Matrix Service Co (MTRX) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Matrix Service Company's second quarter earnings call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session with instructions following at that time. (Operator Instructions). As a reminder, this conference is being recorded. Now I'll turn the conference over to your host, Kevin Cavanah, Vice President and CFO. Please begin.

Thank you. I would now like to take a moment to read the following. Various remarks that the Company may make about future expectations, plans and prospects for Matrix Service Company constitute forward-looking statements for 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 fiscal year ended June 30th, 2013, and the subsequent filings made by the Company with the SEC. To the extent the Company utilizes non-GAAP measures, reconciliations will be provided in various press releases and on the Company's web site. I will now current the call over to John Hewitt, President and CEO of Matrix Service Company.

Thank you, Kevin. Good morning, everyone. We have had a very active second quarter at Matrix Service Company, and I would like to thank all of our employees for dedication and hard work during such a busy time. We continue to make progress towards our long-term strategic objectives and their commitment to success has been key to our performance. I would also like to thank the newest members of the Matrix Service Company family, the employees of Matrix North America Construction for their commitment to the culture, values and future of the Company. More on integration of Matrix NAC later in my prepared remarks, as I would like to first update you on recent safety results for the Company. At Matrix Service Company, our focus on safety is constant and unwavering.

We are focused on achieving zero incident safety-conscious culture that extends beyond the workplace into our homes and to our families. All Matrix Service Company employees have a role in this journey. It is their hard work and dedication to our mission that drives our culture and results. For the first half of fiscal 2014, our total recordable incident rate was 0.70. This culture and performance is the differentiator to our client community. We recently completed a video contest at Matrix where we asked all of our employees in groups or individually to create homemade safety videos that emphasized our culture. The response to this contest was excellent. The winner was Chris Johnson, a project manager in our Eddystone operations.

The video focused on his personal big five and starred his entire family. Each of us have our own big five. These are the top five things in our life that are good safety decisions allow us to enjoy. So great job to Chris and everyone that participated in the event. Please watch for our, for posts on our Facebook page and YouTube channel for some of the videos submitted during the contest, and please feel free to share with your family, friends and colleagues. As I mentioned, the second quarter for our fiscal 2014 fiscal year has been very busy. While the completion of the acquisition in December was certainly a great achievement for the Company, the organic growth and performance within our core business has been robust.

We are creating great opportunity and positive changes in the business as our strategy continues to gain traction. Our electrical infrastructure segment showed growth in backlog, primarily due to the acquired backlog related to the Kvaerner acquisition. Excluding the acquisition, the results for the quarter were mixed, substation work that was expected in Q2 continues to be pushed out, primarily due to overspending by customers on other transmission projects in the respective systems and slower than expected regulatory evaluation of post-Sandy improvement requests. Additionally, a very quiet storm season year-to-date in fiscal 2014 compared to an active season the same period last year contributed to a decline in revenues and margins. We continue to be excited about the transmission, distribution and substation opportunities in our footprint and strategically we see the New England area as a growth opportunity for this segment. While the timing of these opportunities has slipped to the right, we remain the preferred brand in our geographic markets and are excited about the near and long-term potential.

I'm also happy to announce the signing of our first master services agreement for substation, transmission and distribution work out of our new Nevada operation. Next quarter we will be discussing the natural gas supply and power generation market, the deacquisition of Matrix NAC has added to our segment portfolio. Moving on, our oil, gas and chemical segment showed steady growth in the second quarter, with backlog increasing nearly 20% over Q1 2014. Our turnaround of planned maintenance groups continued to transition major bid opportunities to backlog and add capital construction scope to otherwise maintenance-only related business. Executing this work in a timely and safe manner translates to profitable results for matrix, increased scope and additional fit opportunities on future projects.

Industrial cleaning business remains a growth area, and our teams have an excellent service offering, both on a stand-alone basis and as [Insular] work to larger projects being executed by Matrix. We continue to actively evaluate acquisition opportunities in this space, and see it as a probable growth area for the foreseeable future. New tanks, terminals, and balance of plan opportunities continue to drive strong results in our storage solutions segment. We're trusted by our major customers in this segment to execute efficiently under the largest and most complex construction projects, including several terminals currently under construction in North America. Tank construction remains robust in our core geographic areas, and the outlook remains very positive throughout North America, including full balance of plant to terminal opportunities.

We're very active on pre-ving and teamwork, and our engineering groups related to natural gas projects for transportation fuels, as well as other cryogenic applications in storage, delivery and process facilities. It has been our strategy to create EPC projects for the Company by delivering the up front process design and planning with our Matrix PDM engineering specialists. This strong growth and development of expanded scope opportunities has not been without some challenges. In the quarter, as we took a $4.4 million charge on Storage Solutions project, our teams remain committed to delivering quality results for our customers in a timely manner, and we are very pleased with the overall performance in this segment and the continued growth opportunities. Lastly, what with a segment consisting mainly of start -up businesses last year our industrial segment has continued to perform and grow as planned.

Now, with the addition of Matrix NAC's strong industrial business with a baseload of recurring backlog, mixed with capital projects, the segment will have its scale in keeping with our strategic vision. Going back to the acquisition of Matrix NAC in December, we are happy to report that integration is on schedule and progressing as planned. The strategic opportunities , culture and strength of the business that we highlighted during the diligence process continues to be of promise. We are very pleased with the opportunity [falling] in front of us and across leverage potential that this business presents for the Company. We expect great things out of Matrix NAC and look forward to completing the integration by mid-calendar year 2014. Overall, the first half of the year has been very strong, and we have accomplished a lot.

These results are a good indication of the strategic potential of the Company, but we are focused on achieving that potential. We seek continued growth opportunities in all of our segments, this combined with our great leadership teams and strong liquidity position makes Matrix Service Company a strong enterprise. I will now turn the call back to Kevin to discuss the details of our financial performance. Kevin?

Thanks John.

(Inaudible) start with the second quarter results. We generated record revenues of $311 million in the second quarter as compared to $221.4 million in the second quarter of fiscal 2013. The 40.5% increase in revenues was due to strong growth in our storage solutions and our industrial segments. Our quarterly net - quarterly net income was $10.3 million, and our fully diluted earnings per share was $0.38, as compared to net income of $5.4 million and fully diluted EPS of $0.21 in the second quarter of the prior year. As you know, we completed the acquisition of the business we now refer to as Matrix North American Construction in late December.

As [little me] owned Matrix NAC a few days in December, the revenue and net income from that business during the second quarter was nominal. If only significant acquisition-related impact on our quarterly financial results was that we acquired $242 million of backlog and it incurred approximately $2 million in acquisition cost, which reduced our second quarter earnings by $0.05. Consolidated gross profit was $34.2 million in the three months ended December 31, 2013 versus $22.3 million in the three months ended December 31, 2012. Although we had some execution issues on a storage solutions project, which reduced our gross margins by 1.5% to 11% in the second quarter of fiscal 2014, the performance of our overall business was strong. Consolidated gross margins in the second quarter of fiscal 2013 were 10.1%. SG&A expenses were $19.3 million in the three months ended December 31, 2013, compared to $13.6 million in the same period last year.

The increase was a result of the $2 million of acquisition costs I previously mentioned, increase in incentive [hook] rolls reported in connection with the strong performance of the Company, and other costs required to support the growth in our business. The acquisition-related expenses of $2 million increased our SG&A as a percentage of revenue by 0.6%, to 6.2% in fiscal 2014, as compared to 6.1% in the same period last year. Our effective tax rate was 28.4% for the quarter ended December 31, 2013, as compared to 36.5% for the quarter ended December 31, 2012. The decrease resulted from the revision in the estimated benefit from R&D tax credits. Based upon the current environment, we expect the 37% effective tax rate for the remainder of fiscal 2014.

Moving onto the segments, the most significant contributor to the quarterly results was the 84.9% quarter-over-quarter revenue growth in the Storage Solutions segment. Second quarter fiscal 2014 segment revenue increased to $180.6 million, as compared to the second quarter revenues of $97.6 million in fiscal 2013. The increase occurred as we have added significant balance of plant terminal projects to our normal portfolio-obtained projects. Gross margins increased to 11% in the three months ended December 31, 2013, as compared to gross margins of 7.9% in the same period in the prior year. The improvement occurred due to strong overall project performance in the segment.

The industrial segment also experienced significant growth as a result of the continued expansion of mining and minerals business combined with the continued execution on a significant fertilizer project. Revenues for the industrial segment totaled $31.1 million in the three months ended December 31, 2013, compared to $7 million in the same period a year earlier. An increase of 344%. The robust growth combined with strong project execution produced 12.3% gross margins. Which is above our expectations. In the prior year, gross margins were negative as the business was still in a start-up mode.

As expected, our second quarter electrical infrastructure segment revenues decreased compared with the prior year, as we did not experience a significant volume of storm work in our recently completed quarter. The second quarter of fiscal 2013 benefited from storm restoration work and the aftermath of a rough storm season, which included Hurricane Sandy. As a result, our quarterly revenues decreased from $50.1 million in the second quarter of fiscal 2013 to $37.2 million in the second quarter of fiscal 2014. The mix of work in the quarter combined with the lack of storm work contributed to a decline in gross margins from 13.2% in the prior year second quarter to 10.4% in the fiscal 2014 second quarter. The oil, gas and chemical segment continued strong performance in the second quarter, producing revenues of $62.1 million compared to $66.6 million in the second quarter last year.

We experienced significant growth in this segment of fiscal 2013 due to a high volume of turn-around work, [stoke] growth and expansion of our core client base. While our revenues were down slightly in the quarter, we were still pleased with the overall trend in this segment. Our second quarter gross margins were towards lower end of our expectations at 10.8%. Moving on to the six-month results, consolidated revenues were $537.2 million, an increase of 24.6% from consolidated revenues of $431 million in the prior fiscal year.

The increase in consolidated revenues was a result of significant increases in storage solutions and industrial revenues. Consolidated gross profit increased from $44.6 million in the six months ended December 31, 2012, to $59.6 million in the six most ended December 31, 2013. The increase of $15 million, or 33.6%, was due to higher revenues and improved gross margins. Consolidated gross margins were 11.1% in fiscal 2014 as compared to 10.3% a year earlier. Consolidated SG&A expenses were $34 million in the six months ended December 31, 2013, compared to $27.9 million in the same period a year earlier.

The increase was primarily related to the $2 million of acquisition costs and higher short-term and long-term incentive costs as a result of the improved performance of the Company. In addition, we continued our efforts to improve our systems, our processes and employee development. The acquisition-related expense of $2 million increased our SG&A as a percentage of revenue by 0.4% to 6.3% in fiscal 2014, as compared to 6.5% in same period a year earlier. Net income for the first six months of fiscal 2014 increased 67.3%, to $16.9 million as compared to prior-year net income of $10.1 million.

Earnings per share increased 61.5% to $0.63 per fully diluted share as compared to $0.39 per fully diluted share in the prior year. Our backlog on December 31, 2013 totaled $882.6 million, as compared to our backlog at the beginning of the fiscal year of $626.7 million. Project awards totaled $278.8 million in the second quarter and $551.1 million in the first six months of fiscal 2014. In addition, the Company acquired $242 million of backlog in the Matrix NAC acquisition. At December 31, 2013 our cash balance stood at $73.3 million, as compared to $63.8 million at the beginning of the fiscal year.

We utilized $51.4 million of cash for the Matrix NAC acquisition in the second quarter, but our strong operating results, combined with cash generated from operations, and approximately $23 million of borrowings, have allowed us to increase the cash balance through the first six months of fiscal 2014. The cash balance, along with availability under our senior credit facility, provided liquidity of $162 million at December 31, 2013. We are increasing our previous guidance as a result of a strong operating performance of our legacy business and the addition of Matrix NAC. Our previous revenue guidance for fiscal 2014 of $980 million to $1.04 billion is being raised to a range of $1.2 billion to $1.25 billion. We are also increasing our previous EPS range of $1 to $1.15 to the new range of $1.15 to $1.30. That concludes our prepared remarks and we will now open the call to questions.

Thank you. (Operator Instructions). The first question is from Tahira Afzal of KeyBanc. Your line is open.

Thank you very much. Congratulations folks, great quarter.

Thank you.

And [to say], many congratulations to your employees during the execution and productivity are really exceptional. I guess the first question on, you know, you can send each of us an idea of the contribution to GAAP EPS not in your guidance and on the revenue side.

Yeah, I'll take that one. You know, we're looking at this acquisition. It's probably got a revenue range an annual revenue range of $250 to $350 million, so it's, you know, you can expect that to be, you know, half of that to be somewhere in the close to the ballpark for the next six months. And when you look at EPS, the EPS guidance, most of that increase in guidance was -- is related to the legacy business. You know, the acquisition is still going to be a [accretive] but it won't have a really big impact on the next six months and the reasons for that are we're going to be spending money on integration. We've also got amortization of intangible assets including the amounts that were assigned to backlog and customer relationships, so it will be accretive, but it's not a really big number in the next six months.

Okay. And, you know, I've got several other questions, but I'll just one more and then I'll respect, jump back in the queue. The second question I had was really, you know, if I look at the second half implied guidance, the run rate on a quarterly basis, clearly lower than your second quarter, so perhaps you can help us understand, you know, what we should consider in second quarter to be a little outside versus what would be a normalized run rate at this point. And really give us an idea of how much you're building it in terms of the cushion for, you know, the typical execution issues [like sordical], and perhaps the weather we've seen recently, as well.

So I think it looks something, could somebody be numbers crunchers, that when we look at this, that that second quarter was obviously very strong. The growth in the Storage Solutions segment was a lot higher than we normally would expect. We are performing a lot of balance of plant terminal work on in that segment. In the second quarter of you know, a couple significant projects that started right at the beginning of the quarter, some of that work is continuing on into the third quarter and then it will tail off a little bit in the fourth quarter. So, you know, when we look at that guidance, you know, I don't think we could expect that we're going to repeat the same level of revenues in the Storage Solutions for the next two quarters. They will still be strong, but it won't be it won't be as strong as the, as the second quarter.

Got it. And the weather issues, folks, and then I'll jump back in the queue, thanks.

I would say to date, I don't know that we're having any material issues related to storm issues. The biggest problem we're probably having is the management team trying to travel around the country to get to meetings, so getting stuck in airports and missing flights, but I think a lot of our work to date is continuing. We are having occasional missed work days here and there, but some of our job sites, but I think in general we're moving forward. You know, the heavy storms in the northeast is certainly presenting an opportunity for us with any storm repair work, with an electrical infrastructure, and so we're keeping an eye on that.

Thank you very much, folks.

Our next question is from Matt Duncan of Stephens. Your line is open.

Good morning, guys. Congratulations on an outstanding quarter. I want to dig in a little bit more, Kevin, on the balance of plant work you're referring to in the storage business. Can you help us think through that how much that might be adding from a revenue perspective? And is this the first time you guys have done a meaningful amount of that work, and is there maybe an opportunity to do a lot more of this going forward?

So I'll give you the strategic overview of that, Matt. We have traditionally, through the course of time here, done balance of plant work in the terminal, so we're best known for our tank work. But with certain clients, we had in the past done somewhat of balanced plant work, whether that's the foundations for the tanks, some of the piping or petrols work, but it's probably an area that we have not been best known for. So we are, because of the amount of work out there, because not all contractors carry the same level of quality and safety that we do, we have been able to pick up specifically what some of our key clients opportunities with balance and plant and terminal work. It is strategically our intention to put more revenue through the Company, and, of course, more earnings associated with that related to not just the tanks but the terminals, as well. So we are actively pursuing that, specifically with our clients that we do a lot of repeat business with, and so we hope to have more of that type of work mixed in our storage solutions segment, not just the tanks themselves.

Okay. And then Kevin, is there any way you help us in terms that how much that helped from a revenue perspective? And obviously, what I'm getting at is what's really the right run rate for us to use after it sounds like 2Q benefited from a lot of balance of plant work, there's some of that in the 3Q and it tails off. After that drop off, how should we be thinking about, sort of, a quarterly revenue run rate for the storage business just so we don't get too carried away here?

So if you look at the first quarter, we did, you know, I think it was a little less than $110 million for the segment revenues for storage, and we did around $180 million this second quarter. So, you know, when I look at it, I think our business has grown. Our backlog was up significantly last year, but we still have a lot of project to award in that segment, so, but I think the second quarter did benefit, so you're probably about halfway in between that first quarter and the second quarter of reasonable run rate.

Okay. So you know, the $140 million to maybe $150 million range on a quarterly basis is about maybe where we ought to be?

Yeah, I think that's reasonable.

That's helpful. And then, guys, I want to dig into the guidance a little bit more. On the amortization of intangibles, and obviously, Kevin, what I'm getting at is here trying to understand how creative Kvaerner is. Once we're past the integration and the amortization of intangibles, I'm assuming, tails off a little bit, because the backlog, I'm assuming, gets amortized pretty quickly. So what is the quarterly amortization of intangibles to the extent it's flowing through right now, and how much integration expense have you included in your guidance?

So on the amortization, you were right about the backlog. Especially over the next 18 months it will -- the backlog will be amortized off. There's also customer relationships that's a bigger component, that's a longer-term amortization, but over the next, at least the next year and a half, you would -- I would expect about $1 million of amortization expense per quarter related to that acquisition.

Okay. And then obviously there's existing depreciation of their assets on top of that for their total impact on D&A, right?

That's correct.

All right. So probably running around a $1.5 million a quarter, let's say? Total?

Yes, I think that's reasonable.

All right. And on the integration expense, how much are you guys assuming embedded in this guidance? What I'm getting at here is that if you take the expense level implied in your guidance, it feels like it's probably a little higher for the balance of this year for a variety of reasons than it's going to be out into next year. You've got probably an increase in variable costs because you guys are having such an outstanding year, and you got the integration expense with Kvaerner. So want to make sure we can sort of thing this all the way through. So what's that integration expense going to look like?

If you look at that, where that's really related to is their entire business was on the systems of their parent, and all their computer equipment, all their software was their parents, and so we're having to convert that all over. And so during the, during the next six months, there's going to be kind of like while we're getting up to speed, getting them on our systems, on our hardware, we'll have some dual costs in there related to that. There's also, we're wanting to make sure we spend plenty of time going through the policies and procedures of both companies and figuring out what's the best of the best of both. So I don't have a really firm number, because so many people are involved in this. But I would take a ballpark guess and say it's probably $0.5 million to $0.25 million.

Okay. Thank you for helping me. I'll go back in the queue. On the impact of the project where you took the $4.4 million charge, how much longer is that project flowing through from a revenue perspective, assuming it's going to flow through at 0% gross margin? And what I'm getting at here is what gross margin level are you expecting from the whole business in the back half?

So that project. We still have another 12 months, approximately, to go on that project. So when you look at the gross margins expectations for that segment, we have given you 11% to 13%. I think we, last quarter, we talked about [private] towards the upper end of that. So now, it's probably towards the middle of that range. So it's probably 11% to 12% for the next six months.

And then the revenue-side just so we can kind of size the impact on gross margins, is this a fairly big job? It sounds like, if it's a 12 month tail left on it?

It's a moderate size job.

All right.

It's not huge.

It's average. I would say it's an average size tank project for us.

Okay. Thank you, guys. Congratulations on a great quarter.

Thanks.

The next question is from Martin Malloy of Johnson & Rice. Your line is open.

Good morning. Congratulations on the quarter.

Thanks, Marty.

Just in terms of the acquisition impact, I have a few more modelling questions I was hoping you all could help us with. SG&A quarterly run rate going forward and CapEx.

So our -- I'll hit the CapEx first. So we have reforecasted what we think we need from CapEx for the rest of the year. Obviously, I mentioned, we're going to be buying some computer equipment in this next six months, and then they will have their normal CapEx, but I think we have talked about around 25% to 27% of CapEx for the full year for the Company, and if hat will increase slightly maybe $1 million, $1 million or so, because there will be other pieces where we don't spend the cap, previous capital budget we had approved. On the SG&A, obviously this quarter's SG&A was impacted by a number of things that I mentioned in the comments. The acquisition costs being the most significant. So we had about $19 million of SG&A in the quarter. I would expect that we're probably $17 million going forward. Maybe $17 million to $18 million.

Okay. And then as far as the margin impact from the acquisition, it looks like the electrical infrastructure in industrials is where the backlog impact was. What can we expect for margins going forward in the progression for margin improvement as costs are taken out?

Bob, let me hit one topic first. We are more focused on the right now on the leverage opportunities that [Inac] brings and geography, bench strength, than ability to execute additional projects and larger projects, open up doors with some existing clients and facilities where we did not have a strong geographic presence. So there, while there may be some cost synergies between the two businesses, their real impact of the business is the ability to leverage the resources and the skill sets to drive the overall business. So it's, it's more of a one plus one equals three rather than one plus one equals 1.75. We see that as a bigger, a bigger piece of the business. So as we, as we move to the next six months, we're going to determine that what opportunities there are for any cost synergies within the two businesses, but again I think our ability to leverage the strength of the entire business together to continue to grow and catch more market share is really where the benefit is here. As it relates to the margins, we would see the margins in the industrial segment to, you know, I think this quarter --

We're over 12%.

We were over 12% and it was a very strong quarter, that. I think we've gotten to you guys in the past, it was our intention the industrial segment would be operating in the 11% to 13% range.

Eventually.

Eventually. We think with the -- depending on the mix of work, the impact acquisition brings to us, day-to-day maintenance work and MSA work, small capital work, that that guidance would, guidance target would still be good. And on electrical infrastructure side, again, I think we have guided you guys there on 11% to 13% type range. A lot of times we get the high end of that range because of strong work, but we would not see the guidance in that segment changing significantly.

Marty, this is Kevin. I want to go back to your previous question on SG&A. I think correct the forecast is, I underestimated that quarterly amount. It's probably closer to 19% to 20%. That will still take us down to, we'll get that SG&A percentage as a percentage of revenue down below six, which has been more of one of our targets.

Okay. And then one last question, if I could, on the modelling. Is there any seasonality that we should be aware of with the acquired business?

Usually a little bit differently on the industrial side of the work they do in the [armor] and steel businesses, that work sometimes has a tendency to get stronger towards the end of the year, because of their client base is trying to work through their capital budgets and get that money spent, you don't spend you don't use it you loss it kind of thing. So I wouldn't call it strong seasonality, but there are tendencies from time to time where the back half of the year could be a little bit stronger than the front half, but and then in their power generation I would say there is little seasonality. That's more about the timing of the award of the projects.

Thank you.

Next question is from Mike Harrison of First Analyst. Your line is open.

Good morning. It's Steve Schwartz sitting in for Mike today.

Good morning.

Good morning.

On the industrial cleaning initiative, how far along are you guys in the plans to roll that out?

So we're, we, a year ago, little over a year ago, we purchased the assets of [Tele-Cam], which was an industrial cleaning company in, just outside of New Orleans, and we've rolled that out with other industrial cleaning businesses located here in Tulsa, and Baton Rouge, and New Orleans, and that, combined with our [pag] cleaning business -- we finally turned around. So we are operating and functioning that on a nationwide basis now, and we're pretty happy with how that is going. So we are continuing to look for additional tuck in acquisitions there like the Tele-Cam deal, and those are in areas where we see opportunity. We're looking for good, strong businesses that are well managed, well run, have a gross margin expectations that we enjoy in our current business. So that continues to be an area of growth for us, and an area that we're going to be looking at even more growth opportunities now with the new geography that the Matrix NAC acquisition brings to us.

Okay. Sounds good. And then just as a follow up, and I'm sorry if I missed this, but on the industrial side of the business, you know, you've had revenues increasing consistently here. And I know you mentioned mining minerals, fertilizer in your prepared remarks, but what's driving the strength there and what sort of run rate should we expect for the rest of the year?

On the strength side, we've been, we didn't give a good enough shout out to our teams in the Tucson operation that have been working and very strongly with our mining clients in the southwest. They've done a great job here growing that business over the last 12 months. They have really increased the revenue very strongly and the earnings. So that's been a big part of the growth in the industrial segment, as well as, you know, the great performance on the fertilizer project that we're executing for our client in the center of the country. So both those things have gone very well for us. With the inclusion of [M neck], I think you saw the increase in the backlog in that segment for industrials, and so it's our expectations and it's been our strategy that the industrial segment in the near-term, you know, it's not going to reach the level of activity that the storage solution will or probably much of infrastructure, but we would hope that they would get on the same sort of a run rate of operating performance as the oil, gas and chemical segment.

Do you think you stay above $30 million for the next couple quarters?

Oh, yeah, so you know, the -- the legacy business is the -- the $30 million now, you know, it's got some good opportunities. In addition, the significant portion of the acquired business is in that segment, so it's going to, it's going to probably double from here on a quarterly basis.

So $60 million for the March and June quarters?

$65 million to $75 million a quarter, probably. It's going to be tough, you know, we've been trying to grow, that's been a start-up, a lot of start-up businesses in that segment, as he mentioned over the last 12 months, there has been a lot of progress made from the legacy business, and now with can MNAC, you know, that segment is becoming a very meaningful part of our business.

That's great. Okay. Thanks. That's helpful.

Our next question is from Tristan Richardson. Your line is open.

Good morning, guys.

Good morning.

Good morning.

Just a question, I mean, appreciate, sort of, all the help on the acquisition and how that lays out and my question is on backlog. When you look at the burn rate, how much of this backlog is for work to be done past fiscal 2015? I guess I'm trying to get a sense of, you know, size and length of time of the jobs in backlog.

So it's always been interesting question from a, it's more of a segment question, so let's go through the four segments and talk about the, talk about the backlog. So the electrical infrastructure segment has $200 million of backlog. With the NAC Matrix, NAC acquisition, the average length of that backlog is probably six to 18 months. There's some, there are some long-term projects in that segment. When you look at the oil, gas and chemical segment, there's $100 million, it's $142 million. That is the segment that has more of the projects that come in and out of backlog quicker. There are very few projects that are over, that are over six months. There are some projects scheduled for, you know, later on next fall, some turn arounds that have already started to hit in the backlog there, but most of that backlog will be worked off within a year. Storage Solutions, you know, has $353 million. It, like electrical, has some, you know projects, that are, some of them are as long as two years, so there's a good piece of that that rolls off over the next couple years. There will be some that rolls off obviously this year but those are longer-term projects. And the industrial's probably a mix, some similar to electrical.

Okay. And so would you say the acquired backlog is maybe a little bit longer tail than a little bit larger projects than the legacy business?

Probably half the acquired backlog is in excess of 12 months. The other half would be under, if you want to coin it that way.

Sure. That's helpful. And then, I guess how should we think about awards going forward, especially with the new business? I mean, you know, it gives you capabilities to bid on larger work. Should we expect, you know, just project timing to be more and more of factor when you think about quarter to quarter moves in booking?

Part of their, part of their business and part of the reason we bought them is their ability to do larger capital projects. Not unlike our storage business, the timing of awards can move from quarter to quarter.

Sure.

The end of one quarter to the start of the other. So there will be some of that. It certainly is our goal to have a one or two major capital projects in our backlog that we're working off year in and year out, and then the other part of their business is very similar to our very similar to our oil, gas and chemical business. Of they're doing daily maintenance, they're doing small cap projects, and those projects are in and out and of course it could be in and out in the course of a year, and sometimes in the course of -- course of a quarter. So it -- so they're giving us a mix and variety, not totally unlike what we're doing today. Except for the high end of their project opportunities or higher than what we're used to.

Right. Okay. And then you know, I always ask you guys, but I'm curious, sort of, what you're seeing in the market on the storage side in terms of pricing versus, say, a year ago. You know, I know you've got an agreement in place with one operator, and have you, beyond that, have you, have you seen pricing impacts, sort of, your business positively or negatively versus, say, a year ago?

We still see the market as very strong, as we said in one of the earlier questions, we see a lot of opportunities for us to expand our service offering beyond just the tanks.

Yeah.

Involved in more terminal work. So a lot of that -- that closes down the amount of competition that's available to do that. And so I think for us we're seeing, you know, still a competitive market in some places, but our clients still keep us honest, they want to make sure they're getting the right value for the right buck. But certainly we're not where we were two years ago, where pricing pressure was so extreme.

Right. Gotcha. And then my last one, are you, do you guys need different people or have you added, you know, people with different skill sets over the past couple of few quarters as you're chasing the balance of plant work. Does it require some different skill sets than what you guys currently have?

So we are, yes, that question, you know, as we grow that business that's a different skill set, management infrastructure skill set than, say our tank only business. And so we have added some talent, and moved some talent around in the organization. But we feel pretty comfortable where we are now and our ability to recruit the people we need.

That's good. Thank you guys very much for the time.

You're welcome.

We have a follow up from Matt Duncan of Stephens. The line is open.

I want to go back to the quarterly SG&A guide that you gave. Frankly, I'm having an extremely difficult time getting in your guidance range using that number.

Are you maybe leaving out the amortization intangibles from that, a or does that $19 million to $20 million include, you know, the addition of Kvaerner SG&A plus the amortization of intangibles plus the operation expense, I just want to make sure that's an all-inclusive number.

So the number is closer to $20 million but that does include the amortization expense.

So to get to your guidance range I would have to assume that you're counting on a gross margin between 10% and 11%? And honestly, it would have to be more like 10% to 10.5%. And the revenue range is that quarterly SG&A run rate to get into the guidance, so what am I missing? Why would gross margin be down?

I think what you're looking for, the work that we have booked, you know, and what we're planning on this next six months, there's probably a higher degree of reimbursable work that, you know, has a different risk profile, and maybe not lend itself as high a margin as, say, a higher opportunity lump sum work.

Okay. Is that, I guess what I'm getting at, is what really is your gross margin expectation? And I'm sure probably what's going on here is you're probably allowing yourselves some room with your guidance as you have been for the occasional project charge to crop up, and you know, the one this quarter was I think around -- I think about $0.08 if I sort of net out the $4.4 million against maybe a little bit of adjustment of accruals for bonus pay, but are you assuming that you kind of still have every quarter that there's a bad project charge within your guidance?

So we do on a monthly and on a quarterly basis, we forecast forward obviously for the, all of our projects, and consolidate all that in the business, and we're trying to roll in the Kvaerner acquisition into that, assess their, assess their go forward basis on their projects. They're coming in the backlog. And so if we've taken a conservative view on the gross margins there, you know, then that's -- so be it. But we have not specifically said okay we're going to, our gross margins are X and we're going to subtract a certain amount because we know we're going to have a bad project. It is never our goal to have a bad project and we work very hard not to have those. And just as much for you guys, you know, you hear about the bad projects, but you don't hear about the good ones. And so there is -- many times more opportunity, and more, and more projects that have done better than we budgeted than those that have gone bad, so it's tough for us to handicap those going in. We can't handicap what the storm season is going to be like. Like we said, we're starting to see some opportunities in storm maintenance and repair in the northeast because of the kind of winter we've had. There's a lot of ups and downs to this business, and we're trying to make the best assessment that we can for those margins. And that's the assessment we made.

Okay. So to be fair, John, it sounds like you guys are trying to be a little bit conservative with the current path on gross margin. Because if I go through the segment by segment gross margin expectation, it certainly implies a gross margin higher than what's implied in guidance. And so what I guess what I'm getting at, is it fair to say that there is a layer of conservatism in the guide?

I would say that there is a layer of opportunity within our organization for us to do better.

To execute. Got it. That's a good way of looking at it. That makes sense. All right. And then, over the past couple weeks there has been some, you know, potentially positive moves on the storage side I guess. I saw Embridge announced about a $200 million terminal expansion up in Canada, and then obviously the State Department's report on Keystone XL makes it that much more likely that maybe that thing finally gets the green light. With the five year alliance agreement you guys have with TransCanada I have to believe that would be a nice positive for you if that happens. Are you continuing to see more and bigger storage opportunities so that we might see that backlog keep growing?

We've had some, I think there's been some in the quarter, you know, you strip out some of the terminal work, and look at just the tank piece of our business, in the quarter I think it's been a little flat or down but there's a lot of pent up demand there. There's a lot of projects that we're looking at, so we expect that the, the backlog to catch back up in the tank only part. And also, besides TransCanada, with some of our other key clients we are in discussions, you know, on projects for them to provide terminal opportunities, so we still think that market is very strong. As it relates to Keystone, you know, I think the, you know, we're heavily engaged with TransCanada on the southern leg between the tanks and terminal in Cushing, and the tanks and terminal in the at the southern end down in Texas area, so you know, we're active there. On the northern leg, you know, the amount of work for us with them on the northern leg of the Keystone pipeline isn't, you know, as major as the opportunities with them in Canada. Where they are running, they got the Eastern Energy Project and other ones there where they're trying to get oil sands oil into the east coast of Canada and the U.S. as well as their oil into the west coast to be able to ship into Asian markets. So there is, you know, I'm hoping that our government sees the wisdom of the correct decision and approves the the balance of the Keystone pipeline, but if it doesn't, if it doesn't happen, it's not a big killer for us.

Okay. Very helpful, John. Thank you.

Thank you. We also have a follow up from Tahira Afzal of KeyBanc. Your line is open.

Thank you very much. I have a follow up to that. I guess the delays in Keystone have been, in a sense, helpful as well for the storage business in the North. So I guess net net if we do start to see some transportation options come up, you know, net net going forward. Does it imply sort of a flat [ah] storage opportunity for you or does it still imply a growing storage opportunity for you? And also, we started to see a lot of storage tank terminals being proposed and venture export from the petrochem and the crude side. I know they're not from your traditional midstream title companies, but I would love to get a sense if you started to see some interesting opportunities come that way, so that's my first follow up. And then I do have a second one.

So your first, Tahira, your first follow-up has like three questions in it, so if I miss three of them remind me. On the, on the export of crude, you know, obviously that's a -- there's a prohibition, federal prohibition on the export of crude. We hope again that the federal government will see the wisdom of the appropriate decision there and allow the exportation of crude, because of the volume of crude that our country is going to produce over the next couple of, start to reach a level of production over the next couple years and go forward through the next decade or better. And if that would happen, that certainly would provide opportunities for us for either the conversion of existing [silk] products terminals for export or for the construction of new export terminals for crude. On the distilled product side, we do a fair amount of work for Magellan today. Magellan, while they made some conversion to be a crude midstream company, they do have a refined products business, and so we've done storage work for them, both, you know in the, in their pipeline network as well as in terminals, so we expect to, to see, you know, opportunities come forward for us with terminal tanks and terminals with distilled products, certainly as Bakken and Canadian crude gets into the east coast refineries, there's going to be a huge market for them to offshore distilled products, particularly in diesel into the European market because of the cheaper feedstock we're going to have. So that should create some opportunity for us. Did I miss question three?

Actually, that was sufficient. I guess the third one was really, as you look at Keystone coming on, it does also leave a lot of black on the storage side, so --

I think the Keystone thing for me is that that oil is going to get to market, so it's either going to get to market in existing pipelines that come down through from Canada through the U.S. or railroad traffic or trains. I'm sorry. Truck or barge, you know, offshore, you know, so it is going to get to market. Again, for us, what the Keystone, the fact that the federal government does not approve the Keystone pipeline, non-mine it will create opportunities for us in other areas where people are trying to find ways to get that oil to market. So there's a market there, it's going to get there, there's going to be a need for terminals and tanks and pipelines pumping stations, and we think we're in a good position to take advantage of that.

Got it. And John, during the last call you talked about, you know, when you announced acquisition, you know, you did mention that you would be at a point we can talk about some of the larger opportunities, something over the next couple months eventually that you could talk about. Today on the call, you said that you'll be talking a little more about it next quarter. Does it mean, you know, these opportunities are looking really real, you could potentially see something coming up in the near-term?

They're currently executing a combined cycle project now. It was in backlog, came in with the business. They've got an opportunity list of other projects that fits our risk and execution model profile. We're not prepared to talk about those today, but we're pretty comfortable with that list. And where they're going to focus their efforts to go in that work. And certainly through the course of the next 12 months, we would expect to add another project into our backlog.

Got it. Thank you very much.

Thank you.

Thank you. We have a follow up from Martin Malloy of Johnson Rice. Your line is open.

Thank you. Just looking at your balance sheet, still a pretty healthy cash balance there. Could you discuss your appetite for doing additional acquisitions that have diminished at all with this one?

No, I would say we're still have a strategy of adding acquisitions that fit our strategic plan. Right now we will not, I would say, unless something really interesting came, came to light, we're not actively pursuing another contractor sort of the size of Kvaerner over the next, probably, six to 12 on the, most but we are actively presuming smaller tuck-in acquisitions. And we'll continue to look for those and find the ones that fit our strategies the best that we think presents the best pricing point.

Thank you.

Thank you. There are no further questions at this time. I would like to turn the call over to management for any closing remark.

Well, thank you, everybody for being with us today. It was a great quarter. We appreciate your thanks in that, and all of your interesting questions and we look forward to talking to you at the end of Q3. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may disconnect. Have a wonderful day.