2023 Matrix Service Company Earnings Call
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It's been 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 join the webcast today can be found under events and presentations on the Investor Relations section of Matrix Service Company Dark song.
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 because 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 today.
The extent, we utilize non-GAAP measures reconciliations will be provided in various press releases periodic SEC filings and on our website.
Before I turn the call over to John Hewitt I'd like to share information about several upcoming investor conferences and corporate access opportunity.
We will be holding one on one meetings at the D. A Davidson annual diversified industrial and services conference, which will be held in Nashville September 20, <unk> and 20 seconds.
We will have a virtual non deal road show hosted by Roche <unk> Company in October .
On November 14th it's a matrix service company virtual annual stockholder meeting.
And finally, we will present at and hold one on one meetings at the Sidoti Microcap Virtual conference planned for November 15th and 16th if you would like additional information on any of these events I invite you to contact us through the matrix Service Company Investor Relations website, I will now turn the call over to John .
Thank you Kelly and good morning, everyone. We've been working hard over the past few years to set the business up for growth improved performance and long term success as we begin to see the results of this work I want to remind everyone of our duty to maintain a safe work environment.
With more project volume comes a larger number of new field employees or employee hours and expanded geographic footprint of operations and an increased occurrence of that risk activities. This will demand even more attention fiber based on his leadership.
Recently, the construction industry overall has seen a rise in job site incident and increased challenges to achieve the kind of safety performance, it's all before and even during the pandemic.
Matrix and our industry peers saw record safety performance during the height of the pandemic as the focus on health protocols were strictly enforced to prevent the spread of the disease, everyone became extra vigilant about everything including safety processes and procedures, which resulted in significantly reduced incidents.
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As the industry returns to a more normalized work environment training and planning are critical as a situational awareness culture and most of all individual decisions.
Matrix every employee has the right to stop work if their environment for activity feels unsafe.
That is not only a right, but a duty we have to ourselves and others.
Equally important is the experience expectations and accountability that leadership can provide at every level safety is our number one core value and I challenged every employee to be accountable to themselves and each other on that value proposition.
Each of US our company and our industry must do better to keep everyone safe every day.
Turning to the quarter hopefully our listeners today saw the press release, we issued on August 21st as well as our earnings release yesterday afternoon.
<unk> recap the key highlights from those releases in a moment.
I'd like to first acknowledge the entire matrix team for all the effort put forth to get us to where we are today.
Today matrix is in a position of strength, which includes the best backlog position at four years, we have transformed our organization to be more cost efficient, while ensuring our skills expertise and strong brand are aligned with our core markets. We are positioned to safely execute projects with improved operating processes while continue.
To deliver best in class quality for our customers.
I'd like to touch on some of our recent accomplishments and what that means for the future of the company.
As we announced earlier, we generated total awards of $464 million in our fiscal fourth quarter. The highest quarterly awards at five years, resulting in a book to bill ratio of two three.
This was our eighth consecutive quarter with a book to bill at or above one O.
Full fiscal year awards totaled $1 3 billion to highest annual amount in four years, resulting in a book to bill of one seven.
Operator: Fourth quarter, fiscal 2023, earnings call. Participants on today's call will include John Hewitt, President and Chief Executive Officer, and Kevin Cavanagh, Vice President and Chief Financial Officer. Presentation materials we will be referring to during the webcast today and be found under events and presentations on the Investor Relations section of MatrixServiceCompany.com.
For the year it was at or above one two in each of our operating segments, reflecting the strength and momentum of our business.
While we have a strong backlog across each of our segments. The utility and power infrastructure segment was a standout recording a book to Bill of <unk> nine two for the fourth quarter at three one for the year on the back of a large capital project Awards have.
Operator: 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 Security's Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements because of various factors, including those discussed in our most recent annual report on Form 10K and in subsequent filings made by the company with the SEC. To the extent we utilize non-GAP measures, reconcilations will be provided in various press releases, periodic SEC filings, and on our website.
We've been building backlog consistent over the course of the year earlier. This year I said that we expected to end the year with a backlog north of $1 billion and I'm pleased to report that our ending backlog as of June 32023 was $1 1 billion.
This represents an 85% year over year increase.
The company is well positioned with a high quality backlog that contains not only larger long term capital projects, but also our traditional small cap projects and recurring repair and maintenance work. It is important to note that these small cap projects repair and maintenance services are strategic to the company's portfolio and represent on average.
Operator: Before I turn the call over to John Hewitt, I'd like to share information about several upcoming investor conferences and corporate access opportunities. We will be holding one-on-one meetings at the DA Davidson Annual Diversified Industrial and Services Conference, which will be held in Nashville, September 21st and 22nd. We will have a virtual non-deal road show hosted by Rose and Company in October. On November 14th is the Matrix Service Company virtual annual stockholder meeting.
Over 50% of our annual revenue.
While we will disclose individual projects in greater detail as our clients permit us to do so the most recent award is a 180000 gallon per day LNG peak shaving facility for Dominion energy in North Carolina.
This exemplifies our deepening with client relationship with Dominion and follows the 100000 gallon per day LNG peak shaving facility, we completed for them in December of 2022 at the Salt Lake City location.
Operator: And finally, we will present and hold one-on-one meetings at the Sedodi MicroCAP virtual conference planned for November 15th and 16th. If you would like additional information on any of these events, I invite you to contact us through the Matrix Service Company Investor Relations website.
This will be the fifth utility grade LNG peak shaving facility for various clients awarded a matrix since 2017 three of which are completed.
Major set out with a specific strategy to leverage our premier cryogenic storage brand combined with our EPC balance of plant capabilities.
Kellie Smythe: I will now turn the call over to John Hewitt.
John Hewitt: Thank you, Kelly, and good morning, everyone. We've been working hard over the past few years to set the business up for growth and group performance and long-term success. As we begin to see the results of this work, I want to remind everyone of our duty to maintain a safe work environment. The more project volume comes a larger number of new field employees, more employee hours, and expanded geographic footprint of operations, and an increased occurrence of at-risk activities.
Offer full solutions into the growing small to medium sized LNG facility market. This market includes peak shaving units backup power plant fuel supply shipboard Green rocket fueling export facilities. Our teams have achieved a dominant position in this end market better execution.
Performance has built long lasting relationships as evidenced with this recent award.
John Hewitt: This will demand even more attention by the Davidson's leadership. Recently, the construction industry overall has seen a rise in job site incidents and increased challenges to achieve the kind of safety performance it saw before and even during the pandemic. Matrix and our industry peers saw record safety performance during the height of the pandemic as the focus on health protocols were strictly enforced to prevent the spread of the disease. Everyone became extra vigilant about everything, including safety processes and procedures, which resulted in significantly reduced incidents and injuries.
The opportunity pipeline in the small to mid scale LNG market is strong with both new and repeat clients like Dominion.
Given this positioning and the volume of already proposed that bidding opportunities combined with the ongoing feed study, where we expect to continue adding these types of projects to our backlog in the near term and out into the future.
Beyond this strong position in the small to medium scale LNG market, we continue to be very active across all of our segments and core markets. For example, we have an industry leading brand for specialty vessels and facilities for ammonia ethane and other natural gas liquids that brand extends to hydrogen storage vessels and facilities.
John Hewitt: As the industry returns to a more normalized work environment, training and planning are critical as is situation awareness, culture, and most of all individual decisions. Matrix, every employee has a right to stop work if their environment or activity feels unsafe. That is not only a right, but a duty we have to ourselves and others. Equally important is the experience, expectations, and accountability that leadership can provide at every level. Safety is our number one core value, and I challenge every employee to be accountable to themselves and each other on that value proposition. Each of us, our company and our industry, must do better to keep everyone safe every day.
As well as development of large scale storage solutions for various clients.
Our contractor of choice position for electrical infrastructure services, Substations to transmission and distribution and other electrical work presents a strong growth potential for the company.
Carbon capture construction opportunities are growing we continue to be a leading contractor in traditional energy for refinery maintenance repair turnarounds and projects many of which are focused on lower carbon process improvements such as renewable fuel refining we.
We remain active in crude and refined product storage tanks and terminals, both new build and repair and maintenance.
John Hewitt: Turning to the quarter, hopefully our listeners today saw the press release we issued on August 21st, as well as our earnings release yesterday afternoon. I'll recap the highlights from those releases in a moment, who would like to first acknowledge the entire Matrix team for all the effort put forth to get us to where we are today. Today, Matrix is in a position of strength, which includes the best backlog position in four years.
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And finally in midstream gas compression bindings, and minerals chemical and petrochemical and aerospace projects on an E only see only or full EPC basis leverage our project skills construction experience and engineering capabilities all.
All of these end markets have strong <unk> and macroeconomic drivers behind them, including global energy security domestic energy supply assurance clean energy transition goals commodity demand to support renewables and industrial infrastructure re shoring and federal infrastructure investments that will start to meaningfully flow into the <unk>.
John Hewitt: We have transformed our organization to be more cost efficient while ensuring our skills, expertise, and strong brand are aligned with our core markets. We are positioned to safely execute projects with improved operating processes while continuing to deliver best-in-class quality for our customers.
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Between our market focus positioning macro drivers and our transformed organization. We will continue to build on our diversified backlog portfolio, which will lay the foundation for the business to grow at least sustainable well into the future.
John Hewitt: I'd like to touch on some of our recent accomplishments and what that means for the future of the company. As we announced earlier, we generated total of awards of 464 million in our fiscal fourth quarter, the highest quarterly awards in five years, resulting in a book to bill ratio of 2.3. This is our age consecutive quarter with a book to bill at or above 1.0. For the full fiscal year, awards totaled 1.3 billion.
I'll hand, the call over to Kevin now to review the results and give you a sense of our backlog or transition into revenue over the coming quarters.
Thanks, John .
We're all we are pleased with the trends, we're seeing in the business and the improving results during the fourth quarter of fiscal 2023.
John Hewitt: The highest annual amount in four years, resulting in a book to bill of 1.7. For the year, it was at or above 1.2 in each of our operating segments, reflecting the strength and momentum of our business. While we have strong backlog across each of our segments, the utility and power infrastructure segment was a standout. Recording a book to bill of 9.2 for the fourth quarter and 3.1 for the year on the back of a large capital project awards.
We've talked previously about the issues impacting the business in the past few years revenue volume was low as a result of limited project award activity two years ago, our backlog dipped below $500 million and our quarterly revenue decreased to $160 million.
In addition, our revenue was dominated by projects bid during a very competitive environment resulted resulting in limited.
John Hewitt: We've been building backlog consistently over the course of the year. Earlier this year, I said that we expected to end the year with a backlog north of 1 billion and I'm pleased to report that our ending backlog as of June 30, 2023 was 1.1 billion. This represents an 85 percent year-over-year increase. The company is well-positioned with a high-quality backlog that contains not only larger long-term capital projects, but also our traditional small cap projects and recurring repair and maintenance work.
Margin opportunity on the projects that were awarded during that period.
These issues resulted in margin outcomes, well below our historical range and revenue levels that caused under recovered construction overheads and poor leverage of SG&A, all of which combined to account for our results that were below our expectations.
Company has been consistently working to improve these results.
We initially reduced our overhead structure by 30% and have since continued to tightly manage costs, we focused the business to our core markets closing or selling noncore assets, we streamlined and transformed our business for the future with a focus on increasing efficiency improving performance and ultimately providing more consistent bottom line.
John Hewitt: It is important to note that these small cap projects, repair and maintenance services are strategic to the company's portfolio and represent on average over 50 percent of our annual revenue. While we will disclose individual projects in greater detail as our clients permit us to do so, the most recent award is a 180,000-gallon per day LNG peak shaving facility for Dominion Energy in North Carolina. This exemplifies our deepening of client relationship with Dominion and follows the 100,000-gallon per day LNG peak shaving facility.
Results and long term sustainability for all stakeholders finally, with our more focused approach to business development in our core markets. We have been growing the backlog with projects represent a better margin opportunity.
The results for the fourth quarter of fiscal 2023 demonstrate we're making progress toward our business improvement objectives.
John Hewitt: We completed for them in December of 2022 at their Salt Lake City location. This will be the fifth utility-grade energy peak shaving facility for various clients awarded to Matrix since 2017, three of which are completed. Matrix set out with a specific strategy to leverage our premier cryogenic storage brand combined with our EPC balance of planned capabilities to offer full solutions into the growing small to medium-sized energy facility market. This market includes peak shaving units, backup power plant fuel supply, ship bug green, rocket fueling, and export facilities.
Let's take a closer look at project awards and backlog.
Project Award activity throughout fiscal 2023 was significant and the trend is expected to continue.
During fiscal 2023, we averaged just under $200 million in revenue per quarter at the same time, we averaged over $330 million in project Awards.
This level of awards will drive higher revenue as we move through fiscal 2024 with the most significant increase is expected in the second half of the year as more capital projects transition from engineering into construction.
These long term project awards will also benefit fiscal 2025 and beyond.
John Hewitt: Our teams have achieved a dominant position in this end market and our execution performance has built long-lasting relationships as evidence with this recent award. The opportunity pipeline in the small to mid-scale energy market is strong with both new and repeat clients like Dominion. Given this positioning and the volume of already proposed and bidding opportunities combined with the ongoing feed study work, we expect to continue adding these types of projects to our backlog in the near-term and out into the future.
It allows us to fully recover our construction overhead and appropriately leverage SG&A.
The margin opportunity from the backlog booked in fiscal 2023 is in line with our historical margins. In addition, we have substantially completed the backlog of competitively priced projects I mentioned previously together these factors provide for an environment where we.
We can return to our historical consolidated gross margin range of 10% to 12% and achieve key business metrics.
John Hewitt: Beyond this strong position in the small to medium-scale energy market, we continue to be very active across all our segments and core markets. For example, we have an industry leading brand for specialty vessels and facilities for ammonia, effane, and other natural gas liquids. That brand extends to hydrogen storage of vessels and facilities as well as development of large-scale storage solutions for various clients. Our contractor choice position for electrical infrastructure services from substations to transmission distribution and other electrical work presents a strong growth potential for the company.
The fourth quarter results provide good evidence of these trends are occurring revenue increased 10% from the prior quarter to $205 9 million as a contribution to revenue of newly awarded projects has begun to make an impact.
Gross margin improved to seven 1%, which marks the highest quarter of the year and significantly higher than the third quarter gross margin of two 4%.
Our growth our margins improved sequentially due to strong project execution and improved construction overhead recovery.
The impact from under recovered overhead improved from a 400 basis point impact in the third quarter to a 200 basis point impact in the fourth quarter as a result of the 10% increase in revenue.
John Hewitt: Carbon capture construction opportunities are growing. We continue to be a leading contractor in traditional energy for refinery maintenance repair, turnarounds, and projects, many of which are focused on lower carbon process improvements such as renewable fuel refining. We remain active and include and refine product storage tanks and terminals, both new build and repair and maintenance. And finally, mid-stream gas compression, binding minerals, chemical and petrochemical, and aerospace projects on an E only, C only, or full EPC basis, leverage our project skills, construction experience, and engineering capabilities.
We view the under recovery in construction overhead in fiscal 2023, as an investment in our future as it related primarily to our divisions responsible for executing large capital projects.
<unk> storage tanks and terminals this investment was necessary given the prospects in our opportunity pipeline and the strength in the awards through the course of fiscal 2023, which will drive higher revenue and will eliminate this under recovery in fiscal 2024.
Consolidated SG&A expenses were $17 million in the fourth quarter.
John Hewitt: All of these end market tips, strong tailwinds, and macroeconomic drivers behind them, including global energy security, domestic energy supply assurance, clean energy transition goals, commodity demand to support renewables and industrial infrastructure reshoring, and federal infrastructure investments that will start to meaningfully flow into the project phase during calendar year 2024.
Consistent with the first three quarters of the year. The company continues to focus on cost control and expects to leverage its optimized cost structure as revenue improves.
We also completed the sale of a small noncore business during the fourth quarter, which resulted in a gain of $2 9 million.
The overall performance of the business improved significantly with the company producing a net loss.
John Hewitt: Between our market focus, positioning, macro drivers, and our transform organization, we will continue to build on our diversified backlog portfolio, which will lay the foundation for the business to grow and feed sustainable well into the future.
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<unk> to a net loss of $12 7 million or <unk> 47 per share in the third quarter.
For the fourth quarter, we had an adjusted net loss of $3 1 million or.
Kevin Cavanagh: I hand a call over to Kevin now to review the results and give you a sense of how our backlog will transition into revenue over the coming quarters.
Or <unk> 11 per share, which excludes the gain from the sale of the previously mentioned non core assets.
Kevin Cavanagh: Thanks, John. Overall, we are pleased with the trends we are seeing in the business and the improving results during the fourth quarter of fiscal 2023. We have talked previously about the issues impacting the business the past few years.
Adjusted EBITDA was a positive $2 3 million in the quarter as compared to a loss of $7 7 million in the third quarter.
Turning quickly to the segments.
Storage and terminal solutions revenue increased 23% to $64 1 million in the fourth quarter as compared to $52 2 million in the third quarter as a result of revenue contribution from recently awarded capital projects.
Kevin Cavanagh: Revenue volume was low as a result of limited project award activity. Two years ago, our backlog dipped below 500 million and our fully revenue decreased to 160 million. In addition, a revenue was dominated by projects bid during a very competitive environment resulted in resulting in limited margin opportunity on the projects that were awarded during that period. These issues resulted in margin outcomes well below our historical range and revenue levels that caused under recovered construction overheads and poor leverage of SGNA, all of which combined to account for results that were below our expectations.
While the increase was significant it was lower than we expected due to changes that can occur in project execution schedules.
Gross margin of three 2% was negatively impacted by low revenue volume.
Which led to the under recovery of construction overhead costs, while improved the under recovery still negatively impacted gross margins by over 500 basis points.
As John mentioned, the project awards and market opportunities for LNG, Ngls ammonia and hydrogen storage and facilities are strong as such the short and long term prospects for the storage and terminal solutions segment are positive and we expect to achieve improved margins and eliminate the under recovery under recovery issue.
Kevin Cavanagh: The company has been consistently working to improve these results. We initially reduced our overhead structure by 30% and have since continued to tightly manage costs. We focused the business to our core markets, closing or selling non-core assets. We streamlined and transformed our business for the future with a focus on increasing efficiency, improving performance and ultimately providing more consistent bottom line results and long term sustainability for all stakeholders. Finally, with our more focused approach to business development and our core markets, we have been growing the backlog with projects to present a better market opportunity.
For this segment during fiscal 2024 as revenues continue to increase.
In the utility and power infrastructure segment revenue increased to $39 1 million in the fourth quarter compared to $35 million in the third quarter.
Fourth quarter gross margin was nine 6%.
Merrily driven by strong execution on power delivery projects.
<unk> revenue from a peak Shaver project that was previously added to backlog during the second quarter and the full recovery of construction overhead costs.
Kevin Cavanagh: The results for the fourth quarter of fiscal 2023 demonstrate we are making progress toward our business improvement objectives. Let's take a closer look at project awards and backlog. Project award activity throughout fiscal 2023 was significant and the trends is expected to continue. During fiscal 2023, we averaged just under 200 million in revenue per quarter. At the same time, we averaged over 330 million in project awards. This level of awards will drive higher revenue as we move through fiscal 2024, but the most significant increase is expected in the second half of the year as more capital projects transition from engineering into construction.
The LNG peak Shaver awarded in Q4, we will begin to drive enhanced revenue and improve operating results in the second half of the fiscal year and beyond.
Finally in process process and industrial facilities. The revenue level remained strong increasing to $102 7 million in the fourth quarter compared to $99 7 million in the third quarter.
Quarter gross margin of eight 2%.
Included a midstream gas processing project.
Which we have discussed in previous quarters. This project reached mechanical completion in line with our previous forecast and we will be the mobilized in the first quarter of fiscal 2024.
Kevin Cavanagh: These long term project awards will also benefit fiscal 2025 and beyond and allow us to fully recover our construction overhead and appropriately leverage SDNA. The margin opportunity from the backlog book and fiscal 2023 is in line with our historical margins. In addition, we have substantially completed the backlog of competitively priced projects I mentioned previously. Together, these factors provide for an environment where we can return to our historical consolidated gross margin range of 10 to 12% and achieve key business metrics.
Other work in this segment, including refinery turnaround and maintenance aerospace and the renewable diesel project amounted to approximately 80% of segment revenue and produced a gross margin of approximately 10% on strong project execution. This segment fully recovered construction overhead cost which contributed to margin performance.
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With the completion of gas processing of the gas processing project as well as the sale of certain noncore assets.
Revenue in this segment will temporarily decrease in fiscal 2024. However.
Kevin Cavanagh: The fourth quarter results provide good evidence these trends are occurring revenue increased 10% from the prior quarter to 205.9 million as a contribution to revenue of newly awarded projects has begun to make an impact. Gross margin increase to 7.1%, which marks the highest quarter of the year and significantly higher than the third quarter gross margin of 2.4%. Our margins approve sequentially due to strong project execution and improve construction overhead recovery. The impact from under-recovered overhead improved from a 400 basis point impact in the third quarter to a 200 basis point impact in the fourth quarter as a result of the 10% increase in revenue.
However, this decrease is expected to reverse given the drivers for the various market served by this segment as well as a large capital project in backlog that are scheduled to benefit revenue in early fiscal 2025.
Now turning to the balance sheet.
During the fourth quarter, our cash balance increased $6 6 million to $79 8 million after paying back $5 million of borrowings.
On our credit facility, leaving total borrowings of $10 million at June 30 <unk>.
Liquidity of $92 6 million is up slightly in the quarter and is comprised of $54 8 million of unrestricted cash.
$37 8 million of borrowing availability.
<unk> also has 25 million of restricted cash to support the credit facility.
Kevin Cavanagh: We viewed the under-recovering construction overhead in fiscal 2023 as an investment in our future, as it related primarily to our division's responsible for executing large capital projects, including storage tanks and terminals. This investment was necessary given the prospects in our opportunity to pipeline and the strength and the awards through the course of fiscal 2023, which will drive higher revenue and will eliminate this under-recovering in fiscal 2024. Consolidated SGNA expenses were 17 million in the fourth quarter, consistent with the first three quarters of the year.
Our conservative management of the balance sheet puts us in a position to support the growth in.
In the business in fiscal 2024.
Overall, the operating results for the fourth quarter improved in line with our expectations. We believe we are moving past the issues that have impacted us in the past three years and we are excited about what lies ahead.
We expect our revenue.
It will be at or about the current level in the first couple of quarters of fiscal 2024, and then show strong growth in the second half of fiscal.
Of the fiscal year as a result of awards in fiscal 2023 as well as awards expected in fiscal 2024 weeks.
Kevin Cavanagh: The company continues to focus on cost control and expects to leverage its optimized cost structure as revenue improves. We also completed the sale of a small non-core business during the fourth quarter, which resulted in a gain of 2.9 million. The overall performance of the business improves significantly with the company producing in that loss of 0.3 million or one cent per share, compared to on that loss of 12.7 million or 47 cents per share in the third quarter.
We expect Q1 award levels to be similar to Q4 of 2023.
For the full year this will create significant year over year revenue growth.
Bottom line results will follow a similar pattern as the revenue.
We expect to generate net income near breakeven in the first half of fiscal 2024 with significantly significantly stronger results in the second half of the fiscal year. As a result, adjusted EBITDA is expected to be positive across the fiscal year.
Kevin Cavanagh: For the fourth quarter, we had an adjusted net loss of 3.1 million or 11 cents per share, which excludes the gain from the sale of the previously mentioned non-core assets. Adjusted EBITDA was opposed to 2.3 million in the quarter, is compared to a loss of 7.7 million in the third quarter. Turning quickly to the segments, storage and terminal solutions revenue increased 23% to 64.1 million in the fourth quarter, as compared to 52.2 million in the third quarter, as a result of revenue contribution from recently awarded capital projects.
As we move through the fiscal year, we anticipate accelerated movement toward our longer term financial targets I will now turn the call back to John .
Thank you Kevin before we open for questions I'd like to reiterate some key takeaways for today.
Spending recovery in our end markets is beginning to materialize in a meaningful way as we commence work on recently awarded large capital projects, we have strong visibility into our revenue and are focused on maximizing our profitability after ongoing and an internal transformation that has optimized our operating structure, we believe our strategic approach to the energy and industrial end.
Kevin Cavanagh: While the increase was significant, it was lower than we expected due to changes that can occur in project execution schedules. Thus margin of 3.2% was negatively impacted by low revenue volume, which led to the under recovery of construction overhead costs. While improved, the under recovery still negatively impacted gross margins by over 500 basis points. As John mentioned, the project awards and market opportunities for LNG, NGLs, ammonia, and hydrogen storage and facilities are strong.
We serve a strong tailwind and deep client relationships. We hold that have resulted in multiple projects will lead to further near term backlog growth a strong performance for the foreseeable future and the long term the reshaping our global energy markets energy supply security, the push towards lower carbon activity and industrial <unk>.
<unk> all create opportunities that we expect will drive our business for years to come.
Finally, I generally don't like to talk about our share price on earnings calls, but the last time, we had a backlog of this size was in June of 2019, and our share price represented a much better valuation of the business and its potential.
Kevin Cavanagh: As such, the short and long-term prospects for the storage and terminal solutions segment were positive, and we expected to improve margins and eliminate the under recovery issue for this segment during fiscal 2024 as revenues continued to increase. In the utility and power infrastructure segment, revenue increased to 39.1 million in the fourth quarter, compared to 35 million in the third quarter. Fourth quarter gross margin was 9.6%. Primarily driven by strong execution on power delivery projects, the start of revenue from a peak-shable project that was previously added to backlog during the second quarter, and the full recovery of construction overhead costs.
As we execute on our backlog and pursue the further revenue opportunities we see in our end markets I am confident we are on a strong path to generate value for our stockholders with that I'd like to call up for questions.
Okay.
Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
One moment for questions.
Our first question comes from John <unk> with Sidoti You May proceed.
Kevin Cavanagh: The LNG peak-shaver awarding Q4 will begin to drive enhanced revenue and improve operating results in the second half of fiscal year and beyond. Finally, in process and industrial facilities, the revenue level remains strong increasing to 102.7 million in the fourth quarter compared to 99.7 million in the third quarter. Fourth quarter gross margin of 8.2% included a midstream gas processing project, which we have discussed in previous quarters. This project reached mechanical completion, in line with our previous forecast, and we will be demobilized in the first quarter of fiscal 2024.
Good morning, everybody and congratulations on another great bookings quarter.
John I'd like to start with the <unk>.
Gas processing job, it's kind of been weighing on results for the past couple of quarters.
Give us an update is that job completed or if not how long will continue to hit the P&L.
Yes, so first of all congratulations on the Jets victory last night.
Thanks.
Uh huh.
I hope you can find another quarterback.
Yeah. So the gas processing project, we reached mechanical completion in.
Kevin Cavanagh: As a work in this segment, including refining return around maintenance, aerospace, and a renewable diesel project amounted to approximately 80% of segment revenue and produced a gross margin of approximately 10% on strong project execution. This segment fully recovered construction overhead cost, which contributed to margin performance. With the completion of gas processing of the gas processing project, as well as the sale of certain local assets. Revenue in this segment will temporarily decrease in fiscal 2024.
In the fourth quarter.
And.
Are in a process of de mobilizing, which will be completed de mobilizing in this quarter facilities.
<unk> facilities up and running our relationships with our clients good and we do not expect any material change in the forecast of that job.
And to be clear so the the results in the fourth quarter. It basically came in in line with our forecast that we had last quarter.
Kevin Cavanagh: However, this decrease is expected to reverse, given the drivers for the various markets served by this segment, as well as a large capital project and backlog, that is scheduled to benefit revenue in early fiscal 2025.
Right. So, it's a $3 million drag per quarter or has been roughly.
So we'll continue to be dragged into the first quarter and.
And largely done by the second is that what I'm hearing from you guys.
No it will have a much smaller impact than that.
Kevin Cavanagh: Now turning to the balance sheet. Here in the fourth quarter, our cash balance increased 6.6 million to 79.8 million after paying back 5 million of borrowings on our credit facility, leaving total borrowings of 10 million at June 30. The liquidity of 92.6 million is up slightly in the quarter, and is comprised of 54.8 million of underster to cash and 37.8 million of borrowing available. Coming also has 25 million of restricted cash to support the credit facility.
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First quarter here.
Okay.
Got it.
And in regards to your comments about the.
First quarter awards are going to be similar to the fourth quarter and you also I think in your prepared remarks in the first half is looking.
It might be it's going to be a good booking half of 'twenty 'twenty four would you expect to exit fiscal 2024.
Backlog profile of above that $1 billion threshold or are not.
Kevin Cavanagh: Our conservative management and the balance sheet puts us in a position to support the growth in the business in fiscal 2024. Overall, the operating results for the fourth quarter improved in line with our expectations. We believe we are moving past the issues that have impacted us the past three years, and we are excited about what lies ahead. We expect our revenue will be outer about the current level in the first couple quarters of fiscal 2024, and then show strong growth in the second half of fiscal of the fiscal year as a result of awards in fiscal 2023, as well as awards expected in fiscal 2024.
Yes, I think based on what we're seeing in the market and as always everything is driven by timing of awards, but where we are in our proposal activity and some contract negotiations that.
Our expectation is we would exit the fiscal year and a better backlog position than we than we entered it.
Great Great News and just lastly, given that booking profile can you talk a little bit about labor and staffing are you going to have to add personnel are you satisfied with the current staffing level given the backlog profile.
Yes.
From a professional.
Kevin Cavanagh: We expect Q1 award levels to be similar to Q4 of 2023. For the full year, this will create significant year-over-year revenue growth. The bottom line result will fall with similar pattern as out of the revenue, expected to generate net income near break even in the first half of fiscal 2024. The significantly stronger result in the second half of the fiscal year as a result to just leave it off, is expected to be positive across the fiscal year.
<unk> professional level.
There are opportunities for us to add key positions into our operations.
For our projects and so we've been.
We've been pretty active in recruiting.
Over the last quarter or two because we saw the work that was coming so we will continue to do that and have opportunities for that both in our project resources in engineering resources.
And then from a craft labor standpoint, I think we've always been pretty successful.
Kevin Cavanagh: As we move through the fiscal year, we anticipate accelerated movement for our long return financial partners.
Being able to recruit and get craft labor to our job sites.
Operator: We'll now come back to go on.
Around North America, and so while that.
John Hewitt: Thank you, Kevin. Before we open for questions, I'd like to reiterate some key takeaways for today. The spending recovery in our end markets is beginning to materialize and a meaningful way.
Always is one of the challenges for our business and certainly our peers. We think we do a pretty good job of that and creating.
John Hewitt: As we commence work on recently awarded large capital projects, we have strong visibility into our revenue and are focused on maximizing our profitability, after ongoing and internal transformation that is optimized our operating structure. We believe our strategic approach to the energy and industrial end markets we serve, the strong tailwinds, and deep client relationships we hold that have resulted in multiple projects will lead the further near-term backlog growth of strong performance for the foreseeable future. In the long term, the reshaping of global energy markets energy supply security, the push towards lower carbon activity, and industrial resharing all great opportunities that we expect will drive our business for years to come.
Employer of choice.
Kind of situation, where people want to come to work.
I'll just add on that.
One of the things we're trying to do is leverage the back office cost structure, we have and so as John mentioned areas, where we will potentially need to.
John Hewitt: Finally, I generally don't like to talk about our share price on earnings calls, but the last time we had a backlog of this size was in June of 2019, and our share price represented a much better valuation of the business and its potential. As we execute on our backlog and pursue the further revenue opportunities we see in our end markets, I'm confident we are on a strong path to generate value for our stockholders.
Augment our current staffing, but if you look at back office, there should be minimal increases there.
Got it thanks, John and Kevin Congratulations again.
Thank you.
Thank you.
One moment for questions.
Our next question comes from Oliver Corners with da Davidson You May proceed.
Hi, guys. Thanks for having me I'm sitting in for Brent Thielman today.
George I was wondering if you could.
Yes.
I was wondering if you could discuss the net operating losses, you have available and how Thats shield your tax expense for fiscal 2024.
Yes, so we do have a number of.
Operator: With that, I'd like to recall the question. Thank you.
Tax attributes out there that we're going to be able to utilize.
So I think youre going to see.
Operator: As a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again.
And extremely low effective tax rate in fiscal 'twenty four.
We're in the low single digits as our current estimate.
Operator: One moment for questions.
That benefit will also continue into fiscal 'twenty five.
The tax rate will probably be a little higher than but it'll still be low.
John Franzreb: Our first question comes from John Franzreb with Sidoti, you may proceed. Good morning, everybody, and congratulations on another great bookings quarter.
Compared to historical rates.
Guess is it's probably going to be somewhere around 10%.
Okay.
Estimate right now.
John Hewitt: John, I'd like to start with the guest processing job that's kind of weighing on results for the past couple of quarters. Give me some update, is that job completed or if not how long we'll continue to hit the P&L? Yes, so, well, first of all, congratulations on the jet spectrary last night. Thanks. I hope you can find another quarterback. Yes, so the guest processing project, we reach mechanical completion in the fourth quarter and are in a process of demobilizing which will be completed demobilizing in this quarter.
That's great. Thanks, so much.
And then second.
Can we talk about the process and industrial facilities segment in the context of 2024 versus 2023 should we anticipate lower work volume this year, but improved profitability.
Especially as you get through that that project that we just talked about.
That's exactly right.
We'll have we've got a we've got a little bit of a timing gap ongoing capital projects start.
There was a project we got awarded in the third quarter in that segment and that project will meaningfully benefit revenues until the very first of fiscal 'twenty five.
And the projects that you know.
John Hewitt: Facilities up and running, relationships with the clients good, and we do not expect any material change in the forecast of that job. And to be clear, so the results in the fourth quarter, it basically came in and line with our forecast that we had last quarter. Right, so it's a $3 million drug per quarter or has been roughly so continue to be a drug into the first quarter and largely done by the second.
This project has had some issues that's completed now so.
There will be a dip in revenue. There. In addition, we also sold some noncore assets.
So that segment will be down, but I think the profitability should be better.
And when you think about while that's decreasing the increases in the other segments. The backlog on those projects will be starting in fiscal 'twenty four and benefiting the here. So from a consolidated basis want to be clear that we expect some good growth in revenue.
John Hewitt: Is that what I'm hearing from you guys? No, it'll have a much smaller impact in the first quarter here. Got it. And in regards to the comments about the first quarter awards, I'm going to be similar to the fourth quarter, and you also, I think, can you prepare to mark the first half? It's looking like it's going to be a good booking half of 2024. Would you expect to exit fiscal 2024 within a backlog profile of above that billion dollar threshold or not?
<unk> for the fiscal year.
Awesome, that's great and then I guess last question if I can sneak it in.
Could you discuss your capital allocation priorities is M&A on the table as youre starting to see the business stabilize.
Yes, so right now our focus has been returning to profitability.
Our so our capital priorities are going to be related to executing on these.
Projects, we're putting in backlog and the ones that will be put it in backlog so that means.
John Hewitt: Yeah, I think based on what we're seeing in the market and as always, everything's driven by a timing of awards, but where we are in our proposal activity and some contract negotiations that our expectation is we would exit the fiscal year in a better backlog position than we then we entered it. Great, great news.
There may be additional capital expenditures, we need to make.
We've definitely spent less on capex past few years, so there could be some capex there that'll be a priority.
And we will continue to manage our working capital locally the second priority, but I would expect that youre going to see positive cash flows as we move through the year.
John Hewitt: And just lastly, given that booking profile, can you talk a little bit about labor and staffing? Are you going to have to add personnel or are you satisfied with the current staffing level given the backlog profile? Yeah, no, I think from a professional level, there are opportunities for us to add key positions into our operations for our projects. And so we've been pretty active in recruiting over the last quarter or two because we saw the work that was coming.
Once we return to profitability, yes, we.
We'll think about.
What's the right mix next steps, which could include M&A.
Awesome. Thanks, so much guys I'll jump back in the queue really appreciate it.
Okay.
Thank you and as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.
And im not showing any.
One moment for questions.
John Hewitt: So we'll continue to do that and have opportunities for that, both in our project resources and engineering resources. And then from a craft labor standpoint, I think we've always been pretty successful, being able to recruit and get craft labor to our job sites around North America. And so that, you know, always is one of the challenges for our business and certainly our peers, you know, we think we do a pretty good job of that and creating a employer choice kind of situation where people want to come to work.
Our next question comes from John <unk> with Sidoti You May proceed.
Yes, I'm just curious about your expectations for the inflation reduction reduction Act and when you would expect to see jobs related to that.
Hit your backlog profile any kind of thoughts about that would be helpful.
I think what we're our expectation is that those.
Dollars weren't necessarily running into shovel ready projects when they became available.
John Hewitt: I just add on that, you know, one of the things we're trying to do is leverage the back office cost structure we have. And so John mentioned areas where we'll potentially need to augment our current staffing, but if you look at back office, you know, there should be minimal increases there. Got it. Thanks, John and Kevin, and congratulations again. Thank you.
What we think is they'll start having a material impact.
On project opportunities for us in calendar 'twenty four.
Operator: One moment for questions.
Got it got it and how should we think about margin gross margin recovery across the segments, given the court slow, but meaningful turnaround in the backlog profile, where you're going to see first that had the most meaningful impact and where is it going to leg.
Be a little bit when you're looking at it on a segment basis.
Oliver Cornis: Our next question comes from Oliver Cornis with DA Davidson. You may proceed. Hi guys, thanks for having me.
So I think the biggest benefit youre going to see.
In fiscal 'twenty, four star with it's going to be in storage.
Kevin Cavanagh: I'm Sydney for Brent Thielman today. I was wondering if you could discuss the net offering losses you have available and how that's shielded your tax expense for fiscal 2024. Yeah, so we do have a number of tax attributes out there that we're going to be able to utilize. So I think you're going to see extremely low effective tax rate and fiscal 24 and somewhere in the low single digits is our current estimate.
I think youll see revenues increase as we move through the year and that's going to eliminate that under a recovery.
Issue, that's been pretty significant in that segment and on top of that the growth's going to be becoming coming from projects that do present, a good margin opportunity. So I think you could see.
We expect good good margin.
Growth in that segment I would say the second segment the utility segment is going to be.
Pretty good from a margin.
Kevin Cavanagh: That benefit will also continue into fiscal 25. I think the tax rate will probably be a little higher than but it will still be low compared to historical rates. So my guess is it's probably going to be somewhere around 10% as an estimate right now.
Aspect from.
The result of the peak Shaver worked out.
Oliver Cornis: That's great. Thanks so much.
That we've got combined with.
Our work in power delivery boats.
These teams this last year really performed extremely strong for us.
And some of the best in the company. So that's been good to see and I'm sure there'll be trying to continue that I think we talked about process and industrial facilities.
Kevin Cavanagh: And then second, I was, could we talk about the process and industrial facilities segment in the context of 2024 versus 2023? Should we anticipate a lower work volume this year but improve profitability? Especially if you get through that project that we just talked about. That's exactly right. We'll have we've got a we've got a little bit of a timing gap on when capital projects start. There was a project we got awarded in the third quarter in that segment and that project will meaningfully benefit revenues until the very first of fiscal 25.
The profitability is going to be better on lower revenues, but.
Again those.
The rest of the business there has been performed pretty well throughout the year now that's a mix of.
Capital work in Reimbursable maintenance work, so it is a little bit different.
Our project mix that that can impact the margins a bit.
Because it is heavily weighted to reimbursable.
I think all three margins are all three segments should see.
Our forecast to see good margins in the year now will we get to the consolidated 10% I think we can.
Kevin Cavanagh: And the projects that, you know, this project that has had some issues that's completed now so there will be a different revenue there. In addition, we also sold some non core assets. So so that segment will be down but I think the profitability should be better. And when you think about while that's decreasing, the increases in the other segments, the backlog on those projects will be starting in fiscal 24 and benefiting the year. So from a consolidated basis, want to be clear that we expect some good growth in revenue for the fiscal year.
It definitely would not quite not happen until the second half of the year.
Great. Kevin. Thank you that was very helpful insight and John could you already.
Thanks, Gary.
Lauren.
[laughter].
Thank you.
I would now like to turn the call back over to John Hewitt for any closing remarks.
Just thank you to everybody for attending todays call I. Appreciate your continued support of the company.
Oliver Cornis: Awesome, that's great.
And wish everybody to have a safe quarter until we speak to you again.
Kevin Cavanagh: And then I guess the last question if I can sneak you then. Can you discuss your capital allocation priorities is M&A on the table as you're starting to see the business table as? Yeah, so so right now our focus has been returning the profit of building. Our capital priorities are going to be related to executing on these projects we're putting in backlog and and the ones that will be put in backlog.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Kevin Cavanagh: So that means there may be additional capital expenditures we need to make. We've definitely spent less on CapEx the past few years so there could be some CapEx there, that'll be a priority. And we'll continue to manage our working capital, but we have a second priority, but I would expect that you're going to see positive cash flows as we move to the year. Once we return to profitability, yeah, we'll we'll think about what's the right next next steps, which could include M&A.
Yes.
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Operator: Awesome, thanks so much guys, I'll jump back in the queue, really appreciate it. Thank you. And as a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. And I'm not showing any.
Operator: Oh, one more more questions.
Okay.
John Franzreb: All right, so question comes from John friends with Sedoti you may proceed. Yeah, I'm just curious about your expectations for the inflation reduction reduction act. And when you we would expect to see jobs related to that, hit your backlog profile, any kind of thoughts about that would be helpful.
Yes.
Uh huh.
John Hewitt: I think what we're our expectation is that those dollars weren't necessarily running into shovel ready projects when they became available, but we, you know, what we, what we think is they'll start having a material impact on project opportunities for us in calendar 24. Got it, got it.
Yes.
Okay.
Okay.
Yeah.
Kevin Cavanagh: And when how should we think about margin gross margin recovery across the segments, given the call it slow, but meaningful turnaround in the backlog profile, where are you going to see it first that had the most meaningful impact and where is going to leg may be a little bit looking at on a segment basis. So I think the biggest benefit you're going to see in fiscal 24 to start with is going to be in storage.
Yes.
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Kevin Cavanagh: I think you'll see revenues increases removed through the year, and that's going to eliminate that under recovery issue that's been pretty significant in that segment. And on top of that, the growth is going to be becoming coming from projects that do present a good margin opportunity. So I think you could see expect good margin growth in that segment. I would say the second segment, the utility segment is going to be pretty good from a margin aspect from the result of the peak shaver work that that we've got combined with, you know, our work and power delivery, those, those teams this last year really performed extremely strong for us. And some of the best in the company, so that's been good to see and I'm sure they'll be trying to continue that.
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Kevin Cavanagh: I think, you know, we talked about process and industrial facilities. I think the profitability is going to be better on lower revenues, but, you know, again, those that the rest of the business there has been performed pretty well throughout the year. Now, that's a mix of capital work and reimbursable maintenance work. So it has a little bit of different project mix that can impact the margins a bit because it's heavily waited to reimbursable. But I think all three margin or all three segments should see a forecast to see good margins in the year.
Okay.
Earnings.
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Kevin Cavanagh: Now, what we get to the consolidated 10%. I think we can. It definitely would not quite not happen until the second half of the year. Great, Kevin. Thank you. That was very helpful for the insight. And John, get your arm ready. Okay. Yeah.
Operator: Thank you.
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John Hewitt: I'd now like to turn the call back over to John Hewitt for any closing remarks. Just to thank you to everybody for attending today's call. Appreciate your continued support of the company.
Okay.
Okay.
Okay.
Operator: And wish everybody to have a safe quarter until we speak to you again. Thank you.
[music].
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect. Thank you. . John Hewitt, John Hewitt, John Hewitt, John John Hewitt, John Hewitt, John Hewitt, John John Hewitt, John Hewitt, John Hewitt, John Hewitt, John John Hewitt, John Hewitt, John
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