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's call is being recorded. I would now like to turn the conference over to today's host, Ms. Kelly Smyth, Senior Director of Investor Relations for Matrix Service Company.

Thank you, Stephen. Good morning, and welcome to Matrix Service Company's first quarter fiscal 2025 earnings call. Participants on today's call include John Hewitt, President and Chief Executive Officer, and Kevin Kavanaugh, Vice President and Chief Financial Officer. The presentation materials referred to during the webcast today can be found under Events, Presentations, on the investor relations section of MatrixServiceCompany.com. As a reminder, on today's call, we 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 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-GAAP measures, reconciliations will be provided in various press releases, periodic SEC filings, 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 MTRX 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 a zero-incident workplace is achievable. As we have seen our end markets improve, employee headcounts 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 that 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, or speaking up about issues or concerns. 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 coworkers, and the community. In doing so, you can make an impact. I'm going to 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, providing us with a strong degree of visibility into the current year and beyond. We expected the current year to have a slow start comparatively due to the impact of the summer months, as well as completion of a large renewable diesel project in 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 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 in fiscal 2025. The company's cash and borrowing position remains strong, consistent with our disciplined approach to balance sheet management. Our strategic focus is on higher-margin specialty engineering and construction opportunities, the lean operating model, and returns-driven approach toward capital allocation. This focus provides Matrix a foundation for long-term value creation as we enter this next chapter for our business. Overall, there 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 megatrends 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, NGL, 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 feedstocks. 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 in gas-fired generation can be applied to the construction of baseload, peaking, and backup generating facilities. Third, our market-leading specialty vessel and balance of plant capability for the use of LNG, ammonia, and hydrogen as backup and peak shaving fuel storage provides us with project opportunities where 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 book-to-bill may vary quarter to quarter, we expect to continue our book-to-bill trend at a ratio of 1-0 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 into 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, consistent 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 provide increasing revenue over the next few quarters Storage and terminal solutions 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 were partially offset by increases in LNG 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 of work associated with LNG peak shaving projects. And process and 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 reached 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 4.7% 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 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 $0.33 per share compared to an adjusted net loss of $5.7 million or $0.21 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 trailing 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 onsite 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 onsite 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-end cash balance to $150 million and our liquidity to $181 million. Our debt position remains at zero. We will continue to proactively manage the balance sheet and the financial strength and liquidity needed to support the positive revenue inflection 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 Sean mentioned, we are maintaining our revenue guidance of $900 to $950 million. In storage and thermal 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 continuously move through fiscal 2025, driven by LNG, peak shaving projects as customers continue to prioritize investment in power generation reliability, resilience, and load growth. This segment will also benefit from the increasing demand for power to support a diverse mix of projects for end 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 SGMK 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. 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 Frantzrup 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. And I think we thought it would be down a little bit in the the first quarter but i think from this point forward those projects are are underway and you know we would expect a trend of increasing revenues quarter over quarter for the rest of the year okay and also on the quarter um the sgna line jumped up sequentially um by a noticeable amount 18 and a half million dollars versus close to 17 q4 um can you just touch on that a bit yeah so i you know 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. You know, 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 was where it was most price competitive. Maybe just an overview of what's going on there.

Yeah, I think, you know, 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.

You know, I think one of the things we're trying to message here is that, you know, in fiscal 24, you know, we had some lower demand in 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 too.

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 the queue. 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, you know, it's probably...

It's difficult to handicap between what each side says about what they're planning to do, you know, both economically and, you know, 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, you know, 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 legislative process bargaining that's probably going to go on related to tax, in 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 an 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, you know, soon after the inauguration, that will be one of the first things that gets canceled. And so we think that, you know, on a long-term basis, you know, would be a good thing. And 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 DA Davidson. Your line is now open.

Hey, 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, we've got a lot of projects going on, but the 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 than likely now to be in the second quarter. And so I think to some extent that's timing. This is the timing of the awards that we live with. But the other, as it 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 won from a business standpoint. So, yeah. Hard to say.

I'm sure 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, 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. You know, is there anything else you can speak to in terms of this big ramp that you're projecting? What sort of progress 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 in just getting some more confidence around that range.

Yeah, so our major capital projects that, you know, we had, I mean, we had handicapped would start sooner than where they were. And at this point, some of that was tied up with some permitting issues from our clients that they were trying to get completed. Those permitting issues then would hold up a full notice to proceed to us. So while we were working on engineering and procurement, getting onto the job sites was certainly delayed longer than we had expected. And so I think probably one of the positive things in the quarter was a lot of that got resolved in the order so that we now have more clarity as we look out over the over the next couple of years, certainly 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 were holding up our ability to really get rolling there for the most part of 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, uh, through the course of this fiscal year and frankly into 2026. And yeah. And on top of that, you know, we've got a strong opportunity pipeline. We see more opportunities to book more work. across all of our segments. And, you know, again, 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, you know, a lot of things still to try and predict here with election results, but Yeah, certainly, you know, moratorium being lifted on LNG terminals, you know, I think might be a consensus to you there that 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, from a 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 consistently said, these larger scale LNG 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 structural work or whatever. So I think, you know, as those projects get released, I think the opportunity for us will grow in our pipeline. But like I said to

Near-term, the near-term opportunity maybe is a couple hundred million bucks. Very good. Thanks, guys.

Thank you. For our next question, we'll welcome back John Franzrup of Sudoti. Please go ahead.

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

Yeah, 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 wind some of the electrical work we do in the Northeast. So that's renewable generation, right? So renewable fuels, like we said, we completed a pretty sizable project that was in 23 and 24. And I think we have other opportunities on a renewable fuels basis in our opportunity pipeline. I can't speak to the volume of what that is, 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 renewable fuel production and some of it around the lines of sustainable aviation fuels. So I think from that standpoint, we will have a role there. I know part two of your question is, does 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 work in the renewable fuels market and sustainable aviation fuels, I don't know that 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'll be able to have what you need, or are you going to have to add to overhead? How does that kind of look as the projects start to execute?

Yeah, so we've taken, you know, from a From an overhead perspective, we've taken the opportunity to add some talent here and there and 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. 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 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 or 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.

Okay. Thank you for taking my follow-up, Sean. Appreciate it.

Thank you. As a reminder, to ask a question, you'll need to press Star 1-1. Please stand by while we wait for additional questions.

Okay, I'm showing no further questions at this time.

I would now like to turn it back to Kelly Smyth 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.