Matrix Service Co (MTRX) 2008 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Matrix Service Company second quarter fiscal year 2008 earnings results. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Truc Nguyen, Investor Relations for Matrix Service Company. Thank you, Ms. Nguyen, you may begin.

I would now like to take a moment to read the following statement. Various remarks that the Company may make about their future expectations, plans and prospects for Matrix Service Company 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 annual report on Form 10-K for our last fiscal year and in subsequent filings made by the Company with the SEC.

Now I would like to turn the call over to Michael Bradley, President and CEO of Matrix Service Company.

And good morning to everyone. On the conference call today we also have Les Austin, Matrix Service's Chief Financial Officer. Before turning the call over to Les to discuss the financial results in more detail, there are three things that I want to cover on the call today.

First, is the performance of our overall business absent LNG, which had an outstanding quarter. Second, is the charge and the outlook for our LNG project. And third is the outlook for our core business going forward into fiscal 2009, which based on discussions with our customers and bidding activity remains very positive.

Regarding the first topic, we're very pleased to report that our overall business, again excluding the LNG project, performed extremely well during the second quarter of fiscal year 2008. Margins in both of our operating segments increased compared to the same quarter last year, and were also up from the first quarter of the current fiscal year.

Repair and maintenance margins increased to 16.7% versus 15.1%, and Construction Services, excluding the LNG charge, increased to 13.6% versus 11.1% compared to the same quarter last year. We're very pleased with the overall growth in our revenues and our ability to improve profitability.

We did experience a decline in revenues associated with both our Electrical and Instrumentation and turnaround business, as was expected going into fiscal year 2008. We expect revenues for both of these segments to improve in fiscal 2009 based on activity we are seeing today. So in summary, we're very pleased with the performance of our core business during the second quarter.

The second item I want to talk about is the LNG project and the additional cost overruns experienced in the second quarter, which is obviously disappointing. As stated in the earnings release, we recorded a charge of $16 million due to an increase in the forecasted costs to complete this project. Clearly this is a significant change, which comes on the heels of the $11.3 million charge in fiscal 2007. So I want to discuss what has happened to cause this latest charge and where we stand on the project today.

As I have discussed previously, this was a major lump sum job which was bid prior to hurricanes Katrina and Rita. We have commented on the challenges encountered from the onset of this project, including lower productivity and higher turnover due to the strong demand and limited supply of skilled labor in the Gulf Coast area, which led to significant cost escalations. Additionally, we experienced some design issues, and when combined with the above, required a more compressed schedule to meet our customer requirements, which resulted in significant cost increases.

When we forecasted the job in the fourth quarter of fiscal 2007, we recorded costs related to these issues and believe that we had captured all costs, including some allowance for known risks, and felt we had it covered barring any unforeseen events. Unfortunately in the second quarter of fiscal 2008 we encountered some unforeseen issues, which were primarily related to the erection of the structural steel towers for all three tanks. This forced us to further compress the schedule, significantly increasing our labor and subcontractor cost by a sizable factor, which resulted in the $16 million forecasted increase in our cost to complete.

I will give you a little more detail. The structural issues we encountered created a scenario that was not expected and impacted our costs in three significant ways. We began to experience a significant increase in erection time of the structural steel due to some design and fabrication issues, which required us to add more craft in order to make up the schedule. Additionally, we had to duplicate manpower for tanks 2 and 3, since the erection delays caused all three towers to really compress into a concurrent timeline on the schedule.

Our original plans were for a progression on the structural steel towers from one tank to another. But the issues we ran into forced us to fully staffed all three towers to keep our schedule intact.

Second, subcontractors were required to accelerate their schedule accordingly. And third, we had to add additional equipment and scaffolding to further service all three work fronts and support multiple trades working at the same time.

Where we stand today is, first, we plan to meet our customer's schedule requirements with an excellent safety record and a quality product. Second, tank 1 is substantially complete, and the remaining work for tanks 2 and 3 have been forecast assuming the same labor, productivity and subcontractor cost experienced on tank 1. While we hope to improve our productivity on tanks 2 and 3 based on our experience on tank 1, we're not forecasting improvement.

Going forward I would say the risks are primarily centered around weather and crew stability. Long weather delays or increased turnover could have further impacts, as Les will discussed in a minute. But as of today we plan to meet our contractual commitment.

The third topic I want to discuss is the outlook for our business, which we're very excited about. In general, we continue to experience strong demand for our services. Our AST business, both on new construction and repair and maintenance remain extremely strong, and we see continued strength in these areas beyond 2009 based on discussions with our clients.

We are adding internal capacity to our engineering, fabrication and operational teams to provide faster delivery to our clients and increase our services capability. In addition, to our flat bottom tank opportunities, we see significant opportunities in adjacent energy markets for similar skills and capabilities beyond petroleum products and crude oil, and are working to diversify into these markets.

Our capital Construction Services outside of Aboveground Storage Tanks have steady backlog working for key clients throughout the United States. We are seeing increased opportunities related to refinery expansions, power, and alternative energy, and are working to expand our capabilities in markets to continue to grow this element of our business.

As I mentioned, our turnaround and maintenance business is down this year compared to fiscal 2007, which was expected. However, fiscal year 2009 is anticipated to be a strong turnaround year, with key clients beginning to commit to substantial outage-related work.

Our Electrical and Instrumentation revenues were down, as I mentioned earlier, and was expected. We are seeing plenty of opportunities to expand this segment, and are focusing really on higher margin opportunities and market expansion.

Additionally, we began setting up operations in western Canada in the first quarter of fiscal 2008, primarily to focus on expanding our Aboveground Storage Tank operations. We are seeing several opportunities develop and will be in a position to work with our key clients in this market.

Finally, I want to comment on our backlog. Backlog was $486.3 million at the end of second quarter, which is slightly lower than expected. However, we began work on two major projects in the second quarter, which due to delays are not fully included in backlog as of November 30, 2007. Absent these delays, we would have continued to see a sequential increase in backlog. We expect to announce these projects in the future.

In summary, we are very pleased with our overall operations and financial results for the quarter, excluding the LNG project obviously, which has been a challenge. We are approximately 84% complete with the LNG project, and look forward to completing this project and meeting our customer's expectations. Going forward we continue to see a strong outlook and we will focus on continuing to build our backlog and improving profitability. So now I will turn it over to Les who will go through the financial details.

The specific details of the second quarter and the six month year-to-date performance have been disclosed in our press release this morning. So I would like to highlight certain items for each of the operating segments.

Total revenues for the second quarter were $194.7 million, up 17% compared to the second quarter of fiscal 2007. Net income for the second quarter of fiscal 2008 was $200,000, or $0.01 per fully diluted share, compared with $8.1 million or $0.31 per fully diluted share for the second quarter of fiscal 2007.

Included in the current quarter results were pretax charges of $16 million for additional cost overruns on our Gulf Coast LNG project, $1 million to fully reserve a receivable from a customer who filed bankruptcy in the second quarter, and $900,000 for non-recurring employee benefit costs. The impact on earnings per fully diluted share for these charges was approximately $0.39 per share.

Matrix Service also recorded a $700,000 tax benefit in the second quarter for the continuing assessment of the realizability of state investment tax credit. The $16 million charge recorded on the Gulf Coast LNG project in the second quarter of fiscal 2008 reflects management's best estimate of the total revenues to be realized, including incentives and total costs at completion. The current forecast includes actual cost and productivity data as of December 31, 2007 when the project was 84% complete, and detailed cost projections for all remaining activity. The current forecast also reflects the manpower and cost necessary to achieve our contractual delivery dates for each of the three tanks being constructed by Matrix Service.

Based on all available information, we believe we will achieve the delivery dates for all three tanks, and the forecasted revenues include receipt of incentive payments tied to meeting those dates. The contract also provides for liquidated damages as penalty for missing the delivery dates, none of which have been included in the current forecast as we believe we will meet the delivery date.

However, the schedule is not without some risk and it is possible an event or series of events could prevent us from meeting the delivery date, resulting in additional loss on the project. While there are a number of issues that could impact the schedule, the most significant items include excessive weather delays, significant loss of craft labor, or delay by subcontractors.

If we fail to achieve the contractual delivery date, we would begin to loss incentive and incur liquidated damages on a daily basis, subject to contractual limitations. The current revenue forecast includes $7.8 million of incentive payments tied to various delivery dates from February through April of 2008. Liquidated damages under the contract are capped at $6.5 million; however, we do not believe we would incur the full amount of liquidated damages under any scenario.

In addition to lost incentives and payment of the liquidated damages, a delay in schedule could also result in additional labor and equipment, which we are unable to estimate, but could be material.

Construction Services revenues for the second quarter of fiscal 2008 were $116.3 million, up 39.6% compared to the same period a year earlier. Repair and maintenance services revenues were $78.5 million in the second quarter of fiscal 2008 versus $83.1 million during the same quarter of fiscal 2007.

SG&A expenses increased to $11.8 million in the second quarter of fiscal 2008 versus $8.7 million in the same period last year. Of the increase, $1.3 million related to the bad debt charge for a bankrupt customer and a portion of the non-recurring employee benefit cost discussed previously. The remaining increase is primarily related to personnel costs associated with our growth strategy.

For the six months ended November 30, 2007 Matrix Service reported consolidated revenues of $356.1 million, up 21.5% compared to the same period a year earlier. Net income for the six month period was $6.5 million or $0.24 per fully diluted share compared to $11.1 million, or $0.43 per fully diluted share in the prior period.

Included in the current year results were pretax charges of the $17.5 million for additional cost overruns on our Gulf Coast LNG project, $1 million to fully reserve a receivable from a customer who filed bankruptcy in the second quarter, and $900,000 for non-recurring employee benefit costs. The impact on earnings per fully diluted share for these charges was approximately $0.43. The six month results were also impacted by the $700,000 state benefit discussed previously.

Revenues for the Construction Service segment for the six month period where $215.1 million, up 34.4% compared to the same period a year earlier. Repair and maintenance revenues also increased 5.9%, or $7.9 million, in the six month period ending November 30, 2007 to $141 million.

SG&A expense increased to $19.9 million in the six month period ended November 30, 2007 versus $16.4 million in the same period last year. The primary reason for the increase year-to-date related to the charges recorded in the second quarter and the personnel costs associated with growth that have been previously discussed.

Matrix Service has provided the necessary reconciliation in our press release to disclose a non-GAAP financial measure in this conference call. In addition, a reconciliation of EBITDA, earnings before net interest, income taxes, depreciation and amortization, to net income is available in the investor section of the Company's website at www.MatrixService.com.

EBITDA is provided as we believe the financial and investment community utilize this measure to assess our performance and evaluate the market value of companies considered to be in a business similar to ours.

For the second quarter of fiscal 2008 EBITDA was $2.5 million compared to $14.9 million for the same period last year. EBITDA for the six months ended November 30, 2007 was $15.1 million compared to $22.1 million for the year earlier period.

Gross margins before special items have been identified in the press release. Management believes that results, excluding these items, are useful in evaluating operational trends for Matrix Service and its performance relative to our competitors. For the three and six months ended November 30, 2007 consolidated gross margins were 15% and 14.9%, respectively, absent special items.

The Company's bank debt totaled $3.3 million at November 30, 2007, and its cash balance stood at $6.2 million. Matrix Service has utilized $8.4 million of the five-year $75 million revolving facility for outstanding letters of credit.

Capital expenditures during the first six months of fiscal 2008 totaled approximately $8.3 million. The Company also acquired approximately $200,000 of equipment under capital lease. Matrix Service has committed over $15 million for capital expenditures to date, and cash flows for these expenditures could exceed $23 million for fiscal 2008.

Backlog at November 30, as Mike said, stood at $486.3 million, which is a $26.3 million increase over our May 31, 2007 backlog of $460 million. There were no open market purchases of shares for the first six months.

I will now turn the call back over to Mike who will discuss the remaining prospects for fiscal year 2008.

As we stated in our press release, based on the results of our LNG project we will not meet our earlier gross margin guidance. We believe gross margins in the remaining six months of the fiscal year should be in the range of 11.5 to 13.5%, which would include approximately $27 million of additional LNG revenues at zero gross profit.

We still believe our original range of $700 million to $750 million is appropriate, and SG&A expense should still be in the range between 5 and 5.5%.

Again, we are very pleased with the underlying performance of our business in the quarter. We feel good about our outlook, a lot of possibilities and opportunities, and continued strong market that we see in the foreseeable future.

We look forward to continued progress as we move into the third quarter of fiscal 2008. And we thank you for your support. And now we will open it up for questions.

(OPERATOR INSTRUCTIONS). Matt Duncan, Stephens Inc.

Congrats on a great quarter, excluding that LNG project. The first couple of questions I have are really related to the LNG project and then I will move on to happier topics. But first of all, how confident are you guys that this $16 million is going to cover the rest of the cost? And I guess maybe another way to ask that would be, how tight is the timeline, and is there much wiggle room for you guys if things do get delayed just a little bit?

I would say that we spent a lot of time and effort in defining this current charge. We feel confident that based on the items that we laid out, excluding excessive weather delays or issues related to craft turnover loss, we feel good about the number that we have put forward.

Again, the way we looked at it is we incorporated the experience that we've had on tank 1 and assumed that same experience on tanks 2 and 3. As I said, I would hope we would get better, but we're not going to forecast that.

What is the timeline like in the projections that you guys have made? I know Les was running through some numbers about some incentive payments you get for getting done on time. How much wiggle room do you have in the timeline?

I won't discuss the specifics, but I would say that we have built in to our forecast some weather delays and other delays in order to meet those dates. The first tank is scheduled to come online on February 18, so we're closing in on that date. Tank 2 is in April and -- or in March -- and tank 3 in April. So right now we feel comfortable with our ability to meet those dates.

Again, we have factored in some contingency for weather, but anything excessive or unusual events have not been incorporated.

Then just to help with this modeling, kind of that project over the next two quarters, would the incentive payments occur over time or do those only occur at the end? Where do I need to put those in revenue in my model?

The revenue is modeled as we said, about $27 million for the remaining two fiscal quarters. Included in our total estimate to complete is the incentive revenues of $7.8 billion. That is how we arrive at the total loss that we have recorded the project at.

That $7.8 million in incentive payments is not part of those $27 million in revenue?

It is part of the $27 million in revenue. It is part of our total revenue estimate that we have for the project.

You are recognizing that as you go then?

That is correct.

Les, how should I divide up that $27 million between the third and fourth quarter? Just divide it in half, or is there going to be one quarter that is a little heavier than the other?

I think, as we have stated, that we have been working on the project the dates of the three tanks, the first one is in February, and the second one is in March, and the third one is in April. So logically all three months of the third quarter we're going to be working on the LNG project. Theoretically we will only be working two months out of the fourth quarter, with a little cleanup in May.

That is helpful. Then on the back -- as I look at your backlog, specifically for Specialty, talk about, number one, what is in backlog now, and then what is on the horizon for that Specialty Construction segment once you finish this LNG project.

The current backlog, as we have discussed, has $27 million related to the LNG project. The other Specialty work is not significant. It is in the $3 million to $5 million range, really currently associated with some stack liner projects that we are working on. But as Mike has said in his comments, there is quite a good deal of market activity for that group that we foresee in the future going into fiscal 2009.

Let's move on then and talk about gross margin. It looks like you guys have raised the high end of your gross margin guidance for the remainder of the year from 12.5% to 13.5%. Can you talk a little bit about what is driving these better margins and what made you guys decide to do that?

Obviously, we have had the higher margins year-to-date that we have talked about. Absent the LNG charge, it was 15% in the quarter and it was 14.9% year-to-date. We have experienced extremely good margin in both the repair and maintenance and the Construction Services segment. Repair and maintenance up over 16%. With those activity levels, and as the LNG project begins to wain, it is our expectation that the high end of our margin guidance could be exceeded, and that is why we chose to raise it to 13.5%.

A couple more things here and then I will jump back in queue. First, talk about the AST business and what some of the growth drivers have been there. We know some of the end market factors, but just walk us through a little bit of detail because that business has been doing very, very well for you guys.

And then finally, if you would talk about -- Mike, you talked about the turnaround business being better in fiscal 2009 and 2008. I don't know if there's any way to quantify that or just maybe give us a little bit of detail behind that comment. And maybe one way to ask it is you did $121 million in repair and maintenance revenue for Downstream Petroleum in fiscal '07. Is that the type of year you are thinking about four fiscal '09?

Let me first talk about the AST Aboveground Storage Tank business. We are continuing to see significant activity in both new terminals and terminal expansion. We have been meeting with several clients to discuss plans, and we're typically talking about plans over the next two or three years. We are seeing a lot of demand as a result of the Canadian crude oil and the pipeline expansions associated with that. But we're also seeing expansion of import terminals in the U.S., as well as some pipeline expansions that are being planned which will add additional terminals. This is primarily geared towards crude oil and refined products.

We also see some opportunities related to the alternative energy, ethanol, bio diesel and some of those facilities, and we're starting to look at some projects associated along those lines. So we're just seeing really this demand across the country right now, and it is an extremely strong market.

As I mentioned, we have also set up an operation up in Canada, Western Canada, to capture some of the opportunities that we see developing up there, not only with new clients but with some of our current key clients that we service in the United States.

As it relates to the turnaround business, typically we see in advance what the refiners are planning over the year. Going into fiscal year 2008 we did not see the same kind of activity that we saw in fiscal 2007, and so we expected the turnaround business to be slightly down for this fiscal year. What we are seeing now though is there are more customers starting to make commitments for 2009. And we're starting to get some of that business set into place. It is a good indicator based on what we are seeing now that we expect that turnaround activity to pick up in 2009.

I appreciate the insight. Thanks guys. I will jump back in queue.

John Flanagan, First Analysis Securities.

Can you talk about the mix in the backlog at November quarter end between Construction Services and repair and maintenance, and then perhaps comment on the mix of the additions?

The $486 million is made up of about $372 million, approximately, on the Construction Services side, and about $113 million, $114 million on the repair and maintenance side. As far as the additions, I will see if I can find that for you. The additions to backlog in the quarter were $181 million, and about $105 million of that was in construction and about $77 million in repair and maintenance.

Then looking at the outlook comments, thanks for the turnaround color, but also on Electrical and Instrumentation why do you expect things to pick up in fiscal '09? What market -- end market dynamics lead you to that conclusion?

Well a couple of things. One is some of our Electrical and Instrumentation business was impacted by lower turnaround activity that we saw, or had been experiencing this year. I recently have brought in a new person to head up our union business. And we are really -- he brings a lot of experience in power and electrical instrumentation, as other construction.

But we are seeing a lot of opportunities for new capital construction going into '09. And we are really focusing on higher margin opportunities and expanding our market presence. And so we believe based on the activity we are seeing today there is a good opportunity to continue to grow this business. And we have an excellent Electrical Instrumentation group located back East, a good reputation. And just again seeing the activity we have in front of us are anticipating a better year in fiscal year 2009 on revenues, but also on profitability.

The last one for me now. On the AST side, are the -- is the demand for craft that is affecting LNG a general pattern in either that geography or adjust overall where you are just having to really fight to hold onto your craft for AST work?

I would say it is the craft -- the labor market in general continues to be pretty tight throughout our business. We have had to significantly step up our recruiting, as I have talked about in previous conference calls. And we're having success in continuing to recruit people to the staff our jobs. I would say it a continued challenge for all of us.

The Gulf Coast is particularly challenging, just given the amount of work going on in the Gulf Coast and the number of LNG projects. You've got refinery expansions and other work, and so it is particularly strong and a very tight market.

Rich Wesolowski, Sidoti & Co.

Les, a couple of points of clarification on the LNG job. First, the actual projected cost for the project are still in line with the lower $13 million estimate that you gave in late December, correct?

We're saying that our current cost estimate is $16 million, and included in that estimate is some contingent costs for areas that have given escalations in the past.

If you didn't have any escalation in the past, you would come out somewhere lower than $16 million, but you are giving yourself a little bit of cushion, is that correct?

I think as Mike talked about, we are putting into our cost forecast the productivity and the inefficiencies that we experienced on tank 1 into tanks 1 and 3. We have not forecasted any improvement on the project side, even if that improvement may be occurring.

In the quarter you booked $25 million in total cost for LNG, meaning the revenue plus the write-down?

That is correct. Yes. That is correct.

You have $27 million in costs left to complete under the new estimate?

$27 million in revenue and $27 million in cost. Correct.

Shifting to the rest of the business, back in the February quarter we got a bit of [ahead of take] on backlog, I'm wondering whether this is in a similar situation. How far are you booking out tank fabrication capacity?

I think that we got backlog scheduled into calendar 2009 right now. As I had told you in the past, typically our backlog is for twelve months or less in duration. Particularly on the repair and maintenance side it is generally less than twelve months. But we've got terminal work and Aboveground Storage Tank work booked out into calendar 2009.

Looking at the predominately cost plus and incentive-based nature of your contracts, do you think you're going to get a lot of these terminal phases in Cushing and down in the Gulf Coast in smaller packages, and thus we might not see the level of elephant-sized awards and press releasable awards in the future, even though backlog may grow?

I wouldn't say that we're not going to see large press releasable projects come up. I can't comment on specifics, but I would say that some of the discussions we're having are very encouraging about some future opportunities, both in terminals as well as terminal expansions. Not to say that we might not see -- there's a lot of expansions planned for refineries, which they are dividing up portions of the project. But I would say we're not anticipating -- we're not seeing any change in the size of some of the projects that we have been currently executing going forward.

Do you have a stat on how much of your backlog is set to be completed in F'08?

Not particularly. We consumed obviously $195 million of the backlog in the current quarter. We have given you the revenue projections, the range of guidance of $700 million to $750 million. Now that we have changed in the current fiscal year everything runs through backlog. So you can do the math (multiple speakers).

Okay. So there is no -- not a lot of new work running in there, it is just basically coming out of the prior quarter backlog?

There will be some new additions to backlog that will be consumed in the third and fourth fiscal quarters.

Just two quick questions on the margin. The Paulsboro projects that were delayed in Q1, did they get started during the quarter? And if so, did they affect the margin at all?

Those projects did start in the second fiscal quarter, and they were a contributor to the margin.

Finally, the R&M segment margin is something that jumped out at me. Can I assume that you booked some of the same quick turn type work that you reported in the first quarter?

There was some of that, but obviously our second and fourth fiscal quarters are the quarters that we have the lion's share of our turnaround work, spring and fall turnaround seasons. So those were more of a contributing factor in the second quarter versus the call out work that we experienced in the first quarter.

Tahira Afzal, KeyBanc.

Just to start off with a bit of clarification, the incentive that you have on the LNG project, are those built into your 11.5 to 13.5% guidance?

They would be because we have included those revenues in our projections for the current loss we have recorded on the project. In the $27 million of remaining revenue is included the incentive revenues of $7.8 million.

If you take a those out, your margin range would be 11.5 to 12.5 again?

No, I don't think you would look at it that way. You don't take them out because we forecast that we're going to make the contractual dates on tanks 1 through 3, so that is why they are included in revenue.

Got it. Okay.

The only impact would be if we did not meet the contractual dates, and then those incentive revenues would start to erode over a period of time.

Second of all, I just wanted to check in terms of just comparing your fiscal year '07 clientele base and you had around six clients that contributed 52% of your revenue. If you look out to fiscal year '09, and as you have indicated, you have started getting commitments from your clients, how do you expect that stock six client clientele base profile to change? And in terms of the top half, 50% of your revenue, do you still expect that to be fairly concentrated?

I would say, no, we don't expect it to be as concentrated. We are currently working and successfully expanding our customer base. I can't give you exact percentages, but that is one of our focuses that we've had is to expand our customer base, and we are successively accomplishing that.

It would be fair to say that by fiscal year '09 we should see a more diversified base?

I would say you will start to see the diversification impacting fiscal '08.

Fair enough. Then just going back to the LNG project, and I promise to keep it short. You have got enough questions on that. But if I look at -- going back to around August when you talked about the project and your losses, and you talked about the fact that your future outlook was based on current productivity levels, and that obviously turned out to be incorrect. You are assuming the same based on the productivity levels right now. What has changed in terms of how do you assessed the cushion that you have in essence built into that $16 million versus back in August?

What really changed, and as I mentioned, the unforeseen issues that we were ran into was during the construction of the structural steel towers, which support all the mechanical piping and electrical implementation. We, as I mentioned, we encountered design and fabrication issues which really slowed down the construction of these towers, which obviously impacted productivity, not only on one tower, but as I mentioned, we started to get overlapping schedules and so we had to fully man.

So those productivity factors and the experience that we have seen on tank 1 -- which again as I mentioned, tank 1 is substantially complete -- we have anticipated to occur on tank 2 and tank 3. That is how we developed our forecast. Does that answer your question?

Yes, kind of. I guess what I'm trying to see is what has changed, and I guess it is difficult to quantify in a sense how you had changed your -- on assessing this project so that we do not see any, number one, cost overruns, and more importantly, I guess, that it gets done on time. I was wondering if you would be providing more regular updates or be available to comment on that going out into April as the projects approach completion?

Yes. Really, the simplest way to explain how we have factored in is we are substantially complete on tank 1. And so we have the data we need to forecast tank 2 and tank 3.

Then if you look at tank 1, as you have said, you have seen that is substantially complete, would that mean that the incentive that you are going to realize on tank 1 are essentially in your hand, in a sense?

We still have some work to do to complete. We've got insulation and some other work, and our schedule is anticipating the tank be ready February 18. There still time between now and then where some additional work is to be completed. But the major impacts to our cost are substantially complete.

Fair enough. Just one last question, and that is essentially to do with something someone asked earlier on around your Specialty business. If you look at fiscal year '08, or if you look at how this year is progressing and what you have said and done with LNG, potentially you could have $65 million to $70 million, let's say, in revenue from your Specialty group. As you lookout to fiscal year '09 and you don't have that project in there, do you feel that you do have enough demand outside of LNG to actually meet the same revenue levels, or would you be looking for a more slower build into a power and other businesses?

First of all, we are bidding work that would be associated in the Specialty area. We have been and are currently biding work. We have built up a pretty good talent base on the LNG project, which we plan to shift into some of the newer Specialty work going forward. Obviously our focus is going to be on improving profitability of that group, given our experience on the LNG project.

The answer to your question is we are bidding work now. We have -- are performing some current projects as it relates to stack liners. So we see opportunities. Yes, we are seeing growing opportunities in that area for us.

Daniel Burke, Johnson Rice.

I think I just have two questions left. Mike, when you were talking about opportunities in the tank business, you mentioned adjacent markets. Were you referring to biofuel and Canada or other some other things out there that you are looking at that you could give us a little more detail on?

I'm referring to biofuels, referring to scrubbers, stack liners, hopper bins, steel products and storage associated with power and other markets. When you look at our capabilities on Aboveground Storage Tanks there's a lot of capability that we can leverage into other products. And so that is what I mean by that comment.

To go back to biofuel and Canada, a quick follow-up on each. On the bio side, I assume most of the opportunities you are seeing now would be on the terminaling side and the need for incremental and additional blend stocks rather than at the plant level. And then on Canada I would be curious to get an update on how you're navigating the labor situation there.

The answer your first question is, yes. That is what we are seeing on the biofuel. In terms of Canada we have, as I said, we have set up an operation up there. We're doing work in Canada today, not on a large scale. And so we have some experience. But we are also -- have been looking at teaming up with some folks in Canada to work together in terms of being able to staff our particular jobs until we get more experience.

Labor market up in Canada is very difficult. We are proceeding cautiously but optimistically, because we see plenty of opportunities up there. And again some of our key clients in the U.S. are also potential clients up in Canada, and we already developed a relationship with.

And then my last question sort of stick on the labor topic. As you look ahead to the conclusion of the Sabine Pass project, you've already got the TEPPCO Port Arthur project lined up on the terminaling side. What is your interest in accumulating more work in that specific region? And I guess looking over towards Louisiana coast, as well as the Texas coast, on the capital side, given labor constraints, do you feel like you have the capacity to grow beyond the TEPPCO project as you look into, I guess, calendar -- late calendar '08?

Yes, we do. I would tell you that we are not going to bid fixed-price on labor for sure, given our experience here on the LNG project. But we have -- yes, we have had some labor challenges on this project, but we have been able to continue to recruit staff to fill our needs. Some of the challenges are the skill levels of the craft is a big issue for us, and it is a big issue on the Gulf Coast in general. But we are looking at additional work on the Gulf Coast, cost reimbursable type contracts. So the answer to your question is, no, we see other opportunities to pursue.

I guess one quick follow-up and I'm off the line. I understand they would be of course cost reimbursable, but do you think you could hit some of the incentive targets that you are pretty comfortably able to hit in some of the other regions where you are doing terminaling work?

Yes.

(OPERATOR INSTRUCTIONS). Rich Wesolowski.

Mike, does the extra money that you're devoting to completing the Sabine Pass project preclude you from buying back stock? And if you could remind us, how much the Board has authorized you to buy?

I will answer that. We're not constrained from a liquidity standpoint. We have ample liquidity under our revolving line. And I believe it is 1.3 million shares that the Board has authorized us to repurchase under the current authorization that was given in October of 2000.

Is there hope for an amended authorization?

We will continue to look at total shareholder return and do what we feel is in the best economic interest of the Company.

Gentlemen, there are no further questions in the queue at this time. Would you like to make some closing comments?

Sure. I just want to again thank everybody for joining us today. We're very excited about our outlook and again the underlying performance of our business in this quarter, excluding the LNG project. We have provided, I think, a lot more color on the LNG project to explain so that we have a good understanding of where the project is and what the outlook is.

But I think very importantly is we continue to see very strong demand for our services. We're looking forward to fiscal '09 as the opportunities continue to develop. And I want to again thank -- and our folks at Matrix Service who have just on an outstanding job this past quarter and continue to do an outstanding job over the past year. With that, we will sign off. Thanks everyone, and we will talk to you in Q3.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time.