Matrix Service Company
Q3 2021 Earnings Call Transcript

Published: 11 May 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Matrix Service Company conference call to discuss the results for the third quarter fiscal 2021. . I would now like to hand the conference over to your speaker today, Kellie Smythe, Senior Director of Investor Relations. Please go ahead.

[Kellie Smythe:]

Thank you, Josh. Good morning, and welcome to Matrix Service Company's Third Quarter of Fiscal 2021 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 & Presentations on the Investor Relations section of matrixservicecompany.com.

[John Hewitt:]

Thank you, Kellie. Good morning, everyone, and thanks for joining us. As we begin our call, I would once again like to open with a thank you to our employees for their continued focus on maintaining the safest possible working environment, which directly translates to a strong performance in the reduction of incidents and injuries. Even with the increased pressure and safety protocols demanded by COVID-19, our employees achieved a year-to-date consolidated total recordable incident rate of 0.25. This continued excellent performance is truly a testament to the strong leadership and focus on safety by our teams. Turning now to our business discussion. I want to be very clear about the profound impact that COVID-19 pandemic has had on our business. The last 13 months have been extremely challenging for both Matrix and our customers as we've managed through continued energy demand disruption, business uncertainty and global economic conditions brought about by the pandemic. More specifically, in this extreme business climate, our customers, particularly those in oil and gas, have continued to restrain CapEx spending and minimize all but routine maintenance, resulting in ongoing delays in project award starts and overall revenue volume. We have been seriously impacted by not only these worldwide events, but the pandemic has affected overall decision-making processes, efficiencies and productivity for our core customers. Many of them are like us only just now returning en masse to the traditional office environments. This business environment has further contributed to an extended and unpredictable award cycle and drastically impacted our revenue volumes over the past 4 quarters.

[Kevin Cavanah:]

Thanks, John. During the quarter, the most significant item that impacted our operating results is the low revenue volume of $148 million as project awards continue to be delayed. We continue to see a healthy funnel of project opportunities throughout our business, but final project awards have taken longer than normal. As a result of the low revenue, we don't have the opportunity to earn gross margins on that work and we incur unrecovered overhead costs. As a result of these prolonged award cycles, our quarterly revenue has trended down during the year. As John mentioned earlier, we believe we have hit the bottom of the cycle and are confident that in our fourth quarter, we will have significant improvement in our revenue volume and recovery of overheads.

[John Hewitt:]

Thank you, Kevin. As mentioned earlier, fiscal 2021 has been extremely challenging, not only for Matrix but for our customers. During this period of unprecedented challenges, we continue to advance our growth initiatives and make strategic transitions in the business. We have continued to provide our customers with flexible and innovative solutions. We have advanced our growth initiatives in the chemical and petrochemicals by signing MSAs that offer the opportunity for a significant level of future revenue generation for major blue-chip producers and our engineering teams, which will also lead to increased revenues for our fabrication and construction brands as well. We are pursuing a growing list of opportunities for our storage tank and terminal brand in international locations, such as the Caribbean, Mexico and Latin America, as these countries move to secure their sources of energy, reduce their carbon footprint through LNG and open up their countries following the significant impacts of COVID-19. We are further developing strategic partnerships with clients, technology providers and other contractors to address various business opportunities in growth markets such as LNG and hydrogen. We continue to advance our domestic market position in LNG, NGLs and natural gas, which are critical energy, power and industrial feedstocks as well as bridging fuel to the future that support our customers' moves towards clean energy solutions. We have stayed focused on key sustainability issues important to our stakeholders and on telling our story on the progress we are making on ESG initiatives. We have maintained the talent necessary to support our customers as they begin to advance projects that have effectively been on pause across all of our segments. As we look forward to fiscal 2022, we expect to see continued recovery and improvement in margins and overall results. Our opportunity pipeline is strong. And by remaining focused on our long-term strategy, we are well positioned for future opportunities. In mining and minerals, where commodity pricing has improved and there are significant demand for those commodities, clean energy initiatives and general infrastructure investments, we are prepared for what we believe will be a long-term aggressive spend by our clients. The opportunity pipeline for thermal vacuum chambers used to test spacecraft, communication satellites and other high-performance instruments in a simulated space environment remains robust. This is a niche market where we have extensive expertise, having designed more than 70 large vacuum chambers for aerospace companies and government research laboratories. When we think about the growth of electrification across the United States, it includes the need to upgrade and improve the delivery system, the interconnectivity of renewable generation and the investments a federal infrastructure bill would support. These factors will create more opportunities for growth in our electrical delivery business. One of the most significant areas of opportunity for Matrix, which will positively impact all 3 of our reporting segments, is the world's move toward clean energy solutions. Supported by President Biden's recent pledge to slash U.S. carbon emissions by up to 52% by 2030 compared with 2005 levels, the move toward clean energy has also been embraced by many of our oil, gas and utility customers, who have previously set their own aggressive goals for achieving net zero emissions. In the mid-term, getting there will require the use of bridging fuels, such as natural gas and LNG, and in the long term, renewable fuels such as hydrogen, along with more electrification overall, all of which will play a key role in decarbonization efforts and are areas where Matrix possesses extensive expertise. Specifically in LNG, where Matrix enjoys a leading position in the EPC of small- to mid-sized LNG terminals, U.S. Department of Energy has estimated the average annual consolidated CapEx spending for small-scale liquefaction facilities supporting bunkering and peak shaving to be nearly $1 billion. This does not include the need for infrastructure to support the export and import of LNG into nearshore international locations, such as the Caribbean, Mexico and Latin America, all of which is currently a significant part of our opportunity pipeline. It does not include the continued build-out of large-scale export facilities for which we can support major EPC suppliers with the design, fabrication and construction of the storage elements. Those areas where Matrix will play a leadership role will be in bunkering for transportation fuels for ships, where IMO regulations on sulfur will increase the number of LNG-powered ships in the fleet and where fueling infrastructure needs to be created. Matrix already plays a significant role in this investment as announced in the recent Pivotal LNG press release, which recognized us for our contribution to doubling of their LNG storage capacity at their JAX LNG facility in Jacksonville, Florida. In LNG peak shaving, utilities are continuing to look toward infrastructure investments in remote or high-demand urban areas to assure supply during peak electrical demand, high gas demand for feeding or as a way to arbitrage gas supply costs for their rate base. In addition, utilities are considering the need for peak shaving to protect the supply and safety of its customer base when extreme weather events occur as we have recently seen in Texas. And we are fielding several opportunities directly as a result of this concern. And again, the design, fabrication and installation of storage associated with the continued build-out of large-scale LNG export terminals creates incremental growth opportunities to our normal small- and medium-scale market focus. Matrix continues to have a strong position with these projects, competitive model and a world-class brand. Our opportunity and prospect pipeline is rich with projects. We expect additional growth in this area as the transition to cleaner energy, both domestically and internationally, continues. As countries and companies seek to reduce their greenhouse gas emissions, hydrogen is emerging as a key solution for providing clean energy to businesses and consumers to meet their low carbon initiatives. Beating growing demand will require that hydrogen suppliers begin to plan for and build the significant infrastructure needed. This infrastructure, hydrogen liquefaction plants, plant expansions, storage expansion and other hydrogen-related facilities, such as marine bunkering and fueling stations, are all areas where Matrix is extremely well positioned to provide the EPC solutions needed. Building on our more than 50 years of expertise in cryogenic storage, process integration, design, fabrication, construction and installation, we further strengthened our position in this quarter through our memorandum of understanding with Chart Industries to develop unique and cost-effective turnkey solutions for the North American hydrogen market. According to the Hydrogen Council, overall global CapEx investment in hydrogen by 2030 is projected to be $300 billion, 11% of which the final investment decision has been made, another 13% is in the planning stages and 76% has been announced. Currently, our pipeline includes a growing number of opportunities, the majority of which is for green hydrogen and will require electrolyzers and liquefaction systems, storage piers, assemblies and related balance of plants. Based on our analysis of our current hydrogen opportunity pipeline, we expect projects to begin entering our backlog near the end of calendar 2021 and into calendar 2022. Of interest is the fact that this demand is being driven by both suppliers as well as our end customers who are demanding green hydrogen as they pursue their own clean energy initiatives. In some cases, even though green hydrogen is currently more expensive to source than alternative fuels, it supports the end user's overall climate goals across their own portfolio. In closing, while the impact of COVID-19 has been extremely challenging, we are optimistic that we are turning the corner and will also benefit in our position in the engineering and construction of clean energy solutions. We look forward to reporting improved results in our fourth quarter of fiscal 2021 and in subsequent fiscal years and remain confident in our long-term strategy and the opportunities we have for continued growth. Now I would like to open up the call for questions.

[Operator:]

. Our first question comes from Zane Karimi with D.A. Davidson.

[Zane Karimi:]

So first off, thanks for the color around the cost structure. And I was thinking about a little more in the ability you have to cut out both SG&A cost and construction overhead. So how much of that construction overhead looks to return with the growing work and activity in the coming months? And how should we think about SG&A as a percent of revenue as this develops?

[Kevin Cavanah:]

So when we reduced our cost structure, we treat almost all of those reductions as permanent reductions. Now surely, as volume picks back up, there will be some costs that need to come back in. I mean, over the last year, for example, travel costs have been very minimal. It's important for us to be out in the field. And so that will be one cost that kind of comes back in a bit. The other area that I expect to see cost would be primarily related to revenue-producing positions. As our backlog grows, we'll have to make sure that we've got the adequate staff in-house to continue to execute the jobs that we've got. So overall, I'd say that, I don't know, 80% of the costs are probably more permanent reductions in nature would be my best estimate there. And when you're thinking about SG&A as a percent of revenue, our goal is to get SG&A down 6% of revenue. So we'll begin approaching that when we pass $1 billion a year in revenue. It will take us a little bit of time to get there, but that is the goal we're striving to achieve.

[Zane Karimi:]

Okay. Great. And then as we look at a more robust return in demand, are there any segments that might require additional investments from here? How are you thinking about how best to utilize and take advantage of this return?

[John Hewitt:]

So I think most of our segments right now, as we think about here and there over the next 12 months, most of the investments there are going to be people to deal with the opportunity pipeline, improving -- increasing bench strength for people that are directly tied into projects. As Kevin mentioned, we don't see big increases pointing at SG&A. We've kept CapEx pretty low. So in our world, we're a big capital help on our equipment. And so as business starts to return and get a little stronger, we're going to be -- we'll be increasing the amount of money we spend on an annual basis on our CapEx. We're still looking for opportunities to expand our engineering capabilities into the Gulf Coast or each of our footprint rather into the Gulf Coast so that -- we're talking one of the near term, if you're thinking about some acquisition, would be -- again the closest-term acquisition that we would be interested in, but that would be several quarters down.

[Operator:]

. And I'm not showing any further questions at this time. I would now like to turn the call back over to John Hewitt for any further remarks.

[John Hewitt:]

Now thank you, everybody, for joining us today, and I appreciate you taking the time to be with us. I hope everybody stays healthy and safe as we continue to see improvements in all this pandemic environment. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.