Yahoo Finance Matrix Service Company (NASDAQ:MTRX) Q3 2024 Earnings Call Transcript
Matrix Service Company (NASDAQ:MTRX) Q3 2024 Earnings Call Transcript May 9, 2024
Matrix Service Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the Matrix Service Company Conference Call to discuss results for the Third Quarter of Fiscal 2024. Currently all participants are in a listen-only mode. Later we 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 today's host, Ms. Kellie Smythe, Senior Director of Investor Relations for Matrix Service Company.
Kellie Smythe: Thank you, Justin. Good morning, and welcome to Matrix Service Company's third quarter fiscal 2024 earnings call. Participants on today's call include John Hewitt, President and Chief Executive Officer; and Kevin Cavanah, Vice President and Chief Financial Officer. The presentation materials referred to during the webcast today can be found under Events and Presentations on the Investor Relations matrixservicecompany.com. As a reminder, 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 results, forward-looking statements because of various factors, including those discussed in our most recent annual report, the 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. Related to investor conferences and corporate access opportunities, Matrix will be participating in the upcoming Stifel Cross Sector Insights Conference on June 4th and 5th in Boston. If you would 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. Before I turn the call over to John, I would also like to share our safety moment. At Matrix, there is nothing more important than the safety and health of our employees, both physical and mental, and that's why safety is our number one core value.
On our last call, John highlighted the work being done across our industry and at Matrix to identify and provide support for addressing mental health issues, especially given the significantly higher level of suicide experienced in the construction industry when compared to others. But mental health issues are something we all grapple with at one time or another in our lives. As the month of May is Mental Health Awareness Month, we thought it would be a good time for a reminder that each of us should periodically take time to assess our own mental health, just as we do our physical health. In doing so, it's important to identify the root causes of any issues we may be experiencing and above all, remember, it's okay to ask for help. At Matrix, our people are our greatest asset, by ensuring the mental and physical well-being of our people, we are better equipped to do the important work our customers and shareholders count on us to deliver.
I will now turn the call over to John.
John Hewitt: Thank you, Kellie, and good morning, everyone. We delivered mixed third quarter results. Execution performance was good. We maintained our record backlog. The opportunity pipeline continues to be strong and liquidity expanded. However, revenue was a low point for the year driven by the convergence of three key issues. First, the conversion of backlog to revenue on some of our major projects continue to push to the right. This shift does not represent an uncertainty in the projects proceeding, but it does highlight the complexity of finalizing large capital construction project contracts and the impact our clients have on the timing of those project starts. We expect these projects to finally begin contributing additional revenue in Q4 and grow in a more meaningful way throughout fiscal year '25 and beyond.
Second, a long-term multi-decade refinery client changed its spending priorities and contracted labor demand in the third quarter and for the balance of the current contract. And finally, there were 2 areas of softness in our core markets. Crude tank new build and maintenance and repair in the Lower 48 as well as electrical infrastructure in our predominantly Northeast sector. In both cases, we believe this softness is transitory and will begin to firm up moving into fiscal '25, given the market dynamics we are seeing and how we approach those markets. In short, we expect revenue to improve from here and continue to build through fiscal 2025. As this increased volume of projects and backlog and new awards convert to revenue, we expect to drive improved fixed cost absorption and margin expansion toward our historical double-digit levels.
Backlog in the third quarter increased nearly 75% on a year-over-year basis, and we held our all-time high of $1.45 billion driven by a diverse mix of high-value multiyear projects that will support improved profitability moving into fiscal 2025. Our backlog bookings and bidding activity remained very strong as we enter the fourth quarter, which has already produced additional specialty vessel storage bookings. This is also our 11th consecutive quarter with a book-to-bill greater than or equal to one, led by robust demand within our Storage and Terminal Solutions segment where book-to-bill was 2.5% in the third quarter compared to 1.3% a year ago. We continue to maintain strong fitting discipline consistent with our strategic focus on profitable organic growth.
Our opportunity pipeline clearly supports the long-term trend to maintain a strong backlog. While the financial impact of the timing of project starts are a reality for our industry, it is important to keep in mind that the work will get built and that the underlying demand thesis remains unchanged. Matrix is in the right markets at the right time with the right expertise and strategy to drive value creation for our shareholders. I'll ask Kevin to provide more detail around the third quarter results, and then I'll provide more color on our outlook for the business entering fiscal 2025 and why we remain confident that our business is moving toward a positive inflection of profitability over the coming quarters. Kevin?
Kevin Cavanah: Thank you. As John indicated, the results for the third quarter were mixed. Project awards and backlog were in line with our expectations. We generated awards of $187 million in the quarter, and a book-to-bill of 1.1. The most significant award was another large specialty tank project. This increased backlog in the Storage and Terminal Solutions segment to $738 million, a new record high and an increase of 150% versus the prior year period. This also allowed us to maintain our consolidated backlog at a record high of $1.45 billion. While our backlog continues to strengthen, it has taken longer than previously anticipated for our consolidated operating results to improve. Total revenue was down to $166 million, an 11% decrease compared to the prior year period.
We anticipate revenue improvement as we move from the third quarter into the fourth quarter. We have previously discussed that the growth in our backlog has been fueled by long-term construction projects, which have an inherent lag between the time a project is awarded and when it begins to have a material impact on revenue. While these contracts make up a significant portion of the backlog, the contribution to revenue has been minimal in fiscal 2024. We expect the Storage and Terminal Solutions and Utility and Power Infrastructure segments to drive growth as we move forward. Our gross margin in the third quarter was 3.4%, up 100 basis points over the same period a year ago. Our third quarter performance would have been almost 600 basis points higher on gross margin rate, but for two factors.
First, low revenue resulted in under-recovered construction overhead which negatively impacted gross margins by almost 400 basis points. Second, we were impacted by reduced labor demand and turnaround services in the final year of a three-year refinery maintenance contract, which is currently up for renewal. The accounting for this change was applied retroactively over the life of the contract and therefore, impacted our consolidated margin by 200 basis points in the quarter. Moving down the income statement. SG&A was $19.9 million in the quarter. We continue to benefit from organizational efficiencies achieved over the last several years. However, stock compensation expense increased $2.5 million in the quarter due to a 33% increase in the share stock price.
This expense increase is related to cash-settled stock awards issued in previous periods. Expense associated with these awards is variable and fluctuates with changes in our stock price. For the third quarter of fiscal 2024, we had a net loss of $14.6 million or $0.53 per fully diluted share. As previously discussed, the primary driver to the loss was the low revenue, which is [indiscernible] increase. Moving to the operating segments. In the Storage and Terminal Solutions segment revenue was $54 million in the third quarter as compared to $52 million in the prior year period. We expect higher revenue as we move forward and into fiscal 2025 as large specialty storage project awards transition through contracting, engineering, project planning and into field construction.
Gross margin was 4.3% in the third quarter, an increase of 590 basis points over the prior year. This increase related to strong project execution throughout this segment, including specialty storage projects, allowing a return to double-digit direct gross margins. However, both periods were impacted by underrecovered fixed costs due to low revenue. In the current quarter, this negatively impacted gross margins by almost 700 basis points. Revenue is expected to increase in this segment beginning in the fourth quarter, significantly reducing the impact from underrecovered overheads. In the Utility and Power Infrastructure segment, revenue was $46 million in the third quarter compared to $35 million a year ago. Segment revenue is beginning to benefit from the start of previously awarded LNG peak shaver projects, which we expect to increase as we move forward.
The power delivery portion of this segment is currently experienced in a softer market in the Northeastern geographic area we serve. Gross margin was 3.1% in the third quarter compared to 8% in the prior year quarter. The peak shaver proportion of the segment is producing strong gross margins, but that is offset by softness in the power delivery business as well as under-recovery of production overhead costs. This under-recovery impacted gross margins by 550 basis points and is temporary as the backlog is expected to drive higher revenue in this segment beginning in the fourth quarter. In the Process and Industrial Facilities segment, third quarter revenue was $66 million compared to $100 million in the third quarter of fiscal 2023. The revenue decline is due to a couple of factors: completion of a gas processing project in the prior year and lower refinery maintenance revenue as a long-term refinery maintenance customer has reduced labor demand and turnaround services.
The company is also scheduled to complete a renewable fuels project in the fourth quarter, which has been a good contributor to segment results through the fiscal year. We expect revenue to decrease on both a year-over-year and sequential basis as certain existing projects near completion and we await the start of new projects both in backlog and in our opportunity pipeline. The segment gross margin was 2.7% in the third quarter compared to 3.2% in the prior year quarter. The current year quarter was impacted by a change related to refinery maintenance contract in the prior year quarter was impacted by the completion of a challenging gas processing project. Now let's discuss the balance sheet and liquidity. We continue to have a strong balance sheet with cash and credit facility availability of $135 million.
During the quarter, we generated $25 million in cash flow from operations. We also utilized $4.8 million for capital expenditures, the majority of which was used for the purchase of a fabrication facility. As of March 31, 2024, we are in a net cash positive position with no outstanding debt. We will continue to proactively manage the balance sheet to support the improvement business. Before I turn the call back to John, I think it is important to note that overall project execution is strong and the earnings improvement expectation we have been talking about remains intact and is just taking the revenue ramp longer to materialize. That ramp is supported by backlog consisting of several multiyear quality projects, strong markets and a robust opportunity.
I will now turn the call back to John.
John Hewitt: Thanks, Kevin. In the fourth quarter and fiscal 2025, we expect to see improvement in top and bottom line results as projects currently in backlog begin to benefit revenue. Together with our work to streamline the company, Matrix is well positioned for material improvement in revenue and profitability. And as I said in my opening remarks, we are in the right markets with the right expertise and strategy to drive value creation for our shareholders. Matrix is benefiting and will continue to benefit from several megatrends that create demand for infrastructure in the end markets we serve, all of which present a long runway and multibillion-dollar project opportunity pipeline. The clean energy transition and demand for lower carbon solutions required to infrastructure, supporting LNG, ammonia and hydrogen and other renewable fuels.
This is an area where Matrix is recognized as a leading engineering and construction company and one of the very few with the cryogenic expertise needed to complete this complex infrastructure. The need for system reliability and resilience is also driving demand in the utility and electrical infrastructure space for the use of LNG in both peak demand and backup fuel as well as transmission and distribution substation and other system upgrades. Our electrical infrastructure expertise provides significant opportunity for organic growth in high voltage transmission, distribution and substation project work as well as industrial electrical projects. The expansion of this business is a key organic growth initiative for our organization and is already gaining traction with expanded clients, being opportunities and geographies.
An important near-term demand driver for such projects is data center growth which is creating substantial incremental electricity load increases. Nearly half of all planned U.S. data center investment is concentrated in unregulated markets such as California, Texas, Virginia, New York, Florida and Illinois. Current industry expectations are for further geographic dispersion of data center investment over time as data center permitting process become more forgiving across regulated markets. Given our current electrical infrastructure footprint, which is concentrated in the Upper Mid-Atlantic and Northeast, we are well positioned to benefit from incremental data center load growth and the resulting infrastructure investment needs in this geography, specifically related to substations, transmission and distribution.
We're also currently cultivating and developing a relationship with data center clients or electrical opportunities in this space will allow us to expand into new geographies. Global geopolitical instability, the need for energy supply assurance and low-cost feedstock to support manufacturing and other end markets are all creating ongoing demand for hydrocarbon-related infrastructure associated with oil, gas and natural gas liquids, such as ethane, ethylene, butane and propane. As mentioned earlier, all these mega trends have long runways and are expected to drive infrastructure investments for the foreseeable future. Our leading position as a solution provider supporting these infrastructure investments provides us with greater visibility, and it positions us for consistent, profitable growth moving forward.
Breaking it down further, let me add more color and highlight near-term opportunities in just a few of our end markets. We have the unique ability to bring together the cryogenic storage and balance of plant infrastructure under one brand name, which is valued by our clients. Currently, a significant part of our backlog is comprised of projects that support growing demand for LNG and NGLs. In the utility and power industry, small to midsized peak shavers are an increasing critical component for ensuring system reliability and resilience. They allow gas utilities to meet increasing demand resulting from both community and industrial growth as well as peak demands during severe weather events. They provide a means for supply in remote locations with energy and addressing areas restricted by a lack of natural gas pipelines or bottlenecks and existing pipeline infrastructure.
And finally, they allow utilities to buy gas at lower spot prices during periods of decreased demand in store for future use. LNG bunkering facilities and other supply chain infrastructure are integral to the lower carbon and clean energy transition, specifically in the maritime industry, the International Maritime Organization of 2023 strategy on the reduction in greenhouse gas emissions from ships means that more and more commercial vessels, such as container and cruise ships are being converted or built to run on LNG, creating increased demand for bunkering facilities. This lower carbon fuel is also being used in heavy transportation, such as rail trucking. Small to mid-scale LNG facilities have also been an attractive investment for companies entering the energy market as third-party suppliers to both utility and maritime organizations and to individual companies and aerospace, rail and trucking for their own use.
In addition to significant projects already in backlog, our teams are actively monitoring more than 13 near-term LNG projects. These opportunities include small to mid-scale facilities as well as infrastructure upgrades and replacements. In NGLs, our teams are currently at work on multiple infrastructure projects that support ethane, ethylene and other NGLs, and we expect to book several additional awards for NGL projects in the next couple of quarters. Beyond these near-term awards, we continue to see significant infrastructure opportunities, supporting both domestic and international demand for NGLs as the U.S. has become the global low-cost stable producer of these hydrocarbon byproducts. Currently, our teams are actively monitoring 17 near-term NGL projects.
We've also seen an increase in project opportunities supporting the storage, processing, production, loading and distribution of hydrogen and hydrogen derivatives such as ammonia from natural gas and other feedstocks. Overall, our opportunity pipeline remains strong at $6.1 billion, a key indicator of the strength across all of our end markets and our ability to continue our long-term trend of backlog stability and growth. While projects move in and out of our pipeline based on the decisions made by owner operators as well as other factors out of our control, in general, the projects we are currently monitoring are expected to be bid and awarded within the next 18 months and on average, represent projects that will require an 18- to 30-month timeframe to deliver.
Over half of the projects in our opportunity pipeline support specialty vessels, storage and terminal services. In summary, as the current infrastructure investment cycle continues to gather momentum. We remain highly optimistic and believe we are uniquely positioned to drive continued growth while creating long-term value for our shareholders. I now open the call for questions.
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