Good day, and thank you for standing by. Welcome to the Matrix Service Company Conference Call to discuss Results for the Fourth Quarter and Full Year Fiscal 2022. At this time, all participants 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. I would now like to hand the conference over to your speaker, Kellie Smythe, Senior Director of Investor Relations. Please go ahead.

Thank you, Carmen. Good morning and welcome to Matrix Service Company’s fourth quarter and fiscal 2022 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 matrixservicecompany.com. Before we begin, please let me remind you that 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 vary materially from those indicated by these forward-looking statements as a result of various factors, including those discussed in our most recent annual report on Form 10-K and subsequent filings made by the company with the SEC. To the extent, we utilized non-GAAP measures, reconciliations will be provided in various press releases, periodic SEC filings and on our website. I will now turn the call over to John Hewitt, President and CEO of Matrix Service Company.

Thank you, Kellie, and good morning, everyone, and thank you for joining us. I'd like to open with a brief comment on the delay in filing our 10-K. As we stated in our press release on September 12, we believed the review of the misallocated project employee hours to construction overhead would be confirmed to be a material and isolated incident and that the company's internal controls environment would be in good shape. I am pleased to report this is the case. As a result of the company's internal controls, the issue was previously identified and corrected within the fiscal year and the investigation did not result in any additional adjustments. We expect to file our 10-K early next week. Beginning with the safety moment, as Florida and surrounding states recover from Hurricane Ian, I want to thank our Electrical Storm response teams who, along with so many others, answered the call for help to restore power as quickly as possible. The safety of all involved remains top of mind and I encourage everyone to stay situationally aware, look out for one another and follow the direction provided by local authorities. I also want to briefly mention that we will be publishing our sustainability report in mid-October. We have made great progress in establishing the framework we use to report on these efforts. Our ESG strategy includes foundational principles, such as leading positive, blasting impacts in our community, implementing that action plan for reducing the carbon footprint of our facilities, promoting diversity, equity and inclusion and maintain high standards and governance, including the adoption of the task force on climate related financial disclosure recommendations. I want to get started by acknowledging what we all know. These last couple of years for Matrix have been extremely challenging. However, because of the…

Thanks, John. I'll start with consolidated results. Revenue in the fourth quarter of fiscal 2022 was $201 million, an increase of $24 million or 13% compared to the third quarter revenue of $177 million. Gross profit was $0.9 million in the quarter or 0.4% as our margins continue to be impacted by the execution of projects one in a highly competitive market. We expect to complete most of these projects by the end of the calendar year. In addition, while our revenue volume improved, it is still not high enough to fully recover overheads which negatively impacted gross margins by over 300 basis points in the quarter. This under recovery is primarily related to our capital construction businesses, as we balance the overhead cost structure with the anticipated future increased revenue volumes. We believe this investment is appropriate based upon our increasing backlog and project opportunity funnel. On a segment basis, the Storage and Terminal Solutions segment had revenue of $60 million, which was a 24% increase over the third quarter driven by construction on previously awarded LNG and renewable storage projects. The gross margin was 0.8% for the quarter. Overhead recovery improved during the quarter on higher revenue, but still impacted margins by 360 basis points as compared to 740 basis points in the third quarter. In addition, margins were impacted by the mix of work that includes smaller competitively priced capital projects. In the process and industrial facility segment, revenue increased 33% to $92 million as compared to the third quarter. Increased refinery maintenance activity was the primary driver for the quarterly increase as refinery maintenance and turnaround activity has returned to pre-pandemic levels. The quarter gross margin was 2.8% as margin was impacted by over 400 basis points due to an increase in forecasted cost to complete…

Thanks, Kevin. During the year, we committed to the investment in our people to support the market trends in front of us even when it affected our ability to recover all our overheads. This investment, which is primarily related to our forward view of the Storage Solutions opportunity set will pay-off in the quarters to come with improving backlog, revenue and operating results. Our focus on quality, safety, people and communication will continue to be critical to the success of the business. We remain focused on our core strengths and markets and are levering our consolidated business development services to build backlog, grow the business and expand the brand across our client portfolio. In fiscal 2022, we began an organizational transformation journey that is improving our cost structure, competitive position and quality of services. Besides an enterprise wide shared services platform, our organizational transformation includes the creation of our center of excellence to ultimately provide consolidated enterprise wide expertise in key disciplines like quality, safety, procurement, project management estimating and project controls. These changes will improve the gaps experience in some of the company's project outcomes as well as overall project execution capabilities and quality of project and service delivery across the enterprise. As we continue to standardize our processes, and build further discipline into the organization around these processes, we will build our culture of quality and performance with the same emphasis as safety. These changes will result in increased efficiency, continuous improvement in our performance, better outcomes for our clients, delivery on our growth objectives, more consistent bottom line results and achievement of long term sustainability for all of our stakeholders. With that, I'll now open the call for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Jean Ramirez with D.A. Davidson. Please go ahead.

Good morning. This is Jean Ramirez on for Brent Thielman. How are you?

Good. Good morning.

Good morning.

My first question, what size or magnitude of potential opportunities are you seeing? Are they more than $50 million or $100 million opportunities?

Yeah. I think there's got a pretty wide mix. And I would say the kind of the center of the project capital opportunities are in the $50 million to 150 million kind of range. There are a few projects that are larger than that. But I think this kind of sweet spot on the projects that we're looking at are in that range.

Thank you. And just a follow-up, so on margins, to what extent is the inflationary environment impacting margins versus still some overhead of portions to go and competitively bids projects in general?

Yeah. So, inflation is definitely an impact on margins. How significant? I can't really give a good estimate on that. It's definitely a piece of it. I would say that the overhead recovery issue has been pretty significant. It's probably been close to half of the issue on margins. And we saw some improvement in fourth quarter with the increased revenue and I would expect that to continue.

Thank you. And one more, are there any other updates on hydrogen business and potential opportunities here for next fiscal year or perhaps any coming sooner than that?

No, I mean, I think we're -- right. It's part of our strategic focus in our storage business. Our ability to design and execute cryogenic specialty vessel storage is a foundational skill set in the business. Hydrogen fits into that. And so, I think where we see the hydrogen market going as there's an increased demand for hydrogen in the energy mix. The size of the storage has got to be upscaled. And so, there is a -- I think we've seen a lot of energy and utility clients looking out into the industry storage experts on developing storage capabilities that can be 10 times to 20 times the size of what traditional storage is today. And so that's the antithesis of the KOGAS discussion and there are other energy clients out there with the same related questions and thought processes of how they might invest in development of that technology and that storage.

Great. Thank you. I appreciate that so much. I'll hop back in the queue.

Thank you. One moment for our next question. Our next question is from John Franzreb with Sidoti. Please go ahead.

Hi, guys. Thanks for taking the questions. Can you just start with the quick review of the fourth quarter? And how much of the revenue in that matter of the backlog is still associated with competitive priced projects that are largely unprofitable?

Let me do a little math here real quick. So it's not a large percentage of the overall revenue. It's just that the impact that they've had has been pretty significant. We've had quite a few project awards with an average somewhere around $200 million a quarter of project awards recently. And I think we've seen the margin profile on a combined basis each quarter kind of improve a little bit each quarter. And there's definitely projects within that those awards that are in our historical margins and there's some that still aren't in some select markets, but for the most part, it's moving back. So I think we're seeing like a consolidated award margin profile that's closer to a 9% on average margin versus what we were seeing during the pandemic that was much lower. Now I think as far as the projects that we've had issues on in fiscal '22, there's not a lot of revenue left on those. I mean, they're in the final stages for the most part. And those will be completed here in the first quarter and the second quarter, but it's done as higher revenue volume as it was in the prior year.

So Kevin, you are suggesting that if we kind of strip out the older less profitable projects that 4Q margin would have been in a high-single digit range?

I'm suggesting that if I strip out the couple of projects we talked about that and the competitively priced projects, the direct margin on those -- on the rest of the work, is that beyond the higher-single digits. Of course, we start the overhead recovery issue, right? But the direct margins on those projects in that range, yes.

Okay. And the overhead recovery, if I heard correctly is largely associated with your expectations in the storage business. Can you talk a little bit more and give us some more color about what's going on in storage that gives you such optimism that's worth obtaining or those people?

Yes. So it's related -- first of all, it's related to, yes, in the storage business, we'll have a lot of large capital projects, but it's also impacted the other segments also. Probably storage number one secondly would be the utility and power infrastructure segments. And then there's still been some impact in the Process and Industrial Facilities segment, but because it's primarily the more of a service work we haven't had as big of an impact there. Now as far as storage itself, I'll let John.

Yeah. I mean, the storage market and really we are not executing and/or bidding a significant amount of crude related new storage. Our tank maintenance and repair business, which traditionally does quite a bit of work in that crude oil tank repair and maintenance has been pretty busy, but as it relates to new storage, it's mostly around either LNG tanks associated with larger project or wrapped into an overall project and some kind of peak shaving or small scale export seen a lot of activity in ethane tanks. Yeah. We noted the recent award of a large scale ethane tank in the Gulf Coast, a lot of activity there, a lot of activity in large scale ammonia tanks, again used as either as a feedstock for fertilizer or for export in the global markets and as a potential carrier for hydrogen. So it's -- there's been a significant uptick over the last six months in storage related projects even without the balance of plant work to go with it. In some cases, that is included. And in those projects where they're coming to award here, several of them over the next couple of months. So pretty excited about where that market is. And you know that's always been a great driver or foundational driver for our business.

That's good news. And actually, John, I'm actually curious about your assessment of what's going on in the utility market. I know that you had two large projects wind down and the book-to-bill I think the quarter was 0.7%. Can you give us like your overview of how that market plays out in the next year and what's driving it one way or the other?

Yes. So in our utility segment, to be clear, is a mix of electrical infrastructure, pure infrastructure work that we do, substations, transmission, distribution, those kinds of things and then the LNG Peak Shaving. And so we think which we have had expected, there was going to be kind of a -- there was sort of a pause on new awards over the period of the pandemic. But we're seeing a return from several utility clients looking to put contracts in place for new peak shaving facilities. And so several of those that we've prequalified for that we expect to be bidding on here over the next couple of months for award in our third, fourth quarter. And so continue to be a lot of activity around just LNG for peak shaving for utility clients and also repair and upgrades to existing facilities. There's still around 100 LNG Peak Shaving storage facilities for utility clients across the country and most of them were built in the 70s and 80s. And so while those projects in and other sales are not real big projects, but there's a lot of feed work, engineering, maintenance and repair work, associated with those that we're starting to pick up.

Okay. Perfect. And I guess just one other question, just for clarity. You talked about the project profile suggesting that you've returned to profitability in 2023. I'm assuming you mean on a quarterly basis in the second half of the year, not so much on a full year basis. Is that a fair assessment?

Yeah. I think that when you look at it, I think we'll see -- it results in the first couple of quarters be a little bit better than what -- or better than we've seen in the last two quarters because those projects are nearing completion. The revenue volume will still be kind of running at the $70 million a month range. And so I don't think that we'll see a big step change in revenue in the first half of the year, but I do think we'll see margins improve. But when we return to profitability, it's probably not there in the first half of the year. There's a chance it gets there in the third quarter. We'll start to see higher revenue volume in the third quarter. And then the fourth quarter, I see it returning to profitability. And so for the full year, well, it may even also be somewhere around breakeven and may be able to us some profit is what we're hoping to get to. But definitely a big improvement over fiscal ‘22.

Okay. That's great. Hopefully. Thanks, Kevin. Thanks, John.

Thank you. One moment for our next question please. We have a follow-up from Jean Ramirez with D.A. Davidson.

Sorry and thank you. So from everything that we talked about the environment, sounds pretty healthy for you. Is there a potential for you guys to get up to $1 billion plus in backlog over the next four quarters or couple of years? And if so, what kind of runway are you seeing right now and what rate do you think you'll get to there? Thank you.

I think we believe there is the potential to exit the year, if not sooner with the backlog at that kind of level. Based on what we're seeing in our opportunity pipeline of a wide variety of projects across all of our segments.

And by the year, you mean 2022 or fiscal year ‘23?

Fiscal ‘23.

Thank you. I appreciate it.

All right. And I'm going to end the Q&A session for today and turn it back to John Hewitt for final remarks.

Thank you. Yeah. I want to thank all of our employees and all of our stakeholders for your continued commitment and support of Matrix Service Company. Wish everybody to be safe for the weekend and we look forward to talking to all of you soon. So thank you for joining us today.

And with that, we conclude today's conference call. Thank you for participating and you may now disconnect. Good day.