Matrix Service Co Q3 FY2025 Earnings Call

Good morning, and welcome to the Matrix Service Company conference call to discuss the results for the third quarter of fiscal 2025. As a reminder, this conference call is being recorded. I would like to turn the conference over to today's host, Ms. Kellie Smythe, Senior Director of Investor Relations for Matrix Service Company. Please go ahead.

Thank you, Didi. Good morning, and welcome to Matrix Service Company's third quarter fiscal 2025 earnings call. Participants on today's call include John Hewitt, President and Chief Executive Officer; and Kevin Cavanah, Vice President and Chief Financial Officer. Following our prepared remarks, we will open up the call for questions. The presentation materials referred to during the webcast today can be found under Events and 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. The forward-looking statements made today are effective only as of today. To the extent we use non-GAAP measures, reconciliations will be provided in various press releases, periodic SEC filings and on our website. Finally, all comparisons today are for the same period of the prior year, unless specifically stated. Related to investor conferences and corporate access opportunities, Matrix will be participating in the Sidoti Micro-Cap Virtual Conference on May 21 and 22, and we'll also be participating in the Stifel Cross-Sector Insights Conference on June 3 and 4 in Boston. If you'd like additional information on these events or would like to have a conversation with management, I invite you to contact me through the Matrix Service Company Investor Relations website. Turning now to safety. At Matrix, our people take pride in the fact that our work shapes a brighter future, enhances quality of life, and generates lasting value for our employees, partners, shareholders and the communities we serve. We do so by engineering, constructing and maintaining energy and industrial infrastructure that elevates the standard of living, not just here but around the globe. This infrastructure is essential for powering our homes, fueling transportation, supporting businesses and providing the foundational elements for producing clothing, medicine, technology, recreational activities, among many other things. To fulfill our objective, on our work sites and in our offices, we must maintain a steadfast commitment to safety and prioritize quality execution in our work. This week, we join our clients and others in the construction industry for the Construction Safety Week 2025, marking the 12th annual industry-wide initiative dedicated to highlighting the importance of safety in the workplace. At Matrix, our safety culture is rooted in a genuine concern for the mental and physical well-being of our people. It shapes our expectations, informs our leadership and is vital to our ability to realize our mission. On behalf of the company's leadership team, I would like to express my gratitude to the employees for our commitment and responsibility in safely pursuing our mission. I'll turn the call over to John.

Thank you, Kellie, and good morning, everyone. I want to begin by reviewing the organizational improvements we are making to represent a shift in the company's operational structure that will address several key business imperatives. Among them, creating a more efficient organization to ensure we deliver on the significant projects and opportunities in front of us; improving the competitiveness of our offering and strategic focus; and benefiting from greater speed and agility through a leaner, flatter organization. First, we eliminated senior-level positions to ensure we have a more efficient and effective organization. Second, from an operating perspective, we have streamlined our engineering and construction services to create a more seamless offering. Specifically, we recently promoted Shawn Payne to the newly created position of President of Engineering & Construction. The new position will have oversight responsibility of the company's operating subsidiaries and client services. Shawn joined Matrix in 2012 and most recently served as President of the company's non-union construction subsidiary. John will report directly to me. Third, we are decentralizing elements of our business development organization to create a more integrated sales and operations function. The large EPC projects get a significant amount of attention across the enterprise during the proposal process. These projects are critical to our growth strategy. But the foundational services of our business in small capital construction, construction-only, turnarounds, maintenance and repair are equally important to the baseload revenue for the company. Directly reconnecting the development teams to the P&L leaders will create more momentum, opportunities and awards for this part of our revenue platform. These foundational services deepen customer relationships, build bench strength and keep us competitive. Overall, this reorientation of the business development function will improve capture rates, growth strategies and ultimately, revenue across the company. Finally, the company has begun the process of winding down our Northeast transmission and distribution service line. This piece of our ongoing electrical business was competitively disadvantaged due to a mismatch in scale and constrained geography. Growth in scale was highly dependent on capital and strategic investments that do not currently fit the company's direction. While this may seem sudden, the lack of sufficient awards throughout the year confirmed our decision to exit this service line. That said, Matrix has been in the electrical services business in the Northeast, Mid-Atlantic and Ohio Valley for over 20 years, and we'll continue to provide services to our utility, energy and industrial customers as they face rising demand for electrical infrastructure. This infrastructure includes power generation, backup fuel supply, midstream energy infrastructure, manufacturing expansion, substations and data centers, to name a few. The electrical infrastructure market presents strong growth potential and its capital investment demand aligns better today with our long-term business performance targets. As Matrix continues its progress toward a return to profitability with marked improvement in its financial performance, we must continue to evolve for the future. I'm confident that this new structure will enhance communication, accountability and collaboration throughout all levels of the organization. In line with our strategic priorities, we remain committed to delivering sustainable long-term shareholder value by building a resilient, growth-oriented platform that meets the evolving needs of our customers. From a market outlook perspective, we are also closely monitoring the impacts of evolving U.S. trade and environmental policies that have introduced a heightened level of macroeconomic uncertainty. While the underlying demand environment remains strong, some clients may elect to delay final investment decisions and, in turn, project starts, as they assess the potential impact of these policies on project economics, including offtake agreements with global partners, as well as supply chain and operational costs. However, we believe this uncertainty to be temporary. Specific to existing projects and new awards, our contract formats and proposal discipline generally protect us from pricing risk created by the tariff activity. In addition, we are actively collaborating with our customers to find cost optimization opportunities. We're also optimizing our own supply chain by making advanced purchases where we can, working closely with our current suppliers and exploring additional supplier options. This proactive strategy enables us to remain agile and responsive to market changes and ensures we continue to provide outstanding value to our customers. At the same time, several of our energy clients have stated that their intentions are to fund, start and complete as many infrastructure projects as possible over the next four years to take advantage of the more relaxed regulatory environment and higher demand for energy products both domestically and abroad. Considering the current macroeconomic environment and our decision to exit the transmission and distribution business, we believe it's prudent to revise our fiscal 2025 revenue guidance by 10% to $770 million to $800 million, which Kevin will discuss in more detail during his remarks. Please note, our revised guidance continues to reflect quarter-over-quarter growth as we finish the year, as demonstrated by the 20% to 25% growth in the second half of fiscal 2025 compared to the first half. Across the energy and industrial markets we serve, energy-related infrastructure spending remains elevated. The elevated level of spending is supported by an estimated 45% increase in U.S. LNG export demand, as highlighted by the EIA in its recent Annual Energy Outlook. Furthermore, the EIA outlook also projects an 8% increase in demand on the 38 trillion cubic feet of natural gas over the next six years in response to rapidly growing domestic and international demand for LNG and other natural gas-related products. This outlook underpins our $7 billion pipeline of project opportunities, which gives us confidence in achieving a sustainable and profitable growth trajectory as we move into fiscal 2026 and beyond. As a reminder, many of the projects we are currently pursuing are expected to be bid and awarded within the next 12 to 18 months. And once awarded, they will unfold over multiyear construction timelines, providing us with long-term revenue visibility and improved earnings consistency. Now turning to the quarter. Revenue volume continued to accelerate, culminating in our highest quarterly revenues in two years as project activity ramped up throughout the period. As is typical for our fiscal third quarter, we also benefited from elevated activity in our refinery services business. The company grew backlog by nearly 8% sequentially to over $1.4 billion on $301 million of project awards, resulting in a book-to-bill of 1.5. This also increased our year-to-date book-to-bill to 1.0. Storage and Terminal Solutions accounted for $205 million of the quarterly awards, which increases backlog to $848 million, the highest level in the company's history. The quarter activity included a project for the engineering and construction of multiple storage vessels for propane, butane and related NGL products. We are also seeing strength in the Process and Industrial Facilities segment which had $59 million in awards, primarily in our refinery services business. Overall, our strategy remains anchored around three pillars: to win, execute and deliver. Through this framework, we will continue to focus on project discipline with the right clients, commercial structure and timing of delivery. Apply our resume and brand leadership to not only our core markets in energy, industrial and power infrastructure, but also expanding into new high-value verticals. Delivering projects safely, on time, on budget and with high quality. And enhancing operating leverage to drive strong profitability, cash generation and disciplined capital deployment. As we look ahead to the fourth quarter, we believe the momentum exiting the third quarter, combined with the strategic actions I spoke of earlier, will support improved fixed cost absorption, better operating leverage and resulting in positive adjusted EBITDA. Furthermore, we are confident that potential near-term project awards, some of which are insulated from recent macroeconomic developments, will help us end the year with a full year book-to-bill ratio around one. With that, I'll now turn the call over to Kevin.

Thank you, John. Revenue growth continued in the third quarter, increasing 21% to $200.2 million, compared to $166 million in the third quarter last year. The growth was driven by the Storage and Terminal Solutions and Utility and Power Infrastructure segments, partially offset by reduced revenue volumes in Process and Industrial Facilities. Gross margin was $12.9 million or 6.4% in the quarter, compared to $5.6 million or 3.4% for the third quarter of fiscal 2024. I will discuss drivers for that improvement when I get into the segment results. I want to provide an update here on the impact of under-recovery of construction overhead costs. As a result of the revenue growth in the quarter, the impact of under-recovered overhead decreased to 280 basis points. This compares to 370 basis points last year and is the lowest level in two years. As the revenue ramp continues, construction overhead will become fully recovered and the negative impact on margins will be eliminated. SG&A expenses were $17.7 million in the third quarter, compared to $19.9 million for the prior year. The decrease is primarily due to lower cash-settled stock-based compensation expense. For the third quarter of fiscal 2025, the company had a net loss of $3.4 million or $0.12 per share, compared to a net loss of $14.6 million or $0.53 per share in the third quarter of fiscal 2024. Adjusted EBITDA improved to breakeven in the quarter, compared to a loss of $10 million in the third quarter last year. Moving to the segments. Storage and Terminal Solutions segment revenue increased 77% to $96.1 million in the third quarter, compared to $54.3 million in the third quarter of fiscal 2024. The higher revenue is being driven by an increased volume of work for specialty vessel projects. Gross margin was 3.9% in the third quarter of fiscal 2025, compared to 4.3% in the third quarter of fiscal 2024. Although higher revenue has resulted in improved leverage of our cost structure, segment gross margin continues to be impacted by under-recovery as we allocate more resources to this segment in anticipation of continuing revenue growth. Additionally, the third quarter of fiscal 2025 was negatively impacted by lower-than-anticipated labor productivity on a crude terminal project that is nearing completion. Excluding the margin adjustment on this project, the year-to-date project execution for the Storage and Terminal Solutions segment would have been within our 10% to 12% target. As quarterly revenue continues to increase, the company expects to achieve full recovery of construction overheads and the targeted gross margin range. Utility and Power Infrastructure segment revenue increased 27% to $58.7 million in the third quarter, compared to $46.1 million in the prior-year period, benefiting from a higher volume of work associated with natural gas peak shaving projects. Gross margin was 9.4% in the third quarter, compared to 3.1% for the third quarter of fiscal 2024, due to strong project execution and improved construction overhead cost absorption. Process and Industrial Facilities segment revenue decreased to $45.4 million in the third quarter of fiscal 2025, compared to $65.6 million last year, primarily due to lower revenue volumes resulting from the completion of a large renewable diesel project. The company believes this reduction is temporary given our strong backlog and opportunity funnel. Gross margin was 8.3% in the third quarter, compared to 2.7% for the third quarter of fiscal 2024. Last year's gross margin was impacted by an accounting adjustment on a refinery maintenance contract. Last quarter, I discussed some keys to our financial performance. Before we move away from operating results, I want to review those keys and our long-term financial targets. First, revenue level is critical to our earnings. Revenue growth started in the second quarter and continued in the third. We anticipate revenue growth to continue reaching $250 million and above. Second, project execution has been strong, producing overall direct project margins that are approaching our target range. Focus on project execution continues and the margin opportunity within our $1.4 billion backlog and our $7 billion opportunity funnel continues to support a long-term consolidated gross margin target of 10% to 12%. Third, the company continues to proactively manage its cost structure and has taken additional steps to improve our operating effectiveness, as John discussed. This will enhance our competitiveness and allow for continued improvement in the leverage of our cost structure. Construction overhead recovery has been a significant issue but is improving and will be eliminated based on anticipated revenue growth. Leverage of SG&A will also improve due to flattening of the organization as well as revenue growth, driving toward our target of 6.5% of revenue. Finally, the combination of these items will drive the improved performance toward our long-term targets. Moving to the balance sheet. Our disciplined approach to capital allocation remains a cornerstone of our strategy. Working capital management has been strong throughout fiscal 2025. Net cash provided by operating activities was $31.2 million during the third fiscal quarter and $76.8 million year-to-date. Cash flow activity during the year has also further strengthened our balance sheet. Available liquidity has increased to $247.1 million as of the end of the quarter. Liquidity is comprised of $185.5 million of unrestricted cash and $61.5 million of borrowing availability under the credit facility. The company also has $25 million of restricted cash to support the credit facility. And our debt position remains at 0. We'll continue to proactively manage the balance sheet and have the financial strength and liquidity needed to support the execution of our backlog and to deploy capital towards opportunistic organic growth. Before we open the call for questions, I want to touch on the outlook. As we noted in our press release, second half revenue levels have been impacted by the timing of awards in the third quarter as well as the uncertainty around macroeconomic and environmental policy. In addition, full year revenue has been impacted by our transmission and distribution business, which we are now exiting. The full year revenue impact of exiting this business is approximately $50 million. As a result, we reduced revenue guidance for fiscal 2025 by 10% to $770 million to $800 million. Even with this reduction, this implies continued strong year-over-year growth of over 20% in the fourth quarter and a return to profitable performance. Our backlog and revenue growth is coming from larger multiyear projects. As a result, we expect to operate at or above these revenue levels for the foreseeable future. This, combined with the changes we are making to improve operating effectiveness, should lead to strong bottom line results and the achievement of our long-term targets. This concludes our prepared remarks, so we will open it up for questions.

And our first question comes from John Franzreb of Sidoti & Company. Your line is open.

Good morning, everyone, and thanks for taking the questions. I guess I'd like to start with the revenue guidance. Kevin, you just said $50 million was baked into that business, I guess, for this fiscal year. Can you just walk us through the decision-making process to exit the business? Is there a potential buyer out there? Will you just wind it down? And what's the relative cost savings from exiting that business?

I'll share some insights on the strategy, John. At the beginning of the year, the market for the business was over $50 million. However, we find ourselves in a situation where we're too large to be small and too small to be large, making it challenging to secure work at favorable margins. The capital needed for this business would be significantly greater than for the rest of the company. Therefore, it was on our radar this year, and if we could take on some promising projects with reasonable terms, it would influence our decision on whether to pursue growth, sell it, or shut it down. So as we moved into the year, the opportunity for us to win some nice projects in the back half of the fiscal year was significant. However, we didn't win any of them. Thus, trying to win those projects around the commercial framework that we think is accessible to the business wasn't successful. So when we started to see that those projects were not going to come into our backlog, we made a decision that we're going to wind the business down. Without any kind of positive looking backlog, it would be difficult to find a buyer for the business where they just pick up equipment and people. So we made the decision that we just wind the business down and we'll eventually sell off some of the construction assets that are associated with that business. We still have some small contracts that we're going to be working on out into fiscal '26, but it doesn't represent a lot of revenue. And we're doing that with clients that we do other business with. So we just don't want to just walk away from those jobs, which you can't contractually anyway.

Understood. And the potential cost savings?

It's more about the cost savings and the reallocation of some resources to the electrical and instrumentation business that we're keeping. That business has been operating at a loss, so those savings might be more significant than simply adjusting the cost structure. It had relatively low overhead compared to the equipment business because it was grown organically, rather than through an acquisition.

Okay. Fair enough, Kevin. The other part of the adjustment to the revenue guidance was what you said, was deferrals. I'm curious, is the entire balance deferrals, or some cancellations? And the deferrals, what kind of timing are we talking about now versus three months ago?

Some of it is a combination of a couple of things. One is that a major project we anticipated winning in Q2, which was in storage, led us to start negotiating a contract during that time. As we moved into Q3, we expected that project would get awarded in January, allowing us to begin engineering and procure the necessary plate steel, as well as start some civil work on-site. We had expected an earlier award and revenue flow from that project to impact this fiscal year's revenues. However, we didn't sign the contract until the very last day in March. We experienced a delay in receiving a significant portion of the anticipated revenue from that project, postponing it to June and likely into fiscal '26. This was mainly due to the time taken to finalize the contract, which isn't uncommon. Additionally, we have another project where we have been informally chosen, but there has been a hold-up in selling the offtake because one of the clients is overseas and recent trade developments have caused delays. We believe that this delay has now passed, and we expect the project to advance either this quarter or in the first quarter of '26. Other than that, I think it would be unreasonable for us to assume that these uncertainties around the tariff issues and finalization of environmental policy and the regulatory environment isn't keeping clients hesitant on how they're going to spend their capital dollars. However, I can tell you, we've had several of our core clients express their strong intentions to spend as much money as possible on their energy infrastructure over the next four years.

Got it, John. And one last question. You mentioned that you're targeting smaller jobs. Can you talk a little bit about what you think the opportunity profile is as you reengage in some of those smaller projects? Maybe size it for us and timeline it when you expect to start hitting on them?

Yes. We, as an organization, have historically had a mix in the portfolio of maintenance work, turnaround work, small capital projects, construction-only projects, alongside one or two large capital EPC jobs. We continue to see the opportunity for these larger EPC projects to continue to enter the backlog, and we want them to align thoughtfully with our execution plans and our resource availability. However, that doesn't minimize the need in our business for smaller projects. I've laid out how these larger projects get attention, but we need those smaller projects. They build relationships with clients, they help us to strengthen our execution teams, they enhance brand recognition, and they manage overhead. We just need to do a better job of pursuing and winning those smaller foundational elements of our business moving forward. Some of the strategic actions we've taken are directly related to our desire to be better at that than we have been over the past 18 months.

Okay, well, good luck with that. I'll get back into the queue. Thank you, gentlemen.

Thank you.

Thank you. And our next question comes from Brent Thielman of D.A. Davidson. Your line is open.

Hi, thanks. Good morning. John, real big-picture question here. I mean you've been through your share of cycles in the past and we value your perspective here. But look, the geopolitical macroeconomic environment today, you take what you're seeing now, you look at prevailing commodity prices, to some degree influence how your customers spend. I guess my question is, John, I mean, how is all of this stuff that we're seeing in the market influence what your customers may end up doing here? Not necessarily in the short term, but thinking medium term. Is all of this ultimately a positive driver for your business? I'd just love your perspective there.

Whether it's tariffs or media rhetoric, there is a lot of uncertainty running around out of Washington, D.C., the media houses, and across the globe. Thus, it's difficult for anyone, whether you're a business leader or a citizen, to figure out what the future looks like. But based on what we hear from our clients, they are now being more thoughtful regarding their capital plans. However, I think overriding all of that is the continued rise in demand for energy both domestically and globally. This demand has to be met. It will not be solely met by renewable energy sources. There are huge electrical infrastructure needs in the U.S. alone to support the growth in power demand. Regardless of how the tariff situation settles, I believe we will continue to see significant infrastructure being put in place. There is a rising global demand for NGLs from the U.S., and many companies will be looking to us to provide that stability in energy supply. Therefore, I am confident in our markets and our brand position, particularly around specialty vessels and storage and infrastructure, as we look toward the future.

Yes. Appreciate that. And then I guess another one, Kevin, this might be more for you. But there's been an expectation for sort of a progressive ramp in volume and revenue as the fiscal year has played out. I think maybe more specific to storage, I mean you had terrific growth compared to last year, but the growth was somewhat muted relative to the previous quarter. So as you look at the fourth fiscal quarter, is there enough confidence here that we should see that segment step up? I think that's sort of critical to support the outlook. And I guess maybe the question, are you seeing the critical jobs moving forward now in that segment that really should contribute here?

Yes. You're right that the revenue in Q3 was quite consistent with Q2. Part of that was just timing of procurement. As we're looking to Q4, I expect to see a very strong growth cycle in the Storage and Terminal Solutions segment. So that should be supportive of the outlook. You can also expect growth in Utility and Power Infrastructure. Process and Industrial Facilities took a step-up in the third quarter. I would expect it to be somewhere close to that same level here in the fourth quarter. Therefore, the combined segments should make for a strong upward move in revenue levels for Q4. That will also benefit overhead recovery and gross margin percentage significantly.

Perfect. Okay, that's all I had. Thank you.

Thank you. This concludes our question-and-answer session. I would now like to turn it back to Kellie Smythe, Senior Director of Investor Relations, for closing remarks.

Thank you. As a reminder, we will be participating in the Sidoti Micro-Cap Virtual Conference on May 21 and 22. We'll also be attending the Stifel Cross-Sector Insights Conference on June 3 and 4 in Boston. Additionally, if you'd like to have a conversation with management, please contact me through the Matrix Service Company Investor Relations website. You may also sign up to receive Matrix news by scanning the QR code on your screen. Thank you for your time.

This concludes today's conference call. Thank you for participating, and you may now disconnect.