Matrix Service Company (MTRX) Q3 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Matrix Service Company Fiscal 2018 call to discuss quarterly earnings. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. I'd now like to turn the call over to Mr. Kevin Cavanah, Chief Financial Officer. Sir, you may begin.

Thank you. Before I get started, I want to remind everybody that we have slides with today's call, which you can see by dialing into the webcast. So I will now start with the Safe Harbor statements. So please let me remind you that on today's call, the company may make various remarks about future expectations, plans and prospects for Matrix Service Company that constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various factors, including those discussed in our Annual Report on Form 10-K for our fiscal year ended June 30, 2017, 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, and thank you very much for joining us. I've been reflecting on the business challenges our customers and Matrix have experienced over the last couple of years and how in times like these, it's easy to lose sight of safety. But the same thing is true as we see the end markets improve and workloads increase. In either case, at the end of the day, nothing in business is more important than the safety and health of our employees and those around us. It is also important to remember that safety extends far beyond just occupational safety. It also means making sure that people around us are safe from discrimination and harassment of any form and feel safe sharing ideas or speaking up about issues or concerns without fear of retribution. In every instance, our focus on safety has been unwavering regardless of the business background noise this world surrounds us. It is a social imperative that puts the safety and well-being of all people first. So as we enter into the last quarter this fiscal year and as we look forward to a much stronger fiscal 2019, I've asked our employees to further strengthen their resolve in taking personal responsibility for making sure they and everyone around them are safe. The individual choices we each make can and do make a difference please on safety for yourself, your loved ones, your coworkers, and the community. You can make an impact. As noted in our earnings release and as we discussed during our last earnings call, we expected our third quarter results to be the lowest of the year. Actual results proved even more disappointing relative to our earlier forecast and are primarily the result of low-revenue volume due to delays in new project awards and starts on previously awarded work. It is normal, strategic, and expected for our business to have a blend of low-margin reimbursable maintenance work and higher-margin lump-sum capital projects of all sizes. Unfortunately, this blend was more skewed toward maintenance work this quarter. The project work we did have in the quarter did not lend itself to achieving our normal margins. While earlier in the year, we had some excellent project completions from over awards that did provide strong margin upside. This quarter, in particular, you're seeing the opposite impact of capital work tightly bid with lower margins and less robust contingency allowances. As these projects flush through our system in the third and fourth quarter, we expect to see our operating results return to normal levels as fiscal 2019 progresses, given the higher-quality backlog we had been adding. With backlog levels rebounding and the return of large capital projects in key segments, combined with the continued strong bidding environment, we believe that our historical margin expectations are achievable in the coming fiscal year. As you know, our business cycle traditionally lags behind changes in commodity pricing, macroeconomic developments, and client sentiment. In this most recent cycle, the markets and our customers have been impacted by volatility in commodity prices, slow GDP growth, regulatory uncertainty, and a Presidential election cycle that are promoting contrasting approaches to these and other important issues. Since the election, a number of positive legislative and regulatory steps have been taken, leading to tariffs, tax reform, and a generally more business-friendly atmosphere at many of the energy regulatory agencies. This combined with a growing global energy demand and recovering commodity pricing, has created a more encouraging environment for major investment decisions. However, there has been a fundamental shift by a majority of our customers and their boards in the amount of time spent solidifying their strategic direction, investment decisions, and spending levels across both maintenance and capital projects. Let me share a real-world example. Here, the original expected award date for this project was December of 2017, which then shifted to January 2018, either of which would have provided for revenue recognition beginning in the last half of our fiscal 2018. However, with an actual award date of April 2018, our opportunity for revenue recognition has, for the most part, shifted into fiscal 2019, delaying our ability to recognize direct margins and recover construction overheads. Even after an award is made, there are delays that may occur from events outside of our control. For example, a major capital construction project in our Industrial segment that was awarded in the first quarter of this fiscal year was expected to begin construction in December of 2017, but is only now beginning to ramp up. This represents a five-month delay in the revenue recognition for the company. The changing environment has contributed to time spent on permitting, off-take agreements, client financing, and contract negotiations. These conditions, combined with third-party engineering and material delivery delays, can impact our projects award and subsequent start dates. While we are pleased with these projects are now moving forward, the uncertainty around the timing of revenue associated with project awards and starts has impacted our forecast and financial performance in this fiscal year. During this period, we have streamlined operations and reduced overhead costs more sensible without sacrificing our ability to retain good people and ensure we had the capacity needed to meet commitments made on pending project awards as well as those already in backlog. Our business is now starting to develop momentum, as evidenced by the high book-to-bill we have achieved and in the continued strength in our opportunity pipeline. As you can see, our consolidated book-to-bill was 1.8 on awards of $435 million in the quarter and sits at 1.3 year-to-date on awards of $1.03 billion. Backlog is up 34% in just the last nine months, and we expect this trend to continue. Overall, we are confident in our ability to achieve and exceed the performance levels we enjoyed before this down cycle and to accomplish our strategic objectives. This confidence is affirmed by the upward trend in significant project awards that began earlier this fiscal year. Among the projects shown here and awarded in the third quarter is the full EPC for expansion of crude oil storage and marine loading capabilities for a large independent oil company on the Texas Gulf Coast, which was announced by a press release earlier this morning. This project, which began as FEED work performed by Matrix PDM Engineering, clearly demonstrates the strength of our tank and terminal capabilities, the value of our strategic focus on concept-to-completion projects and the use of our enterprise-wide expertise. Also included is an award by GDI for the engineering, procurement, fabrication and general tank construction oversight for 12 tanks that will be part of a new marine liquids fuel terminal located at the Port of Veracruz, Mexico for IEnova. The terminal, when finished will be the largest private refined products marine terminal built in Mexico after the country's recent energy reform and is also among the first of three IEnova expects to construct in Central Mexico as part of the country's emerging $10 billion liquids market. This project represents Matrix's strategic expansion into international markets with our premier storage solutions business. We expect the strong book-to-bill trend to continue in the fourth quarter on additional awards. One such example received after the close of the third quarter is the award of an NGL storage tank along the Gulf Coast, which is expected to be announced soon. Our teams are also currently engaged in strong proposal activity and in some cases, final contract negotiations for several crude oil and liquid terminals; small-to-mid-scale LNG export facilities and peak shaving plants; natural gas processing facilities; expanded scope refinery maintenance, heavy turnaround and small capital project activity; sulfur recovery, processing and handling facilities; iron and steel capital projects; mining and mineral projects; and in markets where Matrix PDM Engineering acquired expertise such as cement and other material handling applications. A large number of these projects are related to the transition of North America from an energy importer to an energy exporter and the related off-shoring of energy, crude, LNG, and NGLs, as well as other solids, including cement and sulfur to global markets. Based on this activity, the overall opportunity pipeline and our expanded expertise, you can expect a continued long-term upward trend in capital projects and maintenance volumes across our Storage Solutions, Oil Gas & Chemical, and Industrial segments. We will enter fiscal 2019 with a stronger and higher quality backlog position than we had going into fiscal 2018. In our Electrical Infrastructure segment, improvement will be at a slower pace compared to our other segments in the short-term due to reduced client spending and increasing competition in our concentrated Northeastern geographic service territory. The infrastructure needs that exist across North America for substation, transmission, and distribution create significant geographic growth opportunities, both organically and through acquisitions. To drive this growth, we have been executing master service agreements with public utilities in areas outside of our traditional service territory in the Northeast, including the Southwest, and Midwestern United States. Further improvement in this segment's volumes will come as we make targeted strategic acquisitions. In Power Generation, following our strategic shift away from large EPC projects over a year ago; our teams continue to see opportunities for smaller work packages, which will be complementary to the segment but not a long-term growth driver. While the last 12 to 18 months have been challenging, we have turned the corner and are confident about the outlook for the coming year and a strong future. I'll now turn the call over to Kevin to discuss third quarter results.

Thank you, John. This quarter was disappointing from an operating results perspective, but also provided significant positive indicators for the future in the form of project awards and backlog growth. There are a few primary drivers to the third quarter operating results I'd like to discuss. The most significant issue in the quarter was low revenue volume that resulted in lost opportunity for direct profit as well as less recovery of construction overhead costs. The challenge has been to balance the negative impact of lower revenue volume on our construction overhead cost, while also ensuring we have the resources needed to fulfill our commitments as the markets improve and our revenue volumes return. In the quarter, we experienced a $30 million revenue shortfall as compared to our expectations. John has discussed the reasons for the shortfall. But the good news is that we are winning many of the key projects we are pursuing. In other words, the revenue is not lost, but it is simply been moved into future periods. In addition to lower revenue volumes, gross margins were also impacted by factors that limited our ability to earn new margins we traditionally expect. This was especially true for the Electrical Infrastructure and Storage Solutions segments. These factors include low-margin work bid in a highly competitive market with minimal project closeouts combined with lower project execution performance. Finally, our effective tax rate was only 14.2% as compared to our expected tax rate of 32%. Our effective tax rate was significantly impacted by a valuation allowance on a deferred tax asset during the quarter, which offset the tax benefit of the pre-tax loss recognized during the period. Now I will discuss specific results. Consolidated revenue for the quarter was $246 million, which compares to $251 million in the prior year. The decrease was driven primarily by a year-over-year decline in the Electrical segment which was partially offset by a strong rebound in the Industrial segment. Our revenue of $246 million in the quarter is the lowest of any quarter over the last three years and we believe represents the bottom of the revenue decline we have experienced over the past year. We expect revenue growth in the fourth quarter, but do not expect to see the full benefit of our backlog growth until fiscal 2019. Based on the improved quality of our increasing backlog, the strong bid funnel, and the improvements we've seen in our end markets, we expect revenue volumes to be supportive of the historical targeted margins we seek across most of our business segments in fiscal 2019. As a reminder, those targets are 10% to 12% for both the Electrical and Oil Gas & Chemical segments, 11% to 13% for the Storage Solutions segment and 7% to 10% for Industrial. The company recorded consolidated gross profit of $14.9 million in the quarter compared to a loss of $2.6 million in the same period last year. The gross profit earned in both periods was impacted by low revenue volumes. In addition, the prior year period was also impacted by a charge of $18.9 million in the Electrical Infrastructure segment. Our overall gross margin in the period was 6.1% as a result of the factors previously discussed. In the prior year, we produced a gross margin of negative 1% due to a charge in that period. Consolidated SG&A expense was $20.8 million in the quarter compared to $18.6 million a year ago. The increase in fiscal 2018 is primarily attributable to higher project pursuit cost. Net interest expense was $0.5 million and $0.8 million in the current and prior year quarters respectively. The decrease in interest expense over the prior year was due to repayments on the senior secured revolving credit facility during the quarter. The company made net repayments on the credit facility of $41.6 million, and as a result, our net borrowings were only $9.3 million at March 31, 2018. As I previously discussed, our income tax provision was impacted by a valuation allowance on a deferred tax asset, which decreased our income tax benefit by $1.1 million or $0.04 per fully diluted share. For the company's upcoming fiscal fourth quarter, we still expect our effective tax rate to be around 32%. As a reminder, we expect our effective tax rate beginning in fiscal 2019 to be around 27%, excluding the effect of non-routine items that may arise from time-to-time. For the three-month period ended March 31, 2018, Matrix reported a net loss of $5.2 million, resulting in a loss per share on a fully diluted basis of $0.19. For the same quarter a year ago, Matrix reported a net loss of $13.8 million, and a fully diluted per share loss of $0.52. Now let me talk briefly about third quarter segment performance. Storage Solutions produced revenue of $77 million as compared to revenue of $74 million in the prior year quarter. Revenue volumes in both periods were impacted by delays in project awards and starts, and as a result, gross margins were negatively impacted by under-recovery of construction overhead cost. Gross margins in the quarter were 5.4% compared to 7.4% in the prior year. Cost reduction and efficiency initiatives have reduced our overhead cost and led to improved recovery of overheads. However, although improved, lower volumes continue to cause under-recovery. Current quarter margins were also impacted by the strategic capture of lower margin projects to be completed until the larger storage awards occur. As these projects are completed in the near future and the work on the recent larger awards commence, we expect margin performance and improved recovery of overheads, which should result in a return to our traditional segment margins. Moving on to our Electrical Infrastructure segment. Revenue on a year-over-year basis was lower due to the wind-down work on a large power-generating facility project and reduction in high-voltage revenue. Gross margins in the quarter were 3% compared to a negative 16.3% in the same period last year. Margins in the current quarter were negatively impacted by lower than expected direct margins and under-recovery of construction overhead cost. Gross margins in the prior year period were negatively impacted by a charge on the project discussed earlier. In Oil Gas & Chemical, revenues were unchanged at $69 million as lower volumes of capital work were offset by higher volumes of maintenance and turnaround work. Gross margins were 6.9% in the current period versus 6.3% in the same period last year as lower direct margins were more than offset by improved under-recovery of construction overhead cost, which decreased due to cost reductions and efficiency initiatives. The Industrial segment turned in very solid performance, substantially increasing operating profits year-over-year as work levels have rebounded. Revenue in our Industrial segment increased significantly to $42 million in the quarter as compared to the prior year due to increased maintenance and capital construction work in the iron and steel industry. Revenue in the prior year quarter was $26 million. Gross margins increased to 10.1% in the quarter compared to 3.7% in the prior year period. Strong project execution was aided in the quarter by a positive contract closeout. Now I will discuss nine-month results. On a consolidated basis, revenue for fiscal 2017 was $798 million as compared to $906 million in the prior fiscal year as prior year volumes benefited from the completion of a significant crude gathering terminals project. Gross profit for the nine-month period totaled $70.5 million, which compared to $57.9 million in the prior year period. Gross margins for the nine-month periods were 8.8% and 6.4% respectively. Fiscal 2017 gross margins were impacted by under-recovery of overheads as a result of low revenue volume and the financial impact of an Electrical Infrastructure project that was partially offset by positive performance on a large terminal project. Fiscal 2018 gross margins benefited from improved operating performance in the Oil, Gas & Chemical and Industrial segments. In addition, cost reductions and efficiency initiatives have decreased under-recovery of construction overhead cost, but low revenue volumes have now allowed for full recovery. Consolidated SG&A expense was $63.9 million in the nine-months ended March 31, 2018, compared to $56.5 million in the same period a year earlier. The increase in fiscal 2018 is primarily attributable to a full-year of acquired overhead and amortization of intangible assets associated with a December 2016 acquisition that expanded the company's engineering business as well as higher project pursuit costs across the entire business. Net income for the first nine-months of fiscal 2018 was $3.2 million as compared to prior year net income of $0.8 million or fully diluted EPS of $0.12 and $0.03 in the same periods, respectively. As shown at March 31, 2018, our cash balance stood at $47 million as compared to $74 million at December 31, 2017, as the company paid down $42 million of debt in the quarter. The cash balance, along with availability under our senior credit facility, provided liquidity of $134 million at March 31, 2018, an increase of $34 million in the quarter. The increase resulted from a reduction in a capacity constraint on the credit facility as well as $16 million of cash generated from operating activities in the quarter. Our debt balance of $9.3 million at quarter-end has been subsequently paid down to $3.9 million and our cash balance is now over $60 million. Finally, I'd like to discuss guidance. At the start of the year, we issued a revenue guidance range of $1.225 billion to $1.325 billion, which had an implied mid-point of $1.275 billion. The EPS guidance issued was $0.55 to $0.75, which has an implied mid-point of $0.65. After experiencing continued project award delays in the first half of the year, we lowered our revenue guidance range to $1.15 billion to $1.225 billion. While we acknowledge a significant revenue shortfall of about $100 million for the year, we maintained our full-year earnings guidance of $0.55 to $0.75. We were able to maintain this earnings guidance as a result of significant positive project closeouts in the first two quarters of the year and the positive impact of new tax laws. At that point, we expected to achieve this full-year updated guidance. While we have obviously made significant traction addressing the revenue volumes with a third quarter book-to-bill of 1.8, the timing of the awards and project start dates have impacted the third quarter revenue, which was about $30 million below our expectations. This timing will also impact the fourth quarter as revenue volume will improve, but it will not reach our previous expectations. We expect the fourth quarter to return to profitability and are providing full-year earnings to be in the range of $0.15 to $0.20 per fully diluted share on full-year revenue of $1.075 billion to $1.1 billion. To sum it up, this demonstrates a nearly $190 million revenue shortfall, which is the primary reason we have adjusted our original earnings guidance. The majority of the revenue shortfall that resulted in these revisions underpin what we believe to be a strong backlog position entering fiscal 2019. I'll now turn the call back to John.

Thank you, Kevin. Before we open to questions, I want to thank our coverage analysts, our investors, our employees, and all those listening to this and other calls. As the trough created by the various market conditions we've discussed extended, we stayed true to our values, stayed focused on safety, put people first, took a long-term view, and looked for opportunities to improve our business operations. Our objective over these challenging times has been to conservatively manage the business to ensure that we'd be well-positioned when the time came to execute in what we knew to be a wave of significant projects and a return to higher levels of spending. That time is now. Customer confidence is returning. The long-awaited release of project awards has begun. The opportunities in the end markets we serve are significant and will support additional backlog improvement. Over the course of the next few quarters, we expect to see margins return to our historical targeted levels. We have maintained our infrastructure, including our employees, who are the best in the business, to ensure we can successfully execute on our expanding backlog and we are confident in a much improved fiscal 2019. I'll now open the call for questions.

[Operator Instructions]. And our first question comes from the line of John Franzreb from Sidoti & Company. You may begin.

I guess I have to start with the third quarter and the $30 million revenue shortfall. I think you isolated the Storage and the Electrical Infrastructure business as the businesses that get the awards you're expecting. Firstly, was it heavily weighted on one segment versus the other? And what's the time and have you captured those awards? And what's the timing of you realized on those awards?

Yes. So the revenue shortfall of $30 million was, we saw that probably most significantly, first, in the storage section because of delayed project awards. We also saw it in the Industrial segment because of not a delayed award but a delayed start from what we expected. And I think that piece was really we had little bit lower volume in the high-voltage business of electrical. With the significant backlog awards in Storage and Industrial, we see volumes improving in Industrial starting in the fourth, but continue to accelerate into fiscal 2019. Storage will also improve, but just neither segment will probably be to the point we previously expected it to be. So, and then we've also adjusted the other segment revenue expectation based upon what we've seen as far as this last quarter.

Okay. And then on the storage side, as you were taking lower-margin business, how long does it take for that to wind through the P&L? And are you finished taking that low-margin business? You kind of implied you're going to be closer to historical margins next year. So can you just kind of walk us through what you're doing there?

So this is John. So, some of the competitive work that we have been addressing in the market is starting to wane. That work is unwinding as we move through the next couple of quarters. The one thing that really helps our margins is the complexity of the projects that we undertake and put in the backlog. We're in a tank sort of tank business, where we're getting maybe one or two tanks into an expansion of a terminal. And that opens the door for a lot of smaller contractors to be able to chase that same work. And they've got probably a lot less lower overhead we do. They provide a lower quality of service. Their safety is not as strong. But in a lot of cases, too, their pricing is lower, plus they're willing to take work for a breakeven basis just to keep food on the table as it were. But as we start looking at some of these larger tank packages and we get into tank only situation where you have five, six, seven, tanks that are being added into a facility when you have a full balance of plant EPC construction that really limits the amount of competition for us and puts us into a place where the value of our services can command a higher margin.

I think the other thing to think about on that is we did have more of that lower-margin opportunity work in the third quarter, but it definitely didn't give us the revenue volumes overall we expect. So there's still an impact of under-recovery impacting it’s the compounds of the issue. So I think that's something that, as we're thinking about the performance in Storage Solutions, we need to think about. So we get that volume back over $100 million, you're going to get to in a quarter, you're going to get to where you're --

[Indiscernible]

Yes, you're getting full recovery in storage.

The other thing to think about, too, in these large awards is that the first piece of these awards is engineering. And so that's a lower-volume piece of the entirety of the project. And so we can't -- it's obvious, I guess, but we can't put a shovel in the ground to hit far enough along with the engineering. The actual construction and the material procurement is dependent on that engineering. So the volumes start to get larger as we commence -- as we finish a percentage of the engineering. So that's usually which is always in these awards and for the first piece of those projects, it's going to be engineering work. That's why the impact of the third and into the fourth quarter is not as big as you would think relative to the backlog build.

Okay. And you kind of implied that the fourth quarter, that the order book is similarly strong. Is it also in the Storage and Industrial sides of the business? So is there a change in the balance of the incoming book?

I think it's probably more heavily weighted into the storage side of our business. What we're -- what's in the immediate near-term for the next three to four months, I mean, we're looking at some good awards, really, across a lot of our segments. But the big chunks of backlog, in our expectations, will come through storage.

And our next question comes from the line of Tahira Afzal from KeyBanc Capital. You may begin.

Hi good morning. This is [indiscernible] on for Tahira today.

Good morning.

Good morning.

So my first question, I guess, is regarding the bookings in the backlog. So I'm just wondering if, at least, the major ones there are fully permitted projects just basically wanted to get a sense of the expected ramp in the coming quarters.

Yes. The awards that we have in this -- the book-to-bill that we've announced, for the most part, I think they are all fully permitted, fully financed projects. Sometimes, what delays the starts of those projects after the awards may be final scoping decisions, finalization of contract terms and conditions? But then generally, the by the time it gets to an award to us, the permitting piece and the financial piece is completed and out of the way.

All right. Okay. That's helpful. And any color on the margin profile in the backlog? That would be helpful.

Yes. So I think the margin profile in the backlog is that the new awards definitely support the types of margins we've talked about from the historical margin range I gave in the script. There is some lower-margin work we continue to work on over the next couple of quarters, as John mentioned. But overall, the quality of the backlog is improving as we're going through the year.

All right. That's helpful. And I'm just wondering whether there was any weather impact for you guys this quarter on the margin. So it was just underutilization that makes -- particularly Storage Solutions, yes?

Yes.

It's fundamentally mixed. We got a higher which is a good thing. We got a high volume of maintenance work, which is generally lower margin, although it does have the opportunity to move overheads, and just a low volume of capital work, the timing of when those things got into the business to blend in and help support the maintenance activities just wasn't there, and the capital projects that we did have of multiple sizes weren't necessarily at the margins that we would like and, in some cases, at contingency levels that we would like that would create opportunities for great performance by our operating teams to drive margins up.

Yes. There may have been some weather impact in the job here and there, but I don't believe it was a significant driver to the overall results.

[Operator Instructions]. Our next question comes from the line of John Franzreb from Sidoti. You may begin.

All right. I guess a couple of quick follow-ups. Can you talk about the timing of revenue recognition on some of these projects, whether it falls proportionally into any quarter coming up? That will be helpful.

So I think on the, if you think about these projects, oftentimes, the first thing is, especially if we're doing the Engineering, is that Engineering worth? And that might be 5%, 10% of the contract. So usually, the first quarter or so after the award is a lower-revenue volume. And then you'll start hitting the field, and you'll slowly build up your team. So you may not hit full scale until the two or three quarters after a project award.

Okay. And can you talk a little bit about labor costs in some of your regions? Have you had difficulty bringing people onboard? Have you retained enough that it's not an issue for you?

I think it's continuing to be a competitive labor environment in specific spots around North America, but we have not had, we have not been challenged to-date to staff our projects with competent labor. I think that is certainly something that we and our peer group will wrestle with. As the market continues to improve here over the next 18 months to two years, that is something we have to be cognizant of when we consider the risks of the projects that we undertake. But to today, I would say that the labor any kind of labor restrictions we've had have been on us kind of a spot basis.

Okay. And [indiscernible] and maybe a longer-term picture here because I was wondering what you're thinking about the sustainability of some of the order book and what your overall overhead profile looks like in the different segments. Do you think that you're satisfied or that there might be a need to further rationalize some of the businesses based on some of the longer-term picture in some of the segments?

We've talked about in opening remarks. We've done some things over the last 12 months to try and streamline and provide some more efficiencies in the business. We have a few more of those, call them, internal projects that we're working on. I wouldn't say they're big, wholesale changes, but they're more kind of tinkering with the inner work into the organization, and those are things we're continuing to work on in spite of the increase in the backlog. Certainly, as the backlog builds, and we expect it to continue to build over the next and into the next fiscal year, there's going to be additional resources that, as an organization, that we'll have to look to bring in. We don't expect big changes in our sort of SG&A level costs. But certainly, in our construction overhead area, where the rubber meets the road with our employees that are executing the projects, there's going to be some additional costs there. But they're going to be into the projects and won't exasperate any kind of construction overhead recovery issues.

Yes. So while we may have some incremental cost addition to the overhead, I think it's you can feel pretty positive that it will be at a much slower rate than the revenue ramp rate.

Okay. Fair enough. And I think you mentioned earlier about an award in Mexico. Can you talk a little bit more about some of the international opportunity that you're seeing out there?

We're -- we had press released the Mexico award a month or two ago. So there's a tremendous build-out in the country in Mexico for liquid storage. They have about one to two days of storage capacity for the entire country as opposed to the United States, where it's more like 30 to 45 days. As they have privatized their energy industry, has created a lot of opportunity for not only companies that have energy assets in Mexico, but also other North American contract -- other North American energy companies that are wanting to build those assets. And so we see that as a significant growth area for us to take our premier tank brand into Mexico in the right projects with the right risk profile. In addition, there is opportunities for us in the Caribbean. We feel switching from coal and fuel oil into -- where power generating will be used with LNG and other natural gas liquids. So overall, our initial foray into international markets is going to be around our tank and storage and terminal brand, and it's going to be in some of that geographic region in south of Mexico and the Caribbean. But we are also looking for opportunities into South America as well, where we think there's opportunities for infrastructure expansion.

Would that necessitate some M&A or no?

Initially, no. Right now, we've got what we feel to be a very strong partner that we're working our first project with. I think we're going to kind of get delayed in the land down there. We don't have immediate intention to hire local labor. We're going to work with our partners on some of the labor piece and provide our expertise, engineering capability, in some cases, fabrication. And we'll take a look at that down the road as that market expands, whether we're going to continue to work in a partnership as a partnership or look for an acquisition opportunity.

And our follow-up question comes from the line of Tahira Afzal from KeyBanc Capital. You may begin.

Hi. I have couple of quick follow-ups. First one is regarding turnaround activity. Just going by the results of some of your peers, I have noticed that the traditional turnaround players, they have seen an uptick in the business, while for other players; it's been a bit mixed. So just wanted to know your thoughts based on your experience. Any thoughts as to why this discrepancy? And can you put things into perspective here?

So our turnaround activity has been on an upward trend over the last few quarters, and we expect that to continue into the fall turnaround season of our fiscal 2019. The number of turnarounds and the size of the turnarounds have gotten bigger. And we're very active right now and are pretty well engaged for turnarounds into next fall and, frankly, next spring. So there is strength returning there. I think there's some lot of wear and tear on our clients' systems that they have been minimizing those repairs over time. And so that is probably one of the factors, I think, that's leading to higher turnaround demand, plus the growth of off-shoring refined products from many of the key Gulf Coast refiners. Again, I think it's driving their demand to maintain their facilities and keep running.

All right. That's helpful. And last one on the LNG market, off late; we have seen a pickup -- a bit of a pickup in the activity levels there. I just wanted your thoughts on how Matrix is positioned to play in the next up cycle here, like the next wave of projects.

Right. So we're -- we've got sort of a two-pronged approach there. So on a large scale, LNG export terminals, we see our role there as a storage tank EPC storage tank provider into either direct to a client or to EPC -- large EPC contractors that don't have a tank storage solution. On a small to mid-scale facilities, they could be peak shaving. They could be small export facilities. We have the capability and capacity to provide that project on a full EPC basis. And so that's kind of our -- that's our two-pronged approach. I think our view is that the larger-scale export facilities' starts are probably still a year to two years away. That market that global market that global demand market is struggling between long-term supply agreements and spot market agreements. And with the spot market agreement -- spot market process, they -- it kind of shuts out the developers who require a large amount of third-party financing to get those projects put in place. And I think it opens up the door for more of the blue-chip energy companies that want to expand their LNG presence globally. But I think we'll have to wait and see how the supply agreements how that market kind of settles out here over the next 18 to 24 months. But we see a lot of activity in the small-scale, mid-scale and in peak-shaving opportunities.

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back to Mr. John Hewitt, President and CEO, for closing remarks.

Once again, thank you, everybody, for being on the call today and for being shareholders and certainly, to our employees, who are doing a great job out there to help build that backlog that we're enjoying today. So thanks, everybody. I look forward to talking to you in the 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.