Matrix Service Co

NASDAQ:MTRX

Earnings Call Analysis

Matrix Service Company maintains 2025 revenue guidance with strong project backlog.

In the first quarter of fiscal 2025, Matrix Service Company reported revenue of $165.6 million, down from $197.7 million year-over-year, mainly due to the completion of a significant renewable diesel project. However, the company anticipates revenue growth as major projects ramp up, reaffirming guidance of $900 million to $950 million for the year, representing a 24% to 30% increase. The backlog remains strong at $1.4 billion, supported by continued demand in LNG and ammonia storage, which positions the company to return to profitability this year. Cash generated from operations increased liquidity to $181 million, with zero debt reported.

A Transition Year Begins

Matrix Service Company started its fiscal 2025 on a somewhat weak note, witnessing a decline in revenue to $165.6 million from $197.7 million in the same quarter last year. This drop primarily resulted from the completion of a substantial renewable diesel project in fiscal 2024. Excluding this project, there was only a 3% revenue decline, indicating that the company expects revenue growth from its upcoming projects over the next quarters as activity picks up.

Segment Performance Overview

The performance varied across segments: 1. **Storage and Terminal Solutions**: Revenue decreased to $78.2 million from $90.1 million year-over-year, mainly due to reduced work volume in flat bottom tank newbuild and repair, although LNG projects showed some growth. 2. **Utility and Power Infrastructure**: Here, revenue rallied impressively to $55.9 million, a jump from $32.4 million in the prior year, as the company capitalized on increased LNG peak shaving projects. 3. **Process and Industrial Facilities**: Revenue experienced a significant drop to $31.4 million from $75.1 million, dramatically impacted by the conclusion of a major project. However, the company anticipates this reduction to be a temporary setback.

Guidance and Strategic Outlook

Matrix Service maintains its revenue forecast for fiscal 2025 in the range of $900 million to $950 million, representing a year-over-year growth of approximately 24% to 30%. The company's strategic focus on high-margin specialty engineering and construction opportunities is aimed at enhancing overall profitability. Furthermore, the management's emphasis on a lean operating model and disciplined capital allocation supports long-term value creation.

Backlog and Future Opportunities

As of the end of the first quarter, Matrix's backlog stood at $1.4 billion, providing solid visibility moving forward. The company expects better conversion of this backlog into revenue throughout the fiscal year, particularly as it begins tackling projects slated for the second half of the year. With a robust opportunity pipeline of approximately $6 billion and a healthy book-to-bill ratio, the company is positioned to meet increasing demand for LNG, NGL, and ammonia storage and terminal infrastructures, alongside ongoing maintenance contracts in existing facilities.

Cash Position and Financial Health

Matrix exhibited a strong financial position with $150 million in cash at quarter-end and no debt, alongside a liquidity reserve of $181 million. The company generated $12 million from operations, showcasing solid cash flow management. This financial stability is critical as Matrix anticipates a revenue upturn and is prepared to support future capital projects.

Looking Forward: Market Dynamics

Several market trends support Matrix's growth trajectory. The increasing demand for electric power, particularly for data centers and advanced manufacturing, presents numerous opportunities. Additionally, a favorable regulatory environment post-election, especially concerning LNG terminal approvals, promises enhanced project velocity. The anticipated return of major clients, particularly in refining, signals a stable long-term relationship that should facilitate further growth.

Conclusion: A Path to Profitability

Matrix is on a cautiously optimistic path towards profitability by the close of fiscal 2025, driven by strategic project execution and a rebound in construction activities shown through its increased backlog and revenue projections. Investors are advised to watch for upcoming quarterly performance that could validate the anticipated growth trajectory.

Earnings Call Transcript 2025-Q1

[Operator]

Good morning, and welcome to the Matrix Service Company Conference Call to discuss results for the first quarter of fiscal 2025. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to today's host, Ms. Kellie Smythe, Senior Director of Investor Relations for Matrix Service Company.

[Kellie Smythe, executive]

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 Cavanah, 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 -- 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 turn the call over to John now.

[John Hewitt, executive]

Thank you, Kellie, 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 began 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 million 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 -- 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 onshoring and upgraded in 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 time frame 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 messed 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 near record levels, and we are maintaining our fiscal 2025 financial guidance, which includes a 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.

[Kevin Cavanah, executive]

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 2021 due to reduced volumes of work for flat bottom tank newbuild and repair and maintenance work, 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 Facilities 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 2-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 2021. While project execution remains strong in all 3 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 the 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 Solutions segment resulted 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 5-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 Facilities 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 and allowing us to leverage SG&A and construction overhead costs.

Exiting the quarter, the balance sheet and liquidity remained 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 0. We will continue to proactively manage the balance sheet, have the financial strength and liquidity needed to support positive revenue inflection we anticipate as we progress through fiscal 2025. We also utilized 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 million 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 peak shaving projects as customers continue to prioritize investment in power generation and 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 our construction overhead and SG&A 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.

[Operator]

[Operator Instructions] Our first question comes from the line of John Franzreb of Sidoti.

[John Franzreb, analyst]

I'd like to start with the quarter. I was a little surprised, I guess, but 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?

[Kevin Cavanah, executive]

In the Utility segment, no, there really -- it's really around timing on the new projects that are starting that. And we kind of -- 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.

[John Franzreb, analyst]

Okay. And also on the quarter, the SG&A line jumped up sequentially by a noticeable amount, $18.5 million versus close to $17 million in Q4. Can you just touch on that a bit?

[Kevin Cavanah, executive]

Yes. 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 our long-term incentive compensation, which is stock compensation, which is tied to the price of the stock.

So our stock price increase from the fourth quarter to the first quarter, that increased our compensation expense. That was the primary driver. I'd 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.

[John Franzreb, analyst]

And John, I think in your prepared remarks, is it 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?

[John Hewitt, executive]

Yes. 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 1 of the things we're trying to message here is that in fiscal '24, we had some lower demand and some of our refinery maintenance work. And while those refiners and we're 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, will be a little better visibility, not only for this year, but from a long-term basis with specifically 1 of our clients in the refinery maintenance business that has stabilized as well, and we expect to see some opportunities on capital work to add to that maintenance activity that we carry on them on a weekly, monthly basis.

[John Franzreb, analyst]

Got it. Understood. And just 1 last question, I'll get back in the queue. Just your general thoughts of the changeover in the administration. It would be nice to hear your thoughts about the puts and takes, both positive and negative, as you see it on a go-forward basis.

[John Hewitt, executive]

Yes. I think it's probably difficult to handicap between what the each side says about what they're planning to do, look 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 legislative targeting that's probably going to go on related to tax -- 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 of projects in our queue that have been sort of lingering and waiting for that to happen. And so we expect soon on the soon after the inauguration. That will be 1 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 and -- but I think from a long-term basis, that will be good for us.

[Operator]

Our next question comes from the line of Brent Thielman of D.A. Davidson.

[Brent Thielman, analyst]

John, I guess there was a little surprise to 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 is just simply timing here?

[John Hewitt, executive]

Yes. I mean, so it's timing. We've got a couple of projects. We've got a lot of projects going on, but bigger ones that create more momentum in the quarterly award cycle. We had anticipated at least 1 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 just 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 specifically said, yes, well, we're kind of waiting around to see what happens. And we had a couple of other clients that were pretty agnostic to whoever want and -- from a business standpoint. So hard to say. I'm sure it's got to be reflected a little bit in some of the decision-making, I would think.

[Brent Thielman, analyst]

Yes. Understood. And I guess, I mean, look, just given the revenue start here, seemingly would be contemplated in context of what you're expecting for the full year, which you're retaining, which is great. I think is there anything else you can speak to in terms of this big ramp that you're projecting 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 giving some more confidence around that range.

[John Hewitt, executive]

Yes. So our major capital projects that we had -- I think we had handicap would start sooner than where they were and a lot of -- at this point, while 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 full notice to proceed to us. So while we are working on engineering and procurement, getting into the -- on to the job sites was certainly delayed longer than we had expected.

And so I think 1 of the -- probably 1 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 next couple of years and certainly this year about our ability to ramp the work up on those projects. And so I think for us, the big chunks of our backlog that are going to drive higher revenues, the things that we're holding up our ability to really get a role in there, for the most part, pretty much out of the way. And so that's why 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 2026.

And on top of that, we've got a strong opportunity pipeline. We see more opportunities to book more work across all of our segments. And again, that's a timing thing, which is normal for our business, but that's going to also support based on what we're seeing there. That's also going to support increased revenues.

[Brent Thielman, analyst]

Okay. John, maybe just 1 more. You did speak to a lot of things still to try and predict here with election results, but yes, certainly, moratorium being lifted on LNG terminals, I think might be a consensus to you there that that's going to happen. I guess 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?

[John Hewitt, executive]

From an opportunity perspective, I think on the -- from a near-term basis, there's probably a couple of hundred million dollars' worth of work for us on a near-term basis, long term could be quite a bit more. So 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, 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, whether that could be mechanical work or structural work or whatever.

So I think as those projects get released, I think the opportunity for us will grow in our pipeline. But like I said, the near-term opportunity, maybe it's a couple of hundred million bucks.

[Operator]

Our next question, we'll welcome back John Franzreb with Sidoti.

[John Franzreb, analyst]

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?

[John Hewitt, executive]

Yes. We don't really have any direct exposure to wind and solar. So what I mean by that is we're not -- there's nothing material in our opportunity pipeline or in our current backlog that we're installing wind turbines or were putting in solar farms. So there's probably some indirect exposure through some of the electrical work we do in the Northeast. And -- but there's the -- 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 those are -- 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 or 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. And probably part 2 of your question is, does the change in administration effect at? my sense is that it doesn't. And I think 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.

[John Franzreb, analyst]

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 are you going to have to add to overhead? How does that kind of look as the projects start to execute?

[John Hewitt, executive]

Yes. So we've taken 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 booked 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 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 disciplined engineers, cost people or schedulers, which is smarter normal. I would say the market is tighter than it has been historically, but we are finding the resources that we need.

[Operator]

[Operator Instructions] I'm showing no further questions at this time. I would now like to turn it back to Kellie Smythe for closing remarks.

[Kellie Smythe, executive]

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.

[Operator]

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