahead.

Thank you, Liz. Good morning. And welcome to Matrix Service Company’s first quarter of fiscal 2022 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, 2021, 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, and good morning, everyone, and thank you for joining us. With Veterans’ Day in the U.S. and Remembrance Day in Canada just two days away, I want to take a moment to thank all veterans, the men and women in military branches and reserve units, who have put themselves in harm’s way and stand ready to protect our freedom and way of life. To our veteran employees, I want you to know that I am extremely proud to have you as part of the Matrix team and appreciate all you do for our company. Before I turn the call to Kevin to provide more detail on first quarter results, I want to give you some perspective on the operations and business. The bidding environment remains extremely active across all our segments to the extent we have had to add resources to handle the increase in activity. Our centralized business development organization is creating an even stronger opportunity pipeline with our more focused approach to the markets and our broader outreach to our core clients. This quarter, we saw a positive increase in awards, many of which were projects we’ve been working on for the past six months. As noted in our earnings release, our quarterly book-to-bill of 1.6 on awards of $267 million is the best quarterly awards cycle since the first quarter of fiscal 2020. As far as revenues in the first quarter, they fell in line with our expectations on how the first half of the year would begin. But at this revenue level, we continue to under absorb construction overhead. From an operations perspective, continuing commissioning and startup challenges on the capital project in our Utility and Power Infrastructure segment that we referenced on last quarter’s call resulted in increased costs to complete. We’ve made good progress moving this project toward substantial completion and will be demobilizing from the site this month. While the project is not in a loss position, the outcome was certainly not at the level which we had expected. Importantly, our client relationship is strong and their reference was key to one of our significant awards this quarter. In addition, there was also a project in the Utility and Power Infrastructure segment that was completed in 2019, which had a pending outstanding receivable that was tied up in litigation. Based on the recent outcome of the litigation and pending a full accounting of the settlement, we believe that there is risk in collecting the full value of the amount owed. This outcome further impacts the margins for this segment. On a positive note for this segment, the Electrical Infrastructure portion not only had a good awards cycle in the quarter, but also performed at a high level from a gross margin perspective. Some storm revenue this quarter also partially supported the margin outcome. Our other operating challenge in the quarter was in the Storage and Terminal Solutions segment, where low revenue volume, mix with competitively priced work and a tough operating environment channels consolidated margins in our tank business. Contributing to the competitive margin environment is a lack of larger multiple tank crude projects and terminals getting to award. The smaller opportunities have been available -- opened the door for regional specialty contractors who drive pricing down to unreasonable levels. Larger tank and terminal opportunities in crude and specialty vessels have been extensive, but awards are limited. These projects which minimize the competitive set and have a better pricing profile are now reaching the anticipated awards cycle. We, therefore, expect this segment outcomes to improve into the back half of the year as newly won projects, better mix of projects, higher volumes and the potential for other near-term opportunities enter our revenue stream. Our Process and Industrial Facilities segment performance anchored by our Nested Refinery Operations and Industrial Services Group provided good direct margins. I also want to share a perspective on a few of the industry trends we are watching closely. First, industry labor shortages at both the professional and craft levels. The industry is competing more aggressively for professional staff such as estimators, engineers and project managers. Increased project activity is stretching supply and demand and the lingering effects from the pandemic are straining the balance between in-office and remote work. As project activity increases in our end markets, as well as adjacent markets and its infrastructure investments are made at a federal level, the shortage of craft workers will become an increasing challenge. These shortages are not new but continue to be of concern to Matrix and to the industry as project activity ramps up. The competition for quality employees can put upward pressure on wages, benefits and overall project costs that we will build into our estimates and commercial arrangements. That said, we work hard to attract, develop and retain best-in-class employees in our offices and on our job sites. We continuously strive to be an employer of choice and are proud of the strong relationships we have with our employees, many of whom choose to work for Matrix, because of our safety, culture and reputation, and travel from job-to-job with our teams. This, together with our focus on diversity, equity, inclusion, makes us a great place to work for all of our employees. Supply chain delays, increase in material costs are other areas we are watching closely as we see escalation of costs on a variety of commodities, construction bulk materials and engineered products. We monitor commodity pricing and raw materials on a continual basis and where possible purchase materials earlier in the project lifecycle to avoid the impacts of potential pricing escalation. We also maintain close contact with our suppliers and subcontractors, which allows us to identify and develop solutions to meet required project dates. Finally, we work with our clients to create a commercial framework that best meets the requirements of the project yet minimizes the risks of these impacts to us. Lastly are the regulatory and client requirements around COVID-19 testing and vaccinations. Just last week, OSHA issued the emergency temporary standard mandating all employers with 100 or more employees to either require employees receive COVID-19 vaccinations or submit to weekly COVID testing and wear masks in the workplace. The order is expected to take effect on January 4, 2022, pending several lawsuits as to its constitutionality. To be clear, Matrix will not mandate vaccinations, but we will comply with the order to test and wear masks. We have been preparing the organization in the event of this emergency order becomes law and feel we are ready to implement the regulation if required. Many clients are beginning to implement their own project specific vaccination requirements, including some who are requiring our employees to be fully vaccinated to access their job sites and other clients requiring frequent COVID-19 testing. To-date, we have been able to comply with these requirements with minimal disruptions. The environment around COVID-19 continues to be fluid, especially in our industry and we are working proactively to anticipate and prepare for what is coming. I will now turn the call over to Kevin.

Thanks, John. The highlight of the quarter was project awards of $267 million that resulted in a quarterly book-to-bill of 1.6 and a 21% increase to our backlog, which ended the quarter at $561 million. Project awards were spread across all three segments with Process and Industrial Facilities producing a 2.2 book-to-bill, Storage and Terminal Solutions 1.6, and Utility and Power Infrastructure 1.1. Moving to segment results, revenue for the Utility and Power Infrastructure segment was $57 million in the first quarter, producing a negative segment gross margin of $6.1 million. The segment results were affected by three issues. First, we incurred an increase in the forecasted cost to complete a large capital project, which resulted in a decrease in gross profit of $5.9 million. The change in the estimate was due to increased costs from delays in commissioning the facility, as well as higher estimated costs related to achieving final completion. Second, we incurred a $2.1 million charge related to the collection of an outstanding receivable on a project completed in 2019 that was tied up in litigation. Third, segment gross margin was negatively impacted by low rev -- low volumes, which led to under recovery of construction overhead costs. These items overshadowed another good quarter for electrical service work, which was bolstered by storm recovery work and produced direct gross margins above the normal 10% to 12% range. We expect improving operating results in this segment as we move through the fiscal year as the project issues are behind us. We also expect revenue volume and overhead recovery to improve. Revenue for the Process and Industrial Facilities segment was $44 million in the quarter, as revenue volume was impacted by typically slow summer quarter. The quarterly segment gross margin was 6.5%. Project execution was within the normal expected range of 10% to 12%. However, gross margin was negatively impacted by the under recovery of construction overhead costs that occurred due to lower revenue volume. As we look forward, we expect improving revenue volume as we move through the year, as recent project awards begin to generate revenue, which should also have a positive impact on the recovery of overheads and gross margin. The Storage and Terminal Solutions segment produced $67 million of revenue in the first quarter as crude oil tank and terminal capital work continued to be impacted by the current environment. The segment gross margin of 0.6% was challenged by under recovery on low revenue volume mixed with competitively priced work in a tough operating environment. While the segment had a strong quarter of project awards, we will not begin to see those awards turn to revenue until we get into the third quarter. As a result, while we expect some improvement in margins in the second quarter, significant improvement will not occur until the last half of the fiscal year. Now, I will discuss consolidated results. The first quarter revenue of $168 million was in line with our expectations. Unfortunately, earnings performance was well below expectations. The consolidated gross profit was a negative $3.5 million or a negative gross margin of 2.1%. All three segments were negatively impacted by under recovery of construction overhead costs. SG&A costs continue to benefit from cost reduction efforts. There were only $16.6 million in the quarter, which is the lowest level since the first quarter of fiscal 2014. There were also one-time cost items included in the quarterly results. We incurred $0.6 million of restructuring costs and a write-off of $1.5 million of unadvertised fees associated with the company’s prior credit facility, which was replaced during the quarter. Bottomline results were a net loss of $17.5 million or an EPS loss of $0.66. While we would normally expect an operating loss at this revenue level, the loss was more significant because of the following three unique items, a $0.30 impact from project issues previously discussed, a $0.02 impact from restructuring and a $0.04 impact from the write-off of unamortized credit facility fees. Returning to profitable performance is the top priority for the company. We believe we are taking the necessary steps to achieve this important goal. Last quarter, I discussed cost reduction efforts we have taken over the past two years and how those efforts have significantly improved the future earnings potential of the company. The lower cost structure requires a lower revenue volume to achieve profitable performance and to achieve full recovery of construction overhead cost, which has been a significant issue during the past 18 months, as our revenue volumes have been impacted by the pandemic environment. This quarter, our revenue of $168 million is short of the amount we need to return to profitability. As demonstrated on this chart, we need to see revenue in excess of $200 million to be near breakeven performance, while the project award performance was strong in the first quarter, the bulk of those awards will not begin to positively impact revenue until the third quarter. As a result, it is not likely we will reach breakeven performance in the second quarter. On the positive side, the first quarter awards, combined with our strong opportunity pipeline, improved the prospects of achieving and surpassing these targets beginning in the third quarter. Moving on to the balance sheet and cash flow. As we reported on the last call, we entered into a new $100 million asset-backed credit facility during the first quarter. The borrowing base of the company’s new facility is adjusted on a monthly basis and is currently $75 million. We have not drawn on the facility, but have issued letters of credit of $43 million, primarily in lieu of retention on a few projects. Three of these letters of credit, totaling approximately $20 million will expire in the second quarter, resulting in a corresponding increase to availability. During the quarter, the company’s cash balance decreased from $84 million to $62 million. The decline in the quarter was due to -- was related to the operating loss and an investment in working capital that is related to the timing of cash flows on projects. The company continues to have a strong balance sheet and no debt. I will now turn the call back to John.

Thank you, Kevin. Turning now to our market outlook, as I said in my opening remarks, we recorded a significant increase in project awards, achieving a book-to-bill of 1.6 on project awards of $267 million and with diversified projects across all three segments, including a thermal vacuum chamber, LNG and renewable fuel storage, Electrical Infrastructure, midstream gas and chemicals, to name a few. These awards support our strategic focus and expectations of improving revenue and results in the second half of the year. This activity also represents a long awaited important sign of an award cycle that will strengthen as we move into the new calendar year. Bidding remains extremely robust across all segments and while the competition for work remains healthy, we believe the volume of opportunities available and our market differentiation will allow us to build backlog. In addition, the new $1 trillion Federal Infrastructure Legislation, Infrastructure Investment and Jobs Act recently passed will have a positive and direct impact on many parts of our business. Its direct impact will be on our Electrical Infrastructure work, including grid repairs, enhancements and expansion to broadband internet, fiber, electric vehicle infrastructure build-out, as well as other transportation improvements and upgrades. In addition, our mining clients will see a continuation of demand growth for their metals and rare earth minerals to support not only the electrification aspects, but also other focus areas the electrification aspects, but also other focused areas of the bill. This demand will increase spending to expand and maintain their facilities. Overall, spending increases from this infrastructure bill will take some time to work through the system. However, some businesses may accelerate projects in anticipation of the demand for their products and services. We also are encouraged by recent reports that the energy super majors are set to increase their combined CapEx programs in 2022 by at least $12 billion. These direct investments combined with the indirect effect across energy and industrial markets, as well as carbon reduction initiatives that they are focused on supports the growth and awards we are forecasting. Currently, future capital investment in the refining sector is moving toward carbon reduction and renewable fuels conversion with a particular focus on diesel replacement products. As these investments are made, we expect our extensive refinery experience to result in a growing number of project awards. One such example is the first quarter award made by Calumet Specialty Products facility in Great Falls, Montana, for seven storage tanks to support their daily production of renewable fuels. Additionally, at BP Cherry Point Refinery where Matrix has maintained an embedded crew for more than 45 years, our teams are providing civil and mechanical work with refineries renewable diesel optimization projects, as well as its cooling water expansion project, which will allow for increased utilization, better energy efficiency and related reductions in CO2 emissions. In LNG and NGLs, we are pricing multiple opportunities in tanks and terminals and are re-pricing several that had been previously put on hold. International opportunities in LNG and NGLs are also continuing to increase. Natural gas is considered a bridging energy source that will continue to grow in importance. Based on the growth in global demand and recent increases in gas prices, data suggests that significant increases in capital expenditures can be expected. This expectation is supported by the fact that several midstream gas processing projects are in our proposal pipeline today. In addition, many of our clients are planning capital expenditures to upgrade their compression and processing stations to minimize the carbon footprints of those facilities. In hydrogen and other renewables, we are currently executing and bidding or have bid on projects for renewable fuels, hydrogen liquefaction, storage and delivery, carbon capture and battery energy storage. As hydrogen projects have begun to be awarded, we expect our market share in this area to improve. Our expertise in cryogenic storage and liquefaction, combined with our relationship with Chart Industries, provides a clear point of entry from which we’ve strengthened our brand in this end market. Additionally, in combination with the recently passed Infrastructure Bill, I discussed previously, we are optimistic about the build back better legislation currently working its way through Congress. Congress will contain climate change related investments that will make these projects more viable and thus improving momentum and awards. Our chemical -- petrochemical strategy to expand our position and service offering is beginning to pay off. Many chemical companies are attracted to Matrix diversified capability offering of engineering, construction and maintenance. Over time, we expect to increase our bench strength and brand through strategic investments In mining and minerals, copper, lithium and gold expansion projects are on the rise due to higher commodity pricing driven by renewable energy and infrastructure investments, I mentioned previously. There are significant proposal activities in this space with some of our exited projects pending award. As we discussed last quarter, the interconnected world of electrical, renewable generation and an aging infrastructure system creates organic growth potential for our electrical business. This is reflected in over $60 million in first quarter Electrical Infrastructure awards in our northeastern territory. These projects included substation rebuilds, relay upgrades, transmission distribution and fiber installation. With substantial infrastructure investments planned across the country, we maintained our goal to create a coast-to-coast service delivery. In aerospace, in addition to a first quarter award for a thermal vacuum chamber, which we hope to announce by press release soon, we continue to see bidding opportunities in this end market where Matrix has a niche position. Overall, bidding activity is strong and award activity has accelerated. While the timing of awards can be fluid, we expect bookings to continue to improve as we move through the fiscal year. I will now open the call up for questions.

[Operator Instructions] And your first question comes from John Franzreb from Sidoti & Company. Your line is now open.

Good morning, John and Kevin.

Good morning.

Good morning.

Congratulations on the turnaround and new award profile. And that’s actually where I want to start, John, how would you characterize the new awards, was it more of deferred jobs coming to market or was this new work coming to the market that is kind of reflective of the better commodity cost profile?

I think there’s a mix in the awards. There’s some of the projects we’ve been entertaining for maybe the past six months, but a few of them are projects that have come up, and probably, what I’d say, kind of a normal bidding cycle, within the two months or three months or maybe right before the beginning of the quarter. I think what you’re seeing is more confidence by our client base on making the capital investments that they’re planning for the future.

And what’s the margin profile in the current backlog relative to historic margin, say, two years or three years ago or how much would be covered from, say, the lows?

So, like, what’s causing the awards, it’s mixed. There’s certain projects that are more competitively bid that are smaller projects and then there’s other projects that are in the historical norms that we talk about of generating 10% to 12%.

And in light of what you said about the tight labor market, how should we think about cost coming back to you as the revenue profile improves?

I think the labor market mix and the escalating materials is going to have a tendency to drive up prices, I think, on our projects and really probably across the -- across all of our segments.

Okay. And I guess one last question on the slide on page 14. Can you talk a little bit about how big this opportunity profile is compared to maybe historic norms? And maybe a little bit more about the hydrogen opportunity and maybe some of the timing you expect to get on those awards coming through your pipeline?

Yeah. So, our overall opportunity pipeline and we’ve defined that in the past, is projects that we have bid, are bidding or are planning to bid. So they’re not they’re not projects that are -- that we’re watching, but that the clients have not started moving forward on. So they’re -- the opportunity pipeline represents legitimate projects there. I would say, they’re in a range, because of whether this awards cycle or projects maybe moving in or out of that opportunity pipeline or is -- has been in the $4 billion to $6 billion range for the past probably 18 months. I think we’ve said on previous calls that the bidding environment has been very, very strong and the opportunity pipeline has been the same. And what we’re seeing differently now is that there are projects now in that opportunity pipeline that are being awarded and so that’s a really positive change for what we’ve seen in the past. As it relates to hydrogen, we’re continuing to bid storage-only kind of projects. We are looking at hydrogen projects that are liquefaction distribution centers to feed local transportation needs. Some of those projects are on an EPC environment. Some of them we’re bidding only the feed portion, the upfront engineering portion, as companies think about putting the project in place. And so there is a mixed bag and there are some projects getting awarded. We did bid a couple of storage spheres here in the last six months that we were not successful on, but that’s probably kind of getting back to a normal sort of cadence in our business for wins and losses. And so we feel pretty good about our position in hydrogen, our capabilities, our relationship with Chart, we’re working together with them to look for combined EPC opportunities where they can bring their technology and we can bring our storage and terminal capabilities.

Okay. And what, I will stop there and I will get back in the queue. Thanks for taking my questions, John.

Thank you.

Thank you. Your next question comes from the line of Zane Karimi from D.A. Davidson. Your line is now open.

Hey. Good morning and thank you for taking my questions.

Good morning, Zane.

Hey. I joined in a little late. So if you already referenced this, apologies for that. But in the last quarter, your maintenance and turnaround services businesses recovered nicely, what are you seeing and is that momentum look sustainable going forward?

So, yeah, I mean, we’re starting to see continued strength in our maintenance businesses and our maintenance businesses go across a lot of different segments. So, obviously, we do maintenance work and turnarounds and refineries. Our nested maintenance operations have been doing very well, as a lot of our -- a lot of those clients try to, kind of, keep that work in-house. Our other refinery maintenance and turnarounds have been kind of muted, because of refiners out there today or they’re making a lot of money based on the demand and the price for refined products. We also do maintenance repair on storage tanks of all varieties, whether there -- it could be crude or refined products or even cryogenic applications. That market has been fairly strong for us and but pretty competitive. And so, but we continue to see more opportunities there. And I think, well, one of the things we’re going to see is a lot more opportunity for us in the cryogenic tank space for, like, LNG tanks that are being anticipated to be used more heavily and they’re going to need to be inspected and repaired. And once that -- and when that starts to build up, that really start to diminish the competitive set to the people that got that capability.

Okay. Thank you for that. And thinking about natural gas and the relative prices there, but how are the natural gas prices rising going to affect your business from a short-term, medium-term standpoint?

So, right now, I mean, our -- what we see in our opportunity pipeline is a growing demand in opportunities. We haven’t -- we’re seeing continue -- continuing to seeing more opportunities in LNG storage, LNG small, LNG export, LNG pit shaling opportunities. I think in the midstream gas market, we’re starting to see a rebound there for gas processing and compression. One of the things we said in our prepared remarks here was -- one of the interesting things is, we have some clients that are looking at how they can reduce their carbon footprint on existing compression stations along their pipeline systems by putting in more efficient pieces of equipment, maybe changing the fuel mix, and so, there’s a lot of I think that activity going on as well.

Okay. Thank you for that and I will jump back in queue.

Thank you. And that concludes our Q&A session for today. I will hand back over to John Hewitt, President and CEO for any closing remarks.

I want to thank everybody for attending today and remind you about three key points. First, our markets are changing and we are changing with those markets, and we are confident in our strategy and positioning. Second, with the improvement in award cycle experienced this quarter, we expect improving awards as we move through the year positively impacting revenue and earnings. And third, our transformation is in progress with the result being a more efficient and economical business platform, a revitalized growth trajectory, supported by our adjusted market focus areas, and ultimately, better and more sustainable bottomline results. To all of our employees, I want to thank you for your efforts and patience in these challenging times for leading to best-in-class safety and for bringing the many opportunities in front of us to reality.

Ladies and gentlemen, that concludes our call for today. Thank you for your participation. You may now disconnect.