Matrix Service Company

Good morning and welcome to the Matrix Surface Company Conference call to discuss results for the first quarter of fiscal 2025. Currently all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will be given at that time. If you require assistance at any time, please press star zero on your telephone. As a reminder, this conference is Call is being recorded. I would now like to turn the conference over to today's host. Miss Kelly smite, senior director of investor relations for matrix service company.

Thank you, Stephen. Good morning and welcome to matrix service companies first quarter fiscal 2025 earnings call Participants on today's call include john Hewitt president and chief executive officer and Kevin cabinet vice president and chief financial officer. The presentation materials referred to during the webcast today can be found under events presentation on the investor relations section of matrix service company.com As a reminder on today's call, we may make various remarks about future expectations plans and prospects for matrix service company. They 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 because of various factors, including those discussed in our most recent annual report on form 10 K and in subsequent filings made by the company with the SEC. To the extent we utilize non gap measures reconciliations will be provided in various press releases periodic SEC filing and on our website. Related to investor corporate access opportunities. If you would like to have a conversation with management. I invite you to contact me through the matrix service company investor relations website. You may also sign up to receive empty Rx news by scanning the QR code on the screen. Turning now to our safety moment at matrix. Our safety culture is at the forefront of all the work we do. And while we work in challenging environments and markets, we believe is zero instant workplace is achievable. As we have seen our end markets improve employee had counts rise and workloads increase. We must also be mindful of the fact that in our business. Nothing is more important than the safety and the health of our employees and those around us. It's also important to remember the safety extends far beyond just occupational safety. It means making sure that people around us are safe from discrimination and harassment of any form and feel safe sharing ideas are speaking up about issues or concern. In every instance, our focus on safety has to be unwavering regardless of any background noise. So, as we look forward to a much stronger fiscal 2025 we must all remember the individual choices we make can and do make a difference. Please own safety for yourself, your loved ones, your co workers and the community in doing so you can make an impact from the call over to John now.

Thank you, Kelly and good morning everyone as communicated on our last call we began fiscal 2025 with backlog of 1.4 billion. Writing us with a strong degree of visibility into the current year and beyond. We expected the current year to have a slow start comparatively do the impact of the summer months as well as completion of a large renewable diesel project and fiscal 2024 and as we begin to ramp up our large capital work. Our first quarter results reflect those expectations on strong project execution we we exited the first quarter maintaining our near record backlog. And expect our conversion of backlog to revenue to increase as we move through fiscal 2025 as backlog conversion accelerates and revenue improves. We will realize improved fixed cost absorption operating leverage and margins, we continue to anticipate a return to profitability and fiscal 2025. The company's cash and borrowing position remain strong consistent with our disciplined approach to balance sheet management. Our strategic focus is on higher margins, specialty engineering and construction opportunities, the lean operating model and returns driven approach toward capital allocation this focus provides matrix of foundation for long term value creation, as we enter this next chapter for our business. Overall, the remain multiple variables that can affect the timing of awards and project starts, including the current presidential election. The legislative and regulatory environment and the timing of customer investment decisions. Given both the strength of our backlog and opportunity pipeline, we are reaffirming our revenue guidance for fiscal 2025 at between 900 and 950 million, which is a year over year increase of 24 to 30%. Looking forward, the key mega trends driving the demand for our services provide significant long term advantages and support our overall growth strategy. Our teams continue to see robust increasing demand for LNG and GL and ammonia storage and terminal infrastructure. This demand encompasses a variety of projects, including greenfield facilities expansions upgrades and retrofits all aimed at supporting lower carbon initiatives. Enhancing system reliability and resilience ensuring energy supply assurance and meeting the growing global demand for low cost feed stocks. During the quarter and in partnership with another contractor, we were awarded the engineering and construction of a dual service specialty vessel storage tank by Delaware River partners. This tank when completed in 2026 will provide service to LPG and ammonia markets on a global basis. The surge in demand for electric power to support data centers AI electrification of everything, as well as on shoring and upgrading of industrial facilities and advanced manufacturing. Supports a diverse mix of client project opportunities for matrix over the coming decade. First, our traditional electrical work, which includes not only short haul transmission and distribution. And substations and interconnects, but also industrial electrical construction services, which all create growth opportunities beyond our traditional clients and geographies. Second. Our legacy experience and gas fire generation can be applied to the construction of baseload peaking and backup generating facilities. Sir, a market leading specialty vessel and balance of plan capability for the use of LNG ammonia and hydrogen as backup and peak shaving fuel storage provides us with project opportunities for matrix is clearly differentiated from the competition. All of these substantial demands require the enterprise wide expertise for which matrix is known and are represented in our opportunity pipeline which remains strong at approximately 6 billion. Given the strength of this pipeline, while booked to bill may vary quarter to quarter, we expect to continue our book to build trend at a ratio of one or greater on an annual basis. As a reminder, many of the opportunities we are currently pursuing are expected to be bid and awarded within the next 12 to 18 months. Once awarded many of these projects will require an 18 to 30 month timeframe to complete providing continued long term visibility and the revenue. This does not include smaller capital projects and maintenance activities performed under master service agreements and individual contracts that lay the foundation for many parts of the business. And play a key role in leveraging SG&A and construction overhead costs. This too is an area where we are seeing increasing interest and opportunity for process facility turnarounds and plant maintenance, including nested services, all based on our reputation for quality and safety and our focus on building long term relationships with our clients. In summary, with exceptional project execution, we started the year on a strong note. Backlog remains near record levels and we are maintaining our fiscal 2025 financial guidance, which includes the return to profitability of this fiscal year. Insistent with our focus on long term value creation for our shareholders. With that, I'll turn the call over to Kevin.

Thank you, John. The first quarter of the year went about as we anticipated from an operating results backlog and balance sheet perspective. Revenue of 165.6 million was lower as compared to the 197.7 million in the first quarter of fiscal 2024. This is due mainly to the completion of a large renewable diesel project in fiscal 2024, which made for a challenging prior year comparison. Excluding this project, revenue declined 3% when compared to the prior year period. We expect this trend to reverse itself as our major capital project providing increasing revenue over the next few quarters. Storage internal solution segment revenue was 78.2 million in the first quarter compared to 90.1 million in the first quarter of fiscal 2024. Due to reduced volumes of work for flat bottom tank new build and repair and maintenance work, partially offset by increases in LG storage and specialty vessel projects. Utility and power infrastructure segment revenue increased from over 70% to 55.9 million in the first quarter of fiscal 2025 compared to 32.4 million in the first quarter of fiscal 2024. Benefiting from higher volumes work associated with LNG peak shaving projects and processing industrial facility segment revenue was 31.4 million in the first quarter of fiscal 2025. Compared to 75.1 million in the first quarter of fiscal 2024 a large two year renewable diesel project reach completion in the fourth quarter of fiscal 2024 resulting in a significant year over year revenue decline in our first quarter. The company believes this reduction is temporary given our strong backlog and opportunity funnel. Consolidated gross margin was 7.8 million or .7% in the first quarter of fiscal 2025 compared to 11.9 million or 6% in the first quarter of fiscal 2024. While project execution remained strong in all three segments gross margins were negatively impacted by the under recovery of construction overhead costs. The quarterly impact was over 600 basis points as a result of the lower revenue. Construction overhead resources for the enterprise have been structured to support the heavy proposal environment. And anticipated revenue growth in each of our segments created by the strong market demand. We remain focused on continued high quality project execution and efficient utilization of the cost structure. The negative construction overhead impact is expected to diminish quarter over quarter as revenue increases throughout the year. SG&A expenses were 18.6 million in the first quarter of fiscal 2025 compared to 17.1 million in the first quarter of fiscal 2024. The company continues to leverage its overhead cost structure while Excuse me, while also investing in new and existing talent to support strong market demand and growth in our business. For the first quarter of fiscal 2025 the company had a net loss of 9.2 million or 33 cents per share compared to an adjusted net loss of 5.7 million or 21 cents a share for the first quarter of fiscal 2024. Now let's discuss backlog. The company's backlog remained at near record levels in the first quarter of fiscal 2025 ending at 1.4 billion. Project awards totaled 148 million in the first quarter in part due to continued strength in the storage internal solution segment resulting in a consolidated book to bill ratio of 0.9 for the quarter and a 12 month book to bill of 1.1. This backlog also includes first year revenue from a recently renewed five year contract at a Northwestern refinery where our teams have been on site for more than 40 years. While this long term refinery maintenance customer had previously reduced labor demand and turnaround services in fiscal 2024 this contract, which benefits our process and industrial facility segment solidifies our on site position for the coming years. It also provides matrix with additional opportunities for capital construction projects related to the refinery's sustainable energy program focused on producing sustainable aviation fuel. As John mentioned earlier, the importance of MSAs and individual contracts like this play a key role in allowing us to leverage SG&A and construction overhead cost. Exiting quarter, the balance sheet and liquidity remain in a strong position. We generated 12 million in cash from operations, increasing our quarter and cash balance to 150 million and our liquidity to 181 million. Our debt position remains at zero. It will continue to proactively manage the balance sheet and the financial strength and liquidity needed to support positive revenue and flexion we anticipate as we progress through fiscal 2025. We also utilize a disciplined approach to capital allocation, one that seeks to maximize our return on invested capital over time while minimizing business risk. Finally, I want to take a minute to expand on our outlook. As John mentioned, we are maintaining our revenue guidance of 900 to 950 million. In storage and terminal solutions, we expect revenue to increase each quarter as we move through the remainder of fiscal 2025 driven by projects already in backlog, as well as the strong opportunity funnel. This activity is driven primarily by LNG, NGL, and Ammonia storage and terminal infrastructure. And as John mentioned, encompasses a variety of projects, including greenfield facilities, expansions, upgrades, and retrofits. In utility and power infrastructure, we expect the growth trend to continue as we move through fiscal 2025 driven by LNG, peach shaving projects as customers continue to prioritize investment, empower generation, reliability, resilience, and low growth. This segment will also benefit from the increasing demand for power to support a diverse mix of projects for in markets that include data centers, AI, advanced manufacturing, and industrial reshoring. And in process and industrial facilities, we expect to improve primarily in the second half of the year as we enter turnaround season, begin work on projects already in backlog, and continue to pursue and capture additional project opportunities. The improvement in our consolidated revenue combined with continued focus on execution excellence and leverage of our construction overhead and efficiency cost structures will allow us to return to profitability in the fiscal year and make significant progress towards the achievement of our long term financial targets. This concludes our prepared remarks and we will now open for questions.

Thank you. At this time, we will conduct the question and answer session. To ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of John Frantrup of SEDOTI. Your line is now open.

Good morning everyone and thanks for taking the questions. I'd like to start with the quarter. I was a little surprised I guess with the lower revenue that you got in the utility business. Was there anything unusual in the business, especially when compared to the fourth quarter tracking?

In the utility segment? No, it's really around timing on the new projects that are starting out. I think we thought it would be down a little bit in the first quarter, but I think from this point forward those projects are underway and we would expect a trend of increasing revenues quarter over quarter for the rest of the year.

Okay, and also on the quarter, the SG&A line jumped up sequentially by noticeable amount, $18.5 million versus close to $17.4 million. Can you just touch on that a bit?

Yeah, so overall I think the cost structure will continue to try to manage that. The only additions we would expect to the cost structure are really going to be around what we need to do to support growth. So when you look at the fourth quarter to first quarter, we didn't have to add a lot of resources. The difference primarily was related to LTI, which are long-term incentive compensation, which is stock compensation, which is tied to the price of the stock. So our stock price increased from the fourth quarter to the first quarter. That increased our compensation expense. That was the primary driver. So I would expect when we're thinking about SG&A, it's going to be in that $18 million range, would be my expectation based on everything I know for the rest of the year.

Thanks, Kevin. And John, I think in your prepared remarks, you said something along the lines that small project demand is maybe improving. Can you just talk to that? Because from what I recall, small projects, who is most price competitive? Maybe just an overview of what's going on there.

Yeah, I think the work, the maintenance work that we do, the smaller project work we do in general, I don't know that the demand necessarily is increasing there. I just think we're at a stable demand level.

I

think one of the things we're trying to message here

is that with fiscal 24, we had some lower demand and some of our refinery maintenance work.

And while those refiners was going through some contract changes with their suppliers, we're through that now. And so I think we've got a little better visibility into, as Kevin had noted, a little better visibility not only for this year, but from a long-term basis with specifically one of our clients in the refinery maintenance business that has stabilized as well. And we expect to see some opportunities on some capital work to add to that maintenance activity

that we carry on for them on a weekly, monthly basis.

Got it. Understood. And just one last question. I'll get back into Q. Just your general thoughts of the changeover in the administration. It'd be nice to hear your thoughts about the puts and takes, both positive and negative, as you see it on a go-forward basis.

Yeah, I think it's probably

difficult to handicap between what each side says about what they're planning to do,

both economically and from a global trade perspective. My sense is that the change in administrations will be net positive for us from a business perspective. I think a reduced regulatory environment will be good for our clients, opening up more opportunities for infrastructure investment. And it's yet to be seen what's going to happen from a tax perspective and yet to be seen, I think, on how the IRA, the Inflation Reduction Act, which supports a lot of renewable and hydrogen projects, where that ends up in the whole region. And I think there's a lot of legislative bargaining that's probably going to go on related to tax laws, my opinion related to tax laws. So my sense would be there'll be a lot of give and take across the markets. But I think immediate impact for us will be the canceling of the pause on new FERC permits for LNG for export. And we've got a couple projects in our queue that have been sort of lingering, waiting for that to happen. And so we expect soon after the inauguration, that will be one of the first things that gets canceled. And so we think that on a long-term basis would be a good thing. So again, timing is always something that drives our awards backlog. But I think from a long-term basis,

that will be good for us.

Great. That's good to hear. Okay. I'll get back to you. Thanks for taking the questions.

Thank you. Thank you. Our next question comes from the line of Brent Thielman of D.A. Davidson. Your line is now open.

Thanks. Good morning. Hey, John, I guess I was a little surprised the book to burn wasn't a little stronger this quarter, especially just given kind of lower revenue levels. And I guess I was just wondering if maybe there's a little bit of hesitation in moving things forward due to the election or is it just simply timing here?

Yeah, I mean, so it's timing. You know, we've got a couple of projects, larger, we got a lot of projects going on, but bigger ones that create more momentum, you know, in the quarterly award cycle. You know, we had anticipated, you know, at least one of those to hit the first quarter, more likely now to be in the second quarter. And so I think to some extent that's timing of this is the timing of the awards that we live with. But the other as relates to the whole election cycle, kind of mixed opinions from our clients, some, you know, specifically said, yeah, well, we're kind of waiting around to see what happens. And we had a couple other clients that were pretty agnostic to whoever want and from a business standpoint. So hard to say. I'm sure it's it's got to have it's

got to be reflected a little bit in some of the decision making, I would think. Yeah, understood. And

I guess, I mean, look, you know, that just given the revenue start here, you know, seemingly would be contemplated in context of what you're expecting for the full year, which you're retaining, which is great. I think. You know, is there anything else you can speak to in terms of this this big ramp that you're projecting what sort of progress here? You're really starting to see on projects. Picking up John or Kevin, I think anything you can kind of relay there, I think would be helpful and just getting some more confidence around that range.

Yeah, so our major capital projects that we had, I think we had handicapped would start sooner than where they were. And a lot of, you know, at this point, some of that was tied up with some permitting issues from our clients that they were trying to get completed. You know, those permitting issues then would hold up a full notice to proceed to us, you know, so while we were working on engineering and procurement getting into the onto the job sites was certainly delayed longer than we had expected. And so, you know, I think one of the probably one of the positive things in the quarter was a lot of that got resolved in the quarter so that we now have more clarity as we look out over the over the next couple of years. Certainly at this this year about our ability to to ramp the work up on those projects. And so, you know, I think, you know, for us, you know,

the big

the big chunks of our backlog that

are going to drive higher revenues, the. The things that we're holding up our ability to really get rolling there

for the most part, pretty much out of the way. And so that's why we feel we feel better about you're going to see a consistent increase in revenues through the succeeding quarters here. Through the course of this fiscal year and frankly into twenty twenty six. And yeah, and on top of that, you know, we've got a strong opportunity pipeline. We see more opportunities to to book more work across all of our segments. And, you know, again, that's that's a timing thing, which is normal for our business. But, you know, that's going to also support

based

on what we're seeing there.

You know, that's also going to support increased revenues.

Okay, John, maybe just one more. You did speak to a lot of things still to try and predict here with election results. But, you know, certainly, you know, moratorium being lifted on terminals, you know, I think might be a consensus to that's going to happen. I guess that maybe is there any way to frame how much work you have tied up in that opportunity relative to some of the other things that you're pursuing out there?

From an opportunity perspective, I think on the near term basis. You know, there's probably a couple hundred million dollars worth of work for us on a near term basis, long term, you know, could be quite a bit more. You know, so, you know, as we've said, we've consistently said these larger scale energy export terminals, our role in those projects is going to be around the storage tank. And so as those projects get funded and they get released to start, you know, we would expect to be providing pricing to larger EPC contractors for the storage and potentially in some cases for maybe some of the other disciplined work on those job sites. You know, whether that could be mechanical work or or structural work or whatever. So, so I think, you know, as those projects get released, I think the opportunity for us will grow in our in our pipeline. But like I said, the near near

term, the near term opportunity, maybe a couple hundred million bucks. Very good. Thanks again. Thank you.

For our next question, we'll welcome back John and friends. We're up with Sudoti. Please go ahead.

Yes, I guess it's worth touching on the flip side of the argument here. Can you just talk a little bit about your exposure to the wind and solar and other renewable markets?

Yeah, we, you know, we don't really have any direct exposure to wind and solar. So what I mean by that is we're not, you know, there's nothing material in our opportunity pipeline or in our current backlog that we're installing wind turbines or we're putting in solar farms. So there's probably some indirect exposure through some of the electrical work we do in the north in the northeast. And but there's the the so that that's renewable generation. Right. So renewable fuels, like we said, we completed a pretty sizable project that was in twenty three and twenty four. And I think we have other opportunities in a renewable fuels basis in our opportunity pipeline. I can't speak to the volume of what that is, but but those are we but but that is an opportunity set where we've got involvement in and with some of our refinery clients that we provide maintenance and turnaround services to some of those clients are looking to find ways to create more, create more, more renewable fuel production. And some of it around the lines of sustainable aviation fuels. So so I think, you know, from that standpoint, we will have a role there. And I know part part two, your question is, is the change in administration affect that? My sense is that it doesn't. And I think, you know, where we see the opportunities for us to to work in the renewable fuels market and sustainable aviation fuels, I don't know that that I don't know that I have a good idea. But I have a sense that that's going to change.

Got it. And I recognize that you reallocated some personnel from some process to some of the other businesses. But I'm just curious about staffing levels as revenues ramp up. Do you think you'd be able to have what you need or you're going to have to add to overhead? How does that kind of look as the project start to execute?

Yeah, so we've taken, you know, from an overhead perspective, you know, we've taken the opportunity to add some talent

here and

there. And in the in the organization, as we not only as we ramp up execution on our book work, but as we see opportunities in the future in our opportunity pipeline, you know, our main focus has been over the last 12 months is to make sure that we've got the resources to execute the projects. And a lot of those costs are either in construction overhead or they go directly to the jobs. And so whether those are construction managers or project engineers or discipline engineers, cost people or schedulers, which is sort of normal. I would say the market is tighter than it has been historically, but we are finding the

resources that we need. OK, thank you for taking my follow up strong. Appreciate it.

Thank you. As a reminder to ask a question, you need to press star one one. Please stand by. We will wait

for additional questions. OK, I'm showing no further questions at this time.

I would now like to turn it back to Kelly Smith for closing remarks.

Thank you. As a reminder, if you'd like to have a conversation with management, please contact me through Matrix Service Company Investor Relations website. You may also sign up to receive the MTRX News by scanning the QR code on your screen. Thank you very much for your time.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.