Matrix Service F1Q08 (Qtr End 8/31/07) Earnings Call Transcript

| About: Matrix Service (MTRX)
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Matrix Service Company (NASDAQ:MTRX)

F1Q08 Earnings Call

October 4, 2007 11:00 am ET

Executives

Michael Bradley - President, CEO

Les Austin - CFO

Truc Nguyen – IR

Analysts

Daniel Burke - Johnson Rice

John Rogers - D.A. Davidson

John Flanagin - First Analysis Securities

Operator

Welcome to the Matrix Service Company first quarter 2008 earnings results. (Operator Instructions) It is now my pleasure to introduce your host, Ms. Truc Nguyen, Investor Relations for Matrix Service Company. You may begin.

Truc Nguyen

Thank you, Claudia. I would now like to take a moment to read the following statement: various remarks that 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 last fiscal year and in subsequent filings made by the company with the SEC.

Now I will turn the call over to Michael Bradley, President and CEO of Matrix Service Company.

Michael Bradley

Good morning everyone, and thank you for joining us on our first quarter conference call this morning. With me today is Les Austin, who is our Chief Financial Officer. Les will cover some of the financial highlights in just a second, but I would like to make some overall comments.

First of all, we are very pleased to report earnings more than doubled when compared to the first quarter of fiscal 2007. Matrix Service continued its progress toward successfully growing our overall company, expanding our revenue base and achieving record levels in our backlog, which now stands at nearly $500 million.

As we have discussed previously, our primary emphasis right now is on improving the efficiency and operating performance of our existing business and expanding our business opportunities organically, given the strong fundamentals surrounding our core business which have continued to make excellent progress.

Critical to that has been our ability to recruit and retain key talent, along with good project execution despite a difficult labor environment. We will continue a strong focus in this area going forward, and we are very pleased with how the overall Matrix team has performed.

As noted in our release, our construction services margins were again impacted by an additional charge on our LNG project. The increased costs are primarily related to additional weather-impacted delays and the associated scheduled recovery costs that have occurred since our last conference call on August 14th. Again, our projections represent our best estimates for achieving our compressed schedule. Our focus remains on completing this project on time, managing our costs and meeting our customers' expectations.

We also experienced some impact to margins for projects that were delayed to the second quarter which resulted in an under absorption of some fixed costs. These projects are now in progress and we do not expect this impact going forward.

So now I will turn it over to Les, who will go through some of our financial details.

Les Austin

Thanks, Mike. The specific details of the first quarter performance have been disclosed in our press release this morning, though I would like to highlight certain items for each of the operating segments.

Total revenues for the quarter were $161.3 million, up 27.1% compared to the first quarter of fiscal 2007. Net income for the first quarter of fiscal 2008 was $6.3 million, or $0.23 per fully diluted share, up 110% and 91.7% respectively versus the first quarter of fiscal 2007.

Construction services revenues for the first quarter of fiscal 2008 were $98.8 million, up 28.6% compared to the same period a year earlier. Repair and maintenance service revenues increased 24.8% or $12.4 million in the first quarter of fiscal 2008 to $62.5 million.

SG&A expenses increased to $8 million in the first quarter of fiscal 2008, versus $7.7 million in the same period last year. This increase is primarily related to employee-related costs. Matrix Service has provided the necessary reconciliation in our press release to disclose a non-GAAP financial measure in this conference call. In addition, a reconciliation of EBITDA, earnings before net interest, income taxes, depreciation and amortization to net income is available in the Form 10-Q and in the investors section of the company's website at www.matrixservice.com. EBITDA is provided, as we believe the financial and investment communities utilize this measure to assess our performance and evaluate the market value of companies considered to be in a business similar to ours.

For the first quarter of fiscal 2008, EBITDA was $12.6 million compared to $7.2 million for the same period last year. Gross margins on a consolidated basis for the current quarter were 11.7% compared to 10.5% reported in the same quarter a year ago.

The company again had no bank debt at August 31 2007 and it's cash balance stood at $7.4 million. Matrix Service has utilized $8.4 million of the five-year, $75 million revolving facility for outstanding letters of credit. The company is currently seeking to increase our total capacity under the revolver to $100 million, and should complete the expansion by the end of October.

Capital expenditures during the first quarter of fiscal 2008 totaled approximately $2.9 million. The company also acquired approximately $100,000 of equipment under capital leases. Matrix Service has committed over $12 million for capital expenditures to-date, and could exceed $25 million in estimated cash flow for these expenditures for fiscal 2008.

Backlog at August 31, 2007 stood at $499.2 million, which is a $39.2 million increase over our May 31, 2007 backlog of $460 million. Matrix Service did not repurchase any shares last quarter, but will continue to evaluate accretive opportunities in either share repurchases, capital expenditures, or strategic acquisitions in the future.

I will now turn the call back over to Mike, who will discuss the remaining prospects for fiscal year 2008.

Michael Bradley

Thanks, Les. Before turning it over to the Q&A, let me say that while performance during the quarter remained strong, particularly in the repair and maintenance services segment, the continued challenges of our Gulf Coast LNG project reduced our overall consolidated gross margins. However, we continue to see exceptional market dynamics in both of our business segments and therefore are reiterating our annual guidance for fiscal year 2008 of between $700 million and $750 million in consolidated revenues, 11.5% to 12.5% in consolidated gross margins, and 5% to 5.5% in SG&A at this time.

We thank you for your support. I look forward to the continued progress as we move into the second quarter of fiscal year 2008. With that, I will turn it over and open it up for Q&A.

Question-and-Answer Session

Operator

Your first question comes from Daniel Burke - Johnson Rice.

Daniel Burke - Johnson Rice

You mentioned you continue to see an exceptional market out there. With regards to the work you are currently booking into backlog, do you feel like the margin opportunity is better than the margin opportunity you have seen over the last one or two years?

Michael Bradley

We have seen margins improve in our overall outlook for our business and we expect to see strong margins given the demand for our services overall. So a strong market, strong demand, and we are seeing improved margins as compared to the past couple of years.

Daniel Burke - Johnson Rice

Let me try a more specific question. You mentioned the call-out work in repair and maintenance services. Could you address in a little bit more detail what caused that call-out work and why we wouldn't continue to see a bit more of that?

Michael Bradley

I think we had what I would call an atypical amount of emergency call-out work in the quarter. That is not work that we anticipate on an ongoing basis, but it was very opportunistic work for us and we were available and we always focus on trying to service our clients. We will continue to look at those opportunities, but we did have what I would call somewhat of an unusual activity in the emergency call-out work during the quarter.

Daniel Burke - Johnson Rice

You mentioned potential acquisition opportunities. It seems like it has been a while since you addressed the Canadian market. I know that is one you have thought about getting more involved in. Are you more or less interested in that market, Mike, as you have now been at the company for nearly a year?

Michael Bradley

The answer to that question is yes, we are interested. Matrix Service has conducted business in Canada in the past but we are in the process of increasing our focus in Canada, primarily toward above ground storage tanks and repair and maintenance. We have seen a lot of interest from our current clients in the U.S., with the additional crude oil coming out of Canada, demand for storage is continuing to be very, very strong. We have a team up in Canada right now focusing and developing our business. So the answer to that question is yes, we have an interest and we are putting more resources in that particular area.

Operator

Your next question comes from John Rogers - D.A. Davidson.

John Rogers - D.A. Davidson

In terms of your backlog and the change in the way that you are reporting it, can you give us a breakdown between the construction services and then the maintenance portion of that?

Les Austin

We will obviously be putting out our 10-Q; I can get you the current breakdown of backlog. The total backlog is $499.2 million. That breaks down $384.3 million on the construction services side, and about $115 million on the repair and maintenance side.

John Rogers - D.A. Davidson

On the repair and maintenance, that's primarily the biggest portion of the change?

Les Austin

The most substantial portion of the change has to do with the repair and maintenance side. The change was $103.6 million, $68.2 million of that related to repair and maintenance; about $35.4 million on the capital construction side.

John Rogers - D.A. Davidson

How far out does that backlog extend, especially on the maintenance side of it?

Les Austin

Generally we are not going to have anything more than 12 months on the maintenance side. On the capital construction side there may be certain projects that extend past 12 months, but beyond 18 months I wouldn't say that we have any project work in backlog.

John Rogers - D.A. Davidson

All of the materials on that are included or hedged or taken by the client?

Les Austin

Generally what we like to do on our steel -- is that what you are asking about?

John Rogers - D.A. Davidson

Yes, I guess that is the biggest one.

Les Austin

On the steel side we generally try to structure our contract in such a way where Matrix is protected on any kind of commodity risk in the pricing deal.

John Rogers - D.A. Davidson

End to end, you are comfortable that you are set with all of this backlog that you have shown here?

Les Austin

Yes.

Operator

Your next question comes from John Flanagin - First Analysis Securities.

John Flanagin - First Analysis Securities

Looking at the specific markets and particularly electrical and instrumentation, do you have a sense of whether on an annualized basis this should be a grower, or is it just going to keep swinging?

Michael Bradley

First of all, let me talk about our turnaround business in general, because that also has an impact on our E&I. In our forecast for '08 we anticipated a slightly lighter schedule for turnaround activity in '08 compared to '07. The E&I business also is impacted by some of that. We had anticipated some downturn in the turnaround activity. We are seeing indications of that activity picking up pretty significantly in the fall of '08 and into '09, so in general, that is what our forecast anticipated.

In terms of our growth opportunities, we see the E&I business as a component of our growth but I would like to talk about the bigger picture, in terms of our focus on expanding our services related to power and what we call our specialty construction services segment. We are continuing to focus on expanding those capabilities and services going forward. We see some great opportunities for Matrix and E&I will be a part of that effort.

John Flanagin - First Analysis Securities

Can you talk a bit about what is in Specialty Construction Services going forward from here, the mix?

Les Austin

Right now the mix in specialty is primarily being driven by our LNG project in the Gulf Coast. But that group would also focus on various other pressure vessels, stack liner projects, continue to look at other LNG projects in the market. So non-ASD, above ground storage plate work, is primarily what that specialty group is focused on.

John Flanagin - First Analysis Securities

Last one, this is on the balance sheet. Is there no longer a contracts dispute receivable?

Les Austin

I think there is about $1 million left, or one dispute that we still have left stemming from a project in 2000.

John Flanagin - First Analysis Securities

I think that is about where you were as of the May quarter, just shy of $1 million.

Les Austin

That is correct.

Operator

Your final question comes from John Rogers - D.A. Davidson.

John Rogers - D.A. Davidson

I just wanted to follow up for a second on your comments about the turnaround activity in the fall of '08. What about some of the new refinery projects that we have seen announced over the past couple of months? When do those start to roll in, in terms of impacting the type of business that you do?

Michael Bradley

Well first of all, we are obviously very interested in actively pursuing some of that work right now. I would expect that to be calendar year '08 as well and further on. A lot of work to be done, and something we are aggressively pursuing.

John Rogers - D.A. Davidson

The initial projects have been released. When would you start bidding for some of that? I guess it would be subcontracting-type work there? When would we possibly hear on some of that?

Michael Bradley

I won't comment on specific timing of that kind of activity, but I will tell you that we are already involved in discussions.

Operator

There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.

Michael Bradley

We appreciate everyone joining us for our call today. We are very pleased with our quarter. We are excited about the year and we look forward to continuing to make the kind of progress we have demonstrated in the past.

So thank you again, and we look forward to talking to you again in about 90 days.

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