MYR Group Inc (MYRG) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MYR Group third-quarter 2015 earnings results conference call. Today's conference is being recorded.

At this time, for opening remarks and introductions, I would like to turn the conference over to Mr. Philip Kranz of Dresner. Please go ahead, sir.

Thank you, and good morning, everyone. I'd like to welcome you to the MYR Group conference call to discuss the Company's third-quarter results for 2015 which were reported yesterday. Joining us on today's call are Bill Koertner, President and Chief Executive Officer; Betty Johnson, Senior Vice President, Chief Financial Officer, and Treasurer; and Rick Swartz, Senior Vice President and Chief Operating Officer.

If you did not receive yesterday's press release, please contact Dresner Corporate Services at 312-726-3600 and we will send you a copy. Or you can go to www.myrgroup.com, where a copy is available under the investor relations tab. Also, a replay of today's call will be available until Wednesday, November 11, 2015, at 11:59 pm Eastern Time by dialing 855-859-2056 or 404-537-3406 and entering conference ID 59506740.

Before we begin, I want to remind you this discussion may contain forward-looking statements. Any such statements are based upon information available to MYR management as of this date, and MYR assumes no obligation to update any such forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements.

Accordingly, these statements are no guarantee of future performance. These risks and uncertainties are discussed in the Company's annual report on Form 10-K for the year ended December 31, 2014; the Company's quarterly report on Form 10-Q for the third quarter of 2015; and in yesterday's press release.

Certain non-GAAP financial information will be discussed on the call today. A reconciliation of this non-GAAP information to the most comparable GAAP measure is set forth in yesterday's press release.

With that said, let me turn the call over to Bill Koertner.

Good morning, everyone. Welcome to our third-quarter 2015 conference call to discuss financial and operational results. I'll start by providing a summary of the third-quarter results, and then turn the call over to our CFO, Betty Johnson, for more detailed financial information.

On October 19, we announced the appointment of Betty Johnson as MYR's Senior Vice President, Chief Financial Officer, and Treasurer. Along with serving on MYR's Board of Directors from 2007 to 2015, Betty served as MYR's Controller from 1992 to 1998, and Vice President and Controller in 1998 and 1999.

Throughout her service on our Board, she has demonstrated strong financial leadership skills and a broad knowledge of our Company and the electrical construction industry. We are confident that her experience and hands-on approach will have a positive impact on our organization, and support our growth initiatives in the future.

Following Betty's discussion, Rick Swartz, our Chief Operating Officer, will provide an overall industry outlook and discuss some of MYR's Group's opportunities going forward. I will then conclude with some closing remarks, and open up the call for your comments and questions.

In the third quarter of 2015, revenues grew nearly 9% to $269.9 million, driven primarily by growth within our transmission and distribution segment. Notwithstanding improved top-line results, our profitability was lower than last year, as gross margins were pressured in what was a challenging quarter for the Company. Increased competition in many of our markets and a few underperforming jobs impacted our results.

Much of our revenue during the quarter was derived from smaller and mid-sized jobs with shorter durations than those experienced a few years ago. These jobs typically result in lower overall equipment utilization and lower labor productivity, because the jobs are often finished before our work crews fully get up the learning curve and reach their productive rhythm. Continuity of work remains one of the keys to our success.

That being said, we are pleased that our investment to expand in several new geographic markets is beginning to show positive results. At the end of the third quarter, our total backlog grew to $425.1 million, representing growth both year-over-year and sequentially. We plan to remain disciplined going forward with our approach, both as we grow organically and consider acquisitions. We intend to capitalize on the strength of our team, customer relationships, specialty equipment resources, strong balance sheet, safety record, and customer service reputation.

Finally, we were active with our share repurchase program during the quarter as we repurchased over 254,000 shares of our common stock under our $42.5 million program. Year to date, we've spent $9.2 million for share repurchases, $11.4 million for the E.S. Boulos acquisition, and $42.8 million for property and equipment. Even with those expenditures, we finished the quarter with over $30 million of cash and no outstanding debt.

Now, I'll turn the call over to Betty for details and our third-quarter 2015 financial results.

Thank you, Bill, and good morning, everybody. As Bill stated earlier, we had a challenging third quarter for 2015. We had higher revenues, but also had lower margins due primarily to heightened competition and labor productivity issues on certain jobs during the quarter.

Our revenue for the third quarter of 2015 were $269.9 million which represented a $21.4 million or 8.6% increase compared to the same period of 2014. The increase was primarily due to higher T&D revenues on jobs of all sizes, and the acquisition of E.S. Boulos, which happened to contribute both to the T&D and the C&I segments.

On a consolidated basis, material and subcontractor cost comprised approximately 31% of our total contract cost in the third quarter of 2015 compared to approximately 36% in third quarter of 2014. Compared to the 2014 third quarter, T&D revenues increased $23.9 million to $203.9 million, while C&I revenues declined $2.5 million to $66 million.

Focusing first on the T&D segment, revenues were $144.7 million for transmission, and $59.2 million for distribution in the third quarter of 2015. This compares to $135.3 million for transmission and $44.7 million for distribution for the third quarter of 2014. The increase in both transmission and distribution revenues were primarily due to an increase in jobs of all sizes.

Material and subcontractor costs in the T&D segment comprised approximately 25% of total contract cost in the third quarter of 2015 compared to approximately 34% in the third quarter of 2014.

In the third quarter of 2015, revenues from our transmission business were 70.9% of total T&D revenues compared to 75.2% in the third quarter of 2014. Revenues from our distribution business were 29.1% of total T&D revenues for the third quarter of 2015 compared to 24.8% in the third quarter of 2014. The growth in distribution revenues was broad-based, and reflected both increased spending and higher market share in certain markets.

C&I revenues decreased by 3.7% to $66 million in the third quarter of 2015 from $68.5 million in the third quarter of 2014, primarily due to lower revenues from large jobs, partially offset by the acquisition of E.S. Boulos. Material and subcontractor costs in our C&I segment comprised approximately 49% of the total contract costs in the third quarter of 2015 compared to approximately 42% in the third quarter of 2014.

Our overall gross profit in the third quarter of 2015 was $28.6 million compared to $32.7 million in the third quarter of 2014. The decrease in gross profit was primarily due to lower overall gross margins partially offset by our higher revenues.

Our gross margin was 10.6% in the third quarter of 2015 compared to 13.2% in the same quarter of 2014. The decline in gross margin was primarily due to increased competition in many of our markets; an increase in shorter-duration jobs, which tend to have lower margins; and certain underperforming jobs, due to labor productivity below previous estimates; and rework on certain jobs.

Changes in estimates of gross profit on certain jobs resulted in a 0.05% decline in gross margin in the third quarter of 2015 compared to a 1% increase in the third quarter of 2014.

Third-quarter 2015 SG&A expenses were $19 million compared to $19.3 million in the third quarter of 2014. The $300,000 decline was due to lower bonus and profit sharing costs, partially offset by higher personnel costs to support operation. This increase in personnel costs includes support of organic and acquisition growth initiatives.

SG&A as a percentage of revenue was 7% for the third quarter of 2015, down from 7.8% for the third quarter of 2014. Third-quarter 2015 EBITDA was $20.1 million compared to $21.9 million in the third quarter of 2014.

Our provision for income taxes decreased to $4 million in the third quarter of 2015 compared to $4.9 million in the same quarter of 2014. Our effective tax rate for the third quarter of 2015 was 39.4% compared to 36.8% in the third quarter of 2014. The increase in the effective tax rate was primarily caused by the year-to-date impact of lower domestic activity deductions, and changes in the mix of business between states.

Third-quarter 2015 net income was $6.2 million or $0.29 per diluted share compared to $8.4 million or $0.39 per diluted share in the third quarter of 2014.

Shifting now to our first nine months of 2015 results. Revenue increased $97.5 million or 14.1% to $790.5 million compared to $693 million for the first nine months of 2014. The increase was primarily the result of higher T&D revenues and the acquisition of E.S. Boulos.

Our overall gross profit in first nine months of 2015 was $89.7 million compared to $90.3 million in the first nine months of 2014, due to the lower margin, gross margin, partially offset by our higher revenues.

Gross margin decreased to 11.4% versus 13% in the first nine months of 2014. The decline in our gross margin in the first nine months of 2015 was primarily due to increased competition in many of our markets; an increase in shorter-duration jobs, which tend to have a lower margin; and certain underperforming jobs, due to labor productivity below previous estimates; and rework on certain jobs.

Changes in estimates of gross profit on certain jobs resulted in a 0.05% increase in gross profit margins in the first nine months of 2015 compared to a 1.7% increase in the first nine months of 2014. EBITDA increased to $62.9 million or $2.98 per diluted share for the first nine months of 2015 compared to $60.9 million or $2.83 per diluted share for the first nine months of 2014.

Net income for the first nine months of 2015 was $21.4 million compared to the net income of $22.4 million in the first nine months of 2014. Diluted earnings per share were $1.01 for the first nine months of 2015 compared to $1.03 for the first nine months of 2014.

We invested $42.8 million in property, plant, and equipment in the first nine months of 2015 compared to $36 million in the first nine months of 2014. We expect our total 2015 capital expenditures will be slightly higher than the capital spending in the last two years, primarily due to a real estate purchase in the third quarter of 2015.

Total backlog at September 30, 2015, was $425.1 million consisting of $295.6 million in T&D segment, and $129.5 million in the C&I segment. Total backlog as of September 30, 2015, increased by $14.1 million from the $410.7 million reported at June 30, 2015.

The overall backlog increased six of the past seven quarters, and is partially due to our expansion into the new geographic markets, including both through organic growth and through the acquisition of E.S. Boulos. T&D backlog increased $19.8 million or 7.2%, while C&I backlog decreased $5.4 million or 4%.

Moving now to the balance sheet, stockholders' equity increased to $341.3 million at September 30, 2015, from $322.6 million at December 31, 2014. Our return on equity was 11.4% for both the 12 months ended September 30, 2015, and 2014. Our return on invested capital for the 12 months ended September 30, 2015, was 14.4% compared to 14.7% for the prior-year period. At September 30, 2015, we had approximately $30.4 million of cash and cash equivalents, no outstanding funded debt, and $155.7 million in availability under our credit facility.

As it relates to our $42.5 million share repurchase program, in the first nine months of 2015, we purchased 327,232 shares of our common stock. We have $18.1 million of remaining availability in this program.

In conclusion, we had a challenging third quarter, as margin pressure and labor productivity issues on certain projects more than offset the increases in our revenues. We continue to look for opportunities to expand our geographic footprint while continuing our disciplined approach to bidding and performing on projects. We believe our strong balance sheet and borrowing capacity will allow us to continue our organic growth initiatives, consider additional acquisitions, and support our share repurchase program.

I'll now turn the call over to Rick, who will provide an overall industry outlook and our view of MYR's opportunities. Thank you.

Thanks, Betty, and good morning, everyone. Although our project mix and project sizes have varied during 2015, and pricing within the industry has become more competitive, we believe there will be opportunities for revenue growth going forward. The T&D and C&I markets continue to offer significant project opportunities across the country, and we expect historical transmission spending levels to remain steady in the foreseeable future. While recent transmission opportunities of been comprised of a higher mix of small to medium-sized projects compared to the concentration of large, high-profile projects we'd seen over the past few years, we continue to bid and pursue a number of large projects throughout the nation, and expect this trend to continue.

According to TransmissionHub's September quarterly market update, 2016 may be a record time for transmission investment in North America, citing the Edison Electric Institute's forecast that utilities and developers will combine to invest $19.2 billion per year, on average, through 2017 in the US and Canadian transmission markets.

The main driver of these investments includes generation interconnection, grid modernization, and replacement of aging and outdated infrastructure. Another source, GenerationHub, stated the US power market will experience a record 228 coal plant retirements by the end of 2017, which represents a total of 38,000 megawatts of generation that will need to be replaced.

GenerationHub predicts 95% of all new generation will come from natural gas, wind, or solar resources, which provides companies like MYR with opportunities for projects related to generation interconnections.

As an example, Duke Energy announced that its North Carolina utility will be seeking approval to construct a new transmission line and substation facility for the planned Asheville natural gas plant. This new infrastructure is estimated to cost around $320 million. We believe that this pending project is just one of potentially many more to come by utilities seeking ways to connect their new generation mix into the electric grid.

The high cost of delaying energy infrastructure was a topic in the New England ISO during the quarter. A group of independent energy and economic consulting firms released a report prepared for a newly formed group called the New England Coalition for Affordable Energy. This group was formed to advocate for the expansion of New England gas and energy infrastructure to make energy more affordable to consumers and businesses. Many current and anticipated projects are intended for reliability, while others are based on economic reasons in terms of congestion relief in high-growth areas.

Several New England states are examining ways to improve energy reliability during peak periods in order to offset the increasing costs of energy in the region. The Coalition also proposed to back several infrastructure projects that would help deliver lower-cost, clean energy to the area.

Due to our long-established T&D presence throughout New England, coupled with the bolstered capabilities through our acquisition of E.S. Boulos earlier this year, we are confident MYR is well-positioned to capture opportunities with new and existing clients in this region.

We also believe that robust transmission spending will continue in the Midwest United States. In the third quarter, the Midwest ISO, or MISO, released a status update regarding its MISO transmission expansion planning report, which includes 344 new projects with an incremental investment of $2.4 billion. In addition, the MISO transmission expansion plan includes regionally planned projects to facilitate wind generation into the regional power generation mix, as coal generation plants are retired.

These projects, which are referred to as Multi Value Projects, are all planed to be completed by 2020, and represent a total estimated investment of $6.5 billion by MISO members. Approximately half of these projects are completed or underway. MYR Group companies have an established track record of performing transmission work in the MISO region, and we believe that we are favorably positioned to secure a portion of these planned projects over the next several years.

We also see continuing activity in Texas and New Mexico. Xcel Energy's subsidiary, [Southwestern] Public Service, is moving forward with its Power for the Plains transmission enhancement program, an investment of more than $1.6 billion by 2020 in new transmission and substation projects.

By enhancing the power grid, Xcel Energy can better integrate renewable energy resources, as well as plan for future load growth. We believe we are strategically positioned to capture our share of work in this region, as we utilize our available resources that have been performing both substation and transmission line work since the completion of our Cross Texas transmission project.

The Western US is also an active market and growth target for MYR Group, along with significant spending for full replacement programs and other reliability initiatives throughout California. Recent legislation could positively affect additional transmission investment in this area. This bodes well for opportunities for our newly established operation in California.

Distribution activity has remained steady throughout the quarter, as many of our utility clients continue to invest in the replacement of their aging infrastructure and increase their use of outside contractors, versus the utility self-performing the work. We believe that reliability mandates and improvement in the housing market will remain key drivers of distribution spending growth in the near- and longer-term.

New housing construction starts reached the near eight-year high last quarter. And a number of the industry engineering firms have indicated a notable increase in engineering activity for future distribution. We anticipate a continued uptick in spending for this market.

Shifting to our C&I business, bidding and project activity continues to increase in most of our C&I regions. The healthcare markets throughout Colorado and Arizona remain strong, which have led to some recent awards for design assist healthcare projects, including the Banner University Hospital tower in Tucson and expansion of the St. Francis Hospital in Colorado.

Large transportation and airport projects are also in the pipeline throughout the western United States. Due to our vast experience in this area, we've secured partnering agreements with many of the strongest civil contractors pursuing these jobs.

Additionally, we see transportation and airfield opportunities continuing throughout the western United States. Our reputation for quality and data center work has allowed us to explore expansion into new geographic territories, while our execution of projects in our traditional markets remain consistent. Sizable aerospace opportunities are also reaching final design, and bidding opportunities are forthcoming.

Meanwhile, as waste storage and water treatment concerns continue to increase across the West, new opportunities are developing in many of our regions. Due to our track record for successful project completion on complex water structures, we have placed a high priority on developing our project management resources to capture work in this evolving growth market.

Finally, the hospitality industry is building momentum in Nevada and Colorado, as several new ventures are on the planning Horizon. Our Las Vegas office continues to bid and capture small projects, which has allowed us to add management staff for future growth.

In Seattle, we're building a quality team capable of securing projects in a variety of expanding markets. Along with this array of activity taking place in our C&I and T&D markets, we plan to continue to establish our presence in new markets, explore potential acquisitions, and pursue specific large projects throughout the country.

Thanks to everyone for your time today.

I'll now turn the call back to Bill Koertner, who will provide us with some closing comments.

Thank you for that update, Rick. We are committed to remaining one of the lowest-cost and highest-value providers of electrical contracting services for our clients, demonstrated through our unwavering commitment to safety, customer service, and a competitive cost structure. Throughout the organization, we remain dedicated to strengthening customer relationships, broadening our base of industry partners, identifying targets, as well as developing strategies for growth, either geographically or through additional service offerings or acquisitions while also evaluating our operations for potential improvements.

Our efforts help us to derive efficiencies throughout the organization, share and adopt best practices, and maximize our ability to capitalize on the most promising opportunities. This is essential for us to grow and deliver for all of our stakeholders, including our customers, employees, industry partners, and stockholders.

MYR Group's diverse capabilities, superior skills, trained and talented people, top-of-the-line fleet, and proven track record of success will make MYR Group an attractive choice within this competitive, exciting, and continuously changing industry.

On behalf of Betty, Rick and myself, I sincerely thank you for joining us on the call today, and for your ongoing confidence in MYR Group. I look forward to updating you on our progress next quarter.

Operator, we are now ready to open the call up for comments and questions.

(Operator Instructions). Andy Wittmann, Robert W. Baird.

I wanted to start with the margins. Starting with -- are there -- as you look at the margin profile as you moved into the fourth quarter, did some of the issues continue maybe as you look at the projects that are in backlog? And I'm specifically referring to the T&D backlog. Is the margin that's in backlog today lower, or kind of moving lower today than it was maybe a year ago?

And maybe another point on the margin question would be: do you have any actions in place, or any actions needed, to rectify some of the margin pressure that you've seen now a couple of quarters in a row?

Andy, as you know, we don't disclose what our backlog and margin is -- so, historically, or going forward, so I can't really elaborate on that. Clearly, there continues to be a lot of opportunities, bidding opportunities that we have seen competitive pressure. We're trying to be smart about how we respond to those competitive pressures. There's definitely no shortage of work to bid. But there are more competitors than maybe what we had, two or three years ago, and that's what's putting pressure on margins. How long that will continue, I think is anybody's guess. But we're trying to be smart about how we approach the market and how we approach bidding and remain disciplined.

What about on the cost side of the equations, Bill? That's kind of the market opportunity side. But is there anything you need to be doing, or thinking about doing internally, to rightsize or maybe not right size? I don't know. But is there anything that you are looking at that you can control?

We're certainly always looking to make sure we've got a cost structure that fits our revenue base and margins. I do feel, with our fleet, we've invested a lot of money in that over the last five, six years, as you know. I think our base of investment and the depreciation expense that we have, going forward, I think is manageable. I think it's an advantage for our Company because we've got those costs already reflected. And we are not adding new fleet unless we can absolutely justify it, based upon our outlook for work. So we're not looking to invest and increase either our fleet resources or our people resources unless we can demonstrate and justify it.

That leads me to my next question is -- CapEx obviously a little up. You mentioned the real estate purchase. Is 2016 CapEx down? And then, more broadly, in the quarter, free cash flow or cash flow from operations was actually pretty weak. It looks like working capital was a pretty big use. Was that just timing? Or is there a receivable that's in dispute right now that is clogging things up? And is there any resolution that you can give us there? Both of those questions would be helpful, and I'll be done.

Let me have Betty respond to that.

Yes, I can take that. From a working capital perspective, you're correct that the working capital overall has increased. I'd say that right now, that is a factor of timing. It's portion -- part of that relates to large jobs that have wound down, even in the acceptance stage, and going through the process with collecting the receivable with no issues with respect to collection. It's just a matter of timing, within a short period of time, of collecting some of those large prior-retention billings.

And it also relates a little bit to the mix and the work, as far as over/under billings as it relates to the ability to build certain things before we hit the month-end, or not. But not anything as it relates to a collection issue, specifically. So I think that would address the working capital question.

And CapEx for next year?

CapEx for next year would be similar to what we've been experiencing over the last four or five years. And we're not running out in January and spending all that money. We have to win some awards to justify that. So our capital budget, which our Board reviews every quarter, is comparable to the last five or six years. We are not going to spend it all unless we can justify it.

Tahira Afzal, KeyBanc Capital Markets.

I guess my first question is I guess the electric transmission side based on some pre-announcement, fairly well telegraphed. I was little surprised on the C&I side. We are not hearing the same commentary consistently from some of your peers. Would love to get little more color, whether it's because you are more regionally specific, et cetera.

Rick, why don't you answer that?

Sure, we are more regionally centered. In the markets we are in, we are seeing a lot of projects, a lot of opportunities out there. The areas we've talked about growing into, Vegas and Seattle; we see those opportunities there, too. So positive on that side. We did have a little underperformance on a couple of jobs within the C&I that affected our quarterly results. So that affected that. Those are primarily behind us. Those projects are substantially complete; when I say that, they are 99.99% complete. So we know our exposure there. But we did have two underperforming projects on the C&I side.

To add to that, whenever you enter a new market, obviously there's some additional risk factors that you need to deal with because we don't know all of the local labor in those particular markets. We try to research it as best we can, and we think these are good, long-term steps for the Company. But there are more risks that you have to manage because you do have some new people that you're dealing with, and trying to understand their productivity and the cultures of those markets.

Got it. It makes complete sense that you have to explore and investigate, and there are some risks going into new markets. I guess I was trying to read into any of your existing markets on the C&I side, when you were talking about competitive pressures, bidding environment. Does it pertain to your newer markets or some of your existing ones?

On the C&I side, the pressures have always been there. I don't see a big change. I do see, with housing developments, with some of the changing in the markets, I see it more as a positive trend. But the competitors on that market remains strong. They always have. And we've got a good niche, in those markets where we understand what we can do and what we can't do. So we've got a good team in place. So I don't really see any competitive -- additional competitive pressures at this time, in that market.

Got it. Okay. That's actually helpful. And Bill and team, if I look at the transmission side of the equation, when do you see some of these large projects ramping up? I'm sure it's been frustrating for your team. Timing-wise, if you were to give your best guess, given everything, all your negotiations, could we see some of these coming through in 2016? Or do we have to wait another year?

I think you'll see some of them come through in 2016. You certainly have access to the same sources of projections as we do: the EEI survey data, the Hub data. They still are constantly dealing with permitting issues and getting regulatory approvals. And we're supporting several clients with their public hearings trying to get -- win siting for different projects. So we definitely see some of the projects coming forward in 2016. And I see 2017, and going forward, probably even better than that.

Got it, Bill. I'll hop back in the queue.

Dan Mannes, Avondale Partners.

Thanks. Good morning, and welcome aboard, Betty.

Thank you.

A couple of follow-up questions, probably continuations of things you have already gotten. Bill, can you maybe remind us of your long-term gross margin targets and expectations? I know you don't give guidance. But you've kind of told, us over the long-term, you expect to be at a certain range. And maybe characterize whether those sort of rates are achievable, given the current competitive environment, and the current mix of work skewing towards small.

Dan, I think the way we responded to that question the past is we're in the C&I market; those margins, at the gross margin level, are typically in the 6% to 8% level. Transmission side -- or the distribution side, 8% 10%; good times. 11%. And then the transmission revenues or transmission margins have typically been higher than that, but there has been increased competition on the transmission side. So being able to maintain those historic margins that we've achieved is -- that's definitely what-- we have our work cut out for us.

Got it. And then the other thing that looked like it [takes] you this quarter, obviously, was some underperformance on jobs which frankly hasn't been the case. You guys have kind of outperformed jobs, several quarters in a row. Can you comment, number one, on it sounded like some of that was C&I. Was that both segments, first of all? And second, are most of those jobs that did underperform, are those already closed out? Or is there some potential continuation?

I can take that, Dan. And you're right, when it comes to the fact that we typically overperform. This quarter we had the 0.05% decline from our adjustments on certain jobs. And this is the first month in -- first quarter in several years. Every other quarter has been a positive uptick from our overall margin adjustments on those, from the larger adjustment perspective. So it is an unusual quarter.

Most of this adjustment, plus some, really came from the C&I side. Rick was referring earlier to two jobs on the C&I side of the business, and happened to be in a new market where we took a fairly large adjustment. And those -- and also commented that those jobs are essentially done, and behind us. So when it comes to the -- are they behind us? Yes. And the majority of the dollar amount is on the C&I. We did not see any large, either positive or negative, items really on the T&D side overall.

Got it. I'll close out on the T&D side. How much of the T&D margin, if at all, is given your regional expansion plans -- is there attached overhead that is kind of weighing on overall results? Or would you say you're at least utilized to a decent degree, relative to some of the new geographies you've moved into?

I believe there is -- I mean, there is an underutilization as you move into a new market of those resources. Though we carry deal labor out there, the management staff we put in place, the estimators we put in place, the overall people we put to build that business, we've got to invest in that. And it was approximately probably $1 million we spent, maybe slightly under that for the quarter.

That's underutilized?

I don't know -- it's being utilized (multiple speakers).

It's the start-up investment.

But it's not being underutilized; I wouldn't take that as an underutilization. It's a necessary investment to grow those areas. They are working on whether it's developing their client base, estimating, developing the business for tomorrow. So it's not -- I wouldn't consider it underutilization.

Dan, we do have some key construction managers that are often job charged, or would be part of contract costs. And if that job is wrapped up, and if we don't have another job immediately to put them on, that would be an underutilized resource. But they're not sitting around. We've put a marketing hat on them and challenged them to go out and beat the bushes and find other projects. So while they may be construction managers, we try to turn them into marketing specialists to find their next meal.

No, that makes sense. Thanks a lot for that color.

(Operator Instructions). Alex Rygiel, FBR Capital Markets.

Thank you. Good morning, Bill, and welcome, Betty.

Thanks.

Good morning, Alex.

Bill -- actually, Bill and Betty -- both of you have been sort of in this business for a few years, possibly through a couple of cycles. We are hearing a lot about sort of a negative mix shift towards smaller projects rather than large projects. And although maybe you have a chance to win a few large projects next year, they probably wouldn't contribute in a meaningful fashion to revenue or earnings until probably 2017. And you're talking a lot about increased competition, which, in kind of a stable-like environment, increased competition probably drives down pricing, too.

Are we in a multi-year period here of declining margin for electric transmission distribution?

Alex, on our last call, I talked about the CREZ market that we were in that largely took place in 2011 through 2013. That was kind of a bubble of work. There continues to be a lot of work in Texas, but nothing like what the CREZ market provided. And as I indicated on the last call, that may have been kind of a mixed, blessing, because that brought in some new competitors that picked up some of that work, and those new competitors now are sitting on a bunch of equipment and people resources that are competing for jobs in other places. So that had a lot to do with increasing the competition that we are facing.

How long those competitors stay active, certainly time will tell. It's going to be absolutely essential that we be efficient and have a very competitive cost structure, because those contractors who were not efficient and do not have a low cost structure are going to really struggle.

And could you help to sort of bridge this to your commentary about CapEx? A couple of years ago, CapEx kind of took a new step higher to acquire a lot of assets for growth and large project opportunities. It seems like growth has slowed, and large project opportunities in the near-term have slowed. Why is CapEx still at such a high level?

Well, CapEx, the nature of the work has shifted a little bit. We are not adding a bunch of big transmission pullers and tension machines. And the kinds of things that we were adding a few years ago, we made quite an investment in bundles, stringing blocks. So if you look at our capital budget, what makes it up today versus what made it up four or five years ago, it would be a different mix of iron to support the distribution business, to support the small or transmission jobs like the 138 lines that are being upgraded -- they don't use bundled conductors.

So the nature of the assets that we have to have in order to perform on those jobs are different than what we were maybe adding four or five years ago. We have a lot more yellow iron that can be used in multiple applications now, versus what we were buying five years ago.

That's helpful. Thank you very much.

Tahira Afzal, KeyBanc Capital Markets.

Bill, this might be a question for you or Rick. But if you look at 2015, and the large prospects you did have see potentially going through in 2015, on average how much have they been delayed by?

Rick, do you want to --?

Boy, I think you follow it the same way we do. We look at the markets; I think some -- most of them moved out, I would say. I haven't looked at them from a time frame to say whether it's three months, six months, or nine months. But we know it's moved out. They have moved out from this point into next year. And some of those are out six months. Some of them could be beyond that. We know the projects are going to be built; it's just a matter of when they can get the permitting done, and that's what's holding up most of them.

Got it. Okay, Rick. Actually that's pretty helpful, thank you.

John Rogers, D.A. Davidson.

I just wanted to follow up a little bit. In terms of the mix of work that you are seeing on the smaller projects, are there more materials flowing through those as a percentage of revenue? And what does that do to the margin profile in the years ahead?

There's probably not more material going through, because the smaller projects would more typically be kind of bread-and-butter utility work, as opposed to things that would be on an EPC basis. We don't (multiple speakers) very many small EPC projects. There are a few of them, like wind farm work might be on an EPC basis. But I would think there wouldn't be a lot of material, at an overall portfolio of these smaller projects.

Okay, all right. Because a couple of years ago, it seems to me there was a period where there was a lot more materials flowing through your books than there is now.

Right.

It depends on our mix of work at any given time. Some of the larger projects had us furnishing the material; other ones, the customer furnished it, so was a mix at that point.

Maybe, John, to expand upon that, as you know, there's a big push with this FERC 1000 work. You have historic utilities that were operating in a franchise region, and now they are wanting to bid on work in some other utilities' region. So these special groups that have been informed to chase work and develop work outside their region, there's a pretty good chance the number of those will have materials outsourced to the contractor.

So both financial -- pure financial developers, as well as those that are affiliated with utilities, are all thinking about a strategy of how to go into somebody else's service area and -- who do they take with them, in terms of partners? And we are in conversations with a lot of those parties, and think that's going to be a growing market for us and others.

Okay. And Bill or Rick, or Betty I guess, in light of the current market conditions, have you rethought your new office and expansion plans?

Our new office in which location?

Well, you went up into Canada and Alaska I guess over the last 12 or 18 months. And on the C&I side, do you think about moving outside of the states that you're operating in is a way to maybe capture market share or grow in a flatter market?

The answer, as far as looking at other markets, looking at other areas, is yes. We've always looked at that. We continue to. I think the markets we chose to go into right now, which is the ones you spoke about -- I mean, including Seattle, Vegas, and Canada -- we all see as growing markets, places that we feel we have opportunities to expand our business and grow organically. So it's something that we are pursuing. It doesn't mean those are the only ones we are looking at.

I've got a team that looks at other opportunities, whether it's following a project or an area that may have long-term growth potential. So we are always evaluating that and looking to push where we can.

I think, John, we probably have rejected more expansion ideas than we have approved to go forward. So when Rick and his team come to me and the Board of Directors with, I want to move Umptysquatch area, they're challenged to put together a business case: why we think we can be successful, what clients we're going to target, where we're going to get the management talent with local connections. I think we've set the bar appropriately high, so we just don't try to chase every market that we can possibly go into.

Okay. Thank you. I appreciate the color.

Adam Thalhimer, BB&T Capital Markets.

Can you give a little more color on the E.S. Boulos acquisition, how it's performing, and what you're seeing in terms of the overall outlook in the Northeast?

Rick, what you want to handle that?

Sure, overall, it's meeting the projections we went in with. Where we stand, it is meeting those. Going forward, I see it a strong marketplace for them to compete. It adds -- it gives us some resources that we didn't have in that area; and some other markets that the substation experience and part of their C&I, we had no coverage on that side in those areas. So we see growth within our old existing customer base, along with allowing them to potentially grow their transmission and distribution side. So overall, it's been a positive experience for us.

Okay. And then, I think you answered this -- just to one of John's questions. But in terms of the C&I expansion, are those the new markets? It would be Seattle and Vegas?

Currently, those are the markets we are looking at to expand in, and that's where we've got to focus right now. As Bill says, there's lots of opportunities on a one-off project basis. We'll follow our customers where we need to, and we do that. That's not something we report on quarterly. We go outside of our geographic areas for projects where customers take us into that. But those are the primary focus right now, those two.

Okay and then the outlook for Arizona and Colorado, on the non-res side, from your comments I think it's still pretty good, right?

Yes, no, I mean if you go into those areas, that's one of the areas you are starting to -- you see cranes. They are building -- there's construction going on, and it's a nice thing to see. So I probably see more activity in the Colorado marketplace, and I see Arizona coming back. Arizona hasn't fully turned, but we do see positive projections out there.

Great, thank you.

William Bremer, Maxim Group.

Good morning, and welcome, Betty.

Thank you.

I'd like to go to your T&D -- bookings for the quarter, over 1.0 there. Can you give us a sense of the pricing dynamics of what was booked in the quarter? Are we definitely at a -- say, a lower level at this point? And, thus, we should be adjusting our figures accordingly?

Let me start off. We don't talk about what margins we have in backlog, so that's not something we could disclose. I think we're telling you it's a very competitive market out there. But getting into the specifics of what margin we historically had, versus what margin we have in current backlog, that's really something we can get into.

Bill, maybe a better way for me to ask this is, with some of the projects, have you had -- or are you looking at change orders on some of them?

As far -- when you say look at change orders, you mean on some of the existing projects we have that -- I think we are always, if it's outside of the scope, we bid the scope of the project. If it falls outside that scope, than there'll be change orders associated.

Right.

90% of our business is long-term, follow-on business with existing customers. We're not a company that goes in creates change orders. But if it's due to us, we pursue it.

Okay, good enough. And then on the C&I side, besides those two end markets, can you give us an update on the data centers there in terms of -- have you had any slowdown in the data center business of the C&I work?

We haven't. In the markets we serve, we haven't seen -- with the customers we do work for -- we haven't seen a slowdown. The quality of our work has actually allowed us to do a couple of projects outside what I'd call our normal geographic reach.

Great. Thank you.

Thank you. And I'm showing no further questions from our phone lines.

I would now like to turn the conference call back over to Mr. Bill Koertner for any closing remarks.

We appreciate everybody taking time this morning to be on the call with us. We look forward to reporting after we finish the fourth quarter, and visiting with you again. So everybody have a great day.

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