Matrix Service Co (MTRX) 2015 Q4 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 fourth quarter and fiscal year ended June 30, 2015. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call could be recorded.

I now turn the conference over to your host for today, Mr. Kevin Cavanah, Chief Financial Officer. 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 disclosed in our annual report on Form 10-K for our fiscal year ended June 30, 2015, 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.

Before I turn the call over John Hewitt, President and CEO of Matrix Service Company, I would like to start with the safety moment. So I would like to talk about flood safety quickly here. Floods are a threat throughout the United States and Canada. And during a flood, water levels and the rate of water -- the rate water is flowing can change quickly. So I would like to spend a few minutes talking about some safety tips.

So really, there's five things we ought to do if we were -- found ourselves in a flooded area. Number one: we got to stay informed. So we should monitor local radio, television, Internet, and social media for any information or updates. Second: we ought to get to higher ground. So get out of areas subject to flooding and get to higher ground immediately.

Third: we got to obey evacuation orders. If told to evacuate, do so immediately. Fourth: we need to practice electrical safety. Do not go into any room if water covers the electrical outlets or if cords are submerged. If you see sparks or hear buzzing, crackling, snapping, or popping noises, get out and stay out of water that may have electricity in it.

Fifth: avoid flood waters. Do not walk through flood waters. It only takes 6 inches of moving water to knock a person off their feet. If you are trapped by moving water, move to the highest possible point and call 911 for help. If you are driving a vehicle, don't drive into flooded roadways or avoid barricades. Water may be deeper than it appears and can hide various hazards. If a vehicle is caught in swiftly moving water, it can be swept away in a matter of seconds, and it only takes 12 inches of water to float a car or a small SUV, and only 18 inches of water can carry away large vehicles.

These are some of the basic safety tips during a flood. For safety tips before a flood and after a flood, visit floodsafety.noaa.gov for more information.

With that, I'm going to turn it over to John.

Thank you, Kevin, and good morning, everyone. I want to begin this call with some reflection on fiscal 2015. We began the year coming off of record revenue, earnings, and backlog in fiscal 2014.

During the current year, turmoil in the energy market created significant challenges and headwinds for those that operate in the industry, all during a time when global economies were showing signs of slowing, and the US recovery remained uncertain. These headwinds continue to some extent today, but looking back on our strategic accomplishments over the past 12 months provides an opportunity to highlight three key elements of our business that reduce the impact of these challenges.

Element number one, as we continue -- we have continued to diversify our business, both organically and by way of acquisition. Our electrical infrastructure business continues to grow and represents over one-third of total backlog at the beginning of fiscal 2016.

Our expertise in this area, from power generation to power delivery, provides a significant and steady source of opportunity for Matrix, regardless of the overall economic market due to planned electrical infrastructure upgrades. We have also successfully transitioned our storage solutions business to a full tank internal provider for oil, refined products, LNG, NGL, and other gases. Despite depressed oil prices, our customers continue to place a priority on planning their storage buildout, as evidenced by a record $670 million in backlog for this segment.

Element two, the client projects we focus on, whether capital construction or maintenance-related, are critical to North American infrastructure in the energy, power, and industrial markets. The majority of our top customers are large publicly traded companies that year over year continue to engage Matrix in planning, constructing, and maintaining their critical infrastructure assets across North America. This fact speaks to the quality of our work and the partnership approach we take to build long-term relationships, and is evidenced by over $1.8 billion of new awards in fiscal 2015.

And finally, element three. We continue to improve our service offering by recruiting, retaining, and developing our people and upgrading our systems and processes to deliver at the highest quality. Specific to fiscal 2015, the year was a record for Matrix in terms of safety, revenue, new awards, and backlog.

We were awarded two foundational projects for fiscal 2016 and 2017: the Napanee Generating Station in Ontario for TransCanada Energy and the gathering terminals associated with Energy Transfer Partners' Dakota Access Pipeline.

We consolidated our union operations under the Matrix NAC brand and opened a new office in Chicago to serve as its headquarters. We bid, won, and executed turnaround and maintenance work in areas of the country new to Matrix. We also reorganized our turnaround and plant maintenance division to provide our customers with an integrated single-source solution for all their facility needs.

The performance in our industrial segment for the year was exceptionally strong across all service lines and exceeded our margin expectations. And we made significant investments in our people and leadership, training and development, and streamlining our processes and in identifying and implementing best practices that will benefit our customers and our shareholders.

While over the year, it was certainly not without its challenges. In safety, while we achieved record results with a total recordable incident rate of 0.60, which places us among top leaders in the industry, this achievement comes with deep reflection on the fact that we lost one of our own in a jobsite incident earlier in the year. This loss serves to strengthen our resolve to realize and maintain a zero incident culture.

Our team worked diligently to complete the Calpine Garrison Energy Center, which was an acquired EPC project. We achieved substantial completion on this project in June to the satisfaction of the client.

Performance in our oil, gas, and chemicals segment was impacted by refinery strikes as well as decisions to delay turnarounds to take advantage of low crude prices. We also experienced project delays related to regulatory permitting that impacted our storage solutions segment.

Against that backdrop, I would like to thank the employees of Matrix for their hard work and dedication through a difficult year. We have an exciting future ahead of us, and I appreciate their hard work.

I will share more about our market and bidding activity after Kevin reviews fourth-quarter and full-year financial results. Kevin?

Thank you, John. Let's start with the results for the quarter. Revenue was $370.5 million, which was higher than last year's revenue of $344.4 million, primarily due to the electrical infrastructure and oil, gas, and chemical segments.

Overall gross margins of 10.9% were impacted by the completion of the work at the Calpine Garrison Energy Center flowing through the books at zero margin, as well as the lower margins in the oil, gas, and chemical segment. SG&A expenses were $22 million in the quarter, which was in line with our expectations, and lower than the same quarter last year. SG&A as a percentage of revenue was 5.9% in the quarter as compared to 6.6% in the quarter last year.

Earnings per share for the quarter was $0.40, which is up from $0.28 in the same quarter last year. Project awards of $545.8 million in the quarter led to a book to bill of 1.5 times, bringing total backlog to $1.4 billion.

Moving on to our segments, gross margins in our industrial segment were strong, at 15.2%, which exceeds our normal expectations. I will share more on this later. Quarterly revenues for the segment were down year over year to $55 million as we experienced challenges in our mining, minerals, and metals businesses that John will discuss shortly. This is also evident in backlog for the segment, which decreased to $123 million on $34 million of awards in the quarter.

Regarding performance in our storage solutions segment, while revenues of $132.9 million for the quarter were lower than the same period last year, gross margins of 13.6% demonstrate strong execution. We recorded a record backlog in the segment of $670.5 million due to awards of $395.1 million in the quarter, including the Energy Transfer Partners award John spoke to earlier.

Revenue of $80.8 million for the oil, gas, and chemical segment was slightly below our expectations for the quarter, partially impacted by shipping turnaround schedules. Gross margins were 7.9% and backlog was $133 million.

Results for the electrical infrastructure segment were as expected for the quarter. Gross margins were 7.4% for the quarter, reflective of our completion of the Calpine Garrison Energy Center within our previous forecast. Backlog decreased as the mapping project ramped up in the quarter and the Calpine project reached substantial completion. Regardless of this, there were $36.4 million of new awards in the quarter and backlog ended the year at $487.9 million.

On a consolidated basis for the fiscal year, revenue of $1.35 billion represents a record for Matrix. SG&A decreased 5.8% of revenue as compared to 6.2% last year. Earnings per share for the year was $0.63. Excluding the impact of the Calpine project and the related impact on incentive compensation, our EPS would have been $1.30 for the fiscal year.

Next, let's discuss liquidity. As of June 30, 2015, our liquidity stood at $174.8 million, including $79.2 million of cash. The loss related to the Calpine project has constrained availability on our line of credit, but this constraint will be eliminated over the next three quarters.

That said, we have sufficient liquidity to achieve our business objectives, which include maintaining our financial strength in an uncertain market, funding working capital and capital expenditures, pursuing bolt-on acquisitions, and stock repurchases. Reiterating our guidance release in July, we expect revenue for fiscal 2016 to be between $1.4 billion and $1.6 billion and earnings per share to be between $1.45 and $1.75.

A few reminders about our guidance. Based on the strength of our backlog, we speculate the electrical infrastructure and storage solutions segments to support gross margins in the range of 11% to 13%. Margins in the oil, gas, and chemical segment should be improved over fiscal 2015 and we expect them to be between 10% and 12%.

Regarding industrial, strong project execution has allowed us to exceed our expectations the past couple of years. However, given the current market conditions, particularly related to our mining, minerals, and metals business, we expect gross margins in the segment to be in the range of 6% to 8%.

The low end of these ranges represent our normal margin performance based upon our current backlog and project opportunities. The upper end represents the potential in each of these segments, dependent upon project outcomes, timing of work, and absorption of overhead.

With that, I will turn it back over to John.

Thank you, Kevin. Discussing our markets more specifically, as evidenced by the Dakota Access award, our storage solutions business continues to see robust growth and a transition to larger EPC terminal products. Our engineering group, Matrix PDM, is working on six FEED studies for LNG-related projects and bid flow remains strong, for our tank construction crews are busy across the United States.

As I mentioned earlier, these projects are key elements of our customers' long-term strategic plans. Overall, North American pipeline activity is forecasted to be strong over the next 3 to 5 years and as such, Matrix is in a leading position to take advantage of the tanks and terminals associated with this pipeline activity. However, we are seeing some softness in Western Canada, as customers reevaluate the timing of key projects.

Moving on to electrical infrastructure, construction on the Napanee Generating Station is progressing well. We are pursuing several power-generating project opportunities with the intention of adding additional backlog later in the fiscal year.

Regarding our power delivery business, our fiscal first quarter is typically the slowest period in the year as utilities are running at their summer peak. With that noted, the bid flow we are seeing continues to suggest a robust environment ahead for substation and distribution work, supportive of our budget in this area for fiscal 2016. We were actively pursuing acquisition opportunities in this space that add geographic diversity to our footprint and allow us to bring our expertise into new markets.

In the oil, gas, and chemical segment, the market for turnaround services appear strong for fiscal 2016 and 2017. Fully integrated oil companies are reducing spend where possible to offset reduced cash flow from their production businesses. Non-integrated refiners continue to enjoy increased margins and, where possible, are postponing turnaround work to maintain higher utilizations.

In spite of these market conditions, we expect the fall and spring turnaround seasons for Matrix to be an improvement of those realized in fiscal 2015. We continue to add value in this segment and others by offering integrated lifecycle solutions, most notably new construction pre-commissioning, advanced chemical and tank cleaning, inspection, and repair. As mentioned earlier, we have worked to realign the pertinent business units within Matrix to facilitate these strategies.

Moving on, the exceptional performance in the industrial segment in fiscal 2015 will be tough to repeat in fiscal 2016, as we face strong headwinds related to our steel and mining and minerals businesses. Our steel customers are suffering from a strong dollar position and aggressive supply from China.

Our mining and minerals customers are reevaluating capital spending and mine maintenance plans in the face of slowing global demand. We expect our mining and minerals customer will look internationally for most of their CapEx cuts, but we do expect some pullback domestically.

Although we are actively tracking several fertilizer projects in the US, we have yet to replace the one currently in backlog. Until then, we expect performance in this segment to be on the lower end of our margin guidance we have previously provided.

I would like to reiterate that despite the challenges of this past year, Matrix demonstrated the strength of our strategy and leadership. We continue to execute against this strategy, diversify our business, and strengthen our balance sheet.

We made and continue to make significant investments in our own internal infrastructure to improve our systems, identify and implement best practices at every level of operations, strengthen our leadership, and invest in our employees through ongoing training and development.

Despite the year's challenges, we achieved record safety, revenue, and new product awards and backlog. Matrix Service Company is stronger than it's ever been and will continue to get stronger. We are excited about the opportunities in front of us.

And with that, I would like to open the call for questions.

(Operator Instructions) Michael Shlisky, Global Hunter.

This is actually Leigh Pressman on the line for Mike Shlisky. I just have a few questions for you guys. The first one would be could you provide a little bit more color on what you are seeing with fertilizers? I know you said you haven't yet replaced the big one that came out of your backlog, but given the somewhat difficult landscape in the agriculture world, is that causing pressure in finding new projects there?

So we continue to have some of these backlog from the Orascom project in our work plan for 2016, although it's a much smaller percentage than obviously what has flown through the books over the last fiscal year. So we have some that we are still working off there, but we should be pretty much complete and off that project, short of us receiving any other work on the job, by probably the end of this calendar year.

But we are tracking four or five fertilizer projects. We have either bids or have -- are doing some small FEED work for some of those fertilizer clients. We've seen some of those projects -- I'd just say move around on their timing of their awards.

The ones that we are focused on that are in our bid funnel, we feel as confident as we can in this market that they are going to go ahead. It is going to be about our ability to win their work and support our clients to put those projects in place.

So we are not -- we are starting out in a position today to write off the potential for the fertilizer business out into the future. We are fairly confident that we are going to be able to add something into our backlog sometime this fiscal year.

Okay, great. Second question for you guys is if you could tell us a little bit more about the opportunities in the storage solutions segment going forward? Has anything changed the extreme low oil price environment we've seen recently? Are customers looking for more flexibility with their supply and could we maybe see more orders going forward?

Yes, I don't think we are -- we are not seeing any sort of material impact to the bid flow for our storage business. Either tanks specifically or terminal opportunities. To some extent -- and it could be a combination of market movement and our ability to sell our expanded services to our clients -- I think we are actually seeing some larger full tank and terminal projects in our bid funnel. But our pure tank-only business I think is -- continued to be strong. I would say we haven't seen a lot of changes there over the last 12 months.

Okay, great. Thanks, guys. I will leave it there.

Tahira Afzal, KeyBanc.

Good morning, folks, and congrats on a good quarter. First question is, you know, I think, John, your commentary on the end markets was reasonably balanced; makes sense.

But at the same time, as you mentioned, there's some pretty large opportunities out there. And I think you and I to some degree might be tracking the same one. Do you feel these are enough for you to potentially grow backlog into fiscal year 2016?

Well, I think what we've talked about in the past is that as our business across our segments change, the sort of quarter-to-quarter up and down in our backlog is going to be something that I think you guys and our shareholders are going to have to get a little more comfortable with.

So -- and some of that has to do with capacity on our part, making sure we are delivering high quality on the backlog that we do have, that we've got an eye on our clients -- our clients' relationships and our safety. So -- but I think we feel fairly -- we are very comfortable with where we are today and our ability to achieve our guidance in 2016. And we see enough opportunities out there to replace our backlog and grow our backlog over the course of the next 12 months.

Got it, okay. That's [what I thought] --

So it's going to be -- so I think there's more risk, if you want to call it, in our ability to win the work and make sure we have the capacity to perform the work than there is a lack of opportunities.

That's a good situation in this market, John. So second question in regards to your margin guidance. From what I can tell, this range hasn't changed much. So I would assume that within that, what you're really putting in is really, as you said, execution and utilization. I would assume there is very little pricing?

I'm sorry; I missed the last part of that, Tahira. You'd assume there is what on pricing?

I assume that your margins are more driven by utilization than pricing improvements, so any uptick in pricing. Would that be the right way to look at it?

I think overall, that's probably true, especially for electrical and storage. There is a small piece of our oil, gas, and chemical is focused on upstream. And that is probably pricing is a little more difficult today. And John mentioned some of the headwinds in the industrial segment, especially in the mining and minerals and metals. And definitely pricing is going to be a concern for our customers there.

The other area, too, is -- and we mentioned that we are seeing some softness in Western Canada. So that -- while there's -- continue to be fairly strong bid flow up there, I think because of the drop in the price of oil and its impact on oil sands work, we are seeing more competition I think than we have in the past probably couple years in the tank and terminal business in Western Canada, even down in the lower parts of Alberta. So that's getting to be a little more competitive up there for us.

Got it. Thank you, folks, and I will jump back in the queue.

Matt Duncan, Stephens.

Nice quarter. So John, I was hoping maybe to piggyback on some of the questions about just outlook for backlog growth, specifically in storage. The Dakota Access one is obviously a big win. I am assuming that that is the full terminals and not just the tanks.

And you mentioned that you are seeing other large opportunities like that out there. Are there are some that you feel pretty good about your ability to win? And as we look out sort of a year from today, is it your expectation that storage backlog specifically would be up?

And the reason I'm asking is I think there has been some concern that you guys would be impacted by oil being lower. It doesn't appear as though that has been the case. I just want to make sure we have a clear view forward on sort of what we should expect from the storage business.

So the Dakota Access job is the full terminal, so it's the tanks and all of the balance of plan work around six different sites on the Dakota Access project. So -- and you need to think about it's a big award: $330 million. But there is -- I don't recall the number, but if you just take that as the tank portions of that work, it probably represent maybe almost 20% of our annual tank volume. So it's a combination of both pieces of the -- or the two legs of the three-legged stool that we talk about, or four-legged stool that we talk about in our storage solutions business.

As it relates to tanks only in our tank-only business, we are continuing to see opportunities. The majority of our clients, again, as we have said in the past, I think are probably more impacted by regulatory issues than they have been on the price of oil.

We are seeing the very strong pipeline -- continued pipeline buildout over the next several years. Those pipelines are going to have tanks and tank terminals associated with them, the different portions of the -- of their routing. And so we are continuing to stay very comfortable and confident in our ability to build on our tank-only part of our business as well as our tanks and terminals.

At this point, from what we are seeing in the market, and given the price of oil, that -- and throw into the mix the different types of storage that we are able to provide services on. So just not on a crude piece, but also in cryogenic-related applications as well. So we feel pretty good about the bid flow and our opportunity to win our fair share and continue to keep a strong backlog.

Okay. So generally speaking, obviously it is going to depend on timing. But you would expect that backlog should going to continue to grow here.

Yes, yes. Again, I would not -- I wouldn't be hanging your hat on every quarter you are going to see our backlog grow. But I think as we talked in the past, our long-term trend we think in this segment will continue to build.

Okay. Yes, that is the point I was trying to get across, okay. And then just Kevin, on the sort of built of the model for this year, to make sure we understand sort of how these big projects are ramping, you've got both the Napanee Generating Station and now the Dakota Access terminal work. At what point should quarterly revenues sort of plateau on those two projects and how do you expect that to ramp as we move through the year?

So I think the -- on the Napanee project, we are 6 months in and is a 30-plus month project. I think it is going to probably be at its peak in the third or fourth quarter. On the Energy Transfer project, we are in engineering. We'll be starting fabrication pretty quickly. But fieldwork really doesn't start until the last half of the year.

So maybe toward the end of the year is when it starts to hit its peak and maybe it's more in 2016. It will still be a good contributor in 2015, but it will be a big contributor to next year, too.

Okay. And then last thing, guys, just on the M&A outlook. John, you talked about this a little bit in your prepared comments. But can you tell us sort of what type of opportunities you guys are seeing?

And as you think about capital allocation, are there certain types of businesses you would prefer to be buying? Are there certain segments that you are really targeting? It sounds like maybe electrical is the key. Am I hearing that correctly?

Yes. So I'm not sure anything specifically has changed the opportunities we are looking at. We are continuing to take a fairly conservative view of the price of those acquisitions. We are continuing to look for geographic expansion in several of our segments.

And specifically in electrical, we've talked in the past and are -- in the delivery side of our electrical infrastructure business, our ability to really significantly grow that is going to be based on geographic movement. And I think through the course of this year, where we were integrating our union businesses, both our traditional business and our new acquired businesses, we've really had -- and that business has had to deal with the Calpine generating station challenges -- they really have not been focused on adding any additional businesses to their service offering.

So I think within 2016, there will be more -- we will have more of a focus on trying to grow and expand that electrical delivery piece of our business. So that is kind of why we kind of brought that up in the script.

But on an overall basis, we are continuing to look at bolt-on opportunities that support all sections of our business, whether that is in specialty services, whether that's in providing additional construction capabilities in different geographic regions in North America. Products; we've talked before about tank products as an area that we want to increase our capabilities and bench strength.

So it's -- I would say nothing has really significantly changed. We are continuing to have a conservative view on all those and we would hope -- again hope to execute something within this fiscal year.

Got it. Okay, thanks.

Martin Malloy, Johnson Rice.

Congratulations on a solid quarter. I wanted to ask about the LNG prospects that are out there. You've mentioned that you've been pursuing some projects for the last couple quarters. And my sense is it's getting difficult to sign these offtake agreements here. Can you talk a little bit more about the likelihood of these projects going forward and the timing?

The ones that -- we are focused on a variety of types here. So we are looking at a couple of projects that are -- would be pure export terminals. We are looking at some projects that are transshipment points for transportation fuels or -- for either on land or at-sea transportation fuels. And so we think -- we do a fairly good job of picking on the projects that got the best chance to succeed, either through their financing, their offtake agreements, or in their permitting status.

And so we again -- we would -- we think it's -- from what we are looking at, this is going to be about our ability to win the work. While there is not a lot of competition in that market for the services that we provide around cryogenic storage, there is some heightened competition just related to the people that do provide that storage capability between a CB&I and Bechtel.

And I think probably the challenge for us is going to be those guys that's international, specifically CB&I is an international player, is going to be looking to build its backlog and its revenue based on the workflow that's available in North America.

But we are pretty confident on our ability to win some of that work. And again, we would -- have we have an expectation that we are going to be -- we are going to add more cryogenic-related storage projects, either in tanks or in some parts of their balanced plan or terminals in this fiscal year. So that's kind of where we see that.

Okay. And then if we could just talk about refinery turnaround outlook. The refineries have been doing pretty well for a while now. And I get the sense that there has been some deferral of some projects that could have taken place. Can you talk a little bit more about what's going on there? Is there a pent-up demand that you see eventually positively impacting you all?

Yes, our guys are feeling -- that's why we said -- and we've said in the past that we think it's difficult to give you a barometer check on the overall refinery turnaround market without talking about the individual companies, depending on who their client base is.

Our guys feel very comfortable based on our client relationships, what we see in the bidding pipeline that the second half of our fiscal year will be a stronger turnaround period for us than it was a year ago. And that -- and we see some strength in this fall as well.

So for sure, there is going to be some pent-up demand. The refinery delays and movements that we talked about that affected our business last year from the strikes and from the low oil price opportunities to raise our utilization rates. That eventually puts off the inevitable and so the question is when does the inevitable happen.

So -- plus we mentioned in our script we've done some reorganizing of our individual business units, where we are able to continue to provide more value-added services, in special with cleaning and waste minimization and some other things relating to refineries' operations. We are starting to see that gain some traction with several of our clients. We hope over time that will continue to build some of our revenue stream.

And does that realignment, does that apply to pursuing opportunities on the Gulf Coast with (technical difficulty) as well?

Yes, I think we've had -- we have talked about in the past, I think. You know, our refinery business, our [chronic] turnaround and maintenance business, has really been a Midcontinent and West Coast business. While we would occasionally do some work in the Gulf, the Gulf is much more of a competitive market.

But we are seeing more opportunities down there, I think, with our ability to provide these vertically integrated specialty services is creating some differentiators for us in the market in the Gulf Coast. So I think over time, we will slowly grow our presence in Gulf Coast refineries.

Thank you.

Robert Connors, Stifel.

One of -- I believe it was about a year ago that you guys stated one of your corporate goals was on the SG&A line to reduce it to about 5.5% of revenues on a trailing basis. Thus far, even over the past year, you have done a pretty good job of reducing the SG&A there. Just still wondering if you guys still believe that goal is still attainable and whether it be sort of a 2016 or 2017 type of event.

Yes, I think we've had good progress this year on SG&A. It's below 6%. We were at 6.2% last year for fiscal 2014, so we feel like we're on the right track. And getting 5.5% is still something we are shooting for and think that is something we can achieve.

Okay. And I guess as far as the other thing that I think escapes people's mind is the fact that you are also making pretty good strides on reducing the working capital that's tied up in this business and that continues here. But as some of these large projects start to transition to the field, can we expect to see a working capital build here in 2016? Or do you expect it to remain pretty low relative to history where is that?

I appreciate you noticing the improvement in working capital. It's something we've worked hard on. And when we look going forward, we ended the year around 4% working capital. I think we can continue to take that down. That is our goal, is to get it down to, say, 2% or eventually to zero.

And with the backlog we have, the projects we have, we've tried to make sure we consider the cash flow on those projects as we've been contracting them. So we expect that the makeup of our backlog should allow us to continue with our trend in working capital.

Okay, great. And congratulations on the quarter.

Dan Mannes, Avondale Partners.

Good morning and nice quarter, guys. First: quick question on the industrial segment. Obviously, I'm catching the idiosyncrasy of the fact that you put up a really, really strong margin in the fourth quarter and you have a pretty constrained view on next year.

Can you maybe just walk us through -- was this is kind of the completion of something? Are you near the end, maybe, of the fertilizer project or something really strong that is kind of leading to that pretty material delta between Q4 and 2016?

I will give you the big picture view from me. This is -- the quarter was -- we were starting to see in the quarter some roughness from the iron and steel business. That was starting to turn down pretty dramatically, so I think that even highlights better the performance of the mining and minerals business as well as the fertilizer business.

I think it's a combination story. So you have a steel business that is starting to fall off. We had the fertilizer business, where several of the projects that we had in place with Orascom we were starting to close those out. And we were able to bring some contingencies to the bottom line.

In our mineral mining and minerals business, while that market is getting tougher, continue to perform really, really well. So I think from me, it's a little bit of a mixed story there. But it's just -- it is just an overall great performance in the quarter.

Sounds that way. Real quick on the power gen side; obviously, you are just ramping on Napanee. But given that that is a project in Canada, it is obviously using local labor, what's your real constraint in terms of pursuing the next power job in the US?

Is it a project management issue as you are waiting for Napanee to move forward? Or are you kind of ready now; it's just a question of when something moves into contract phase?

So I would say it's probably combination of all the above. The projects that we think we have the opportunity to be the most successful on, their timing, to make sure that we've gotten comfortable with the depth and bench strength of the resources that we have.

We want to get a little further down the road on the Napanee project. Conservative nature of our leadership team to make sure that we are comfortable with the ability to add another one in the backlog and execute that.

It takes -- when you get something that you are really interested in a power job, it takes 12 months from the point that you are really going to work your way into an RFQ process because by the time you get through all the contract Ts and C negotiations that you're actually going to be able to put something in the backlog. So there's a lot of time involved putting that together. And that timing for us is okay.

Fair enough. And then lastly, I want to close in on storage solutions. You kind of mentioned pipeline activity as I guess a corollary to tank work and terminal work. And clearly, that is the case on Dakota Access and I think Sandpiper, which is already in your backlog.

But at least for us, most of the pipeline work that we are tracking going forward is more in the natural gas side. Are you looking? Are there tankage opportunities there? Or are you seeing a pretty strong level of oil pipeline opportunities as you look out that are going to support the tank and terminal work you're talking about?

I think we are seeing both. And just so people don't forget: we have capabilities on the gas pipeline side associated with the spheres, with the pressure stations, with gas processing. That's an area for us as a Company where we think there's a lot of growth. We probably have not done as good a job marketing our capabilities in that piece of the business.

But those opportunities continue to exist out there. We see the demand for gas and gas-related products continuing to be strong, and to be strong out into the future. And so that's an opportunity -- the whole gas value chain for us, from power plant to the chemical facilities and the fertilizers and upstream is a opportunity for growth for our business.

But you do see a strong outlook in terms of oil pipelines as well? Or are you seeing kind of a shift and you just happen to have maybe more capabilities on the gas side than we have given you credit for?

No, I think we are not getting real specific. I mean, I think we are seeing opportunities on both sides, both in liquids and gas.

Great, thank you very much.

(Operator Instructions) Tahira Afzal, Keybanc.

I had a couple of follow-ups for you folks. Number one, when you have talked about some competitive pressures on the storage side, etc., clearly those are to be seen. What about the power side, John? The activity there, we are entering a cycle which is positive; I know for some of the large contracts out there, there is competition from general contractors. But are you seeing in your sweet spot some improvement?

I don't think that we are seeing anything has changed in the last 12 months related to competition in that part of the business. I think it's quality of the competition, especially in a union environment. Our power and construction capabilities reside on the building trade side of our business.

That creates more challenges for a lot of the competition out there. We don't have as a strong as a presence in our relationship with the building trades that we do in many parts of the country. And that creates a bit of, I think, a differentiator for us in that market and helps to minimize some of the competition. And also puts in a position to team up with some of the larger EPC firms that don't necessarily have a union delivery solution.

So I think if anything, I think we've got some very differentiated services because of our geography and our union relationships.

Got it. And second question is, I know you folks have been doing sort of an introduction that starts with a safety message. And to put it in perspective for a lot of investors, I know you've talked about having lost a colleague. But perhaps you can talk a bit about how important safety, even when you go out and compete. And how that scores with your customers.

So I think that that's -- and I really, really, really appreciate that question, Tahira. So I think it gets lost sometimes in the message. We talk about safety with you folks in everything that we do because it's not only part of our culture and our value systems, but it's also a huge differentiator with the number of our clients that we deal with.

So that's a -- the big either refinery clients, the power clients, our industrial clients -- safety is a high core value for them. They want their vendors to perform at an exceptionally high level. They have set that expectation.

I will tell you that when we had the unfortunate fatality this year, that we had at least a dozen of our clients who wanted to meet with us and wanted to meet with our executive teams and talk about that issue. They wanted to understand what happened; how we were dealing with it.

And it was more in a positive framework. But if it was something that we weren't able to provide and characterize the incident and talk about the protocols that we were changing as a business to deal with that specific issues around the incident, it could have been a different situation. We could have clients that would take us off their bid list or would put us in sort of a penalty box, where, all things being equal, our safety performance may not lead them to want to contract with us.

So I think it's very important for us that we send a message to you guys and to our own employees who listen to these calls, our potential future employees, that our number one core value in this business is that our employees go home safely. And that culture drives performance. And that's why we talk about it all the time.

Thanks a lot, John.

Thank you. And I'm showing no further questions in queue. I would like to turn the conference back over to management for any closing remarks.

Thanks, everybody, who joined us today and we appreciate your support. And we'll look forward to talking to you at the end of the next quarter. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of your day.