Good day, and thank you for standing by, and welcome to the Matrix Service Company conference call to discuss results for the second quarter fiscal 2023. At this time all participants are in a listen-only mode, [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kellie Smythe, Senior Director of Investor Relations. Please go ahead.

Thank you, Justin. Good morning, and welcome to Matrix Service Company's second quarter fiscal 2023 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 in presentation on the Investor Relations section of matrixservicecompany.com. Before we begin, please let me remind you that on today's call, we 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 most recent annual report on Form 10-K and in subsequent filings made by the company with the SEC. To the extent we utilize non-GAAP measures, reconciliations will be provided in various press releases, periodic SEC filings and on our 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. I'd like to open today's call with a reminder that we are all accountable for safety. Responsibility for the safety of ourselves and each other does not stop when we work. We carry that responsibility into our personal lives as well. This personal safety responsibility is about accountability, communication and training, or short ACT. We use this acronym to focus our leadership and drive a culture of safety across the organization. It reminds us to be accountable to ourselves and each other and live up to the leadership expectations we each carry. It says we must communicate directly with purpose, the expectations and risk to execute better, and it reminds us that training improves outcomes, skills and leadership. Our road to zero injuries never ends at work or at home, and each of us have a personal role play in that journey. Now for our business update. As we have discussed on previous calls, some projects that we took into backlog during the pandemic were lower in overall margins and were affected by the operating dynamics over the last several years. As noted previously, we have one of these midsized legacy projects left in the portfolio, which we are in the midst of completing. This project at midstream gas processing facility, which is in the Process and Industrial segment was awarded in calendar 2021. Due to breakdown and commercial negotiations concerning the extensive scope changes that impacted our ability to progress the project work according to forecast as well as the impact of global supply chain issues and inflation, we have taken a charge of $9.6 million in the quarter related to the forecasted outcome. The project is expected to be mechanically complete in the fourth quarter…

Thank you, John. The second quarter was shaping up to be in line with our expectations. As John discussed, project award activity was strong across all three segments. Our liquidity improved during the quarter, and operating results for the second quarter were similar to the first quarter with one exception. Unfortunately, the outlook or change order recovery and an increase in the forecasted costs to complete a midstream gas processing project in the Process and Industrial Facilities segment changed significantly just prior to our original planned release of earnings. As a result of that change, we recorded a significant adjustment through the project forecast and put the project into a loss position. We recorded a quarterly charge of $9.6 million or approximately $0.36 per share. The project is scheduled to be mechanically complete in the fourth fiscal quarter. We will continue efforts to manage the forecasted costs and negotiate a reasonable outcome of our claims with the client. This adjustment also triggered a goodwill impairment analysis for the impact of business unit in the Process and Industrial Facilities segment. To be clear, the long-term prospects of the Process and Industrial Facilities segment are strong across multiple markets, completed thermal banking chambers, refining renewable fuels, chemicals and mining and minerals. However, our recent project performance and near-term prospects in the gas processing portion of this segment required us to reevaluate the fair value of the related goodwill. Medium-term an impairment of goodwill was required for one of the business units serving this market and recorded a non-cash charge of $12.3 million or approximately $0.46 per share in the quarter. Our second quarter revenue was $194 million compared to $208 million in the first quarter. Consolidated gross profit decreased to a loss of $1.3 million in the quarter, including the project adjustment.…

[Operator Instructions] And our next question comes from Brent Thielman from D.A. Davidson. Your line is now open.

Hey great. Good morning, John, Kevin. I guess just one question on the revenue volume. Just kind of wanted to gauge your temperature. I mean are you surprised by the time it's taking to kind of get some of these new awards moving forward? Kind of anything unusual behind that? And then I just kind of want to get your confidence what you're seeing happen with some of these awards, again, gives you confidence around pickup in the fourth quarter as you've laid out?

Yes. So if you look at the revenues for the quarter, they were pretty much in line with our expectations. I'd say the only exception to that was the volume within storage internal solutions was a little bit lower than we originally expected. And that's the result of, as I mentioned in my comments, a large storage project that -- we expect it to be awarded in and we would have started during the second quarter, it would have had a pretty decent amount of revenue in the quarter. That project is still not awarded, and the timing of when it will be awarded don't know that. But the good news is that the segment had a bunch of other projects that we have awarded the last six months. And so the prospects for the increased revenue secular are still there. It just start a little later than the projects that didn't get awarded. So we're -- that's the only variance from the revenue standpoint. The timing of some of these projects that we were pulling into backlog, the work on -- generally on some of them takes -- could take up to two quarters before we get any kind of heavy revenue. There's some -- there'll be some upfront engineering. Some of the projects or a little bit more complex, so there's more time taken to negotiate contracts. Those are making us some final permits to get in place. So usually, as we said in our comments, it can take a quarter or two for those things that really start impacting our revenue.

And John, is that just because these are kind of more of the larger capital projects? Is that fair?

Yes. I mean -- even I mean larger capital projects, but even projects that are in -- sometimes are in the, say, $30 million to $50 million kind of range, depending on who the client is and how their processes work after they select a contractor. We can be selected and we could be able to put it in the backlog, but it could take a couple of months before we're really going to start putting money into it. So, it's just kind of sort of the nature of the business. And as we return our revenue levels, it's a little bit more impactful to the business on a quarter-over-quarter basis until we get back up to a revenue run rate that's foundational for the company.

Okay. That's helpful. And then just on the midstream gas processing project. Just sort of curious why negotiations didn't sort of translate to the outcome you'd anticipated? And I think the bigger question here is probably just -- are there others of this magnitude, you're in negotiations with customers where maybe there's risk of a similar outcome or is this sort of truly unusual to you?

Yes. No, I think this is sort of an unusual situation. This is -- as we said and we spent before in other calls, this is probably the last of our larger, what I'd call, our COVID contracts. And so, I would say we're not completed with our clients discussing through some of the commercial issues, but we felt at the time of the filing here that we needed to take a position that we've taken.

Understood. And I guess, John or Kevin, I mean, any context for what sort of revenues left for that job as we work through the kind of fiscal second half?

Yes, so $25 million to $30 million. And a lot of that will be out in the third quarter.

Okay. And John, I mean, John. It sounds like you're pretty confident. Book-to-bill is going to be pretty strong here over the next couple of quarters? I mean, any kind of highlighted sectors you want to point to, you're really seeing a lot of activity?

Yes, I think whole thing storage. So, there's a lot of -- and there are obviously two words on the bigger projects are, but a lot of activity in storage around LNG, ammonia, ethane, propane, hydrogen, we continue to work in that sector. Those opportunities continue to keep flowing in on pre-feed work and hydrogen opportunities, both domestically and internationally. And so, we're continuing to work in that market. And so, I think what we see out in front of us, the opportunities for LNG shaving facilities, LNG plants related to ship on grain and export is pretty big. And so, we feel very comfortable where we are, and we're going to continue to see good awards and positive bookings as we move out over the next several quarters. And let is normal, our business and timing of all that, when we can take it into backlog that can move month-to-month. And -- but as we've said before, the trend in backlog growth for us is what's important work cycle. And I think what we see out of the future is a very positive trend in awards and building our backlog.

Okay, great. Appreciate that’s all. Best of luck.

[Operator Instructions] And our next question comes from John Franzreb from Sidoti. Your line is now open.

Hey John, Kevin. Thanks for taking my question. Just to circle back to the midstream processing project. Was there anything unique about this contract that you didn't have to engage in before?

I don't think it's anything -- as far as the process, the design, the fabrication, the erection of the facility, I would say it's not -- we do more complex things.

So, what was -- what's the unusual part that the customer pushback on the changes in scope?

Well, I really don't want to debate that in public. So, we're trying to give you guys a perspective of the challenges on the project. Certainly, the supply chain issues that I think the planet has felt over the last 18 months [indiscernible 0:27:24.5] had an impact from and both from us, from a delivery timeframe and inflationary pressure. And as we noted in the release, the job had want to changes in scope from the client. And when there's a significant amount of changes that can also impact our ability to perform as we had planned. And so those are things that we're working through with our clients, and we're continuing to do that.

So, John, do you feel there's any -- in hindsight, I guess, any operational changes that you should make in order to prevent this kind of incidence to happen again?

I mean we'll do what we normally do. We will do a lessons learned, and we will do a lessons learned with the client. If that's supported to us when we're done and to talk about how we interact with. There's continues to be possibility for future work with this client and certainly, that would be an outcome that that we would like. We have a lot of clients. We build complex projects with over and over and over again. And so, we're -- they're obviously happy with our performance. And so, I would say this is still a bit of a unique situation. But we're always honest with ourselves, and we'll look at the areas where we think we could have done something differently or better, and we'll make those adjustments.

Okay. And it sounded like during the quarters, you made some minor structural change, closed down an office. It makes me wonder if the breakeven point for the company has changed at all, either positively or negatively in light of recent operating environment?

So, I don't think it's changed significantly from what we talked about in the last quarter. 1.5 years ago, we were talking about $200 million was kind of a quarterly breakeven, and that's gone up a bit to probably 215, 220 based on inflation. So -- but there's not a big change in what we need to either fully recover or breakeven.

Okay. And the revenue that was pushed out of storage, you said you expected it to close and be working on it in the quarter. That job hasn't closed. Is there any expectation it will close by year? Or do you think it's firmly pushed out for now?

Yes, we've sort of taken the position here that this project will not be in this fiscal year as we look at our forecasting going forward. And so, it was a fairly sizable storage-related project, but the owner has had issues getting to financial close and permitting. So, we've kind of taken the position, and we're sort of -- we've been working with them for a while doing some fieldwork and that we were working towards converting that into a full contract. We're kind of out of that process right now until they get their situations together and straight on to make a decision on how to proceed with the project. So, we fundamentally taken it out and so came out of the -- in the middle of the second quarter, basically. And so that's why you've had this impact in the second quarter.

Got it. And John, you said that the jobs in the backlog are closer to historic norms on the gross margin side. How far away, I don't know, across the whole business profile, do you think you're often getting normalized gross margins? And what kind of timing do you see on realizing that?

So, we're driving the average is up in the backlog. One of the -- some of these newer projects that are in this $300-plus million of awards in the quarter are in that range. So, they're driving those averages -- the averages for the organization back up into that range, plus the opportunity that average range from a historical perspective might be on the low side, but we generally had good performance across our projects on a quarter-to-quarter basis. We're able to upsize our direct margins because we're either underrun our costs, we're able to convert other contingencies and things that are built into the projects to the bottom line. So that's -- our historical operating environment is that we've got more opportunities to drive the margins up than to drive the margins down. And -- so that also contributes to keeping those margins in that range.

Okay. And I guess one last question, and I'll jump back in. There was once a time you talked about exiting fiscal 2023 with a $1 billion backlog. Is that number still on the table? Or has that been pushed to the left or right, either way?

That's still on the table for me.

Okay. Thanks a lot.

And thank you. And I am showing no further questions. I would now like to turn the call back over to John Hewitt, President and CEO, for closing remarks.

So, thank you, everybody, for joining us today. Certainly, a challenging quarter for us, but we are making progress with the organization, all the things that we've done and we've invested in, and we feel very strongly about the direction of the organization and where we're going and going to continue to build backlog and we're going to continue to improve operating results here over the next couple of quarters. So, we look forward to speaking with everybody in May.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.