Q3 2021 Matrix Service Co Earnings Call
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Ladies and gentlemen, please standby your matrix service Company conference call to discuss the results for the third quarter of fiscal 2021 will begin momentarily. Thank you agree of patients and please standby.
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Okay.
Ladies and gentlemen, thank you for standing by the and welcome to the Matrix Service Company Conference call to discuss the results for the third quarter fiscal 2021.
At this time all participants are in a listen only mode. After the speaker presentation there'll be a question and answer session to ask the question during the session you'll need the press star one on your telephone please be advised the today's conference maybe recorded the require any further assistance. Please press star Zero I would now like turn the conference over to your Speaker today, Kellie Smythe Senior director.
<unk> of Investor Relations. Please go ahead.
Thank you John Good morning, and welcome to the Matrix service company's third quarter fiscal 2021 earnings call.
On today's call will include John Hewitt, President and Chief Executive Officer.
Kevin I'll, Vice President and Chief Financial Officer.
The presentation of heroes, who will be referring to during the webcast today can be found under events and presentations under the <unk>.
On the Investor Relations section of Matrix service company of Dot Com before we begin please funding the remind you that on today's call of the company may make various remarks about the future expectation.
And prospects from 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 the result of various factors, including those discussed in our annual report on form 10-K.
Fiscal year ended June 32020, and in subsequent filings made by the company with the SEC to the extent the company utilizes non-GAAP measures reconciliations will be provided the various press releases periodic.
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 Kevin.
Good morning, everyone and thanks for joining us as we begin our call I would once again like the Google with the thank you to our employees for the continued focus of maintaining the safest possible working environment.
Which directly translates to the strong performance of the reduction of incidents and injuries.
Even with the increased pressure of safety protocols and just like COVID-19, our employees achieved a year to day consolidated total recordable incident rate of zero point too far.
This continued excellent performance is truly assessment of the strong leadership and focus on safety of our team.
Yes.
Yeah.
Turning now to our business discussion I want to be very clear about the profound impact of COVID-19 pandemic has had on the harvest the law.
Last 13 months have been extremely challenging from both matrix and our customers because we've managed to continue the energy demand destruction business of uncertainty in global economic conditions brought about by the pandemic.
The specifically and its extreme business climate, our customers, particularly those in the oil and gas and continue to restrain capex spending and minimized all of the routine maintenance, resulting in ongoing delays in project awards starts and overall revenue volume.
We have been seriously impacted by not only of these worldwide events that the pandemic has affected.
Overall decision, making processes efficiencies and productivity for our core customers. Many of the more of like US only just now returning in mass to the traditional office environments.
This business environment has further contributed to an extended and unpredictable award cycle and drastically impacted our revenue volumes over the past four quarters in.
The impact of our third quarter once severe as a third of the anticipated wave of COVID-19 reached levels multiple times higher than previous peaks across North America, and severe weather outbreaks across the country of Texas to the East coast all serve to enhance the disruption from many of our project sites and all of them.
Operations.
As a reminder, low revenue volume impacts not only margins I'm missing revenue, but has the material impact on our ability to recover overheads of these.
<unk> cover not only direct project resources at the project management controls all the safety et cetera, but also of SaaS side, the estimating planning and proposing.
Robust project pipeline.
As it relates to operating results positive and negative project outcomes as compared to the individuals esol budgets or of Nashville, part of our business and they generally offset each other to the positive over the course of the year.
And this year in our third quarter, specifically dramatically reduce revenues amplified the materiality of these outcomes in spite of this overall portfolio of work is performing well our earnings issues over the last 12 months are principally the result of reduced revenues and under recovery of construction overhead is that.
We believe that we have hit the bottom and expect the fourth quarter to be the highest revenue volume sort of the fiscal year book.
Book to bill in the quarter, albeit on depressed revenue volumes.
At one point O.
And while the opportunity pipeline across all segments is robust.
<unk> continues to strengthen the timing of project awards, which is dependent upon a return of confidence for our customers will ultimately drive that outcome.
Over the past 18 months, we've made significant reductions of SG&A and construction of overhead costs and we continue to look for ways to improve our efficiency and competitiveness without jeopardizing, our ability to bid win or support anticipated conversions of an extensive opportunity pipeline in the backlog.
The net balance of the trigger right cost level and the human capital investments to prepare for the future opportunities the right in front of us kind of times seem more like an art. The science, we're first and foremost of people business and those people in this hyper competitive employment environment are critical to our emergence from the pandemic inspired downturn.
And successful execution of the opportunities that await us.
In our opinion the timing of awards the slides of the REIT is running out of room to slide we expect conversion to begin to occur at a faster rate and fully expect that many of the opportunities to begin converting as we move through the first half of fiscal 2022 as our cash.
Customers regain confidence in the markets, we believe our brand position of historical win rate will translate into improving backlog levels and revenue volume.
Finally, as you know we have historically taken a very conservative approach to our balance sheet.
The energy we have employed to support the long term health of the company throughout business cycles, we have avoided depth of where possible and always worked to maintain strong cash levels and summary of COVID-19 has created unprecedented challenges in our business, but we have done what we always do adjust the business of the changes of the markets provide best.
The class solutions to our clients to maintain our leading position in key end markets and the strength of our brand keep a focus on the strong balance sheet and prepare the company for the growth opportunities that are in front of us.
Honestly, we expected market conditions to recover at a faster pace and true.
Monopoly, we're unique in that expectation. However, we do see of recovery on the horizon.
The expected to start in the third quarter, we will begin in the fourth and slowly improve from there over the next fiscal year the markets of support our business will improve as vaccination rates climb infection rates decline energy demand increases federal fiscal stimulus the rollout and climate policy is codifying.
The impact from developing nations not yet getting their pandemic under control is of concern as to its ability to slow the improvement in the global economy and the energy demand. However, at least domestically. These things are coming together, which in turn will begin to improve our results as well the pent up demand from maintenance energy.
The industrial infrastructure as well as the strong move toward a lower carbon future as real and filling of our opportunity pipeline.
In support of our clients combined with improved COVID-19 conditions in most of our locations and increases we see in the future volumes caused by the pent up demand or administrative and engineering teams are returning and force. The majority of our office locations. After 13 months of remote working which we enacted to protect their health and safety.
As I said earlier, we expect the fourth quarter of this fiscal year two of your strongest with the return to near breakeven Chemo will give you an overview of the numbers and then I'll come back to talk about our outlook and strategy.
Thanks, Sean.
During the quarter, the most significant item that impacted our operating results.
The low revenue volume of $148 million as project awards continue to be delayed.
We continue to see the healthy funnel of project opportunities throughout our business, but the final project awards have taken longer than normal.
As a result of the low revenue, we don't have the opportunity to earn gross margins all network and we incur unrecovered overhead costs as a result of these prolonged award cycles, our quarterly revenue has trended down during the year.
As John mentioned earlier, we believe we've hit the bottom of the cycle and are confident in and of our fourth quarter. We will have significant improvement from a revenue volume and recovery of overheads.
This chart provides the revenue trend through the recently completed quarter as well as the anticipated improvement in our fourth quarter.
Since the COVID-19 pandemic in the United States. Our revenue has significantly decreased at the beginning of the pandemic, we understood that our business would be negatively affected.
And the implemented cost reductions based on our estimate of the impact of accordingly, we implemented measures.
Reduced which resulted in an annual reduction to our overhead costs of over $60 million and those efforts continue from the targeted manner today the.
Biggest portion of those savings have reduced our construction overhead.
The total quarterly construction overhead costs are down, 30% or 30% lower today as compared to a pre pandemic level.
We have tried to balance between reducing the cost structure were of lower lower revenue volume and being positioned to execute projects as the revenue volume improve.
We will continue to look for areas to improve cost efficiency and underperforming niches of the business through the fourth quarter and end of fiscal year 2022.
This chart demonstrates that the recovery of overheads is directly tied to revenue volume.
The cost reductions have been significant.
They have not been sufficient to eliminate the under recovery of overhead costs from these unexpectedly low revenue quarters.
These under recovered overheads, while painful in the short term, we consider as an investment of our future. We always manage the business based on the opportunity pipeline taking into account the projects in the pipeline.
Historical one percentages and award timing.
Based on the newest information, we expect that the second quarter was going to be the low revenue point of the year.
And that revenue volumes will begin to improve sooner.
The project awards happened of late.
We now believe the third quarter was the floor for revenue and expect a significant increase from the fourth quarter. As the result, we should move closer to full recovery of overheads in the fourth quarter and see a strong improvements of our gross margin.
Going into fiscal 2022, we believe business conditions will continue to improve the will provide sufficient volume to fully recover from an overhead cost structure.
I know I've spent a significant amount of time on overheads I believe this was warranted given the significant impact to margins and profitability.
Now I will continue with the overview of the quarterly numbers, our gross profit was $1 6 million in the quarter.
And our quarterly gross margin was one 1%.
The most significant impact on our margin what was the negative the impact of under recovered overheads and all three segments as a result of low revenue.
We estimate the impact on third quarter gross margin related to the under recovery of about 450 basis points.
We also incurred net of unusual project items, which negatively impacted margins by 300 basis points.
The gross margin from the utility and power infrastructure segment was the negative 10, 5%.
The additional cost in the large capital project and overhead under recovery under recovery, partially offset by strong project execution.
On the watch for.
Process of industrial facilities project work produced the direct gross margin within our normal expectations during the quarter. However.
However, significant under recovery combined with a one time adjustment.
Related to the estimate the amount due on the completed project resulted in the segment gross margin being reduced to negative 4%.
The storage and terminal solutions produced the gross margin of 10, 6% in the quarter. Although this segment also incurred under recovery. It was positively impacted by our assessment of recovery of change orders on a capital project Paul on achievement of mechanical completion.
The mobilization.
Moving down the income statement SG&A was $17 2 million from the quarter as the company continues to operate on a reduced cost structure in the third quarter. We also incurred an additional $1 9 million and restructuring costs as we continued our efforts to streamline the business.
For the quarter, we had a net loss of $12 9 million were <unk> 49 per share our adjusted EPS, which excludes restructuring of the loss of 43 cents per share.
Moving to year to date results consolidated revenue was 498 million from the nine months ended March 31, 2021 as the revenue has continued to be impacted by the current environment on.
On the segment basis revenue decreased significantly in the process of industrial facilities and storage of terminal solutions segments, while the utility and power infrastructure segment experienced a small increase.
Consolidated gross profit through the third quarter was $31 2 million as good project execution has produced direct margins and our project work within our normal expectations.
However, under recovery has reduced the margin down about 400 basis points to six 3%.
Consolidated SG&A expenses from $52 million from the first nine months of fiscal 2021, which represents a 22% reduction when compared to the prior year as a result of cost reduction efforts for the fiscal year. We have also incurred $6 6 million of restructuring costs for the nine months, we produced the net loss of <unk>.
The 5 million or 78 cents per fully diluted share excluding restructuring costs. Our adjusted net loss per share was 59 cents.
Moving to our balance sheet and liquidity as a result of our conservative management of our balance sheet remains strong. We ended the third quarter was $74 million of cash and no debt.
We believe our balance sheet and sufficient to support our business for the foreseeable future.
During the year, we utilized $10 million to pay off all outstanding debt. The limited capital expenditures of $4 million year to date of our capital expenditures are less of 1% of revenue. We expect to continue with this lower level of capital spending in the near term.
We utilized 4 million from restructuring activities in connection with the ongoing cost reduction efforts and we utilized 9 billion for operations, including the additional working capital investment.
As a result of the company's cost reduction efforts of our operations, our near breakeven on the cash flow basis for the year to date, despite the decreased revenue and earnings.
Our conservative approach to managing the balance sheet is unchanged. However, based on our operating performance we're required to a man of the credit facility.
The amendment of eliminate certain financial covenants for the third quarter as well as the next three quarters.
<unk> of our ability to borrow and make certain disbursements, including stock repurchases and acquisitions and limits Capex.
These provisions are generally consistent with our previously enacted management practices in this disruptive business environment.
We will also be required to maintain a strong cash balance and produced minimal amounts of EBITDA as defined in the credit agreement.
We have included detailed disclosure disclosures of the amendment and our form 10-Q, which was filed yesterday with the Securities Exchange Commission.
In summary, we have a strong history of effectively managing our balance sheet and are confident of our liquidity is sufficient to support the business and revenue growth as it returns.
During the quarter, we had project awards of $138 million, which is an improvement from the first two quarters with the book to Bill of <unk> nine.
Largely offsetting the project awards the company removed the <unk>.
<unk> toward of nearly two years ago with a major energy company that initially had some unexpected.
Regulatory delays followed by COVID-19, inspired offtake issues <unk> had a sense that day, which the customer did not renew.
We have been paid for the work executed under the LNG piece of the date.
The balance of the backlog of approximately $74 million has been removed.
<unk> itself has not been canceled but will require a rebid and refresh of the numbers given the amount of time that has laughs. It's our understanding that this client still intends to move forward with this project once financial close has been achieved.
Its removal reduced our quarter end backlog of 538 million.
Just the light project is one example of the uncertainty our customers have base during the past year has they alter the previous spending limits the.
The growth of our backlog and revenue volume is critical to our ability to produce good operating results. We believe the third quarter was the floor of the cycle and based upon the project funnel, we expect to begin regrowing that backlog and revenue in the fourth quarter.
Closed the new if Theres one thing you should take away from this financial discussion it should be that our bottom line results have principally been impacted by a short term volume problem, which is the result of being in an unpredictable environment.
Turn the call back to John to provide more color on our markets and opportunities as we move forward.
Yes.
Thank you Kevin.
As mentioned earlier fiscal 2021 has been extremely challenging not only from matrix of all of our customers.
During this period of unprecedented challenges, we continue to advance our growth initiatives and make strategic transitions in the business.
Continued to provide our customers the flexible and innovative solutions, we have advanced our growth initiatives of the chemical and petrochemicals by assigning the msas that offer the opportunity for a significant level of future revenue generation from major Blue chip producers and our engineering teams, which will also lead to increased revenues for our fabrication and construction.
<unk> brands as well, we're presuming a growing list of opportunities for our storage tank and terminal brand international locations, such as the Caribbean, Mexico, and Latin America as these countries move to secure their sources of energy.
We do sort of carbon footprint of our LNG and open up their countries. Following the the significant impacts of COVID-19.
We are further developing strategic partnerships with clients technology providers and other contractors to address various business opportunities in growth markets such as LNG hydrogen we continue to advance our domestic market position in the LNG Ngls and natural gas, which are critical energy power and industrial feedstocks as well as <unk>.
<unk> fuel for the future that support our customers moving towards clean energy solutions. We stayed focused on key sustainability issues important to our stakeholders and I'm, telling our story on the progress we are making on ESG initiatives. We have maintained the talent necessary to support our customers as they begin to advanced projects.
Secondly on pause across all of our segments.
As we look forward of fiscal 2022, we expect to see continued recovery and improvement in margins and overall results our opportunity pipeline is strong and by remaining focused on our long term strategy, we are well positioned for future opportunities in mining and minerals, where commodity pricing has improved and there were significant.
And for those commodities clean energy initiatives and general infrastructure investments, we're prepared for what we believe will be of long term of aggressive spend by our clients the opportunity pipeline for thermal vacuum chambers use of tests based crafts communications satellites and other high performance instruments and the simulated space environment remains.
Got it.
The niche market, where we have extensive expertise having designed more than 70 large vacuum chambers of aerospace companies and government research laboratories.
We think about the growth of electrification across the United States that includes the need to upgrade and improve the delivery system.
Connectivity of renewable generation and the investments of federal infrastructure Bill would support these factors will create more opportunity for growth in the electrical delivery business.
The most significant areas of opportunity for matrix, which will positively impact all three of our reporting segments as the wells move for clean energy solutions.
Supported by President of <unk> recent pledged to slash the U S carbon emissions by up to 52% by 2030 compared with 2005 levels. The move towards clean energy has also been embraced by many of the oil gas and utility customers, who had previously set their own aggressive goals for achieving net zero emissions.
In the mid term getting there will require the use of bridging fuels, such as natural gas and LNG and in the long term renewable fuels such as hydrogen along with more of electrification overall, all of which will play a key role in the carbonization efforts in our areas of our matrix possesses extensive expertise spin.
Typically in LNG or matrix enjoys the leading position in the EPC of small to midsized LNG terminals U S. Department of energy is estimated average annual consolidated capex spending the small scale liquefaction facilities supporting bumping each.
JD to be nearly $1 billion. This does not include the need for infrastructure to support the export import of LNG and the near shore International locations, such as the Caribbean, Mexico, and Latin America, all of which is currently a significant part of our opportunity pipeline.
It does not include the continued build out of large scale export facilities for which we can support major EPC suppliers with the design fabrication and construction of the storage elements of those areas will matrix will play a leadership role will be in Boston for transportation fuels for ships ammo of regulations on the sulfur hauls reached the number.
Of our of LNG powered ships in the fleet and were fueling infrastructure needs to be created.
So already plays a significant role in this investment as announced in the recent pivotal LNG press release, which recognized us for our contribution to the doubling of their LNG storage capacity as of Jax LNG facility in Jacksonville, Florida.
And LNG peak shaving utilities of continuing to look towards infrastructure investments of remote for high demand urban areas to assure supply during the peak electrical demand high gas demand for TD or as a way to arbitrage gas supply cost for the rate base.
The addition utilities are considered the need for <unk> to protect the supply and safety of his customer base of extreme weather events occur as we have recently seen in Texas and we are fielding several opportunities directly as a result of this concern.
And again, the design fabrication and installation of storage associated with the continued build out of large scale LNG export terminals creates incremental growth opportunities to our normal small and medium scale market focus.
Matrix continues to have a strong position of these projects competitive model at World Class brand our opportunity in prospect pipeline is rich for the projects.
The additional growth in this area as the transition to cleaner energy both domestically and internationally continues.
As countries and companies seek to reduce their greenhouse gas emissions hydrogen is emerging as a key solution for providing clean energy of the businesses and consumers to meet the low carbon initiatives meeting growing demand will require the hydrogen of suppliers begin to plan for and build the significant infrastructure needed.
The infrastructure.
Fashion plants plant expansions storage expansion and other hygiene related facilities, such as marine Bunkering of fueling stations all areas of our matrix is extremely well positioned to provide the EPC solutions made it.
Building on our more than 50 years of expertise in project storage process integration design fabrication construction and installation we further strengthen our position in this quarter through our memorandum of understanding of the chart industries to develop unique cost effective turnkey solutions for the North American nitrogen market.
According to the hydrogen council overall global Capex investment in hydrogen by 2030 is projected to the $300 billion.
The 11% of which the final investment decision has been made another 13 percentage of the planning stages at 76% has been announced currently our pipeline includes a growing number of opportunities. The majority of which is for green hydrogen and will require electrolyze yours and liquefaction system storage spheres of assembly.
<unk> and related balance of plant based on our analysis of our current heightened uptake pipeline, we expect projects to begin entering our backlog near the end of calendar 2021 end of calendar 2022 of.
Of interest is the fact that this demand is being driven by the suppliers as well as of end customers, who are demanding green hydrogen as they pursue their own the clean energy initiatives in some cases, even though the green hydrogen is currently more expensive the source that alternative fuels. It supports the end users overall climate goals across the around port.
Folio in closing while the impact of COVID-19 has been extremely challenging we are optimistic that we are turning the corner and will also benefit in our position in the engineering and construction of clean energy solutions. We look forward to reporting improved results in our fourth quarter of fiscal 2021, and subsequent fiscal years and remain confident in.
Our long term strategy and the opportunities we have flow containment of growth now.
Now I would like to open up the call for questions.
Thank you as a reminder to ask a question you will need the press star one on your telephone to withdraw your question from the bounty. Please stand by all of this compile the Q&A roster.
Our first question comes from Zane <unk> with D. A Davidson you May proceed with your question.
Good morning, and thank you guys for taking my call.
Sure.
So first off thanks for the color around the cost structure I was thinking about that of a little more and the ability you have to cut out about that G&A cost and construction overhead. So how much of that construction overhead looks to return with the growing work and activity in the coming months.
How should we think about SG&A as a percentage of revenue as.
The balance.
So when we when we reduced our cost structure.
We treat almost all of those reductions as as permanent reductions.
Surely as volume picks back up there will be some cost of need come back in I mean over the last year for example.
Cost of been very minimal.
It's important for us to be.
Out of the field.
So that will be one cost of the kind of.
Comes back into the.
The other periods of expect to see cost would be primarily related to revenue producing positions.
As our backlog growth grows we'll have to make sure that we've got the adequate.
The staff.
And how soon.
We need to execute the jobs that we've got so.
Overall, I'd say that I don't know 80% of of the comps are probably more permanent reductions in nature.
Would be my best estimate there and when you're thinking about SG&A as a percentage of revenue.
Our goal is to get SG&A down 6% of revenue.
So we'll begin approaching NAV when we pass the $1 billion a year in revenue.
It will take us a little bit of time to get there, but the fact is that as the <unk>.
We're striving to achieve.
Okay, great. Thank you for that and then as we look at more robust return of demand are there any segments that might require additional investments from here.
How are you thinking about how best to utilize and.
Take advantage of this return.
So okay.
Most of our segments right now as we think about here in the over the next 12 months and months of the investments they are going to the people.
To deal with the opportunity pipeline.
The improvement in increasing both the strength of our people that are directly tied into projects.
Kevin mentioned that we don't see the increase was planned and SG&A.
We each week.
Net capex pretty low so.
In our world.
We're being part of a lot of our equipment.
And so as business starts to return and get a little stronger we're.
We're going to the will be increasing amount of money, we spend on the annual basis on oil.
Our capex.
We're still looking for opportunities to expand our engineering capabilities into the Gulf coast footprint.
Footprint, rather than the Gulf coast. So that we're probably one of the near term if youre thinking about some acquisitions with the IBM.
Close to start an acquisition that we would be interested in but thats would be several quarters out.
Okay. Thank you very much for all of us.
Thank you and as a reminder to ask a question you'll meet the press star one on your telephone please standby the compile the Q&A roster.
And im not showing any further questions at this time I would now like to turn the call back over to John Hewitt for any further remarks.
Now I'll, thank everybody for joining us today.
I appreciate you taking the time to be with us by the by the state of helping in savings as we continue to see improvements in our pandemic environment. Thank you.
Yeah.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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Okay.
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No.
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Okay.
And the dividend.
And the growth.
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