Matrix Service Co (MTRX) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Matrix Service Company to discuss results for the second quarter ended December 31 conference call. (Operator Instructions).

I would now like to introduce your host for today's conference, Mr. Kevin Cavanah, Chief Financial Officer. 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 [10-Q] for our fiscal year ended June 30, 2015, and the subsequent filings made by the Company with the SEC.

To the extent the Company utilizes non-GAAP measures, reconciliations will be provided in various press releases and on the Company's website.

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

Thank you, Kevin. Good morning, everyone. Last quarter, we discussed the difference between total recordable incident rate and lost time incident rate, and why at Matrix we hold ourselves to this standard, as it is a better representation of our overall safety performance. For the first six months of this fiscal year, our TRIR stands at 0.64. The value of holding ourselves to this higher standard is a clear differentiator, which was confirmed with the recent extension of our contract at BP Cherry Point Refinery, where our team has been the primary on-site contractor providing turnaround, maintenance, and repair services since 1995.

As you may know, work inside a refinery is, by nature, dangerous, and in an environment where an outage can mean temporarily bringing on 700 or more new employees. Maintaining a consistently low TRIR can be challenging. Yet this team has achieved a zero total recordable incident rate, year after year. They stand as proof that our work can be completed with zero recordable incidents. And they lead the industry in their commitment to safety, and have built a culture in which that commitment thrives.

It is for these reasons that this operating unit has been recognized with our Company's highest honor, the 2015 Board of Directors Safety Award. Matrix Service has been recognized as the contractor responsible for starting the safety revival at BP Cherry Point, and has set the new standard of excellence by which all other contractors are measured. Together with exceptional quality work, it is also this safety record that allowed Matrix Service to recently be awarded a five-year contract extension, valued at nearly 4 million man-hours. I'm extremely proud of the safety leadership and culture Matrix Service and this team has built at BP Cherry Point. Please join me in congratulating those achievements.

Moving on, I want to set the stage for today's call by discussing current market conditions and the effect those conditions have on our various operating segments. I'll also want to spend some time discussing our Company's growth strategy; the strength of that strategy; and how, especially in times like these, it brings value to our employees, our Company, and shareholders. Before I address these topics, I want to give you some perspective on our decision to revise the guidance range.

This revision is primarily due to two factors: first, a shortfall in revenue as a result of slower ramp-ups on certain projects, which in turn shifts revenue and profit to future quarters; secondly, a nonrecurring bad debt charge related to an unexpected client bankruptcy.

Now, let me share you with some of our views about the markets. There's no question, upstream oil and gas companies have pulled back significantly on spending plans over the past six months in response to the dramatic decline in oil prices over the past year, and in particular the acceleration of this trend more recently.

However, in the midstream and downstream segments of the North America energy sector, where most of our work in this market segment takes place, we have seen minimal changes in our clients' planned projects; and, in fact, continue to see significant opportunity. The single exception is TransCanada's Hardisty Project, now delayed indefinitely by President Obama's rejection of the Keystone Pipeline. We do believe current market conditions have owners taking a more cautious approach to timing, and in some instances, a tightening of credit may make financing for larger-scale projects more strenuous.

As we've discussed on prior calls, timing of awards, especially on larger projects, will create variability in our backlog. However, that said, the bid funnel for our storage solutions segment remains strong, at $5.3 billion, and we continue to earn strategically significant awards. One such example is the recently announced Eagle LNG project in Jacksonville, Florida. This award is the first of what we expect to be a sequence of awards in the LNG transportation fuel space, with a shift to greater use of LNG transportation fuels in trucking and shipping will create ever-increasing demand.

We have also just received a limited notice to proceed on a second LNG transportation fuels project. We expect to release a formal announcement of this project in the coming weeks, once the contract terms have been finalized. Neither of these awards are included in the December 31 backlog. These smaller LNG facilities represent a significant market opportunity for Matrix. Given our expertise in cryogenic storage tanks and terminals, this market is one where our ability to provide full EPC services uniquely positions Matrix to take the lead.

Across the rest of our -- excuse me. Matrix is also well-positioned to act in partnership with others on large LNG facilities, as evidenced by our having been verbally selected as a contractor for the tanks and associated on-tank mechanical work on a large-scale LNG export facility in the Gulf. This work is also not in our December 31 backlog, as it is pending negotiation of offtake agreements by the facility owner.

Across the rest of our storage business, including flat bottom crude oil opportunities, continue to be strong. Even in our Western Canada operation, which is experiencing a depressed market, we picked up project awards at seven different client locations in the second quarter.

Our engineering division, Matrix PDM, is also generating significant EPC prospects, as they have taken the lead on numerous FEED studies for both crude storage and cryogenic opportunities. The current level of FEED work is creating a high workload for our teams as they engage in multiple FEED studies with a total construction value in excess of $1.2 billion.

In our oil, gas and chemical segment, refiners continue to delay turnaround, maintenance and repair work in order to take advantage of low crude pricing. While doing so may push planned work later into fiscal year 2016 or early fiscal year 2017, the work itself is inevitable, and ongoing delays only create a pressure wave of future work. In spite of these delays, we have 23 mechanical or specialty turnarounds planned for the balance of fiscal 2016.

In power generation, the cost of natural gas is positive news for Matrix, driving continued momentum for the large-scale project opportunities in one of our key business segments. The unprecedented shift away from coal to natural gas as a fuel source to generate electricity in the US continues, and is accelerating, supporting a new build natural gas combined cycle power plants as a primary source of clean energy. Bolstered by the recently signed Paris Climate Accord and the EPA Clean Power Plan, the pipeline of power generation is very strong, with industry experts reporting [156] high probability US projects through 2020, valued at nearly $46 billion.

Power delivery is equally strong, with $85 billion in transmission, distribution, and substation infrastructure investment projected through 2018. Currently our focus is on projects in the Northeast, mid-Atlantic, and upper Midwest. This work is being driven by not only aging infrastructure, but also new sources of generation such as gas-fired combined cycle and renewables. In power generation and power delivery, we are currently tracking a combined total of $5.4 billion in projects; and, as stated on previous calls, expect to book our next major power generation project by the end of calendar year 2016.

Given these market opportunities, the electrical infrastructure segment of our business represents a key focus area for significant, acquisitive growth. The markets represented by our industrial segment continued to face significant challenges. With the decline in nonferrous metal pricing, continued pullback on major CapEx projects in mining and minerals is underway. Our integrated iron and steel customers also continue to suffer from a strong dollar position and aggressive supply from China. And while the strength of the automotive industry is creating significant demand for their products, a decline in the upstream oil and gas drill pipe market is currently offsetting this demand.

In the fertilizer segment, while low-cost feedstock has created opportunity for new fertilizer facilities, some owners face funding challenges for new projects. However, we are currently in final negotiations for the storage and refrigeration components on a greenfield fertilizer facility located in the Mid-Continent. We hope to finalize this agreement and take it into backlog in the third quarter.

Against this backdrop, I also want to affirm our Company's position and strategy for growth. Our current market conditions present both challenges and opportunities. Our deliberate, measured approach and diversification through both acquisitive and organic growth, along with our conservative approach to managing our balance sheet, has positioned us well and has resulted in a strong and sustainable company. Across our key business segments we continue to evaluate, pursue, and acquire strategic bolt-on acquisitions that position us to provide better service to our customers.

Both recently we announced the acquisition of Baillie Tank Equipment, a premier provider of geodesic domes, aluminum internal floating roofs, and other key storage tank engineered components. As mentioned in our press release earlier this week, Baillie Tank Equipment is headquartered in Sydney, Australia, with manufacturing in Seoul, South Korea. Its customer base spans more than 85 countries, with existing annual revenues approaching $20 million.

Moving forward, the company will operate under our Matrix Applied Technologies brand. In addition to serving and growing their existing base of international customers, this acquisition allows us to provide a high standard in aboveground storage tank products to our storage solutions customers across North America. These products will also be a catalyst to grow our tank maintenance and repair services.

Given our strong financial position, we will continue to look at strategic bolt-on acquisitions as an ongoing investment opportunity to grow and diversify the business, as well as increase our fundamental bench strength.

Finally, the current market environment, combined with our financial strength, also allows us to take advantage of larger acquisition opportunities to greatly accelerate our strategic growth plan.

With that said, I'll turn the call back to Kevin to review our second-quarter results.

Thank you, John. Before getting into the numbers, I wanted to provide some insight that will help frame the rest of the fiscal year. We have said in the past that there can be instances where elements outside our control can delay the start of a project, typically related to permitting, scope changes requested by the customer, or weather. As a result, schedules shift, and this affects our ability to ramp up revenue as originally planned. This has impacted the second quarter to some extent, and we expect it will -- to continue through the balance of the year.

With that in mind, let's review the quarter. Consolidated revenue for the quarter was $324 million, which compares to $343 million in the prior year. On a segment basis, revenue increased in the electrical infrastructure segment, but this was more than offset by decreases in the industrial; oil, gas, and chemical; and the storage solutions segments.

Consolidated gross profit of $30 million in the quarter was up from $16 million in the same period last year, with both periods being impacted by work related to the Garrison Energy Center. The charge in this quarter was related to project closeouts. Excluding these impacts, gross profit margins on an adjusted basis were solid at 10.9% this quarter, although down modestly from 11.4% in the prior year.

A non-routine bad debt charge of $5.2 million from an unexpected client bankruptcy increased consolidated SG&A expenses to $25.1 million in the quarter as compared to $19.6 million in the same period a year earlier. This charge reduced second-quarter earnings per share by $0.12 to $0.20 per share in the quarter. This compares to earnings of $0.12 per share in the same period a year ago. The quarter also benefited $0.04 per share, primarily as a result of retroactive reinstatement of certain tax credits. Going forward, we now expect our effective tax rate to be around 36.5% versus the prior forecast of 37%.

As we have discussed previously, the makeup of our backlog has changed with the addition of larger construction projects. As such, the timing associated with these project awards makes it important to view backlog over a period of time, rather than looking at sequential quarter-to-quarter trends. We ended the quarter with backlog of $1.12 billion, which is down from $1.28 billion at the end of last quarter.

Backlog was also impacted by a project delay related to President Obama's rejection of the Keystone XL Pipeline permitting, which John mentioned earlier. While the project itself has not been canceled, the uncertainty of the project requires us to take it out of backlog. Backlog also declined due to the strengthening of the US dollar versus the Canadian dollar, reducing the value of work we have booked in Canada.

Project awards for the three- and six-month periods this fiscal year totaled $178 million and $373 million, respectively. As John discussed earlier, while the pipeline for projects in both the electrical infrastructure and storage solutions segments remain strong, we do believe the current market conditions may have owners taking a more cautious approach to the timing of larger-scale projects. However, we continue to expect these opportunities to transition into backlog over time.

Moving on to our segments, quarterly revenue for the storage solutions segment was down 6% on a year-over-year basis to $122 million. The decrease is primarily associated with our Canadian operations, which was partially offset by higher domestic activity. Gross margins were 11.8% for the quarter, up from 11% a year ago. Margins for the segment were in line with our projected range of 11% to 13%.

Many of the projects we currently have in backlog, including the sixth terminal project for the Dakota access pipeline, are transitioning from an engineering phase to the field constructions. And we expect our revenue run rate will increase as we move into the fourth quarter.

In our electrical infrastructure segment, revenue of $91 million increased by 56% versus the prior year, as volumes increased in both our power generation and power delivery businesses. Margins for the quarter were negatively impacted by project close-out costs during the first quarter -- or first year of operation of Garrison Energy Center. On an adjusted basis, gross margin for the quarter was 10.2%, which compares to an adjusted margin of 11.9% a year ago. Going forward, we expect margins in this segment to improve, returning to the 11% to 13% range we've discussed previously.

Revenue for the oil, gas, and chemical segment was $62 million in the quarter, down from $75 million in the prior year. As John indicated in his opening comments, low oil prices continue to drive high refinery utilization, further delaying maintenance and turnaround work we expected to materialize in our second quarter.

Gross margins were 9.7% in both the current and prior year quarters. The shortfall in revenue caused us to undercover -- our overhead cost structure in this segment. We continue to expect that gross margins for this segment will improve and return to our expected range of 10% to 12%.

Moving to the industrial segment, headwinds persist from a top-line perspective, with revenues for the quarter of $48 million, down from $79 million a year ago. The decline, as we've previously discussed, is due to lower business volumes in the iron, steel, and mining markets, as well as lower revenue recognized on a fertilizer project that is nearing completion. Nonetheless, gross margins of 11.5% exceeded expectations. Margins were positively impacted by the mix of work and continued project -- strong project execution.

Now I will briefly discuss our six-month results. On a consolidated basis, revenues for the first half of fiscal 2016 were $643 million, which was down 3% from the same period in the prior fiscal year. This small decline was primarily due to lower revenues in the industrial segment, which were offset by a strong electrical segment.

Gross profit for the six-month period totaled $65 million versus $44 million in the prior year. Excluding the impact of the Garrison Energy Center, gross profits were comparable on a year-over-year basis. As mentioned earlier, a non-routine bad debt charge of $5.2 million, from an unexpected client bankruptcy, increased consolidated SG&A expenses to $44.6 million in the quarter as compared to $39.5 million in the same period a year earlier.

Net income for the six months of fiscal 2016 increased to $15.4 million as compared to prior-year net income of $9.2 million, with fully diluted EPS increasing from $0.34 to $0.56 over the same period. At December 31, 2015, our cash balance stood at $82 million as compared to $79 million at the beginning of the fiscal year. The cash balance, along with availability under our senior credit facility, provided a liquidity of $216 million, an increase of 23%.

As we have discussed on previous calls, our financial strength and liquidity allows us to achieve our business objectives, which included executing on our strategic plans, funding working capital and capital expenditures, pursuing strategic acquisitions, and share repurchases.

Moving on to our guidance, we have adjusted our revenue and earnings per share ranges for the full year. Our new revenue guidance range is $1.3 billion to $1.4 billion, which compares to a previous range of $1.4 billion to $1.6 billion. Our updated guidance for earnings per share in fiscal 2016 is now between $1.30 and $1.50 per fully diluted share, which compares to our previous range of $1.45 to $1.75 per fully diluted share.

With these guidance numbers in mind, and based on our anticipated backlog roll-off for the balance of the fiscal year, we anticipate a light third quarter and a potentially record fourth quarter.

I will now turn the call back to John for closing remarks.

Thanks, Kevin. Before we open the call for questions, I wanted to emphasize just a few topics that we covered in these opening remarks. First of all, our strategy for diversification across various markets provides strength and stability to the business, and we will continue with that strategy element. Consistent with our last call, the pipeline of near-term project opportunities across our four operating segments continues to be in excess of $10 billion.

Our balance sheet focus on working capital, CapEx, and risk management keeps the business strong during these turbulent times. There continues to be a significant opportunity for long-term growth, both organically and acquisitively. While we will continue our bolt-on acquisition strategy as appropriate, we are now actively seeking larger acquisitions to round out the business.

Our guidance change is principally associated with a nonrecurring bad debt charge from an unexpected client bankruptcy, a full-year reduction of revenue caused by the timing of revenue realization, and continued weakness in the ferrous and nonferrous markets. All other aspects of our business are strong, and we continue to operate normally.

With that said, I'll open the call up for questions.

(Operator Instructions). Matt Duncan, Stephens.

John, can we start with the Garrison project? I guess I'm a little confused because I thought we were going to be done with that job effectively -- with the charges, anyway -- when we got to substantial completion. So, what resulted in the charge this quarter? How many people do you have left there? And when will you be totally off that site?

So, we talk about -- in various of these calls, and with you guys and our investors, and our quarterly performance -- that we normally have project closeout changes on a lot of our jobs. Obviously on the bigger ones there is -- that can create bigger impacts. And we have positives and minuses on project closeouts on all of our projects. So on Garrison, it was no different. Unfortunately, the Garrison job, which has been a lost -- was a lost project for us, these kind of closeouts, on a negative fashion, probably -- probably reemphasize the pain we went through last year.

So, through the course of this year, while the client was operating, there were still warranty topics that came up. There were subcontractor closeouts that we had to work on. There was an outage of -- planned outage that we had to complete some topics on that again created some warranty issues. All those things combined put us in a position for a project closeout that was in a negative fashion. So, are we off the site? Essentially we're off the site; been off the site.

We do have a -- we have one trailer there. I think we have about 15 people doing some miscellaneous touch-up on insulation and painting. We have to do some landscaping work. And then we have closeouts with subcontractors and some warranty topics that we have to complete. So as far as we're concerned, the project is done. For us, this is not -- the Garrison thing is not the big news in the quarter or the year.

Okay. I guess I just want to make sure we understand the risk profile of that project, going forward. Is there a chance that, as you do get the last 10 or 15 people out of there, that we could have more charges? Or do you think that the risk is in the past now?

Well, certainly we think the risk is in the past, based on what we know today. We're not completing more work. We're not finding more scope. These are normal closeout issues on projects of this size and complexity.

Okay. On the customer bankruptcy, is that something that you guys are concerned you could see more of, given the current oil price environment? Or is this an isolated incident that you don't think will continue to be a problem for you?

Well, I would tell you that this client was on our watch list, although we did not think that they were in this kind of a situation. So, we review, on a monthly basis, all of our outstanding clients. Certainly we're paying special attention to those that are in the midstream space. The predominant amount of our clients in the midstream space are what I'd call blue-chip midstream people that we do not have any credit risk that we're concerned about. And so these guys pretty much caught us by surprise.

To frame this a little bit, approximately a year ago, they had a fire at this facility. They called our Company to come in there on the project, reimbursable project that was sub-$2 million. And through the course of our performance, both on a quality and a safety standpoint, that project grew to nearly $30 million. We had a great performance there. Brought to the facility back online for the customer in the fall, issued a press release. And all of a sudden, we start to get a little concerned about them, late in the year, as we started watching final payments on the job.

And then to be transparent with you guys, Tuesday afternoon at 5 o'clock, we get a note from -- through the legal channels that they'd filed bankruptcy. So that's how late that happened. But Kevin's team has gone back -- we've gone back and looked through all of our -- not only our clients, but our key vendors and suppliers, to make sure there isn't anybody else out there that we think could be a credit risk. And that just -- there isn't anything out there that's any kind of substantial performance. We really, really believe that this is a one-off in our portfolio.

Kevin, do you have any (multiple speakers)?

Yes, so, Matt, if you take a look at our top 30 customers, 24 of those customers are public companies. So there's readily available information as to what their financial condition is. None of those customers are a concern for us. Of the six that are private, four of those are large, well-known, solid companies that we are not concerned about. One of them was the company that filed bankruptcy. And the other is one that, while it's not as well known, the way we had contracted with that customer, we have security that insulates us from any bankruptcy risk.

As John mentioned, yes, we've been combing through our receivables, our customer lists, and feel good about the make-up of our clients. And if you look at our history, I've been with the Company for 12 years; I know of three or four customers that have filed bankruptcy and -- over that 12-year period. Most of them were very small in nature. This happened to be a big one. We are disappointed in it. We are doubling down our review. This project was complete. And we had been -- we'd already been paid over 85% of the contract price, so at least they didn't get to us for everything.

But John mentioned the charge was on Tuesday. We had to take the charge and push it back into the second quarter to make sure we were in compliance with GAAP.

Okay. All right. I appreciate all the detail. One more and I'll hop back in queue. Just curious on the backlog trend. Obviously understand that there's a seasonal component to a December backlog number, and that there's big contracts that you guys are both executing and working off and out there chasing that you don't control the timing on.

So I'm curious just in terms of the outlook for backlog, how confident are you guys that it can grow from this level over the next year? And that, John, as you look at the bidding environment that you're seeing, do you guys feel comfortable that these are real bids that are going to turn into real work? Or do you feel like maybe some of what you are seeing is customers effectively price-checking, and taking their time to decide whether or not they want to move forward with something?

I think we have that -- your latter comment there -- in normal markets. I don't know that there there's anything different happening in today's market versus a normal market. And we've talked before about, you got to look at our backlog on a year-over-year trend. Our year-over-year trend in backlog, overall consolidated as a company, is up. And my expectation, and I think our business leaders' expectation, is that a year from now, our backlog will be up.

So I think the trend line for our business, based on what we see in the market -- the opportunities, how we're handicapping, and timing of awards -- we continue to believe our long-term trend will be up.

Matt, if you look at the backlog, it's up to 33% year-over-year. And it's also -- if you look at the second quarter of last year, our book-to-bill was 0.58, and we were at 0.55 this quarter. I think -- unless there is something -- a large contract that comes in in the second quarter, for us that's a traditionally lower award quarter.

Sure. Understood. All right. Thanks, guys. Appreciate all the color.

Martin Malloy, Johnson Rice.

Could you remind us, just on the LNG projects that you spoke about, the size of the transportation-related LNG projects -- the scope potential for you, versus maybe some of the larger export-oriented ones?

So, it smaller than -- so I can't give you the size. That's something our client doesn't want us to talk about. I will just tell you, it's smaller than an export terminal.

Okay. And then you gave out a number for the number of, I think, turnaround projects or smaller capital projects. I think it was 23. How does that compare, relative to a year ago, or can you give us some perspective for that?

I actually don't have that number in my hand. But our guys felt, and we have been saying, that we felt the second half of this year would be a strong turnaround year. Probably some of the differences in some of those turnarounds, while we're going to be very active doing turnarounds, will be the size of those turnarounds. And where in previous years, the size of each individual turnaround might have been bigger, I think the opportunity here is that -- with a lot of these delays that have happened in the refineries, there is opportunity for growth in the turnarounds that we're going to be undertaking here over the six-month period that could create some upside opportunity for us.

Certainly, we don't want to count on that. And we don't really project that, because you never know when that's going to happen. But I think that opportunity is out there.

The other thing is that turnarounds in general come in cycles, and we think that over the next 12 to 24 months, that the cycle is naturally coming back. And that because of some of the delays and things that have been occurring over the previous 12 months, that that cycle could be one of the biggest ones from not only a number of turnarounds, but the size of the turnarounds that we've seen in the market for a while.

So we're pretty optimistic about the turnaround space, where that's going. And very pleased with our market position, and the things that our teams have accomplished over the past couple of years to really carve out a great spot in that market.

Okay. And if I could just ask one last question. Share repurchase: could you give us your thoughts there? You spoke about more acquisition opportunities, and pursuing them. But given the multiples where your stock is trading, can you talk about your thoughts there?

Again, we have an annual $25 million share repurchase program approved by the Board, and we will execute that when we think that that's the best use of our capital. Yes, we stated in the minutes here, in the comments, that we're going to continue to look at acquisitions to invest and grow the business. We have an eye on some potentially larger prospects. And we're going to weigh that against the -- what the value is of us spending our excess cash on stock. So, I can't -- we're not promising anybody that we're going to buy more stock back, but it certainly is an option.

Yes, and if you looked at our -- we had $82 million in cash at the end of the year. That number had grown in the month of January, and we're still above that level, even after funding the acquisition. So we're in a position to execute on that if we decide to do it.

Okay, thank you.

John Rogers, D.A. Davidson.

First of all, just on the bankruptcy in the gas storage business, I assume you've got claims in there. Is this something that's just going to be hanging out there for the next couple of years? Or any thoughts there?

Yes, so it's a little too early for us. Like I said, this company just filed on Tuesday. We spent basically the last 24 hours scrambling to prepare our Q2 results. But we -- the amount of money that we took in the quarter was the 100% of the value of the open receivable with that client. So there isn't any potential there for more pain. We have reviewed -- and we're looking at making sure that we're actively involved in any creditor committees, and such things that go along with -- in a bankruptcy court. So at the end of the day, the outcome here probably for us was only upside as opposed to any more downside.

Okay, thank you. And the second thing is in terms of your guidance -- you characterized it as a potentially record fourth quarter. And I know there's a lot of moving parts here. But John or Kevin, is that dependent on the turnaround business coming back? Or is that work that you have in hand, and are waiting to get released on?

Yes, it is work in hand, in some cases. In some cases, work that has the ramp-up of that work has slid. So it isn't something where we think we got to go win the work to drive that high fourth quarter. It's work that we have in hand. So it's dependent more on our ability to spend the money than it is about winning the work.

Which we do expect the turnaround business to be stronger in the fourth quarter than the third.

Sure.

And the storage business should have a significant ramp into the fourth quarter.

Okay. And just to check, two of your larger projects -- the Dakota pipeline project, and the power project up in Canada -- are they essentially on-budget, at this point?

Absolutely. The Dakota Access, which we are barely 2% complete.

Right.

And the Napanee project is in the teens, in percent complete, and is on track.

Okay, great. Thank you.

Tahira Afzal, KeyBanc Capital Markets.

So I guess first question is, given in this macro environment we are seeing some project push-out, then if I look at the projects that you highlighted and provided color around, it seems that your construction start expectations were pretty tightly bound to what the official schedules have been to date.

So as you look out on how you are forecasting the rest of the year, and how you are thinking qualitatively beyond that, how should we think about how you are taking the project push outs, you think, into account? Is there a cushion when you talk about that record potential fourth quarter as well?

So, it's probably a different story for every one of our segments and projects. At a very high level, the Dakota Access project had a permit delay that obviously would -- we can't get into the field until the client had gotten their permit in place. And so, that delay prevents us from spending the real money, which is the money we have to get into the field. So that has an effect of impacting the second quarter and parts of the third quarter. And it's going to create a bigger ramp-up for us in the fourth quarter to get up to speed. So that's an example of how things have moved around.

Turnaround -- same thing Kevin had mentioned. We've had some turnarounds move from third to the fourth, and we've had some move from the fourth to the third. But the preponderance of that work is going to be in the back end of the third, and in the fourth. So it's just the way things work.

Napanee, we're working through the winter months up there. As we come out of the winter in March, there will be an expectation. Foundations are in place, and a lot of the site work is done. And that will be a time when we'll really be able to start spending money. So it's just the timing of all of these sort of things have come together that's created this movement.

And then the iron and steel business just continues to be soft, softer than what we had expected, so that's creating some revenue movement. And for those guys, too, they're not spending the money, especially around their capital projects. And similar to the refinery business, that work eventually has got to get done. So there's going to be more opportunities in later quarters, not in this fiscal year, but it is going to create more work for us. Just things are just moving around. As you said in the call, things aren't going away; they're just moving around.

Right. And given they are moving around, and we're probably going to see more of that, to be honest. Just from the higher-profile, permitting-oriented nature of some of your projects, and just a macro -- have you guys taken a different approach to forecasting of -- where everything sits right now is how you are forecasting?

Well, I would say this: for the rest of fiscal 2016, a large percentage of that work is booked, and permits are in place on the bigger projects. So, we shouldn't see the delays associated with those projects. So, the permitting delays could affect any -- the big awards in the future. But when you look at the current backlog, that risk isn't as high now as it was in the past.

Got it, okay, that's helpful. And the second question, in a sense, for me, is really around execution. Obviously the -- I'm sure it's frustrating that you are still paying the warranty expenses on one of your power plant projects. How should we think about execution, what you're doing differently? Because you are moving to a more complex mix, with LNG potentially coming in. Is that going to be more of a fixed price contract, hybrid contract, negotiated? What should give investors comfort that, execution-wise, there's a different blend going forward?

Our execution through the first six months overall on our projects -- you just look at the direct gross profits have been above plan. So we're comfortable with how we're executing our projects. We have a mix of reimbursable and lump sum work. We don't see that mix changing. And we think we continue, as we go through time, as part of our strategy, to continually to improve our employee skills, our bench strength, the depth of our leadership. And all those things, I think, are bearing fruit in the quality of our execution.

The lump sum work [might] have some risk to it. But the better job we do of managing that risk, and having high-quality people and systems and processes with all of that, helps to minimize it.

Got it. So I should think that as your mix goes even towards more complex LNG projects, it's more the skill set that will hopefully influence [rex wafers]. Anything different in the way you are negotiating contracts?

No. We still negotiate our contractual terms with the same rigor that we negotiate all of them. So I don't see anything different there. Where we're -- a lot of this storage work, and especially on the cryogenics side, is right in our wheelhouse and our capabilities that we've got a long-standing history with. Just because it's a cryogenic tank doesn't necessarily mean it's more complex or difficult for us to install. So that, if anything, that work is probably more baseline.

I mean, is the cryogenic work you're doing outside of the very large LNG projects -- I guess my concern is, if I go back historically for Matrix, you guys lost a lot of money on the last LNG project you worked on. So how would these be a little more standardized, the smaller LNG projects, John? Anything there would help. Thanks.

I wasn't here when that happened, and I'm not ditching the responsibility. But what I understand or appreciate about that is that that -- first of all, that facility was hit by at least three hurricanes. That contract structure was a [teaming] arrangement and not the one that we performed all in-house. And so there was a lot of outside forces, I think, that affected the outcome of that project -- that today, as we have more experience at; we're larger; we have our own internal technical resources; we have more experience with the cryogenic plant design and construction.

So I think the conditions from that project back in -- I think it was 2007 time frame -- is different today at Matrix than it was seven, eight years ago.

Yes, I'll add to that, since I was here. We had not executed on the PDM engineering acquisition at that time, so they weren't part of the Company back then. And they've got a long history in LNG. And I think the other thing is LNG was new to the Company back then. Since then, we have added a lot of talent into the Company, and we've got a lot of LNG experience with that talent. And we didn't have that when we went into that LNG project, almost 10 years ago.

Got it. Kevin, actually, that's very helpful. Thanks, guys.

(Operator Instructions). Dan Mannes, Avondale Partners.

Had a couple quick follow-up questions. First, as it relates to guidance, I think it's pretty clear $0.20 -- or $0.19 of items this quarter; you cut your guidance range roughly $0.15 or -- and $0.25. So we kind of caught the middle of it. I guess my question is, how do we triangulate that with the revenue reduction? Because it seems like that should create some incremental downside risk to guidance. But does that implicitly assume you're going to get better margins over the year, or am I missing something obvious?

So when we've talked about the guidance, we've talked about it being two items that caused the guidance to go down. We talked about revenue shortfall being one of them. One of the things we didn't talk about was the Garrison charge. If we hadn't had that bad debt charge, we would have still been on-budget for the first six months. Because as John mentioned, direct margins have been higher. And then we also got the positive benefit of the tax adjustment. The warranty work, while we weren't happy with it, that wasn't going to bring the guidance down.

Got it. So, in reality, it's only $0.12, plus the revenue cut. Okay.

Yes, yes.

Got it. And then as you look at the guidance, do you have anything explicitly in there related to the transport-oriented LNG projects that you've more recently picked up? Or are those more likely to ramp next year?

Yes, we'll be performing engineering and some light procurement here in the back half of this year. But we will probably have a bigger -- should have a more significant impact on revenue and bottom-line performance in 2017, fiscal 2017.

Got it. And then on the power plant side, you're obviously upbeat. And you continue to reinforce you're expecting to pull another big project into backlog, hopefully this calendar year. Can you maybe give us a little bit more color on either geographically where you're looking, or alternatively whether you're looking regulated utility versus competitive provider? One of the things we're looking at a little bit is maybe a more challenging credit environment, particularly for those competitive plants. And I just wanted to get an idea of what you're chasing down.

So, on a geographic region, we're primarily focused in the mid-Atlantic states and the Midwest. These are primary regions that we're looking for in power generation. So we've got -- there's a huge pipeline of projects out there. And we narrowed that down to the ones that you could fit a specific geographic profile, or risk profile, or a client that we would want to do business with.

I'm not prepared to give you the names of all the different targets we're looking at. But there's probably somewhere in the neighborhood of 5 to 7 specific targets that we are in some form of either starting a bidding process or working on seeking an RFP.

Got it. And any --?

It takes time for those projects to get from boardroom -- client's boardroom to our boardroom. And it can take upwards of 10 to 12 months to get to a contract. So those things just take what they're going to take. And we had hoped we were going to be able to get one booked in this fiscal year, but that project didn't work out for us.

Do you see the credit markets as a challenge for these? Or are you maybe a little bit more aligned on the utility developed projects, versus the competitively developed ones?

We see both. We see projects that are both invested around utilities, as well as developers. So we're looking at both sides on the developer side. We're trying to stay close to the projects that we think have a better chance of getting financed, and that they will be able to get their purchase power agreements in place. And we know those guys pretty well. Our business development executives spend quite a bit of time sifting through those -- their leadership.

Like anything else, they've got to have the right credit quality, and the right financial [pro forma] to get -- if there's any off-balance-sheet financing needed. But we try to keep an eye on that to sift through the opportunities down at the ones that we think have the best chance of going ahead.

Makes sense. And my final question is the recent acquisition. Can you talk a little bit at all -- does this create maybe more of an aftermarket opportunity for you? Alternatively, as you build new tanks for people, is this an opportunity to design-in, and create an aftermarket stream? Can you maybe talk about a little bit how this integrates with the current business you are in?

Yes, so our initial focus with this -- so these -- first of all, so this company provides -- we spent a lot of time searching the market for the right company. This company makes some very, very high quality products in a lot of their business lines. But they are owned by a private individual. He was looking for a transition. He was in a situation, but he was kind of happy with the -- his size of his business. It was easy for him to manage. Plus, he did not have a presence in North America until we started talking to him.

And so we have since helped him sell some of his geodesic domes into this market with clients that we normally do business with. And so, our initial focus with him is to maintain his international presence, but really greatly expand his presence in North America. And we're going to do that through our own very extensive client contact and client base. And then we're going to be able to not only sell those products in, on the aftermarket side, but also provide growth opportunities for our maintenance and repair guys throughout North America to install these products.

And then on our new tanks, in general, in the past, we've had to install somebody else's product. So we weren't able to provide an end-to-end solution to our clients. In some cases, we would go buy that product from will be now a competitor, or the owner would provide us that product for us to install. So with this acquisition, we're going to be able to provide a much more complete solution on new tanks, as well as we're going to be able to expand our maintenance and repair operations here by installing new products and aftermarket solutions to our existing clients.

So, the opportunity for us to grow this in North America is huge. And then it also gives us an opportunity for an international footprint out in the future, where they've already got markets and clients in which they are working, that we'll be able to help them to expand and grow that. So we're very excited about what this acquisition can do for our overall storage business.

Sounds good. Thanks for all the color.

Matt Duncan, Stephens.

Let me piggyback on that question, just quickly. First of all, how would you size the cross-sell revenue opportunity as you help bring that business and that product to North America? And then, secondly, could we see you go the other direction, too, and maybe start building tanks in some international markets, now that you are going to find some customers presumably through this business that you've bought?

So on the international side, I would say that would be a long-term vision, outside of a client here taking us into maybe a Latin American destination or a Caribbean destination. Our immediate focus is on building the North American business and portfolio. The size of the cross-sell into our maintenance and repair groups, I can't -- and our new tank group -- I can't really tell you. We have a long-term goal of this business being in the $100 million range in sales on a global basis.

Any time frame attached to that, John? Or is that really just where you think you can get it, in some undetermined amount of time?

Well, if you ask me, it would be in six months. If you ask the guys that run that business, they'd tell you 3 to 4 years. (laughter)

Okay. Well, if you get there in 3 to 4 years, it's still a big win from a business doing $20 million right now, so --.

Yes. Right, absolutely.

I think we'd all be happy with that. Okay. Kevin --.

Matt, plus the margins in this business are stronger than our general margins.

Okay. Kevin, I'm hoping maybe that we can nail you down a little bit more on the commentary about the ramp in revenue from 3Q to 4Q. Maybe put it in perspective of 3Q relative to 2Q. Is it going to be fairly similar to the second quarter, from a revenue perspective? Hopefully we don't have the charges; so profits are better, and then we get a pretty sizable ramp into the 4Q. Is that the way to think about it?

Yes, when you look at our third quarter, we're not expecting that to be any larger than the revenues we've had in the first two quarters. And the big increase will be in the fourth.

And it sounds like that is predominantly in storage, where that is happening, as you presumably are ramping the terminal work for Dakota Access.

Yes, I think storage is probably the biggest increase. I think you'll see the oil, gas, and chemical -- that will be its best quarter. And I think it will also be the best quarter for electrical.

Okay. Very helpful. And then last thing, John, I want to come back to an earlier question about just the size of transportation-related LNG, versus terminals. I certainly understand that you can't name the size of this particular project, as the customer does not want you to do that. But generally speaking, if you were to look at the average transportation-related LNG project, versus the Sabine Pass project or something like that, that's an export terminal, what is the -- or presumably export terminal, at this point -- what was the size differential, on average, there, do you think?

That's a difficult question to answer, because there's a lot of -- could be a potential lot of scope differences between what kind of tank it is. Is it a full containment tank? Is it single containment? What are the offloading things associated with that? So, I'm going to -- and how much of fueling, how much storage, or what are their storage requirements? So if you just go tank-to-tank, from a typical export terminal tank to one of these, it's probably half.

Okay. That's helpful. And it just depends on the scope of the job to go from there, but that definitely helps frame it up quite a bit. Okay. All right, that's all I had. Thanks, guys.

(Operator Instructions). John Rogers, D.A. Davidson.

Just a couple of quick follow-ups. In terms of the storage solutions market -- or your backlog as it stands now -- what portion of that is related to gas versus oil?

I don't know. We'd have to get back to you on that one to give you an accurate representation.

Okay. And then the other question I had was, is there an opportunity related to export -- storage associated with oil exports? Is that a 2017-2018 opportunity, or how do you think about that?

So, our expectation is that's going to create -- it may not create a massive amount of extra opportunities for us. But it is creating -- yes, it is already creating opportunities for our storage business. We've already -- have received some RFPs for some clients that are looking to expand their terminaling capability in the Gulf Coast to deal with the export demand and -- potential export demand.

So, when that ban got lifted, which we think was the right thing to do, there wasn't an immediate rush to market by our clients. I think they had to be thoughtful of that. They need to appreciate what overall global -- their overall supply/demand imbalance comes into position.

But long-term, I think it's going to open up a lot of opportunities for us. So I think it's a good thing.

Okay, great. Thank you.

I'm showing no further questions at this time.

I would now like to turn the call back over to Mr. John Hewitt, Chief Executive Officer.

John, before you do your closing comments, one thing I wanted to revisit is I want to make sure we were clear on our change in guidance. So, really, if you look at that guidance, half of the change in our guidance is a result of the bad debt charge that we took in the second quarter. The other half of the change is related to the revenue forecast change that's caused by two factors: timing of projects, and just the challenges in the industrial segment. So those were the two things that are impacting the guidance change for the year.

Thank you, Kevin. So, just to tail onto that, before we sign off, so -- and to reiterate that we're very happy with the performance of the business overall. We're very happy with our position in all of our markets, and the opportunities for us to continue to strengthen and develop our business. So thanks, everybody, for your attention on the call today, and for the great questions. And we'll look forward to seeing you next quarter.

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