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Matrix Service (NASDAQ:MTRX)

Q1 2013 Earnings Call

November 09, 2012 11:00 am ET

Executives

Kevin S. Cavanah - Chief Financial Officer, Chief Accounting Officer, Vice President and Secretary

John R. Hewitt - Chief Executive Officer, President and Director

Analysts

Richard Wesolowski - Sidoti & Company, LLC

Michael J. Harrison - First Analysis Securities Corporation, Research Division

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

Martin W. Malloy - Johnson Rice & Company, L.L.C., Research Division

Stephen Ragard - Stephens Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Matrix Service Company conference call to discuss results for the first quarter ended September 30. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host for today, Mr. Kevin Cavanah, Vice President and CFO. Sir, you may begin.

Kevin S. Cavanah

Thank you. I would now like to take a moment to read the following. Various remarks the company may make about future expectations, plans and prospects for Matrix Service Company constitute forward-looking statements for 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, 2012, and in subsequent filings made by the company with the SEC.

I will now turn the call over to John Hewitt, President and CEO of Matrix Service Company.

John R. Hewitt

Thank you, Kevin, and good morning, everyone. We appreciate you joining us on the call this morning.

Before discussing our first quarter results, I want to provide some brief comments related to Hurricane Sandy and our operations on the East Coast. First of all, our best wishes, thoughts and prayers are with our employees, family members, friends and the local communities in which we work as they recover from the destruction caused by Hurricane Sandy. Many of our employees in the northeastern U.S. have been working around-the-clock in response to Hurricane Sandy, the health and safety of those individuals and all our employees has been our top priority. All of our offices on the East Coast are up and running and many of our clients are beginning to return to normal operations. I want to thank our employees and all other storm response personnel in the area for their hard work and dedication to improving the condition of those impacted by the storm.

Regarding our operations, we continue to execute on our strategic objectives and are satisfied that the business is responding as we expected. The performance in the first quarter was strong and reflects the company's hard work. Our strategic focus areas are beginning to gain traction, supported by continued strength in the markets we serve.

Matrix Service Company booked nearly $250 million of new work in the first 3 months of fiscal 2013. Our consolidated backlog continues to increase and was $534.6 million as of September 30, 2012.

The company continues to see a strong bid pipeline and new opportunities opening up in connection with our strategic objectives. We have laid the groundwork for this growth in several ways: Key talent additions throughout the organization, re-segmenting to improve both internal and external visibility of our business and launching a new brand and corporate identity to better position the company going forward.

Regarding acquisitions. We are actively pursuing several opportunities, as well as reaching out to potential targets on a consistent basis. We are committed to find the right opportunities for the company that will supplement our existing service offering and further strengthen our strategic growth areas.

Now a few words about our segments. The Electrical Infrastructure segment continues to see solid margins and consistent work in the northeastern region of the United States. As mentioned on our last call, the company's reputation for providing transmission, distribution, substation and strong response work is growing throughout the Northeast due to our capable employees and quality work performed in a safe and professional manner.

We continued to view our Electrical Infrastructure segment as a high-growth area within the company and are actively looking for acquisition opportunities that complement the profile of our existing business.

I'm also pleased to announce that Matrix SME was recently awarded contracts in excess of $12 million for high-voltage transmission work throughout New Jersey. These awards further demonstrate the company's capabilities in the Transmission and Distribution industry, as well as our commitment to growth within our Electrical Infrastructure segment.

In addition, we are currently pursuing opportunities for natural gas-fired combined cycle power generation projects on the East Coast, which we believe will add to the strength of this segment.

Our Oil, Gas & Chemical segment continues to see strong growth in the turnaround maintenance and industrial cleaning spaces. The West Coast, Gulf Coast and Mid-Continent states continue to represent areas of strength for our plant services work, although we continue to make steady progress in other areas throughout the U.S. including recent plant projects in Hawaii, Alaska, Wyoming and Utah.

Also in the quarter, we performed turnaround and maintenance work for the new owners of the refinery in Trainer, Pennsylvania, which represents an improvement in this area from previous quarters.

Additionally, our industrial cleaning business is successfully bidding work alongside our plant maintenance teams, focusing on supplementing core services with higher margins specialty work. This ability to cost leverage our services was a key strategic objective and we're beginning to see results.

The storage solution segment represented nearly 50% of consolidated revenue for the quarter. We continue to be successful bidding, winning and executing work throughout the U.S. and Western Canada, and outside of our historical core geographic markets. During the quarter, we were awarded sizable storage projects in Oklahoma, Alabama, Louisiana, Texas, New Mexico and Western Canada. As a result, segment backlog increased to $264.9 million in the quarter, an improvement of 12% over year end June 30, 2012 results.

In western Canada, our crews are busy with several large storage projects in the region, the amount of work planned and in progress in Western Canada is significant. We are taking a very measured approach to each opportunity to assure we are able to support our brand reputation with safe, high quality, project executions combined with long-term client relationships.

The industrial operating segment continues to impress with a steady flow of project awards and sizable bid pipeline. Backlog of $17.6 million represents a 15% improvement since our year end June 30, 2012 results. The majority of this work is a part of our mining and minerals group operating in the Western and Rocky Mountain states. Our offices in Tucson and Salt Lake City are currently working for some of the top global companies in the mining and minerals industry. Subsequent to the quarter end, we're awarded a $20 million project with one of our key mining clients, which highlights our growth in the mining and minerals industry. This project will be added to our backlog in the second quarter.

I'd now like to turn the call back to Kevin to discuss details of our financial performance. Kevin?

Kevin S. Cavanah

Thanks, John. The revenues for our first quarter were $209.6 million compared to $169.3 million in the same period last year. The 23.8% increase in revenues was due to strong growth in our Electrical Infrastructure, Oil Gas & Chemical, and Storage Solutions segments. As a result of the higher business volumes, we increased our quarterly net income to $4.7 million and our fully diluted EPS to $0.18, as compared to net income of $3.5 million and fully diluted EPS of $0.13 in the first quarter of the prior year.

As expected, first quarter earnings include $0.04 per fully diluted share for activity related to our strategic investments, including the rollout of our new brand and support of our storage businesses.

Consolidated gross profit increased from $18.1 million in the 3 months ended September 30, 2011, to $22.2 million in the 3 months ended September 30, 2012. The increase of $4.1 million or 22.7%, was primarily due to the higher revenues in the first quarter of the current year. Gross margin of 10.6% were consistent with the prior year.

SG&A expenses were $14.3 million in the 3 months ended September 30, 2012, compared to $11.5 million in the same period last year. The increase of $2.8 million was consistent with our plan, with the exception of a $700,000 bad debt charge. SG&A expense as a percent of revenue remained unchanged at 6.8%.

The Electrical Infrastructure segment revenues increased from $22 million in the first quarter of fiscal 2012 to $33.3 million in the first quarter of fiscal 2013. The increase was primarily due to the increased high-voltage work in the northeastern United States and unexpected storm restoration work in the aftermath of hurricane Isaac.

Our gross margins were 14.1% in the first quarter as compared to 12.7% in the same period last year. These margins are above our normal expectations of 11% to 13% for the Electrical Infrastructure segment.

Oil Gas & Chemical segment revenues increased 46.5% to $67.1 million in the first quarter compared to $45.8 million in the first quarter last year. The increase was due to higher volume of turnaround work and capital construction projects. As a result of the increased volume of work, gross margins improved 11.7% as compared to 9.5% in the first quarter of fiscal 2012. The margin performance was somewhat above our normal margin expectations for the segment of 9% to 11%.

The Storage Solutions segment generated first quarter revenue of $104.2 million. The 9.8% increase over the first quarter revenues of $94.9 million in fiscal 2012 is a result of higher levels of work, both domestically and in Canada. As a result of geographic growth expansion efforts and a mix of smaller tank passages, our gross margins in this segment has slipped to 9.6%, which is below our normal expectations of 11% to 12.5%. Based on recent project awards, we believe this trend will be short-lived and we expect our Storage Solutions gross margins will return to the normal range.

Revenues for the Industrial segment totaled $5 million in the 3-months ended September 30, 2012, compared to $6.6 million in the same period a year earlier. The decrease of $1.6 million or 24.2% was largely due to the timing of projects related to latency industrial work, offset in part by higher revenues in our mining and minerals, and bulks materials handling businesses. Gross margins in the current quarter were negatively impacted by a start up cost related to our entry into the bulk material handling and mining mineral markets.

At September 30, 2012, our cash balance was $17.2 million as compared to $39.7 million at the beginning of fiscal 2013. The decrease in cash during the quarter was a result of the timing of project cash flows, including investments and working capital required to fund that 23.8% revenue growth. The cash balance, along with availability under the senior credit facility, resulted in liquidity of $125.6 million as of the end of first quarter of fiscal 2013.

Subsequent to the end of the quarter, our cash balance has increased approximately $50 million as working capital invested during the first quarter turned to cash. The management of our balance sheet is extremely important to the company's success as we believe the strong financial position allows us to capitalize on the strategic growth opportunities we have talked about during the last couple of quarters.

The start of the year is consistent with our expectations, so we are maintaining our previous fiscal 2013 guidance of revenues in the range of $800 million to $850 million, and EPS in the range of $0.83 to $0.98 per fully diluted share.

That concludes our prepared remarks, and we would now like to open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today comes from the line of Rich Wesolowski from Sidoti & Company.

Richard Wesolowski - Sidoti & Company, LLC

When you look at the profitability for your oil and gas and the electrical business lines, they were comfortably above the average expected ranges, the long-term ranges offered by management last quarter. Can we interpret these as seasonally strong results that are going to be watered down by other periods or will we look back from next year's September quarter and say that there is some great onetime jobs in there that shouldn't be expected to be repeated?

Kevin S. Cavanah

I think that when you look at these segments, there's 2 different answers. So if you look at the Electrical Infrastructure segment, we talked about -- we mentioned the storm work from Hurricane Isaac, that had a positive impact, so depending upon what storm restoration work, you might have a recurrence. But if we look long-term on our segment there, we've been operating in that 12% to 13% range the last 1, 1.5 years, so that's what our expectations are right now. On the Oil Gas & Chemical side, it was a very strong quarter from a man-hour perspective. As we've grown geographically, we have seen our man-hours increased during those summer months, we've done a lot of work up in Alaska, and that is contributing to better absorption in that segment. So if we can continue with those volumes, we'll be at the upper end of that margin range and it could exceed at some quarters. I don't believe when you look at the -- for either segment as within the storm work, if you look at any of the projects that we have, there was just some exceptional profits on really high-margin work, it was just a large volume.

Richard Wesolowski - Sidoti & Company, LLC

You mentioned on your tank margin, as you did last quarter, that the spread away from Cushing would be in it clients are still offering smaller tank packages, on the latter, where have you seen movement from customers toward large tank passages, have any been bid out and the company has been unsuccessful or mostly being pushed toward the right?

John R. Hewitt

Probably -- maybe some clarity on those couple of words, is that what we're seeing is sort of a trend to smaller tanks and smaller collective packages. So what's that doing is, in some cases, in some of our markets, opening up the door for sort of smaller local contractors that they are able to bid those projects and it makes those projects a little more competitive, but we are seeing in our pipeline many more large volume multi-tank packages, and that's giving us some comfort that we think some of the margins will begin to return to more historic levels.

Richard Wesolowski - Sidoti & Company, LLC

Did the company already have bids outstanding for some of those larger packages?

John R. Hewitt

Yes.

Richard Wesolowski - Sidoti & Company, LLC

Okay. And then last one, would you remind us where the mining and material handling business is included within your segments?

John R. Hewitt

It's in the Industrial segment.

Richard Wesolowski - Sidoti & Company, LLC

Right. And you mentioned in the call that -- excuse me, a project that was won I think after the quarter, and last call, you had mentioned $40 million to $60 million in revenue, is that still valid or is that something that's maybe going to straddle fiscal '13 and '14?

John R. Hewitt

I think we are still targeting that, that range of revenue is possible in this fiscal year and that we would hope that sometime within the next couple of weeks, we'll be able to provide a press release on the project that we mentioned here in the call.

Operator

Our next question comes from the line of Mike Harrison from First Analysis.

Michael J. Harrison - First Analysis Securities Corporation, Research Division

Just kind of building on the last question on the Industrial business. At a $40 million to $60 million revenue run rate, where would you guys expect operating income to shake out for fiscal '13?

Kevin S. Cavanah

For fiscal '13, I think at some point during the year, when we ramp up the volume, we will flip to where we're earning profits in that business. For the full year, obviously, the operating income percentage will be low, gives that a negative number for this first quarter. So I think longer term, as we look at this segment when we're at a volume where we're at that $60 million run rate for a full year, I think you would expect the operating margins to pump up to the 5%, 6% range.

Michael J. Harrison - First Analysis Securities Corporation, Research Division

Okay. And as I look at the sort of the implied SG&A costs in that Industrial segment, it looks like there really was quite a jump this quarter, was that where the bad debt expense was or is that just the kind of start up costs associated with some of the material handling business?

Kevin S. Cavanah

It's 2 things. One, it was where the bad debt charge was recorded. And secondly, when you're looking quarter-over-quarter, if you think about the first quarter of last year, we didn't really -- we were just starting on material handling, and we didn't have anything on Mining and Minerals in there. So we didn't have our Salt Lake office or Tucson office in those numbers. But the $700,000 bad debt charge was in Industrial. It wasn't related to mining and it wasn't related to material handling.

Michael J. Harrison - First Analysis Securities Corporation, Research Division

Okay. And then in terms of the impact of Hurricane Sandy, I'm glad to hear that everything is back up and running on your side and that you're seeing customers return to normal, you've got obviously the negative impact of some downtime and then potential positive impact from the emergency repair business and storm related repair. Should we assume that the storm is a net positive for you in the fiscal second quarter?

John R. Hewitt

I would say obviously the assumption would be -- it would probably be a good assumption, at a minimum it would be maybe a neutral, net neutral. Today, we're only a couple of weeks into this cleanup from Hurricane Sandy, and so majority of our focus has been in our -- as we had open the call up, with the safety of our employees and those that are working to do that repair work, we are making sure that they're working in very safe conditions. And as we get more visibility down through the month, as the repairs start to -- and the cleanup begins to get to an end, we'll have more visibility on the impact to our quarter. But I would say the assumption would be that this would be, should at least, would be a neutral impact.

Michael J. Harrison - First Analysis Securities Corporation, Research Division

All right. And then last question for you, on the M&A front now that we have some certainty around the election results, are you expecting to see some M&A opportunities move forward before the end of the year, given expected potential tax increase?

John R. Hewitt

I would tell you that the -- there is a -- we've got a shortlisting, a handful of M&A targets that we're in some discussions with now. And that has not been a priority for those business sellers to complete a transaction by the end of the year. So whether they are not concerned about it or realize that at this point in the year, they can't get done anyway, so we're not seeing -- we're not necessarily seeing that pressure by potential targets.

Operator

Our next question comes from the line of Tahira Afzhal from KeyBanc.

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

I guess I just wanted to ask you a [indiscernible] question, several of your peers have talked about good things in particular. Number one, potentially, a lot of petro chem and possibly a very large gas liquids project being built and if you look at the components, there seems to be a lot of work both on that and on the petro chem side that it can be Matrix could take part in. So if you could just give me any kind of color you can outside of LNG as you look at petro chem and you look at GPL, are there any other opportunities for you, and whether you've been approached by sponsors or other companies to joint venture with?

John R. Hewitt

So we think the market, the oil and gas market and NGLs, and in general in chemicals and refining is going to be continue to be strong through the course of the year. There are project opportunities that we have -- are bidding or have been in our pipeline or in our radar screen related to those markets that we are tracking or that we are bidding. And so I would expect that all of those would have some impact on our revenue and backlog as we go through the course of the year.

Tahira Afzal - KeyBanc Capital Markets Inc., Research Division

On the electric T&D side clearly that market is picking up very close to your headquarters, even in Texas, I know you've had more of a presence on the managed side but any comments on whether you'd like to reach really through your footprint?

John R. Hewitt

I think I might have understood your question. We're continuing to focus our footprint for the high-voltage T&D work and substation work in a union environment. We want to continue to strengthen our market presence on the East Coast, and we are looking for opportunities in other union-related areas within the country to expand our service area. At the moment, movement into Texas, I think you asked about Texas or Oklahoma or Gulf Coast for our T&D is not on our radar screen.

Operator

Our next question comes from the line of Martin Malloy from Johnson Rice.

Martin W. Malloy - Johnson Rice & Company, L.L.C., Research Division

In terms of the acquisition opportunity, you mentioned you were actively pursuing, can you maybe talk a little bit perhaps about what industries or geographic areas that they're in?

John R. Hewitt

I would tell you that what we're pursuing is in 2 of our segments. One is oil gas and chemical and in Electrical Infrastructure. So there are -- both the acquisitions that we're looking at will support either in providing more depth on our services or more geographic reach in either one of those 2 segments.

Martin W. Malloy - Johnson Rice & Company, L.L.C., Research Division

Okay. And then on the storage solution side, I guess -- there's a lot of talk about pickup in the construction of Liquids Pipelines in '13 and '14, can you talk a little bit about storage terminalling opportunities that would maybe go along with those projects?

John R. Hewitt

So like we said, the market there has been very strong for us outside of our traditional Cushing hub. Western Canada has been very strong. We are tracking and bidding several terminal opportunities, some of them are just -- not only in Western Canada but in other parts of the U.S. So we're looking at not only the tankage piece but also in some cases, the complete terminal. And there are areas in Louisiana, down to Texas, in Oklahoma as well, up into Wisconsin and Western Canada. So the market continues to be very strong and we're seeing several other projects we would call for us would be large sized tankage and with multiple tank packages.

Operator

[Operator Instructions] Our next question comes from the line of Matt Duncan from Stephens.

Stephen Ragard - Stephens Inc., Research Division

This is actually Stephen in for Matt this morning. Just drilling back down on margins for a second. I just want to make sure I'm understanding you, so out of the E&I and the Oil Gas & Chemical side, I know you noted some kind of a benefit from Hurricane Isaac and from higher utilization of the workforce, did the turnaround work at Oil Gas & Chemical. I guess, going forward, so you expect those 2 segment gross margins to kind of come back down to the normal ranges? I guess E&I was what, 11% to 13%, and Oil Gas & Chemical is 9% to 11%, is that correct in my thinking? And how should we think about that progressing through the year?

Kevin S. Cavanah

So when you look at the Electrical Infrastructure segment, we've consistently been in the 12% to 12.5%, 12.7% range, the last number of quarters, last 5 and 6 quarters in that segment. This quarter, we got some benefit, our traditional business that the margins we expect on that business haven't changed. So short of anything you need, I would expect those margins to be back in that range of 12% to 13%. When you look at the Oil Gas & Chemical, we had a range of 9% to 11%. If you'll recall, the 9% was when we had a low-volume of work going through that segment. Our volume has increased significantly in that segment. And so in that -- I would expect us to be operating at the upper end of that range going forward and that's something we'll be considering whether we need to move that margin guidance for that segment in the future.

Stephen Ragard - Stephens Inc., Research Division

And I guess just one other question. On the back log, can you comment on the mix within that backlog? I think the Storage Solutions side, nice sequential pickup in backlog. Are you seeing an improvement in mix there?

Kevin S. Cavanah

I think the backlog story was good for just about every segment. Both Electrical Infrastructure and Storage Solutions segments have a book to bill of over 1.2, Oil Gas & Chemical was pretty much flat for the quarter, and industrial was up, and as we mentioned on the call, we've got a significant Industrial award that will basically double the size of that backlog, so the good thing about backlog story this quarter is that it was good for all 4 segments. So we're seeing positive trends throughout our business.

Operator

I'm showing no further questions in queue and would like to turn the conference back over to Mr. John Hewitt for any closing remarks.

John R. Hewitt

I want to thank everybody for participating today, for the good questions and we look forward to talking with you all in the future. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of the day.

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