Matrix Service Company (NASDAQ:MTRX)
Q2 2016 Results Earnings Conference Call
February 04, 2016, 10:30 AM ET
Kevin Cavanah - CFO
John Hewitt - President and CEO
Matt Duncan - Stephens
Martin Malloy - Johnson Rice
John Rogers - D.A. Davidson
Tahira Afzal - KeyBanc Capital Market
Dan Mannes - Avondale Partners
Good day, ladies and gentlemen, and welcome to the Matrix Service Company to discuss results for the second quarter ended December 31 conference call. [Operator Instructions]
I would now like to introduce your host for today's conference Mr. Kevin Cavanah, Chief Financial Officer. You may begin.
Thank you. I would now like to take a moment to read the following: Various remarks that the company may make about future expectations, plans and prospects for Matrix Service Company constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various factors, including those discussed in our annual report on Form 10-Q for 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. Good morning, everyone. Last quarter we discussed the difference between total recordable incident rate and loss timings in the rate and why at Matrix we hold ourselves to this standard. As it is a better representation of overall safety performance.
For the first six months of this fiscal year, LTIR stands at 0.64. The value holding ourselves to this high standard is a clear differentiator which was confirmed with the recent extension of our contract at BP Cherry Point Refinery where our team has been the primary on-site contractor providing turnaround, maintenance and repair services since 1995.
As you may know, working in that refinery is by nature dangerous and in an environment where an outage could mean temporary bringing on 700 or more new employees. Maintaining in a consistently growth TRIR can be challenging. Yet this team has achieved zero total recordable incidents rate year-after-year.
They stand as prove that our work can be completed with zero recordable incidents in the leading industry in our commitment to safety and build the culture in which that commitment drives. It is for these reasons that these operating unit has been recognized with our companies highest honor the 2015 Board of Directors safety award.
Matrix Service has been recognized as a contractor responsible for starting the safety revival at the BP Cherry Point and has set the new standard of excellence by which all other contractors are measured. Together with exceptional quality work, it is also the safety record that allowed Matrix Service to recently be awarded a five year contract extension guided at nearly $4 million man-hours.
I’m extremely proud that the safety leadership and culture Matrix Service and his team has built at BP Cherry Point. Please join me in congratulating those achievements.
Moving on, I want to set the stage for today's call by discussing current market conditions, and the effect of those conditions have on our various operating segments.
I also want to spend some time discussing our company's growth strategy, the strength of that strategy and how especially in times like this its brings value to our employees and our company and shareholders.
Before I address these topics, I want to give you some perspective on our decisions to revise the guidance range. This revision is primarily due to two factors, first a short fall in revenue as a result of slower ramp ups on certain projects which in turns shifts revenue and profit to future quarters. Secondly, a non-recurring bad debt charge related to unexpected client bankruptcy.
Now let me share you with some of our views about the markets. There is no question upstream oil and gas companies had pulled back significantly on spending plans over the past six months in response to the dramatic decline in oil prices over the past year and in particularly the acceleration of this trend more recently.
However in the midstream and downstream segments of the North American Energy Sector, our most of all work in this market segment takes place, we have seen minimal changes in our clients planned projects and in fact continue to see significant opportunity. The single exception is TransCanada's Hardisty project now delayed indefinitely by President Obama's rejection of the Keystone Pipeline.
We do believe current market conditions have owners taking a more cautious approach to timing in a sub instances like tightening of credit they make financing for the larger scale projects more strenuous.
As we discussed on prior calls timing of awards especially on larger projects will create variability in our backlog. However that said, the bid final for our storage solutions segment remains strong at $5.3 billion and we continue to earn strategically significant awards.
One such example is the recently announced Eagle LNG project in Jacksonville, Florida. This award is the first of what we expect to be a sequence of awards in the LNG transportation fuel space with the shift of greater use of LNG transportation fuels in trucking and shipping will create ever increasing demand.
We've also just received a limit notice received on a second LNG transportation fuels project. We expect to release a formal announcement of this project in the coming weeks once the contract terms have been finalized. Need of these awards are included in the December 31 backlog.
These smaller LNG facilities represent significant market opportunity for Matrix. Given our expertise and cryogenic storage tanks and terminals, this market is one where our ability to provide full EPC services uniquely positions Matrix to take the lead.
Matrix is also well positioned to act and partnership with others on large LNG facilities as evidenced by having [inferably] [ph] selected as a contractor for the tanks and associated on tank mechanical work on a large scale LNG export facility in the Gulf. This work is also not in our December 31 backlog as it is pending negotiation of all take agreements by the facility owner.
Across the rest of our storage business including flat bottom crude oil opportunities continue to be strong. Even in our Western Canada operation which is experienced at the press market, we picked up project awards at 7 different client locations in the second quarter.
Our engineering division, Matrix PDM is also generating significant EPC prospects as they have taken the lead on numerous feed studies for both crude storage and cryogenic opportunities. The current level of feed work is creating up high work load for our teams as they engage in multiple feed stays with the total construction value in excess of $1.2 billion.
In our oil gas and chemical segment, refiners continued to drive turnaround maintenance repair work in order to take advantage oil crude pricing. While doing so may push plan work later in the fiscal year '16 or early fiscal year 2017, the work itself is inevitable and ongoing delays only create a pressure wave in future work. Inspite of these delays, we have 23 mechanical or specialty turnarounds planned for the balance of fiscal 2016.
In power generation, the low cost of natural gas is positive news for Matrix driving continued momentum to large scale project opportunities in one of our key business segments. The unprecedented shift away from coal to natural gas as a fuel source to generate electricity in the U.S. continues and is accelerating supporting the new build natural gas combined cycle power plants as a primary source of clean energy.
Hosted by the recently signed Paris Climate Accord and the EPA clean power plant, the pipeline of power generation is very strong with industry experts reporting 150x high probability U.S. projects through 2020, valued at nearly 46 billion.
Power delivery is equally strong with 85 billion transmission, distribution and substation infrastructure investment projected through 2018. Currently our focus is on projects in the Northeast, Mid Atlantic and upper Midwest. This work is being driven not only by ageing infrastructure but also new sources of generation such as gas supplier combined cycle and renewable.
In power generation and power delivery, we’re currently tracking a combined total of 5.4 billion in projects and as stated in our previous calls, expect our book on next major power generation project by the end of calendar year 2016.
Given these market opportunities, the electrical infrastructure segment of our business represents a key focus area for significant acquisitive growth. The markets represented by our industrial segment continue to face significant challenges. There is a decline in non-ferrous metal pricing, continue pull back on major CapEx projects and mining minerals is underway.
Our integrated iron and steel customers also continue to suffer from a strong dollar position and aggressive supply from China and while the strength of the automotive industry is creating significant demand for their products, a decline in the upstream oil and gas drill pipe market is currently offsetting this demand.
In the fertilizer segment, while low cost feedstock has created opportunity for new fertilizer facilities, some owners face funding challenges for new projects. However, we're currently in final negotiations for the storage and refrigeration components on a Greenfields fertilizer facility located in the midcontinent. We hope to finalize this agreement and taking it to backlog in the third quarter.
Against this backdrop, I also want to affirm our company's position and strategy for growth. Our current market conditions present both challenges and opportunities. Our deliberate measured approach to diversification in both acquisitive and organic growth along with our conservative approach to managing our balance sheet has positioned us well and has resulted in a strong and sustainable company.
Across our key business segments, we continue to evaluate, pursue and acquire strategic bolt-on acquisitions that position us to provide better service to our customers. Most recently we announced the acquisition of Baillie Tank Equipment, a premier provider of geodesic domes, aluminum internal floating roofs and other key storage tank engineering components.
As mentioned in our press release earlier this week, Baillie Tank Equipment is headquartered in Sydney, Australia with manufacturing in Seoul, South Korea. Its customer base spans more than 85 countries with existing annual revenues approaching 20 million.
Moving forward, the company will operate under our Matrix supply technologies brand. In addition to serving and growing their existing base of international customers, this acquisition allows us to provide a high standard and above ground storage tank products to our storage solutions customers across North America. These products will also be a catalyst to grow our tank maintenance and repair services.
Given our strong financial position, we will continue to look at strategic bolt-on acquisitions as an ongoing investment opportunity to grow and diversify the business, as well as increase our fundamental bench strength.
Finally, the current market environment combined with our financial strength also allows us to take advantage of larger acquisition opportunities to greater accelerate our strategic growth plan.
With that said, I will turn the call back to Kevin to review our second quarter results.
Thank you, John. Before getting into the numbers, I wanted to provide some insight that will help to frame the rest of the fiscal year. We've seven paths up there can be instances for elements outside our control can delay the start of a project. Typically related to permitting, scope changes requested by the customer or weather.
As a result, schedule shifts and this affects our ability to ramp up revenue as originally planned. This has impacted the second quarter to some extent and we expect it to continue through the balance of the year. With that in mind, let's review the quarter.
Consolidated revenue for the quarter was $324 million, which compares to $343 million in the prior year. On a segment basis, revenue increased in the electrical infrastructure segment but this was more than offset by decreases in the industrial oil gas and chemical and storage solutions segments.
Consolidated gross profit of $30 million in the quarter was up from $16 million in the same period last year with both periods being impacted by work-related to the Garrison Energy Center. The charge in this quarter was related to project close out.
Excluding these impacts, gross profit margins on an adjusted basis was solid at 10.9% this quarter while down modestly from 11.4% in the prior year.
A non-routine bad debt charge of $5.2 million from an unexpected client bankruptcy increased consolidated SG&A expenses to $25.1 million in the quarter as compared to $19.6 million in the same period a year earlier. This charge reduced second quarter earnings per share by $0.12 to $0.20 per share in the quarter. This compares to earnings at $0.12 per share in the same period a year ago.
The quarter also benefited $0.04 per share primarily as a result of retroactive reinstatement of certain tax credits. Going forward, we now expect our effective tax rate to be around 36.5% versus the prior fourth half of 37%.
As we have discussed previously, the makeup backlog has changed with the addition of larger construction projects. As such, the timing associated with these project awards makes it important to view backlog over a period of time rather than looking at sequential quarter-to-quarter trends.
We ended the quarter with backlog of $1.12 billion, which is down from $1.28 billion at the end of last quarter. Backlog was also impacted by a project delay related to President Obama's rejection of the Keystone XL Pipeline [permitting] [ph] which John mentioned earlier.
While the project itself is not being cancelled, the uncertainty of the project requires us to take it out of backlog. Backlog also declined due to the strengthening of the U.S. dollar versus the Canadian dollar with decent value work we have TransCanada.
Project awards for the three and six month period this fiscal year totaled $178 million and $373 million respectively. As John discussed earlier, while the pipeline for projects in both the electrical infrastructure and storage solution segments remain strong. We do believe the current market conditions may have owners taking in more cautious approach to the timing of larger scale projects. However, we continue to expect these opportunities to transition into backlog overtime.
Moving on to our segments, quarterly revenue for the storage solution segment was down 6% on a year-over-year basis to $122 million. The decrease is primarily associated with our Canadian operations, which was partially offset by higher domestic activity.
Gross margins were 11.8% for the quarter, up from 11% a year ago. Margins for the segment were in line with our projected range of 11% to 13%.
Mainly the projects with currently having backlog including the six terminal project for the Dakota Access pipeline are transitioning from an engineering phase to the field constructions and we expect our revenue run rate will increase as we move into the fourth quarter.
In our electrical infrastructure segment, revenue of $91 million increased by 56% versus the prior year as volumes increased in both our power generation and power delivery businesses. Margins for the quarter were negatively impacted by project closeout cost during the first quarter - first year of operation of Garrison Energy Center.
On an adjusted basis, gross margin for the quarter was 10.2%, which compares to an adjusted margin of 11.9% a year ago. Going forward we expect margins in this segment to improve returning to the 11% to 13% range we have discussed previously.
Revenue for the oil, gas and chemical segment was $62 million in the quarter, down for $75 million in the prior year. As John indicated in his opening comments, low oil prices continue to drive high refinery utilization, further delay in maintenance and turnaround work, we expected to materialize in our second quarter.
Gross margins were 9.7% in both recurring and prior year quarters. These shown fallen revenues caused us to undercover our overhead cost structure in this segment. We continue to expect the gross margin sale will improve and return to our expected range of 10% to 12%.
Moving to the industrial segment, headwinds persist from a topline perspective with revenues for the quarter of $48 million down from $79 million a year ago. The decline as we previously discussed is due to lower business volumes in iron and steel and mining markets, as well as lower revenue recognized on a fertilizer project that is nearing completion.
Nonetheless, gross margins of 11.5%, exceeded expectations. Margins were positively impacted by the mix of work and continued project - strong project execution. Now, we'll briefly discuss our six months results.
On a consolidated basis revenues for the first half of fiscal 2016 was $643 million, which was down 3% from the same period in the prior fiscal year. This small decline was primarily due to lower revenues in the industrial segment, which was offset by a strong electrical segment.
Gross profit for the six months period totaled $65 million versus $44 million in the prior year. Excluding the impact with the Garrison Energy Center, gross profits were comparable on a year-over-year basis.
As mentioned earlier, a non-routine bad debt charge of $5.2 million from an unexpected client bankruptcy increased consolidated SG&A expenses to $44.6 million in the quarter, as compared to $39.5 million in the same period a year earlier.
Net income for the six months of fiscal 2016 increased to $15.4 million as compared to prior year net income of $9.2 million before diluted EPS increasing from $0.34 to $0.56 over the same period.
At December 31, 2015 our cash balance stood at $82 million as compared to $79 million at the beginning of the fiscal year. The cash balance along with availability under our senior credit facility provided the liquidity of $216 million, an increase of 23%.
As we have discussed on previous calls, our financial strength and liquidity allows us to achieve our business objectives, which include executing on our strategic plans from the working capital and capital expenditures, pursuing strategic acquisitions and share repurchases.
Moving on to our guidance. We have adjusted our revenue and earnings per share ranges for the full year. Our new revenue guidance range is $1.3 billion to $1.4 billion with compared to our previous range of $1.4 billion to $1.6 billion.
Our updated guidance earnings per share at fiscal 2016 is now between the $1.30 and $1.50 per fully diluted share, which compared to our previous range of $1.45 to $1.75 per fully diluted share. With these guidance numbers in mind and based on our anticipated backlog roll off for the balance of the fiscal year, we anticipate a light third quarter and a potentially record fourth quarter.
I will now turn the call back to John for closing remarks.
Thanks, Kevin. And before we open call for questions, I wanted to emphasize a few topics that we covered in these opening remarks.
First of all, our strategy for diversification across various markets provide strength and stability to the business and we will continue with that strategy expenses element. Consistent with our last call, the pipeline of near term project opportunities across our four operating segments continues to be in excess of $10 billion. Our balance sheet focused on working capital, CapEx and risk management keeps the business strong during these turbulent times.
There continues to be significant opportunity for long term growth, both organically and inquisitively. While we will continue our bolt-on acquisition strategy as appropriate, we are now actively seeking larger acquisitions to round out the business.
Our guidance change is principally associated with a non-recurring bad debt charge on unexpected client bankruptcy, a full year reduction of revenue caused by the timing of revenue realization, and continued weakness in the ferrous and non-ferrous markets. All other aspects of our business are strong and we continue to operate normally.
With that said, I'll open the call up for questions.
[Operator Instructions] And our first question comes from the line of Matt Duncan with Stephens. Your line is now open.
John, can we start with the Garrison project? I guess I'm a little confused, because I thought we were going to be done with that job effectively with the charges anyway when we got this to substantial completions. So what resulted in the charge this quarter, how many people do you have left there and when will you be totally off that site?
We talk about in various these calls and with you guys and our investors and our quarterly performance that we normally have project close out changes on a lot of our jobs obviously on the bigger ones that can create bigger impacts. And we have positives and minuses on project closeouts on all of our projects, so on Garrison was no different.
Unfortunately Garrison job which has been a loss, it was a loss project for us, these kind of closeouts on a negative fashion probably try to reemphasize the pain we went through last year. So, you know till the course of this year our plant was operating, there were still warranty topics that came up, there were subcontractor closeouts that we had to work on, there was an outage - planned outage that we had to complete some topics on there – again created some warranty issues and all those things combined but it’s in no position for project closeout that was in a negative fashion.
So are we off the site, essentially we are off the site, we’ve been off the site, we have one trailer there. I think we’ve about 15 people doing some miscellaneous touch up on insulation, painting. We’ve got to do some landscaping work and then we have closeouts with subcontractors and some warranty topics that we have to complete.
So as far as our consider projects done and for us this is not, the Garrison thing is not the big news in the quarter or the year.
Okay, I guess I just want to make sure we understand sort of the rust profile of that project going forward, is there a chance that you do get the last 10 or 15 people out of there that we could have more charges, or do you think the risk is sort of in the past now?
Well, certainly we think the risk is in the past, based on what we know today. We’re not completing more work, we’re not finding more scope, these are normal closeout issues on projects of this size and complexity.
Q – Matt Duncan
Okay. On the customer bankruptcy, is that something that you guys are concerned you could see more of given the current oil price environment or is this an isolated incident that you don’t think will continue to be a problem for you?
A – John Hewitt
Well, I would say that this client was sort of on our watch list although we did not think that they were in this kind of a situation, so we review monthly basis all of our outstanding clients, certainly paying special attention to those that are in the midstream space. The predominant amount of our clients in the midstream space are what I'd call blue chip midstream people that we do not have any credit risk that we are concerned about.
And so these guys pretty much caught us by surprise and so you know so frame us little bit approximately a year ago, they had a fire at this facility, they called our company to come in there on the project, reimbursable project that was you know $72 million and through the course of our performance both on quality and safety standpoint that project grew to nearly 30 million.
We had a great performance there, brought the facility back on line for the customer in the fall, issued a press release and all of a sudden we started to get little concerned about them late in the year as we started watching final payments on the job and then the TransCanada Energy guys Tuesday afternoon at 5 o' clock we get a notice from the legal channels that they filed bankruptcy.
And so that’s how late that happened and so but Kevin’s team has gone back, we’ve gone back and looked through all of our, not only our clients but our key vendors and suppliers to make sure there isn’t anybody else out there that we think could be at credit risk and that there isn’t anything out there that’s any kind of substantial performance. We really believe that this is kind of a one off in our portfolio. Kevin any –
Matt if you take a look at our top 30 customers, 24 of those customers are probably companies and so there is readily available information as to what their financial condition is and so none of those customers are a concern for us.
Of the 6 that are private, 4 of those are large well known solid companies that we’re not concerned about. 1 of them was the company that filed the bankruptcy and the other is one that while it’s not as well known we have contracted with that customer, we have security that insulates us from any bankruptcy risks.
So, as John mentioned, we’ve been combing through our receivables, our customer lists and feel good about the makeup of our clients. And if you look at our history, I’ve been with the company for 12 years, I know 3 or 4 customers that have filed bankruptcy and over that 12 year period most of them were very small in nature. This happened to be a big one, we’re disappointed in it, we’re doubling down our review.
This project was complete and we’ve been, we’d already been paid over 85% of the contract price, so at least they didn’t get to us for everything. But you know John mentioned the charges on Tuesday, we had to take the charge and push it back into the second quarter to make sure we’re in compliance with GAAP.
Okay, I appreciate all that you tell, one more and I’ll hot back in queue, just curious on sort of the backlog trend. Obviously I understand that there is a seasonal component to a December backlog number and there is a big contract that you guys are both executing and working off and out there chasing that you don’t control the timing on.
So I’m curious just in terms of the outlook for backlog how confident are you guys that it can grow from this level over the next year and then John as you look at the sort of the bidding environment that you are seeing, do you guys still comfortable that these are real bids that are going to turn into real work or do you feel like maybe some of what you are seeing is customers effectively sort of price checking and taking their time to decide whether or not they want to move forward or something?
I think we have that. We have your latter comment there in normal markets. So I don’t know that there is anything different happening in today's market versus the normal markets. And we’ve talked before about, we’ve got to look our backlog on a year-over-year trend. Our year-over-year trend in backlog overall consolidated as a company is up and my expectation and I think our business leaders expectations is that a year from now our backlog will be up.
So I think the trend line for our business based on what we see in the market the opportunities, how we are handicapping the timing of awards. We continue to believe our long term trend will be up.
Matt if you look at the backlog, it’s up 32% year-over-year and also if you look at the second quarter of last year, our book to bill is 0.58 and we’re a 0.55 this quarter. I think unless there is something a large contracts that comes in - in the second quarter for us that’s a traditionally lower award quarter.
Sure, understood. All right, thanks guys. Appreciate all the color.
And our next question comes from the line of Martin Malloy with Johnson Rice. Your line is now open.
Good morning. Could you remind us just on the LNG projects that you spoke about that the size of the transportation related LNG projects the scope potential for you versus maybe some of the larger export oriented ones.
I can't give you the size, that's not what our client doesn’t want us to talk about. I will just tell you it’s smaller than an export terminal.
Okay. And then you gave out a number for the number of I think turn around projects or smaller capital projects I think it was 23. How does that compare relative to a year ago or can you give us some perspective for that?
Martin we don’t have that number in my hand but our guys felt and we’ve been saying that we felt the second half of this year would be a strong turnaround year. Now probably some of the differences and some of those turnarounds role we’re going to be very active doing turnarounds will be the size of turnarounds. And we are - in previous years, the size will reach into those individual turnaround might have been bigger.
I think the opportunity here is that with a lot of these delays that have happened in the refineries, there is opportunity for growth and the turnarounds we're going to be undertaken here over the six month period if it will create some upside opportunity for us. Certainly we don't' want to count on that, we're going to project that, because you never know when that's going to happen. But I think that opportunity is out there.
The other thing is that turnarounds in general comes in cycles. And we think that over the next 12 to 24 months, the cycle is naturally coming back and that because of some of the delays on things that have been occurring over the previous 12 months that cycle could be one of the biggest ones from not only a number of turnarounds, but the size of the turnarounds that we've seen in the market for a while.
So we're optimistic about the turnaround space where that's going and very pleased with our market position and the things that our teams have accomplished over the past couple of years to really - to met to really call that as sweet spot in that market.
Okay. And if I could just ask one last question. Share repurchase, could you give us your thoughts there? You spoke about acquisition opportunities and pursuing them, but given the multiples where your stock at trading, can you talk about your thoughts there?
We have annual $25million share repurchase program approved by the Board. And we will execute that when we think that that's the best use of our capital. There we stated in the minutes here in the comments that we're going to continue to look at acquisitions that best can grow the business. We have an eye on some potentially larger prospects and we're going to write that against what the value of our spending or excess cash on stock. So I can't -- we are not promising anybody that we're going to buy more stock back, but it certainly is an option.
Yes. And if you looked at our -- we had $82 million of cash at the end of the year. That number had grown in the month of January and we're still above that level even after funding the acquisition. So we're in a position to execute on that if we could decide to do it.
Our next question comes from the line of John Rogers with D.A. Davidson. Your line is now open.
Good morning. First of all, just on the bankruptcy of the gas storage business. I assume you've got claims in there -- I mean is this something that's just going to be hanging out there for the next couple of years or any thoughts there?
It's a little too early for us. Like I said, they just -- this company just filed on Tuesday. We spent basically the last 24 hours to prepare our Q2 results. But we - the amount of money that we took in the quarter was the 100% of the value of the - we spoke and receivable with that client, so there isn't any potential there for more pain.
We have reviewed. And we're looking making sure they were actively involved in any creditor committees and such things that go on with the bankruptcy court. So at the end of the day, the outcome here probably for us was only upside as opposed to any more downside.
Okay. Thank you. And the second thing is, in terms of your guidance -- I mean you talked -- you characterized as potentially record fourth quarter and I know there is a lot of moving parts here, but John or Kevin is that dependent on the turnaround business coming back or is that work that you have in hand and are waiting to get released on?
It is working here. In some cases work that has the ramp up of that work has slid. So it is something that where we think we got to go with the work to drive that high fourth quarter. Its work that we have in hands, so it's dependent more on our ability to spend the money than it is about willing to work.
But we do expect the turnaround business to be stronger in the fourth quarter than third. The storage business should have a significant ramp into the fourth quarter.
Okay. And just to check, your two -- two of your larger projects be energy or code or pipeline project and the power project up in Canada, are they essentially on budget at this point?
Absolutely. The code access was barely 2% complete and the Napanee project is in the teens and is to complete and is on track.
Okay, great. Thank you.
Our next question comes from the line of Tahira Afzal with KeyBanc Capital Market. Your line is now open.
Thanks. Good morning, John and Kevin, how are you doing holding out? So I guess first question is given in this macro environment, we are seeing some project push-out. If I look at the projects that you've highlighted and provided color around, seems that your construction start expectations were pretty tightly sort of bound to what the official schedule has been to date.
So as you look out on how you're sort of forecasting the rest of the year and how you're thinking qualitatively beyond that, how should we think about how you're taking the project push-out you’re seeing into account? Is it a cushion when you talk about that record potential fourth quarter as well?
So there is probably a different story for every one of our segments and projects had a very high level. The code of access project had a permanent delay that obviously would -- we' can't enter in the field until the client has government permit in place. And so that delay prevents us from spending the real money, which is the money we have to get into the field. And so that has an effect of impacting the second quarter in and parts of the third quarter. And it's going to create a bigger ramp up crossing the fourth quarter to get up the speed. That's kind of an example of how things have moved around.
Turnaround, same thing Kevin had mentioned, we've had some turn around move from third to fourth. We have had some move from the fourth to the third, but refinery of that work is going to be in the backend of the third and in the fourth.
So just the way things work, Napanee -- we're working to the winter months up there, actually come out of the winter in March. There will be an expectation, foundations are in place and a lot of the side work is done and that will be a time we'll really be able to start spending money.
So it's just the timing of all these sort of things have come together that's created this movement. And then iron and steel business just continues to be soft. They are softer than what we have expected and so that's creating some revenue movement. And for those guys too, they're not spending the money especially around their capital projects. It's similar to the refinery business that work eventually has to got to get done.
So there is going to be more opportunities in later quarters, not in this fiscal year that's going to create more workforce. So these things are just moving around. As you said, things are gone away, they're just moving around.
Right. And given they're moving around and we're probably going to see more of that to be honest, just from the higher profile permitting oriented nature some of your projects and just a macro. Have you guys taken a different approach to forecasting wherever everything subscribe now is how you're forecasting?
Well, I would say this for the rest of fiscal '16, a large percentage of that work is booked and permits our employees on the bigger projects. So we shouldn't see the delays associated with those projects. So the permitting delays could affect any of the big awards in the future, but when you look at the current backlog, that risk isn't as high now as it was in the past.
Got it. Okay. That's helpful. And second question in a sense for me is really your non-execution you obviously the -- I'm sure it's frustrating that you still bring in the warranty expenses on one of your power plant projects. How should we think about execution what you're doing differently, because you're moving to a more complex mix with that energy potentially coming? Is that going to be more of a fixed price contract, hybrid contract, negotiated, what should given rest this comfort that execution wise, you know there is a different blend going forward?
You know our execution in the first six months overall in our projects, just so you look at the direct rose profits that have been above plan. So we are comfortable with how we're executing our projects. We have a mix of reimbursable and lump sum work. We don't see that mix changing. And we think we continue as we go through time as part of our strategies, they could chain lead to improve our employee skills.
There are bench strengths, the depth of our leadership and all those things I think are very improved at the quality of our execution. So the lump sum work and they have some risk too, but the better job we do at managing that risk and having high-quality people and systems and process is involved with that helps to minimize it.
Got it. So I mean I should think that as your mix goes even towards more complex LNG projects, it's more the skill set that will hopefully influence risk versus anything different in the way you're negotiating contract?
No, I mean we still negotiate our contractual terms with the same rigor that we negotiate all of them. So I don't see anything different there. There were a lot of this storage work and especially on the cryogenic side is right in our will house, our capabilities that we have got a longstanding history with. Just because it's a cryogenic tank doesn't necessarily mean it's more complex or difficult for us to install and so that if anything, that work is probably more baseline.
I mean its the cryogenic work you're doing outside of the bay larger LNG projects, I guess my concern is if I go back historically for Matrix since you guys lost a lot of money on the last LNG project you worked on, so how would these feel a little more standardized, the small LNG projects John? Anything that would help. Thanks.
I'm not -- here what had happened is I'm not wishing responsibility, but what I understand and appreciate about that is that first of all that facility was hit by at least three hurricanes, that contract structure was a teaming arrangement and not one that we performed all in-house.
And so there was a lot of outside forces I think that affected the outcome of that project that today as we have more experienced that, we're larger, we've our own internal practical resources, we have more experienced with cryogenic plant design and construction. So I think the conditions from that project back in 2007 timeframe is different today at Matrix than it was seven, eight years ago.
Yes, I'll add to that since I was here. We had not excused on the PGM Engineering acquisition. At that time they weren't part of the company back then and they've got a long history in LNG. And I think the other thing is LNG was new to the company back then. Since then we've added a lot of talent into the company and we've got a lot of LNG experience with that talent and we didn't have that when we went into that LNG project almost 10 years ago.
Got it, Kevin, actually that's very helpful. Thanks guys.
[Operator Instructions] And our next question comes from the line of Dan Mannes from Avondale Partners. Your line is now open.
Had a couple of quick follow up questions. First as it relates to guidance, I think it's pretty clear $0.20 or $0.19 are right into this quarter. You cut your guidance range roughly $0.15 and $0.25, so we're kind of caught in middle of it. I guess my question is how do we kind of triangulate that with the revenue reduction, because it seems like that should create some incremental downside risk to guidance, but does that implicitly assume you're going to get better margins over the year or am I missing something obvious?
So when we talked about the guidance, we've talked about the two items that caused the guidance to go down. We've talked about revenue shortfall being one of them. One of the things we didn't talk about was the Garrison charge. If we hadn't had that bad debt charge, we would have still been on budget for the first six months, because as John mentioned direct volumes have been higher and we also got the positive benefits of the tax adjustments. So the warranty work while we weren't happy with it, that wasn't going to bring the guidance down.
Got it. So in reality you're only -- it's only $0.12 plus the revenue cut. Okay.
Got it. And then as you look at the guidance, do you have anything explicitly in there related to the transport-oriented LNG projects that you've more recently picked up or are those more likely to ramp next year?
Yes. We will be performing engineering and some light procurement here in back half of this year, but we'll probably have a bigger portion of that are more significant impact on revenue and bottomline performance in fiscal '17.
Got it. And then on the power plant side, you're obviously up beaten and you have continued to reinforce your expecting to pull another big project into backlog, hopefully this calendar year. Can you maybe give us a little bit more color on either geographically where you're looking or alternatively whether you're looking regular utility versus competitive provider? Because one of the things we're looking at a little bit is maybe a more challenging credit environment particularly for those competitive plans and I just wanted to get an idea of what you're kind of chasing down.
So on geographic region we're primarily focused in the federal annexed states in the Midwest, but these are primary region that we're looking for power generation. So we've got -- there is a huge pipeline of projects out there and we narrowed that down to the ones that either fit on geographic -- specific geographic profile or risk profile or client that wanted to do business with.
So I'm not at apparently giving you the names of all the different targets we're looking at, but there is probably somewhere in the neighborhood of five to seven specific targets there. We are in some form of either starting the bidding process or working on receiving an RAP.
Got it. And any --
It takes time for those projects to get from board room, client's board room to our board room. And it can take upwards of 10 months to 12 months to get to a contract. And so those things just take -- it jus take what they're going to take. And we at halt, we're going to be able to get one booked in this fiscal year, but that project didn't work out for us.
Do you see the credit markets as a challenge for these or you may be a little bit more wind on the utility-developed projects versus the competitively developed ones?
We see both. We see projects that are both and thus around utilities as well as developers. So we're looking on both sides. On the developer side, we're trying to stay close to the projects that we think has a better chance of getting finance and that they'll be able to get their purchase priorities in place. And we know those guys pretty well. Our business development executes spend quite a bit of time shifting through those, getting to know their leadership.
So like anything else, it's got to have the right credit quality and the right financial pro forma to get -- if there is any balance sheet financing needed, but we're trying to keep eye on that. Swift through the opportunities down to the ones that we think has the best chance going ahead.
Makes sense. And my final question is the recent acquisition, can you talk a little at all, is this create -- maybe more of an aftermarket opportunity for you, alternatively as you build new tanks for people, is this an opportunity to design in and kind create an aftermarket stream. Can you maybe talk about a little bit how this integrates with the current business you're in?
Our initial focus to this - so this company provides and we spend a lot of time searching the market for the right off its still the right company. This company make some very, very high quality products in a lot of their business lines. And with their own by private individual, we would look at for a transition, he was in a situation but he was kind of happy with the - his side of his business that we would begin to manage and plus you did not have a presence in North America until we thought talking to him.
And so we since helped themselves some of his geodesic domes into this market, the clients that we’ve informally do business with and so our initial focus within is to maintain international presence but really a great way to expand his presence in North America.
And we are going to do that through our own very expensive client contact and client base and then we’re going to be able to somehow only sell those products on the sort of the aftermarket side but also provide growth opportunities for our maintenance and repair guys throughout North America to install these products.
And then on our new tanks in general and their past, we had to install somebody’s else product and so we won’t able to provide an end-to-end solutions to our clients, in some cases we would go by that product from will be now competitor or the owner would provide us that product for us to install.
And so with this acquisition, we’re going to provide a much more complete solution on new tanks, as well as we’re going to able to do expand our maintenance repair operations here by installing new products and aftermarket solutions to our existing clients.
So the opportunity lets us growing this in North America is huge and then it also gives us an opportunity for international footprint on to the future where they’ve already go markets and clients and which they are working - they will be able to help them to expand and grow that. So we’re very excited about what this acquisition can do for our overall storage business.
Q – Das Mannes
Sounds good, thanks for all the color.
We have a follow up question from Matt Duncan from Stephens. Your line is now open.
Hi, guys, so let me piggyback on that question just quickly. First of all what - how would you size the cross sell revenue opportunities you help bringing that business and that product to North America. And then secondly could we see you go the other direction too and may be start building tanks and some international markets now that you are going to find some customers presumably through this business that you bought.
So on the international side I would say, that would be long term vision outside of a clients here taken us into - may be a Latin American destination or in the Caribbean destination. Our immediate focus is on building the North American business and portfolio, the size with the cross sell into our maintenance repair groups I can - in our new tank group, I can’t tell. We have a long term goal of this business being in the $100 million in sales on a global basis.
Any time frame attested to that John or is that really just a sort of why you think you can get and some undermined amount of time.
A – John Hewitt
Well you asked me it would be six months. If you ask the guys who run the business tell you three to four years.
Okay. Well if you get there in three to four years is still big one from a business during $20 million right now - I think we’d all be happy with that, okay. Kevin -
A – John Hewitt
Matt, plus the margins in this business are stronger than our general margins?
Okay. Kevin, I’m hoping maybe we can nail it down a little bit more on the commentary about the ramp and revenue from 3Q to 4Q you know may be put it in perspective of 3Q relative to 2Q, is it going to be fairly similar to the second quarter from a revenue perspective. Hopefully we don’t have the charges or profits or better and then we get a pretty sizable ramp into the4Q is that way to think about it.
When you look at our third quarter, we are not expecting that to be any larger than the revenues we had in the first two quarters and the big increase will be in the fourth.
And it sounds like that is predominately in storage where that is happening as you presumably are ramping the terminal work for the code access.
Yes, I think storage is probably the biggest increase. I think you'll see the oil gas and chemical that will be the best quarter and I think it will also be the best quarter for electrical.
Okay, very helpful. And then last thing John, I want to come back to an earlier question about just the size of transportation related LNG versus terminals. Certainly understand that you can’t name the size of this particular project as the customer does not wants you to do that but generally speaking if you were to look at the average transportation related LNG project versus this would been past project or something like that, it’s an export terminal, what is the presumably export terminal at this point, what was the size differential on average there do you think?
A – John Hewitt
Such a difficult question to answer because there is a lot of - to be a potential a lot of scope differences between - what kind of tank it is, it is an full containment tank, is it single containment, what are the offloading things associated with that. So I’m going to - how much you are fueling, how much storage, what is the storage requirements. So we just go tank -to-tank from an export typical export terminal tank to a one of these probably have.
Okay, that’s helpful, and it just depends on the scope of the job to go from there but that’s definitely helps frame it up quite a bit. Okay, all right that’s all I had. Thanks guys.
[Operator Instructions] And our next question comes from the line of John Rogers with D.A. Davidson. Your line is now open.
Thanks, just a couple of quick follow up. In terms of the storage solutions market, already your backlog is extends now what portion of that is related to gas versus oil?
I don’t know, would I be back that one – be an accurate I would say.
Okay. And then the other question I had was - is there an opportunity related to export storage to associate with oil exports and I mean is that 2017, 2018 opportunity or how do you think about that?
So our expectations that’s going to create – may not create a massive amount of export opportunities for us but it is creating. Yes, it is already creating opportunities for storage business we’ve already have received some RFPs or some clients there looking to expand their term link capability in the Gulf Coast to deal with the export demand and potential export demand.
And so when that brand divested which we think was right thing to do it was that immediate rush to market by our client I think there has to be thoughtful that they need to appreciate what overall global, their overall global supply demand in balance comes in position and so the long term I think it's going to open up the opportunities for us so, I think it’s a good thing.
Okay, great. Thank you.
I'm showing no further questions at this time. I would now like to turn the call back over to Mr. John Hewitt, Chief Executive Officer.
John before you give your closing comments, one thing I wanted to revisit, is I want to make sure we were clear on our changing guidance. So really if you look at that guidance, half of the change in our guidance is a result of the bad debt charge that we took in the second quarter.
The other half of the change is related to the revenue forecast change that's caused by two factors, timing of projects and just the challenges in the industrial segment. So those are the two things that are impacting the guidance change for the year.
Thank you, Kevin. So I'd just add to tail on to that, before we sign off so and to reiterate that we are very happy with the performance of the business overall. We’re very happy with our position in our – in all of our markets and the opportunities for us to continue to strengthen and develop our business.
So, thanks everybody for your attention on the call today and for the great questions and look forward to seeing you next quarter.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.
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