MATRIX SERVICE CO Q3 FY2025 earnings call

Management Statement and Operational Highlights:

• Organizational improvements: Eliminated senior-level positions, promoted Shawn Payne to President of Engineering & Construction, decentralized business development, and began winding down Northeast transmission and distribution service line.
• Market outlook: Monitored impacts of U.S. trade and environmental policies, but believed uncertainty was temporary; energy clients intended to fund infrastructure projects over next four years.
• Revenue guidance: Revised fiscal 2025 revenue guidance by 10% to $770M-$800M due to transmission and distribution exit and macroeconomic uncertainty.
• Backlog and awards: Grew backlog nearly 8% sequentially to over $1.4 billion with $301 million in project awards, book-to-bill of 1.5, and Storage and Terminal Solutions had $205 million in awards, Process and Industrial Facilities had $59 million.

Segment Performance:

• Storage and Terminal Solutions: Q3 2025 revenue increased to $96.1 million, a 77% increase from the prior year. This segment accounted for $205 million of the quarterly awards, increasing backlog to $848 million, the highest in the company's history.
• Utility and Power Infrastructure: Revenue grew 27% to $58.7 million in Q3 2025 compared to the prior-year period,受益于天然气调峰项目的工作量增加.
• Process and Industrial Facilities: Revenue decreased to $45.4 million in Q3 2025 from $65.6 million last year, primarily due to the completion of a large renewable diesel project.

Guidance:

• Revised fiscal 2025 revenue guidance to $770M-$800M, a 10% reduction, reflecting impact of transmission and distribution exit and macroeconomic uncertainty.
• Anticipated quarter-over-quarter growth with 20%-25% growth in second half of fiscal 2025 compared to first half.
• Backlog and revenue from large multiyear projects provide long-term visibility and improved earnings consistency.

Risks:

• Macroeconomic uncertainty due to evolving U.S. trade and environmental policies potentially delaying project starts.
• Impact of tariff activity and supply chain costs on project economics.
• Exit of Northeast transmission and distribution service line which was competitively disadvantaged and lacked sufficient awards.

Q: Good morning, everyone, and thanks for taking the questions. I guess I'd like to start with the revenue guidance. Kevin, you just said $50 million was baked into that business, I guess, for this fiscal year. Can you just walk us through the decision-making process to exit the business? Is there a potential buyer out there? Will you just wind it down? And what's the relative cost savings from exiting that business?

A: I'll give you some of the strategic stuff there, John. So going into the year, the market for the business was higher than $50 million. But because we're, probably simply put, we are too big to be small and too small to be big, and so our competitive dynamics in that business made it difficult for us to win work at acceptable margins. And plus the capital investment in that business would be dramatically higher than the rest of the company. So it was sort of on our watch list this year, that if we were able to pick up some good projects with acceptable commercial terms, then we would -- it would modify or at least would guide our decision on whether we thought there was an opportunity to continue to grow it or that we needed to sell it or that we needed to just shut it down. So as we moved into the -- and what we saw was the opportunity for us to win some nice projects in the back half of the fiscal year. And we didn't win any of them. And so, trying to win those projects around the commercial framework that we think is accessible to the business. So when we started to see that those projects were not going to come into our backlog, we made a decision that we're going to wind the business down. Without any kind of positive looking backlog, it would be difficult to find a buyer for the business where just they're picking up equipment and people. So we made the decision that we just wind the business down and we'll eventually sell off some of the construction assets that are associated with that business. We still have some small contracts that we're going to be working on out into fiscal '26, but doesn't represent a lot of revenue. And we're doing that with clients that we do other business with. So we just don't want to just walk away from those jobs, which you can't contractually anyway. So we want to continue to support those clients because, again, because they have other work that our electrical business does. That's kind of how we got to where we are.

Q: Understood. And the potential cost savings?

A: It's more about -- there are cost savings and that -- but there's also a reallocation of some resources to the electrical and instrumentation business that we're keeping. And then I think that business has been operating at a loss. So that's probably the bigger savings than the cost structure. It was a relatively low-overhead business than the equipment. And that the reason for that is that this was a business that we grew organically. This wasn't from an acquisition.

Q: Good morning, everyone, and thanks for taking the questions. I guess I'd like to start with the revenue guidance. Kevin, you just said $50 million was baked into that business, I guess, for this fiscal year. Can you just walk us through the decision-making process to exit the business? Is there a potential buyer out there? Will you just wind it down? And what's the relative cost savings from exiting that business?

A: I'll give you some of the strategic stuff there, John. So going into the year, the market for the business was higher than $50 million. But because we're, probably simply put, we are too big to be small and too small to be big, and so our competitive dynamics in that business made it difficult for us to win work at acceptable margins. And plus the capital investment in that business would be dramatically higher than the rest of the company. So it was sort of on our watch list this year, that if we were able to pick up some good projects with acceptable commercial terms, then we would -- it would modify or at least would guide our decision on whether we thought there was an opportunity to continue to grow it or that we needed to sell it or that we needed to just shut it down. So as we moved into the -- and what we saw was the opportunity for us to win some nice projects in the back half of the fiscal year. And we didn't win any of them. And so, trying to win those projects around the commercial framework that we think is accessible to the business. So when we started to see that those projects were not going to come into our backlog, we made a decision that we're going to wind the business down. Without any kind of positive looking backlog, it would be difficult to find a buyer for the business where just they're picking up equipment and people. So we made the decision that we just wind the business down and we'll eventually sell off some of the construction assets that are associated with that business. We still have some small contracts that we're going to be working on out into fiscal '26, but doesn't represent a lot of revenue. And we're doing that with clients that we do other business with. So we just don't want to just walk away from those jobs, which you can't contractually anyway. So we want to continue to support those clients because, again, because they have other work that our electrical business does. That's kind of how we got to where we are.

Q: Understood. And the potential cost savings?

A: It's more about -- there are cost savings and that -- but there's also a reallocation of some resources to the electrical and instrumentation business that we're keeping. And then I think that business has been operating at a loss. So that's probably the bigger savings than the cost structure. It was a relatively low-overhead business than the equipment. And that the reason for that is that this was a business that we grew organically. This wasn't from an acquisition.

Q: Hi, thanks. Good morning. John, real big-picture question here. I mean you've been through your share of cycles in the past and we value of your perspective here. But look, the geopolitical macroeconomic environment today, you take what you're seeing now, you look at prevailing commodity prices, to some degree influence how your customers spend. I guess my question is, John, I mean, how is all of this stuff that we're seeing in the market, how do you think it might influence what your customers may end up doing here? Not necessarily in the short term, but thinking medium term. Is all of this ultimately a positive driver for your business? I'd just love your perspective there.

A: Well, I think, whether it's tariffs or no matter what it is we see in the media, there's a lot of rhetoric running around, both out of the Washington, D.C. and out of the media houses, and across the globe. So I think it's difficult for all of us, whether you're a business leader or a normal citizen, to figure out what the future looks like. But for me, I think, and what we hear from our clients, I think they're being adding some more thoughtfulness to what their capital plans are. But I think overriding all of that is the, not only domestically, but globally, the demand for energy is continuing to rise. That demand has got to be met. It is not necessarily going to be 100% met by renewable energy sources. You've got huge electrical infrastructure needs in the U.S. alone to fuel the growth in power demand. And so I think irrespective of how all the tariffs things settle out, which I personally think will get settled out here over the next three or four months, I think we're still going to see a lot of infrastructure put in place. We're going to see this huge demand globally for NGLs coming out of the U.S., and for LNG, because, I mean, basically, the demand for energy is growing, like I said, and it supports a higher quality of life around the globe, and there's a lot of instability in the energy sources and people are going to be looking to the U.S. to provide that stability. So I'm pretty bullish and confident in the markets that we're in with our brand position, particularly around specialty vessels and specialty vessel storage and infrastructure, that we're going to play a strong role in that as we look out to the future.

Q: Yes. Appreciate that. And then I guess another one, Kevin, this might be more for you. But there's been an expectation for sort of a progressive ramp in volume and revenue as the fiscal year has played out. And I think maybe more specific to storage, I mean you had terrific growth compared to last year, but the growth was somewhat muted relative to the previous quarter. So as you kind of look at the fourth fiscal quarter, is there enough confidence here that we should see that segment step up? I think that's sort of critical to support the outlook. And I guess maybe the question, are you seeing the critical jobs moving forward now in that segment that really should contribute here?

A: Yes. So you're right that the revenue was, in the third -- in Q3 was pretty consistent with Q2. Part of that was just timing of procurement. Now when we're looking to 4Q, I'm expecting to see a really strong growth cycle in the Storage and Terminal Solutions segment. So I think that is supportive of the outlook. I think you'll also see some growth in Utility and Power Infrastructure. Process and Industrial Facilities took a step-up this third quarter. I would expect it to be somewhere close to that same level here in the fourth quarter. So the combined should have a strong upward move in revenue level for 4Q. I think that will benefit overhead recovery and the gross margin percentage in a significant way.