Matrix Service Co (MTRX) 2015 Q1 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 first quarter ended September 30. (Operator Instructions) I would now like to introduce your host for today's program, Kevin Cavanaugh, Vice President and CFO for Matrix Service Company. Sir, you have the floor.

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 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 fiscal year ended June 30, 2014, and in 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 website. I will now turn the call over to John Hewitt, President and CEO of Matrix Service Company.

Thank you, Kevin, and good morning, everyone. To start, I would like to discuss our safety performance in the first quarter of fiscal 2015. Whether we're rolling out our safety program in a new market, discussing expectations with current or future employees, or integrating a newly acquired business, our safety culture is at the forefront of all the work we do. So while we work in challenging environments and markets, we believe a zero-incident workplace is achievable. Continuing on this journey to zero, our total recordable incident rate for the three months ended September 30, 2014, was 0.67. I'd like to thank all Matrix employees for their dedication to a zero-incident mindset and fostering safe environments at work and at home.

Before we discuss our segments and markets that we serve, I wanted to provide some commentary on energy prices and their impact on our business. As we have stated in the past, we work closely with our customers to understand their capital programs and plan our resources accordingly. Changes in the global and domestic price of oil is but one indicator of the market strength in at least two of our segments: oil, gas, chemical, and storage solutions.

Our clients' capital programs are generally based on a long-term outlook that is not significantly moderated by near-term energy price fluctuations. Additionally, our strong relationships provide us with a better understanding of their capital and maintenance spending plans. As such, we are not seeing any reduction in the midstream storage and terminal spending plans for either crude, refined products, LNG, or NGL projects.

From a short-term perspective, a reduction in drill rigs does not immediately create a reduction in infrastructure spending. The demand for pipeline and terminal logistics capacity has been a market highlight for us, and that continues to exist. The potential lull in drilling, in our view, allows for our clients to catch up on badly needed infrastructure expansion. On the refining side, the majority of our unintegrated clients did not have an upstream component, so low oil prices provide them little operational stress.

In the short term, reduced demand can provide opportunities for increased maintenance activities as they work to catch up on critical plant repairs. In addition, while low oil prices and domestic refined product demand might limit capital expansion activities, spending on federally mandated environmental compliance and plant optimization improvement projects will continue.

To date, we have not seen any project cancellations in our business, and our project funnel has not been impacted by these price declines. In fact, as we have stated on other occasions, overall strength in the North American economy is a key component of all of our segments.

For example, lower prices at the pump will, over the short term, drive increased consumer spending, which has an impact on our industrial markets. Continued cheap natural gas has a direct impact on our storage solutions, industrial and electrical infrastructure segments by creating more opportunities in electrical generation, cryogenic storage, fertilizer facilities, and general manufacturing. Our strategic move to diversify the Company across multiple energy and industrial markets is important so that we can take advantage of opportunities as they are presented. In summary, we don't view the current decline in energy prices changing outlook for our business.

Moving on to our electrical infrastructure segment, although quarter-over-quarter backlog is down slightly, bidding activity is robust. Our customer spending plans are substantial and reflect a need to replace and/or upgrade significant infrastructure in their geographies. The funnel of new power generation projects continues to be full, and we are actively tracking and fitting our projects we see as providing Matrix the best opportunity for success and fits our risk profile. Likewise, opportunities for substation and other power delivery work has picked up. So despite the quarter being slower than expected on a volume basis, we anticipate this to improve as projects are awarded and backlog increases.

Performance in our oil and gas and chemical segment has been strong on reduced revenues. These reduced revenues impacted our ability to absorb the entire construction overhead cost structure. Given the strength in our proposal and bidding activity as well as improved bookings, we expect both revenue and margins to increase through the balance of the year.

The majority of the activity in this segment is related to our downstream work. These activities are underpinned by anticipated turnaround activity, and we continue to bid on and win throughout our service areas. Additionally, as we integrate HDB into our business, we are already providing expanded services to upstream clients in central California such as Oxy, Chevron, Aera Energy, and Freeport-McMoRan.

Our business development teams continue to cross-sell our breadth of services including mechanical trades, industrial cleaning, pad management, and various advanced capabilities. The response to these efforts are positive for new and existing clients who are increasingly interested in minimizing the number of contractors employed to service their needs.

Moving on to the storage solution segment, backlog of $538 million represents an all-time record for Matrix. This backlog includes a mix of new tank work, maintenance and repair to existing tanks, as well as our growing terminal project activities. In fiscal 2014, we experienced significant growth in this segment while increasing our backlog year over year. The market provides an opportunity to achieve similar results in fiscal 2015.

Additionally, while the growth in our crude tank and terminal construction business continues to be a headline for Matrix, our specialty vessel opportunities, including the LNG and other cryogenic applications, is robust with projects that stretch from Alaska to the Gulf coast.

Lastly, performance in our industrial segment was stronger this quarter due to strong project execution, including positive project closeouts. The outlook for the three markets included in the segment is positive. There continue to be many opportunities at new and expanded fertilizer facilities. Our mining and minerals operating unit has proven itself as a viable business line, with repeat customers doing Matrix as their go-to choice for construction and maintenance services. And finally, the iron and steel business has a strong outlook in general facility maintenance, capital projects, and critical outages.

In all of our segments, we are looking for acquisition opportunities that bring head and bench strength, market penetration, or unique specialty component to complement our existing services. Overall, the business is performing as envisioned in our strategy, and we see growth opportunities in all of our segments.

Before I turn the call over to Kevin, I would like to discuss our overall margin performance. We are currently in the third year of the five-year strategic plan we commenced at the beginning of fiscal 2013. That plan included a number of strategic objectives that we are on track to achieve or exceed including enhancement of our safety culture; achieving annual revenue growth of 12% to 15% through a combination of organic growth and strategic acquisitions; improved cash management and balance sheet strength; top-quartile performance against our peer group; diversification of our markets, operations, customer base, and geographic presence; and infrastructure improvements to support the growth in our business.

While we have made significant progress in these areas, there's one strategic objective for which our progress has not met our expectations: the improvement of our operating margins of 150 to 200 basis points as we grow the business. We are proud that our growth has significantly exceeded our original targets, but that growth and growth-related investments has created complexities in our business and organizational inefficiencies which is limiting our ability to achieve the top quartile margin as compared to our peer group.

This is not a surprise. It was contemplated in our tactical plan for the back half of the strategy that I just discussed. Our business success has been directly tied to leadership at all levels and focus on the critical tasks at hand. Margin improvement is just one of those tasks, so again, in line with our strategy and while we continue to grow the business, this fiscal year we will also commence an initiative that will focus the entire Company on the achievement of this objective to process improvement, analysis of business efficiency, and organizational excellence.

Improving of operating margins will be a key measurable of this initiative. We expect margin improvement will occur in increments over the next three years. We would be glad to discuss this initiative during the Q&A, so I will now turn the call back to Kevin to discuss the details of our financial performance. Kevin?

Thanks, John. The revenue for our first quarter was $321.7 million, compared to $226.2 million in the same period last year. Consolidated gross profit increased from $25.5 million in the three months ended September 30, 2013, to $28.4 million in the three months ended September 30, 2014. SG&A expenses were $19.8 million in the current quarter as compared to $14.7 million in the same period last year. SG&A expense as a percentage of revenue decreased to 6.2% in the quarter compared to 6.5% for the three months ended September 30, 2013.

Quarterly net income was $5.9 million as compared to $6.6 million in the first quarter of fiscal 2014 and our fully diluted earnings per share was $0.22 in the current quarter as compared to $0.25 in the first quarter of last year. In order to evaluate the operating performance in the quarter, we need to consider a couple of items. First of all, while revenues increased significantly over the first quarter of last year, the volume was less than we expected. We anticipate revenue will pick up through the remainder of fiscal 2015. Secondly, the lower revenue volumes contributed to an under-recovery of our over -- construction overhead cost structure which reduced gross margins 180 basis points to 8.8%.

Thirdly, other than a project charge in our electrical infrastructure segment related to a joint venture Power Generation project, the overall project execution and the business was strong. As the joint venture associated with the project is consolidated, 100% of the charges reflected in our operating results including our partners share. The total charge was $3.3 million, of which $1.2 million is attributable to our partner. That $1.2 million is excluded from net income and earnings per share.

Moving on to segment results, revenues for the electrical infrastructure segment increased $22.8 million or 69.3% to $55.7 million in the three months ended September 30, 2014 as compared to $32.9 million in the same period last year. The increased revenue volume was due to the inclusion of Matrix NAC activity which is not included in the first quarter last year partially offset by lower business volumes in the legacy transmission and distribution business. The segment operated at a net loss on the gross margin line for the three months ended September 30, 2014 compared to 10.1% in the same period a year earlier. Fiscal 2015 margins were negatively affected by the charge I previously mentioned.

Despite this charge, the project remains profitable and will be completed this fiscal year. Gross margins will continue to be impacted by this project through completion, however excluding the joint venture project, the electrical infrastructure segment produced gross margins consistent with the previous quarter.

The oil, gas, and chemical segment revenues were $53.3 million in the three months ended September 30, 2014 as compared to $62.5 million in the first quarter last year. This segment continued a string of strong, consistent project execution, but on a lower level of revenues. The revenue shortfall was primarily due to the timing of turnaround work, which resulted in under-recovery of construction overhead costs and reduced gross margins in the segment from 12.1% in the first quarter of last year to 8.2% in the current quarter. We expect revenues and margins to increase as we move through the remainder of fiscal 2015.

The first-quarter revenues for the storage solutions segment increased from $108.1 million in fiscal 2014 to $133.3 million in fiscal 2015. The 22.3% increase was primarily due to higher levels of work in our domestic ASC business and increased terminal work. We experienced strong execution in the quarter on our portfolio projects throughout the US and Canada. Gross margins decreased to 10.9% compared to 11.9% in the same period in the prior year due to under-recovery of construction overhead cost structure by approximately 130 basis points.

Revenues for the industrial segment increased to $79.4 million in the three months ended September 30, 2014, as compared to $22.7 million in the same period a year earlier. The increase of $56.7 million was primarily due to the inclusion of Matrix NAC activity, which was not included in the same period a year earlier. Gross margins were 12.6% in the current quarter as compared to 7.8% in the same period last year. Gross margins were higher than the top end of our expected range primarily due to profit recognized on favorable project completions.

During the first quarter of fiscal 2015, backlog increased to a record $984.7 million as compared to $672.8 million a year earlier. Our book to bill was 1.2 as a result of $390.5 million in new projects. The growth occurred as a result of turnaround rewards in our oil, gas and chemical segment, and tank and terminal awards in our storage solutions segment. The increase in the quarter continues the growth trend in our overall backlog, which has increased 46.4% over the last 12 months.

At September 30, 2014, our balance sheet is strong, with a cash balance of $72.8 million and liquidity of $236.8 million. The management of our balance sheet is extremely important to the Company's success, as our strong financial position provides us with the necessary liquidity to support the expected growth and business volumes as we enter the second quarter. In addition, we are in the position to execute acquisitions that support our strategic growth plan.

The Company's stock buyback program, which was scheduled to expire December 31, 2014, has been replaced with a new program that expires December 31, 2016. Under the new plan, the Company may annually purchase on a calendar-year basis up to $25 million of the Company's common stock. The plan will be utilized to repurchase shares in the event management believes the stock is undervalued based on peer comparisons and the Company's liquidity requirements. We believe having this program in place is appropriate, but we currently have no intention to repurchase shares, as we believe better use of our liquidity is funding acquisitions and our expected organic growth.

I will now turn the call back over to John to discuss our guidance.

Thanks Kevin. So before I provide the guidance and turn the call over for questions, I want to hit a couple key points. First of all, Matrix is a very healthy values-led Company. We are in great diversified markets, we have very strong tailwinds, we have some of the best employees in the industry, and we have strong leadership at every level. And we have accomplished many of our strategic goals. So when we talk about construction overhead structure, margin improvement, business efficiency, I want you to remember I'm talking about fine-tuning, incremental improvement.

As it relates to operating margins, we are not satisfied with being average. We expect to be the best at everything we do. So when you have a goal to be the best, as we do, you have to set very high expectations for yourself. And we have confidence in our ability to achieve those expectations.

So for now, our guidance -- we are maintaining our revenue guidance range of $1.425 billion to $1.525 billion and our fully diluted EPS range of $1.40 to $1.60 per fully diluted share.

So with that, we have completed our prepared remarks, and I would like to open the call up for questions.

(Operator Instructions) [Kevin] Malloy, Johnson Rice.

Could you talk maybe a little bit more about what's causing -- what caused the delays in revenues during the quarter? When I look at your revenue, it's trended down the past two quarters. And you had a fourth-quarter earnings call in early September where you talked about short-term growth opportunities in addition to the longer-term ones. What is -- is it permitting or just customer-driven delays? What is happening with your revenues not coming out of backlog?

So there's probably two or three key projects that had the majority of impact on the revenue shortfalls. They were primarily in the tank and storage and pumping station projects. And they are primarily related to finalizing contracts and agreeing with terms and lining up start dates with our clients. So there was -- they are not -- they weren't market driven, they are just part of the way we do business and the way our clients do business.

So it's just whether we were able to get a contract finalized in commercial terms agreed to between the parties for the time it takes to do that. When, from that point in time, the client is positioned to either provide us with engineering or provide us with an opening to his site because of his existing operations that we are able to start for one month to another. So it's not a systemic issue, it's just the way our business goes.

And that was primarily in the -- for the storage business, I think the oil, gas, chemical and electrical businesses -- the first quarter is naturally our slowest period of the year for both of those segments.

Okay. And then on your last call you talked about an electrical infrastructure target gross profit margin of 11% to 13%. Do you mind updating what your thoughts are around that for this year?

Sure. So we believe that we will get back to our range of 11% to 13%. Obviously the margins in that segment were a little lower last year, around 10%. As we book new work, as we grow that segment and fully leverage the cost structure, we will get back up to that range. It may take us the remainder of the year to get there, but we will start to move back to that range in the future.

Thank you.

Matt Duncan, Stephens Incorporated.

Hey Kevin, on the project delays, is there a way you can quantify for us the impact it had on both sales and gross margin?

Well, I would say this. From a top-line perspective, we were probably 10% below what we were expecting as far as the volume when we look at these for the quarter. And obviously that impacted the gross margins. I think we have talked about what the impact was on under absorption in the quarter.

These are all storage jobs, then. That implies storage should have been -- if these jobs had been going when you expected them to be north of $160 million of revenue this quarter. Is that a good run rate for us to think about going forward?

No, and I -- most of the delays were in storage, but there was some in the other segments. I think we will get back to that level. Let's get through the latter part of the year. But -- and I think we will see a positive trend in the second quarter, but it may not get back -- I wouldn't expect to get back to the $160 million level in the second quarter.

Okay, that's helpful. John, let's talk a little more about the drop in oil prices and how we should think about it for your business. I think one thing that we all want to get some comfort with is that these project delays that you are seeing in storage are not in any way tied to the fall in oil prices. So can you talk about since the end of the quarter, have those jobs, have those contracts been signed? Those jobs are now going. And have you seen anything in your backlog get delayed or slow played by a customer due to this drop in oil prices, or is it really all full steam ahead?

Yes, I would say that we are not seeing any impact in delays in either our backlog or the proposal funnel related to the price of oil. So if you look at -- if you look at our key clients in the midstream space, we've had -- we have direct conversations with our executives. We've had -- in fact, some of our management team spent time with one of our top midstream client recently. And I would say every one of those clients executive say the same thing: that they view this oil price dip as a short-term fluctuation that they feel very strong about the long-term outlook for oil pricing, for the demand of oil, and that they are looking at -- they look at this infrastructure on a long-term basis.

So they are not delaying their spending plans. Many of them have billions of dollars of spending that they are planning over the next five years. And they are telling us and the rest of their suppliers that they are not slowing down. So they see the need, they see the demand that this dip in oil pricing into the 70s is a short-term occurrence. And several of them have even been fairly clear that they think that we are in a six- to 18-month oil price dip but that it's going to stabilize out sometime in the next six to 12 months in the $90 range.

So we're not seeing that. Our clients who we do the majority of our business with aren't talking about that. They are, in fact -- I was on the phone with one of our clients -- executives this morning anticipating your question. And he had -- their company had just announced the continuation with a new pipeline out of the Rocky Mountains, and they've got no intention of slowing any of that down.

Okay. That's all very helpful color, John. In looking at the oil, gas and chemical segment, I noticed the backlog there is up over 30% since the end of June. Kevin, how much of that is tied to fall turnaround projects versus the spring? And in looking at the fall, I guess we've heard that the start-up of fall turnaround season was two or three weeks later than normal, which is meaningful for you guys because it normally starts right after Labor Day. So if it was late September, it really didn't help your quarter. But that does seem to suggest that you've got a much better quarter coming in the December quarter in that segment, just taking into account when it started and looking at your backlog.

Yes, so the backlog increase was the result of turnaround activity for that segment, and it relates to turnarounds in the second and the third quarters. I think we will see a significant increase in the revenues in oil, gas, and chemical in the second quarter as a result of increased activity.

Okay. And then last thing, John, you open the door in the prepared comments saying you would talk more about the margin plan if anybody asked. So let's dig into that little bit more if we can, please.

Well, you weren't supposed to ask. I think a lot of things that we are trying to do with the organization, and we are accomplishing a lot of things, I think one of those is -- and we have talked before, you guys, that we benchmark ourselves against our peer group, and we want to be a top-quartile performance. And while our margin performance is -- like I said, is average, we know we can be better at that. And there's a lot of areas of the Company that I think we can find ways to improve to drive better margin performance.

And it's kind of above the line and below the line. So above the line in our cost base -- in our cost of sales, are we procuring at the best prices that we can? Are we making the best commercial arrangements with our clients? Are we taking advantage of the right risk profiles on our projects? Are we executing the best we can with the best people to convert contingency to margin below the line? In the cost -- in the construction cost overhead piece, how we're managing our people, how we are managing our equipment, how we're thinking about our insurances. All those things are areas where we can make incremental changes in our margin performance.

And so those are all things that we have been thinking about, we're focused on doing. But as we've grown the business and tried to maintain with the growth over the last three years, the tendency is to throw people and machinery at the execution. So that's not necessarily the most efficient way for us to operate.

So we need to be able to do two things. One is to keep our foot on the gas pedal. But two is to look at how we are actually operating, how we are processing paper, how we're thinking about the utilization of our equipment, how we are thinking about the utilization of our people, and are we being as efficient at that as we can.

And I think as we move through that, and that's -- we can't just stop growing the business and shut everything down and go back and re-look at everything, so we've got to do two things simultaneously. So it's going to take some time as we pick at each individual piece and find areas for our improvement.

But we are very confident we're going to be able to make that happen. And we -- internally, what we're going to do to bring focus to that is we will actually make that as a companywide project, as a continuous improvement effort like we've done with safety, where we want to build a culture around being as efficient as we can in our business. And so we will be -- that's something we will be working on as we go forward here in time.

I would say that if you look at the last three years, we've had organic revenue growth of -- on average of 20% per year, plus we've done a number of acquisitions. And I think our employees have done an exceptional job of growing the business and executing on the strategic plan. I think it's just natural that there is inefficiencies or opportunities for improvement in the way we do things that get -- that present themselves because of the growth. And now it's time for us to go attack those and see if we can take advantage of it.

That helps. Thanks, guys.

Tahira Afzal, KeyBanc Capital Markets.

The first question is the execution, kind of disappointing in the quarter. Even if I was to take your part of the power plant project and take out what you got from the joint venture, that portion, it still means you could have got a meaningful 20% plus EPS upside versus where you ended up in the first quarter.

So I guess first question really, given that as you look at all your strategic objectives you've outlined, John, how many are really focused on execution? Particularly given power plants do tend to be a little more tricky on the combined cycle side in terms of the track record out there for a lot of your peers. And also given really the welding environment, which is probably pricing up.

And then second of all, you haven't changed guidance. So would that suggest you're seeing some other portions of your business in terms of outlook improving, which is why you have kept your range intact?

So let me address the first part and let Kevin get you with the second part on the numbers. But, so -- we have talked many times. And, again, you guys only hear about the bad stuff; you don't hear about the good stuff. So this is a business that's made up of pluses and minuses. And the better job we do at minimizing the minuses accentuates the positives.

So in this quarter -- so while we've had a project with some stress on it, we've had other projects that have done very well. So I take exception to the project execution operation of the Company. We had a very good, strong execution this quarter in a lot of areas of the Company. In fact, to some extent, much that well overshadowed that one individual project.

So from an execution side on the business, taking it whole, we were -- I would say we are a plus rather than a negative. And so what we really need to focus on is how we support that execution with our construction overheads. And that's really, I think, the story in the quarter. With the revenues down a little bit, our ability and how we have structured the fundamental infrastructure and foundation of the Company to deal with our revenues is the thing that we've got to work on in those efficiencies. But our project execution -- the risk profiles we are looking for in our projects, I think we're doing a very good job at that.

As it relates to combined cycle work, that is -- that project was -- came with the acquisition. We are very comfortable with where we are at in that project, and we see that as a continuing part of our -- those types of projects continue to be a key part of our backlog into the future and a key growth engine for our Company.

So you asked a question about welders. Currently today, I would say that is not a big problem with us being able to recruit welders into our Company in most places across the country. We are seeing -- starting to see a little bit of tightness in that market in the Gulf Coast, but it's something that we think we can manage and that will be considered in a risk profile of our jobs as we go forward.

So Tahira, I would echo John's comments on the execution of the work. I think if you looked at the industrial segment, the project execution produced gross margin well above our range. If you look at the oil, gas, and chemical, and storage, both of those were in the upper end of our range. We did have the issue in electrical, but overall, it was very good execution.

And for the quarter, we had $321 million of revenue. We have maintained our revenue guidance. The midpoint of that is about [1475]. So that implies an average revenue per quarter of around $380 million. So that's $60 million higher than what we did in the first quarter. So if we were successful in achieving that, that under-absorption issue, which was the story of the quarter, gets minimized. We essentially fully absorb at those levels. And as a result, the earnings are going to improve. So I'm expecting that we will see some good pickups in revenue volumes beginning with the second quarter.

Got it. Second question I had was -- John, you replied to average margins and really taking them to the next level. And as I look at the specialty contracted group as a whole, the average margin -- in fact, even the NCCs as a whole are really in the 5% to 6% double rating margin range with maybe the really good performers giving a high single-digit operating margin range. So when you're talking about really migrating from average margin -- and clearly, you have kind of closed ahead 5% in 2014 -- where are you taking them in terms of timeline? How you really view operating margins in terms of what you perceive to be above average?

So our peer group -- and that was probably -- we probably would have to delay your peer group -- you think our peer group is against it, we think our peer group is side-by-side and have that discussion separately. So for us, operating in the 4.5% to 5% range, operating margin range -- right, we think where that's about -- in our peer group, what we see as our peer group is that we are in a 50% percentile. And so we want to be up in the 6.5% range. And so, as we said in the call, that's a 150-basis-points improvement, and that will put us up in the top quartile of the people that we consider to be our peer group.

And so if we were a private Company, the owner of the Company would be very happy with the kind of margins they we're putting out. But we're not satisfied with that, and we want to be -- as I said, we want to be in the upper quartile of our peer group because we think that's going to help us continue to drive improved shareholder value and our view on the market.

And so those are incremental improvements in our operating margin performance in a whole lot of areas. So it isn't just one thing. As I talked about, there's a whole lot of different things that we're doing that we are investing in, that we are analyzing that are going help us get that incremental improvement.

So it's kind of like safety performance. So when you drive your safety performance down into the area where we are, which we consider ourselves a world-class performance, of a 0.67 reportable incident rate today, to get those next changes, to get the 0.67 down to 0.5 and 0.4, it's incremental changes. They are fine-tuning in adjustments in the Company. There is -- so that next extra 150 basis points is possible for -- in the margins, but we have areas we know we can work on the make that happen. So it's just going to take some time, but we're confident we're going to get there.

Got it. That was helpful. And last small question for you, the award you announced this morning which is tied to the Sandpiper pipeline, would love to get your thoughts on how you perceive that as a booking and flow-through. The Sandpiper project looks like it's being contested on a state legislative level from a permitting standpoint and some alternatives being considered. So just to give us a perspective, it seems a lot of these delays, as you have mentioned, are permitting oriented. And would love to take that as an example and really talk around in terms of how you would book it and how you would see the timing of flow-through.

Well, for the project we announced today, we are working on engineering. We are -- we prep them for fabrication; we're getting our crews together. Our client Enbridge is one of our key clients there. They have talked -- again, they are one of the clients that I referenced that is basically saying that the -- they are looking long term. That this dip in the price of oil and -- is not affecting their long-range plans.

And so all these pipelines have permitting issues one way or another depending on what state they are going through, what federal or state regulatory agent has got to look at it. But I don't -- so they've contracted us with a nice contract sum to start engineering and fabrication, which we already doing. And so I don't think they would be out spending that money if they didn't have confidence that that was going to go through.

Thanks a lot, folks.

Mike Harrison, First Analysis.

Just in terms of the timing -- project timing and the overhead absorption issue, obviously you need to have personnel and equipment in place ahead of a project moving forward. How much flexibility do you really have if you see that a project is going to be delayed by a few weeks or month? What can you do about that? What can't you do in order to reduce the margin impact?

So yes -- go ahead.

From an overhead perspective, there is probably not a lot you can do from a project that is delayed such a short time. There may be things that you can do to delay certain direct project costs, but from an overhead perspective, I don't think there's a lot you can -- a lot of cost you can take out of your business for a month or two.

That's why we have said in the past that you've really got to look at our business on an annual basis that these quarter-to-quarter swings of projects and project starts can be a little unsettling if you just focused on one quarter to the next. But we are confident that those revenues and those costs are going to become -- those revenues are going to occur and those costs are going to become fully applied as you move out in time, as we execute those projects that slide from one quarter to another.

Another thing is that, you know -- so you take pieces of that overhead like our construction equipment. Are we doing as good a job as we can of applying that equipment into our projects where -- are we -- as we have some delays in project starts, can we take some of our component and construction equipment and put that on to projects that where we are renting equipment and minimize some of those impacts? So those are some of the business efficiency things that we've got to be able to do and take a good look at.

And then just looking at the $3.3 million charge, can you give a little bit more color on exactly what was driving that? And I think I understood you to say that if you excluded that project overall, gross margin in the EI segment was about similar year on year. So were there further headwinds on that project beyond just the charge that you took?

No, it's the -- I think the -- Kevin can confirm that, but I think the -- if you exclude that project, gross margins were at an 11% range in that segment. So no, it's a -- the project's in -- it's in fairly decent shape. We had -- so I don't want to get in the details of what all the issues on the project, but I think we've captured those issues. The project is over 70% complete. We will be essentially complete with all of the construction -- the actual construction work sometime in January. And so we're fairly comfortable where that's going.

There's still -- certainly on any project, there's still risks to get to the end. But we think we've got a very -- our hands on the job and issues related to what caused us to reduce the forecast on the profit output on the job. And so we thought it was prudent to make that adjustment.

And then just lastly on the recent elections, I think it's easy to view that as positive for you guys on a national and a state level in terms of energy policy, maybe moving forward after being stalled for quite a while here. Do you think that's going to happen, or are you still a little skeptical that we're going to see significant changes in policy anytime soon?

So anything I would say here will be my opinion. So my personal opinion is that because of the -- we've got another election in two years for our new President. And who is going to be probably -- the prime contender will be a Democrat, and the desire for the Democrats to get re-control of the House and the Senate that I think they are not going to want to be perceived as getting in the way of improved energy policy and the economy and jobs. And so my glass-half-full thinking here is that they're going to push through an energy policy that's going to allow faster approval of LNG projects, that's going to allow the approval of the Keystone pipeline, and for potentially even the export of crude oil.

So all those things, obviously, I think would be good for our business. We have not accounted for that one way or the other within our guidance and -- because that's -- who knows what's going to happen there. But I think -- in our view, what's going on with the election is going to be positive for our business.

The other thing I think is potentially -- maybe is potentially positive, too, is that -- will there be some reform on the corporate taxes. And what impact will that have not only on our business but on the economy in general. So I would say I am cautiously optimistic that the results of the polls this week are going to create additional tailwinds for our business out to the future here.

All right. Thanks very much.

Tristan Richardson, DA Davidson.

Appreciate you laying out the clear margin goals. And I get it that you guys want to be the Johnny McEnroe of your peer group. Curious about the timeline, though. Is this a by the end of fiscal 2016, we think we've got it? Or is this -- I'm curious on that front.

So I would prefer Lebron James, actually. A little more -- McEnroe is a little old. (laughter)

1980s McEnroe.

Yes, 1980s McEnroe. So what was your question again? (laughter)

(laughter) Timeline.

Timeline -- like I said, these are incremental things that we're going to have to do. I think that our goal is that the -- when we get to end of fiscal 2017 and 2018 that we will be in that top quartile of our peer group and our margins. So I can't tell you whether we're going to get 25% improvement this year and 25% the next year. We're going to start picking off some of the low-hanging fruit that we see and improving our processes and efficiencies. And so I think we said in our prepared statements that there are going to be incremental changes as we move forward. So I'm not prepared to commit that it's going to be a certain percentage per year for the next three years.

I do think that it's -- for us to achieve these, it will take some changes that will take a little bit of time to work through to the margins. So it will take a little while to get started before you start seeing that improvement, but hopefully as we move through this year, we will start to see it.

Okay. Thanks. And then in the past, you guys have talked about a couple of power-gen opportunities on the horizon that you are looking at. And I'm just curious the update of the timing there. Has anything changed? Still looking at possible awards this year? This fiscal year?

Yes, yes. So we are looking at opportunities that would be awards in this fiscal year. And so we are balancing that -- our desire to move that strategy forward with accepting projects that have a risk profile that fit our asset type. And -- but we are -- we remain optimistic that in this fiscal year that we will be able to add some power-generation project or projects into our portfolio.

Great. And then lastly, could you talk a little bit about the new awards profile in storage? Just generally, is it sort of plain-vanilla tanks or -- you talked about diversifying the scope of work. I'm curious what the jobs look like in the quarter that you sold.

So one of the jobs that was added into the backlog this quarter is a full-tank terminal project in the Gulf Coast. That booking was in excess of $75 million and -- so that is one of the profiles. We are still doing tank-only projects. We have some -- we actually have some projects that are terminal only or maybe manifold systems or pumping stations.

And so I think the full breadth of the tank and terminal opportunities is we are getting our share of and that we think there's increased opportunities for us to provide full EPC solutions where we can do all the engineering besides all of the construction on these terminal projects. And we see -- continue to see many opportunities out there with our -- not only our core clients but some of the other clients that we do work for on an off-and-on basis. So we are still pretty comfortable where we are in that market, and we think we're going to continue to have our unfair share of the -- unfair share of what's going on there.

That's helpful. And then I guess lastly on the profile where the backlog sits today, specifically in storage, could you talk about the split between US versus Canada?

I think it's -- Canada is probably 25%, 30% of the backlog.

Great. Okay. Thanks, guys.

Robert Connors, Stifel.

Just wondering if since the close of the quarter, can you comment at all if on those three projects that were Delayed? Have you started to see any improvement and been able to gain access to the site? And then also to the extent that you are able to comment, if these projects are already financed and/or permitted.

So one of the projects I know we are moving ahead at full speed. And I believe all those projects are -- specifically, one of them is on an on-balance-sheet project. So the other ones, I believe they are, too. I think most of these projects are coming out of these clients' cash flows.

Okay, that's helpful. And then the -- I guess just generally speaking on the cost structure and business inefficiencies that you guys are targeting, just wondering how much of it is driven by some of the recent M&A where, after peeling back the onion, you find that maybe the cost structure was a little bit higher. Do you see opportunities there? Or just how much is related to just the overall growth that we've seen in some of your end markets?

So it's both. Certainly, the acquisitions create opportunities where there is some overlap where we are not doing our best to utilize all the resources that we brought together both on a sales side and from a cost side. And so it's both.

For instance, in our union business that we brought together with the Kvaerner acquisition, while they were using the same finance and accounting system we were, there was a different version. And so that creates a lot of double entry and a lot of stress in the finance and accounting group for people pulling information together, which is just inefficient and takes up people's time from doing other things they could be doing.

So that's an example of -- from an acquisition standpoint where we've got to get that sorted out and get those systems. And it may not be a choice of one or the other. The possible choice is something a little bit different than the two of them. So that's something we have to work through.

And that's why these things are going to take time. That doesn't happen overnight. And as we pull those together, that's going to create more efficiency in how we report. So each of those little -- so while that may seem like a small thing, each of those provide -- each of those things within our entire business add up to areas where we can be more efficient and quicker.

Okay. And then I know you have recently -- or earlier you had said that you still continue to look at M&A. But do just think that with some of the things you are discovering maybe M&A is put on hold for a little bit, or is it still -- you are still considering targets out there?

No, no, we are still considering targets. We are comfortable. We have our hands around what we have and how that's coming together, and we have plans along those lines. A lot of these things that -- some of the things we have talked about here -- while we mentioned in the call that we are going to commence this initiative, some of these things actually have already started related to the -- these acquisitions. They have been ongoing for since we did the deals. So we are just broadening that. We're just broadening these moves on business and business efficiency.

So no, we're still actively in the market looking for acquisition opportunities that fits our strategy in all four of our segments.

Okay, great. Thank you.

Mike Schlitsky, Global Hunter.

Just wanted to touch on the balance of the year, what happened here in this past quarter. So it sounds like you're going to have pretty high utilization of your staff going forward. Is this going to be perhaps what we might see as the more near-term peak margins for you? Is it essentially -- is there any -- a example of what your Company can do going forward if all goes well? Or is what's in your backlog currently at a bit higher margin than what you've currently got that was kind of delayed from the first quarter here?

So I think we're going to let Kevin provide an answer here, too. I think going forward we're going to minimize the impact of the under-absorption of our cost structure, but that doesn't necessarily mean that that's the best we can do.

Yes, and I think when you look at the quarter -- first quarter, we had strong -- operate direct margins on -- throughout most of the business. And the quality of the backlog is similar to what we've just executed. And so if we are able to fully absorb, then we should be able to produce margins for the most part in the ranges that we've previously provided. Again, electrical may take a little longer to get there. But overall, I think we can produce good margins that are in line with our overall expectations.

Okay, thanks. That's all I've got. Appreciate it.

(Operator Instructions) There are no other questioners in the queue at this time.

Okay. Well, thank you, everybody, for participating in today's call. As I mentioned at the beginning of this call, the business is performing as envisioned in our strategy. We see growth opportunities on all of our segments, and we're focused on improving operating margins to achieve top-quartile performance. Again, we expect to be the best and have every confidence in our ability to achieve those high expectations. So we look forward to talking with you again in the future. And thanks to everybody for participating.

Ladies and gentlemen, thank you for your participation in today's conference. This now concludes the program. You may all disconnect. Everyone have a great day.