Matrix Service Company Q3 2023 Earnings Call

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Good morning, and welcome to the Matrix Service Company Conference call.

Discuss results for the third.

Our fiscal 2023.

Currently all participants are in a listen only mode. Later, we will conduct a question answer session and instructions will be given at that time.

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to todays host Ms Kelly Smart.

Senior director of Investor Relations of Matrix Service Company. Please go ahead.

Good morning, and welcome to Matrix service company's third quarter fiscal 2023 earnings call.

On today's call will include John Hewitt, President and Chief Executive Officer extra Thanks, Kevin I'll, Vice President and Chief Financial Officer. The presentation materials, we will be referring to during the webcast today can be found under events and presentation.

Mr Relations section of Matrix service company.

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 this.

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.

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 Kelly and good morning, everyone and thank you for joining us quite open our call congratulations to our operations team.

Recognize for contractor safety achieved five separate refineries by the American fuel petrochemical manufacturers Association.

These safety record name recognition with represent the strong commitment and leadership our people bring to the workplace every day, thanks to our employees safety critical parts.

Right.

I don't know a business update we continued to see very strong award momentum as reflected in total project awards of 309 in the.

Third quarter. This resulted in a book to Bill of one 7% our seventh consecutive quarter at or above what pointed out year to date, we have been awarded 862 million of projects up 35% over the same period in the prior fiscal year.

Started in a book to Bill at one three or greater in each of our segments and consolidated book to Bill of one five we're seeing positive trends in our business and projects build backlog and execute with our transform their organization.

Bidding activity remains robust across all segments and we're confident of strong award cycle will continue at the end of the quarter project backlog was 832 million a 42% increase from the start of the fiscal year with backlog up across each of our segments.

Amy that rewards aside our proposal activity suggests that we will return to a more normalized backlog or the $1 billion in the near term keep in mind that many of the larger projects in the backlog may take upwards of six months before they have a material impact on revenue and a various assets perhaps longer.

In any case as this improved quality size and growing backlog flows more steadily through the business financial results will improve along with higher and more stable revenue.

From a segment perspective storage at Charles Solutions, our third quarter book to Bill was one three or awards to $66 million. This segment includes significant near term opportunities storage infrastructure projects related to LNG ammonia hydrogen Ngls, we believe specialty vessel at terminal projects.

In LNG and Ngls and hydrogen will be key growth drivers for this segment.

At our utility and power infrastructure segment, our book to Bill was <unk> seven product rewards of $26 million, primarily comprised of power delivery maintenance and smaller capital projects power delivery bidding is very active and the opportunities are expanding as we grow our core utility electrical business in your market capture.

Client expansion and geographic reach for LNG peak shaving projects also part of this segment.

The market opportunities continue to be strong and our proposal teams are very busy.

These projects have a long courtship process much larger in size on an individual basis.

Frequent but provide a much longer sustainable backlog for the segment, we expect to expand this part of the segment backlog in the next few quarters as we convert opportunities to wide projects.

Finally, and in process and industrial facilities, our book to Bill was exceptionally strong at $2. Two on awards of 217 billion, which include a large construction project to upgrade our natural gas compressor station other construction projects of similar size and nature of our currently the proposal process.

We also continue to see demand for refinery maintenance turnaround work as well as increasing opportunities in mining and minerals chemicals and renewables processing facilities.

Over the past year, our project opportunity pipeline has stabilized and now consists of $5 6 billion in projects greater than $5 million.

This pipeline does not include our normal day to day and recurring maintenance and small project activity, which represents approximately a third of our business revenue across all three segments. We continue to actively support to pursue work with our clients in the traditional energy chemical space, which represents approximately 26% of our.

Consolidated opportunity pipeline.

We're also supporting many of these same clients as they invest in projects that deliver on or support.

Delivery of low carbon energy and industrial infrastructure. These represent 72% of our pipeline.

The skills and expertise the basic software sales and engineering and construction contractor position us well to bid and win our fair share of this work and more so it will provide us for long sustainable runway of quality projects.

This runway is supported by key market drivers that provide strong tailwind as client spending decisions are made based on concerns about energy security globally aging infrastructure energy reliability domestically.

Energy transition and the need for commodities to support these investments.

As it relates to the federal infrastructure investments the inflation reduction act as forecast of about <unk> three trillion of infrastructure investments over the next decade with the largest revenue from the government expected to break springboard for private sector spending.

Doug the third Great Energy Revolution, this will significantly accelerate upgrades to electrical infrastructure as well as growth across the hydrogen ecosystem in the U S and internationally.

Services and expertise perspective matrix has a significant role play across nearly every aspect of these infrastructure investments, which impacts all three of our segments.

With respect to hydrogen specifically this is a mid to long term opportunity given the market is effectively in the first innings of what will be a multi decade investment cycle of several several companies in the U S, including matrix that build cryogenic storage spheres for butane and propane only two one of which is matrix of engineered and constructed prior gen.

<unk> hydrogel Spears considered considering the massive investments to build out the hydrogen infrastructure, both domestically and globally today, the bidding environment for hydrogen sphere storage is very active and we expect it to be added to our backlog in the coming quarters.

We are working on a pre feed studies with several energy majors to help them develop hydrogen storage solutions, both domestically and abroad. Additionally, in support and support a growing opportunities abroad. We are just by their exclusive relationship with France space to sell industry to offer total engineering procurement and construction solution.

For liquid hydrogen storage across the United Kingdom, Norway, Switzerland, and the European Union and expect to see a press release about this relationship later today as I said earlier, we are in the early innings of an energy Revolution, one that will occur globally matrix has positioned itself with technology business partners key employees.

Strong brand awareness at Blue chip clients to play a very active role, bringing these various projects.

Overall in both the short and long term the market supports our vision for the future are growing awarded backlog position and a return to normalized financial performance as this backlog close to the business I'll now turn the call over to Kevin to discuss our results.

Two questions. Thanks, John .

Overall, our operating results for third quarter were in line with our expectations, except for some additional cost growth as we move towards completion and close out of our midstream gas processing work more on this shortly.

Our third quarter revenue of $187 million was in line with our expectations as certain projects awarded in prior periods continue to work off while the contribution to revenue of newly awarded projects is still limited.

Progress through engineering and planning stages.

We anticipate higher revenue volumes in the fourth quarter as the newly awarded projects entered the revenue stream.

The other revenue of these newly added projects will also have a positive impact impact on our gross margins.

Our gross margin in the third quarter was two 4% as a result of under recovery of construction overhead costs on lower revenue and some parts of the business. This impacted the gross margin by approximately 400 basis points to.

The company also incurred an additional $3 3 million in the quarter related to forecasted cost to complete and close out certain midstream gas processing work, which we expect to be mechanically complete.

<unk> of July 2023.

This additional cost negatively impacted gross margin by 190 180 basis points.

Margins for the remainder of our work improved as we move towards historical margins. The margin profile of our backlog also continues to improve as we book new projects in line with previously stated ranges.

Consolidated SG&A expenses were $16 9 million in the third quarter, which is consistent with the first two quarters of the year.

We've continued our focus on cost control and expects to leverage the cost structure as revenues improve beginning in the fourth quarter.

During the first two quarters of the year, our effective tax rate was zero that continued in the third quarter of one positive exception interests.

400000 received tax refunds would record a tax benefit in the quarter.

We continued to place valuation allowances on newly generated deferred tax assets.

And we will realize the benefit associated with the reserved deferred tax assets.

Company returns to profitability.

For the three months ended March 31, 2023, we had a net loss of $12 7 million or <unk> 47 per fully diluted share on an adjusted basis, we had a net loss of $8 9 million or <unk> 33.

The primary difference between unadjusted and adjusted earnings in the quarter relates to the valuation allowance on deferred tax assets.

Now turning to our segments, starting with utility and power infrastructure.

Revenue for the segment decreased to $35 million in the third quarter compared to $51 million in the second quarter. Following the completion of a picture of her work.

In the first half of the year.

From the awarded future projects added in the second quarter will not begin to benefit revenue until late in the fourth quarter of fiscal 2023.

Third quarter gross margin was 8%. This margin was driven primarily by good execution on our mix of Reimbursable power delivery work as.

As the volume of LNG peak shaving work increases in this segment.

We will be able to sustain and exceed this gross margin level.

And process and industrial facilities revenues increased 23% to $100 million in the third quarter.

Compared to $81 million in the second quarter. The increase was primarily related to refinery turnarounds and maintenance third quarter gross margin of three 2%. So stably impacted by increased forecasted cost to complete midstream gas processing work discussed previously, which reduced gross profit by $3 3 million a quarter.

And their work in this segment, including refinery turnaround and maintenance aerospace and mining and minerals.

Which amounted to approximately 80% of segment revenue produced a gross margin of approximately 10% on strong project execution.

And finally in storage and terminal solutions.

Revenues decreased to $52 million in the third quarter as compared to $62 million in the second quarter.

While project awards have been strong for this segment with a year to date book to Bill of one six these awards will not begin to generate additional revenue until the fourth quarter.

The third quarter gross margin for the segment was a negative one 6% as the low revenue volume resulted in substantial under recovery of construction overhead cost.

The under recovery impacted gross margins by 950 basis points.

Revenue volume is expected to significantly increase in the fourth quarter as a Warner work accelerates on projects that have a higher gross margin profile.

Added revenue will virtually eliminated under recovery of construction overhead costs for this segment.

Now turning to liquidity during the third quarter, our liquidity increased to $11 9 million as a result of an expected decrease in working capital investment and the receipt of tax refunds.

Liquidity of $92 4 million is comprised of $48 2 million of unrestricted cash and $44 2 million of borrowing availability accounting also has $25 million of restricted cash to support the credit facility and borrowings of $15 million.

The company's financial position is sufficient to support the needs of the business depending growth that will come from the strong award activity achieved throughout fiscal 2023.

I will now turn the call back to John Thanks.

Thanks, Kevin before we open up for questions.

Any thoughts here, so I want to make sure that it's clear to the business is making progress toward normalized levels of operations.

Any parts of the company on plant are getting there has taken longer than we expected and by the end of this fiscal year. We have works. We will have worked through substantially the lower margin projects that were awarded and impacted during the pandemic period.

Also transformed our organization to be better able to leverage our cost structure as revenues return improve efficiency competitiveness and quality of our delivery, we strategically focus the company's business development approach of services platform on a narrower list of existing and new markets with opportunities for sustainable growth now and into the future and Siggi.

<unk> improved our project awards have backlog in terms of both size and margin profile, which we expect to continue.

As we move into our fourth quarter of the fiscal year and toward fiscal 2024, we are positioned to continue our business improvement progress by reaching $1 billion plus in backlog, achieving our revenue expectations and returning our margin profile to more historical ranges with that.

Good questions.

Thank you would you like to ask a question. Please press star one on your telephone.

We ask that you wait to be announcing please proceed with your question one moment, while we compile the Q&A roster for questions.

The first question will be coming from John France with Sidoti Your line is open.

Hi, good morning, guys and thanks for taking the questions.

I'd like to start with John something that you just closed out with regarding the low margin business from unprofitable business and still running through the P&L can you quantify how much that impacted.

Third quarter results and if I heard you correctly, you expect that to be completely done by the fourth quarter.

And so the one specific job I think Kevin said in his notes was impacted.

Margins by around three three to $3 2 billion.

And that project.

We are focused on mechanical completion.

Probably sometime within the first two weeks of July .

At which time a couple of weeks after that will be turned over to the client. So the material spending related to the project would be would be over at that timeframe.

And John as far as it goes.

So if you look on a consolidated basis I'd say, we're probably in the 15% to 20% of our revenue was at the lower margin type type work in the third quarter that that person should decrease and one in the fourth quarter it would be.

Down in the single digits low single digits and that as we move into fiscal 'twenty four.

Okay got it and specifically on <unk>.

Let's call it the two weakest segments on the quarter.

Storage and utility.

You indicated you expect storage to bounce back <unk> by the fourth quarter.

Walk us through what's going on in storage and utility.

You should think about the puts and takes as far as the revenue profile.

For the balance of the year fiscal year.

Some of the larger storage awards that we received in Q1 and Q2.

Just took more time than was usual to get those into a position where we could start spending more material money for those contracts. Each one has its own story evolved with it some of it was some regulatory issues that our clients have to get through to allow us.

To start some of that was finalizing contract negotiations some of the process around those facilities and then there is engineering upfront for us in order for us to order materials.

Get ready to put the foundations in place and so low piece of the revenue of those so we're.

On a couple of those awards are expectation assets, where our planning is going well be moving into the field on those projects here and.

Busy in fabrication and construction so those those two things those two projects alone will have a impact on revenues of it started and ended up fourth quarter plus.

Plus we've been pretty active with some other awards and bookings.

Four.

Various storage projects that.

We're going to get started.

More earnest fashion during the fourth quarter.

On the utility and power infrastructure side again, I think we're.

We're finding it's very active on the power delivery side with our bidding environment, we're expanding our client base and a little bit of our geography, where organic perspective, we are.

Our revenues in that space include more transmission work than they have historically for us that's been helping to drive revenues and margins.

And so we expect that trend to continue and then we did put in.

Relatively smaller peak.

Peak shaving facility into backlog in the first thing was the first or second quarter second quarter and again that has some upfront engineering work and things that had to get done before we can start placing orders for equipment that and move into the field and so it's of that activities will start here later in the fourth quarter.

Got it.

I guess, one last question and then I'll, let somebody else take over regarding the bookings that you're doing today.

How close are they to be back to normal historic gross margin profile.

And if some businesses or segments are not up to that level yet.

The resistance in getting there.

So Kevin can pile on here.

I would say the majority of the larger project work that we've been booking here. This fiscal year are indicative of our historical gross margin profile.

And with.

I think the right risk profile associated with those.

So there's those.

Those awards have been.

Well spread across all the segments.

Upi is probably got the.

Today, it's got the smallest volume, but it also has some of the largest opportunities out in the near term.

To turn that around so I think those projects.

Those projects that have been we've been putting in backlog.

This year all of them are in that historical profile.

I would just add on the larger projects are definitely in that.

Double digit gross margin profile.

If you get to smaller projects.

So I was a bit more competitively against.

More contractors and the margin opportunity of those projects may not be as high.

Okay guys. Thanks.

Back in the queue. Thank you.

Thank you one moment, while we prepare for the next question.

And our next question will be coming from Brent Thielman.

D a davidson your.

Your line is open.

Alright, great. Thanks, guys.

John or Kevin I guess with these.

Magnet multitude of large projects I guess picking up here on ramping up do you think you can get to that billion dollar kind of annual revenue run rate in the fourth quarter.

Hello.

One moment please.

Okay.

Okay.

Please standby one money Brett.

Okay.

Okay.

Yes.

Yes.

Okay.

Okay.

Kelly This is Brent Thielman can you hear me.

Hi, Brian .

Okay. Good.

Yeah.

Okay, great. So let me finish their question. So because your question was do we think will.

When will we get back into the $1 billion kind of annual revenue run rate and so based on where we see the.

Opportunities in front of Us and the award timing.

That should be somewhere in the second or third quarter of 2020 fours, where we believe we will be getting into that range.

Okay.

Okay, I guess, maybe after that do you still expect an acceleration from here.

Right.

I think there was some anticipation that might come this quarter.

Yes, I think we're going to see you're going to see some acceleration in our revenues in the fourth quarter and ended the first quarter.

B is probably going to be if you'd look at it.

As a graph, it's going to be a rise plateau arise plateau and so we think that'll that's kind of a step progress step process will occur as we move into fiscal 2024.

Through and work through those quarters.

Okay.

John .

John I've heard some other companies talking about sort of future pipeline prospects associated with.

Hydrogen kind of more beyond this year, you mentioned hydrogen storage projects.

As an opportunity is that something you see as early as this year where.

It's going to be seeing different quarter drought, yes, it'd be work.

<unk> got the overall hydrogen infrastructure build out.

We.

I think it's a fairly early innings, but there is still.

A lot of opportunities domestically and internationally for individual hydrogen storage spheres.

Into existing either industrial facilities or <unk>.

Into some of the early.

Our regional hubs that are getting built.

And so we're fielding a lot of those projects now, we're making a fair amount of ups that are both domestically with this new relationship with to settle we mentioned.

We hope to start providing the engineering and procurement services to support their efforts in Europe , and so feel fairly confident in saying as we move into fiscal 'twenty. Four we just start adding some hydrogen more hydrogen projects into our backlog.

They are right now where we're doing some feed work for some types of clients.

Some hydrogen facilities we're doing.

Some study work to upscale the size of hydrogen storage for a couple of energy majors, but those are not certainly not big revenue dollars, but they position us very well for what we see to be a pretty large investment cycle moving outside.

Okay.

And then just I mean, given the debt.

You guys are sort of maintain maybe even added to headcount last.

Few years in anticipation that much better.

Better market, which seems to be here now obviously pretty good.

Bid pipeline in front of you.

When you look at the.

Current position of the company your overhead.

I mean, what what level of revenue are you prepared to take on an annual basis, knowing that we're working our way back towards a $1 billion run rate here.

Yeah. Good question I think overall I think our head count as we've kept our head count pretty flat. The last couple of years, we might have added a few positions as it relates to specific project needs.

Would be unlike pullet placement really.

<unk> grown.

<unk> decreased to make down administratively.

Offsetting that.

You know as we as we look at the cost structure today.

Probably support somewhere around $1 billion.

$1 billion 1 billion one of annual revenue.

Sure there'll be some select positions will need to add depending on which projects make up that revenue stream.

But you know I.

I think one of the important aspects of our.

Our financial improvement as well.

We've talked about a lot on this call revenue volume increasing margins, improving but I think the third component is leverage on the cost structure.

Eliminating the under recovery of construction overhead costs in it are.

SG&A percentage down to a lower a lower level.

Those are important aspects, though.

As a company, we're going to be doing all we can say.

On a hold of the cost structure.

While still having the infrastructure, we need to execute on the project now as we return to profitability there'll be some variable cost to come back in but our.

Our overall basis, we're planning on holding that cost structure to get the get the leverage.

Okay very good thanks, Thanks al.

Thank you and I would like to turn the call back over.

To John Hewitt for closing remarks.

Thanks.

Thanks, everybody for taking the time today to join us on the call.

Wish everybody be safe out there and we look forward to speaking with you on our next call.

Thank you all for particularly participated these conference call. This concludes today's event you may all disconnect and everyone enjoy the rest of your day.

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