Matrix Service Company
Q3 2020 Earnings Call Transcript

Published: 10 May 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Matrix Service Company Conference Call to discuss Results for the Third Quarter Fiscal 2020. [Operator Instructions]I would now like to hand the conference over to your speaker today, Kellie Smythe, Senior Director at Investor Relations for Matrix Service Company. Thank you. Please go ahead.

[Kellie Smythe:]

Thank you, April. Good morning and welcome to Matrix Service Company’s third quarter 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, the company 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 as a result of various factors, including those discussed in our Annual Report on Form 10-K for our fiscal year ended June 30, 2019, and in subsequent filings made by the company with the SEC. To the extent the company utilizes non-GAAP measures, reconciliations will be provided in various press releases, periodic SEC filings and on the company’s website.I will now turn the call over to John Hewitt, President and CEO of Matrix Service Company.

[John Hewitt:]

Thank you, Kellie. Good morning, everyone and thank you for joining us. As many of you know, we often begin each of our earnings calls with a focus on health and safety as a way to draw our awareness to our top priority and number one core value. This quarter, COVID-19, an unprecedented pandemic that has swiftly and dramatically impacted communities and businesses all over the world, has demanded an even greater focus on health and safety at every level of society. At Matrix, our leadership team and our employees acted quickly to implement business continuity measures and develop and implement a COVID-19 specific mitigation plan. Our plans and programs consider guidance issued by local governments and agencies in the areas in which we operate as well as guidelines issued by the CDC and United States and Canadian governments.We transitioned the majority of our 1,000 administrative and engineering employees from our offices to working remotely and we did so in less than a week with minimal disruption and providing support services to meet client and project site needs. Most of our projects and maintenance sites continue to work or experience limited suspensions, staffing reductions or significant supply chain disruptions. In all cases, we worked collaboratively with our clients as they made decisions about their project sites and accordingly, our field and craft employees have taken extraordinary steps to keep everyone safe.I want to take this opportunity to thank our employees for continuing to support our customers in their critical ongoing work at project sites across the country. I cannot be prouder of your commitment to always doing the right thing, particularly considering the significant challenges we are facing. Through this period, we are creating new habits, workflows and communication techniques that will positively impact our environmental and social efforts, keep us even more connected and make our organization more efficient and competitive going forward.Turning now to a more specific discussion about the business and our outlook. In addition to dramatically impacting economic activity on a global basis, COVID-19 has also been the driving force behind energy demand dislocation. As Matrix was founded over 35 years ago, the company has operated in some very challenging times. We have been able to persevere and grow the business over that time period. This is due in part to our conservative approach to managing our balance sheet. Our approach is simple. We always look to maintain a good cash balance with minimal debt and aggressively manage our working capital demands. This approach serves our company and our stakeholders well and provides the financial strength needed to weather the frequent variabilities common in our industry as well as uncommon events like this pandemic.While we are in a strong financial position today, we continue to review our business to ensure our cost structure is appropriate for the current market environment. We have already made adjustments and expect to make others before the end of the fiscal year, among them, our organizational changes and cost reduction programs enterprise-wide; elimination of all noncritical capital expenditures for the remainder of the fiscal year, which is a 40% decrease compared to our budget and to freeze the haul hiring, except for project chargeable personnel and key organization improvement requirements.In summary, these measures and others will result in an annual decrease in SG&A and construction overhead costs of approximately $40 million. These actions will make us leaner and more efficient and protect our already strong liquidity position. We will continue to be sharply focused on managing working capital to execute on existing and new contracts. Our financial strength supports our ability to manage the business over the short-term and gives us the flexibility to take advantage of the opportunities in the market that will present themselves over the next 12 months. While the next several quarters will be challenging, especially for our Oil Gas and Chemical segment, I am confident about the long-term outlook for our business, the opportunities in front of us and our ability to achieve our strategic growth initiatives.Moving on to our operating segments. We continue to see heavy activity in the Storage Solutions segment in North America and select international locations across crude, small to mid-scale LNG and NGLs with significant near term booking opportunities. For example, we were recently awarded the limited notice to proceed on an LNG peak shaving facility, similar in scope to the facility we are currently constructing for Piedmont Natural Gas. With client approval, we anticipate making formal announcement on that award soon. While the project for Eagle LNG mid-scale export facility in Jacksonville, Florida, has yet to commence, we are finalizing the terms of the limited notice to proceed. I should note that neither of these projects are currently included in our backlog.And finally, with an immediate need for additional storage created by the oversupply of crude oil, our inspection, maintenance and repair teams are also seeing increased bidding opportunities by customers who have previously idled storage assets. While we feel good about the activity in the storage solutions market, recent macro events could impact start dates on awarded projects and award dates for proposals in progress and our extensive opportunity pipeline.In our Electrical Infrastructure segment, as communicated last quarter, we implemented a performance improvement plan for the power delivery services portion of this segment with expectations that we will increase revenue volume, gross margins and overall performance as the changes from plan take hold. The geographic footprint of most work in this segment is concentrated in the Mid-Atlantic and Northeastern US, which has been severely affected by the COVID-19 pandemic.As a result, we have experienced suspensions of work at certain job sites and client proposal activity has slowed as they manage other pandemic related challenges. This environment has impacted volumes in the quarter and will most likely persist in the near term. We are pleased, however, that despite lower volume, we are seeing better execution with improved direct margins and increased project opportunities from existing and expanded clients. We believe this is indicative that the corrective actions we have taken are having a positive impact. On the generation side, we continue to find quality opportunities to support the construction of new gas fired power assets with other EPC contractors. The growth of the Electrical Infrastructure segment remains an important part of our long-term diversification strategy.Our Oil Gas and Chemical segment performed at a high level with strong direct margins in the quarter, but the segment has suffered from refinery project postponements and temporary delays as a result of the crude oil supply/demand dislocation discussed earlier. Under absorption and construction overhead costs impacted the gross margin performance as we prepared for what was traditionally a busy March and fourth quarter. Demand deterioration as well as precautionary measures related to COVID-19 reduced, delayed or suspended a considerable amount of the planned seasonal refinery turnaround and maintenance activities.Other projects such as the capital construction work on the ISO alkylation unit and Chevron Salt Lake City refinery continues, as does our work in the midstream gas processing space, including the EPC cryogenic natural gas processing facilities. Our teams are also hard at work growing brand awareness and gaining more bidding opportunities in the chemical and petrochemical markets, a key growth area for the segment.Finally, as we continue to streamline the business and focus on markets where we have the greatest opportunity, I’m pleased to report that in our Industrial segment, our timely exit from having a continuous presence in the domestic iron steel market is complete. Industrial segment today consists of work for various industries, including major mining and minerals companies engaged primarily in the extraction of nonferrous metals, aerospace and defense, cement, agriculture and various industrial facilities. Given our exit from the iron and steel business, we are likely to collapse the balance of the services in this segment into the other reporting segments beginning in fiscal 2021.As we move forward in this disruptive environment, managing our cost base without sacrificing the quality and safety of our work for our market footprint is a critical part of our near term plan. Our ability to do so in a conservative approach to our balance sheet gives us a good deal of flexibility to execute on our plan.Next couple of quarters will certainly be challenging. We are prepared for those challenges. And Matrix Service Company continues to be in a leadership position with best-in-class employees, a strong financial foundation and diversified opportunity pipeline. We don’t know how quickly the recovery will unfold, but we are confident that when we exit this unprecedented time, Matrix Service Company will be leaner, stronger and optimally positioned to take advantage of the business opportunities that are presented to us.I’ll now turn the call over to Kevin.

[Kevin Cavanah:]

Thanks, John. Before we get into actual results, I want to address two related topics of critical importance in the current environment

[John Hewitt:]

Thank you, Kevin. Before we open the call for questions, let me reiterate three points. First, we will continue to be relentless about the health and safety of our employees, clients and business partners. Next, we will remain focused on those elements we can control. We are making adjustments to our cost structure that are appropriate for the current environment and we will continue to take conservative approach to our balance sheet, which benefits all of our stakeholders, especially in times like this.Finally, despite the significant challenges ahead, we are confident that Matrix will exit this period stronger and more competitive, and we will achieve our long-term growth objectives.With that, I’d like to open the call for questions.

[Operator:]

[Operator Instructions] And your first question is from John Franzreb with Sidoti and Company.

[John Franzreb:]

I guess I want to start with the deferrals you’re seeing as far as maintenance work and the turnaround season. You mentioned that some of them will be pushed into the fall. Can you talk a bit about your ability to recapture all that work? Or is this going to go into the fall and into, again, next spring of next year? What are your thoughts there?

[John Hewitt:]

The clients that we normally do business with year in and year out, the fixed based maintenance operations that we have, our workforce was reduced, you know that. We’re already hearing about plans to start to bring that back here over the next couple of quarters. So no real concerns there. That will be dependent on our clients’ maintenance demands on our sort of MSA work and our turnarounds that we had planned. Would be our belief and strong belief that those clients that we had lined up for turnarounds in the spring that have pushed out work, that we will be back with the majority of those clients when it’s time for them to do their turnaround, whether those turnarounds in the future are minimized or potentially expanded, depending on the condition of their facilities.

[John Franzreb:]

Okay. And regarding the awards that you had in the quarter and that you’re seeing now through the fourth quarter, can you talk about how much has been pushed out that you kind of expected to flow through in Q3 and possibly into Q4? And do you expect it to flow into Q4? Or is it something like the timing of these awards, are they moving into next year? And size them for me. What are you thinking along those lines?

[Kevin Cavanah:]

Well, so if you look at the three projects that we’ve talked about that have moved out, I think we would have expected one or maybe two of those that have been signed in the third quarter actually get into backlog. I think there’s been some delays in the award process. As John mentioned, there’s still been progress on those. So it’s hard for us to gauge exactly when we’re going to get all the T’s crossed and I’s dotted to be able to put those things in backlog at this point. But the good news is that these three projects are moving forward, it appears. And these are good sized projects. These are projects that would move the backlog back up to a more – a level that we would normally expect.

[John Franzreb:]

Okay. All right, Kevin. And one last question. Given the excess oil around North America as far as you are concerned, can you talk a little bit why you haven’t seen some spike in demand on the storage side of the business? What’s the headwind there that prevents customers from building storage facilities?

[John Hewitt:]

So two things there. One is that our repair and maintenance and inspection teams, which is work we do on a quarter-over-quarter basis, they are seeing some spike in bringing idled tank assets back online so people can use those to store crude. But from a midstream company’s perspective and probably from an integrated company’s perspective, if you look at the forward curve on oil and then price of oil, and then you consider the amount of time it takes to get through all your permitting, environmental studies, financing decisions, get things - FEED studies, get them built, you got a 12 or 18-month cycle there.So if you look at that and then look at what the forward curve is, there isn’t a real great financial model that would say, oh gee, we’ll cut oils, pick a number, $20. We’ll go build 5 million barrels worth of storage, and we’ll have that in 18 months. Well, price of oil 18 months from now could be $45. So there isn’t a – by the time you actually be able to buy the oil and start. So the financial models don’t necessarily work real well based on where the forward curves are on the crude oil.So I think what we’re seeing is the projects that – the true midstream people, they look out the time a long way. They care about what’s going to be going on in the supply demand five, ten, 15 years from now. They’re putting long-term assets in place. And so a lot of the big projects that we were providing preliminary engineering on, a FEED work on, those projects are still out there. They’re still looking out into the future to build those projects. And so those kinds of things that make common sense investments are continuing.

[John Franzreb:]

Great, John. Thanks. I appreciate the color. I’ll get back into queue. Thank you.

[Operator:]

Your next question is from Bill Newby with D.A. Davidson.

[Bill Newby:]

Maybe, Kevin, I just wanted to start on the cost reductions. Is there a portion of those that will take time to kind of ramp up or put into place? Or do you guys expect to enter fiscal 2021 kind of with all of those $40 million cost reductions in place on a run rate basis?

[Kevin Cavanah:]

Yes. The plan is that virtually all the steps required to get those savings of $40 million would be in place as we start the fiscal year. So we’ve been taking actions in the third quarter. There’s been some activity already in the quarter. So we’ve got a set plan to achieve that $40 million.

[John Hewitt:]

We know where those cost reductions are coming from. It’s not a reactionary plan, right? So we’ve done a review of the higher cost structure of the company business by business, including corporate, and we have a plan. We know where those cost reductions are coming from. And we’re executing that plan right now.

[Bill Newby:]

Got it. I appreciate that, John. I guess I’m wondering, could you guys maybe try to help size the potential downside in Oil Gas and Chemical in the near term? I mean I look back at 2015 time frame, and it looks like that segment did dip like $30-ish million in a quarter. I mean is that potential there here in the near term? Or do you think you’re closer to a floor than that?

[Kevin Cavanah:]

I think we’re closer to a floor than that, Bill. I think our business has changed since 2016. We do have a bigger gas presence. And while that market is under stress, too, we do have work there. So I think we’re closer to the floor now than – I wouldn’t expect to dip down [indiscernible].

[Bill Newby:]

Okay. And then I just wanted to touch on storage quickly. I mean with - assuming we continue to see projects pushed to the right, I mean, it’s like we have in kind of past cycles, with what you guys have in the backlog right now and the cadence of those projects, I guess starts can kind of move around. But I guess how far out does your visibility to growth go in that business just with what you guys have in backlog? At what point does growth start to get a little more muddy [ph]?

[John Hewitt:]

So for the three projects that we’ve mentioned, at least two of those, as we get those into backlog, that’s going to give us a lot of strength over the next 12 months. And what we’re seeing in the bidding and opportunity environment there, we still think we’ve got a very strong pipeline. There’s some mix with individual tank projects as well as oil terminal projects and a couple of different energy mediums [ph]. It’s just the visibility for us on the timing in this market is a little murkier, so - as opposed to the work - as opposed to is it working.So we feel fairly confident about the quantity of work that’s out there in the future, our ability to continue to work out into the future, the quality of our backlog, we feel very good about. So it’s just going to be that when these things will get awarded and when they start. So if you remember back in 2016 when we went into this oil price compression, we’re not the same company we were four or five years ago. We’ve got a much more expanded and strong business development space. We’ve got bigger geographic footprint and we’ve proven ourselves in the LNG market very well and proven ourselves in terminal markets since that – when we were building the Dakota Access infrastructure. So we’re just a different company we were.So we’ve got a much more solid position in the storage market than we have had in the past. And on top of that, we’re continuing to see more international opportunities. So international for us would be into islands Caribbean [ph] Islands down in Mexico potential deposits out there [ph]. So we’re continuing to see more opportunities down there, too. So I would say we feel pretty good about the position in the storage market, where that’s going. It’s just going to be the timing of awards, what quarter will the next big award come, how will the smaller awards flow through our backlog over the next two to four quarters?

[Kevin Cavanah:]

Yes, Bill, we ended the quarter with $520 million of backlog. We’ve been averaging around $145 million of revenue per quarter in the first three quarters of the year in storage. So we’ve got close to a full year of backlog today without those three projects. So we are positioned well to – for the next year.

[Bill Newby:]

Got it. No, that’s what I was thinking. I appreciate it. I’ll jump back in queue.

[Operator:]

We have a follow-up question from John Franzreb with Sidoti and Company.

[John Franzreb:]

Yes. Just on the electrical side of the business. I know you have customer concentration in the Northeast and Mid-Atlantic. But from another call, one of your frustrations when you decide to downsize the businesses is that you didn’t feel like you were getting your fair share of awards that were out there and the opportunity in the pipeline. Can you kind of talk to how that’s progressing three months later since we’ve had this conversation last?

[John Hewitt:]

Yes. So a couple of things, we haven’t completely finished the [indiscernible] improvement plan. We’ve got a lot of work done around the execution and the bidding part of it. The business development piece has been the part that we haven’t gotten as far as what we wanted. We’ve had some really quality improvement and personnel additions there. But we have a couple of other steps that we want to take. And unfortunately, this pandemic issue has created a hole in that part of the plan. And then you got our main clients in the Northeast - they’re dealing with their issues, like a lot of other places across the country related to the pandemic. And so from an administrative standpoint, they’re focused on other things, not necessarily on what’s the next substation they’re going to fix. But we’re starting to open up some doors on some clients we don’t traditionally work for. Some of that work has gone on. And so I think when things get back to a little bit more run rate for our [indiscernible] clients, then we’ll start to see a much improved proposal opportunity pipeline.

[Kevin Cavanah:]

Yes. And I’d add on to that. Think about the Electrical segment performance this quarter, we really didn’t have any, what we call, a major project base. And for that matter, we didn’t have any bad projects throughout any of the four segments. And so I think that shouldn’t be lost that our teams are booking good projects and then executing those projects. And for us, it’s a focus on getting the next projects in and getting the cost structure in line with the future revenue base to improve the earnings and the gross margins in all four of the segments.

[John Franzreb:]

Okay. Fair enough. And just on the soon to be merged Industrial business. The cost actions that you’re taking, how quickly will they nullify the operating loss that this business is currently generating? I mean you did operating loss of $7 million this quarter, almost $10 million last quarter. I mean we’re going to get to breakeven with that remaining stub piece of the business by the June quarter or not?

[John Hewitt:]

I’ll let Kevin add pile on here. As Kevin noted, we had some stranded overhead costs as we wound down our services in the iron and steel business that we can’t get rid of immediately. All that stuff will be out of the company by the end of the fourth quarter. If you normalize that segment without that stuff, the things that remained in there provided gross margins at the top end of the ranges that we expect in Industrial. So if you get that stuff out, that segment was making money.

[Kevin Cavanah:]

Yes. And one thing about that $7 million loss, and you’ll see this in a footnote in 10-Q that will be filed later today in Nasdaq, $3 million of that is restructuring charges of that $7 million. There are some costs that are still hitting that will be out of it by the end of the quarter. So just to support John’s point that the projects that are in there are actually good projects, making decent margins.

[John Franzreb:]

Perfect. Exactly what I was looking for, thanks a lot guys. Good luck.

[Operator:]

[Operator Instructions] And I am showing no further questions at this time. I would now like to turn the conference back over to John Hewitt.

[John Hewitt:]

I just want to thank everybody for joining us today. I encourage everyone to be careful, to be healthy and to be safe in your homes and environments where you’re working. Continue to take the cautions that are being recommended by the CDC and your state, local and federal governments.And as it relates to Matrix, I mean, we’re going to continue to do that. We’re going to be conservative on how we reenter the normal workforce. But we feel really, really good about our company, about where we are, about our ability to work through this storm that we’re in a very good and strong position financially. We’re in really great markets and we’ve got some good visibility and good client relationships. And we’re really excited about when the markets start to pick up and as the economy begins to churn, we’re going to be in a really good place to take advantage of those improved market conditions. And so with that, I look forward to talking to everybody in the next quarter. And thank you very much for being with us today.

[Operator:]

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