Good morning, ladies and gentlemen and welcome to the Matrix Service Company Conference Call to discuss results for the Third Quarter Fiscal 2019. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to turn the conference over to your host, Ms. Kellie Smythe, Senior Director of Investor Relations. Ma'am, you may begin.

Good morning and welcome to Matrix Service Company's third quarter 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 using during the webcast today can be found on the Investor Relations section of the Matrix Service Company 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 the 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, 2018, 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. 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. This morning, I would like to talk about safety within the context of our current environment, which includes an increased number of projects, strong backlog and a robust opportunity pipeline, aggressive scheduled demands by our clients, greater number of employees on our job sites working longer hours and an increasing number of new employees entering the industry. While this business environment is very positive for our Company, it is imperative for us to not lose focus of our core values, number one of which is our relentless drive to zero injuries. I ask all our employees whether at home or work to stay focused on this priority. Our culture of safety requires your steady leadership, focus and commitment to be successful. Only through your efforts, will we achieve zero incidents, differentiate ourselves from the competition and meet the increasingly stringent expectations of our clients and provide value to our shareholders. Moving on, as I stated in our earnings release, we are very pleased with our third quarter results, which reflect the improvements in revenue gross margins and earnings per share that we forecasted and have discussed on previous calls. We expect continued strong performance in the fourth quarter. Our quarterly book-to-bill of 1.3 on project awards of nearly $460 million and our ending backlog of more than $1.1 billion demonstrate the continued strength we see across nearly all of our end markets, specifically in Storage Solutions and Industrial. This backlog includes the strategic project award announcement made last week by Piedmont Natural Gas. I would like to direct the balance of my comments to a discussion about the markets we serve and our progress toward our long term strategic objectives, including the goal of achieving $2 billion in…

Thank you, John. We are pleased with our strong performance this quarter. Before I turn to review the financial results for the period, I want to focus on three specific areas. First, backlog. We ended the quarter with the backlog of $1.146 billion. Our book-to-bill was 1.3 this quarter on project awards of $459 million, including $242 million in the Storage Solutions segment. This continues the trend of backlog improvement that began two years ago. During that two years, our quarter book-to-bill has not always been above one as the timing of project awards is fluid. As we have said in the past, backlog should be viewed based upon the longer term trend. The trend is positive with a market environment that remains strong. We are actively pursuing numerous viewed project opportunities throughout our business. We will have quarters that have a book-to-bill below one, but we will also have quarters of the high book-to-bill. What is important is that we have -- that we expect the positive trend in our backlog to continue as we move into and through fiscal 2020. Next, let's discuss our balance sheet and liquidity. We ended the quarter with total liquidity of $180 million, including the cash balance of $49.7 million and only $2.2 million of debt. During fiscal 2019, we have invested almost $40 million in working capital to support the 23% increase in fiscal year -- year-to-date revenue. Despite that investment and $13.7 million in capital expenditures, we have improved our liquidity, which has increased by nearly $43 million as a result of improved operating performance. This has further strengthened our financial position and we expect liquidity improvement to continue as we complete the fiscal year. Next, I'll talk about guidance. The performance improvement ramp that began at the start of this…

Thank you, Kevin. Before we open for questions, I want to thank our investors for their continued support, our clients for their trusts in our expertise and ability to safely deliver high quality projects and our employees for their commitment to our culture and core values of safety, integrity, stewardship, positive relationships, community involvement and delivering the best. I'm very optimistic about our ability to achieve our long-term strategic objectives and to generate sustainable shareholder value. It all starts with demand. We're working in strong, sustainable, diversified markets in an environment of positive GDP growth. We're focused. We have a clear vision, a strong strategy and an understanding of who we are and where we're going. We have a proven leadership team not just at the board and executive level, but at every level of our organization. And we have best-in-class people committed to our culture and core values. In combination with the demand and focus elements, we will execute safely, provide consistent performance across our diversified revenue streams and effectively manage capital. Doing these things will create continuous momentum and help us achieve our goal of creating greater long-term shareholder value. With that, we'll now open the call up for questions.

[Operator Instructions] Our first question comes from the line of Tahira Afzal with KeyBanc. Your line is open.

Hi, folks. Congrats on a great quarter.

Thank you.

Thank you, Tahira.

So, a tricky question for you, John. But as we are touching the end of this fiscal year, how would you look at the moving parts into next year? I know it's a little early, but I just wanted to get a sense, one of the things that has thrown you off guidance before has really been the start point of some go project. Seems like you have a lot of projects now rolling into ramp. Would you say that the air pocket you see into the next fiscal year up maybe perhaps less than what you saw this year?

Well, we obviously definitely feel better. Obviously by the strength of our backlog, we feel very good about the strength of our opportunity pipeline and not just in storage. While that is really strong and how into the future of what we see as potential projects. But really pleased in Oil Gas & Chemical is what we -- well the opportunities are not only for our market position and refining, but also the opportunity for us to continue to expand our position in the midstream gas processing market. Industrial continues to be strong, albeit for the most part a reimbursable lower margin business, but we continue to see that spending to be strong and the opportunity for you know other capital projects in work in the non-ferrous mining business, which really has not kicked off yet. And then you think about electrical, so we have as Kevin said, we still have more work to do in our -- on the power delivery side of our electrical business to get those kind of margins performance back up and that's going to be largely driven by our ability to expand geography. So we feel very good about the business, we feel really good about the opportunity to continue to grow our business over the next coming two, three years. For us to be able to do that, we're going to continue to be making some investments in people and processes and technology and equipment and can be doing acquisitions. All the things we need to continue to do to grow the business and take advantage of the momentum we have across all of our markets. So I mean I've given you the answers you were looking for, but I would say we still very -- kind of very positive where we are is positioned in the -- where we're positioned in our segments.

I mean John would it be -- sorry, go ahead.

I was just going to add on. So if you look at our funnel, there's a lot of new projects out there that we're tracking. Those are still while we've got a good backlog, those next projects are still fluid as the exact timing of when those -- when those get awarded and then when they start. So yeah it's probably not as great at risk on the wind project start as it was say 12, 18 months ago, but it's not a risk that's been totally eliminated.

I mean would it be fair to say, if I was to compare your commentary from last year you sounded more confident about that funnel moving through a release point.

Yeah, I think we feel you know we obviously feel more comfortable about our opportunity funnel than we did 12 to 18 months ago. Those projects for the most part are either backed by blue chip companies with strong balance sheets or there is some high takeaway demand required in good regulatory environment that they're in and [indiscernible] timing of awards issue for us to some extent is a good thing too as we build our bench strength and roll some -- roll teams from projects to projects. The way we see those projects the award cycle there rolls good into our ability to move from project to project and continue to grow our services across the Storage Solutions segment.

Okay. And on the margin side, given as always helpful on the segment margin ranges you're looking at for this year, there you're going to be entering it seems the next fiscal year with higher margin for utilization, I should say, in couple of your very important sectors like segments like Storage. So do you feel a little more comfortable or confident around the bias headed into next year on where you could end up in those margin ranges with potential for maybe some of those maybe revised up?

Yeah I think we're -- I think we're probably the most confident in the storage margins. We've got the backlog there. We know the quality of projects we have there. Obviously Oil Gas & Chemicals performing well and so we've seeded that margin and expectations there this quarter. Still feel pretty good about the margins there. If you look at the industrial segment, we've been just below the bottom end of the range, with the segments dominated by iron and steel reimbursable work, that's really low risk and may not be the best margins, but it's low risk. For us to consistently get in that 7% to 10% range, we need to see more revenue from the copper side of the business is really very small at this point. And that is looking out, but we still got to get those projects in the door. And as John mentioned the Electrical segment, yeah this is a great quarter for them. Congratulations to that business. Well, we still have more work to do to consistently achieve margins in that range. So overall, yeah I feel better about the margin ranges now than it did a year ago. Still got more work to do.

Great. Thank you.

Thank you. And our next question comes from the line of John Franzreb with Sidoti. Your line is open.

Good morning, John and Kevin.

Good morning.

Back to the margin discussion, it almost sounded to me like you were tapping down expectations in oil and gas from coming down to 13% to more than the normal range of that business. Is that a function of how strong this turnaround season was and that maybe the full one doesn't line up with similar strength or is any of the particular reason why you would see that margin contract a little bit going forward?

So we've got a diverse business there. It's not just turnaround and maintenance. There's a lot of other things that contribute to that business. You have gas processing work, there's at least the chemical business, there's some industrial cleaning. You've got just normal refinery maintenance in there. And this quarter, if you look at each one of those individual businesses, they all performed at a very good level. And so when you combined it all together, you've produced a 13% gross margin. That doesn't always happen and that's not something we should normally count on. 100% of the business is operating now at a 13% level. So I would say that I'm not trying to temper down expectations for that segment. I'm just trying to talk about what's reasonable, what's that we should expect for that segment?

So much for wishful thinking. Okay. And in the industrial side of the business, I mean you kind of called out that you have reimbursables going on. I think you said a vacuum chamber project that's also a low margin business. I guess my kind of -- my question is in the project awards in the quarter, I think it was $85 million or so. How much of it is still low reimbursable business and has that shift started yet?

I'd say almost all the project awards in the quarter were reimbursable work for iron and steel and some of that was capital work and we traditionally performed a little better on that work. And that is still reimbursable and you don't really know what the end results going to be till we get to before the end of those projects. The thermal vacuum chamber project, we've done good projects on thermal vacuum chambers where it made good money. Just happens with one. We're working on now is when we booked during the downturn. The good news is, we're going to be complete on that here in the next few months. So that will be an issue.

Okay. Got it. Got it. And just one last question regarding your $2 billion revenue forecast few years out. That necessitated a sizable amount of M&A. We haven't seen a lot in the past two years. Can you kind of just talk us through what your thoughts are as far as the M&A environment. What segments might have the best near-term opportunity. Just an update there would be helpful. Thank you.

Yeah, we -- this is John. So I think that growth is come out of both organic means and out of M&A. And M&A just kind of help support the organic growth. So we want to grow our electrical piece of our business. We'd like that to be three times bigger than it is today. We're going to be looking at acquisition opportunities to move that business into other parts of the US, as well as we mentioned in our prepared remarks, there's -- where there's organic means where we can expand that business as well, which we're already doing by working for some of the major utilities in the Ohio Valley and in the Midwest. We're going to be looking at and areas where we can strengthen our engineering resources. So we're able to take on more EPC projects where we're able to get on the front end of projects say in the chemicals business to help to support our terminals -- terminal tank and terminal business, where we see a lot of opportunity there for just organic growth. So we need to have the bench strength to build to support that. We have the aspiration to be able to provide our tank and terminal business into Latin America, Mexico and into the Caribbean where we see opportunities coming at us today. So looking for a execution platform for companies that operate down in that area are going to be important to us. And just other acquisitions where we can continue to strengthen our organizations diversified platform across the entire enterprise. So we're actively out looking. We're going to continue to be conservative on what we do. I think we've had a pretty good track record of not overpaying for acquisitions of not taking on significant debt to do an acquisition. And so we're going to be very focused on the things that we want to strengthen and grow within our strategy and those are the things we're going to be going after.

Great. Thanks a lot, john. I'll get back to the queue.

[Operator Instructions] Our next question comes from the line of Bill Newby with D.A. Davidson. Your line is open.

Good morning guys. Again congrats on a great quarter.

Good morning, Bill.

Just another one on margins. I guess, you -- Kevin called out the small power work in Electrical is kind of helping out the recovery there in the quarter. I guess when you look at that business going forward, does -- there's a mix in that business. They're fundamentally the same and give you the same opportunity to kind of hit the midpoint of that target range or I mean I guess how should we think about that going forward into 2020? Just with the mix you have in backlog.

Yeah, I think it does have a similar mix going forward. We're still going to have the smaller package power generation work. The -- we're seeing some good indication signals with the power delivery work. I said there's more work to do there. So I think we're set to be at the least to lower end of the guidance range as we move through fiscal 2020 and I know the teams are working hard to get the margins up consistently in a second.

Okay. Good to hear. And then I guess on oil and gas and chemical, I mean it sounds like the spring turnaround season thus far has been pretty strong. Any insight into what the fall looks like?

Yeah, I mean I think it's going to be probably similar to last year's turnaround cycle. We don't see anything really significantly changing there. Probably it is going to be dependent on whether there is some discovery work that creates more man hour demands within those turnarounds. But right now, we're expecting our teams to be fully deployed in next fall's turnaround cycle.

And I guess just one more on labor. I mean John you mentioned that the general tightness across the country. Is there any of your segments where you see more or less difficulties on the labor side or is it more concentrated by geography, if any more granular thoughts there?

It's probably right now is a little bit more about geography, location and the type of type of skill trade we may need in that geography, but we do a pretty good job being able to recruit nationwide on our merit, on our union business. We have great relationships with the building trades and we're generally able to fill the needs that we have at this point. And so, just in general as an industry, we've got to continue to work hard with the labor force to make sure that as an industry, we're attracting some of the best people into the industry that this -- that the construction industry is a good place to work, that people can have a good high paying job and career in a construction industry and so not on ourselves, but a lot of our competition are doing a lot of things on the side and making investments for the long term to make sure that we are sort of reversing that trend of declining labor pool.

All right. Appreciate it, guys. Congrats again.

Thank you. Our next question comes from the line of Noelle Dilts with Stifel. Your line is open.

Hi, guys. Good morning.

Good morning, Noelle.

Just kind of tying into that last question. In terms of which you touched on labor availability. Any areas where you're kind of seeing labor costs increase? And then, can you generally just speak to pricing and it's just know tightness in the labor markets and strong demand is driving any pricing across any of your businesses.

We're being -- on the merit side of our business, we're being cautious as we enter into the longer term contracts and making sure we've got appropriate escalations included in those contracts to cover any potential labor increases. We have not today had any significant issues with either the availability of labor or the cost of labor that we estimated into our projects. It's not to say that people are waiting around outside the gate on our projects to come to work. So we have to do our job to make sure we're recruiting the best into our projects.

Okay. And then circling back to the question on M&A, you've been talking about expanding and power delivery for some time. I do hear a number of companies talking about entering into that business in a bigger way. Are you seeing multiples for target increase or just kind of curious about how you're thinking about the availability of and accessibility of targets within the space?

Yeah. So in the last couple of years, we've been sort of on -- hit the pause button on any acquisitions as we work through the down cycle in our market. We're just now within the past -- this year -- this calendar year actually started to get a lot more active and looking for potential candidates. So I can't really comment right now on valuations. We have not been active enough in that market. But ask me again in six months and I'd probably give you a better answer.

All right. Sounds good. Thank you.

But again just to reinforce, we're not going to -- we really want to grow that business, but we're not going to do anything stupid to do it.

Makes sense. Thanks.

Thank you. And our next question is a follow-up from John Franzreb with Sidoti. Your line is open.

Yeah. This is probably one for Kevin. The SG&A kind of stepped up sizeably this quarter from -- sequentially from the previous one. Is that just a function of higher revenue and what should we be thinking about that on a go-forward basis. And similarly, the tax rate I know you guided for the year, but what should be thinking about for tax rate for next year?

So on the tax rate, the 27% is really go-forward and that includes fourth quarter and I don't know any reason why it would change for next year. So right now, [indiscernible] 27%. Now we're still -- we're still doing our budget for next year to begin that process. So I guess that could change, but I don't expect it to close to 40%.

SG&A?

SG&A. So the SG&A increase in the quarter is directly tied to the improved operating results and not to the revenue, but to the improved operating income. It's just -- it's primarily the variable component of compensation, so incentive compensation and there is some impact on stock compensation expense also.

And is there a level we --

Going forward, we're still trying to get that SG&A down John mentioned we're making some investments. So we made some good headway this quarter, we get it down about 6.7% of the revenue. I'd like to see this get down to 6.5% next year. Again we're still in the budgeting process.

Okay. Thank you very much, Kevin. Appreciate it. Thank you.

Thank you and I'm not showing any further questions. I'll now turn the call back over to Mr. Hewitt for closing remarks.

Thank you everybody for joining us on the call today and I really want to thank all of our employees across our enterprise for their very hard work that they've done leading up to -- leading up to it in the third quarter and their hard work and safety, leadership as we move into this fourth quarter and into next year. So with that, look forward to seeing everybody on our next call. Thank you.

Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone, have a great day.