Q1 2024 Matrix Service Co Earnings Call

November 9, 2023

Good morning, and welcome to the Matrix Service Company Conference call to discuss results for the first quarter of fiscal 2024. Currently all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time as a REIT.

Minder. This conference call is being recorded I would now like to turn the conference over to todays host Ms. Kellie Smythe.

Senior director of Investor Relations for Matrix Service company.

Thank you Josh good morning, and welcome to Matrix service company's first quarter fiscal 'twenty 'twenty four earnings call.

All 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.

Brian Kit during the webcast today can be found under events <unk> presentations on the Investor Relations section of Matrix Service company Dot com.

Before we begin please let me remind you that on today's call we may make various remarks about future expectation.

And prospects for matrix service company that constitute forward looking statements for the purposes of the at the private Securities Litigation Reform Act with 1995.

Actual results may differ materially from those.

Forward looking statements because of various factors, including those discussed by our most recent annual report on Form 10-K.

And in subsequent filings made by the company with the SEC to the extent, we utilize non-GAAP measures reconciliations will be provided in various press releases periodic SEC filings.

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.

And November 14th they will hold the matrix service company virtual annual stockholder meeting you can register to attend as instructed and the proxy or via the events tab on our Investor Relations website.

We will present at in both one on one meetings at the Sidoti Microcap virtual conferences planned for November 15th and 16th.

And finally, we will hold a virtual non deal road show hosted by raising company in December.

Would like additional information on any of these events I invite you to contact us at Matrix Service Company Investor Relations website, I will now turn the call over to John.

Thank you Kelly and good morning, everyone here at matrix, we continue to pursue and expect zero injuries across our platform.

Our focus is around accountability communication and training to drive better outcomes each of us need to be accountable to ourselves and each other.

About our behaviors decision, making and risk awareness and not only our professional lives.

At home as well, we need to communicate our expectations why safety is important and support each other as a learning organization training is critical to improve awareness of decision, making and ultimately outcomes.

Overall, each employee has the authority and the obligation to stop work when they see or feel uncomfortable with the task of day or a coworker or about to perform.

Very simple questions what am I about to do how.

How can I get hurt.

Am I going to do about it are key to keeping yourself and your co workers safe.

Turning to the quarter, we're pleased to update you on the continued momentum in our business and our end markets. We generated awards of $497 million in our fiscal first quarter, surpassing our fourth quarter of fiscal 2023 awards of $464 million. This is our highest project award total in five years.

Project Awards resulted in a book to Bill ratio of two five.

Our storage and terminal solutions segment was the standout in the quarter recording a book to Bill of four six on the back of a large capital Project Award.

This award is a mid sized LNG liquefaction and storage facility in the eastern U S. Similar to previous small to midsized LNG projects completed in the past.

This is a project for a client we've done a good deal of work for over the years, which is a testament to our ability to deliver complex projects safely on time and with high quality at our last earnings call. We referenced another LNG project. We were awarded in the fourth quarter of fiscal 2023, and LNG peak Shaver and our utility.

Our infrastructure segment.

Together these projects aligned with our strategy of leveraging our strong cryogenic storage brands and our capabilities in engineering fabrication procurement and construction.

Our strategy to offer complete solutions to the growing small to midsized LNG facility market is creating awards in growth for the company as we expand our brand and capture market share.

This market covers a range of uses such as peak shaving units backup power plant fuel supply ship Bunkering rocket fueling export facilities. Our teams have a great reputation executing these types of projects and have built strong client relationships over the years made clear by continued awards like the most.

Recent one I mentioned above.

The pipeline for.

Opportunities in the small to mid scale LNG market remained strong with both new and repeat clients.

Patriot capability to wrap the complete facility around the storage is unique in our markets and among our competition.

Jason to this strong position in the small to mid scale mid sized LNG market. Our strategy extends to other specialty vessels and facilities for ammonia ethane and other natural gas liquids. In addition, our branded skill sets extend our hydrogen storage facilities as well as development of large scale storage solutions for various.

Clients, we have several clients that are part of the seven hydrogen up teams recently selected by the department of energy to receive funding under the bipartisan infrastructure law.

We are in discussion with these clients on how we can assist them in these programs. We believe there will be significant opportunities for our company and not only these hubs, but also a variety of other projects that are taking advantage of the changing energy mix.

<unk> clean energy funding and tax credits as we look out into the future, we fully expect our backlog and specialty vessel storage and related facilities to continue to grow with a diversified mix of energy projects.

In addition to our storage market strategy division for the rest of the business creates opportunity for growth expansion and sustainability and grab it.

For example, our position for electrical infrastructure services from Substations to transmission distribution and other industrial electrical work presents a strong growth potential for the company in a market that has significant demand of expansion upgrades and repair across the country.

We are working with technology providers by an increasing number of project opportunities across the country for carbon capture we continue to be a leading contractor in traditional energy for refinery maintenance and repair turnarounds and projects many of which are focused on lower carbon process improvements such as renewable fuel refining.

We remain active in crude and refined product storage tanks and terminals, both new build and repair and maintenance and finally midstream gas compression mining and minerals chemical and petrochemical and aerospace projects on an EU only see only for full EPC basis leverage our engineering capabilities project skills.

And construction experience.

These service lines offerings and skill sets complement each other and support the growth aspirations of the entire business market capture and geographic diversity of our operations.

All of these end markets continue to be supported by the strong tailwind and macroeconomic drivers. We've discussed before which include global energy security domestic energy supply assurance clean energy transition goals commodity demand to support renewables and infrastructure upgrades and industrial re shoring of manufacturing as well as <unk>.

Federal infrastructure investments that will start to meaningfully flow into products into the project phase during calendar year 2024.

I can confidently say that we're executing our strategy from a position of strength our backlog has grown by 27% from the end of the fourth quarter of fiscal 2023, and 126% from a year ago at $1 4 billion of our backlog is at its highest level since June 32015, even with one.

$6 billion of awards. These past four quarters, our opportunity pipeline remains steady between $5 to $6 billion, providing a strong indication of the potential in our markets and our ability to continue our long term trend of backlog growth.

Our organization has been meaningfully transformed over the past few years.

We are focused on the end markets that present, the best opportunity for us to leverage our decades of experience, we have restructured our organization to be more cost efficient, while maintaining our skills expertise and strong brand. We are positioned to safely execute projects with improved operating processes, while continuing to deliver best in class quality for our.

Customers and we continue to invest in digital solutions to improve our administrative and project execution performance. While the company is well positioned with a high quality backlog that contains larger long term capital projects. It is important to note that our traditional small cap projects and recurring repair and maintenance work, which is.

<unk> to our overall portfolio come in and out of backlog in a shorter timeframe and this work has historically represented on average over 50% of our annual revenue.

So to be clear, our strategic market focus and positioning the macroeconomic and industrial drivers and a steady opportunity pipeline combined with our transformed the organization will continue to build on our diversified backlog portfolio, which will lay the foundation for the business to grow and be sustainable well into the future with that I'll hand the call.

Over to Kevin to review the results.

Thanks, John.

Overall, the first quarter of fiscal 2024 was in line with our expectations highlighted by the strong project Awards John previously discussed.

Revenue of $198 million during the first quarter was lower than the $206 million in the fiscal 2023 fourth quarter, primarily related to the decrease.

In the process and industrial facilities segment, which I'll discuss shortly as well as seasonality in our business.

The contribution to revenue of newly awarded projects is beginning to benefit the storage and terminal solutions segment.

Currently limited as the projects progress through engineering and planning stages.

Gross margin was 6% in the first quarter of fiscal 2024 compared to a gross margin of seven 1% in the fourth quarter of fiscal 2023.

Despite generally strong project execution gross margins in the first quarter experienced a 470 basis point impact from the under recovery of construction overhead cost.

Some of these construction overhead resources have been more actively involved in the pursuit and planning of future work.

With the improved backlog more resources will now shift to the execution of projects.

On a consolidated basis, we expect to achieve full recovery of construction overhead costs on higher revenue volumes in the second half of fiscal 2024.

Consolidated SG&A expenses were $17 1 million in the first quarter compared to $17 million of SG&A expense in the fourth quarter of fiscal 2023.

The first quarter expense includes an additional accrual of $1 6 million associated with the variable accounting for cash settled stock based compensation.

Which increased due to a significantly higher stock price.

The improved stock price is obviously a positive we have all been working to achieve but it does increased expense related to certain to certain stock based awards.

Subject to variable accounting.

The increase was offset by various other lower cost as.

As we manage our cost structure, which includes our continued streamlining of the business as well as delaying certain costs based on the timing of revenue.

Other income during the first quarter included a gain of $2 5 million on the sale of a previously utilized facility, which was no longer strategic to the future of the business. This transaction is just one of many steps we have taken as we focus the business to its core offerings improve efficiency and manage our cost structure.

As expected the effective tax rate for the first quarter was zero and we expect the effective tax rate to be around zero throughout fiscal 2024.

So for the first quarter of fiscal 2004, we had a net loss of $3 2 million or <unk> 12 per share compared to a net loss of <unk> 3 million or <unk> in the fourth quarter of fiscal 2023.

Now, let me briefly discuss the operating segments.

And the storage and terminal solutions segment revenue increased to $90 million in the first quarter as compared to $64 million in the fourth quarter of fiscal 2023.

Revenue for this segment was positively impacted in the first quarter by the procurement of materials and components for capital projects awarded in the prior fiscal year.

We expect revenue to significantly improve in the second half of fiscal 2024.

Gross margin of five 5% improved over the fourth quarter of fiscal 2023 due to strong project execution, but was still negatively impacted by the under recovery of construction overhead costs.

We have allocated additional resources to this segment to support recent awards and additional revenue in the second half of fiscal 2024.

As these revenues increase we expect to eliminate the under recovery of construction overhead costs in this segment.

And the utility and power infrastructure segment revenue was $32 million in the first quarter compared to $39 million in the in the fourth quarter due to lower volumes of power delivery work during the summer months.

LNG peak shaving work added to backlog over the past year is expected to positively impact revenue as we move through fiscal 2024.

Margin of 11, 4% was positively impacted by strong project execution, which led to favorable project closeouts as well as in LNG peak shaving projects, which have a better margin profile.

And process and industrial facilities segment revenue decreased to $75 million in the first quarter of fiscal 2024 compared to $103 million in the fourth quarter of fiscal 2023.

Primarily due to the completion of certain gas processing work.

Lower refinery volumes during the summer months and the sale of a noncore business during the fourth quarter of fiscal 2023 despite.

Despite generally strong project execution.

First quarter gross margin.

Of 66, 8% was negatively impacted by low revenue volumes, which led to the under recovery of construction overhead cost.

So now let's move to the balance sheet.

In the first quarter, we utilized $28 million of cash working capital purposes. This was expected and primarily related to the timing of cash flows on projects.

We ended the first quarter with total liquidity of $80 million and $10 million in debt.

Liquidity is comprised of $27 million of unrestricted cash and $53 million of borrowing availability under the credit facility.

We also have $25 million of restricted cash to support the facility.

We expect to see cash and liquidity increase as we move through the rest of the fiscal year.

In fact, an event subsequent to the end of the first quarter also benefits our financial position.

In October we reached a favorable resolution on a long standing legal dispute with an iron and steel customer that resulted in the receipt of $16 8 million.

The amount collected represented the full amount owed under a reimbursable contract, which the company had pursuit for a number of years.

Another subsequent event that warrants mentioned is that with the improving financial position of the company, we repaid all outstanding borrowings under the credit facility in early November.

We will continue to proactively manage the balance sheet to support the improving business.

On our last call, we provided an outlook for fiscal 2024, which is substantially unchanged.

Overall the results for the first quarter when were in line with our expectations were.

We now expect revenue to be at a similar level in the second quarter and then showed strong growth in the second half of the fiscal year as a result of the improved backlog for the full year. This will create significant year over year revenue growth the.

The bottom line results will follow a similar pattern as the revenue was significantly stronger results in the second half of the fiscal year.

We also anticipate accelerated movement towards the longer term financial targets in the second half of the fiscal year.

This concludes my prepared remarks, I'll turn it back to Jon Thanks, Kevin for you over for questions I'd like to reiterate some key takeaways for today.

First of all our strategic approach to the energy and industrial end markets. We serve has been validated given the strength of our awards and ultimately backlog. This is supported by a steady opportunity pipeline across these markets and the timing and volume of project Awards or awards will not be linear and there will be some wider award quarters, but overall, we believe our strategic approach will lead to further.

Backlog growth and strong performance into the future and the long term the reshaping our global energy markets energy supply security push towards lower carbon activity in industrial reassuring all create opportunities that we expect will drive our business for years to come.

We are well positioned and structure to maximize our profitability and generate value and growth stakeholders.

That I'd like to open the call up for questions.

Thank you as a reminder to ask a question. Please press star one on your telephone.

To withdraw your question. Please press star one again.

One moment for questions.

Our first question comes from Brent Thielman with D. A Davidson you May proceed.

Hey, great. Thanks, Good morning, John Kevin Kelly.

I guess first off John I wanted to get just gear.

For the higher cost of capital environment looks to be sustaining going forward Youre still.

Looking market an elevated pace maybe.

Your customer's reaction to that.

That might be impacting the umbrella business or bookings pipeline I imagine.

Maybe that 50% of the business with smaller project work.

Essentially be susceptible, but love to get your.

On that.

I'll, probably two comments there one is that we do hear from some customers.

Yeah.

That they have that they are re looking at their portfolio of projects capital projects that theyre doing.

Based on the cost of debt, but I would say, that's a pretty small percentage of our entire client base that we're kind of hearing those things from and a lot of that may be mixed up with individual things that they've got going on where they're at within their organization of how they have spat or overspent.

Their capital in the past year or two.

So we're not hearing of we're not hearing a lot of that too.

Two is is that.

It's probably not a great market right now for a developer led project because of the cost of capital, but the majority of our clients and the clients that we're we're we're seeing a lot of our backlog backlog growth from.

Are more blue chip companies that they've got a heavy piece of their personal balance sheet and their own cash flows that are funding the projects.

And they have a.

Those companies have a tendency to look much longer term.

On interest rates or the price of energy.

<unk> in the market and.

And then appreciating that some of these larger projects take upwards of three years to get put in place. So.

Currently I would say, we're not seeing a major effect on our business from our this award cycle.

Okay, great that's encouraging.

Second question was on LNG peak shaving projects, you've been really active there and it sounds like the pipeline is pretty busy there may be some forthcoming opportunities as well.

You mentioned the margin profile attached to these.

Is pretty attractive I was wondering if you could just kind of give us a sense what those look like maybe relative to kind of a long term averages. We expect from the business from a gross profit perspective can these be sort of accretive beyond those targets as we kind of get deeper into execution on them.

So those those.

Okay.

Those projects certainly support our consolidated.

Our long range forecast for gross margins.

We've said in the past in the 10% to 12% range.

But I think one of the things that support that for those projects is it's a smaller competitive set for us.

And the risks risk and margin profile embedded in the entire entirety of the project gives us an opportunity to deliver on the margins that we need to support the consolidated margin profile of the business. So the levels of contingency and escalation.

Projects were.

These are projects are getting to be more.

Repetitive so we're able to appreciate the risks better.

And two.

Manage the execution better that we're able to deliver on those margins.

<unk>.

I think those are a couple of reasons that help us drive.

The overall business to this.

More of a consolidated margin profile and I think what's key here is the consolidated margin profile. This.

As John said these projects have good margins, but.

One of the other added benefits is that we've talked about under recovery of construction overhead has been a big driver ensured our our margins not being where we want them to be and so the volume from these projects will benefit us.

On that recovery of overhead.

Great I appreciate that.

I guess the last one I'll get back in queue.

Kevin I think you've sort of indicated look as you start ramping up on these projects should see increasing cash generation potential.

Essentially debt free at this point seems like it could be building some cash on the balance sheet.

Two part question would be when do you start to think about doing with that cash John or Kevin and two how do we think about kind of the conversion to cash.

Cash conversion and again you start ramping up on these projects just to get a feel for the cash potential this year.

Yes so.

I do believe that our balance sheet position is going to improve as we move through the rest of the year.

I think that's going to come from a couple of places.

One is the improved financial results just producing positive earnings is going to produce positive cash secondly, if you look at the mix of work we're going to do.

So certainly there will be increases in repair and maintenance work.

Reimbursable that will have to fund, but I think that will be more than offset by just the timing of cash flows on the capital projects.

I think there will be able to.

Build cash and I think our initial focus on the use of that cash is going to be more internal and making sure that we have.

We've got the right.

Equipment.

Needed for that to support that business.

As we've said before we've been focused on.

Really returning the company to profitability before we.

Get too aggressive on either any other actions such as <unk>.

M&A stock buyback given entity of that stuff. So those will be things, we consider in the future but focus this year is really about.

<unk>.

Rebuilding the company's profitability getting back to the financial targets that we've set.

Okay.

Okay, great. Thank you.

Yeah.

Thank you.

One moment for questions.

Our next question comes from John <unk> with Sidoti You May proceed.

Good morning, everyone. Thanks for taking the questions.

John Congratulations on another great bookings quarter.

I want to start right there.

You mentioned in your prepared remarks that youre relocated reallocated our resources from procurement to execution does that kind of suggests that we should think that the incoming booking profile will be a little bit more muted in the next quarter or two.

As you move to execution.

Especially in light of the fact that you guys had mentioned in some large projects out there that are certainly near term opportunities.

Yes, I don't think we have not taken our foot off the gas pedal as it relates to continuing to book projects and awards. These things have a tendency to come in.

Right.

Waves on the Ocean and we certainly had a strong wave here the past couple of quarters.

And we've seen it coming right. So we understood I appreciate the timing of when our clients are going and making decisions on some of these larger projects and so we're.

We're not taking our foot off the gas pedal right, we're continuing to pursue projects to build backlog, we're looking out into the future.

How we're going to continue to take a bigger share of that market related.

To our storage.

<unk> position in that market.

And but.

We took two effectively chase some of that work, we do engage our project teams.

<unk>.

To not only to help plan and create estimates on a budget for that work, but also to two <unk>.

Talk to our clients our potential client.

Arthur projects about how we're going to execute it very important for us to put our project project and field management in front of our clients.

But yes, they will they are starting to transition over into the execution phases.

We continue to have proposal specific people that that's what they do for the organization and so.

That doesn't change and so they will they will combined with our business development teams are continuing to pursue projects.

Projects to build backlog out in the future.

Got it got it thanks for the clarity there.

And.

Clearly the under absorption issue.

It has been a problem for some time.

Kevin certainly say that the second half of the years, we're probably migrate to a much better situation. It seems to me that's largely going to be led by storage and tuned and lesser extent the utility business, but the process will be lagging a bit.

Can you kind of review the outlook on the process side.

When do you expect that business, maybe to turn the corner I know the expectation is for it to be down this year, but whats the depth and duration of that.

Yes. So first first thing I think we will see pretty good growth in both story Jan and utility.

Segment for.

For process industrial facilities.

We've got a number of things that are impacting.

The top line for that segment.

We've completed some some work that.

We previously had.

<unk> been trying to get done, but that was pretty significant for the company important important step.

We did sell a noncore business.

Debt in the fourth quarter of last year that that impacts that segment.

But we've also had some good bookings in that segment. If you go back to I think it was the third quarter of fiscal 2023.

We booked a large capital project that project is a little unique its got up theres a longer runway before we really start seeing revenues on that project. It won't really start benefiting not until the first quarter of fiscal.

25, so we have visibility to seeing these revenues increase but most of that will happen in the very first part of fiscal 'twenty one 2025.

Got it and then regards to your.

Your long term financial targets.

Excuse me I'm most interested in the four 5% operating margin target.

What kind of revenue profile and gross margin profile are you using to get that $4 five.

<unk> op margin target, it's certainly better than what I was expecting by the end of next year.

There's a number of things that are going to that will go in to us getting to that target. So we need to get revenue volume up and we've talked previously that.

To get to where we're fully recovering our construction overheads, we probably need at least $250 million of quarterly revenue to get there.

But we also want to get.

The SG&A percentage down to six 5% or lower so in order for that to happen. We are finding that revenue to be even higher than that.

Get it up to $2 75, or so in a quarter.

No.

Those are two big drivers and then the third one is just.

Whats the margin opportunity in the in the in the full backlog of the business.

On the capital projects in the.

And now with.

The repair and maintenance projects and needs to be north of 10%. So the combination of those three things.

What's going to get us to the four 5% and unless at MC and.

In my comments.

All three of those areas are going to improve and be helping us move towards that make a significant step toward those.

<unk> targets as we complete the fiscal year.

Great Great Kevin Thanks, Thanks for that and I guess, one last question.

Guarding the tax rate you mentioned that you expect it to be.

<unk> zero this year, how does that look in 2025, which the step function up.

Yeah. So I think it'll be near zero. This year I mean, there's always unique tax issues that could.

Adjust that so it can be zero to 5%. Some work. This year next year will still be utilizing a lot of reserved tax assets.

I'm currently backlog envelope projected out to be somewhere around 10% next year.

My Best guess at this point.

Okay. That's fair enough. Thank you everybody and congratulations again on that strong bookings numbers.

Thanks Dara.

Thank you I would now like to turn the call over to John Hewitt for any closing remarks.

Couple of things real quickly first of all I want to thank all of our employees for your hard work for your dedication to quality and the team work Thats gone into delivering on the not only on the on the strong awards.

But also to our execution strategy in the improvement in the business overall, certainly want to thank our shareholders for your support through this period.

Leave everybody again with a reminder, on your personal safety awareness to ask those three questions. What am I about to do how can I get hurt what am I going to do about it and to remember for our employees that you do have the authority to stop work and you have the obligation to do that as well if you see something or feel something is unsafe.

Other than that and glad to have spent time with everybody today and look forward to seeing you in future conferences and calls.

Thank you. This concludes today's conference call. We thank you for your participation you may now disconnect.

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[music] good morning, and welcome to the Matrix Service Company Conference call to discuss results for the first quarter of fiscal two.

1024 currently all participants are in a listen only mode. Later, we will conduct a question and 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. Kellie Smythe.

Senior director of Investor Relations for Matrix Service company.

Thank you Josh good morning, and welcome to Matrix service company's first quarter fiscal 'twenty 'twenty four earnings call.

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 take with Bryan Kid during the webcast today can be found under events <unk> presentations on the Investor Relations section.

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 the at the private Securities Litigation Reform Act with 1995.

Actual results may differ materially from those initiatives.

Looking statements because of various back.

Please note this lifestyle and most recent annual report on Form 10-K.

And in subsequent filings made by the company with the SEC.

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 subtle.

Coming investor conferences, and corporate access opportunity.

On November 14th we will hold the matrix service company virtual annual stockholder meeting you can register to attend as instructed and the proxy or why are they have been tab on our investor Relations website.

We will present at in both one on one meetings at the Sidoti Microcap virtual conferences planned for November 15th and 16th and finally, we will hold a virtual non deal road show hosted by raising company in December.

Additional information on any of these events I invite you to contact us at Matrix Service Company Investor Relations website, I will now turn the call over to John.

Thank you Kelly and good morning, everyone here at matrix, we continue to pursue and expect zero injuries across our platform broadly our focus is around accountability communication and training to drive better outcomes each of us need to be accountable to ourselves and each other as we think about our behaviors decision, making and risk awareness.

And not only our professional lives.

At home as well.

We need to communicate our expectations why safety is important and support each other as a learning organization training is critical to improve awareness of decision, making and ultimately outcomes above all each employee has the authority and the obligation to stop work when they see or feel uncomfortable with the task of day or a co worker.

We're about to perform.

Three simple questions what am I about to do.

Can I get hurt.

What am I going to do about it are key to keeping yourself and your co workers safe.

Project Awards resulted in a book to Bill ratio of two five.

Our storage and terminal solutions segment was the standout in the quarter recording a book to Bill of four six on the back of a large capital Project Award.

This award is a mid sized LNG liquefaction and storage facility in the Eastern U S. Similar.

So previous small to midsized LNG projects completed in the past. This is a project for a client we've done a good deal of work for over the years, which is a testament to our ability to deliver complex projects safely on time and with high quality.

At our last earnings call, we referenced another LNG project, we were awarded in the fourth quarter of fiscal 2023, and LNG peak Shaver and our utility and power infrastructure segment <unk>.

Together these projects aligned with our strategy of leveraging our strong cryogenic storage brand there are capabilities that engineering fabrication and procurement and construction.

Our strategy to offer complete solutions to the growing small to midsize LNG facility market is creating awards and growth for the company as we expand our brand and capture market share.

This market covers a range of uses such as peak shaving units backup power plant fuel supply ship Bunkering rocket fueling export facilities. Our teams have a great reputation executing these types of projects and build strong client relationships over the years made clear by continued awards like the most.

Recent one I mentioned above.

The.

Pipeline for opportunities in the small to mid scale LNG market remained strong with both new and repeat clients.

This capability to wrap the complete facility around the storage is unique in our markets and among our competition.

Considering our current position and a robust market and with the numerous project proposals and bids in progress as well as the ongoing feed studies, we expect to keep adding similar projects to our backlog over time adjacent to this strong position in the small to mid scale mid sized LNG market our strategy extends to other.

Specialty vessels and facilities for ammonia ethane and other natural gas liquids. In addition, our branded skill sets extend our hydrogen storage facilities as well as development of large scale storage solutions for various clients. We have several clients that are part of the seven hydrogen up teams recently selected by the department of energy.

To receive funding under the bipartisan infrastructure wall.

Federal clean energy funding and tax credits as we look out into the future, we fully expect our backlog and specialty vessel storage and related facilities to continue to grow with a diversified mix of energy projects and.

In addition to our storage market strategy division for the rest of the business creates opportunity for growth expansion and sustainability in graphic.

They are in crude and refined product storage tanks and terminals, both new build and repair and maintenance and finally midstream gas compression and mining and minerals chemical and petrochemical and aerospace projects on and only see only or full EPC basis leverage our engineering capabilities project skills and.

Actual experience.

These service lines offerings and skill sets complement each other and support the growth aspirations of the entire business market capture and geographic diversity of our operations.

All of these end markets continued to be supported by the strong tailwind and macroeconomic drivers. We have discussed before which include global energy security domestic energy supply assurance clean energy transition goals commodity demand to support renewables and infrastructure upgrades and industrial re shoring of manufacturing as well as Federer.

Infrastructure investments that will start to meaningfully flow into products into the project phase during calendar year 2024.

I can confidently say that we are executing our strategy from a position of strength our backlog has grown by 27% from the end of the fourth quarter of fiscal 2023, and 126% from a year ago at $1 4 billion of our backlog is at its highest level since June 32015.

Even with $1 6 billion of awards. These past four quarters, our opportunity pipeline remains steady between $5 to $6 billion, providing a strong indication of the potential in our markets and our ability to continue our long term trend of backlog growth organization has been meaningfully transformed over the past few years.

We are focused on the end markets that present, the best opportunity for us to leverage our decades of experience, we have restructured our organization to be more cost efficient, while maintaining our skills expertise and strong brand we're positioned to safely execute projects with improved operating processes, while continuing to deliver best in class quality for our <unk>.

Our overall portfolio come in and out of backlog in a shorter timeframe and this work has historically represented on average over 50% of our annual revenue.

So to be clear, our strategic market focus and positioning the macroeconomic and industrial drivers and a steady opportunity pipeline combined with our transform the organization will continue to build on our diversified backlog portfolio, which will lay the foundation for the business to grow and be sustainable well into the future with that I'll hand.

The call over to Kevin to review the results.

Thanks, John.

Overall, the first quarter of fiscal 2024 was in line with our expectations highlighted by the strong project Awards Don previously discussed.

Revenue of $198 million during the first quarter was lower than the $206 million in the fiscal 2023 fourth quarter, primarily related to the decrease.

In the process and industrial facilities segment, which I will discuss shortly as well as seasonality in our business.

The contribution to revenue of newly awarded projects is beginning to benefit the storage and terminal solutions segment, but it's still currently limited as the projects progress through engineering and planning stages.

Gross margin was 6% in the first quarter of fiscal 2024 compared to a gross margin of seven 1% in the fourth quarter of fiscal 2023.

Despite generally strong project execution gross margins in the first quarter experienced a 470 basis point impact from the under recovery of construction overhead cost.

Some of these construction overhead resources have been more actively involved in the pursuit and planning of future work.

With the improved backlog more resources will now shift to the execution of projects.

On a consolidated basis, we expect to achieve full recovery of construction overhead cost on higher revenue volumes in the second half of fiscal 2024.

Consolidated SG&A expenses were $17 1 million in the first quarter compared to $17 million of SG&A expense in the fourth quarter of fiscal 2023.

The first quarter expense includes an additional accrual of $1 6 million associated with the variable accounting for cash settled stock based compensation.

Which increased due to a significantly higher stock price.

The improved stock price is obviously a positive we have all been working to achieve but it does increased expense related to certain to certain stock based awards that are subject to variable accounting. This increase was offset by various other lower cost.

As we manage our cost structure, which includes our continued streamlining of the business as well as delaying certain costs based on the timing of revenue.

As expected the effective tax rate for the first quarter was zero and we expect the effective tax rate to be around zero throughout fiscal 2024.

So for the first quarter of fiscal 2004, we had a net loss of $3 2 million or <unk> 12 per share compared to a net loss of <unk> 3 million or <unk> in the fourth quarter of fiscal 2023.

Now, let me briefly discuss the operating segments.

And the storage and terminal solutions segment revenue increased to $90 million in the first quarter as compared to $64 million in the fourth quarter of fiscal 2023.

Revenue for this segment was positively impacted in the first quarter by the procurement of materials and components for capital projects awarded in the prior fiscal year.

We expect revenue to significantly improve in the second half of fiscal 2024.

Gross margin of five 5% improved over the fourth quarter of fiscal 2023 due to strong project execution, but was still negatively impacted by the under recovery of construction overhead costs.

We have allocated additional resources to this segment to support recent awards and additional revenue in the second half of fiscal 2024.

As these revenues increase we expect to eliminate the under recovery of construction overhead costs in this segment.

LNG peak shaving work added to backlog over the past year is expected to positively impact revenue as we move through fiscal 2024.

Gross margin of 11, 4% was positively impacted by strong project execution, which led to favorable project closeouts as well as in LNG peak shaving projects, which have a better margin profile.

And process and industrial facilities segment revenue decreased to $75 million in the first quarter of fiscal 2024 compared to $103 million in the fourth quarter of fiscal 2023.

Merrily due to the completion of certain gas processing work.

Lower refinery volumes during the summer months and the sale of a noncore business during the fourth quarter of fiscal 2023.

Generally strong project execution.

First quarter gross margin.

Of 66, 8% was negatively impacted by low revenue volumes, which led to the under recovery of construction overhead cost.

So now let's move to the balance sheet during.

During the first quarter, we utilized $28 million of cash.

Working capital purposes. This was expected and primarily related to the timing of cash flows on projects.

We ended the first quarter with total liquidity of $80 million and $10 million in debt.

Our liquidity is comprised of $27 million of unrestricted cash and $53 million of borrowing availability under the credit facility.

We also have $25 million of restricted cash to support the facility.

We expect to see cash and liquidity increase as we move through the rest of the fiscal year.

In fact, an event subsequent to the end of the first quarter also benefits our financial position.

In October we reached a favorable resolution on a long standing legal dispute with an iron and steel customer that resulted in the receipt of $16 $8 million.

The amount collected represented the full amount owed under a reimbursable contract, which the company had pursuit for a number of years.

Another subsequent event that warrants mentioned is that with the improving financial position of the company, we repaid all outstanding borrowings under the credit facility in early November.

We will continue to proactively manage the balance sheet to support the improving business.

On our last call, we provided an outlook for fiscal 2024, which is substantially unchanged.

Overall the results for the first quarter were in line with our expectations.

The bottom line results will follow a similar pattern as the revenue was significantly stronger results in the second half of the fiscal year.

We also anticipate accelerated movement towards the longer term financial targets in the second half of the fiscal year.

This concludes my prepared remarks, I'll turn it back to Jon Thanks, Kevin for you over for questions I'd like to reiterate some key takeaways for today.

Backlog growth and strong performance into the future and the long term the reshaping our global energy markets energy supply security push towards lower carbon activity in industrial re shoring all create opportunities that we expect will drive our business for years to come.

We are well positioned and structure to maximize our profitability and generate value and growth stakeholders.

That I'd like to open the call up to questions.

Thank you as a reminder to ask a question. Please press star one on your telephone.

To withdraw your question. Please press star one again.

One moment for questions.

Our first question comes from Brent Thielman with D. A Davidson you May proceed.

Hey, great. Thanks, Good morning, John Kevin Kelly.

I guess first off John I wanted to get just gear.

For the higher cost of capital environment looks to be a sustaining going forward youre still.

<unk> market and elevated pace maybe.

Year customer's reaction to that.

That might be impacting the outgrow kind of business or bookings pipeline I imagine.

Maybe that 50% of the business with smaller project work could be.

Actually the susceptible but love to get your.

Sense on that.

I'll, probably two comments there one is that we do hear from some customers.

Yeah.

That they have that they are re looking at their portfolio of projects capital projects that theyre doing.

Their capital in the past year or two.

So we're not hearing of we're not hearing a lot of that too.

Two is is that.

<unk> sheet and their own cash flows that are funding the projects.

And they have a.

Those companies have a tendency to look much longer term.

On interest rates or the price of energy.

And in the market and.

And then appreciating that some of these larger projects take upwards of three years to get put in place. So.

Currently I would say, we're not seeing a major effect on our business for this award cycle.

Okay, great that's encouraging.

I guess second question was on LNG peak shaving projects <unk> been really active there and it sounds like the pipeline is pretty busy there was maybe some forthcoming opportunities as well.

You mentioned the margin profile attached to these.

Is pretty attractive I was wondering if you could just kind of give us some sense of what those look like maybe relative to kind of a long term averages would you expect from the business from a gross profit perspective can these be sort of accretive beyond those targets as you kind of get deeper into execution on them.

So those those.

Those projects certainly support our consolidated.

Our long range forecast for gross margins.

We've said in the past in the 10% to 12% range.

I think one of the things that support that for those projects is it's a smaller competitive set for us.

Projects were.

These are projects are getting to be more.

Repetitive so we're able to appreciate the risks better.

And two.

Manage the execution better that we were able to deliver on those margins.

No.

I think those are a couple of the reasons that help us drive.

The overall business too.

More of a consolidated margin profile and I think what's key here is the consolidated margin profile now as.

As John said these projects have good margins, but.

On that recovery of overhead.

Great I appreciate that.

I guess the last one I'll get back in queue.

Kevin I think you've sort of indicated look as you start ramping up on these projects should see increasing cash generation potential.

You've essentially debt free at this point seems like it could be building some cash on the balance sheet.

Two part question would be when do you start to think about doing with that cash John or Kevin and two how do we think about kind of the conversion to cash.

Cash conversion and again Youre still ramping up on these projects just to get a feel for the cash potential this year.

Yes so.

I do believe that our balance sheet position is going to improve as we move through the rest of the year.

I think thats going to come from a couple of places number one is the improved financial results just producing positive earnings is going to produce positive cash secondly, if you look at the mix of work we're going to do.

So certainly there will be increases in repair and maintenance work.

Reimbursable, though.

To fund, but I think that'll be more than offset by just the timing of cash flows on the capital projects.

I think we'll be able to.

Build cash in and I think our initial focus on the use of that cash is going to be more internal and making sure that.

We've got the right <unk>.

<unk>.

Needed for that to support that business and.

As we've said before we've been focused on.

Really returning the company to profitability before we.

Get too aggressive on either any other actions such as <unk>.

M&A stock buyback given entity of that stuff. So those will be things, we consider in the future but focus this year is really about.

<unk>.

Rebuilding the company's profitability getting back to the financial targets that we've set.

Okay.

Okay, great. Thank you.

Thank you.

One moment for questions.

Our next question comes from John <unk> with Sidoti You May proceed.

Good morning, everyone. Thanks for taking the questions.

John Congratulations on another great bookings quarter.

I wanted to start right there.

You mentioned in your prepared remarks that youre relocated reallocated our resources from procurement to execution does that kind of suggests that we should think that the incoming booking profile being a little bit more muted in the next quarter or two.

As you move to execution.

Especially in light of the fact that we also mentioned in some large projects out there that are certainly near term opportunities.

Yes, I don't think we have not taken our foot off the gas pedal as it relates to continuing to book projects and awards.

These things have a tendency to come in.

Right.

Waves on the Ocean and we certainly had a strong wave here the past couple of quarters.

And we've seen it coming right. So we understood appreciate the timing of when our clients are going and making decisions on some of these larger projects and so we're.

We're not taking our foot off the gas pedal right, we're continuing to pursue projects to build backlog, we're looking out into the future.

How we're going to continue to take a bigger share of that market related.

To our storage.

<unk> position in that market.

And but.

We took two effectively chase some of that work, we do engage our project teams.

And to not only to help plan and create the estimates on our budgets for that work, but also to to talk to our clients or potential clients.

About the projects about how we're going to execute it very important for us to put our project.

Reject and field management in front of our clients.

But yes they.

They are starting to transition over into the execution phases.

We continue to have proposal specific people that that's what they do for the organization and so.

That doesn't change and so they will they will combined with our business development teams are continuing to pursue.

<unk> to that.

Build backlog out in the future.

Got it got it thanks for the clarity there.

And <unk>.

Currently the under absorption issue.

<unk> has been a problem for some time.

Kevin certainly say that the second half of the year is where were probably migrate to a much better situation. It seems to me thats largely going to be led by storage and tuned and lesser extent the utility business, but the process will be lagging a bit.

Can you kind of review the outlook on the process side.

When do you expect that business, maybe to turn the corner I know the expectation is for it to be down this year, but.

What's the depth and duration of that.

Yes. So first first thing I think we will see pretty good growth in both story Jan and the utility.

Segment for.

For process industrial facilities.

We've got a number of things that are impacting the top line for that segment.

We completed some some work that.

We previously.

I've been trying to get done, but that was pretty significant for the company and important important step.

Did sell a noncore business.

Debt in the fourth quarter of last year that impacts that segment.

But we've also had some good bookings in that segment. If you go back to I think it was the third quarter of fiscal 2023.

We booked a large capital project that project is a little unique its got a there's a longer runway before we really start seeing revenues on that project. It won't really start benefiting not until the first quarter of fiscal <unk>.

25, so we have visibility to seeing these revenues increase but most of that will happen in the very first part of fiscal 'twenty 2025.

Got it and then regards to euro.

Your long term financial targets.

Excuse me I'm most interested in the four 5% operating margin target.

What kind of revenue profile and gross margin profile are you using to get that four five.

<unk> op margin target, it's certainly better than what I was expecting by the end of next year.

There's a number of things that are going to that will go in to us getting to that target. So.

We need to get revenue volume up and we've talked previously that.

To get to where we're fully recovering our construction overheads, we probably need at least $250 million.

Quarterly revenue to get there.

But we also want to get.

The SG&A percentage down to six 5% or lower so in order for that to happen. We are finding that revenue to be even higher than that.

Get it up to $2 75, or so in a quarter.

No.

Those are two big drivers and then the third one is just.

What's the.

The margin opportunity in the in the in the full backlog of the business.

Turning to capital projects in the <unk>.

The repair and maintenance projects that needs to be north of 10%. So the combination of those three things.

What's going to get us to the four 5% and unless ethnic.

In my comments.

All three of those areas are going to improve and be helping us move towards that make a significant step toward those.

<unk> targets as we complete the fiscal year.

Great Great Kevin Thanks, Thanks for that and I guess, one last pesky question.

Regarding the tax rate you mentioned that you expect it to be.

Approaching zero this year, how does that look in 2025, which is a step function up.

Yeah. So I think it'll be near zero. This year I mean, there's always unique tax issues that could.

Adjust that so it can be zero to 5% somewhere this year next year will still be utilizing a lot of reserved tax assets.

I'm currently backlog envelope projected now to be somewhere around 10% next year.

My Best guess at this point.

Okay. That's fair enough. Thank you everybody and congratulations again on that strong bookings numbers.

Thanks, John.

Thank you I would now like to turn the call over to John Hewitt for any closing remarks.

So.

But also to our execution strategy in the improvement in the business overall, certainly want to thank our shareholders for your support through this period.

Leave everybody again with a reminder, on your personal safety awareness to ask those three questions. What am I about to do how can I get hurt what am I going to do about it.

And to remember for our employees that you do have the authority to stop work and you have the obligation to do that as well if you see something or feel something that is unsafe.

Other than that I'm glad to have spent time with everybody today and look forward to seeing you in future conferences and calls.

Thank you. This concludes today's conference call.

Thank you for your participation you may now disconnect.

Q1 2024 Matrix Service Co Earnings Call

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