Good morning and welcome to the Matrix Service Company Conference Call to discuss results for the Third Quarter of Fiscal 2023. [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 of Matrix Service Company. Please go ahead.

Good morning, and welcome to Matrix Service Company's third quarter fiscal 2023 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 constitutes 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 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. I will now turn the call over to John Hewitt, President and CEO of Matrix Service Company.

Thank you, Kelly. Good morning, everyone, and thank you for joining us. I'd like to open the call with congratulations to our operations team for being recognized for contractor safety achievement at 5 separate refineries by the American Fuel and Petrochemical Manufacturers Association. These safety recognitions represent a strong commitment and leadership our people bring to the workplace every day. Thanks to all our employees for making safety a critical parts of your mission. Our business update; we continue to see very strong award momentum as reflected in total project awards of $309 million in the third quarter. This resulted in a book-to-bill of 1.7, our seventh consecutive quarter at or above 1.0. Year-to-date, we have been awarded $862 million in projects, up 35% over the same period in the prior fiscal year. This has resulted in a book-to-bill of 1.3 or greater in each of our segments and consolidated book to bill of 1.5. We are seeing positive trends in our business as event projects, build backlog and execute with our transformed organization. Bidding activity remains robust across all segments, and we're confident the strong award cycle will continue. At the end of the quarter, project backlog was $832 million, a 42% increase from the start of the fiscal year with backlog of across each of our segments. Timing of awards aside, our proposal activities suggest that we will return to a more normalized backlog of more than $1 billion in the near term. Keep in mind that many of the larger projects we're putting into backlog may take upwards to 6 months before they have a material impact on revenue and a rare instances perhaps longer. In any case, as this improved quality, size and growing backlog flows more steadily through the business, financial results will improve along…

Thanks, John. Overall, the operating results for the third quarter were in line with our expectations, except for some additional cost growth as we move towards completion and closeout of our midstream gas processing work more on this shortly. Our third quarter revenue of $187 million was in line with our expectations as certain projects awarded in prior periods continue to work off, while the contribution to revenue of newly awarded projects are still limited, that they progress through engineering and planning stages. We anticipate higher revenue volumes in the fourth quarter as the newly awarded projects enter the revenue stream. The added revenue of these newly added projects will also have a positive impact on our gross margins. Our gross margin in the third quarter was 2.4%, as a result of under recovery of construction overhead costs on lower revenue in some parts of the business. This impacted the gross margin by approximately 400 basis points. The company also incurred an additional $3.3 million in the quarter related to forecasted costs to complete and close out certain midstream gas processing work, which we expect to be mechanically complete by the beginning of July 2023. This additional cost negatively impacted the gross margin by 180 basis points. Gross margins for the remainder of our work improved as we move toward historical margins. The margin profile of our backlog also continues to improve as we book new projects in line with previously stated ranges. Consolidated SG&A expenses were $16.9 million in the third quarter, which is consistent with the first 2 quarters of the year. The company continued our focus on cost control and expects to leverage the cost structure as revenues improved beginning in the fourth quarter. During the first 2 quarters of the year, our effective tax rate was…

Thanks, Kevin. Before we open up for questions, just for some closing thoughts here. So I want to make sure that it's clear that the business is making progress toward normalized levels of operations with many parts of the company on plan. While getting there has taken longer than we expected, and by the end of this fiscal year, we have worked -- we will have worked through substantially the lower-margin projects that were awarded and impacted during the pandemic period. We've also transformed our organization to be better able to leverage our cost structure as revenues return, improve efficiency, competitiveness and quality of our deliveries. We strategically focused the company's business development approach and services platform by a narrower list of existing and new markets with opportunities for sustainable growth now and in the future, and significantly improved our project awards and backlog in terms of both size and margin profile, which we expect to continue. As we move into our fourth quarter of the fiscal year and to our fiscal 2024, we are positioned to continue our business improvement progress by reaching $1 billion plus in backlog, achieving our revenue expectations, and returning our margin profile to a more historical ranges. With that, I'll open the call for questions.

[Operator Instructions] The first question will be coming from John Franzreb of Sidoti.

I'd like to start with John, something that you just closed out with regarding the low-margin business or unprofitable business that is still running through the P&L. Can you quantify how much that impacted third quarter results? And if I heard you correctly, you expect that to be completely done by the fourth quarter?

So the one specific job I think Kevin said in his notes was a lot impacted margins by around $3.3 million, $3.2 million. And that project, we are focused on mechanical completion probably sometime within the first 2 weeks since July, at which time a couple of weeks so after that when we turn the moment to the client. So the material spending related to the project would be over in that timeframe.

And John, as far as it goes on -- if you look on a consolidated basis, I'd say we're probably in the 15% to 20% of revenue is at the lower margin type work in the third quarter that opportunity should decrease in the fourth quarter and be down in the single digits, low-single digits in them as we move into fiscal '24.

Okay, got it. And specifically on, let's call it, the 2 weaker segments on the quarter, on Storage and Utility. You indicated you expect Storage to bounce back sizably by the fourth quarter. Just walk us through what's going on in Storage and Utility that we should think about, the puts and takes as far as the revenue profile for the balance of the year, fiscal year?

Some of the larger storage awards that we received in Q1 and Q2 just took more time than was usual to get those into a position where we could start spending more material money from those contracts. Each one has its own story involved with it. Some of them with some regulatory issues that our clients had to get through to allow us to start. Some of them was finalizing contract negotiations. Some of the process around those facilities and then there's engineering upfront for us in order for us to order materials and get ready to put foundations in place. It's a low piece of the revenue with those. So we're -- on a couple of those awards, our expectation is and where our plan is going, we'll be moving into the field on those projects here and be busy in fabrication and construction. So, those 2 things -- those 2 projects alone will have an impact on revenues starting in the fourth quarter. Plus, we've been pretty active with some other awards and bookings for various storage projects that are going to get started in a more earnest fashion in the fourth quarter. On the Utility and Infrastructure side, again, I think we're finding -- it's very active on the power delivery side with our bidding environment. We're expanding our client base and a little bit of our geography. From an organic perspective, we are -- our revenues in that space include more transmission work than they have historically for us, that's been helping to drive revenues and margins. And so we expect that trend to continue. And then we did put in a relatively smaller peak shaving facility into backlog in the first, I think it was the first or second quarter, second quarter and again, that has some upfront engineering work and things that had to get done before we could start placing orders for equipment and move into the field. And so that activities will start here later in the fourth quarter.

Got it. I guess one last question and I'll let somebody else take over. Regarding the bookings that you're doing today, how close are they to being back to normal historic gross margin profile? And if some businesses or segments are not up to that level yet, what's the resistance in getting there?

So Kevin can follow on here on the -- I would say the majority of the larger project work that we've been booking here this fiscal year are in our historical gross margin profile. And with, I think, the right risk profile associated with those. And so those awards have been pretty well spread across all the segments, probably UPI has probably got the -- today got the smallest volume, but it also has some of the largest opportunities out in the near term to turn that around. So I think those projects, those projects that have been -- we've been putting in backlog this year, all of them are in that historical profile.

Yes, I'd just add on the larger projects are definitely in that double-digit gross margin profile. If you get to the smaller projects, a lot of times those are a bit more competitive against more contractors and the margin opportunity of those projects may not be as high.

And our next question will be coming from Brent Thielman of D.A. Davidson.

Great. John or Kevin, I guess, with these multitude of large projects, I guess, picking up here or ramping up. Do you think you can get to that $1 billion kind of annual revenue run rate in the fourth quarter? Hello. Kellie, it's Brent Thielman. Can you hear me?

Brent, we can hear you. Can you hear us okay?

I can hear you, yes.

Great.

So let me finish your question. So your question was, do we think we'll -- when will we get back into the $1 billion kind of annual revenue run rate. And so based on where we see the opportunities in front of us and the award timing, that should be somewhere in the second or third quarter of 2024 is where we believe we'll be getting into that range.

Okay. I guess maybe off of that, do you still expect an acceleration from here? I think there was some anticipation that might come this quarter.

Yes. I think we're going to see -- you're going to see some acceleration in our revenues in the fourth quarter and into the first quarter. It's going to be -- it's probably going to be -- if you look at it as a graph, it's going to be a rise, plateau, a rise, plateau. And so we think that will -- that's kind of a step process will occur as you move into fiscal 2024 and through and work through those quarters.

Okay. And then John, I've heard some other companies talking about sort of future pipeline prospects associated with hydrogen kind of more beyond this year. You mentioned hydrogen storage projects as an opportunity. Is that something you see as early as this year or it's going to be things that will further out?

Yes. We're bidding. The overall hydrogen infrastructure build-out that we, I think, is in fairly early innings, but there is still a lot of opportunities domestically and internationally for individual hydrogen storage spears into existing either industrial facilities or into some of the early regional hubs that are getting built. And so we're filling a lot of those projects now. We're bidding a fair amount of them that are both domestically with this new relationship with Tassal. We mentioned we hope to start providing engineering and procurement services to support their efforts in Europe. And so I feel fairly confident in saying as we move into fiscal '24, we should start adding some hydrogen, more hydrogen projects into our backlog. Right now, we're doing some feed work for some clients on some hydrogen facilities. We're doing some study work to upscale the size of hydrogen storage for a couple of energy majors, but those are not, certainly not big revenue dollars, but they position us very well with what we see to be a pretty large investment cycle outside.

Okay. And then just -- I mean, given the -- you guys have sort of maintained maybe even added the headcount last few years in anticipation of a better market, which seems to be here now, obviously, a pretty good bid pipeline in front of you. When you look at the sort of current position at the company or overhead. I mean, what level of revenue are you prepared to take on an annual basis knowing that we're working our way back towards a $1 billion run rate here?

Yes, good question. I think overall, I think our headcount has -- we've kept our headcount pretty flat the last couple of years. We might have added a few positions as it relates to specific project needs would be full in place. We've really grown. We've probably decreased some headcount administratively offsetting that. As we look at the cost structure today, it probably supports somewhere around $1 billion, $1.1 billion of annual revenue. There'll be some select positions we'll need to add depending on which projects make up that revenue stream. But I think one of the important aspects of our financial improvement is we've talked about a lot on this call, revenue volume, increasing margins, improving. But I think the third component is leverage of the cost structure, eliminating the under-recovery of construction overhead cost, get it on SG&A percentage down to a lower level. Those are important aspects. So as a company, we're going to be doing all we can to kind of hold the cost structure while still having the infrastructure we need to execute on the project. Now as we return to profitability, there will be some variable costs that come back in. But on an overall basis, we're planning on holding that cost structure to get the leverage.

Thank you. And I would like to turn the call back over to John Hewitt for closing remarks.

Thanks, everybody, for taking the time today to join us on the call. I wish everybody be safe out there, and we look forward to speaking with you on our next call.

Thank you all for participating in today's conference call. This concludes today's event. You may all disconnect, and everyone, enjoy the rest of your day.