Good morning and welcome to the Matrix Service Company Conference Call to discuss Results for the First Quarter of Fiscal 2024. Currently, all participants are in a listen-only mode. [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.

Thank you, Josh. Good morning, and welcome to Matrix Service Company's first quarter fiscal 2024 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 different 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. Before I turn the call over to John Hewitt, I'd like to share information about several upcoming investor conferences and corporate access opportunity. On November 14, we will hold the Matrix Service Company Virtual Annual Stockholder Meeting. You can register to attend as instructed in the proxy or via the Events tab on our Investor Relations website. We will present at and hold one-on-one meetings at the Sidoti Micro-Cap Virtual Conference planned for November 15 and 16. And finally, we will hold a Virtual Non-Deal Roadshow hosted by Rose & Company in December. If you'd like additional information on any of these events, I invite you to contact us with Matrix Service Company Investor Relations website. I will now turn the call over to John.

Thank you, Kellie, and good morning, everyone. Here at Matrix, we continue to pursue and expect zero injuries across our platform. Broadly, our focus is around accountability, communication and training to drive better outcomes. Each of us need to be accountable to ourselves and each other as we think about our behaviors, decision-making and risk awareness and not only our professional lives, but at home as well. We need to communicate our expectations, why safety is important and support each other. As a learning organization, training is critical to improve awareness, decision-making and ultimately, outcomes. Above all, each employee has the authority and the obligation to stop work when they see or feel uncomfortable with the task they or a coworker are about to perform. Three simple questions: What am I about to do? How can I get hurt? What am I going to do about it? Are key to keeping yourself and your coworkers safe. Turning to the quarter. We're pleased to update you on the continued momentum in our business and our end markets. We generated awards of $497 million in our fiscal first quarter, surpassing our fourth quarter of fiscal 2023 awards of $464 million. This is our highest project award total in 5 years. Project awards resulted in a book-to-bill ratio of 2.5. Our Storage and Terminal Solutions segment was the standout in the quarter, recording a book-to-bill of 4.6 on the back of a large capital project award. This award is a midsized LNG liquefaction and storage facility in the Eastern U.S., similar to previous small to mid-sized LNG projects completed in the past. This is a project for a client, we've done a good deal of work for over the years, which is a testament to our ability to deliver complex projects safely, on…

Thanks, John. Overall, the first quarter of fiscal 2024 was in line with our expectations, highlighted by the strong project awards, John previously discussed. Revenue of $198 million during the first quarter was lower than the $206 million in the fiscal 2023 fourth quarter, primarily related to the decrease in the Process and Industrial Facilities segment, which I will discuss shortly, as well as seasonality in our business. The contribution to revenue of newly awarded projects is beginning to benefit the Storage and Terminal Solutions segment but is still currently limited as the projects progress through engineering and planning stages. Gross margin was 6% in the first quarter of fiscal 2024 compared to a gross margin of 7.1% and in the fourth quarter of fiscal 2023. Despite generally strong project execution, gross margins in the first quarter experienced a 470 basis point impact from the under recovery of construction overhead cost. Some of these construction overhead resources have been more actively involved in the pursuit and planning of future work. With the improved backlog, more resources will now shift to the execution of projects. On a consolidated basis, we expect to achieve full recovery of construction overhead costs on higher revenue volumes in the second half of fiscal 2024. Consolidated SG&A expenses were $17.1 million in the first quarter compared to $17 million of SG&A expense in the fourth quarter of fiscal 2023. The first quarter expense includes an additional accrual of $1.6 million associated with the variable accounting for cash settled stock-based compensation, which increased due to a significantly higher stock price. The improved stock price is obviously a positive, we have all been working to achieve, but it does increase expense related to certain stock-based awards that are subject to variable accounting. This increase was offset by various…

Thanks, Kevin. Before we go to questions, I'd just like to reiterate some key takeaways for today. First of all, our strategic approach to the energy and industrial end markets we serve is being validated given the strength of our awards and ultimately backlog. This is supported by a steady opportunity pipeline across these markets. The timing and volume of project awards, our awards will not be linear and there will be some lighter award quarters. But overall, we believe our strategic approach will lead to further backlog growth and strong performance into the future. In the long term, the reshaping of global energy markets, energy supply security, push towards lower carbon activity and industrial reshoring, all create opportunities that we expect will drive our business for years to come. We are well positioned and structured to maximize our profitability and generate value and growth stakeholders. With that, I'd like to open the call for questions.

[Operator Instructions] Our first question comes from Brent Thielman with D.A. Davidson.

I guess first off, John, I wanted to get just your feel for look, higher cost of capital environment looks to be sustaining going forward. You're still looking work at an elevated pace, maybe your customers' reaction to that, how that might be impacting the overall kind of business or bookings pipeline? I imagine maybe the 50% of the business that smaller project work could potentially be susceptible, but love to get your sense on that.

Probably two comments there. One is that we do hear from some customers that they have -- that they're relooking at their portfolio of projects capital projects that they're doing based on the cost of debt. But I would say that's a pretty small percentage of our entire client base that we're kind of hearing those things from. And a lot of that may be mixed up with individual things that they've got going on within their organization of how they have spent or overspent their capital in the past year or two. So we're not hearing a lot of that. Two is that it's probably not a great market right now for a developer, mid-project, because of the cost of capital but the majority of our clients and the clients that we're seeing a lot of our backlog growth from are more blue-chip companies that they've got a heavy piece of their personal balance sheet and their own cash flows that are funding the projects. And they have a those companies have a tendency to look much longer term on interest rates, the price of energy demand in the market and then appreciating that some of these larger projects take upwards of 3 years to get put in place. So currently, I would say we're not seeing a major effect on our business on this award cycle.

That's encouraging. I guess second was question was on LNG peak shaving projects. You've been really active there. And it sounds like the pipeline is pretty busy there with maybe some forthcoming opportunities as well. I think you mentioned the margin profile attached to these is pretty attractive. I was wondering if you could just kind of give us a sense what those look like, maybe relative to kind of the long-term averages you expect from the business from a gross profit perspective. Can these be sort of accretive beyond those targets as you kind of get deeper into execution on them?

Those projects certainly support our consolidated long-range forecast for gross margins; and as we've said in the past, in the 10% to 12% range. I think one of the things that support that for those projects is it's a smaller competitive set for us and the risk and margin profile embedded in the entirety of the project gives us an opportunity to deliver on the margins we need to support the consolidated margin profile of the business. So the levels of contingency and escalation, projects were -- these are projects that are getting to be more repetitive, so we're able to appreciate the risks better and to manage the execution better that we're able to deliver on those margins. So I think those are a couple of reasons that help us drive the overall business to this more of a consolidated margin profile.

Yes. And I think what's key here is the consolidated margin profile. As John said, these projects have good margins, but it -- one of the other added benefits is that we've talked about under-recovery of construction overhead has been a big driver towards our margins not being where we want them to be. And so the volume from these projects will benefit us on that recovery of overhead.

I guess the last one, I'll get back in queue. Kevin, I think you've sort of indicated look, as you start ramping up on these projects you should see increase in cash generation potential. You're essentially debt-free at this point. It seems like you could be building some cash on the balance sheet. I guess a two-part question would be, what do you start to think about doing with that cash, John or Kevin? And two, how do we think about kind of the conversion to cash or cash conversion, as again, you're start ramping up on these projects, just to get a feel for the cash potential this year?

So I do believe that our balance sheet position is going to improve as we move through the rest of the year. I think that's going to come from a couple of places. Number one is the improved financial results, just producing positive earnings is going to produce positive cash. Secondly, if you look at the mix of work we're going to do, Certainly, there'll be increases in repair and maintenance work that's reimbursable that we'll have to fund, but I think that will be more than offset by just the timing of cash flows on the capital projects. So I think that we'll be able to build cash. And I think our initial focus on the use of that cash is going to be more internal making sure that we've got the right equipment needed for us to support that business. And as we've said before, we've been focused on really returning the company to profitability before we get too aggressive on either any other actions such as M&A, stock buyback, dividend, entity of that stuff. So those will be things we consider in the future, but focus this year is really about rebuilding the company's profitability, getting back to the financial targets that we've set.

Our next question comes from John Franzreb with Sidoti.

John, congratulations on another great bookings quarter. I want to start right there. You mentioned in your prepared remarks that you've relocated -- reallocated resources from procurement to execution, does that kind of suggest that we should think that the incoming booking profile will be a little bit more muted in the next quarter or two as you move to execution, especially in light of the fact that you also mentioned there are some large projects out there you think that are certainly near-term opportunities?

I don't think, we have not taken our foot off the gas pedal as it relates to continuing to book projects and awards. These things have a tendency to come in, in like waves on the ocean. And we've certainly had a strong wave here in the past couple of quarters. And we've seen it coming, right? So we appreciate the timing of when our clients are going to be making decisions on some of these larger projects. And so we're not taking our foot off the gas pedal, right? We're continuing to pursue projects, to build backlog. We're looking out into the future. How we're going to continue to take a bigger share of that market related to our storage, brand position in that market. And but to effectively chase some of that work, we do engage our project teams and to -- not only to help plan and create the estimates and the budgets for that work, but also to talk to our clients, our potential client, about the projects about how we're going to execute it. Very important for us to put our project and field management in front of our clients. But yes, they will -- they are starting to transition over into the execution phases we continue to have proposal specific people that that's what they do for the organization. And so that doesn't change. And so they will combine with our business development teams are continuing to pursue projects to build backlog out in the future.

And clearly, the under-absorption issue has been a problem for some time. Kevin certainly said that the second half of the year is where we'll probably migrate to a much better situation. It seems to me that's largely going to be led by storage and to a lesser extent, the utility business, but the process will be lagging a bit. Can you kind of review the outlook on the process side, when do you expect that business maybe to turn the corner? I know the expectation is for it to be down this year, but what's the depth and duration of that?

So first thing, I think we'll see pretty good growth in both Storage and the Utility segments. For Process and Industrial Facilities, we've got a number of things that are impacting the top line for that segment. We completed some work that previously have been trying to get done, but that was pretty significant for the company, an important step. We did sell a noncore business that in the fourth quarter of last year that impacts that segment. But we've also had some good bookings in that segment. If you go back to -- I think it was the third quarter of fiscal 2023, we booked a large capital project, that project is a little unique. It's got a -- there's a longer runway before we really start seeing revenues on that project. It won't really start benefiting until the first quarter of fiscal '25 so we have visibility to seeing these revenues increase, but most of that will happen in the very first part of fiscal 2025.

And in regards to your long-term financial targets, I'm most interested in the 4.5% operating margin target. What kind of revenue profile and gross margin profile are you using to get that 4.5% op margin target? It's certainly better than what I was expecting by the end of next year.

There's a number of things that are going to -- that will go into us getting to that target. So we need to get revenue volume up. And we've talked previously that to get to where we're fully recovering our construction overheads, we probably need at least $250 million of quarterly revenue to get there. But we also want to get the SG&A percentage down to 6.5% or lower. So in order for that to happen, we probably need that revenue to be even higher than that, getting it up to $275 million or so in a quarter. So those are two big drivers. And then the third one is just what's the margin opportunity in the full backlog of the business between the capital projects and the repair and maintenance projects, and that needs to be north of 10%. So the combination of those three things are what's going to get us to the 4.5%. And as I said in my comments, all three of those areas are going to improve and be helping us move toward that make a significant step for those financial targets as we complete the fiscal year.

And I guess one last pesky question, regarding the tax rate, you mentioned that you expect it to be approaching zero this year. How does that look in 2025, what's the step function up?

So I think it will be near zero this year. I mean there's always unique tax issues that could adjust that. So it could be zero to 5% somewhere this year. Next year, we'll still be utilizing a lot of reserved tax assets. So I currently back the envelope projecting that to be somewhere around 10% next year. That's my best guess at this point.

I would now like to turn the call over to John Hewitt for any closing remarks.

Couple of things real quickly. First of all, I want to thank all of our employees for your hard work for your dedication to quality and the teamwork that's gone into delivering on the -- not only on the strong awards but also to our execution strategy and improvement in the business overall. I certainly want to thank our shareholders for your support through this period. And would leave everybody, again, with a reminder on your personal safety awareness to ask those three questions: What am I about to do? How can I get hurt? What am I going to do about it? And to remember for our employees that you do have the authority to stop work and you have the obligation to do that as well, if you see something or feel something that is unsafe. Other than that, I'm glad to spend time with everybody today and look forward to seeing you in future conferences and calls.

Thank you. This concludes today's conference call. We thank you for your participation. You may now disconnect.