Matrix Service Co (MTRX) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the conference call to discuss results for the fourth quarter and fiscal year ending June 30, 2016.

(Operator Instructions)

As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Mr. Kevin Cavanah, Vice President, 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 most recent annual report on Form 10-K 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. Welcome, everybody. Good morning. First, a quick safety reminder for our call today.

As we begin the school year it's a good time to take stock of our driving habits, especially around schools and school buses. According to the National Safety Council, most of the children who lose their lives in bus-related incidents are just four to seven years old and are hit either by the bus or by a motorist illegally passing a stopped bus. Children walking, riding their bikes, or being dropped off and picked up by parents are also in danger. It's important to slow down and pay attention when kids are present.

Here are just a few tips offered by the National Safety Council. Don't double park. It blocks visibility for other children and vehicles.

Don't load or unload children across the street from the school. Pull up next to the school and be sure your children exit your vehicle on the curb or sidewalk side.

Carpool if you can in order to help reduce the number of vehicles at the school. Don't block the crosswalk when stopped or waiting to make a turn. Doing so forces pedestrians to go around you, potentially putting them in the path of a moving vehicle.

Don't pass a school bus or vehicle that is stopped for any reason. Take extra care to look out for children in school zones, near playgrounds and parks and in residential areas.

And, finally, stay alert, be aware of what might be behind you or below your line of sight. Let's all do everything we can to make this a safe school year for our children.

Related to our fiscal year safety performance, our employees achieved a recordable incident rate of 0.55, which is a record low performance for Matrix. We're very proud of our employees' focus on our culture of safety and the differentiation it creates in the market.

Turning now to fourth-quarter and full-year results, we believe that our financial performance in this quarter provided a strong close to the fiscal year. We began the fiscal year with a record level of backlog. And while our business was impacted by significant variability in the commodity markets, as well as an unexpected client bankruptcy, we delivered solid results for the year.

Looking to the coming fiscal year, we begin the year with a backlog that is at a statistically normal range for the business, and we continue to see a strong pipeline of project opportunities across our segments. Two of the key projects in our existing backlog are TransCanada's Napanee Generating Station and all six terminals for Energy Transfer's Dakota Access Pipeline.

At Napanee, major foundations are nearing completion and underground work is being finalized, while the heat recovery steam generator erection and centerline equipment installation is under way. Other project areas are also progressing well, including the construction of the switch yard, cooling tower, control room, water treatment building, as well as the placement of major structural components over the power block. While a significant amount of work has been completed, there is still critical work ahead of us.

Related to the six terminals for Dakota Access Pipeline, civil work is substantially complete, while storage tanks are being prepared for hydro testing. The balance of planned piping and electrical work are also fully under way. As a reminder, our work on Dakota Access is scheduled to be substantially complete before the end of this calendar year, while the Napanee project will continue through the middle of our fiscal 2018.

Moving on, backlog was $869 million at the end of fiscal 2016, compared to $1.4 billion at the end of fiscal 2015. It's important to remember that both of the major projects I just discussed were taken into backlog in the third and fourth quarters of fiscal 2015, with Dakota Access Pipeline coming just before the close of that fiscal year. This $1.4 billion in backlog represented a record for the Company but is not consistent with our normal historical opening backlog percentage.

Keeping that in mind, we traditionally start the year with between 50% to 60% of upcoming annual revenue included in backlog. This year, our opening backlog represents more than 60% of anticipated fiscal 2017 revenue.

When we look forward, the overall opportunity pipeline continues to be very strong. The ability to convert these opportunities into future backlog for 2017 and beyond will be driven by variability in the commodities market, a tough competitive environment, and general economic and regulatory uncertainties. Despite these factors, we believe that our strong brand position, top-tier safety performance, and reputation for quality delivery will be the differentiators we need to support our backlog development.

Within the month, we will be announcing a critical construction award for Matrix North American Construction, and anticipate further strategic awards to be announced in other parts of our business.

Let me now make a few comments related to the macroeconomic backdrop in which we are operating and how Matrix is navigating this environment. Economic growth across North America has slowed. Commodity prices in general remain low as demand continues to lag supply. And the federal election cycle has created a period of uncertainty that may delay investment decisions.

Having said that, the projects we focus on at Matrix are critical and fundamental to our customers' long-term business plans, ongoing operational integrity, and North America's infrastructure investment needs. Many of these projects are not speculative. They are fundamental with only project timing in question.

At Matrix, we have consistently taken a conservative approach to managing our balance sheet and the inherent risks in our business. In doing so, our strong liquidity position enables us to weather the variability of the current business environment, positions Matrix to take advantage of strategic opportunities, and protects our shareholders' long-term investment.

We continue to make investments in areas that help create differentiation and enhance our competitiveness, such as safety, leadership and people development, as well as systems and process improvements. These investments are essential to improving the overall efficiency, competitiveness, and sustainability of the Company.

Finally, before I turn the call over to Kevin, I want to talk about current market conditions and the impact to each of our segments. As you know, over the last five years our employees have worked hard to diversify our business beyond the midstream and downstream oil and gas markets to include the energy, power and Industrial markets. It's this diversification in both the work we do and the markets we serve that has created a more balanced book of business and enhanced our long-term growth prospects. In each of these markets, the need for the critical infrastructure services we provide persists.

In our electrical Infrastructure we have shared on past calls infrastructure needs across North America are substantial. In power generation, the costs for needed facilities are estimated in excess of $100 billion through 2025.

As a highly qualified contractor with expertise in natural gas fire generation, we are in a leading position to bid and win work. As utilities customers shift focus toward a full EPC solution versus an approach where engineering and construction are managed separately, we are positioning ourselves to be a preferred partner on the construction side.

In fact, under these market dynamics, substantial opportunity exists for Matrix to provide specific subcontract services and centerline erection, electrical, and other mechanical services, which represent the legacy expertise for which we are known. Refining our strategy to meet the demands of the market allows us to take on multiple smaller projects simultaneously, which reduces overall risk and will produce a steadier conversion of backlog to revenue.

In power delivery, about $880 billion is expected to be spent by utilities in the US and $100 billion in Canada over the next two decades. Matrix expects to be a key provider of these services. This is an area where projects can range from a few thousand dollars to multiple millions. And while we may not often make specific project announcements, our teams consistently bid and win multiple projects on a weekly basis.

We enjoy a longstanding relationship with major utilities across the northeast and expect to expand beyond this region through both organic growth and acquisitions. We're also adding to our leadership base with national experience in electrical infrastructure to support organic growth ambitions.

In storage solutions, we see infrastructure opportunities for crude oil, refined products, natural gas, and natural gas liquids in both the US and Canada, as well as select projects in Latin America. Considering the planned buildout of additional pipeline systems across the US and Canada, the demand for new and expanded storage terminals is anticipated to increase.

As a recognized leader in the design, construction, maintenance and repair of storage tanks and terminals, we continue to see strong bid opportunities for both above ground storage tanks, specialty vessels and related balance of plan. Overall, while some projects have been delayed due to regulatory permitting or low commodity pricing, as discussed earlier, we believe these delays are only temporary. The required infrastructure is integral to our customers' long-term business plans to support both domestic energy demands as well as international export opportunities.

In oil, gas and chemical, overall market sentiment remains cautious as crack spreads on gasoline and diesel have narrowed and refined product supply is at record levels, resulting in refiners completing fewer major revamps and reducing capital expenditures. The number of turnarounds is consistent for the period, for project scopes are being minimized.

Generally, while refiners are holding down spending now, the maintenance work itself is inevitable. And, as we have indicated on prior calls, ongoing delays may result in additional maintenance and repair work. However, the timing of the work remains uncertain.

We expect planned maintenance to be slightly below normal for the rest of this calendar year, but we do anticipate that it will pick up significantly in early 2017, especially at refineries along the Gulf Coast. We continue to add bench strength to our leadership team responsible for these areas, and have also restructured some of our business units to allow for a more seamless integrated project delivery model for our customers. We are pleased with our current market position, which is creating opportunities to expand the geographic reach of this business, and remain opportunistic about our project pipeline and anticipate new awards to be forthcoming.

In our industrial segment, low commodity pricing continues to impact the iron and steel industries, as it does mining and minerals. That said, we are seeing signs of improvement related to the maintenance work in the iron and steel market, although capital construction opportunities are still limited.

Our work supporting the US fertilizer industry is also accounted for in this segment. The outlook for this work is stronger due to the fundamental changes happening to this industry. Over three decades ago rising natural gas prices and price volatility resulted in North American fertilizer manufacturing moving offshore. Now with the low cost of natural gas, developers see an opportunity to bring this production back.

Our work at the Orascom project was substantially completed in fiscal 2016, and today we've begun work on the 20,000-ton ammonia tank for a new greenfield fertilizer facility in Nebraska, taken into our backlog just in July. A press release will be forthcoming.

Other opportunities, though delayed due to difficulty in securing financing and off-take agreements, remain. While we believe the long-term opportunity in this segment remains positive, especially given our strong brand position, in the interim we are focusing on minimizing costs while maximizing resource utilization and cross-business synergies.

In summary, we begin the new fiscal year with a solid backlog, and the Company has upcoming project awards with significant opportunities in the pipeline. Our employees continue to provide quality service and leadership, resulting in our position as a top-tier contractor in the markets we serve.

With that, I'll turn the call over to Kevin to discuss fourth-quarter and full-year financial results.

Thank you, John. As John indicated, we're pleased with our fourth-quarter results, which were in line with our expectations. Consolidated revenue for the quarter was $360 million, which compares to $364 million in the prior year and a 16% increase over the third quarter of fiscal 2016. Work on Dakota Access and the Napanee Generating Station continue to underpin the storage solutions and electrical infrastructure segments.

Gross profit of $34.1 million for the quarter is down from $40.4 million in the prior-year quarter. Consolidated gross margins were 9.5% and 11.1% for the same periods, respectively. The decline in gross profit and margins was primarily the result of continued headwinds in our electrical segment.

On a segment basis, quarterly revenue for storage solutions was up 24% to $164 million. The increase is primarily associated with the Dakota Access Pipeline.

Gross margins were 11% for the quarter, down from 13.6% a year ago that resulted from positive project closeouts and earned incentives. Margins for the segment were in line with our projected range of 11% to 13%.

In our electrical infrastructure segment, revenue of $98 million represented a slight increase versus the prior year as construction progresses on TransCanada's Napanee Generating Station. Gross margins of 10.4% were higher than 7.9% earned in the same period last fiscal year but were a little lower than the expected range of 11% to 13% due to under-recovery caused by less than expected capital work in the US.

Revenue for the oil, gas and chemicals segment was $64 million in the quarter, down from $81 million in the prior-year fourth quarter. The decline was due to lower level of capital work performed in the current period. Both quarters were negatively impacted by low turnaround volume. In fiscal 2015 we saw turnarounds deferred and in fiscal 2016 we experienced smaller than normal turnaround work scopes.

Gross margins were 6.7% in the quarter, versus 7.9% in the same period last year. Margins were low in the quarter due to under-recovery of construction overhead cost as a result of low revenue volumes. A return to our long-term expected range of 10% to 12% is dependent upon a return to a normal level of turnaround activity and capital work, the timing of which is uncertain.

Moving on to the industrial segment, operating results improved over the third quarter of fiscal 2016. However, headwinds persist due to the weak outlook in the segment's end markets. Revenue for the fourth quarter of fiscal 2016 was $33 million as compared to $55 million in the prior year.

Gross margins were 4.7% compared to 15.2% for the same period in the prior year. Prior-year gross margins were positively impacted by project closeouts while current year margins were negatively impacted by low volume. The outlook for the industrial segment remains difficult in the near term and we continue to adjust the cost structure accordingly.

Consolidated SG&A expenses decreased to $20 million for the fourth quarter of fiscal 2016 compared to $22 million in the same period last fiscal year. The cost decrease is the result of efficiency improvements and reduced incentive compensation. Earnings per share of $0.34 was in line with our expectations for the quarter due to strong performance in the electrical infrastructure and storage solutions segments.

With regard to the 12-month results, revenue of $1.3 billion was essentially flat in a difficult market when compared to fiscal 2015. Strong revenue growth in both electrical infrastructure and storage solutions, which were up 35% and 12%, respectively, over the prior fiscal year were offset by declines in our other two segments. Gross margins of 9.6% for the year is up from 6.5% a year earlier, the latter of which was impacted by a significant project charge during the year.

Consolidated SG&A was flat year over year, exclusive of a bad debt charge of $5.2 million incurred during the second quarter, along with acquisition-related costs of $1.2 million. Including these two items, actual SG&A expense was $85 million in the fiscal year. From an earnings perspective, the strong fourth quarter allowed us to complete fiscal 2016 with earnings per share of $1.07, which is within our previous guidance range of $1 to $1.10.

During the year we improved liquidity significantly while funding capital expenditures of $13.9 million, the acquisition of Baillie Tank Equipment for $13 million, and repayment of $1.9 million of acquired debt. We also fully paid off the revolver under our senior credit facility, which had an $8.8 million balance at the beginning of the year.

In addition, in the fourth quarter the Company repurchased $5 million worth of stock, bringing full-year share repurchases to $10.5 million. Our cash balance of $72 million, along with availability under our senior credit facility, provides liquidity of over $230 million versus $175 million of liquidity at the end of fiscal 2015. This financial strength and liquidity continue to support our business objectives which include executing on our strategic plans, funding working capital, funding capital expenditures with a target below 1.5% of annual revenue, pursuing strategic acquisitions and opportunistic share repurchases.

Moving on to guidance for fiscal 2017, we expect full-year revenue between $1.3 billion and $1.45 billion, and earnings of $1.10 to $1.40 per fully diluted share. We believe that this guidance reflects the quality of our backlog and the opportunity pipeline, along with the current market uncertainty.

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

Thank you, Kevin. Before we open the call for questions I'd like to thank our employees for their dedication and commitment to our core values, for delivering exceptional service to our customers, and for producing a report safety year for our Company. To each of you I say thank you.

To our shareholders, thank you for your continued trust in our management and our Company.

With that, we'd like to open up the call for questions.

(Operator Instructions)

Our first question comes from the line of Matt Duncan of Stephens, Inc. Your line is now open.

Hey, good morning, guys. This is Will on the call for Matt. I appreciate the details on where construction stands on both of your large projects, but can you talk more about how you are tracking on the DAPL terminal and Napanee project relative to both budget and schedule?

No. We generally don't give that kind of detailed information about any of our projects and not going to start now. Both our clients are public companies. I don't know what they're telling their stakeholders, so we don't want to get cross purposes with what they've got going on.

We wanted to give you guys a high level of progress on both those jobs, which we did. But I think, as a general rule of thumb, we have not in the past on really any size of our projects told you guys percent complete or how we're doing against the budget or anything else, and we're not likely to start.

And, Will, if you look at the margin performance in both those segments, they were good, strong margins in the quarter, reflective of the execution. Neither segment benefited this quarter from any unusual project closeouts that sometimes results in our margin bumping up a little higher. They both just reflect good project execution.

Okay. And as we look at backlog, it's been steadily declining as you work off those large projects. But it sounds like you expect better bookings going forward. Do you expect backlog levels to grow from here by the end of calendar 2016 as well as by the end of fiscal 2017 as you look at those bookings?

I think what we're seeing in our pipeline and in our bookings, there isn't any one specific project that is the size of those two, where we added some pretty significant backlog, as we talked about, at the end of 2015 with those two jobs. I don't want anybody to walk away from the call saying we're getting ready to book another $400 million job. That's not what we see in our pipeline.

What we see in our pipeline are multiple projects of smaller size, a couple of which that we have been selected but have not been put in a position with that client to do a press release yet because of the timing of the situation. We have other projects that we're either on the short list or we're negotiating terms and conditions for.

We've talked about this earlier, that we of felt like towards the end of 2016 our backlog would start to flatten out. So, I think, based on what we're seeing in the pipeline and the potential for projects, I think that's probably where we're going to be. We're going to see backlog start to flatten out a little bit for the organization and start to move back in a positive direction in calendar 2017.

But, again, to reinforce what we said in our prepared remarks, the current level of our backlog as a percentage of the anticipated revenue for fiscal 2017 is not unusual for our business. In fact, it's at the high end of the range of the backlog level that we enter the year with.

Okay. Then last thing from me, John, you're sitting on over $70 million in cash and no debt, so you have ample dry powder to grow the business. What kind of acquisitions are you looking at right now and what does the M&A funnel look like?

M&A funnel looks fairly strong. Things that we are interested in is, again, as we've mentioned, we want to grow, expand our electrical infrastructure piece related to delivery, the high voltage work, T&D. As we said before, we've got a great brand position on the East Coast. We want to have that brand position in other areas of the country. So, we are actively looking for the right company to do that with.

We also would like to continue to add more engineering services, more technical services, maybe some expanded process capabilities within other parts of our oil and gas segment and storage solutions segment. We feel very strongly that, as the energy commodities get more into balance, that there's going to be significant work, terminals and tanks in both crude and LNG and other natural gas liquids, and that we need to make sure we've got the capacity to be able to handle that.

In general, those are the two of the biggest things right now that we're looking at. And the cash balance is great. But as Kevin has talked about on the call before, we can see some pretty wide swings in our working capital demands as we go through the year on a lot of these projects.

Great. Thank you, guys. Congrats on the good quarter.

Thank you. And our next question comes from the line of Bill Newby of Davidson. Your line is now open.

Good morning, guys. It's Bill on for John Rogers today. Congrats on the good quarter.

First, I was just hoping to follow up on the bookings opportunities for the remainder of this year and into 2017. I was hoping you could provide some color on just where you're seeing the majority of those opportunities in terms of end market. Any more commentary there would be great.

Where we're seeing most of the opportunities would be in two segments, electrical infrastructure and in storage solutions, for the most part. While we'll see some good opportunities, we think, in oil, gas and chemical, with some potential turnarounds, potential for some larger turnarounds, in the back half of this fiscal year, as well as some plant expansion opportunities, I would say the preponderance are the two opportunities within those two segments I just talked about.

Now, we do have a couple things that would be industrial related, but they're potentially a little further out. We're doing some feed work on some projects that we can't totally talk about at the moment but that could convert themselves into EPC opportunities for us.

Our next question comes from the line of Matt Tucker of KeyBanc Capital Markets. Your line is now open.

Hey, good morning, guys. This is Grier Buchanan on for Matt. Congratulations on the quarter. A lot of my questions have been covered.

I just wanted to follow up on the guidance. Could you talk a little bit about your commodity price assumptions and maybe add some color on how you're thinking about commodity prices at the lower and upper ends of that range? Thanks.

We don't have a mathematical connection between the price of crude and our guidance. I would think our market research and understanding believes that as we move through the end of this year, that we think that, and are hopeful that, global oil prices will start to stabilize out in the mid to high $50s. And we think that's the level, high $50s to low $60s, that's going to really open up a lot more opportunities for a lot of our clients.

Really, we look at the guidance based on what we've got in backlog and what we see in the funnel today and how we handicap the go and the get percentage of what we see in the funnel. And certainly a drop in crude prices back down into the $30s would not be a good thing but right now I don't think we see that.

And the other thing that we're very, very active in right now is LNG for export. While we think many of these projects, there's a second wave of the projects, and they could be anywhere from a year to two years out before they get contracted. But we're very busy with feed work and planning and budgeting for a number of clients related to LNG for export and storage.

That's helpful, John. Thanks for that color. And then moving to the oil and gas segment on refinery turnaround specifically, you guys have made a clear point about continued uncertainty around timing, yet you are expecting a pickup, I think, in early calendar 2017 due to pent-up demand. Has anything changed at all there in terms of your conversations with customers? Or is that just the baseline assumption based on the delays to date?

I think probably for the past two years we've said it's coming, it's coming, it's coming, and it hasn't, like most people. I think just based on our planning conversations, what we're hearing from our competitors, what we're hearing from actually equipment and parts suppliers to the refiners, I think everybody's pointing towards the back half of our fiscal year 2017, which is obviously the first half of calendar 2017.

Whether that's going to be a huge turnaround season or not, I don't know. I think most people are feeling that it's going to be bigger than what we've seen over the past couple years.

Yes, makes sense. And then one more on the oil and gas. Just curious, in the fiscal fourth quarter, what drove the quarter-over-quarter improvement in awards and revenues, given that's typically a seasonally lighter quarter?

In the oil, gas and chemical, our fourth quarter's typically a little bit better. And I would say that we had a little bit more turnaround activity in the fourth quarter than the third, but it was still light.

Okay. Thanks, guys. I'll jump back in the queue.

Thank you. And our next question comes from the line of Dan Mannes of Avondale Partners. Your line is now open.

Thanks. Good morning, everybody. A couple follow-ups here. I want to first talk a little bit more on the guidance. I don't want to say it's a wide range but obviously $150 million and $0.30.

Could you maybe just walk us through some of the key items that could swing this? I don't know for instance if the high includes a pickup in turnaround business in early calendar 2017, and the low end doesn't. If you could maybe walk us through a couple of the swing factors, I think that would be helpful.

I'll give you a couple of my thoughts and Kevin can chime in here. There still continues to be this uncertainty in the market and in our ability to be able to win and book work. In some of our segments, the competitive set contractors has gotten a little stiffer.

So, while we may win more work, it could drive down the margins of what it's going to take for us to win. What's the outcome of the presidential race and who gets in office and how that's going to affect our spending patterns of our clients.

So, for us, it's this wide range -- what you would call a wide range, which we don't think is that wide -- but what you call this wide range for us is we're trying to allow for the variability and our ability to fill up the rest of our backlog pipeline that we need to do. Again, we see projects out there in front of us. We've got projects that we see coming down the path that we're going to win on.

But I think last year for fiscal 2016 we were caught a little unaware, obviously, by how quickly the awards and the opportunities got delayed, caught us by surprise. So, we're just trying to give a little bit of a buffer there for ourselves.

We're 60% booked, or a little over 60% booked, going into the year, which is normal. But it's definitely been an uncertain environment for project awards, so I agree with John there. And what that can do is impact how well we recover our fixed cost structure.

So, we try to bake that variability into the guidance. That's where the majority of that range is. SG&A is not going to be a very wide range as far as our expectations.

And tax rate can have a little bit of variability, depending upon the mix of work between US and Canada. But we still don't see a huge range there. So, it's mainly in the volume of revenues and a little bit in what's the ultimate gross margins we're able to achieve.

And, of course, project outcomes are always important, too. No matter the size of the project, the outcome of the projects obviously can have a positive or negative effect on our business.

Let me ask it another way. Your comments on coming in 60% booked is good for you guys. And understanding you guys have a lot of shorter-term book-and-burn maintenance business, and the inclusion of capital projects like Napanee is more of a newer phenomena, when you think about your booking position in normal, or quote-unquote, normal levels of book-and-burn and shorter-term work, can you get to the bottom end of your guidance range without any larger contract wins, is my question.

Yes, I think so. As I said, we don't have an expectation right now of having a $400 million project coming in. We think our bookings are going to be, what we see coming in the future, are going to be individually sub $150 million, and then our normal smaller projects that we do year in, year out.

I'd just say that normally, as Kevin said, coming into 60% in a normal environment, we feel very good about that. We would be less concerned about filling up the other 40%. But we're being a little cautious on the projects that we see, that them happening in the timing that we're expecting, and that we're going to be able to win those at a gross margin level that we would say is normal for our business.

Makes sense. And my final question, and somewhat related, is can you walk us through maybe the cadence of the year? Because especially given the amount of revenue still to be complete, for instance on Dakota Access and the visibility on Napanee, could this be maybe a little bit of a different year where you have a lot more first-half visibility rather than second half; whereas, maybe last year you were expecting more of a second-half lift versus first? I don't know if you can maybe give us a little more color on that.

Yes. You're right there. I think we went into last year expecting a much more robust second half of the year, and then we saw the awards didn't come and that didn't happen. As we go into this year, we've talked about specifically the Dakota Access project. We're hitting substantial completion in the second quarter. But it definitely puts a little bit higher volume into the first half than what you might see in the second half.

Got it. That's very helpful. Thank you.

Thank you. And our next question comes from the line of John Franzreb of Sidoti & Company. Your line is now open.

Good morning, guys. John, you touched on the margin variability going forward. I was just wondering if some end markets pricing on the new jobs are tougher than others, can you just talk to that?

Some of it's mix of work. So, you look at our industrial segment, the work in iron and steel and copper, there's less work, some competition has fallen away. But the work we're winning there has lower margins to it. It's more a mix of maintenance work and less capital work, so that's driving those margins down.

If you look at our tank business, just itself, just tanks -- and this phenomenon happens to us, it seems, on a cyclical basis where we're bidding just the tank-only projects where there's multiple tanks associated with it, where you've got four to six tanks, that presents a different competitor set rather than a one-off tank. When you get a one-off tank, all of a sudden we're competing against more of a mom-and-pop contractor that's willing to take a job for a lot less margin just to keep food on their table. So, that can have a tendency, that mixed with the repair and maintenance work there, can have a tendency to drive down some of the margins in that end.

Oil, gas and chemical, again, is really all about volume and our ability to recover our construction overheads there, that we can't just shut that off because we need those people as that work comes back. Then you move into electrical infrastructure, electrical infrastructure I don't think we're anticipating any low margin pressure there. It'll be more about a mix of work between when we have maintenance and capital work.

That's my view on the world. I don't know if Kevin has anything to add to that.

No, I think you covered the big variability.

Okay, good. And recently there was an announced proposed merger in the fertilizer market. How does that play into your expectations of a recovery in the industrial side of your business next year?

Was that the Orascom, CF Industries?

Agrium and Potash.

Yes, I'm afraid I don't have any intelligence there to comment on. I know that for a while CF Industries was going to buy Orascom's fertilizer business, which eventually fell apart.

Most of what we're seeing in the fertilizer business, there's a lot of projects out there on the planning stage, but getting the financial close has been difficult. Some of that, we believe, has been driven by the major cost overruns that Orascom has had on their greenfield facility, and schedule problems that they've had on their facility. As we mentioned in our prepared notes, we have essentially completed our work there, which went very well for us.

But their overall project, which was a multi-billion dollar project, they've had a lot of problems on it. I think to some extent it has shaken up the financial markets a little bit on the ability for these developers to meet their financial performance based on what it's going to cost to build them.

Right. And one last question. What kind of timing are you thinking about adding a follow-on project to Napanee in the power gen market?

What we're seeing and what wasn't clear in our prepared remarks is that the market has been shifting on us, where there's going to be less projects that are similar to a Napanee where your client is going to play general contractor and they're going to hire an engineer, buy the $1 million of pieces of equipment and hire a contractor. We're seeing more of a demand for full EPC solutions.

Many of the EPC contractors out there that fit that model -- which we don't, because we do not have the internal engineering resources and it's difficult for us to find an engineering partner that's willing to line up with the risk associated with that. So, we're going to find ourselves more looking to partner with some of the bigger EPC firms to provide specific packages of work.

Our pipeline now actually is pretty full with projects where we may be doing centerline erection, which is all the turbine work and the heat recovery steam generator installations. Or it could be all the electrical work and the switch yards, or it could be some the other mechanical pieces in piping and the high energy piping and some of those things.

We're strategically trying to stay flexible there. So, I would say it's unlikely that you are going to see us put a major power generation project in our backlog, at least for the next couple years. They're going to be these smaller packages. Now, these smaller packages could be anywhere from $50 million to $150 million each.

But our ability to be able to do that, especially in areas of the country where we've got a very strong presence in the union markets, which in general provides some uncertainty for some of the big EPC firms, puts us in a very good differentiated position where hopefully we'll be able to have a multiple of these smaller projects going simultaneously or in a sequential order, and will provide a much more steady flow of backlog and revenue in and out of the Company. It's actually a good thing and obviously a smaller project like that, more defined scope presents less risk for the Company.

Great. That's perfect color. Thank you very much.

(Operator Instructions)

Our next question comes from the line of Matt Duncan of Stephens Inc. Your line is now open.

Hey, guys, just a quick follow-up from me. Kevin, you hit on it a little bit with your guidance commentary but I was wondering about how we should think about quarterly SG&A costs going forward.

I don't think you're going to see a big variability in quarterly SG&A. The biggest variability in SG&A is just the incentive compensation aspect of SG&A follows how profitable a quarter is. Our people are earning higher incentives when we're making more money and lower incentives when we're not. That's the biggest piece of variability.

I think overall is you shouldn't see much variability and you shouldn't expect the huge escalation. We're really focused on trying to control our overhead cost, both the construction overhead and SG&A, and to lever those where we can.

So, we've still got a goal to keep that or get that SG&A percentage as a lower percentage of revenue. We've talked about that in the past. This year we were still around 6%. We'd like to get below that and that's still a goal of ours.

Okay. Great. Thank you, guys.

Thank you. And I'm showing no further questions at this time. I would you now like to turn the call over to John Hewitt for closing remarks.

Thank you, everybody, for a good call. Great questions today. And we look forward to talking to you again at the end of the next quarter.

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