Matrix Service Co (MTRX) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Matrix Service Company conference call to discuss results for the third quarter ended March 31, 2016. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions)

I would now like to introduce your host for today's conference, 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 discussed 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.

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

Thank you, Kevin, and good morning, everyone. I just want to start our call with a little discussion on safety. We talked in the past about Total Recordable Incident Rate, or TRIR, and why, at Matrix, we measure ourselves against the standard, as it is a better representation of overall safety performance.

For the first nine months of this fiscal year, our TRIR stands at 0.60. And we remain vigilant in our pursuit of zero injuries across all of our Company. Next month, June, marks National Safety Month, where the National Safety Council encourages all companies and individuals to focus on reducing the leading causes of injury and death at work, on the roads, and in homes and communities. Among those causes are transportation-related incidents, falls, choking, suffocation, and fire.

They, like Matrix, believe safety is no accident. It's a choice determined by our behaviors, attitudes, and mindset. Across our Company, we will be joining the National Safety Council in elevating safety awareness even more during the month of June. And I encourage each of you to do the same.

Before we discuss quarterly results, I'd like to spend some time, as always, on current market dynamics. I want to do so within the context of our vision and strategy for growth and long-term sustainability.

First, some historical perspective. In fiscal 2011, just five years ago, the Company closed its books with a consolidated revenue of $627 million and backlog of $405 million. That same year, we set our sights on becoming a top-tier multibillion-dollar diversified EPC contractor. Since then, we have more than doubled and diversified our revenue to $1.3 billion, achieving a compound annual revenue growth rate of 21% from fiscal 2011 through fiscal 2015. We've more than doubled our backlog to over $1 billion and strengthened our balance sheet, reduced our working capital needs, and improved our invested capital returns.

Let me provide just a few comparisons between then and now. In 2011, the majority of our revenue was generated through regional services provided in the midstream and downstream petroleum industry. Today, our work spans the energy, power, and industrial markets across North America.

Five years ago, revenue in our Electrical Infrastructure segment came primarily through substation projects as well as transmission and distribution work. Recognizing the wave of infrastructure needs coming in both power generation and delivery, we positioned ourselves to expand services in this segment and to become a premier provider of construction solutions in gas-fired power plants.

We made a significant acquisition that provides us with the foundational expertise and a legacy of success in combined cycle power plants. As you know, we are currently building TransCanada's 900 megawatt Nappanee generating station, the second combined cycle power generating facility we built for TransCanada, and one of many generation facilities built by the legacy company we acquired. This project is proceeding as planned.

In our Storage Solution segment, in 2011, just 2% of the revenue generated represented balance of plan for terminal work. By focusing on turnkey solutions, leveraging our leading position in tank construction, as well as resources and expertise in engineering, verification, and capital construction, in 2016, balance of plant work has grown to more than 33% of the segment. The recently awarded Dakota Access Pipeline project for energy transfer, where Matrix had been selected to build all six gathering terminals, stands as proof of our transition from tank to full terminal construction.

Our work today also extends beyond crude tanks and terminals to LNG and NGL infrastructure, while we continue to provide engineering feed work, budgeting, and planning for owners of large-scale LNG export facilities who are currently in the FERC and financial approval process. We see even more imminent opportunities in small to mid-scale natural gas liquid projects.

Matrix is uniquely positioned as a contractor of choice to meet the growing demand for smaller LNG and NGL tanks and terminals, including LNG transportation facilities evidenced by the recent award of the Eagle LNG project in Florida. We have continued to add bench strength and capability to our Engineering division, thus putting us in a position to better leverage feed studies to generate additional EPC bid opportunities. These bid opportunities have a total project value in excess of $1 billion.

We have expanded services across the lifecycle of our customers' infrastructure assets by adding chemical and industrial cleaning capabilities, and enhanced our maintenance and turnaround services. We also have established our Products business, Matrix Supply Technologies, by acquiring a company known for its precision-engineered and premier ASP products.

And finally, we have continued to focus on attracting and retaining best-in-class employees as well as employee development through our own Matrix University, underpinned by a robust learning management system that allows us to offer leadership development programs, personal and soft skills training, and more. Additionally, our association with the Construction Industry Institute is rewarding us with industry-leading best practices that will help us to drive our Company to the long-term sustainable success we envision.

Even with all the progress we have made, we are still not immune to the variabilities in the energy and commodity markets. Due to the impact of low commodity pricing, our Industrial segment has had the greatest negative impact on the fiscal year. The combination of a reduced volume of low-margin maintenance work, along with a lack of capital projects across both our ferrous and nonferrous metals businesses, is impacting this segment's overall performance.

We believe the long-term opportunity in this sector remains positive. And that, given our strong brand position, Matrix can, in the future, return to the strong results we have demonstrated over the past several years. In the interim, our focus will be on minimizing costs while maximizing utilization of our resources across associated markets and geographies.

In addition, our ability to replace our fertilizer-related project activities has been impacted by the difficulty of prospective clients to achieve project funding. While the lack of revenue from fertilizer-related activities is impacting top and bottom-line performance in the Industrial segment, the resources associated with our current project are being deployed to other projects in our Storage Solutions segment.

In the Oil, Gas and Chemicals segment, we continue to perform work attributable to routine maintenance and required turnarounds. There is no question, however, that our nonintegrated refiners are feeling the impact of reduced crude and crack spreads, while integrated oil companies with exploration and production divisions are also experiencing these impacts, and additionally, have direct exposure to the supply and demand imbalance that has driven down global crude pricing.

These market forces are resulting in lower levels of capital work, smaller scopes of turnaround activities, and decreased and delayed spending on other maintenance projects. In addition to these market forces, our West Coast operations have been impacted by California State Senate Bill 54, which requires apprenticeship programs and prevailing wages for labor service providers in chemical manufacturing and processing facilities, including refineries.

All of these factors have impacted our ability to achieve the levels of growth and earnings that we have expected in this segment. Our ability to vertically integrate our offering of specialty services with mechanical trades, the implementation of a revised labor delivery model on the West Coast, combined with a high quality of work, a strong safety culture, and attention to our long-term relationships, will help us combat these disruptive market forces.

Specific to California Senate Bill 54, Matrix Service has already implemented its own journeyman apprenticeship program, which is fully accredited and has been approved by the US Department of Labor.

Now let's talk about the future. As we work to drive long-term sustainability and greater shareholder value, we will continue to focus not only on our current strategic objectives that have proved successful, but also those strategies and tactics that will improve our performance, market penetration, and long-term growth.

Looking forward in electrical, as one of a limited set of qualified contractors with expertise on natural gas-fired generation facilities, Matrix is in a leading position to bid and win a portion of substantial work projected by the industry. This work will be required as a result of planned retirements in the coal generation fleet, cheap natural gas, and environmental pressure, as well as a growing need for new baseload and peak generating capacity. Collectively, the cost of this new infrastructure is estimated in excess of $100 billion.

In power delivery, the needs are equally as great. Approximately $880 billion is expected to be spent by utilities in the US over the next 20 years on transmission and distribution infrastructure. Canada will see approximately $100 billion over that same period.

With a strong footprint in key population centers in the Northeast, we expect to continue to expand our market presence organically. We are also actively exploring larger national and regional acquisition opportunities to expand our reach beyond our existing footprint. Expansion of these services is a key diversification strategy and growth opportunity for the Company.

Additionally, in preparation for taking on more work in both power generation and power delivery, we continue to recruit top tier leadership that brings even greater bench strength and years of experience in both energy and power to our teams. In storage solutions, there is significant infrastructure yet to be built for crude oil, natural gas, and natural gas liquids. In fact, the Interstate Natural Gas Association of America recently projected that the US and Canada need to make infrastructure investments of over $546 billion over the next 20 years, about $26 billion annually.

As a North American leading contractor in AST, specialty vessels, and associated terminal work, Matrix will benefit from these investments. Beyond work in North America, opportunities for Matrix are also opening up in other parts of the world, including Mexico, Central America, and the Caribbean.

Additionally, with the recent acquisition of Baillie Tank Equipment, which has an established client base in over 85 countries, Matrix can now offer its North American customers these same premier international products. The combination of this expanded international footprint, with the Matrix brand name known for leading storage engineering, fabrication, construction, and products capabilities, position us as a global storage solution provider.

In our Oil, Gas and Chemical segment, we expect to expand our geographic reach, specialty service and client base. In addition, we will enhance our ability to provide lifecycle services to oil, gas, and chemical clients through the expansion of our maintenance services, the addition of process engineering and related EETC services.

And finally, we will also continue to weigh opportunities in chemical processing facilities, a natural extension of our business.

Overall, considering the tough energy and industrial markets in which we work, our performance, while not meeting our expectations, has in no way changed the long-term outlook for Matrix. We are confident in the strength of our Company, the long-term view of our key markets, and our ability to continue to grow in our business through both organic and acquisitive means.

With that, I'll turn the call back to Kevin.

Thank you, John. Consolidated revenue for the quarter was $309 million, which compares to $314 million in the prior year. Revenue in the Electrical Infrastructure segment almost doubled year-over-year, and we also experienced significant increase in our Storage Solutions segment revenue on a comparable basis. However, these increases were offset by decreases in the Oil, Gas, and Chemical and Industrial segments.

Consolidated gross profit of $27.3 million in the quarter is up from $2.6 million in the same period last fiscal year. For comparative purposes, the third quarter of fiscal 2015 was negatively impacted by a $28.5 million charge on a joint venture project, of which $10 million was our partner share. Consolidated gross margins were 8.8% and 0.8% for the same periods, respectively.

In this quarter, we recorded $2.8 million of project reserves in our Oil, Gas and Chemical, and Industrial segments. Combined with $0.8 million of one-time acquisition costs, these charges reduced fiscal third-quarter earnings-per-share by $0.08. On a segment basis, quarterly revenue for Storage Solutions was up 24% to $133 million. The increase is primarily associated with the six-terminal project for Energy Transfer Dakota Access Pipeline, which has transitioned from an engineering and procurement phase to field construction.

We expect our revenue run rate will continue to increase as we move into the fourth-quarter. Gross margins were 11.4% for the quarter, up from 10.5% a year ago. Margins for this segment were in line with our projected range of 11% to 13%.

In our Electrical Infrastructure segment, revenue of $94 million increased by approximately 96% versus the prior-year, as volumes increased in both our power generation and power delivery businesses. Gross margins of 11% moved into our expected range of 11% to 13% on improved project execution.

Revenue for the Oil, Gas and Chemical segment was $56 million in the quarter, down from $96 million in the prior-year. The decline is due to the execution of an unusually large turnaround in the prior-year, as well as a lower level of capital work in the current year. Gross margins were 4.7% in the quarter, down from 7.6% in the third quarter of fiscal 2015.

Margins were lower than expected as a result of a charge on an upstream project, combined with under-recovery of construction overhead costs as a result of lower revenue volumes. We expect gross margins in this segment to gradually improve over the next few quarters, and return to our expected range of 10% to 12% through a combination of higher volumes and cost structure realignment.

Moving to the Industrial segment, headwinds persist from a topline perspective, and the decline of business activity we have been experiencing in this segment accelerated this quarter. As you know, we've been upfront with the weak outlook for this segment for the past year. There have been instances over the past few quarters where we have been able to outperform our internal expectations. However, with business levels continuing to decline, underabsorption issues are more acute this quarter.

Revenue for this segment came in at $27 million, down from $63 million a year ago. As a result of under-recovery of overhead costs combined with a customer settlement reserve, gross profit in the quarter was a negative $800,000 as compared to $6.5 million of profit in the prior-year quarter. The outlook for the Industrial segment continues to be difficult in the near-term, and we will adjust the cost structure accordingly.

Consolidated SG&A expenses increased to $21 million for the third quarter of fiscal 2016 compared to $17.1 million in the same period last fiscal year. The increase was primarily due to the impact of the joint venture project charge on fiscal 2015 incentive compensation, as well as an acquisition-related cost of $0.8 million in fiscal 2016. EPS of $0.16 for the quarter was below our expectations, and primarily due to under-recovery of construction overhead costs, acquisition costs, and the project reserves in our Oil, Gas and Chemical, and Industrial segments discussed earlier.

Moving on to backlog, the market and business timing associated with project awards makes it important to view backlog over a long period of time rather than looking at sequential quarter-to-quarter trends. As noted previously, larger projects do not flow in and out of backlog as quickly as our traditional baseline business.

Project awards in the quarter of $225 million represent the largest in this fiscal year. There continues to be substantial opportunity in our primary market segments, which we believe will add to our backlog in a manner and timing that supports the dynamics in the market and the operational capacity of the business. We ended the quarter with backlog of $1.03 billion, which compares to backlog of $1.12 billion at December 31.

Now I will briefly discuss our nine-month results. On a consolidated basis, revenues for the first three quarters of fiscal 2016 were $952 million, which was down 2.7% from the same period in the prior fiscal year. The decline was primarily due to lower revenues in the Oil, Gas and Chemical, and Industrial segments, which offset a significant increase in Electrical Infrastructure revenue as well as a modest increase in storage revenue for the period.

Consolidated gross profit for the nine-month period totaled $92 million versus $47 million in the prior-year. Gross margins increased to 9.6% from 4.8% in the same period, respectively. Fully diluted EPS for the first nine months of fiscal 2016 increased to $0.73 from $0.23 in the same period of fiscal 2015.

At March 31, 2016, our cash balance stood at $73 million as compared to $79 million at the beginning of the year. The cash balance, along with availability under the senior credit facility, provided liquidity of $240 million.

We have improved liquidity in the quarter, while at the same time, blending share repurchases of $5.5 million, capital expenditures of $4.2 million, the acquisition of Baillie Tank Equipment for $13 million, and debt repayments of $5.2 million of which $1.9 million was acquired in the Baillie transaction. Our financial strength and liquidity continued to support our business objectives, which include executing on our strategic plans, blending working capital and capital expenditures, pursuing strategic acquisitions, and opportunistic 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 $1.275 billion to $1.325 billion, which compares to our previous range of $1.3 billion to $1.4 billion. Our updated guidance for earnings-per-share is now between $1.00 and $1.10 per fully diluted share, which compares to our previous range of $1.30 and $1.50.

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

Thank you, Kevin. Before we open the call for questions, I'd like to remind you that significant infrastructure needs in our primary segments, as well as the inevitability of required work in the Oil, Gas and Chemicals segment, combined with our strategic focus on operational performance, will lead to overall improvement in financial results. While there's no question that low commodity prices are impacting results, we remain confident in our vision for the future, even in the dynamic environment we are currently experiencing.

With that, I would like to open the call up to questions.

(Operator Instructions) Martin Malloy, Johnson Rice.

On the industrial side, it sounds like you are still pretty cautious in your outlook near-term. But some of the metals prices have increased here in recent months. Is there any signs of improvement in terms of customer discussions?

Yes, a couple things there, Marty. The -- this doesn't necessarily make a trend, but over the past few weeks, we have seen an uptick in maintenance demand with some of our clients. Right now we don't have any long-term visibility on what that means for capital projects. We are currently in a small turnaround and -- for one of our clients in the Midwest on one of their iron-making facilities.

And so we are -- we think maybe we might have hit the bottom here, and that with the tariffs, the price increases in flat roll and hot band, that there's an opportunity here that the market may be in an uptick going forward. But we are continuing to be cautious, and make sure we are being as efficient as we can with our cost structure.

Okay. And then could you maybe update us on the progress on the Nappanee station? How the execution is going thus far?

Yes, I think we are coming out of the winter. Progress is on our plan. We are closing up a lot of the underground, providing more clear and free access to the site. We have completed the concrete work on the -- both combustion turbine foundations. We have all the main forensic pieces assembled.

We are in the process of the final core of the tabletop on the steam turbine. Building structural steel is 50% complete in round numbers. Our warehouse building and control building is well in progress. Started work on the substation and switch yards, I think within the week. And so overall, now, like I said we've come out of winter, I think progress is accelerating as we had anticipated. And we are working very closely with our client as we move down the road.

Thank you.

Matt Duncan, Stephens.

So, John, your two biggest segments seem to be performing really quite well, but the two smaller ones, Oil, Gas and Chemical, and Industrial, are weighing you down and performing poorly. And it appears as though, yes, metal prices are up some, but in the short-term, the outlook for both of those pieces is not all that great.

So I'm curious sort of how you guys are thinking about attacking the cost side in either of those segments to improve profit? And whether or not you may be giving any thought to whether it would make sense to divest either of the two, and focus on what's good in the business. You guys have always been a really great storage company, and electrical is really coming on strong. So it's unfortunate that these two are weighing on you right now. So just sort of curious how you're thinking about all that?

Well, let's take them a piece at a time. So the Oil, Gas and Chemical side has been a -- is nearly as long-term legacy part of our portfolio as the storage part, dating back into the 1990's. So we -- while we think we've got opportunities from some operational improvement in our Oil, Gas and Chemicals segment, we think on the union side, we are actually opening up more opportunities there for us in some of the Midwest and East Coast refineries.

And then on our nonunion side, where we've got a very great brand position, where there's opportunity to move geographically into the Gulf Coast. And we've made some -- we frankly have made some management reorganizational changes there. So we are pretty comfortable where we are.

I mean, you know, the markets -- the market is not as strong as we'd like it, and things are not coming to fruition as quickly as we would like. But we've essentially been fairly flat over the last five years in that segment. And we are just not getting the growth out of it, and have had trouble, a little bit, on the bottom-line on some of the earnings.

This quarter was affected by this project that we had in our upstream segment actually that we've had -- as Kevin mentioned, we had to take a reserve on. So that's had a little bit of what was weighing down the quarter.

So, Oil, Gas and Chemical is still in a long-term future part of our business. We still think there is growth opportunities there for us.

On the Industrial side, we've got -- basically got three components of that that's been driving that segment over the last two to three years. You've got mining and minerals, which is weighted to the copper industry. You've got iron and steel, which is in the major integrated steel producers of -- and our primary clients there are US Steel and ArcelorMittal. And then fertilizer work.

So we take those a piece at a time, and the fertilizer work is really a project and not an operating unit. And it just fit into that segment. So those resources, as we wind down on that project, frankly, those resources, those people and equipment, those are moving into other parts of our business into other segments.

So, for instance, a gentleman who was the construction manager and some of the administrative people are moving from those projects up into our Dakota Access projects. And you look at the iron and steel business.

So we are not ready to exit that business. We've got a very, very strong brand position there. You know, probably in excess of 30 years of experience working in that market. While that market is becoming tougher and tougher because of our clients' economics, but it's -- it can be a cyclical business and you can have these downturns.

So, the goal for us there is how do we maintain our market share, maintain the strength of our brand, make sure that we are being as efficient as we can in our cost structure, and deploy any of those resources into other local markets within the geography that we provide those services. And those are things that we are doing as we speak.

And then, thirdly, in the copper markets, again, have had -- we've been in that market about two-and-a-half, three years; have had some really phenomenal financial performance. Frankly, in one of our US, was one of the highest -- delivered some of the highest margins in the business. And again, it's a business that can be a cyclical business.

But we are able to take some of those employees and resources, and dispatch them into other projects that we have going on in the business to try and make our costs -- the costs have been associated with that region as effective as we can. So again, we've got people from that -- those operations up into our Dakota Access projects and into some other things that we are doing around the country.

So, we are not prepared to exit any of those. We are being mindful. We are watching our costs. We are finding opportunities to move people around to get the highest utilization we can out of all of our employees. And we're just going to continue to watch it.

All right. So as we look at margins then, in the short-term, what should our gross margin expectations be for both of those segments? And then in Oil, Gas and Chemical, more specifically, you said that you still think you can get into the target range there. What kind of revenue is it going to take on an annual basis to get there?

So, I think, first of all, for Oil, Gas and Chemical, we've been running, I'll say, averaging 8% the past few quarters. And we would have been slightly below that this quarter, excluding the upstream charge John mentioned. So if we can increase volumes 10% to 20%, we'll get to where we are fully recovering and get back to that level of full absorption. And that would get us back in that range of 10% to 12%.

So we just need more turnaround activity to materialize. That's been slower than we've expected. And that will help us get there along with the proactive cost measures that John talked about.

On the Industrial segment, you know right now the majority of the work is maintenance work. So, we are probably at the lower end of the range we gave at the beginning of the year, which was I believe 6% to 8%. And that's the range we are probably looking at for the near-term. If we can get some free-up of money that goes toward capital projects, that's when you'll see us get back to 10% in that segment, and that we've performed at the past couple of years.

Okay, that helps. And then the last thing just on the storage work that you are doing for Dakota Access, it sounds like we have entered the construction phase there. Just give us an update on how that's progressing? And sort of how should we think about your quarterly revenue run rate, Kevin, in that segment, as that job ramps up to sort of full production? I guess my recollection is there is a completion date of year-end there.

So I'm assuming there's going to be a big revenue jump. Just want to make sure we kind of think about that right.

Yes. So if you look at the first couple quarters of this year, we were in the low-120's, I believe, in the segment. We bumped up to above [130] this quarter. I think that will continue to increase. I think we should get up to [150-plus] a quarter for the next -- for at least the next three quarters.

Okay. All right, that helps. Thanks.

Matt Tucker, KeyBanc Capital Markets.

I had to join the call a few minutes late, so I apologize if you've addressed some of this. But I wanted to follow up on the guidance reduction. You cited the low commodity price environment, although oil prices have rallied quite a bit since the last call. So I guess is it fair to say customers -- you are not really seeing customers react to the improvement in prices? Or even have they become more cautious over the past few months?

No, I don't think -- we've had some of the -- for instance, in our storage side of our business, specifically in the flat bottom tank ,have had some of the heaviest bidding environment and RFP environment that we've had in the year. So, I think our clients are just being more deliberate about where they are spending.

We still see some very large tank terminal opportunities in the marketplace. But again, the deliberation to get those into the -- activated is just taking a little bit more time than normal or what would've happened a couple of years ago. And we are -- as we said, we are very active in sort of this gas liquids and LNG market.

And it's doing a lot of feed work, looking at a lot of projects, the small to medium scale, which really fit our sweet spot probably more so than these big LNG export terminals, where there, we were going to be a subcontractor to build the tanks. On these smaller facilities, we can provide the full terminal capability and not just the storage. And where the bigger EPC guys have really got to take a step down to get to be in a more competitive mode against these -- some of these smaller gas-related projects.

So, bidding activity is very, very -- is very strong. And really in the storage and electrical segment, both in electric, both in power gen and in power delivery. It's just, in storage, it's just taking a little bit longer time to get that stuff into the backlog.

And one thing you ought to consider here is that if you think about a project lifecycle, it takes a period of time from the time the customer says, hey, I'm going to go forward with this project, to the time that project gets awarded and work actually starts on that. So there's always a delay there.

Got it. So I guess to respect to kind of what changed relative to the prior guidance, it sounds like the bidding activity has been strong but things have just been moving more slowly than you'd expected. Is that fair?

Yes, I think so. And I think the -- what we are seeing, if you think about big chunks of backlog coming in and out of the business, certainly one of those would be power generation. A lot of what we're looking at right now are not the full general construction opportunities. We are looking more at specific packages on those facilities, whether they are all the mechanical work, HSRG erection, the electric piece.

And so those projects are all moving down the timeline. But again, as Kevin said, in the power generation market, I mean, it takes months to get those projects bid and negotiated and into backlog. Clients have to -- developers and clients have to win their ability to enter into a power district and they have to win those awards. And they've got to award the projects to their contractors.

So, it just takes time to get that in. I mean, we're very confident in that segment. Not only in our ability to continue to build some backlog on the generation side, but frankly on our delivery side, where we do substation work, transmission and distribution. We are -- it's not transparent to you guys on the phone, but it's -- we are having a very, very strong year there.

And they are frankly overachieving on that piece of our business compared to what we had thought going in. And plus there's a lot of growth opportunity for us to move that model, as we said; not only expand our market share in the Northeast but to move into the Midwest and up into Ontario. So, those are focus areas for us for growth and we see those opportunities. Those opportunities are out there.

Got it, thanks. And then with respect to the kind of portion of the guidance reduction that relates to the fourth quarter, how much of that reduction in EPS expectations is driven by lighter expected workload than you were previously thinking versus maybe lighter margins on work that you were already expecting to do?

So I would say that if you looked at that change in EPS guidance, 25% to 35% of that change is just related to the third quarter -- you know the $0.08 of charges that we talked about, a little bit of under-recovery. And the other portion relates to -- while volumes will be higher, they weren't going to achieve as high a level as we thought they were, previously.

Got it. So I guess -- and I guess what I'm kind of getting at is the portion that relates to the fourth quarter, is the lighter outlook more due to just lower utilization, lower topline than you were expecting? Or are there some maybe some jobs where you are seeing lighter margins or some execution issues in the fourth quarter?

No, it's fundamentally topline, which also has an impact on the bottomline because of the potential underabsorption issues. And so we've got -- and it's a combination of a lot of things. So we've got projects that we've had a high -- that we felt we had a high likelihood to win and start working off in the fourth quarter, that we either didn't win or the projects were delayed by our owners; or we had had an assumption, for instance, in our Industrial segment, that there was the opportunity for improvements in some of those businesses that we are just not seeing at the rate that we thought they would come back.

So it was a combination of a lot of different things. But it's primarily a topline-driven issue, not a known performance issue that we are having on any of our backlog work.

Makes sense. Appreciate the color, guys.

Welcome.

John Rogers, Davidson.

Thanks for taking the questions. I guess, John, just going back to your comments on the electrical power business, when do you expect these opportunities to materialize? I mean, I know the business is going well now, but I'm looking at the backlog run-off here and just trying to think about when you need to be able to bring some more work on.

So when we came into the new year, we had anticipated adding, on the electrical generation side, additional work that would be booked and worked off in the back-half of fiscal 2016. And that didn't happen. And that wasn't necessarily because the project -- when the projects went away, it's just either they moved or we were not successful in that bidding.

And so there still is plenty of opportunities out there. We are actively bidding today as we speak. You know specifically two, three projects on the East Coast that we feel very good that we are going to be able to add pieces and portions of those projects into our backlog in fiscal 2017, but they just didn't materialize in this year like we had expected.

Okay. And is that -- I mean, is that a competitive issue? Or your capabilities or new competition coming into that market?

No. I think again, it's -- some of it is the dynamic with the client base on when they are taking projects to market. Some of it is a little bit of dynamics change in the execution of these projects with the major EPC contractors that they are looking at instead of being a partner, and taking more of a subcontractor relationship with folks like us. And so that doesn't change the competitive dynamics. It does change the execution dynamics for us and how they think about some of these projects.

So, you have some owners like a TransCanada, for instance, that wants to play the EPC contractor. They will go hire the engineer, they will go do the procurement of the major equipment. They'll go hire a general contractor. And then you have other clients and developers in this market that want -- fundamentally because they need the third-party nonrecourse financing support, they want to go to a full EPC contractor as a single source of supply for them.

And so, depending on what type of those projects are that are coming to market at the time that we are ready to bid them, can have an impact on our ability to win, how big a piece of a single project we can win, and the timing of what that gets into our backlog, and when it can start to roll out, depending on the lifecycle of the project. So those dynamics that move around through that industry, I would tell you are pretty normal. And it's just something that we, as a service provider there, that we've got to deal with on a month-over-month basis.

Okay. And then if I could just follow up again on the Oil, Gas and Chemical business and the lower outlook there. Is it your sense that your customers are deferring maintenance that needs to be done? Or is it -- or is this truly all tied to reductions in capital spending, which then would mean to suggest that this market that this segment is going to be under pressure for years?

Well, I think probably you've got a little bit of everything depending upon who the client is that the turnarounds that we are doing -- so you talk about turnaround market, and we, I think, we had told you guys on the last call that we had 23 turnarounds that we were contracted for through the course of this year. I think the majority of those we are still intending to happen within 10%.

But the size of them have been not as big as what we have done traditionally. So, I think our clients are wanting to get back online quicker, that they are holding down their spending on the repairs where they may -- are doing what they need to do but not what they'd like to do. And so we still fundamentally believe in our turnaround and plant maintenance teams think that they are pushing a lot of the maintenance work off.

And -- but we don't see this work as going away. It's just a timing issue. And so we've got to make sure we stay in position with our relationships with our clients that we are there when that happens. And so it's just something again that we are going to have to deal with in this market environment.

So I think you saw probably Frontier release their earnings this week or the end of last week and they didn't have the best of quarters. And a lot of that is driven by -- for them, anyway, and their markets that they serve, was driven by an oversupply in refined products. So naturally, of course, that's probably affecting it. And we had some turnarounds with them and we do maintenance work with them. So, that, of course, is going to drive an impact into their spending plans.

Okay. I'll get back in queue, thanks.

(Operator Instructions) Dan Mannes, Avondale.

I had a follow-up as it relates to the two charges you took. And I apologize if I missed this in your prepared comments. Can you walk me through what the charges were that you took, both in Industrial and in Oil and Gas, just so I have a better flavor for what the issues were?

Yes. It was two projects. The combined charge was $2.8 million in the quarter. These were -- both were reserves on projects that are still open. So we are not going to get to the point where we are talking about the individual charges, just because we are still negotiating the final closeouts on those projects with the customers.

The one in Oil, Gas and Chemical was an upstream-related project. So, that's probably not too unexpected tough environment there. And on the Industrial, that reserve, we are hopeful that we can improve that. But that was our -- that's our best estimate at this point.

Got it. And then as it relates to the turnaround, you talked about the 23 turnarounds you are expecting. How much of the, I guess, scope change occurred in Q3? And how much is just your expectation of smaller scopes in Q4 versus actually notification of smaller scopes?

We don't project, into our forecast, increased scopes on our turnarounds. We've got a majority of all of our turnarounds we were involved in the planning with our clients on what the scopes were going to be. Those are the man-hour forecasts we use to feed our forecast.

And so if there is opportunity for turnarounds to grow, we really won't know that and won't take account of that until it actually happens and we are in the middle of it. And so in the third quarter, while we had some turnaround activity, there wasn't really any kind of great growth rate in those turnarounds.

And then again, because it sounds like I mean -- it sounds like you have even more of a meaningful take-down on the fourth quarter. You are already anticipating -- since you don't include growth in the turnarounds in your guidance, does this then suppose that the refiners have come to you, and even what had previously been planned has already been reduced for the fourth quarter?

Right, so this is probably less about refinery turnarounds and more about -- there's a lot of things that are in our Oil and Gas and Chemicals segment. So there is also work that we do in some work we actually do in chemical plants and some processing facilities, that there's capital work involved that I had mentioned earlier, that we had a high percentage in our forecast that we were going to be able to win that work and begin to execute it.

So for instance, in -- on the East Coast, one of our clients on the East Coast, we had a -- they're spending a tremendous amount of money. We had a couple of key project in our go-get that we thought we would win and to get start working some of that off in the late third, early fourth-quarter. And those projects, there was two or three of them. One of them got pushed out just because of timing of the execution in the overall facility. The other ones we didn't -- the other two we didn't win. They went to the -- as we like to say, the successful low bidder.

So they -- the person might have won the work, but they may not make any money on it. And we are not in the business to chase numbers. So we are still on the -- this is supposed to be a profit-making operation so we are not -- we aren't going to go do work for nothing. So I don't want to mislead you there. All the changes in the topline in Oil, Gas and Chemicals are all related to light turnarounds. So there's other things in there besides turnaround market that can restrict our revenues.

No, that actually really helps clarify. Lastly, I'll just ask about capital allocation. Obviously you started to work a little bit more in the buyback. Given the decline in the stock price, does this change the calculus at all for you in terms of how much more you want to allocate to the buyback? Because you've spoken pretty openly about your desires to do M&A and diversify the business even a little bit more.

So we are still actively looking at M&A opportunities, both for things that we would pay for with cash as we've traditionally done, and there's opportunities where we might have to take a different position on that, if it's something very strategic to build our business. Plus, we've got, especially through the first half of 2017 and into, frankly, the fourth quarter, we are really ramping up on our two major projects.

We want to make sure that we are in a good liquidity position to provide the working capital we need for those projects. And so to some extent that also would restrict our desire to go invest a lot of money in the repurchase of stock.

So it's, again as we -- as Kevin said in his opening remarks, we are going to be opportunistic about when and how much stock that we will repurchase. And so, there's no reason to believe that we wouldn't get back into the market here at any time to go back and purchase some stock if we thought we were excessively undervalued. So, we'll watch that.

Sounds good, thanks.

John Franzreb, Sidoti.

Just sticking a little bit with the last topic. You talked a little bit about the Baillie acquisition and how smoothly that's going. Should we expect any other costs associated with the purchase in the coming quarters?

No. I think the costs are primarily in. I don't expect any additional lagging acquisition costs.

And the acquisition has gone very well. The products have been very well-received in North America. So we are maintaining -- the initial short-term strategy there is to maintain our -- the legacy company's international market and presence, and bring them into North America where we can take some of our -- leverage our brand and our market presence and our client contacts, and bring these, what we think are some of the highest quality products into the industry, into the North American market.

And we are finding a really great acceptance by our clients, both existing and frankly some new clients, that are really interested in our products within their storage facilities. And so we've been -- within two -- within the last two months, we've got -- we bid over $40 million in tank products into the market. And so it's -- I would say it's exceeding our expectations to date.

The individuals that we've added onto the team through the acquisition are excellent. Personally visited our engineering group in Australia and our manufacturing group in Korea in March. Exceptional people, very bright, great systems and very focused on being part of the Matrix organization and delivering great results, and have the capacity for us to plug in additional sales opportunities.

You also see disclosure in the 10-Q that will be filed today or tomorrow that provides more information on Baillie. Just a little tidbit from that disclosure -- the revenues recognized on that acquisition in the first couple months were $3.5 million, producing operating income of $0.7 million. So, definitely off to a good start here with us.

Got it. And will M&A continue to focus maybe on overseas opportunities similar to Baillie? Or are you still looking here in the states?

No, I think we are still -- the Baillie thing wasn't necessarily an international focus. It was just that's where we found the best product provider. We are going to be more focused in the US and Canada here in the short-term.

But that's not to say that we would not look for a -- or be interested in a company that is US-based that might not be doing some work outside the United States or Canada. But as far as going into a foreign country to look for an acquisition, I would say today that's not on our list.

Okay. Thank you for taking my question.

Thank you.

Martin Malloy, Johnson Rice.

Just on the storage side and aboveground storage tanks, any interest from your customers in expanding capacity at Cushing, given that it's not that far away from operational full capacity?

Yes. So we, actually in the quarter, had an award with one of the midstream companies there to add -- I'm not sure of the quantity of the barrels, but I think it was three or four tanks into their terminal out in Cushing. We're doing some other work out there for a few other clients.

We've actually got a couple proposals in-house for some major additions into Cushing by both existing and some startup midstream companies. So there are still people interested in adding storage capabilities and blending capabilities out in the Cushing storage depot. And so we are pretty upbeat about that opportunity.

Okay. And then regarding 2017 guidance and when you might issue that, is the intention to, like last year, issue forward your guidance around mid-July?

Yes. Yes, we will do that sometime earlier than where we had traditionally done it, once we get through our budget cycle here and get this year closed. But probably sometime in July.

Okay, great. Thank you.

You're welcome.

At this time, I am showing no further questions. I would like to turn the call back over to Mr. John Hewitt for closing remarks.

Thanks, everybody, for listening in for the great questions on the business. We continue to be extremely bullish on our markets and our business in general. We think we are doing some really great strategic things with the Company. Very exciting time to be at Matrix. And additionally, would encourage everybody to take notice about June being National Safety Month, and think about that in your -- both your working and your professional lives.

So, thank you, everybody. And we'll talk to you next quarter.

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