Q2 2024 Matrix Service Co Earnings Call

February 8, 2024

Operator: Good morning and welcome to the Matrix Service Company conference, where we will discuss results for the second quarter of Fiscal 2020. Currently, all participants are on a list, and only later we'll conduct a question and answer session, and instructions will be given at that time. As reminderd, this conference call is being held. I would now like to turn the conference over to your host today, Ms. Kellie Smythe, Senior Director of Investor Relations for Matrix Service. Thank you, Valerie.

Kellie Smythe: Good morning, and welcome to Matrix Service Company's second quarter fiscal 2024 earnings call. Participants on today's call will include John Hewitt, President and Chief Executive Officer, and Kevin Cavanah, Vice President and Chief Financial Officer. The presentation materials we will be referring to during the webcast today can be found under Events and Presentations in the Investor Relations section of MatrixServiceCompany.com. Before we begin, please let me remind you that on today's call, we may make various remarks about future expectations, plans, and prospects for Matrix Service Company that constitute forward-looking statements for the purposes of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements because of various factors, including those discussed in our most recent annual report on Form 10-K and in subsequent filings made by this company with the SEC. To the extent we utilize non-GAAP measures, reconciliations will be provided in various press releases, periodic SEC filings, and on our website.

Kellie Smythe: Before I turn the call over to John Hewitt, I'd like to share that Matrix will be presenting at the upcoming Sidoti Small Cap Virtual Conference on March 13th and 14th. If you'd like additional information on this event or would like to have a conversation with management, I invite you to contact me through the Matrix Service Company Investor Relations website. I'll now turn the call over to John. Thank you, Kellie, and good morning, everyone.

John R. Hewitt: When we think about the safety risks present in the construction industry, we often think about the physical risks to people. But there are equally significant risks that have to do with mental health and well-being. Mental health issues arise for a variety of reasons, including loneliness, high-pressure work environments, seasonal layoffs, loss of a family member or friend, and can manifest in different ways, including loneliness, anxiety, depression, suicidal thoughts, and substance abuse.

John R. Hewitt: The construction industry has one of the highest suicide rates of any industry, and when compared to all other construction fatalities, suicide occurs five times more often. This is why the construction industry is taking a collaborative approach to better understand mental health issues by providing research-based solutions. Through our participation in the Construction Industry Institute and Construction Safety Research Alliance, Matrix is directly involved in this effort. Matrix is also committed to doing all we can across our job sites and office locations, and we're doing so through a cross-functional internal initiative, Matrix Cares. We believe that together, we can make a difference for our own employees and others across our industry. And I believe the mental and physical safety of our employees, as well as those visiting our offices or job sites, is the most important thing we can do as co-workers and leaders.

John R. Hewitt: Now, let's talk about the business. I'm proud to announce that with awards of $233 million in a quarter, we have achieved a record backlog for Matrix of $1.45 billion. This is an all-time high for the company in its 40-year history and is an achievement that is the result of the hard work of our people and our focused strategic approach in our core markets. 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. As you will see when Kevin walks through our results, Matrix has resolved the primary issues that have plagued us the last few years.

John R. Hewitt: We have completed projects that were bid in the highly competitive pandemic environment, which resulted in limited margin opportunity. We have also streamlined and refocused the company, restored our direct gross margins to our historical double-digit range, rebuilt our backlog to historic levels to support higher revenue volumes in the coming quarters, and improved our liquidity position and reduced our debt to zero. With dramatic improvement in both the volume and quality of the projects in our backlog, we expect revenue volume to grow and, as such, leverage our streamlined cost structure, which will resolve our final issue. Now I want to spend a few minutes on our work in the energy markets. Recently, President Biden paused pending future permits to export LNG to non-free trade agreement countries.

John R. Hewitt: Generally, we do not expect this pause to impact our opportunity pipeline or backlog. All of the small to mid-scale LNG facilities we have won and are pursuing are domestic in nature, providing backup fuel supply, peak shaving, or shipbuckering. Any LNG tank projects that are related to large-scale export facilities that might be associated with the current White House permit position are more of an opportunistic pursuit for Matrix. We have significant opportunities in the small- to mid-scale LNG market I just described, as well as NGLs, ammonia, and hydrogen, and expect these opportunities to continue contributing to backlog. While the transition to a low-carbon energy mix has been the focus of global energy policy, the world is still heavily dependent on fossil fuels and will be for the foreseeable future.

John R. Hewitt: At the same time, energy companies are actively at work developing longer-term, more sustainable energy solutions. For Matrix, our expertise in both the traditional and emerging energy markets, together with our long-standing reputation for safe, quality delivery, positions us as a leading contractor across the entire industry and puts us in an advantageous position. Our opportunity pipeline remains steady at $5 billion, demonstrating the strength of our markets and our ability to continue a long-term trend of backlog growth. We remain a contractor of choice for work in traditional oil and gas, including the engineering and construction of crude storage tanks and terminals, ongoing maintenance and repair work, refinery turnarounds, retrofitting for renewable fuels, and the installation of natural gas processing infrastructure. With the increasing use of LNG as a low-carbon solution for ensuring reliable and affordable power for electricity, heating, and cooling, and also as an alternative fuel for high-horsepower applications, Matrix has emerged as a leader in the design, construction, maintenance, and repair of LNG storage tanks and the balance of plant facilities.

John R. Hewitt: Major energy companies also rely on us for NGL storage tanks and terminals, such as ethane, ethylene, propane, and butane that feed the global marketplace because of our country's vast, safe, and dependable natural gas availability. Looking forward, the transition to sustainable energy is a broad initiative that will include, among others, hydrogen. This is a market that, while not presently a significant revenue driver for us, will be as we assume a major leadership role in fulfilling the significant infrastructure needs that will evolve. Just as creation of our strong market position in LNG was made possible because of our specialty vessel and cryogenic capabilities, the hydrogen market requires these same specialized skill sets. It is not a market that will develop overnight, nor is it one that any contractor can simply step into once it's developed. The same is true for ammonia and methanol as energy carriers and a means of transporting hydrogen. Drawing on our extensive cryogenic engineering and construction expertise, Matrix is already at work laying the foundation needed to ensure we are at the forefront and provide the needed solutions in this space.

John R. Hewitt: For example, we have completed the construction of a hydrogen sphere in the southwestern U.S. and are beginning the engineering for a liquid hydrogen storage sphere for a client on the West Coast, which we will also construct. We're also actively at work on a feed study for a hydrogen production and distribution facility and working on a feasibility study for a global energy company to develop a large-scale liquid hydrogen storage solution, with an increasing number of hydrogen and ammonia opportunities internationally. We're building strategic relationships with construction organizations, like that recently announced TESO Industries and other European partners, which provide the ability to offer complete EPC solutions across the European Union, the United Kingdom, Norway, Switzerland, and elsewhere. As shared last quarter, we are in communication with several of our longstanding clients who are also part of the Hydrogen Hub teams identified to receive funding under the bipartisan infrastructure law.

John R. Hewitt: Of course, we continue to be active in our other end markets with robust opportunities and growth potential across each of our reporting segments. As I've said before, our organization has been meaningfully transformed over the past few years, and that transformation is showing up in our performance. We continue to fine-tune the organization and are investing in the technology, systems, and personnel needed to execute our strategy and grow the business. I'll hand the call over to Kevin.

Kevin S. Cavanah: Thank you, John. The overall results for the second quarter were in line with our expectations. While revenue was a bit lower than expected, direct margin performance, cost management, bottom line performance, backlogs, and liquidity were all at or above our expectations. We generated awards of $231 million, resulting in a book-to-bill ratio of 1.3, our 10th consecutive quarter at or above 1.0. With these awards, we have increased our backlog to $1.45 billion, the highest in company history; backlog has increased 95% in the last year and 33% in the first half of fiscal 2024. Revenue of $175 million in the second quarter was on the lower side of our range of expectations.

Kevin S. Cavanah: The decline compared to first quarter revenue of $198 million related primarily to the normal timing of project execution on storage construction projects, with the first quarter benefiting from a high level of project procurement. As I mentioned last quarter, our backlog contains larger, long-term construction projects. There is an inherent lag between the time when a project is awarded and when it begins to have a material impact on revenue. In some cases, this lag can be between three and six months or longer.

Kevin S. Cavanah: The contribution to revenue from these projects has been minimal thus far as each moves through the scope finalization, engineering, and planning stages at its own pace. We expect revenue from these projects to increase modestly in the third quarter and then pick up meaningfully in the fourth quarter and remain at elevated levels throughout fiscal 2025 and 2026. In the meantime, we are encouraged that direct gross margins returned to historical double-digit levels in the first half of 2024. Project execution was strong once again, but was offset by under-recovered construction overhead resulting from the low revenue volume that impacted gross margins by almost 500 basis points. The result was a gross margin of 6%, which was consistent with the first quarter. We expect to see improved overhead recovery in the third quarter and to achieve full recovery in the fourth quarter as a result of the revenue ramp we previously discussed.

Kevin S. Cavanah: Organizational efficiencies achieved over the last several years continue to benefit our cross-structure. Consolidated SG&A expenses were $15.7 million in the second quarter, which is the lowest level since the first quarter of fiscal 2014. This compares to $17.1 million in the first quarter. The decrease in SEC 4 was primarily attributable to a reduction in expense associated with the variable accounting for cash settled stock compensation and lower project pursuit costs.

Kevin S. Cavanah: The company will continue to control costs in order to leverage SG&A but expects to see modest targeted increases to support revenue growth as the year progresses. Other income during the second quarter included a gain of $2 million on a $2.7 million sale of a facility in Catoosa, Oklahoma. The facility was previously utilized for an industrial cleaning business, which was sold during the fourth quarter of fiscal 2023. This completes the divestiture and closure of non-core service offerings as part of our strategy to focus the business on a core market. As expected, the effective tax rate was near zero for the second quarter, and we expect the effective tax rate to be around zero throughout the remainder of fiscal 2024.

Kevin S. Cavanah: For the second quarter of fiscal 2024, we had a net loss of $2.9 million, or $0.10 per fully diluted share, which was similar to the net loss of $3.2 million, or $0.12 per share, in the first quarter. Moving to the operating segments, In the storage and terminal solutions segment, revenue was $62 million in the second quarter. That's compared to $90 million in the first quarter of fiscal 2024. First quarter revenues for this segment were positively impacted by the procurement of materials and components for construction projects awarded in the prior fiscal year. However, we did not have a similar level of procurement in the second quarter.

Kevin S. Cavanah: We expect higher revenue volume as we move through the remainder of fiscal 2024 and into fiscal 2025 as large specialty storage project awards transition through contracting, project planning, and mobilization, and into field construction. Gross margin was 2.9% in the second quarter, as strong project execution was negatively impacted by 770 basis points from the under-recovery of construction overhead costs due to lower revenue. We have allocated additional resources to this segment to support recent awards, a significant opportunity proposal pipeline, and the related additional revenue that we expect in the coming quarters. With revenue increases in this segment, we expect to reach full recovery of construction overhead costs in the fourth quarter. In the utility and power infrastructure segment, revenue was $40 million in the second quarter compared to $32 million in the first quarter, as revenue begins to benefit from Peak Shaver projects previously awarded.

Kevin S. Cavanah: We expect L&G peak shaving revenue to continue to increase as we move through the second half of fiscal 2024. Gross margin was 3.5% in the second quarter of fiscal 2024. However, that good project execution in this segment was offset by almost 600 basis points from under recovery of construction overhead costs. We've allocated additional resources to this segment as well to support recent awards, a strong bidding environment, and related anticipated revenue growth. As revenue continues to increase in this segment, we expect to reach full recovery of overhead costs in the fourth quarter of fiscal 2024. And finally, in the process and industrial facility segment, second-quarter revenue was $71 million, which was slightly lower than the $75 million in the first quarter. We expect revenue to remain at a similar level as we move through the remain for fiscal 2024 and then increase in fiscal 2025 related to previously awarded construction work. The segment gross margin was 9.4% in the second quarter compared to 6.8% in the first quarter.

Kevin S. Cavanah: With project execution strong in both quarters, we also reduced construction overhead costs in the second quarter by allocating resources to other segments, as I noted previously. Now, let's discuss our financial position. Liquidity increased to $106 million, and an improvement of $26 million in the quarter, positive net cash inflows of $30 million from operations, allowed the company to repay all outstanding borrowings on our credit facility of $10 million, and increase our cash balance by $20 million.

Kevin S. Cavanah: We expect to see cash and liquidity also improve in the second half of fiscal 2024. We will continue to proactively manage the balance sheet to support the improving business and believe we have the liquidity to support our financial needs, including funding working capital for the normal spring peak in reimbursable work, funding construction projects that are in a prepaid position, and targeted capital expenditures to support operations. As we move forward and continue to strengthen our balance sheet, we will evaluate our approach to capital allocation to ensure we are creating value for our shareholders. That concludes my prepared comments, so I'll now turn the call back to John. Thank you, Kevin.

John R. Hewitt: Before we open for questions, I'd like to reiterate some key takeaways for today. First, with record high backlog, we expect to see a marked improvement in revenue volumes in the near term. Those higher revenue volumes will provide for better construction overhead absorption, leverage of SG&A, and improve bottom line performance.

John R. Hewitt: While it's difficult in our business to accurately predict the timing of awards, starts, and backlog conversion to revenue, we are highly confident in this outlook. Second, we believe our strategic approach to our strong end markets, clients, and services will help us maintain a sizable opportunity pipeline and lead to further backlog growth and strong performance well into the future. Third, organizationally, we are leaner and more efficient.

John R. Hewitt: We will continue to invest in the processes, systems, and people needed to drive performance improvement and deliver strong project execution. In conclusion, there is a lot of positive momentum in the business, and we are well positioned to maximize our profitability and generate value and growth for our stakeholders. I'd like to open the call for questions and then come back to you for some closing thoughts. Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star, 1-1 on your remote control. Again, to ask a question, please press star.

Operator: One moment, please. Our first question comes from the line of John Franzreb of Sidoti & Company, Alana Zagitova. Good morning, everyone, and thanks for taking the questions. I'd like to start with the gross margin profile for the second quarter. Considering how much revenue is down, and we look at it versus a year ago, it was sizably better. How much reflects the absence of unprofitable jobs and how much reflects new jobs that are priced appropriately in that mix?

Kevin S. Cavanah: Can you give us a sense of what you owe the margin in the quarter? So, as I talked about on the call, the direct gross margins in the quarter were strong, back in the double-digit area that we've been striving to get to. You know, that's the result of the quality of bookings that we've had over the last year and a half. If you look at the same period last year, the direct margins were extremely low, low single digits. And that was because of the combination.

Kevin S. Cavanah: We were still working off the COVID backlog. We were still continuing to work on a project that was very difficult for us to complete in a profitable manner. So when you look at the margin performance, quarter over quarter, it's an extremely big improvement. You know, I don't have to split between what's related to new projects versus the old ones, but suffice it to say, the margin performance is back where we need it to be on these projects. Now all that's left is to get the revenue volume up to where we want it so we can fully recover our construction overhead. And Kellie, just for clarification's sake, what's your definition of direct gross margin? So when I think about direct gross margins, it's the actual margin that I'm earning on each individual job.

Kevin S. Cavanah: And when I think about gross margin, it's the combination of those direct margins on jobs combined with the recovery of our construction overhead pool of costs that we utilize to manage all those projects. So, when we get to a period where we've got the right volume, we're fully, we're fully recovering those overheads. And therefore, the direct gross margin is fairly equal to the gross margin, in a period where our revenue volume is low. We're not fully recovering yet.

John R. Hewitt: That under recovery can have a very significant impact on our margins, as it did this quarter, you know, almost 600 basis points. So that's something that's extremely important for us to manage, and it's the one item that John noted in his comments that we've still got to finish getting that completed. If we've completed everything else, we just have to get that strong backlog we've booked for the last, you know, year plus to convert to revenue, which we think is coming. And John, regarding the awards cycle, what inning do you think you're in? Is it unreasonable to assume that you can persist at the current rate of awards? No, I don't think that's unreasonable.

John R. Hewitt: I mean, you know, timing, you know, timing is everything. And, you know, whether orders quarter after quarter, you know, it's going to be above one or not. But we certainly think we're in a position to exit the year with a plus on awards and our book to bill, and projects that are in our pipeline, of a variety of sizes, we think will continue to contribute to backlog well into the future. So, we think we're in the early innings in our ability to continue to add some good projects to backlog and continue to build and grow the business. Okay, I got it.

Kevin S. Cavanah: That sounds great. And one last question. If I understood correctly in the prepared remarks, it sounds like the revenue outlook is strong through fiscal 2026 based on the current bookings profile that doesn't assume any incremental new awards. Is that the proper understanding?

Kevin S. Cavanah: Well, we always have a portion of our revenue that's what we'll call book and burn, that will get awarded, and we'll burn it off in the next quarter or two, and then we have the larger projects that have a two-and-a-half, three-year construction period. You know, when we make comments like that, you know, with these larger projects, we've added the backlog. We've got much better visibility into the total revenue stream for 25 and 26, and that gives us the confidence to make that statement. If I add to that, John, I would say the backlog in place now helps us lay a foundation for the future, and then what we see in the opportunity pipeline gives us confidence that we're going to be able to have a strong revenue stream here over the next couple of years. Great. That's great, John. I appreciate it. I'll get back into queue and let somebody else go first.

Operator: Thank you. Our next question comes from the line of Gene Ramirez of D.A. Davidson. Hi, this is John Ramirez for Brent Thielman at D.A. Davidson. Alright, I'll start with a very good question.

Operator: Should we see some revenue progression from fiscal quarter to fiscal quarter, from the second fiscal quarter to the third? It seems like this should be sort of a trough for revenue given the fiscal backlog. Yeah, we would agree with that. I think this will be a low point in the fiscal year. You'll see some decent growth here in the third quarter and then there should be higher growth in the fourth. Thank you.

John R. Hewitt: Any views on the refinery turnaround season and activities you performed there? Just wanted to see if it's better or worse relative to the past few years. I mean, we're entering our refinery turnaround cycle, basically now we're sort of in it, and the majority of our refinery turnaround work is located in the Pacific Northwest. And I don't know if there was anything unusual this year versus last year. I would say I'd probably point it out as sort of an average turnaround cycle for us in the facilities that we work in. And one more question.

Kevin S. Cavanah: So you mentioned some favorable direct margins. Are those continuing to get better with New York, with the work awarded in New York? Or to put it another way, do the bid margins keep moving higher because the market's so busy right now? I think the way I would look at it is, when we look at the margin performance in the first half of fiscal 2024, we had some good project closeouts on completing some projects that have moved that margin up. Really, overall strong execution by our field has helped that.

Kevin S. Cavanah: I think that'll be replaced by the quality backlog that we've got; those projects should lend themselves to a similar level of margin. So I wouldn't expect, you know, we'll continue to strive to maximize direct margin performance, but I wouldn't expect direct margins to go significantly higher than our 10 to 12% range that we've talked about being the normal range for the business. And you also need to remember that, you know, 30, 40% of our businesses are reimbursable, and a lot of maintenance activities, that type of work. Really good work for us, but it lends itself to a lower margin profile, so instead of double-digit margins, we're in the high single digits for that type of work. Perfect. I appreciate it. I'll hop back in and let someone else do it. Thank you.

Operator: One moment, please. It looks like we have a question from John Franzreb, Sidoti, Ilana... Party, Mr. Franzreb. Your line is open. Thank you.

John R. Hewitt: John, just back to the hydrogen discussion. I might have missed this. You said it was small, but put in context how much business you do in the hydrogen market, what you think maybe the potential is, and the timeline for realizing that kind of potential. Um, so I think, you know, obviously it's about, you know, I'll pass the least as the US transitions to a higher percentage of hydrogen in the energy mix. I think we feel pretty comfortable long term that hydrogen will take a larger position in the US energy mix, whether that's for certainly industrial processes, but also as a fuel for transportation, or in it for some kind of a mix or blending for our generation.

John R. Hewitt: So I think what you're seeing, what we're seeing right now, was a lot of kind of foundation work for us, laying the foundation for that future were, you know, a lot of time spent on marketing time spent on providing feasibility and feed studies to various clients to help them with their decision-making profile on what their next steps are, picking up an occasional storage sphere or an occasional, maybe smaller hydrogen processing facility. So I think it's going to continue to grow for us. So, I think you know, we're probably a couple years away from hydrogen having a material impact on our backlog and revenues from hydrogen. That said, you know, I would expect him here over the next 12 to 18 months.

Kevin S. Cavanah: And we'll continue to add, you know, small, small hydrogen-related projects to our backlog, and that should continue to grow, you know, over the subsequent years. And just a little bit about the leverage discussion. Kevin, you suggested that the second quarter's SG&A was artificially low due to the timing of, I guess, bonus accruals and other items. But you also said that you expect to leverage the SG&A line rather significantly in the year ahead. So how should we think about SG&A on a go-forward basis, similar to maybe the first quarter? A marginal increase. Any color on that line would be helpful.

Kevin S. Cavanah: You know, I think that the second half is probably going to be higher than the first half was. The variable accounting on cash settled stock based compensation will have a higher expense. We also anticipate increased Project Pursuit costs as we continue to work to build the backlog and then, you know, then just some other targeted increases that we'll need just for the added revenue volume that comes. The way I think about SG&A is we've got a target out there we're trying to get SG&A at six and a half percent.

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 your host today, Ms. Kellie Smythe Senior director of Investor Relations for Matrix Service company.

Thank you Valerie good morning, and welcome to Matrix service company's second quarter fiscal 2024 earnings call participants on today's call will include John Hewitt, President and Chief Executive Officer, and Kevin Cavanah, Vice President and Chief Financial Officer. The presentation materials, we will be referring to during the webcast.

Today can be found under events and 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 expectations plans and prospects for matrix service company that constitute forward looking statements for the purposes of the private.

Securities Litigation Reform Act of $19 95, 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.

To 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 that matrix will will be presenting at the upcoming Sidoti small cap virtual conference on March 13th and 14th if you'd like additional information on this event or would like to have a conversation with management I invite you to contact me through matrix Service Company Investor Relations website.

I'll now turn the call over to Jennifer.

Thank you Kelly and good morning, everyone.

Good morning, and welcome to the Matrix Service Company Conference call to discuss results for the second quarter of fiscal 2024. Currently all participants are in a listen only mode.

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Later, well 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 your host today, Ms. Kellie Smythe Senior director of Investor Relations for Matrix Service company.

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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.

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Now, let's talk about the business, we're proud to announce that awards of $233 million in the quarter. We've achieved a record backlog for matrix of 145 billion. This is an all time high for the company and its 40 year history and is an achievement that is a result of the hard work of our people and our focused strategic.

Before I turn the call over to John Hewitt I'd like to share that matrix will.

We'll be presenting at the upcoming Sidoti small cap virtual conference on March 13th and 14th if you'd like additional information on this event or would like to have a conversation with management I invite you to contact me through matrix Service Company Investor Relations website, I'll now turn the call over to John.

Approach at our core markets, 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 approved operating processes, while continuing to deliver best in class quality for our customers.

Thank you Kelly and good morning, everyone.

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As you will see when Kevin walk through our results matrix has resolved the primary issues that have plagued us. The last few years. We have completed projects that were bid in the highly competitive pandemic environment, which resulted in limited margin opportunity. We also streamlined and refocus the company.

And and emerging energy markets together with our long standing reputation for safety quality delivery positions us as the leading contractor across the entire industry and puts us in an advantageous position.

Our opportunity pipeline remains steady at $5 billion, demonstrating the strength of our markets and our ability to continue a long term trend of backlog growth.

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Now I want to spend a few minutes on our work in the energy markets recently, President Biden pause pending and future permits to export LNG to non free trade agreement countries generally we do not expect this pause to impact our opportunity pipeline or backlog.

Major energy companies also rely on us for NGL storage tanks terminals, such as ethane ethylene and propane and butane that feed the global marketplace because of our country's fast safe and dependable natural gas availability.

Mall to mid scale LNG facilities. We have won and are pursuing are domestic in nature Friday backup fuel supply peak shaving a ship bunkering.

The LNG tank projects that are related to large scale export facilities that might be associated with the current white house permit position are more about opportunistic pursuit for matrix.

Looking forward the transition to sustainable energy is a broad initiative that will include among others hydrogen.

This is a market that while not presently a significant revenue driver for us will be as we assume a major leadership role in fulfilling the significant infrastructure needs that will evolve.

We have significant opportunities in the small to mid scale LNG market I, just described as well as Ngls ammonia and hydrogen and expect these opportunities to continue contributing into backlog.

Just as creation of a long of a strong market position in LNG was made possible because of our specialty vessel cryogenic capabilities. The hygiene market requires these same specialized skill sets.

While the transition to a low carbon energy mix has been a focus on global energy policy. The world is still heavily dependent on fossil fuel that will be for the foreseeable future at the same time energy companies are actively at work developing longer term more sustainable energy solutions for our matrix our expertise in both the traditional and.

The market that will develop overnight nor is the one that any contract you can simply step into once it's developed.

Same is true for ammonia of ethanol as energy carriers and a means of transporting hydrogen.

And emerging energy markets together with our long standing reputation for safety quality delivery positions us as the leading contractor across the entire industry and puts us in an advantageous position.

Drawing on our extensive cryogenic engineering and construction expertise matrix is already a work laying the foundation needed to ensure we were at the forefront in providing the needed solutions in this space.

For example, we have completed construction of our hydrogen sphere in the southwestern U S and are beginning the engineering for liquid hydrogen storage sphere for a client on the west coast, which will which we will also construct we're also actively at work on a feed study for hydrogen production and distribution facility and working on the feasibility study for a global.

Our opportunity pipeline remains steady at 5 billion, demonstrating the strength of our markets and our ability to continue a long term trend of backlog growth.

Energy company to develop large scale liquid hydrogen storage solutions.

With an increasing number of hydrogen in ammonia opportunities internationally, we're building strategic relationships with construction organizations.

The increasing use of LNG as a low carbon solution for ensuring reliable and affordable power electricity heating and cooling and also in alternative fuel for high horsepower applications Paychex has emerged as a leader in the design construction maintenance and repair of LNG storage tanks and balance of plant facilities.

Like the recently announced <unk> industries, and other European partners, which provides the ability to offer complete EPC solutions.

Across the European Union, United Kingdom, Norway, Switzerland and elsewhere.

As shared last quarter, we are in communication with sub over our long standing clients, who were also part of the hydrogen up teams identified to receive funding under the bipartisan infrastructure law of course, we continue to be active in and in our other end markets with robust opportunities and growth potential across each of our reporting segments.

Going forward the transition to sustainable energy is a broad initiative. It will include among others hydrogen. This is a market that while not presently a significant revenue driver for us will be as we assume a major leadership role in fulfilling the significant infrastructure needs that will evolve.

As I've said before our organization has a meaningfully transformed over the past few years and that transformation is showing up on our performance. We continue to fine tune the organization and are investing in the technology systems and personnel needed to execute our strategy and grow the business.

Just as creation of a long a our strong market position in LNG was made possible because of our specialty vessel cryogenic capabilities. The hygiene market requires these same specialized skill sets.

The call over to Kevin.

Thank you John.

Overall results for the second quarter were in line with our expectations, while revenue was a bit lower than expected margin performance cost management Bottomline performance backlog and liquidity.

Auto market that will develop overnight nor is the one that any contract you can simply step into once it's developed same is true for ammonia and methanol is energy carriers and a means of transporting hydrogen.

We were all at or above our expectations, we generated awards of $231 million, resulting in a book to bill ratio of 1.3, our 10th consecutive quarter at or above one point, though.

Drawing on our extensive cryogenic engineering and construction expertise matrix is already at work laying the foundation needed to ensure we were at the forefront in providing the needed solutions in this space.

With these awards, we have increased our backlog to $1 45 billion.

<unk> in company history.

<unk> increased 95% in the last year and 33% in the first half of fiscal 2004.

Also actively at work on a feed study for hydrogen production and distribution facility and working on the feasibility study for a global energy company to develop large scale liquid hydrogen storage solutions.

Revenue of $175 million in the second quarter was on the lower side of our range of expectations. The decline compared to first quarter revenue of $198 million related primarily to the normal timing of project execution on storage construction projects with the first quarter benefit.

With an increasing number of hydrogen in ammonia opportunities internationally, we are building strategic relationships with construction organizations.

Like the recently announced with <unk> industries, and other European partners, which provides the ability to offer complete EPC solutions across the European Union, United Kingdom, Norway, Switzerland and elsewhere.

From a high level of project procurement.

As I mentioned last quarter.

Our backlog contains larger long term construction projects. There is an inherent lag between the time when a project is awarded and when it begins to have a material impact on revenue in some cases. This lag can be between three and six months or longer the contribution to revenue from these projects has been minimal thus far.

As shared last quarter, we are in communication with sub over a long standing clients, who were also part of the hydrogen up teams identified to receive funding under the bipartisan infrastructure law of course, we continue to be active in and in our other end markets with robust opportunities and growth potential across each of our reporting segments.

Of each moves through scope Finalization engineering and planning stages at its own pace. We expect revenue from these projects to increase modestly in the third quarter, and then pick up meaningfully in the fourth quarter and remain at elevated levels throughout fiscal 2025 and 2026.

In the meantime, we are encouraged that direct gross margins return to historical double digit levels in the first half of 2024.

Ill hand, the call over to Kevin.

Thank you John.

Project execution was strong once again, but was offset by under recovered construction overhead, resulting from the low revenue volume that impacted gross margins by almost 500 basis points.

The overall results for the second quarter were in line with our expectations, while revenue was a bit lower than expected margin performance cost management Bottomline performance backlog and liquidity.

The result was a gross margin of 6%, which was consistent with the first quarter.

All at or above our expectations, we generated awards of $231 million, resulting in a book to bill ratio of 1.3, our 10th consecutive quarter at or above one point, though.

We expect to see improved overhead recovery in the third quarter.

And to achieve full recovery in the fourth quarter as a result of the revenue ramp we've previously discussed.

Organizational efficiencies achieved over the last several years continued to benefit our cost structure. So all dated SG&A expenses were $15 7 million in the second quarter, which is the lowest level since the first quarter of fiscal 2014.

With these awards, we have increased our backlog to $1 45 billion.

The highest in company history backlog has increased 95% in the last year and 33% in the first half of fiscal 'twenty four.

Revenue of $175 million in the second quarter.

This compares to $17 1 million in the first quarter.

The decrease in <unk> four was primarily attributable to a reduction in expense associated with the variable accounting for cash settled stock compensation and lower project pursuit costs.

The lower side of our range of expectations the decline compared to first quarter revenue of <unk>.

$198 million related primarily to the normal timing of project execution on storage construction projects with the first quarter benefiting from a high level of project procurement.

The company will continue to control costs in order to leverage SG&A, but expect to see modest targeted increases to support revenue growth as the year progresses.

As I mentioned last quarter our.

Other income during the second quarter included a gain of $2 million on a $2 $7 million sale of a facility into tusa, Oklahoma. The facility was previously utilized for industrial cleaning business, which was sold during the fourth quarter of fiscal 2023.

This completes the divestiture and closure of non core service offerings as part of our strategy to focus the business on our core markets.

As expected the effective tax rate was near zero for the second quarter, and we expect the effective tax rate to be around zero throughout the remainder of fiscal 2024.

For the second quarter of fiscal 2044, we had a net loss of $2 9 million or <unk> <unk> per fully diluted share, which was similar to the net loss of $3 2 million or <unk> 12 per share in the first quarter.

In the meantime, we are encouraged that direct gross margins return to historical double digit levels in the first half of 2024.

Project execution was strong once again, but it was offset by under recovered construction overhead, resulting from the low revenue volume that impacted gross margins by almost 500 basis points.

Moving to the operating segments in the storage and terminal solutions segment revenue was 62 million in the second quarter as compared to $90 million in the first quarter of fiscal 2024.

The result was a gross margin of 6%, which was consistent with the first quarter.

First quarter revenues for this segment were positively impacted by the procurement of materials and components for construction projects awarded in the prior fiscal year, we did not have a similar level of procurement in the second quarter.

We expect to see improved overhead recovery in the third quarter.

And to achieve full recovery in the fourth quarter as a result of the revenue ramp we've previously discussed.

Organizational efficiencies achieved over the last several years continued to benefit our cost structure consolidated SG&A expenses were $15 7 million in the second quarter, which is the lowest level since the first quarter of fiscal 2014.

We expect higher revenue volume as we move through the remainder of fiscal 2024 and into fiscal 2025 as large specialty storage project awards transition through contracting project planning of mobilization and into field construction.

This compares to $17 1 million in the first quarter.

The decrease in <unk> was primarily attributable to a reduction in expense associated with the variable accounting for cash settled stock compensation and lower project pursuit costs.

Gross margin was two 9% in the second quarter.

As strong project execution was negatively impacted by 770 basis points from the under recovery of construction overhead costs due to the lower revenue.

The company will continue to control costs in order to leverage SG&A and expects to see modest targeted increases to support revenue growth as the year progresses.

We have allocated additional resources. This segment to support recent awards, a significant opportunity proposal pipeline and the related additional revenue that we expect in the coming quarters.

With revenue increases in this segment, we expect to reach full recovery of construction overhead costs in the fourth quarter.

And the utility and power infrastructure segment revenue was $40 million in the second quarter compared to $32 million in the first quarter as revenue begins to benefit from peak Shaver projects previously awarded.

This completes the divestiture and closure of non core service offerings as part of our strategy to focus the business on our core markets.

We expect LNG peak shaving revenue to continue to increase as we move through the second half of fiscal 2044.

As expected the effective tax rate was near zero for the second quarter, and we expect the effective tax rate to be around zero throughout the remainder of fiscal 2024.

Gross margin was three 5% in the second quarter of fiscal 2024 as good project execution. In this segment was offset by almost 600 basis points from under recovery of construction overhead cost.

For the second quarter of fiscal 2024, we had a net loss of $2 9 million or <unk> <unk> per fully diluted share, which was similar to the net loss of $3 2 million or <unk> 12 per share in the first quarter.

We have allocated additional resources to this segment as well to support recent awards, a strong bidding environment and related anticipated revenue growth.

Moving to the operating segments in the storage and terminal solutions segment revenue was $62 million in the second quarter as compared to $90 million in the first quarter of fiscal 2024.

As revenue continues to increase in this segment, we expect to reach full recovery.

Overhead costs in the fourth quarter of fiscal 2004.

And finally in the process and industrial facility segment.

Second quarter revenue was $71 million, which was slightly lower than the $75 million in the first quarter.

We expect revenue to remain at similar level as we move through the remainder of fiscal 2024, and then increase in fiscal 2025 related to previously awarded construction work.

Segment gross margin was nine 4% in the second quarter compared to six 8% in the first quarter.

With project execution strong in both quarters, we also reduce <unk>.

Gross margin was two 9% in the second quarter.

As strong project execution was negatively impacted by 770 basis points.

<unk> and overhead costs in the second quarter by allocating resources to other segments as I noted previously.

From the under recovery of construction overhead costs due to the lower revenue we have.

Now, let's discuss our financial position.

Liquidity increased to $106 million, an improvement of $26 million in the quarter.

Allocated additional resources. This segment to support recent awards, a significant opportunity proposal pipeline and the related additional revenue that we expect in the coming quarters.

Positive net cash inflows of $30 million from operations allowed the company to repay all outstanding borrowings on our credit facility of $10 million and increased our cash balance by $20 million, we expect to see cash and liquidity also improved in the second half of fiscal 2024.

With revenue increases in this segment, we expect to reach full recovery of construction overhead costs in the fourth quarter.

And the utility.

And power infrastructure segment revenue was $40 million in the second quarter compared to $32 million in the first quarter as revenue begins to benefit from peak shaver projects.

We will continue to proactively manage the balance sheet to support the improving business and believe we have the liquidity to support our financial needs, including.

Rewarded.

We expect LNG peak shaving revenue to continue to increase as we move through the second half of fiscal fourth quarter.

On the working capital for the normal spring peak in Reimbursable work.

Ending construction projects that are in our prepaid position.

Gross margin was three 5% in the second quarter of fiscal 2024 as good project execution. In this segment was offset by almost 600 basis points from under recovery of construction overhead cost.

And targeted capital expenditures to support operations.

As we move forward and continue to strengthen our balance sheet, we will evaluate our approach to capital allocation to ensure we are creating value for our shareholders.

We have allocated additional resources to this segment as well to support recent awards, a strong bidding environment and related anticipated revenue growth.

That concludes my prepared comments, so ill 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 first with record high backlog, we expect to see a marked improvement in revenue volumes in the near term those higher revenue volumes will provide for better construction overhead absorption leverage of SG&A and improved bottom line performance.

As revenue continues to increase in this segment, we expect to reach full recovery.

Overhead costs in the fourth quarter of fiscal 2024.

And finally in the process and industrial facility segment.

Second quarter revenue was $71 million, which was slightly lower than the $75 million in the first quarter.

Difficult in our business to accurately predict the timing of awards starts at backlog conversion to revenue. We are highly confident in this outlook second we believe our strategic approach to our strong end markets clients and services.

We expect revenue to remain at similar level as we move through the remainder of fiscal 2024, and then increase in fiscal 2025 related to previously awarded construction work.

<unk> maintained a sizable opportunity pipeline and lead to further backlog growth strong performance well into the future.

Segment gross margin was nine 4% in the second quarter compared to six 8% in the first quarter.

Organizationally, we are leaner and more efficient we will continue to invest in their process processes and systems that people needed to drive performance improvement and deliver strong project execution.

With project execution strong in both quarters, we also reduce construction overhead costs in the second quarter by allocating resources to other segments as I noted previously.

In conclusion, there is a lot of positive momentum in the business and we are well positioned to maximize our profitability and generate value and growth for our stakeholders like to open the call for questions and I'll come back to you for some closing thoughts.

Now, let's discuss our financial position.

Liquidity increased to $106 million, an improvement of $26 million in the quarter.

Okay.

Positive net cash inflows of $30 million from operations allowed the company to repay all outstanding borrowings on our credit facility of $10 million and increase our cash balance by $20 million.

Thank you, ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone again to ask a question. Please press star One line one moment for your first question.

We expect to see cash and liquidity also improved the <unk>.

Our first question comes from the line of.

Half of fiscal 2024.

John <unk> of Sidoti <unk> Company. Your line is open.

We will continue to proactively manage the balance sheet to support the improving business and believe we have the liquidity to support our financial needs, including.

Good morning, everyone and thanks for taking the questions.

I'd like to start with.

The gross margin profile in the second quarter.

Funding working capital for the normal spring peak and Reimbursable work.

Considering how much revenue was down and when you look at it versus a year ago.

Funding construction projects that are in our prepaid position and targeted capital expenditures to support operations as.

Size of we better how much reflects the absence of unprofitable jobs and how much reflects new jobs are priced appropriately in that mix can you give us a sense of west which drove the margin in the corner.

As we move forward and continue to strengthen our balance sheet, we will evaluate our approach to capital allocation to ensure we are creating value for our shareholders.

That concludes my prepared comments, so ill now turn the call back to John.

So.

Kevin before we open for questions I'd like to reiterate some key takeaways for today first with record high backlog, we expect to see a marked improvement in revenue volumes in the near term those higher revenue volumes will provide for better construction overhead absorption leverage of SG&A and improved bottom line performance.

As I talked about on the call.

Growth direct gross margins in the quarter.

Our strong back into double digit.

Area that we've we've been striving to get to yes.

That's the result of the quality of bookings that we've we've had over the last year year and a half.

You look at the same period last year.

Margins were.

Were extremely low low single digits.

Maintain a sizable opportunity pipeline and lead to further backlog growth strong performance well into the future third organizationally, we are leaner and more efficient we will continue to invest in their process processes and systems that people needed to drive performance improvement and deliver strong project execution.

And that was because of the combination we were still working off the COVID-19 backlog.

We were still.

Continuing to work on.

Project that was.

Very difficult for us to complete in a profitable manner.

So when you look at the margin performance.

Quarter over quarter.

It's an extremely big.

<unk>.

I don't have the split between what's related to that.

Thank you, ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone again to ask a question. Please press star One line one moment for your first question.

New projects versus the old, but but it's suffice it to say.

The margin performance.

<unk> is back where we needed to be on these projects now what's left is to get the the revenue volume up to where we want it. So we can fully recover our construction overhead.

Our first question comes from the line of.

John <unk> of Sidoti <unk> Company. Your line is open.

Good morning, everyone and thanks for taking the questions.

And Kevin just for clarity sake, what your definition of direct gross margins.

I'd like to start with.

The gross margin profile in the second quarter.

So when I think about direct gross margins. It's the actual margin then im wondering on each individual job.

Considering how much revenue was down and we look at it versus a year ago.

And when I think about gross margin.

It's the combination of those direct margins on jobs.

Combined with the recovery of our construction overhead pool of cost that we utilize to manage all of those projects. So when we get to a period, where we've got the right volume we're fully.

So as I talked about on the call.

Growth direct gross margins in the quarter.

We're fully recovering those overheads and therefore, the direct gross margins is fairly equal to the.

Our strong back into double digit.

Area that we've we've been striving to get to yes.

That's the result of the quality of bookings that we've we've had over the last year year and a half.

The gross margin in a period, where our revenue volume is slow and.

And we're not fully recovering.

That under recovery can have a very significant impact.

You look at the same period last year.

Our margins as it as it did this quarter almost 600 basis points. So that's that's that's something that's extremely important for us to manage and it's the it's the one item that John noted in his comments that we still got it got it.

Origins were.

Were extremely low low single digits.

And that was because of the combination we were still working off the COVID-19 backlog.

We were still.

Continuing to work on.

Finished getting that completed.

Project that was.

We've completed everything else, we've just got to get that strong backlog, we booked the last year.

Very difficult for us to complete in a profitable manner.

So when you look at the margin performance.

A year plus to convert to revenue, which we think is coming.

Quarter over quarter.

And John regarding the award cycle.

It's an extremely big.

<unk>.

What inning do you think you're in is it unreasonable to assume that you can persist at the current rate of awards.

So you don't have the split between what's related to that.

New projects versus the old, but but it's suffice it to say.

No I don't think Thats unreasonable I mean.

Again timing timing is everything.

The margin performance.

<unk> is back where we need it to be on these projects now what's left is to get the the revenue volume up to where we want it. So we can fully recover our construction overhead.

Whether one quarter quarter after quarter.

It's going to be above one or not but we certainly think we're positioned to exit the year with.

One cross on awards, and our book to Bill and projects that are in our pipeline.

And Kevin just for clarity sake, what your definition of direct gross margins.

So when I think about direct gross margins. It's the actual margin then I am wondering on each individual job.

Yes.

A variety of sizes, we think will continue to contribute to backlog.

Out of the future. So so we think we're in early innings and our ability to continue to.

And when I think about gross margin.

It's the combination of those direct margins on jobs.

At Southland projects to backlog and continuing to build and grow the business.

Combined with the recovery of our construction overhead pool of cost that we utilize to manage all of those projects. So when we get to a period, where we've got the right volume we're fully.

Okay got it that sounds great and one last question.

If I heard correctly in the prepared remarks, it sounded like the revenue outlook is strong through fiscal 2026 based on the current bookings profile that doesn't assume any incremental new awards is that Mary.

We're fully recovering those overheads and therefore, the direct gross margin is fairly equal to the.

The gross margin in a period, where our revenue volume is low and.

Understanding.

Well so.

And we're not fully recovery.

We always have a portion of our revenue that's what we'll call book and burn that will.

That under recovery can have a very significant impact.

On our margins as it as it did this quarter almost 600 basis points. So that's that's that's something that's extremely important for us to manage and it's the pits.

So we will get awarded and will burn it off in the next quarter or two and then we have the larger projects that are.

Have a tablet to.

253 year.

One item that John noted in his comments that we still got it got it.

Restructuring period so.

When we make comments like that.

Finished getting that completed.

With these larger projects we've added to backlog.

We've completed everything else, we've just got to get that strong backlog, we booked last year.

We've got much better visibility into the total revenue stream for 25, and 26 that gives us the confidence to make that statement.

A year plus to convert to revenue, which we think is coming.

If I add on to that John I would say the backlog in place now is helps us lay a foundation for the future and then overlay what we see any opportunity pipeline.

And John regarding the award cycle.

What inning do you think you're in is it unreasonable to assume that you can persist at the current rate of awards.

It gives us confidence that we're going to be able to have a strong revenue stream here out over the next couple of years.

No I don't think Thats unreasonable I mean.

Great that's great John I appreciate it.

Again timing timing is everything.

Get back into queue, and let somebody else go. Thank you.

Whether order quarter after quarter.

Thank you one moment please.

It is going to be above one or not but we certainly think we're in a position to exit the year with.

Okay.

Our next question comes from the line of Jean Ramirez of D. A Davidson your line is open.

One for us.

On awards and a book to Bill and projects that are in our pipeline.

Hi, This is John mirrors for Brent Thielman at D. A davidson.

Yes.

A variety of sizes, we think we will continue to contribute to backlog.

Hi, Jay.

Hi.

I'll start with revenue question.

Well out of the future. So so we think we're in early innings and our ability to continue to add.

<unk>.

Should we see some revenue progression from fiscal quarter.

From the second fiscal quarter to the third it seems like this should be sort of a trough revenue. During this household backlog today.

We saw good projects to backlog and continuing to build and grow the business.

Okay got it that sounds great and one last question.

Yes, we would agree with that I think this will be the low point of the fiscal year Youll see some some decent growth here in the third quarter, and then should be higher growth in the fourth.

If I heard correctly in the prepared remarks, it sounded like.

Revenue.

Outlook is strong through fiscal 2026 based on the current bookings profile that doesn't assume any incremental new awards.

Okay. Thank you.

Just any views on the refinery turnaround season and activities you performed there.

We've got the proper understanding.

Well so far.

Just want to see is it better or worse relative to the past few years.

We always have a portion of our revenue that's what we'll call book and burn that will.

We're entering our refinery turnaround cycle basically now we're sort of in it.

We will get awarded and will burn it off in the next quarter or two and then we have the larger projects that are.

The majority of our.

Have a have a.

Binary trial workers.

253 year.

<unk> the Pacific Northwest.

Construction period so.

And I don't know if there is anything unusual unusual this year versus.

When we make comments like that.

With these larger projects we've added to backlog.

Last year, I would say it'd probably pointed as sort of an average turnaround cycle for us.

We've got much better visibility into the total revenue stream for 25, and 26 that gives us the confidence to make that statement.

And the facilities that we work.

Add on to that John I would say that.

Thank you.

Backlog in place now is helps us lay a foundation for the future and then overlay what we see any opportunity pipeline.

And one more question.

See.

You mentioned some favorable direct margins are those continuing to get better with New York with the work awarded in New York or in other words do the bid margins keep moving higher because the market's so basically right now.

It gives us confidence that we're going to be able to have a strong revenue stream here out over the next couple of years.

Great that's great John I appreciate it I'll get back into queue and let somebody else go. Thank you.

Thank you one moment please.

I think what I would the way I would look at it is when we look at the margin performance in the first half of fiscal 2024.

Our next question comes from the line of Jean Ramirez of D. A Davidson your line is open.

We've had some some good project closeouts.

On completing some projects that have move that margin up.

Hi, This is John mirrors for Brent Thielman at D. A davidson.

Overall strong execution by our.

Hi, Jay.

Hi.

I'll start with revenue question.

By our field that has helped.

Yes.

I think that'll be replaced by the quality backlog that we've got those those projects.

Should we see some revenue progression from fiscal quarter.

From the second fiscal quarter to the third it seems like this should be sort of a trough for revenue given the household backlog today.

Lend themselves to.

A similar level of.

Yes, we would agree with that I think this will be the low point of the fiscal year Youll see some decent growth here in the third quarter, and then should be higher growth in the fourth.

Margin.

So I wouldn't expect.

Mobile continues to strive to.

Maximize the direct margin performance, but I wouldn't expect direct margins too.

Go significantly higher than the 10% to 12% range that we've talked about being the normal range for the business.

Okay. Thank you.

Just any views on the refinery turnaround season and activities we perform there.

And you also need to remember that.

Just want to see is it better or worse relative to the past few years.

<unk>, 40% of our businesses is reimbursable and.

We're entering our refinery turnaround cycle basically now we're sort of in it.

A lot of maintenance activities that type of work.

Really good work for us.

But it lends itself to a lower margin profile.

The majority of our rigs.

Binary trial workers.

Profile, so instead of double digit margins were in the high single digits for that type of work.

The Pacific Northwest.

I don't know if there is anything unusual.

Unusual this year versus.

Last year, I would say I'd, probably pointed as sort of an average turnaround cycle for us.

Perfect I appreciate the color I'll hop back and let someone else ask some questions. Thank you.

Thank you one moment please.

At the facilities that we work.

Looks like we have a question from John Frans ramp of Sidoti Your line is open.

Thank you.

And one more question.

So.

Our new Mr. <unk> Your line is open.

Okay. Thank you.

John just back to the hydrogen discussion.

I might have missed this you said it was small but putting context, how much business you do in the hydrogen market.

What you think maybe the potential is and the timeline for realizing that kind of a potential.

I think what I would the way I would.

Look at it is when we look at the margin performance in the first half of fiscal 2024.

So I think obviously it's about.

Had some some good project closeouts.

How fast the <unk>.

Bleeding in some projects that help move that margin up.

The U S.

Transitions to <unk>.

Overall strong execution by our.

A higher percentage of hydrogen in the energy mix I think we feel pretty comparable long term that hydrogen will take a larger position in the U S energy mix.

By our field that has helped that.

I think that'll be replaced by the quality backlog that we've got those those projects.

That's for serving the industrial processes, but for.

Lend themselves to.

Yes.

A similar level of.

Fuel for transportation fuel in it for.

Margin.

So I wouldn't expect.

Some kind of a mixed ore blending for.

We'll continue to strive to.

Our generation, so I think what youre seeing what we're seeing right now is a lot of kind of foundation.

Thanks, Mike.

Direct margin performance, but I wouldn't expect direct margins to.

Go significantly higher than the 10% to 12% range that we've talked about being the normal range for the business.

For us laying the foundation for a report that future. We're in a lot of time spent on marketing time span on providing feasibility and feed studies to various clients to help them with their decision making profile or what their next steps are.

And you also need to remember that <unk>.

<unk> 30, <unk>, 40% of our businesses is reimbursable and.

A lot of maintenance activities that type of work.

Picking up an occasional storage sphere or an occasional maybe smaller.

Really good work for us.

It lends itself to a lower margin.

Profile, so instead of double digit margins were in the high single digits for that type of work.

Hydrogen processing facility. So I think it's going to continue to grow for us So, but I think we're probably a couple of years away for more hydrogen from a material impact on our backlog and revenues from hydrogen that said.

Perfect I appreciate the color I'll hop back and let someone else ask some questions. Thank you.

Thank you one moment please looks.

I would expect here.

It looks like we have a question from John France ramp of Sidoti Your line is open.

Over the next 12 to 18 months and we will continue to add.

Small small hydrogen related projects into our backlog and that should continue to grow over the subsequent years.

Mr. <unk> your line is open.

Okay. Thank you John.

John just back to the hydrogen discussion.

Understood and just a little bit about the leverage discussion.

I might've missed this can you.

You said it was small but putting context, how much business you do in the hydrogen market.

Kevin do you suggested that the second quarter SG&A was artificially low due to the timing of.

What you think maybe the potential is and the timeline for realizing that kind of a potential.

I guess bonus accruals and other items.

But you also said that you expect to leverage the SG&A line, rather significantly in the year ahead.

So I think obviously it's about.

How fast the.

How should we think about SG&A.

At least the U S track.

On a go forward basis similar to maybe the first quarter.

Transitions too.

A higher percentage of hydrogen in the energy mix I think we feel pretty comfortable long term that hydrogen will take a larger position in the U S energy mix.

Marginal increase.

Just any color on that loan would be helpful.

I think the I think the second half SG&A I'll, probably be higher than that.

Whether thats for serving the industrial processes, but for.

The first half was.

As a fuel for transportation fuel in it.

Okay.

Variable accounting on cash settled stock based compensation, we will have a higher expense. We also anticipate increased.

Sure.

Some kind of a mixed ore blending for.

Our generation, so I think what youre seeing what we're seeing right now is a lot of kind of foundation.

Project pursuit cost as we continue to work to build the backlog and then.

For us laying the foundation for a report that future were.

And then just.

Some other targeted increases that will need just for be added revenue volume that comes at the way I would think about SG&A as we've got a target out there we're trying to get to get the SG&A at a six 5%.

Lot of times spend on marketing time spent on <unk>.

<unk> ability and feed studies to various clients to help them with their decision making profile or what their next steps are.

We will make a significant move toward that.

Picking up an occasional storage sphere or an occasional maybe.

And especially in the fourth quarter I'm not sure what.

Maybe smaller.

All the way there but.

Processing facility. So I think it's going to continue to grow for us So, but I think we're probably a couple of years away for hydrogen from a material impact on our backlog and revenues from hydrogen that said.

We can definitely get.

How much closer hopefully get to seven or 7% or lower and then I think thats achievable mark in fiscal <unk>.

25.

And when you talked about.

Would expect here.

Asset relocations using about moving guys from a personnel from <unk>.

Over the next 12 to 18 months that we will continue to add.

From process into utility and starts not not adding additional personnel and I understand that properly.

Small small hydrogen related projects into our backlog and that should continue to grow over the subsequent years.

Yes, there is.

Really two aspects of the construction overhead so first of all when we talk about reallocating resources, we've talked about the fact that our.

Understood.

Just a little bit about the.

The leverage discussion.

Kevin you suggested that the second quarter SG&A was artificially low due to the timing of.

Our our staffs can work in multiple segments and if you look at the volume of revenue that was flowing through the process and industrial facilities segment last year.

I guess bonus accruals and other items.

You also said that you expect to leverage the SG&A line, rather significantly in the year ahead. So how should we think about SG&A on a go forward basis similar to maybe the first quarter.

It was definitely a higher percentage that we completed some of that work and I mentioned that we're kind of at all.

And a lull period here before additional work kicks in.

No.

Marginal increase.

<unk> resources are being allocated toward the other two segments.

Just any color on that loan would be helpful.

I think.

Just trying to put a little color on those resources, what the Saar that's all the the project management the quality and safety.

The second half SG&A will probably be higher than that.

The first half was.

All of that.

Yes.

Infrastructure, we have in place to execute the projects will be more focused on those other two segments.

Okay.

Variable accounting on cash settled stock based compensation.

We'll have a higher expense, we also anticipate increased.

In the second half of the year band than they were in say the prior year.

Project pursuit cost as we continue to work to build the backlog and then.

Okay, and just lastly on the long term financial targets any kind of update and when we would expect to realize those targets.

And then just.

Some other targeted increases that will need just for be added revenue volume that comes.

Exit philosophy in this 2025 or what are your thoughts there.

I think about SG&A as we've got a target out there we're trying to get to get the SG&A at a six 5%.

I think again, it's similar probably to the answer on SG&A I think see significant movements.

Toward towards those targets.

In the fourth quarter will we get there all the way I'm not sure about that.

Do you think those are achievable.

In fiscal 'twenty five.

Great guys. Thank you for taking the follow ups.

Thank you.

A moment please.

It looks like we have follow up questions from the line of John Ramirez of D. A Davidson your line is open.

Hi.

Just.

Thinking about Capex can you give us a sense of how we should be modeling capex for the year or the next couple of years.

Should we think of that is tied to revenue growth for <unk>.

Cost to support our growth rate.

It is tied to revenue growth and its also ties back that.

As we've been trying to control costs. The last few years, we've we've held our capital expanding pretty low so I would expect it to increase we've put a long term target out there at one 5% of revenue.

I think we'd probably be.

Around that level for the second half of the year or potentially a little higher as we as we kind of almost you ramp up some of that capex for the revenue volumes that are filming.

And having that don't have a fiscal 'twenty five capex.

But at this point, but I would expect.

That we'd probably be at least at the one 5% next year or potentially go higher.

And.

For fiscal year, 'twenty, five and when you say a little higher is that compared to.

The second half of the.

Fiscal year, 'twenty, four or just in general a little higher than one I'm talking I'm talking a little higher.

Percent of revenue.

When I talked about the one 5% of revenue it could be it could be one eight.

2%.

But again I don't have we don't have developed capex forecast, yet I'm, just anticipating that there will be needs for portions of the business that are growing.

Perfect makes sense acreage should a follow up thank you so much.

Thank you.

I'm showing no further questions at this time I'd like to turn the call back over to John Hewitt for any closing remarks.

Yes.

Everybody for being on the call today I hope, it's clear that there are a lot of great things happening in the business and that we are positioned for significantly improved bottom line profitability and as you look out into the out into the short term here. So thank you very much for your time today and everybody please be safe.

Thank you ladies and gentlemen, this does conclude today's conference. Thank you all for participating you may now disconnect have a great day.

Q2 2024 Matrix Service Co Earnings Call

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