Matrix Service Company - Q4 2023

Transcript

Kellie Smythe (Senior Director of Investor Relations)

Fourth quarter Fiscal 2023 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 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 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 information about several upcoming investor conferences and corporate access opportunities. We will be holding one-on-one meetings at the D.A. Davidson Annual Diversified Industrials & Services Conference, which will be held in Nashville, September 21st and 22nd. We will have a virtual non-deal roadshow hosted by Rose & Company in October. On November 14th is the Matrix Service Company Virtual Annual Stockholder Meeting. And finally, we will present at and hold one-on-one meetings at the Sidoti Micro-Cap Virtual Conference, planned for November 15th and 16th. If you would like additional information on any of these events, I invite you to contact us through the Matrix Service Company investor relations website.

I will now turn the call over to John.

John Hewitt (President and CEO)

Thank you, Kellie, and good morning, everyone. We've been working hard over the past few years to set the business up for growth, improved performance, and long-term success. As we begin to see the results of this work, I want to remind everyone of our duty to maintain a safe work environment. With more project volume comes a larger number of new field employees, more employee hours, an expanded geographic footprint of operations, and an increased occurrence of at-risk activities. This will demand even more attention by the business leadership. Recently, the construction industry overall has seen a rise in job site incidents and increased challenges to achieve the kind of safety performance it saw before and even during the pandemic.

Matrix and our industry peers saw record safety performance during the height of the pandemic as the focus on health protocols were strictly enforced to prevent the spread of the disease. Everyone became extra vigilant about everything, including safety processes and procedures, which resulted significantly reduced incidents and injuries. As the industry returns to a more normalized work environment, training and planning are critical, as is situational awareness, culture, and most of all, individual decisions. At Matrix, every employee has a right to stop work if their environment or activity feels unsafe. That is not only a right, but a duty we have to ourselves and others. Equally important is the experience, expectations, and accountability that leadership can provide at every level. Safety is our number one core value, and I challenge every employee to be accountable to themselves and each other on that value proposition.

Each of us, our company, and our industry must do better to keep everyone safe every day. Turning to the quarter, hopefully, our listeners today saw the press release we issued on August 21st, as well as our earnings release yesterday afternoon. I'll recap the high, the key highlights from those releases in a moment. We would like to first acknowledge the entire Matrix team for all the effort put forth to get us to where we are today. Today, Matrix is in a position of strength, which includes the best backlog position in four years. 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.

I'd like to touch on some of our recent accomplishments and what that means for the future of the company. As we announced earlier, we generated total awards of $464 million in our fiscal fourth quarter, the highest quarterly awards in five years, resulting in a book-to-bill ratio of 2.3. This was our eighth consecutive quarter with a book-to-bill at or above 1.0. For the full fiscal year, awards totaled $1.3 billion, the highest annual amount in four years, resulting in a book-to-bill of 1.7. For the year, it was at or above 1.2 in each of our operating segments, reflecting the strength and momentum of our business.

While we have strong backlog across each of our segments, the Utility and Power Infrastructure segment was a standout, recording a book-to-bill of 9.2 for the fourth quarter and 3.1 for the year on the back of large capital project awards. We've been building backlog consistently over the course of the year. Earlier this year, I said that we expected to end the year with a backlog north of $1 billion, and I'm pleased to report that our ending backlog as of June 30, 2023, was $1.1 billion. This represents an 85% year-over-year increase. The company is well-positioned with a high-quality backlog that contains not only larger long-term capital projects, but also our traditional small cap projects and recurring repair and maintenance work.

It is important to note that these small cap projects, repair and maintenance services, are strategic to the company's portfolio and represent, on average, over 50% of our annual revenue. While we will disclose individual projects in greater detail as our clients permit us to do so, the most recent award is a 180,000-gallon-per-day LNG peak shaving facility for Dominion Energy in North Carolina. This exemplifies our deepening the client relationship with Dominion and follows the 100,000-gallon-per-day LNG peak shaving facility we completed for them in December 2022 at their Salt Lake City location. This will be the fifth utility-grade LNG peak shaving facility for various clients awarded to Matrix since 2017, three of which are completed.

Matrix set out with a specific strategy to leverage our premier cryogenic storage brand, combined with our EPC balance of plant capabilities, to offer full solutions into the growing small to medium-sized LNG facility market. This market includes peak shaving units, backup power plant fuel supply, ship bunkering, rocket fueling, and export facilities. Our teams have achieved a dominant position in this end market, and our execution performance has built long-lasting relationships, as evidenced with this recent award. The opportunity pipeline in the small to mid-scale LNG market is strong, with both new and repeat clients like Dominion. Given this positioning and the volume of already proposed and bidding opportunities, combined with the ongoing FEED study work, we expect to continue adding these types of projects to our backlog in the near term and out into the future.

Beyond this strong position in the small to medium scale LNG market, we continue to be very active across all our segments and core markets. For example, we have an industry-leading brand for specialty vessels and facilities for ammonia, ethane, and other natural gas liquids. That brand extends to hydrogen storage vessels and facilities, as well as development of large-scale storage solutions for various clients. Our contractor of choice position for electrical infrastructure services, from substations to transmission and distribution and other electrical work, presents a strong growth potential for the company. Carbon capture construction opportunities are growing. We continue to be a leading contractor in traditional energy for refinery maintenance 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 E-only, C-only, or full EPC basis, leverage our project skills, construction experience, and engineering capabilities. All of these end markets have strong tailwinds and macroeconomic drivers behind them, including global energy security, domestic energy supply assurance, clean energy transition goals, commodity demand to support renewables and industrial infrastructure reshoring, and federal infrastructure investments that will start to meaningfully flow into the project phase during calendar year 2024. Between our market focus, positioning, macro drivers, and our transformed organization, we will continue to build on our diversified backlog portfolio, which will lay the foundation for the business to grow and be sustainable well into the future.

I'll hand the call over to Kevin now to review the results and give you a sense of how our backlog will transition into revenue over the coming quarters.

Kevin Cavanah (VP and CFO)

Thanks, John. Overall, we are pleased with the trends we are seeing in the business and the improving results during the fourth quarter of fiscal 2023. We have talked previously about the issues impacting the business the past few years. Revenue volume was low as a result of limited project award activity. Two years ago, our backlog dipped below $500 million, and our quarterly revenue decreased to $160 million. In addition, our revenue was dominated by projects bid during a very competitive environment, resulting in, resulting in limited margin opportunity on the projects that were awarded during that period. These issues resulted in margin outcomes well below our historical range and revenue levels that caused under-recovered construction overheads and poor leverage of SG&A, all of which combined to account for results that were below our, our expectations.

The company has been consistently working to improve these results. We initially reduced our overhead structure by 30% and have since continued to tightly manage costs. We focused the business to our core markets, closing or selling non-core assets. We streamlined and transformed our business for the future with a focus on increasing efficiency, improving performance, and ultimately providing more consistent bottom-line results and long-term sustainability for all stakeholders. Finally, with our more focused approach to business development in our core markets, we have been growing the backlog with projects that present a better margin opportunity. The results for the fourth quarter of fiscal 2023 demonstrate we are making progress toward our business improvement objectives. Let's take a closer look at project awards and backlog. Project award activity throughout fiscal 2023 was significant, and the trend is expected to continue.

During fiscal 2023, we averaged just under $200 million in revenue per quarter. At the same time, we averaged over $330 million in project awards. This level of awards will drive higher revenue as we move through fiscal 2024. with the most significant increases expected in the second half of the year as more capital projects transition from engineering into construction. These long-term project awards will also benefit fiscal 2025 and beyond, and allow us to fully recover our construction overhead and appropriately leverage SG&A. The margin opportunity from the backlog booked in fiscal 2023 is in line with our historical margins. In addition, we have substantially completed the backlog of competitively priced projects I mentioned previously.

Together, these factors provide for an environment where we can return to our historical consolidated gross margin range of 10%-12% and achieve key business metrics. The fourth quarter results provide good evidence these trends are occurring. Revenue increased 10% from the prior quarter to $205.9 million, as the contribution to revenue of newly awarded projects has begun to make an impact. Gross margin improved to 7.1%, which marks the highest quarter of the year, and significantly higher than the third quarter gross margin of 2.4%. Our margins improved sequentially due to strong project execution and improved construction overhead recovery.

The impact from underrecovered overhead improved from a 400 basis point impact in the third quarter to a 200 basis point impact in the fourth quarter as a result of the 10% increase in revenue. We view the underrecovery and construction overhead in fiscal 2023 as an investment in our future, as it related primarily to our divisions responsible for executing large capital projects, including storage tanks and terminals. This investment was necessary given the prospects in our opportunity pipeline and the strength in the awards through the course of fiscal 2023, which will drive higher revenue and eliminate this underrecovery in fiscal 2024. Consolidated SG&A expenses were $17 million in the fourth quarter, consistent with the first three quarters of the year. The company continues to focus on cost control and expects to leverage its optimized cost structure as revenue improves.

We also completed the sale of a small, non-core business during the fourth quarter, which resulted in a gain of $2.9 million. The overall performance of the business improved significantly, with the company producing a net loss of $0.3 million, or $0.01 per share, compared to a net loss of $12.7 million, or $0.47 per share in the third quarter. For the fourth quarter, we had an adjusted net loss of $3.1 million, or $0.11 per share, which excludes the gain from the sale of the previously mentioned non-core assets. Adjusted EBITDA was a positive $2.3 million in the quarter, as compared to a loss of $7.7 million in the third quarter. Turning quickly to the segments.

Storage and Terminal Solutions revenue increased 23% to $64.1 million in the fourth quarter, as compared to $52.2 million in the third quarter, as a result of revenue contribution from recently awarded capital projects. While the increase was significant, it was lower than we expected due to changes that can occur in project execution schedules. Gross margin of 3.2% was negatively impacted by low revenue volume, which led to the underrecovery of construction overhead costs. While improved, the underrecovery still negatively impacted gross margins by over 500 basis points. As John mentioned, the project awards and market opportunities for LNG, NGLs, ammonia, and hydrogen storage and facilities are strong.

As such, the short and long-term prospects for the Storage and Terminal Solutions segment are positive, and we expect to achieve improved margins and eliminate the underrecovery, underrecovery issue for this segment during fiscal 2024 as revenues continue to increase. In the Utility and Power Infrastructure segment, revenue increased to $39.1 million in the fourth quarter, compared to $35 million in the third quarter. Fourth quarter gross margin was 9.6%, primarily driven by strong execution on power delivery projects, the start of revenue from a peak shaver project that was previously added to backlog during the second quarter, and the full recovery of construction overhead costs. The LNG peak shaver awarded in Q4 will begin to drive enhanced revenue and improve operating results in the second half of the fiscal year and beyond.

Finally, in Process and Industrial Facilities, the revenue level remained strong, increasing to $102.7 million in the fourth quarter, compared to $99.7 million in the third quarter. Fourth quarter gross margin of 8.2% included a midstream gas processing project, which we have discussed in previous quarters. This project reached mechanical completion in line with our previous forecast, and we will be mobilized in the first quarter of fiscal 2024. Other work in this segment, including refinery turnaround and maintenance, aerospace, and a renewable diesel project, amounted to approximately 80% of segment revenue and produced a gross margin of approximately 10% on strong project execution. This segment fully recovered construction overhead costs, which contributed to margin performance.

With the completion of the gas processing project, as well as the sale of certain non-core assets, revenue in this segment will temporarily decrease in fiscal 2024. However, this decrease is expected to reverse given the drivers for the various markets served by this segment, as well as a large capital project and backlog that is scheduled to benefit revenue in early fiscal 2025. Now turning to the balance sheet. During the fourth quarter, our cash balance increased $6.6 million to $79.8 million, after paying back $5 million of borrowings on our credit facility, leaving total borrowings of $10 million at June 30. Liquidity of $92.6 million is up slightly in the quarter and is comprised of $54.8 million of unrestricted cash and $37.8 million of borrowing availability.

The company also has $25 million of restricted cash to support the credit facility. Our conservative management of the balance sheet puts us in a position to support the growth in the business in fiscal 2024. Overall, the operating results for the fourth quarter improved in line with our expectations. We believe we are moving past the issues that have impacted us the past three years, and we are excited about what lies ahead. We expect our revenue will be at or about the current level in the first couple of quarters of fiscal 2024, and then show strong growth in the second half of the fiscal year as a result of awards in fiscal 2023, as well as awards expected in fiscal 2024. We expect Q1 award levels to be similar to Q4 of 2023.

For the full year, this will create significant year-over-year revenue growth. The bottom line results will follow a similar pattern as the revenue. Expect to generate net income near break even in the first half of fiscal 2024, with significantly stronger results in the second half of the fiscal year. As a result, Adjusted EBITDA is expected to be positive across the fiscal year. As we move through the fiscal year, we anticipate accelerated movement toward our longer-term financial targets. We'll now turn the call back to John.

John Hewitt (President and CEO)

Thank you, Kevin. Before we open for questions, I'd like to reiterate some key takeaways for today. The spending recovery in our end markets is beginning to materialize in a meaningful way. As we commence work on recently awarded large capital projects, we have strong visibility into our revenue and are focused on maximizing our profitability after undergoing an internal transformation that has optimized our operating structure. We believe our strategic approach to the energy and industrial end markets we serve, the strong tailwinds and deep client relationships we hold that have resulted in multiple projects, will lead to further near-term backlog growth and strong performance for the foreseeable future. In the long term, the reshaping of global energy markets, energy supply security, the push towards lower carbon activity and industrial reshoring all create opportunities that we expect will drive our business for years to come.

Finally, I generally don't like to talk about our share price on earnings calls, but the last time we had a backlog of this size was in June of 2019, and our share price represented a much better valuation of the business and its potential. As we execute on our backlog and pursue the further revenue opportunities we see in our end markets, I'm confident we are on a strong path to generate value for our stockholders. With that, I'd like to call for questions.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. One moment for questions. Our first question comes from John Franzreb with Sidoti. You may proceed.

John Franzreb (Senior Equity Analyst)

Good morning, everybody, and congratulations on another great bookings quarter.

John Hewitt (President and CEO)

Thank you.

John Franzreb (Senior Equity Analyst)

John, I'd like to start with the gas processing job that's kind of been weighing on results for the past couple of quarters. Can you give us an update? Is that job completed, or if not, how long will it continue to hit the PNL?

John Hewitt (President and CEO)

Yeah, so, well, first of all, congratulations on the Jets victory last night.

John Franzreb (Senior Equity Analyst)

Thanks. It was painful.

John Hewitt (President and CEO)

I hope you can find another quarterback. Yeah, so the gas processing project, we reached mechanical completion in the fourth quarter and are in the process of demobilizing, which will be completed in this quarter. Facilities up and running, relationships with the clients, good, and we do not expect any material change in the forecast of that job.

Kevin Cavanah (VP and CFO)

And to be clear, so the results in the fourth quarter, it basically came in in line with our forecast

John Hewitt (President and CEO)

Yeah

Kevin Cavanah (VP and CFO)

that we had last quarter.

John Hewitt (President and CEO)

Right. So it's a $3 million drag per quarter, or has been, roughly. So continue to be a drag into the first quarter and largely done by the second. Is that what I'm hearing from you guys?

Kevin Cavanah (VP and CFO)

No, it'll have a much smaller impact in the first quarter here.

John Franzreb (Senior Equity Analyst)

Okay. Got it. And in regards to your comments about the first quarter awards are going to be similar to the fourth quarter, and you also, I think, in your prepared remarks, said the first half is looking like the, it's going to be a good booking half of 2024. Would you expect to exit fiscal 2024 with a backlog profile of above that billion-dollar threshold or, or not?

John Hewitt (President and CEO)

Yeah, I think based on what we're seeing in the market and as always, everything's driven by timing of awards. But you know, where we are in our proposal activity and some contract negotiations, that our expectation is we would exit the fiscal year in a better backlog position than we entered it.

John Franzreb (Senior Equity Analyst)

Great. Great news. And just lastly, given that booking profile, can you talk a little bit about labor and staffing? Are you going to have to add personnel, or are you satisfied with the current staffing level given the backlog profile?

John Hewitt (President and CEO)

Yeah, no, I think, you know, from a professional level, you know, there are opportunities for us to add key positions into our operations for our projects. And so we'll, you know, we've been pretty active in recruiting over the last quarter or two because we saw the work that was coming. So we'll continue to do that and have opportunities for that both in our project resources and engineering resources. And then from a craft labor standpoint, I think we've always been pretty successful with being able to recruit and get craft labor to our job sites around North America.

While that, you know, always is one of the challenges for our business and certainly our peers, you know, we think we do a pretty good job of that in creating an employer choice kind of situation where people want to come to work.

Kevin Cavanah (VP and CFO)

I'd just add on that, you know, one of the things we're trying to do is leverage the back-office cost structure we have. And so John mentioned areas where we'll potentially need to augment our current staffing. But if you look at back office, you know, there should be minimal increases there.

John Franzreb (Senior Equity Analyst)

Got it. Thanks, John and Kevin, and congratulations again.

Kevin Cavanah (VP and CFO)

Thank you.

Operator (participant)

Thank you. One moment for questions. Our next question comes from Oliver Chornous with D.A. Davidson. You may proceed.

Brent Thielman (Managing Director and Senior Research Analyst)

Hi, guys. Thanks for having me. I'm sitting in for Brent Thielman today. First, I was wondering if you could discuss the net operating losses you have available and how that should shield your tax expense for fiscal 2024?

Kevin Cavanah (VP and CFO)

Yeah, so we do have a number of tax attributes out there that we're going to be able to utilize. So I think you're gonna see extremely low effective tax rate in fiscal 2024, and somewhere in the low single digits is our current estimate. That benefit will also continue into fiscal 2025. I think the tax rate will probably be a little higher then, but it'll still be low compared to historical rates. My guess is it's probably gonna be somewhere around 10% or as a

Brent Thielman (Managing Director and Senior Research Analyst)

Okay.

Kevin Cavanah (VP and CFO)

as an estimate right now.

Brent Thielman (Managing Director and Senior Research Analyst)

Oh, that's great. Thanks so much. And then second, can we talk about the Process and Industrial Facilities segment in the context of 2024 versus 2023? Should we anticipate lower work volume this year, but improved profitability, especially as you get through that project that we just talked about?

Kevin Cavanah (VP and CFO)

That's exactly right. We'll have a little bit of a timing gap on when capital projects start. There was a project we got awarded in the third quarter in that segment, and that project won't meaningfully benefit revenues until the very first of fiscal 2025. The projects that, you know, this project that has had some issues, that's completed now, so there will be a dip in revenue there. In addition, we also sold some non-core assets. That segment will be down, but I think the profitability should be better. When you think about while that's decreasing, the increases in the other segments, the backlog on those projects will be starting in fiscal 2024 and benefiting the year.

From a consolidated basis, want to be clear that we expect some good growth in revenue for the fiscal year.

Brent Thielman (Managing Director and Senior Research Analyst)

Awesome. That's great. And then I guess last question, if I can sneak it in. Can you discuss your capital allocation priorities? Is M&A on the table as you're starting to see the business stabilize?

Kevin Cavanah (VP and CFO)

Yeah. So right now, our focus has been returning to profitability. So our capital priorities are gonna be related to executing on these projects we're putting in backlog and the ones that will be putting in backlog. So that means there may be additional capital expenditures we need to make. We've definitely spent less on CapEx the past few years, so there could be some CapEx there. That'll be a priority. And we'll continue to manage our working capital. That'll be the second priority. But I would expect that you're gonna see positive cash flows as we move through the year. Once we return to profitability, yeah, we'll think about what's the right next steps, which could include M&A.

Brent Thielman (Managing Director and Senior Research Analyst)

Awesome. Thanks so much, guys. I'll jump back in the queue. Really appreciate it.

Operator (participant)

Thank you. And as a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. And I'm not showing any. Oh, one moment for questions. Our next question comes from John Franzreb with Sidoti. You may proceed.

John Franzreb (Senior Equity Analyst)

Yeah, I'm just curious about your expectations for the Inflation Reduction Act and when we would expect to see jobs related to that hit your backlog profile. Any kind of thoughts about that would be helpful.

John Hewitt (President and CEO)

I think our expectation is that those dollars weren't necessarily running into shovel-ready projects when they became available. But you know, what we think is they'll start having a material impact on project opportunities for us in calendar 2024.

John Franzreb (Senior Equity Analyst)

Got it. Got it. And when, how should we think about margin, gross margin recovery across the segments, given the, call it, slow but meaningful turnaround in the backlog profile? Where are you going to see it first, that have the most meaningful impact, and where is it going to lag maybe a little bit, when you're looking at it on a segment basis?

Kevin Cavanah (VP and CFO)

So I think the biggest benefit you're going to see in fiscal 2024, to start with, is going to be in storage. I think you'll see revenues increase as we move through the year, and that's going to eliminate that underrecovery issue that's been pretty significant in that segment. And on top of that, the growth is going to be coming from projects that do present a good margin opportunity. So I think you can expect good margin growth in that segment. I would say the second segment, the utility segment, is going to be pretty good from a margin aspect from the result of the peak shaver work that we've got, combined with, you know, our work in power delivery.

Those teams this last year really performed extremely strong for us, and some of the best in the company. So that's been good to see, and I'm sure they'll be trying to continue that. I think, you know, we talked about Process and Industrial Facilities. I think the profitability is going to be better on lower revenues, but you know, again, that the rest of the business there has performed pretty well throughout the year. Now, that's a mix of capital work and reimbursable maintenance work, so it has a little bit different project mix that can impact the margins a bit, because it's heavily weighted to reimbursable. But I think all three margins or all three segments should see, or forecast to see good margins in the year.

Now, will we get to the consolidated 10%? I think we can. It definitely would not, might not happen until the second half of the year.

John Franzreb (Senior Equity Analyst)

Great, Kevin. Thank you. That was very helpful for the insight. And, John, get your arm ready.

Kevin Cavanah (VP and CFO)

You're in trouble.

John Franzreb (Senior Equity Analyst)

Yeah, I get my arm trouble.

Operator (participant)

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

John Hewitt (President and CEO)

Just a thank you to everybody for attending today's call. Appreciate your continued support of the company, and I wish everybody to have a safe quarter until we speak to you again.

Operator (participant)

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.