Matrix Service Co (MTRX) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Matrix Service Company conference call to discuss results for the third quarter ended March 31, 2014. At this time, participants are on a listen-only mode. (Operator Instructions). I would now like to introduce your host for today's conference, Mr. Kevin Cavanah. Sir, you may 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 T K., or fiscal year ended June 30 2013, and in subsequent filings made by the company with the SEC. To the extent the company utilizes non-GAAP measures, reconciliation will be provided in various press releases and on the company's website.

I will now turn the call over to John Hewitt, President and CEO of Matrix Service Company.

Thank you, Kevin, good morning, everyone. On a quick logistics note, we had a power outage this morning at our corporate headquarters in Tulsa, so Kevin and I and the team are calling in from our fabrication facility at the Port of Catoosa. If you have any problems hearing us, please let us know, and we'll move closer to the phone or try something different. If you need to reach us today after the call, please send us an email at ir@matrixservicecompany.com and we will get back to you.

I'd like to thank the employees of Matrix Service Company for a record third quarter of 2014. It was through their dedication and commitment that we continue to make progresses on the goals we established in 2012, in our five years strategic plan. We recently brought together our operational team leaders to revisit and refresh this plan, which runs through our fiscal 2017. This process provided clarity on our objectives, and the tremendous market opportunities in front of us.

As I mentioned earlier, the third quarter of our 2014 fiscal year was a record for the company. We continue to see excellent organic growth opportunities in the business, versus our expectations in our initial five year strategic plan. This growth has been significant in the progress towards achieving our objectives has been a key to this success. We measure ourselves against the peer group's operating performance, and set strategic metrics as goals to our performance. It is our vision to be the best of the best, and while there is still work to do, we have made considerable progress towards this vision. As we act on the tactics detailed in that plan for each of our segments we will continue to create growth, consistency in our performance, and enhance value for Matrix employees, customers, and shareholders. We remain confident in the tactics to continue with our success.

Our number one objective will always be commitment to safety, and our continued focus to creating an injury-free workplace. As we have stated in previous calls, this objective is a journey which at times can be challenging. In the quarter, our performance was not in keeping with our goals. However, we believe that progress continues to be achieved in the development of our zero-injury culture. For the nine months ended March 31, 2014 our total recorded incident rate was at 0.70. While this performance is exceptional against a construction industry at large, it falls short of our expectations. An injury-free workplace is an achievable goal, because of commitment to work safely is a choice, and therefore incidents are also a choice and preventable. I encourage everyone on the phone today to contemplate your personal commitment to safety, and that of your family and co-workers. Please visit our YouTube channel, at youtube.com/MatrixCompany to view our employee submissions for our annual safety video contest, which we discussed in the previous quarter's call.

Last month, we celebrated the 30th anniversary of Matrix Service Company. The leadership team and employees are very proud of the accomplishment, and excited of the potential of the business over the next 30 years. In our strategic plan refresh process, the spirit for creation of the next 30 years is core to our decision making. I want to take this time to thank not only our employees, but our long-time shareholders, who have been with us on this tremendous journey, and we look forward to your continued support in the future. Again, please go to our YouTube channel for a 30th anniversary video message. A link is included in our IR homepage.

Before we discuss the results of the quarter, I want to provide an update of the Kvaerner North American Construction integration. We expect phase one to be complete by mid calendar year 2014, which generally includes IT, accounting, HR, and safety infrastructure. The employees of Matrix NAC, or Matrix North American Construction, and those on the integration team have been working tirelessly to meet this goal, and we remain on schedule thanks to their dedication.

Revenue on our electrical infrastructure segment showed growth in the third quarter primarily due to the inclusion of a full quarter's activity related to Matrix North American Construction. Despite a tough winter, substation work across our service area returned to expected levels. We also saw transmission and distribution work restart with some of our large customers after our temporary shifting of priorities. Management is focused on the continued development of the core business in the Northeast as well as expanding into new territories. Expansion into the New England area, Long Island, and the West Coast are priorities for our team, and progress for these plans are tangible. With that said, we were recently awarded our first substation project for a major utility in Southern California.

Regarding power generation, Matrix NAC expects bid activity to be high to the end of the fiscal year and beyond, as a number of potential gas-fired power projects in a development phase continues to expand. Our current power projects are progressing well, with construction activity expected to increase in the near term. While the financial performance for the quarter was not -- has not achieved our expectations, I am comfortable with the opportunities of potential for this segment going forward.

Moving on, our oil and gas segment had a strong third quarter, with solid growth and gross margins. Our revenue was down year-over-year, we are pleased with the mission of business we are seeing in this segment. Our turn around and maintenance group has received several recent strategic project awards that are notable as they continue to strengthen our brand, and position in the marketplace, and lay the foundation for strength in fiscal 2015.

In our core geographies, we are extending existing contracts with maintenance customers and winning work from competitors. On a quarter over quarter basis, we continue to see client facility and geographic expansion opportunities in this segment. We are also starting to see inroads in the upstream oil and gas sector. We are actively bidding on opportunities in the space, and are excited about the possibilities for our capital construction group. Customers like our diverse service offering, brand strength, and historical project execution success. Our team in this segment is committed to enhancing value for our clients, and we are pleased with our success to date.

With over $242 million in new awards in the quarter, and $565 million since June 30, 2013, new tanks, terminals, and plant opportunities continue to drive strong results in our storage solutions segment. This is evidenced by the press release posted this morning concerning two major terminal expansion projects that have been awarded to Matrix from Embridge, valued in excess of $100 million. While growth is centered primarily on our large crude storage projects, tanks and full terminals, we continue to see increased interest in our specialty vessel offering, including cryogenic and refrigerated storage related to LNG and natural gas liquids. Our engineering group is busy responding to enquiries for free feed and feed studies for cryogenic-related tank and terminal projects across North America. These opportunities are leading us to full EPC projects for the export of propane, butane, ethane, and LNG as well as transportation fuel terminals. In addition, we are seeing strong demand across the US and Canada, as the energy industry plans massive infrastructure construction to support the gathering, transportation, processing, and eventual sale of crude, gas, gas liquids and refined products. We are committed to enhancing value for our customers and continue to position ourselves to meet their needs over the long term.

Our industrial segment is delivering strong results, with quarter over quarter improvements in revenue and margins. Our mining group continues to expand the brand as a result of finding a critical niche in a market dominating by small local contractors and large global EPC firms. Customers are finding our diverse service offering enhances value for them, in an environment of poor competitive performance and the need for increased capital effectiveness. Our work on the fertilizer project is going very well, and we are bidding additional scope for that site. In general, the market outlook remains strong for the development of additional fertilizer-related businesses, and our experience in engineering expertise is creating a key differentiator for our value proposition.

Regarding our iron steel business, strong project activity by several key customers provided a steady stream of work during the quarter. We expect a strong finish to fiscal 2014 with a solid backlog of work, and opportunities leading into the next fiscal year.

As I mentioned earlier, I'm excited with our year-to-date results. Matrix has grown substantially over the past three years, primarily through organic means, but also with strategic acquisitions. We are developing the strategic potential for the company, and positioning ourselves as a premier North American engineering construction firm. While these are exciting times at Matrix, the future remains just as bright.

I will now turn the call back over to Kevin, to discuss the details of our financial performance. Kevin.

Thanks, John. Our third quarter results were very strong. We generated record revenues of $381.5 million, compared to $226 million in the third quarter of fiscal 2013. That's an increase of $155.5 million, which included $64 million from the recently acquired Matrix North American construction. The legacy business growth was $91.5 million, or 40.5%, as compared to the prior year third quarter.

On a segment basis there was strong growth in the storage solutions and industrial segments. Our quarterly net income of $11.4 million, and fully diluted EPS of $0.42, both represented record performance. In the third quarter of last year, the company produced net income of $6.5 million, and fully diluted EPS of $0.25. Consolidated gross profit was $39.9 million in the three months ended March 31, 2014, versus $23.1 million in the three months ended March 31, 2013. The performance of our overall business produced 10.5% consolidated gross margins, as compared to 10.2% consolidated gross margins in the third quarter of fiscal 2013.

SG&A expenses were $21.1 million in the three months ended March 31 2014, compared to $14.7 million in the same period last year. The increase was a result of the addition of SG&A cost and amortization expense related to Matrix NAC, as well as an increase in incentive accruals recorded in connection with the strong performance of the company, and the other costs required to support the growth in our business. SG&A is a percentage of revenue decreased to 5.5% in the third quarter of fiscal 2014, as compared to 6.5% in the same is period last year.

With regard to segment performance, the storage solutions segment was a major contributor to our overall results with 91.8% revenue growth quarter over quarter. Third quarter fiscal 2014 segment revenue increased to a record $181.8 million, as compared to third quarter revenues of $94.8 million in fiscal 2013. The increase resulted from higher levels of work in our domestic and Canadian above-ground storage tank business, in addition to significant balance of plant terminal work.

Gross margins increased to 10.6% in the three months ended March 31st, 2014, as compared to gross margins of 9.3%, in the same period last year. Current year gross margins were reduced by $1.4 million or 0.9%, due to an additional charge on an aboveground storage tank project discussed last quarter.

The industrial segment also experienced significant growth, as a result of the continued expansion of our mining and minerals business, the addition of services provided by Matrix NAC to the iron and steel industry, and continued execution on a significant fertilizer project. Revenues for the industrial segment totaled $74.6 million in the three month ended March 31, 2014, compared to $15.8 million in the same period a year earlier, an increase of 372%. Effective project execution, and a higher recovery of construction overhead costs, produced 9.8% gross margins as compared to 8.1% gross margins produced in the third quarter last year.

As expected, the recent acquisition helped drive an increase in our quarterly electrical infrastructure revenues from $41.7 million in the third quarter of last year to $62.1 million in the third quarter of this year. The mix of work in the quarter, including a higher amount of low risk, reimbursable work, and the lack of storm work contributed to the decline in gross margins, from 12% in the prior year third quarter to 9.6% in the fiscal 2014 third quarter.

Oil, gas, and chemical segment continued its strong performance in the second [sic] quarter producing revenues of $63 million compared to $73.6 million in the third quarter last year. We experienced significant growth in this segment fiscal 2013, due to a high volume of turnaround work, scope growth, and the expansion of our core client base. While our revenues are down in the current year, we are still pleased with the overall trend of this segment. Our third quarter gross margins were strong at 11.7%, as compared to 10.9% in the same period last year.

Moving on to the nine month results consolidated revenues were $918.7 million, an increase of 39.8% from consolidated revenues of $657 million in the prior fiscal year. Matrix NAC revenues since acquisition were $69.4 million. The remaining increase of $192.3 million, or 29.3%, is attributable to the legacy business. On a segment basis, both storage solutions and industrial revenues increased significantly.

Consolidated gross profit increased from $67.7 million, in the nine months ended March 31 2013, to $99.6 million in the nine months ended March 31 2014. The increase of $31.9 million, or 47.1%, was due to higher revenues and approved gross margins which were 10.8% of fiscal 2014, as compared to 10.3% last year. Consolidated SG&A expenses were $55.2 million in the nine months ended March 31, compared to $42.6 is million in the same period in fiscal 2013. The increase was primarily related to the second quarter acquisition of Matrix NAC, higher costs to support the organic growth of the business, and higher short term and long term incentive cost as a result of the improved performance of the company. In addition, we have continued to invest in improvements of our systems, processes, and employee development.

SGNA expenses included approximately $2 million of direct acquisition costs which increased our SG&A, as a percentage of revenue by 0.2%, to 6% of fiscal 2014, as compared to 6.5% in the same period last year.

Net income for the nine months of fiscal 2014, increased 70.5%, to $28.3 million, as compared to prior year net income of $16.6 million. Earnings per share increased 66.7%, to $1.05 for fully diluted share as compared to $0.63 for fully diluted share in the prior year.

Moving on, backlog at March 31,2014 totaled $905.1 million, as compared to $626.7 million at the beginning of the fiscal year. Project awards including the Embridge projects announced this morning, totaled $404 million in the third quarter, and $955 million in the first nine months of physical 2014. In addition, the company acquired $242 million dollars of backlog in the Matrix North American construction acquisition.

Looking at the balance sheet our cash balance stood at $59.8 million at March 31, 2014, as compared to $63.8 million at the beginning of the fiscal year. During the third quarter, the company utilized the revolving credit facility to partially fund the high growth, and as a result, the company's borrowing under the revolving credit facility increased from $23.2 million at December 31, 2013, to $45.1 million dollars as of March 31, 2014. During the quarter the company also executed an amendment to our credit facility, which increased the revolver from $125 million to $200 million. The amendment was executed to ensure we had sufficient liquidity to execute on our strategic plan. The cash balance along with availability under the credit facility provided liquidity, of $197.7 million in March 31, 2014.

Based problem the strong performance in the third quarter, we are increasing our fiscal 2014 guidance. Our previous revenue guidance for fiscal 2014 of $1.2 billion, to $1.25 billion is being raised to the range of $1.25 billion to $1.3 billion. We are also increasing our EPS range of $1.15 to $1.30 for fully diluted share to the new range of $1.34 to $1.42.

That concludes our prepared remarks, and we would like to open the call up for questions.

(Operator Instructions). Our first question comes from Matt Duncan from Stephens Incorporated. Your line is now open.

Good morning, guys. Congrats on another excellent quarter.

Thank you.

First I just want to start with the storage business. Obviously, that's the strongest part of your business right now. I am curious how much of the revenue you guys are recording there is tied to this balance of plant work is that seems to be adding quite nicely to that segment?

The balance of plant work is a significant driver of that growth. We don't have a specific number we are disclosing for each various service we provide by segment. But I think it is sufficient to say that it's a significant driver.

Okay, is there more of that work in your backlog?

Yes. Including there's more balance of plant work, associated with the projects announced this morning.

Okay. Looking at, John, you mentioned LNG opportunities and storage. It sounds like you don't have anything in backlog as yet, but there's probably a pretty active quote and bid environment there. Would you expect to be recording revenue tied to LNG in 2015?

We probably have to break that down a little bit. So if we are talking about LNG export terminals, there are opportunities for us out there. Some of our large competitors have an internal of their business have a same skill sets and capability we have, but there are other large EPC firms that are looking for the services that we can provide. And so there are some opportunities out there that we are looking at that may -- that would have the potential to come into backlog within our organization, perhaps in 2015. So there's that piece of it that we are looking at that is still a competitive environment, no guarantees.

And then there's also the LNG related to transportation fuels, where we are currently doing some feed studies for clients, along those lines with transportation tools related to ship fueling. But there's also other aspects for us with the LNG market is some of the older facilities needed some upgrades and some inspections, and so those provide a combination of an engineering and technical review service by us as well as construction services, perhaps to do some repairs on the shell repairs, in-tank pumps, different parts of the assemblies of the systems of these facilities that might be a little bit older.

Okay, that's helpful.

Right, so we are looking at all of those things. I would certainly hope in fiscal 2015, that some pieces of what I just said will start to enter into our backlog.

Okay, great, last thing I will hop back in the queue. Kevin, on Kvaerner, can you give us the revenue there this quarter and maybe break that down into your reporting revenue segments for us? And then what did it do for your earnings in the quarter? How accretive was the deal in the quarter?

Well, the revenues in the quarter were $64 million. From a segment basis, the acquisition is primarily in the electrical and industrial segments. But we're integrating that business, we aren't going to be breaking out revenues from that acquisition by segments. It's just one of the drivers and I think that's important as we try to truly do a good job of integrating that business. And as we have discussed before, we said this acquisition was going to be accretive the first year. And it was accretive in the first year. Even with the step up in basis of the fixed assets which added to depreciation, and even with about $1 million of amortization of intangible costs. So without those, it would have contributed a couple million to the bottom line.

Do you have the actual amount of EPS that it did add? How much of the $0.42?

You will see a disclosure is that says a $0.01. But without the amortization, there's about $1.6 million of excess amortization of either intangibles or the excess depreciation.

Okay, thank you.

Thank you, our next question comes from Tahira Afzal from KeyBanc Capital Markets your line is open.

Hi. This is [Sunil] on behalf of Tahira.

Good morning.

Hi.

I'm good. Thank you. And congratulations first of all on excellent quarter. My first question is regarding the booking slip going forward. I just wanted to how sustainable is the bookings run rate going forward.

Well, so I want to be clear that the $4.4 million that we had in the third quarter was probably I believe that's a record for us. Booking wise. And it's definitely up from our previous couple of quarters. And when we look at the overall prospects in each of the segments we're still feeling really good about each of those segments opportunities.

Yes, so it's -- so we don't guide backlog in the coming quarters, the markets are very strong across all of our segments. And it is certainly as we have talked on these calls before, it is possible because of the timing of awards for our backlog to go up and down from quarter to quarter, depending on when things get awarded. So it's certainly our goal is to continue to build our backlog, and to continue that upward trend, because that helps to feed the animal as we grow the business. But from quarter to quarter the backlog could go down. I wouldn't take that as a -- I wouldn't be concerned because you have to look at the long term run rate of the backlog growth.

Okay. Got that. Can you provide us some color on the segment wide operating margin outlook?

The segment margin operating margin outlook, we usually talk about gross margins. So we will start with storage. They were 10.6% in the quarter. We -- without the charge that we talked about, they would have been in our range, so our guidance there hasn't changed. We have been talking 11%, to 12.5%, 11% to 13% gross margin expectations for storage. The oil, gas, and chemical segment was 11.7%. And you know we have had a similar range expectation for them. So that's as expected. The electrical was a little lower than our normal expectation of 11% to 13% for that segment. There was a different mix of work in the quarter, we didn't have any storm work. We had a lot of reimbursable low risk work, so that's why that margin was a little lower this quarter, and I think last quarter. Hopefully we will see that come rebound a little bit in the future. And then on the industrial segment that was in line with our expectations. We started the year expecting 8% to 10%. I know that segment has exceeded that, especially in the second quarter, but 8% to 10% is probably the still the normal margin for that segment.

So there no change in the guidance of the outlook you have given on segment wide gross profit margins in.

No. Not for -- not as of right now. We are in the middle of updating our strategic plan, and doing our finalizing our budget for fiscal 2015, so we will be releasing guidance on for fiscal 2015 in the summer, and at that point, if there's a reason to change the guidance on operating or gross margins for each of the segments, we would at that point.

All right, got it.

I'm not -- right now I don't have a reason to change anything.

Got it, the last one from my side, a quick one, what are the storage tank opportunities you are seeing on the petrochem side?

So our -- our storage tank opportunities continue to be strong all across our system, both on refined products, crude products, specialty vessels. And so I can't give you a breakdown on percentages against the opportunities that we are looking at. But I would say throughout the customer base and is potential uses we see a lot of strength.

Okay, got it, that's it from me. Thanks for taking my questions.

You are welcome.

Thank you, and our next question comes from Tristan Richardson, from DA Davidson, your line is now open.

Hey, good morning, guys.

Good morning, Tristan.

Just a quick one. Kevin, can you call out what the incremental write down on the tank job was this quarter? I think you said it was $4.4 million last quarter.

I'm sorry, $1.4 million in the quarter.

Okay, $1.4 million. Thank you. And then the time left, or sort of the schedule left on that project.

We are going to be into that project through the balance of this calendar year. We have done a lot of things with management, and equipment changes, and procedure changes, with that, we're starting to -- we're feeling very comfortable about where the project is headed and at this time, we should be substantially complete by the end of this calendar year.

Okay. Thank you, John. And then -- I guess -- when you talk about some of the cryo opportunities out there, and you talked about some of the marine transportation, and the big LNG export, and some of the upgrades to older terminals, I'm curious, sort of -- where do you say Matrix's sweet spot there? You have talked before how you don't expect Matrix to ever be a -- a turnkey EPC on a multibillion dollars export project, and so I guess I'm curious, what is the size that you think you are most competitive in in terms of some of those cryo projects out there?

First of all, forever is a long time, so is there -- we will never be that -- it will probably be true for the next five years. In your career, maybe not mine, we will be that guy. But anyway, it is probably less about the dollar value then where it fits into the project. So if you take the large export terminals where our competitors, like a CB&I or like a Bechtel have is the internal tank competence, and then you take a like some other contractors out there that don't have that skill sets. So they are a big company they can handle a multibillion dollars project, but they need the engineering and construction competence around the storage of cryogenic liquids. So those are opportunities for us where we would be able to come in and partner with them and team and attack those jobs. And those projects, depending on the number of tanks can be $100 million to $250 million type projects for us that we would take a part of. So on those big jobs it is less about the size, and it's more about the -- who we would team with, and the ability of that team to win the projects.

On the transportation fuels, those projects are probably can be in the $25 million to $100 million type range projects. Those are certainly well within our bread basket of projects that we can do on an EPC basis and I would say -- I like our chances competing against the big guys on any of those projects because I think we can be much more efficient and competitive, and to win those projects. And that would also go into these -- the smaller repair type projects and upgrade projects on existing LNG facilities where they might be -- those type of projects could be in the $5 million to $25 million range, and those for sure would put us into a spot where we are bringing the engineering expertise, we are bringing the construction capabilities, and so it's -- they are very small projects that would make us even more competitive against the big guys. And most smaller contractors that maybe the size wouldn't scare them, wouldn't have the skill sets to bring to that kind of a project.

Just to follow up to that -- John, when you look at the market for LNG right now, do you see this as sort of the next big wave of spending for MTRX in terms of a new cycle starting up?

Well, I think as we have talked before, I think that the whole specialty vessel market, the storage, and process is and handling of natural gas liquids, gases, transportation fuels, LNG, the exportation of propanes, and methanes, and butanes, I think we are in the very early innings of the baseball game in that market. So in our view, there's a lot more work to do there across North America. And we think we're in a really good position now to relatively ride that capital spending wave.

Okay. All right, thank you guys very much.

Thank you.

Thank you, and our next question comes from Mike Harrison from First Analysis, your line is is now open.

Hi, good morning. Nice quarter.

Thank you.

If I can piggy back on the last question there, is that really, when you guys talk about opportunities in upstream oil and gas -- are those the kind of projects you're looking at? Can you give us some other examples of what the opportunities are there?

That's an area of strategic growth for us. We would like to not walk away from what we are doing in more the midstream activities than downstream, but we would like to get more of our portfolio in upstream, whether it's in oil or whether it's in gas. So we aren't going to get at the well-head where we are doing site prep and drilling rigs and that sort of thing, but gas compression, and gas processing, oil pumping stations, those types of capital spend and projects throughout the system, we think there continues to be a lot of opportunities at length there for us that we are able to bring in many cases both not only just the competence, but also the engineering.

And is that something is you can go after largely with existing resources, or is it going to require a significant amount of investment?

Yes. We have the skills to do that, but we are also -- and have been, frankly, actively looking for small regional acquisition opportunities that would help to accelerate our move into that market. And in some cases for our building to handle what we see as the workload, available to us, that there may be some onesie-twosie people that we would add into our existing engineering structure to continue to help to provide that service. Right now we don't see it as a huge capital investment, but there will be some opportunities there maybe for acquisitions for us.

Interesting. And then looking at the storage business, can you give us a sense of where the strength was? Maybe disaggregate a little bit what Cushing looked like, versus Gulf Coast, versus Canada, versus other areas?

So we are working in a lot of areas. One thing I would say was very strong in this quarter, and frankly in the second quarter was Cushing and that was on the balance of plant work. So we had a fairly large project that we were very schedule-intensive for one of our key clients that we stepped into, and are nearing completion now. So that drove a lot of those revenues in this quarter in the past. We are still very, very busy up in western Canada on several different project opportunities. We are busy in sort of the Midwest, and the Wisconsin, and Illinois area, on not only tanks but on terminal related projects. We have projects going down in Houston Ship Channel area, we are in Louisiana. So we're working a lot of different area. One of the big drivers like I said, for at least this quarter that passed was the fairly sizable balance of plan opportunity that we worked on in Cushing.

Kevin, you mentioned performance-incentive accruals contributed to the higher SG&A in the third quarter. Do you think we are fully accrued at this point? Or given the performance here, could we see some further catch up in Q4?

I hope so. So is we have an incentive plan which covers the full year, obviously, and we are accruing throughout the year, based upon the percentage we think the ultimate pay out is going to be based upon all the various factors that go into that incentive, including not just financial performance but safety performance. And so I think we're appropriately accrued at March 31. They will be incentive accruals in the fourth quarter, and like John said, I hope they are large, but -- we're -- it's not a catch up accrual. It's just as the company has outperformed our expectations and had the high operating income, our -- we have is to reward the people who have generated that performance.

Understood, thank you very much.

(Operator Instructions). And our next question comes from Matt Duncan from Stephens Incorporated. Your line is now open.

Hey, guys just want to look at the TransCanada Alliance Agreement for a minute. How is that going so far? And I don't know if you are at liberty to say or not, I know you are working on a project for them in Cushing, are you by chance doing any balance plant work there?

Potentially.

Fair enough. So how is that progressing? Are the revenues coming in at the pace you expected them to? Is it maybe doing a little better a little worse? Just curious how that's performing so far relative to where you guys thought it would be.

I would say the Alliance is going very well, our relationship with TransCanada continues to be strong. We are doing projects for them in Cushing, and we are doing projects for them in the Houston area. We are working on projects for them up in Western Canada. And we are as part of the Alliance, we are looking at projects for them on their planned capital spending for over the next three to five years. So we're involved not only in the construction and installation projects for them right now, but we're also heavily involved with them in their planning and budgeting stages.

Okay.

And so we're -- that relationship is going well. We believe TransCanada feels the same. And certainly you know they have been a big contributor, TransCanada has been a big contributor to our business over the past year. And we believe that that will continue into the future.

Okay. Wage inflation, is that something is you are starting to experience anyone in the business yet? Maybe especially along the Gulf Coast where it looks like things are really starting to pick up.

Probably in some spotty areas, we are starting to see a little bit. But I would say right at this point it's not having a big impact on our business. Certainly we talked before, we would expect over the next two to four years that there's going to start to get pressure on wages and availability of labor. We are already in front of that curve, we are already looking ahead, and how we can continue to develop our labor resources. And create an environment at Matrix as a place where people can want to come to work, when they make those choices. The Gulf Coast is going to be a hot bed of capital spending down there, that is going draw a lot of resources. A lot of companies that traditionally draw their resources out of the Gulf Coast, may not have that opportunity in the future. That they -- those resources that they normally count on to travel for them, will want so stay home. But we have what we think is a pretty expansive network of labor resources all across the country, and we are doing things today with local technical colleges, local chambers, the businesses that companies that we work with on a daily basis to build, and create additional labor resources for us to use.

Okay, and John, I assume this is the case, but just to make sure, I assume on projects with tails that would get you into that two to four -- year outlook on wage inflation, there are appropriate wage inflators in those contracts, do you feel like?

Absolutely.

Okay. Great, thank you, guys.

We have projects that go out into multiple years, we are -- as part of our negotiations is that we include escalation, escalation clauses for not only for labor but also for materials.

Okay. Great, thank you.

You're welcome.

Thank you, and I'm showing we have no further questions at this time, I'd now like to turn the call back over to your host, John Hewitt, for any further remarks.

Thank you everybody for participating in today's call, and we look forward to talking to you in the near future. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, you may now disconnect and have a wonderful day.