Ladies and gentlemen, thank you for standing by, and welcome to the Matrix Service Company Conference Call to discuss results for the Fourth Quarter Fiscal 2020. At this time, all participants’ lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session.

[Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Kellie Smythe, Senior Director of Investor Relations. Thank you. Please go ahead, ma'am..

Good morning, and welcome to Matrix Service Company's fourth quarter and fiscal 2020 year-end earnings call. Participants on today's call will include John Hewitt, President and Chief Executive Officer; and Kevin Cavanah, Vice President and Chief Financial Officer.

The presentation materials we will be referring to during the webcast today can be found under Events and Presentations on the Investor Relations section of the matrixservicecompany.com website.

Before we begin, please let me remind you that on today's call, the Company may make various remarks about future expectations, plans and prospects for Matrix Service Company that constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various factors, including those discussed in our annual report on Form 10-K for our fiscal year ended June 30, 2020, and in subsequent filings made by the Company with the SEC.

To the extent the Company utilizes non-GAAP measures, reconciliations will be provided in various press releases, periodic SEC filings and on the Company's website. I will now turn the call over to John Hewitt, President and CEO of Matrix Service Company..

Thank you, Kellie. Good morning, everyone, and thank you for joining us. Before I begin, I would like to once again express my thanks to all of our employees. This has been a very tough environment to work in, and our team has truly outperformed.

Our project execution has not suffered, and our strict adherence to health and safety protocols has ensured our first priority, the wellbeing of our employees. We reacted quickly to the health and safety conditions brought about by COVID-19 to protect our employees, suppliers, and clients.

We also made significant changes to our organizational design and cost structure to improve our business performance. And finally, recognizing the generational transformation that pandemic has and will continue to have in our markets, the economy, and our lives.

We began to reshape our end-market strategy to find growth opportunities, sustainable work activity, and improved bottom line results. I am exceptionally proud of our leadership teams and diverse employee base as they demonstrated flexibility, resolve, innovation, and foresight in the face of the most challenging global market conditions of our time.

While Kevin will review the details of our fiscal 2020 fourth quarter and full-year financial results, I would like to share my perspectives on the year as well as more about what we see for the future. Fiscal 2020 was a challenging year for Matrix Service Company, our industry, and our clients.

Throughout the year and despite significant challenges, Matrix Service Company achieved strong direct margin performance across most of our operating segments.

We grew our market share in LNG peak shaving facilities and bunkering, natural gas processing and renewable energy like hydrogen and ethanol storage, strengthening the Matrix brand in these markets. Further, we continue to dominate in crude-related storage and terminal markets.

We also made important business and strategic decisions to better position the company for the future. We restructured our power delivery business, which led to improved performance and solid direct margin results in the fourth quarter despite the dramatic impact of COVID-19 in our Northeast service territory.

The organizational restructuring of our engineering subsidiary resulted in above plan earnings as supported internal EPC projects for our construction subsidiaries as well as independent third-party contracts in various markets.

Finally, we exited the iron and steel business in United States, eliminating 70% of our annual Industrial segment revenue, but also substantially reducing the risk related to the cyclical nature of this business, which typically produced the lowest margins enterprise-wide and also demanded the highest working capital in our portfolio.

All of these changes were positive and are delivering as planned, however, the full benefits will be reflected over time due to the severe end market impacts created by the COVID-19 pandemic. This pandemic caused severe energy demand destruction, which affected many of our end markets. The environment and our end markets has been volatile.

We experienced delayed project awards and starts as well as significantly reduced near-term capital and maintenance spending by our clients. While most of our capital projects that were already in process, continued, maintenance and turnaround work was severely impacted.

Bidding activity also slowed considerably as clients navigated the turbulent energy markets and focused on pandemic-related and overall economic restrictions. Finally, both delays and logistical issues were present as our clients focused on implementation of new health and safety protocols.

Despite the turbulence in fiscal 2020, I want to highlight accomplishments that not only demonstrate our control of near-term outcomes that have also set the table for a strong future.

In fiscal 2020, our employees achieved strong safety performance with a consolidated total recordable incident rate of 0.50, while also implementing and adhering to increased health and safety protocols to help mitigate the spread of COVID-19.

Our project site teams implemented specific health and safety protocols, and in doing so, were recognized by multiple clients providing a comprehensive approach that allowed us to return to site often ahead of any other contractors.

We took a heightened approach to diversity, equity, and inclusion across the company as we expand bias training, provide data transparency, engage our communities, and set expectations across the organization.

Matrix Service Company and its employees take seriously our role in our communities to deal with the social and racial injustices that we believe are embedded in the society. We will do our part as business leaders and community supporters to help affect positive change.

Recognizing the critical importance of environmental, social, and governance to the overall company performance and long-term strategy, we also commenced formalization of our ESG reporting framework with oversight by the Nominating and Corporate Governance Committee of our Board of Directors.

The company also quickly and efficiently streamlined the business and reduced costs. As a result of the reduced business volume, the uncertainty regarding the recovery from COVID-19 and the transformational changes happening across our markets, we performed a comprehensive cost structure review.

The outcome of that review reduced our planned overhead costs by approximately $45 million or 18% through reductions in force, elimination of planned headcount additions, closure or consolidation of facilities, organization consolidation, reduction of capital spending, and significant reductions of other discretionary spending, including travel.

While these reductions were significant and many of them permanent, we do not believe they impact our capabilities or ability to grow our revenue and execute work. In fact, while we have reduced costs in many areas, we have increased our investment in other aspects such as business and corporate development.

For example, we have created a new position in corporate for a Vice President of Business Development and Chief Strategy Officer, which has been filled internally by a subsidiary executive.

This position will coordinate all the company's sales and strategic planning efforts in order to bring the full strength and diversity of the enterprise to the market. We expect these changes will contribute to a more competitive, expanding, and profitable business in the future.

Our work on a number of very important infrastructure projects continued, including EPC execution of the Piedmont LNG facility for Duke Energy, construction of the first ever alkylation unit in the U.S.

providing for a non-hazardous and environmentally friendly alkylation process at Chevron's Salt Lake City Refinery; turnkey EPC work on Keyera's Wildhorse marketing terminal in Cushing, Oklahoma; completion of EPC work on expansion of Moda Midstream's Ingleside export terminal, which included 13 additional storage tanks as well as marine dock expansion to accommodate VLCCs; start-up of the natural gas reliability project using stored LNG for Southwest Gas in Tucson, Arizona; construction continued on the Lockheed Thermal Vacuum Chamber in Littleton, Colorado.

We were also awarded EPC contract on another LNG peak shaving facility in the Western U.S., which we announced in late May 2020, further strengthening our brand position in this growing market.

We were selected for FEED work on other LNG-related infrastructure projects and overall are anchoring our position as a leading EPC contractor in the small to mid-scale LNG market.

And we were awarded several storage projects in the growing renewable energy space, including hydrogen, biofuels, renewable natural gas, thermal energy storage, which are additional strategic opportunities for our dominant EPC storage brand.

As discussed earlier, our team's improved execution in our restructured power delivery business at the direct margin line as a result of the performance improvement plan implemented earlier in the year.

Volumes continued to be light, driven mostly by the COVID-19 impact on the Northeast regions, but as the pandemic lifts its grip, combined with our enhanced business development talent, we expect volumes to increase. This area of the business remains a growth focus for the company, which we will achieve primarily through acquisitions.

The exit from iron and steel business is also substantially complete. And as we discussed, while painful in the short-term, this exit should improve long-term margins, portfolio cyclicality and open the door for more focused growth opportunities in other sustainable businesses.

In summary, we reorganized portions of the business, cut overheads, closed and downsized offices, added key positions and streamlined operations to align the company's cost structure with our near-term expectations.

In doing so, we have created an 18% savings in our planned cost structure, which have not only help to soften the impact of the current business environment, but more importantly, prepare the organization for growth opportunities in electrical downstream markets and renewables and provides broader engineering services that will support a better margin profile for the enterprise in the long run.

Against the market backdrop, as bad as we have ever experienced, the actions we took not only allowed us to come within $0.01 of breakeven adjusted earnings in the fourth quarter, but also set the table for a strong future growth.

We are in a strong position to take advantage of growth opportunities, expand existing services and enter new end markets to meet the evolving business of energy, electrical and industrial clients. Moving forward as we enter the fiscal quarter – fiscal 2021, we're beginning to see improvement in some of our markets.

Maintenance volume, turnaround planning and smaller capital project bidding activity are all picking up. Larger capital project bidding starts and awards are still slow to develop. That said, we are working to closure on a couple of significant opportunities in the back half of the calendar year.

We expect revenue in the first half of fiscal 2021 to be relatively flat, but we are forecasting the back half of the year to show improvements in revenue and margins. Based on the opportunities we see and the timing of awards, we should exit fiscal 2021 with a book-to-bill above 1.0.

As we previously announced, results in fiscal 2021 will be reported under three new operating segments. These are utility and power infrastructure, process and industrial facilities, storage and terminal solutions.

Consistent with industry practice and in connection with this segment change, corporate costs will be presented separately from the operating results of these three segments.

This new reporting segmentation is designed to provide greater perspective into existing and new end markets, the growth areas where we are strategically focused and to better represent our long-term vision. We believe there are significant opportunities across each of our new operating segments.

Our Utility, Power and Infrastructure segment includes traditional work in power delivery and power generation, which will benefit from the significant demand for upgraded North American Electrical Infrastructure as well as engineering, procurement and construction services for utility-grade LNG peak shaving facilities across North America, where we will continue to expand our industry leading position in this portion of the clean energy market.

We also intend to expand our geographic reach and provide new services to support demand for renewable power, grid upgrades and enhanced connectivity as well as battery storage.

Our Process and Industrial Facilities segment will include front-end engineering design or FEED studies, EPC, maintenance and repair work across a variety of industries, including midstream natural gas, refineries, chemicals, biofuels, fertilizer and sulfur, mining and minerals and aerospace.

Our Storage and Terminal Solutions segment will include work in storage, terminals, import export infrastructure. The company will benefit from the delivery of existing services as demand for crude oil recovers across North America.

Additionally, the opportunities for continued growth in the demand for cleaner energy sources like LNG and hydrogen are significant and will be a continuing growth area for the business both domestically and through international expansion in select markets.

As the company continues to provide critical infrastructure needs to support our client's businesses, we are also increasing resources focused on providing services to the renewable energy industry, including hydrogen, biofuels, renewable natural gas and thermal energy storage.

We are already engaged in many of these areas through FEED studies, detailed engineering and construction.

In the long-term, the company will continue to grow its non-crude-based businesses such that our other offerings in gas LNG, NGLs, electrical, renewable energy, chemicals and other process-related industries will represent an increasing share of our overall business portfolio.

This is not to say the company will walk away from its industry-leading position in crude storage or refinery turnarounds, maintenance and capital projects or stop looking for growth opportunities, only that we will be less reliant on it in the future compared to the balance of the portfolio.

Today, crude-related activities represent an increasingly smaller part of the enterprise portfolio with approximately 40% of the business in this market. We will strategically reduce this percentage in the future. I'll now turn the call over to Kevin to discuss fourth quarter and full-year results..

utility and power infrastructure, 10% to 12%; process and industrial facilities, 9% to 11%; storage and terminal solutions, 10% to 12%. During the first half of the fiscal year, we expect that under recovery will likely result in margin somewhat below these longer-term ranges.

We anticipate improved overhead recovery and margin performance as the revenue volumes increase as the year progresses. We expect to maintain a lower consolidated SG&A with a quarterly run rate of around $20 million. A couple of quick reminders related to SG&A.

First, the variability within consolidated SG&A is dependent on the specific level of strategic activities, including M&A as well as incentive compensation, which is based largely on operating results. Second, a portion of our SG&A is related to corporate activities.

These costs normally represent between 2.5% and 3% of consolidated revenue and will not be allocated to the operating segments. We believe this change increases transparency of our cost structure and is consistent with industry practice.

While our tax rate in fiscal 2020 was unusual, we still expect an effective tax rate of 27% in fiscal 2021, and our longer-term capital expenditure target is 1.5% of revenue. However, we will continue to limit our capital expenditures as we start fiscal 2021. This should result in fiscal 2021 capital expenditures of no more than 1% of revenue.

Now I'll turn the call back to John..

Thank you, Kevin. Before we open the call for questions, I’d like to be clear on three points. First, our people focus will be strong and intentional as we continue to be relentless about the health and safety of our employees, clients and business partners.

Our diversity, equity and inclusion initiatives will set the standard in the industry, creating not only lasting impact and the success of the company, but in the communities in which we work. Next, our streamlined business structure, reduce costs and strong balance sheet will set the foundation as we navigate these challenging markets.

It will also be our foundation for growth and expansion across our new operating segments. And finally, despite the significant challenges we have encountered in the uncertain market ahead, we are confident that Matrix will exit this period stronger, strategically focused, and successful on our ability to achieve long-term growth objectives.

With that, I’ll open it up for questions..

[Operator Instructions] Our first question comes from Brent Thielman with D.A. Davidson. Your line is open..

Great. Thank you. Good morning..

Good morning..

Good morning..

John, Kevin, I'd be interested to hear your thoughts around the competitive bid environment today, presuming bid margins are under some pressure a bit.

I think it'd just be helpful to hear you put it in context of what you've been through during prior down cycles? And then also, what you all are doing to ensure your teams are also after the right work?.

Yes.

I think, like, most of the activities in our portfolio, the smaller projects generally collect more competition, and when there's a limited amount of maintenance and project opportunities that has a tendency to drive not only the competitive pressure up for reduced margins, and those margins are usually not necessarily the gross margins that we might sell a job for, but the ability to carry more contingency and other risk items in those projects.

And so from that perspective, the competition right now is pretty stiff. Our clients are both on the smaller projects, maintenance opportunities on larger projects, or in some cases taking advantage of that situation by trying to move the pendulum on the commercial terms and conditions, put more risk down on their contractors.

And so we have those two things that were – that I’m fighting with. It's not something that's unusual. I think that those – both those things happened and sort of downward – when there's downward trends in our industry and things that we're used to dealing with.

We've got a very good risk management process, especially on the larger contracts where there's less contractors involved, where – on the larger contracts, we've got – we're competing against other big contractors. They got the same risk policies and practices that we have and aren’t willing to do what we say foolish things.

And so, we manage that pretty well I think as an organization. We’re not willing to chase projects, especially high-risk projects to the bottom. So, I think we've done a pretty good job of managing our way through those commercial drivers as a business..

Okay. I appreciate that. The electrical business and the efforts you made, I guess, starting 2Q to improve the performance of the business, it seems like a pretty good market out there in that segment.

I mean, would you expect to see bookings and backlog start building in that business from these levels with the new team you've got in place now?.

Yes. So we've got – the fourth quarter was – like a lot of our businesses, the opportunity pipeline fundamentally shutdown, particularly where our service territories are in the Northeast.

And our clients for the most part are pretty either distracted on their own pandemic relief efforts or we had – projects were delayed because clients didn't want to put too many people onto a restricted site. But we – as we moved into Q1 of fiscal 2021, we started to see a lot more bidding activity and we're winning more work at good margins.

And so, I would expect to see as you move through the year, not only the environment getting a little better in our territory, but also the business development and management changes in that section of our business start to bear some fruit..

Okay..

Long-term, we do want to grow that business, and so we are going to be actively looking for acquisitions in that market both in our current service territory, but more specifically outside of that territory to gain more scale in that business..

Okay. Great. The push on the renewable side, any set targets you're looking to get to for that is a portion of Matrix? I hear a lot going on, on that side of the business, but just thinking about that over the course of the next few years, just wondering how large that can be for you..

Yes. So I mean, when you talk renewables, it spreads across a bunch of different things. So it's renewable generation, electrical generation, it’s renewable interconnectivity, it is renewable energy and hydrogen and biofuels.

And so there's a lot there and so I think what we're trying to let you guys know today is that directionally that's an area where we're headed. And we think that to some extent the pandemic has accelerated what was eventually going to be a bigger market in North America. And so we want to get out in front of that curve a little bit.

And so as we work through specific plans and investment opportunities there, we'll give you guys kind of a better feel for what that could look like within the organization, but the segmentation change we made and what's going to go into those segments is meant to give you some perspective directionally where we're headed..

Okay. Maybe just one last one for me. As you think about – once again, you come into this cycle with great balance sheet.

Can you talk about your views on stock repurchases versus thinking about some inorganic opportunities out there? I know you suspended that repurchases back in March, but the stock below book value here, just curious what your thoughts here are? Thank you..

I mean, as we continue to – we suspended stock repurchases fundamentally because we are trying to manage our cash. And we didn't know, like a lot of people didn't know what this pandemic was going to look like, how badly it was going to impact the economy.

And so as that starts to improve, we get more visibility, we're going to weigh those purchases against acquisition opportunities that are out in the marketplace. And so we'll make that decision out there in the future. But it's certainly – I mean it's on our radar screen.

We appreciate the fact that where the price of the stock is, and we're going to balance that against the other things that we have gone..

Okay. Thank you, guys..

Thank you. [Operator Instructions] Our next question comes from John Franzreb with Sidoti. Your line is open..

Good morning, Kevin and John. Guys, I wanted to touch up based on the cost saving actions that you have taken. A couple of questions actually.

How much of it's variable? How much of it is dependent on a revenue rebound and how much do you expect to realize in the first quarter of 2021?.

So we've talked about this – we go about $45 million out of the cost structure. Those actions to achieve that savings, we’re substantially complete by June 30. So, we should be – we saw a lot of benefit in the fourth quarter. It helped us achieve near breakeven on that low revenue volume.

I think as we move into fiscal 2021, those cost savings initiatives are fully in place. Now there is split between SG&A and construction overhead activities.

So it maybe harder for you to see the full amount in the income statement that you can see from the anticipated revenue for SG&A run rate, there's a pretty significant impact in SG&A, but the bigger impact is in construction overhead activities. I really wouldn't – we consider most of these reductions as permanent and not really variable.

Now if you looked at SG&A and you compare it to the fourth quarter to the four quarter of the prior year, you're going to see that it's down like $7-plus million. Now we did not expect $7 million reduction in SG&A every quarter.

The variable component of SG&A is, as we talked about it, it could be strategic activities such as M&A, but probably the biggest variability is related to incentive compensation, which is largely tied to operating results. So as operating results are improving, then the amount of incentive compensation improved.

If we're not making money then the amount of incentive compensation is extremely small. So that's the variable component of our SG&A..

I think, John, a couple of points there.

On the construction overhead side, as work starts to pick up and where we see opportunities, where we're going to add project management, more estimating health, quality, safety, whatever, you would start to see those costs that you – as Kevin said, are tough to see within our balance sheet, but we'll start to add some people back here and there as the work starts to pickup.

On the SG&A side, short of us doing an acquisition and adding a walk of revenue and the SG&A required to manage that revenue. I don't – the way we're laid out now from an SG&A perspective, both from a corporate and in our subsidiaries, there isn’t a lot we need to add.

And even if we – even if our revenues become better than what we have planned for this year, there’s not a lot of additions that are going to be required in our SG&A..

So as long as I understand this properly, John, at the current revenue level, okay, in the first quarter, you're not going to receive the full benefit of, say, $11 million of cost savings?.

Yes. Our SG&A run rate..

And construction overhead..

And construction overhead is at the reduced level right now..

Okay. One more question, I guess, regarding the cost savings.

Are some segments more impacted than others? As far as what you've taken out of the cost on the new segmentation profile, so?.

On the new segmentation profile, I would say that the biggest impact was obviously to industrial, so that's not existing anymore. So it's probably spread out pretty evenly between the three segments. And we looked at the – it was company-wide review and there were cuts on just about every level of cost throughout the company.

So it's pretty segment wide..

Okay. And on the new segmentation, could you just talk a little bit about what businesses went where? Especially in light of the fact is – that it looks like you clipped about 100 basis points from your previous gross margin expectations in storage. So I assume there's some shuffling going on that we don't really see..

Yes. So there's some big changes in the segments. When we started talking about – looked at the new segments, it was – we started out with – we have the small industrial segment that was left and needed to do something with that. But as we’ve looked at what our segment should be, we made some other significant changes.

One thing is that John talked about it, about 40% of our businesses probably related to crude. But if a reader looked at our financial statements and said, okay, what's the crude percentage. They could very easily have taken all of the Storage Solutions segment and the Oil, Gas and Chemical segments that most of that is related to crude.

So the company is 70% related to crude or 80% related to crude, and that's not the case. A lot of the growth we've seen in storage over the last few years is LNG-related of peak shavers. And so we've moved those peak shavers over to be combined with our power delivery and power generation. I'd say that's probably the most significant change.

I would say that the – a lot of the process-type businesses that were included that were left over in the Industrial segment got moved over into and combined with the old Oil, Gas and Chemical segment. It's probably the biggest couple of changes.

Oh and then I guess, the third change is, I mentioned it was – we previously allocated our corporate costs to the three segments. We did a review of our peers and 75% of our peers do not do that.

And so we decided to make sure that our segmentation is consistent with our peer group and we are not allocating out the corporate costs to the other three segments. They'll be presented separately. You'll be able to see them.

I think it increases transparency of our cost structure, like I say, consistent with industry practice, and I think it will be an improvement to the segment presentation..

Thank you. Actually, we do have a question from Noelle Dilts with Stifel. Your line is open..

Hi. Good morning, John and Kevin. I just had one quick question, which is – I was wondering if you could just go a little bit deeper into how you're thinking about the refinery services market. Obviously, it's been a really tough year.

We have some players in the market that are a little bit more optimistic on the spring turnaround coming up, others less optimistic. Could you just delve into how you're thinking about the outlook as we move into next calendar year and even a little bit longer-term? Thanks..

Sure. So Q4 was pretty much a blood bath, I think for us and for a lot of people. And work was stopped, moved out, canceled. Our maintenance – our fixed based maintenance operations were, in some cases, reduced by 25% of manpower.

And so we are – as we move into the summer months, we're starting to see our maintenance operations come back, we're seeing our planning and bidding opportunities and discussions with refinery clients on turnarounds is coming back.

And so our expectation is the – this coming fall cycle will be stronger than what we just went through in the fourth quarter, which wouldn't take much, but it was going to be stronger. And that the opportunities there for next spring's turnaround cycle to be very, very heavy.

A lot of work, a lot of opportunity, a lot of work has been – had been put off by our clients. It’s going to get more in line for them and they'll be able to get prepared for next spring. So we really think that the back half of the year in our refinery-related businesses will be very strong..

Thank you..

Thank you. I am showing no further questions at this time. I’d like to turn the call back over to John Hewitt for closing remarks..

I want to thank everybody for sharing time with us today. I encourage everybody to be safe and to be careful to take care of yourselves in this COVID environment that we're all working in. And probably more importantly, let's all be nice to one another. So good day, and thank you for listening in..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..