Good day, ladies and gentlemen, and welcome to the Matrix Service Company's sets date to discuss results for the third quarter ended March 31, 2017, conference call. [Operator Instructions] As a reminder, today's program may be recorded. I would now like to introduce your host for today's program, Kevin Cavanah, Chief Financial Officer. Please go ahead.

Thank you. I would now like to take a moment to read the following. Various remarks that the company may make about future expectations, plans and prospects for Matrix Service Company 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, 2016, 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 and on the company's website. As a reminder, there are supporting slides for the webcast posted on our website. I will now turn the call over to John Hewitt, President and CEO of Matrix Service Company.

Thank you, Kevin, and good morning, everyone. And thank you for joining us. During challenging times like these, we must always guard against losing focus on our core values, number one of which is our attention to the safety of all our employees. I would, therefore, like to highlight just a few of the recent awards given to our teams for a great safety performance. PSEG, one of the largest combined electrical and gas companies in the U.S., recently named Matrix NAC as the top contractor in a supplier performance management program, which grades contractors on safety, environmental, cost and schedule, partnership and sustainability. Matrix NAC was also awarded 7 outstanding safety awards at the New Jersey Governor's Occupational Safety and Health awards for their excellent safety performance on various Atlantic City electric projects. In early April, the National Electric Contractors Association named Matrix NAC as the recipient of its 2017 NECA national district 2 Safety Excellence Award. The team also received the Safety Excellence Award at a regional level for the second consecutive year. Matrix Service's turnaround and plant services team was awarded the Shell Martinez Refinery bronze eagle for their demonstrated goal 0 safety culture within the Shell Martinez Refinery as well as across the company. Since 2011, Matrix service has worked 245 hours inside the refinery. In addition, Matrix Service was also awarded 8 contractor safety awards from the American Fuel & Petroleum Manufacturers for work at various customer refineries and their operating facilities. And finally, Matrix Services Port of Catoosa fabrication facility recently surpassed 2 years and approximately 650,000 hours without a recordable injury. Congratulations to all of our employees for putting our core value of safety first, which differentiate us from our competitors and brings greater long-term value. As indicated in the businesses update issued…

Thank you, John. Consolidated revenue for the quarter was $251 million, which compares to $309 million in the prior year. This decrease was driven by the forecast change in the quarter related to the Electrical Infrastructure project discussed earlier and the reduced revenue associated with the wind down of the Dakota Access project as well as fewer project awards in Storage Solutions. As you can see in Slide 1, market softness has impacted revenue volumes across the business. And as a result, our revenue of $251 million in the quarter is the lowest in any quarter over the last 3 years. However, from a project execution standpoint, our people continued to perform at a high level. And on a consolidated basis, direct margin performance has met or exceeded our targets, with the exception of the Electrical segment project already discussed. The company recorded a consolidated loss in gross profit of $2.6 million in the quarter compared to a gross profit of $27.3 million in the same period last year. The reduction in gross profit is primarily due to the $18.9 million charge recorded in the Electrical Infrastructure segment as well as lower revenue volume as compared to historical norms in the Storage Solutions segment and in portions of the Oil Gas & Chemical and Industrial segments. For these reasons, reported gross profit declined to a negative 1% in the quarter compared to 8.8% in the same period a year ago. Consolidated SG&A expense was $18.6 million in the quarter compared to $21 million a year ago. We have worked to control our expenses in this uncertain environment, and this approach has allowed us to keep SG&A from growing, even though we continue to invest in business improvement initiatives. The decrease in the quarter is primarily due to a reversal of…

Thanks, Kevin. Want to spend a few minutes on backlog and opportunities in the markets we serve. We achieved a book-to-bill of approximately 1.0 for our 2017 fiscal second quarter, a noticeable improvement over the comparable periods in 2015 and 2016. In our third quarter, we saw total project awards of $228 million, achieving a solid book-to-bill ratio of just over 0.90 in this current environment. As we commented earlier, in the fiscal year, this flattening out of backlog was anticipated as we move through fiscal 2017, with expectations that we'll begin to rebuild through fiscal 2018. Let me share more with you on a segment basis. Slide 5 is a look at backlog trending for our Oil Gas & Chemical and Industrial segments, both of which bottomed out in June of 2016. As you can see, Oil Gas & Chemical is trending up, with backlog at a record high of $241 million in this quarter, up 164% over the end of fiscal 2016. This increase is driven by the need for new capacity build-out and spending in gas processing and NGLs and the expertise brought to us by our most recent acquisition. One such example is a recent project announced for a cryogenic gas processing plant in Oklahoma, which would not have been possible without our recent engineering acquisition. Also contributing to this backlog build are capital projects and expanded maintenance opportunities in refinery geographies that have not been traditional Matrix strongholds. Excluding these geographies, our traditional refinery maintenance and turnaround business has provided limited impact to the recent improvement in segment backlog. However, based on market conditions and client demand for our planners, we expect greater contribution in fiscal 2018. For example, we continue to work with our clients on already scheduled maintenance activities, with fewer limitations on…

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

I'd just like to start off with your press release. Last night, you came out, you said one of the reasons for the profit deterioration was the turnover of key systems to the client. Could you just explain to me what that means, provide some color around it and how big of an issue that was?

Yes. So if you think about the systems in a power plant or any project, like the systems in your car, right. Your car doesn't run unless all those systems are operating, so whether it's transmission or your cooling system or your air intake system. So it's all similar to -- in a power project or any project. So as we complete systems, so they might be a hot reheat system or it might be a high-temperature steam system or it might be an electrical system, we turn those over in pieces to the commissioning team so when they go through the start of plant update, they actually run through performance testing and startup and commissioning protocols on individual systems before they put all the systems together to make the entire plant facility, or in my example, the automobile run. And so we have to complete what we call bulk construction to curate the systems, and then those systems are commissioned. And those systems are put together to create a fully operating plant. So that was what that term meant.

Okay. And why was there a delay in turning that over?

So as we mentioned, that there -- we are -- are numerous factors, which we're not planning to get into the detail on, that are delaying schedule and result in labor productivity declines. And those things are -- all pushed back the ability for -- to complete bulk construction and then turn those systems over.

Okay. John, you made it sound like you're backing away from being a general contractor on these large power projects. Two questions, really: One, if I think about Napanee versus Garrison, were there similar problems that you had with those 2 projects? And secondly, how should we think about the size of the business on a go-forward basis? How would you like to scale the business relative to the rest of the company?

Again, can't get into a lot of details on the current electrical project, is that the principal difference is the Garrison project was an EPC project. The Napanee project is a C only. The engineering and a lot of the procurement and engineering procurement is divided by others. That's not within our responsibility. So those are the 2 principal differences. As it relates to the overall size of the company, we continue to feel strongly in our ability to grow our business and on the back of the 4 operating segments that we report to you on. And we see opportunities, really, in all of those segments. Based on our strategic positioning today, and as our markets approve -- improve, that we'll be able to continue to grow our top line and improve our bottom line performance.

Okay. And one final question, then I get back into queue. Could you just talk to us a little bit about what the free cash flow is going to look like now? Do you need to borrow to complete the project? I know you paid down some debt in the quarter. But just looking forward, are you going to need to change maybe the balance sheet a little bit?

Yes. I'll take that one. So as I mentioned, we've got $147 million of liquidity at the end of the quarter. And if you look at our balance sheet, taken cash out of the balance sheet, our net current position is net current assets of $100 million. So we've got more owed to us from customers than we have obligations to expend. So I don't see a significant issue with us being able to fund the work that we've got in front of us. That's something that -- liquidity is something that we've obviously talked about on every call. It's something we consistently monitor, and we'll continue to that. Our intent is to continue to keep a strong balance sheet so that doesn't become an issue. And quite frankly, keeping a strong balance sheet will help us get through this issue.

[Operator Instructions] Our next question comes from the line of Tahira Afzal from KeyBanc Capital Markets.

So the first question is I know you've gone through too many details on the problem project right now. But could you give us some help on how much is in your backlog right now so we can kind of assess them? And I'm sorry if I missed that earlier on. Had a whole slew of calls.

So if you'll recall, Tahira, the original project was around USD 450 million, and there've been some change orders. And the project now is a little over 50% complete. So there's still -- we still got another 4 quarters or so of work to do on the project.

Okay. And if you were to look at -- I don't know if you can talk about this, but if you can, maybe the amount of shifts you're doing, are you doing 2 shifts? How many times a week? Are you working on 6-day weeks per week kind of schedule? Just trying to assess the cushion you have if there are more productivity issues.

So Tahira, before I answer the question, I'm impressed at your project management skills. So yes, so we are, on various parts of the plant, we are working overtime. And so -- and we're trying to manage that against -- too much overtime is not good for productivity, and it's not -- certainly not good for safety performance. So we were on a bit of a sort of a rolling schedule where we're making sure nobody on the job site works longer than 2 weeks straight. And -- but we are working overtime on several elements of the remaining work.

Got it, okay. And last question on this project, and then we can move on. John, if you look at -- I mean, with power plants, you typically have liquidation damages. Are there any associated, if you do see further delays with this one?

So certainly, in our contract, there are certain requirements for completion. And those are some of the issues that we're working through with our customer. And that's really today, all I can say about that.

So Tahira, I'll just add a little bit. So if you look at our -- what we've done is considered various scenarios in our forecast on the project and just reported to what we believe is the most likely outcome.

Got it. Okay. And then just moving -- shifting to the rest of your business. We have started to see, obviously, the oil and gas outlook of onshore in the U.S. improve. And obviously, the oil run has positive consequences for you. And then on the LNG side, I know things are still slow this year, but it seems there's some positive movement about next year to some degree. How are you guys looking at all these moving parts? And how thoughtful are you being in terms of when you build your guidance, how you bake this in, given the timing nuances we've seen to date?

The -- again, the timing has been challenging. I think, there's -- with our clients in the energy markets, I think they've been looking for some stability in commodity pricing as well, as they sort through how they're going to spend their capital dollars. I can tell you that our bidding environment related to all aspects of our storage delivery is some of the highest that it's been, to the extent when we talk about construction overhead that -- our issues there are really almost gets to be a capacity issue from an estimated standpoint, where we have so much project opportunities that we're in a position now where we're actually sorting through the projects that best fit our risk profile and our ability to be successful, and where we think we can deliver those projects. And so as we go through the next few months here, we hope to see some of those projects start to get in the backlog. And that'll give us a better feel for how we're going to judge guidance coming into our fiscal 2018.

Got it, okay. And then, John, given the momentum, and I concur based on what we are seeing and the projects we are tracking, do you even need to go after some of these large power plant EPCs in the future? I know you're trying to sort of be disciplined in the near term as you manage through this project. But do you even need to take that risk going forward?

As I mentioned in our prepared notes, there are -- we have no either EPC or general contractor proposals in-house related to full power plant construction. So I would tell you over -- at least over the near term, and near terms longer than 6 months, so over the next couple of years, you will not be seeing us adding a full EPC power job into our backlog. We're much more focused, I think, where we have a greater opportunity and a better risk profile for our business in the packages into these projects where we've got maybe a regional dominance in a delivery. So for instance, the electrical package on the Sewaren job for PSEG, we've got a very, very strong presence in the electrical construction markets up on the Northeast. And we can deliver a strong A team to that project and so build our resume that way. So that will be the trend that you see from us, and I would seriously doubt anytime over the next few years, you're going to see us add another large power job.

[Operator Instructions] And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to John Hewitt for any further remarks.

Thank you to everybody who listened in today and for the great questions. And we look forward to seeing you on another call.

Hold on. John Franzreb, are you -- do you have under another question?

He has requeued, yes.

Sure. Sorry guys, I chimed in a little late there. Just -- could you just talk a little bit about the storage business? It seemed last quarter that while you were telegraphing weakness, that it was probably weaker than you expected in Q3. Can you talk about may be the trends you see there, the competitive landscape and just a little bit more color about what you're seeing on the storage side of the business?

Yes. So if we break it into pieces into the full terminal applications where we are and have been very busy in our bidding environment for projects, majority throughout the Gulf Coast, but some in sort of central parts of the country as well. So that bidding environment's very strong, and that timing of awards is the thing that we've been -- that our clients and us have been struggling with, probably over the next -- last 2 quarters, which we explained in some detail on our last call. And as you get into sort of our basic flat bottom tank business and our tank maintenance and repair business, the amount of opportunities over the last couple of months has been fairly lean, and the competition has been very stiff. We're starting to see more opportunities break in our flat bottom tank business and into -- and with, say, bigger packages. As we like to say, the onesie, twosie tanks really allow for some stiff competition with more of the mom-and-pop suppliers. But we're starting to see bigger packages, and so we're -- that's why we said earlier in our prepared remarks that we think we've seen the bottom in our flat bottom tank business and expect to see that continue to rise here over the next couple of quarters. And then just talk about specialty vessels in both large-scale LNG and then smaller scale, midscale LNG facilities for export and for peak shaving. We're seeing exceptional amount of opportunities there. Some of those that we're in -- actually a lot contract discussions with some of those clients. Obviously, we have to win that work, and they've got to get through their financial approval process at their board level. But we're very, pretty comfortable in our position in that market and where we see that going over the next couple of quarters.

Okay. So against that backdrop, can you just kind of talk a little bit about the pricing of contracts in the backlog in storage? Should it be improving going forward? Or is the price competition still so significant that you probably need this level for an extended period of time?

Right. So we have -- as Kevin said in his remarks, our direct margin performance on the work that we have in backlog has been very strong. It's been at or above what our expectation is, our performance. And obviously, that's consolidated mix between the business. But overall, we feel very good about that, including what's going on in our storage business. And so we've been very careful to not take work that is overly risky or extremely low margins just to run work through the business. And so we will continue to do that and to have that philosophy. So I think that going forward, certainly as the market gets a little hotter as labor availability continues to maybe become a little bit more of a challenge out into the future, we're going to see some opportunities for some improvement in our overall pricing. But I would not expect that largely in the real near short term, but over the long term, over the next, probably year I think, we'll start to see some pricing improvement overall for our industry. And -- but again, the work that we're taking into backlog now, we're meeting our risk and margin profiles that we expect as a business.

Once again I'd like to hand the program back to John Hewitt.

Okay. Again, thanks, everybody, for listening to the call and for the good questions. And we look forward to speaking with you again in the next call.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.