Exterran Corporation
Q4 2020 Earnings Call Transcript

Published: 2 Mar 2021

[Operator:]

Greetings, and welcome to the Exterran Fourth Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. . As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Blake Hancock, Vice President, Investor Relations for Exterran. Thank you. You may begin.

[Blake Hancock:]

Good morning, and welcome to Exterran Corporation's fourth quarter 2020 conference call. With me today are Exterran's President and Chief Executive Officer, Andrew Way; and David Barta, Exterran's Chief Financial Officer.

[Andrew Way:]

Thanks, Blake, and good morning, everyone. I hope you and your families are keeping well during these difficult times. I'm sure you will all agree that the fourth quarter and 2020 as a whole has been challenging for many reasons, primarily related to the COVID pandemic, which has greatly affected the global economy and changed our lives in many ways. At Exterran, our primary focus throughout 2020 is employee safety, particular attention to cost actions and executing on our strong backlog, all while navigating the challenging oil and gas macro environment. During the fourth quarter, Exterran executed well against its performance metrics with our expectations and guidance in the high $30 million EBITDA range, as adjusted EBITDA came in at $39 million. This was driven by a modest improvement in contract operations revenue, along with improved margins in our product sales business, underscored by strong cost management both at the operating expense and SG&A levels. As we look forward, the rollout of the COVID vaccination brings hope that life will one day return to a semblance of normalcy, which is becoming evident with travel and indicators like the rebound in commodity prices over the past couple of months. However, I believe the dynamic pandemic is far from over as we continue to see some logistical challenge emerge with hotspots appearing in some regions across our operations. We remain optimistic about all the events that have unfolded during the past couple of months and the proactive steps we have taken to achieve positive results despite these challenges. Commercially, we had some very significant wins beginning with a large Middle East product sales award we secured in the first quarter of 2020, followed by over $200 million of contract operations renewals in Latin America. We continue to manage what was in our control as our SG&A came down by another 13% year-over-year as we focused on margin improvements and returns.

[David Barta:]

All right. Thanks, Andrew. All results presented have been restated to exclude the U.S. compression fabrication business from our reoccurring numbers as it was reclassified to discontinued operations. For the quarter, we delivered EBITDA as adjusted of $39 million, which was in line with our guidance on revenue of $152 million. This represents an EBITDA margin rate of 26% compared to 21% in Q3 and 24% in Q4 2019. From a segment perspective, revenue for contract operations was $84 million, while adjusted gross margin was $58 million, resulting in an adjusted segment gross margin rate of 69%. ECO backlog at the end of the quarter stood at $1.1 billion. For AMS, revenue was $30 million, and adjusted gross margin was $6 million, which resulted in adjusted segment gross margin rate of 18%. The margin rate was impacted due to the service parts mix and some contract revenue delays. Revenue in the product sales segment was $38 million and adjusted gross margin was $5 million, resulting in an adjusted gross margin rate of 14%. Revenue decreased sequentially as we completed a number of international compression projects in Q3, along with some COVID-19-related project delays. Margins increased for the quarter due to better mix.

[Andrew Way:]

Thanks, Dave. So looking forward, Exterran is well on its way in its transformational journey and the water wind during the first quarter sets a strong foundation for the years to come. Our sustainable product offerings and global footprint provides us the opportunity to continue to participate in the energy transition as many in this space will struggle to find their way in the evolution. Our core competencies revolve around processing, treating and moving molecules, regardless of the type, and will give us the ability to look at ways to participate across the water consumption and reuse advancement along with the hydrogen, renewable natural gas and carbon capture value chains. Our extensive service footprint and installed base affords us the ability to help our customers focus on their emission reduction targets, while allowing us to build additional recurring revenues. We will maintain a strong focus on protecting the core of the organization and improving our long-term cash flow and returns of the organization. We have a solid backlog to start the year that will require a strong focus on execution and delivery. I'm very excited about the opportunities I see ahead. And with that, I'll now turn the call back to the operator.

[Operator:]

. Our first question comes from the line of Kyle May with Capital One Securities.

[Kyle May:]

Andrew, you mentioned the 12-month outlook has improved over the last couple of months. Can you talk more about where you're seeing the improvement? And also give us a regional update of the business?

[Andrew Way:]

Yes, sure. So first, over the past 12 months, I'd say that our regional teams, in particular, have continued to do a really great job of building, first of all, the foundation for strong customer relationships, which in turn, has led to a fair amount of bid activity. That bid activity is obviously what feeds our pipeline. And as we sit today, we've seen over the past 6 to 9 months a fairly large pipeline but a lack of awards, which I think gave us a pause at the end of 2020 as we were considering will these projects go ahead. What I'd say this year as demonstrated by the water project, is that a lot of this pipeline has really started to get to a place where we feel customers will be making awards. So not only is the pipeline being continuing to grow, but I think there's a confidence that we're seeing certainly internationally -- I'll talk about the U.S. in a second, but certainly, internationally, there's a lot more dialogue, a lot more late nights on calls with the Middle East, a lot more weekend calls and just a lot more activity with regards to the commercial pipeline. Whereas I'd say, 6 months ago, internally, we were very busy, and it just felt as though it was going into a pipeline. So something is different. We were talking about this recently as a leadership team, something is different in the last 2 to 3 months, and it feels as though it's prime in order for a lot of these projects that we've been bidding on to come through, which is just great news for us.

[Kyle May:]

Yes. That's very helpful. Thank you, Andrew. And for my next question, maybe this is better for Dave. I appreciate the guidance that you provided for the year. But can you talk a little bit more about maybe the cash flow expectations and the impact on the leverage ratio in 2021?

[David Barta:]

Yes. We provided model assumptions for you during the prepared comments. So maybe just a little more qualitative commentary. First of all, obviously, those tied together with our assumptions of the market. And we -- obviously, we're -- as Andrew just said, there are definitely some, I call them green shoots, but some bright signs. Some of those are in kind of prebid budgetary position, but we certainly have some bright spots. But what we provided was based on the muted market assumptions going forward. And I think the first question is, why does that matter? More product sales and many of the opportunities we see are more along the lines of product sales, so more gas plant opportunities. Historically, those have a good cash flow associated with them. So they're not things that have deferred cash, is generally paid as you're building and providing those products. So hopefully, we could see improvements in the product sales that would certainly help bias that in a positive way. And then the big project we booked in the Middle East. This is also, again, factoring into the working capital. So our guidance today is based on our current schedule and the assumptions, which, as we have said, been certainly impacted by COVID to a large degree. And so we're still working through with the customer the final schedules for that project. And along with the actual schedule of completing that project is how they are paying and reimbursing us. And so again, it's based on our current view of that and we're certainly always working to improve that, but it does require -- that project does require working capital early in the project. And then as we get later into the project, then it's actually a positive cash curve at that point. And I think beyond working capital, which certainly is certainly a factor in that guidance, we're making decisions to invest in the business. And as shown by this award of this water contract operations project and those are conscious decisions we're making that we think are the best use of capital for this business, where, certainly, in the short run, it impacts cash flow than the capital investment. In the long-term, these are good projects. They are generally high-return projects, high-margin projects that certainly at least meet, if not exceed our threshold for returns. So again, we think that that's a good use of capital, while, again, in the short run, impacts free cash flow. In the long run, the right decision for the business, particularly given the opportunities we're seeing in water and how that can continue to transform this company, given the technology and so forth we bring. Certainly, in the short run, this all impacts leverage, and we're above kind of our historic leverage rates and where we prefer to be. We prefer leverage to be lower. But again, we're making these decisions, looking forward, really feel comfortable with the cash flow assumptions from these projects that eventually then start bringing leverage down as the cash starts showing up and the investments are complete.

[Operator:]

Our next question comes from the line of Doug Becker with Northland Capital Markets.

[Douglas Becker:]

Andrew, you mentioned at a high level some of the opportunities you see to help customers achieve energy transition, sustainability targets. But I was hoping you could go into more detail about where you see the best near-term opportunities? And just how would you try and quantify the opportunity for Exterran?

[Andrew Way:]

Yes. So it's a big topic. And I don't think today as it sits with Exterran, we have a full transition theme. I think for us, it's more of an energy collaboration, and ultimately, transition. But I don't think we see a market where there will be no demand for the products and services that we offer today. I think gas is an important component. And I think the narrative around gas continues. And we certainly believe from the pipeline that we see today that there is an opportunity to continue to grow in that space. And as it relates to gas specifically, there are a lot of areas that we play today. And for many years, we've been helping customers in certain regions produce it more efficient, more clean, taking out some of the nasties further upstream. And whether it's our process in treating or our amine plant designs, they're all areas and spaces that we're able to help our customers integrate better solutions today. As we think locally in the short term, from a U.S. market perspective, we've seen a lot of interest in conversion to electric drive from traditional gas. We're certainly seeing an opportunity for us in the short-term to put more low emission valve solutions and sort of emission control products and technologies around our offerings. And then certainly, our water business, I think that has the biggest breakthrough in terms of our ability to provide reusable water, whether it's at the well site or whether it's during a process further downstream. Not having to potentially ship water in and then ultimately not ship water out and being able to clean it to the standards that we just described in my prepared remarks and what we've talked about previously is a real breakthrough for us. And so I think in the short-term, we certainly see more opportunities to do more of what we're doing. And then in the longer term, we're currently working through and searching for other potential solutions for some of the adjacent ideas that we have of how we can bring our solutions to bear. So this is a work in progress for Exterran. And it isn't a headline discussion as we speak, but we're working through, I'd say, collaboration towards more of an energy transition story.

[Douglas Becker:]

So that's definitely encouraging. You've mentioned the pipeline around water a couple of times. How big do you think EWS could be in a year or 2? I guess it's about 15% of ECO backlog right now. Where do you see the opportunity there? Is it 20%, 25%? And then how do you balance that with just the CapEx associated with growing those businesses in the leverage ratio, just

[Andrew Way:]

Great question. Yes, great question and one that we speak quite frequently, not just ourselves, but through the industry and the Board and kind of having a discussion around the size and scale and scope. And I think what we're seeing as various countries around the world, think about legislative and regulatory challenges in a different way, and I'd say in some countries, we are further advanced on legislation in terms of reuse than we are here in the U.S. I'd say that there's also differences by state that we're seeing unfold here in relation to the overall topic of water and reuse and how big and how important can that be. Everything that we're investing in, every patent that we have filed, and we continued to work that path also in 2020, is only going to aid the narrative around regulatory, sustainability and the importance of water. Today, I think this is the first time we've seen our water pipeline larger than the rest of the products combined in Exterran. And we're very excited about the opportunity set that we see, as I said, particularly in the Middle East. Not all those projects are ECO. There are some of those projects that are traditional product sales, where we would sell the product with a solution and probably an AMS solution on the back end of it. But in terms of how big it can be, I think part of that is going to be how we as a company allow the water business to be bigger as a percentage of the total Exterran portfolio than our traditional quo. I think it's too early to declare what that looks like, but our intentions over time is for the water business to be the largest segment that we have in the company. And that's the goal that we have. And that's backed with the resources and the support and the team that we've built out in the past 12 months. As I said, we haven't stood still. Dave, maybe you have a few thoughts?

[David Barta:]

Yes, Doug, and this is kind of follow-up to Kyle's question as well. We see, as Andrew just said, tremendous opportunities for the technology that we have to be applied. And certainly, today, the focus is in energy. But frankly, there are opportunities outside of energy. When you think about, what do we do? We clean water. That's not just an energy problem. So there's certainly other opportunities. Yes, many of these customers are looking -- and in fact, I think probably universally, customers are looking to put more investment on their partners' balance sheets, so whether that's capital or working capital, we're seeing that. And one of the things we're doing is also looking for other ways to finance those. So other type of, I'll call it, partnerships that might exist where someone else carries that equipment investment and maybe someone that's more appropriate. I mean, we're not a bank. We're not an investment shop that looks to make returns just on the equipment or the interest, but there are people that, that is what they look for. They look for those infrastructure-type investments where they can get a decent return. And those are avenues we're exploring. Difficult with all the accounting rules to perfect that in a way that keeps that debt, that investment off our books. But it's something we're spending quite a bit of time on now and, frankly, hope that we come up with some solutions there. So we can keep bringing our technology to customers, keep adding to the pursuit of more sustainable environmental solutions, but put that investment on someone's balance sheet that that's what they do for a living.

[Douglas Becker:]

That makes sense. And just one more. If you could address the margin outlook in the first quarter, particularly as it relates to aftermarket and product sales where aftermarket, we saw the dip in margins and then pretty strong margins in product sales. But just outlook for the first quarter given some of those variances.

[David Barta:]

Yes, I don't have the specific numbers here. Obviously, we're going to pull them up. But I think our aftermarket business, there isn't -- we mentioned it. There's a bit of seasonality with that business, frankly, in the southern region, Latin America -- or South America, it's actually their holiday periods, so we generally have a little less activity in Latin America during the first quarter. So generally see that in terms of revenue and a bit in margins. And then it comes down to a couple of other factors. One would be a mix of parts versus services, so more parts, generally lower margin. And then as we mentioned too, there's a couple of AMS deals where we've got some costs right now, but not the full revenue and we expect that to improve as we move into the second quarter. So kind of a continuation, I guess, of the margins we saw in AMS in the fourth quarter into the first quarter and then should improve going forward. Same story a bit with products. As we mentioned, we completed some of the international compression projects during the third quarter, so still had a pretty good margin in products in the first quarter. As we come into the first quarter, though, frankly, the big project we're working on is that project in the Middle East. So we've got a P&T facility here in the U.S. that right now doesn't have volume. And so we're being -- certainly, we can have some pressures due to fixed cost absorption, both in terms of plant and then some of the overhead. We've made significant adjustments into our cost structure, but we've also made a conscious decision, one of those other decisions we've made, to keep certain technical skills around engineering and project management, given this backlog we're seeing and the quote activity. So we'll -- that will weigh on us a bit with some of the costs without the revenue in the first quarter on the product side.

[Operator:]

Our next question comes from the line of Samantha Hoh with Evercore ISI.

[Samantha Hoh:]

I recall that there was 2 large water projects that you thought could have been awarded in the back half of last year. It looks like you guys have 1 on the books now. Curious if this other project is out there? And if other projects that you guys are bidding on have similar sort of long bill cycle times and similar sort of terms as the one that you just announced today?

[Andrew Way:]

Yes. Great question, Samantha. And I think what you're referring to is some remarks we made in the middle part of last year where the second half of the year, we're expecting to see some water contracts come through. And you're right. The first 1 happened at the early part of in Q1. So it slipped. And as I said in my prepared remarks, and I just commented to Kyle, that was really the trend of 2020. It's very difficult to project some of the projects that were coming through in terms of award activity. That’s second large water contract we're currently working through as we speak. And we have a number of other projects that are both product sales and other methodologies in how we could generate revenue in the pipeline as well. So not all the projects that we have would take that 12, 18, 24 months to build and realize the revenue. We have some other projects and opportunities that we're working on, too. But I think the timing of what you described, certainly, we saw it push on the fourth quarter. We booked the first one in the fourth first quarter here, and we're working on other projects as we speak and hope to announce some additional wins in the near term.

[Samantha Hoh:]

Great. And then maybe just keeping on the Middle East topic. I noticed that on your sustainability award, you guys kind of highlighted -- or your sustainability report that you guys highlighted some work that you had done in terms of helping customers their reduce flaring. And that just seems to be a topic that's just really going to start going up in the U.S. soon. I was wondering if you could maybe explain to us how you go about doing that. And then where we would say that, is it -- if you could just sort of explain that process, how it benefits or different segments. What it really means for Exterran as we potentially get some new regulations here in the U.S., that would be really great?

[David Barta:]

Yes. I think -- this is Dave. Maybe I'll start and let Andrew jump in. When you're flaring, you obviously have gas that you don't have another use for. And so I think the primary way we weigh into that is bringing our process and treating technology to capture that gas and do something sustainable and productive with it. So whether that's generating electricity at the site, for the site. As Andrew mentioned, there is a move towards more electric drive equipment. Well, you've got to come up with that power somewhere. If you've got gas you're flaring that potentially you turn to power, there's your source for electricity. And so that's certainly front and center for us in our process of treating business is to bring our gas plant technology, whether on a very large scale or smaller scale, to bear to do something with that gas that otherwise would have been just burned off.

[Operator:]

Our next question comes from the line of Tim Monachello with ATB Capital Markets.

[Tim Monachello:]

First question was just on the water contract that you announced. I'm wondering if you could give a little bit more details in terms of how long the term on the contract is and what you expect for CapEx requirements for that 1 project?

[Andrew Way:]

Yes. So Tim, at this point, I think it's too early in the process to kind of get into that specific detail on, Tim. This is a competitive bid, and a lot of the information is clearly competitive. So I think at this stage, we prefer not to share that. What I will say is that this is a typical project that we see in some of the Middle East countries where we're helping our customers with some existing fields. This particular field is a development field. There are small water operations aside from the facility that we just won. This is up to 350,000 barrels of liquids a day. It's a good size quantity to apply the technology with some early oil conditioning that will help our customers on that side of thing to very high water content. And so we see this particular opportunity to be pretty standard in terms of some of the fields in this particular country. And we will continue to build out more and more solutions to support that customer as we go forward. But as it relates to day, I think the contract award size we're comfortable with over $200 million. 18 to 24 months before we'll start seeing that flow through and then as this becomes more public and if the information is more relevant, we'll update you as we go forward on this project.

[Tim Monachello:]

Okay. I guess in terms of the CapEx guidance, $75 million to $85 million. I assume that would only probably include about half of the project. Is that the right way to think about it, given the 18 to 24 month build time?

[David Barta:]

Yes, it's -- again, it's tied to the customer schedule. And like all of our projects early on, you tend to have more engineering and then to get into CapEx. And it tends to be more back-end loaded, frankly, was if you looked at the curve of how we spend capital because it's been engineering upfront and then procurement and build and so forth. So without giving any more specifics, they're definitely in our guidance. But obviously, that the CapEx impact for this year is included.

[Tim Monachello:]

Okay. Does that range contemplate the award of that second Water Solutions contract that you guys are working on?

[David Barta:]

No, the CapEx -- the growth CapEx guidance we gave is for what we call committed projects. That includes this one as it is a committed project that's been signed, but does not include any other projects that haven't been signed. And frankly, with most ECO projects, we're now in March so even an award in the near future, probably some with minimal CapEx just given the normal process.

[Tim Monachello:]

How much of that CapEx guidance would be for maintenance, sustaining capital, including renewals of contracts…?

[David Barta:]

Around $20 million for what we'd call non-growth and just general corporate-type CapEx, so maintenance CapEx and other.

[Tim Monachello:]

I guess just the last one on CapEx then. Is there an upper end, I guess, spending that you guys would be comfortable with in 2021, given the size of the project outlook that you're looking at today?

[David Barta:]

I'm not sure I fully -- are you talking in total or specific projects?

[Tim Monachello:]

Yes. I'm just saying like if you were to win some big projects, how high could -- would you be comfortable with CapEx going in 2021?

[David Barta:]

I think the governor on that, obviously, is leveraging our outlook. We don't want to be in a position where we're making decisions for the company based on short-term leverage concerns. So we're going to want to make sure we keep a reasonable leverage position. And so it depends on the specifics, too. The reimbursable component is always another variable. We're working hard on DPO and getting our suppliers to join in some investment in these projects as well. So certainly, there are opportunities to get into projects where we can construct the cash flow in a way that allows us to maintain reasonable leverage, but still fulfill what a customer would like us to do with them. So we'll continue to work all those levers, and we don't want to be in a position to tell customers we can't. And as I said earlier, we're also looking for ways to kind of offload that capital with financial type investors that are comfortable with that as their business versus us in what we do.

[Tim Monachello:]

Okay. I appreciate that. And then second line of questions I have is just around the energy transition. I'm curious if you could speak specifically on a couple items, including your exposure to CCUS potential for hydrogen and also RNG. One of your competitors has spoken sort of in detail on the, I guess, internal expertise, and potential leverage and growth within those segments as well. So I'm just curious where you see your exposure?

[David Barta:]

Yes. I think there's -- again, I'll give a few thoughts on that. We've been spending quite a bit of time and Blake in his other job has business development and on where we could play in some of these. And I think there's really 2 initial ways. One is there -- if you're talking about RNG, for example, there is processing, albeit different scale than what we do today with a large natural gas processing facility, but you've got a processing facility, you've got transportation, you've got compression, same is true with hydrogen. So there's certainly some core competencies we have around what we do today and how those could apply in some of the more renewable energy transition space. I think the other area is what do we do on our ECO side, we design things well, we build them well and then we run them extremely well. And I think you have that opportunity to every single one of these energy transition-type applications has a services element to it. And I think we're looking at where does it make sense for us to play. We're not going to get into areas where it doesn't make sense from us from a return standpoint or a margin standpoint. But we're spending a lot of time looking at where we could take what we do really well as a company and apply it in the energy transition space.

[Operator:]

. Our next question comes from the line of Brian DiRubbio with Baird.

[Brian DiRubbio:]

Dave, maybe starting to you. Can you help us understand sort of what are the drivers that get you to the low end of the guidance versus the high end of the guidance?

[David Barta:]

Yes. I think the one of the variables, and I kind of alluded to it a bit and some of the -- answer some of the questions. This project in the Middle East is one variable. And as we've said, that project has been slowed by COVID. Certainly, that specific region has had their challenges. Thought they were getting through them and kind of got into their second wave. That project being as big a project as it is, that schedule, and we're very close to having that nailed down and back on track. But we've kind of put some allowances in there if things when that project run a little faster or slower based on what happens with COVID, which is unfortunately, anybody's guess. So that's probably the biggest variable we have in there. We don't have an assumption in our base plan for a bunch of product orders, gas plant orders that aren't on the radar. And I think that can certainly be something that could move us certainly higher in the range, if we can -- and we're starting to see those, as we've mentioned, many of them in kind of budgetary prebid-type stages. There are some projects that have been sidelined. We're probably most hopeful on those because those have been sidelined. And some of those are -- the discussions are coming back well on those, we've been well in the engineering phase on some of those projects. And in fact, some cases have inventory sitting that could be applied to those. So some of those could happen and could happen faster, and that would certainly bias us towards the upper end of that range. And we'll just have to frankly see -- we provided a range that's fairly broad. But we wanted to certainly provide a range where we're very comfortable with the low end and have a path to get to that high end should things open up a bit for us.

[Brian DiRubbio:]

Yes, that's fair. And as we think about -- look at your backlog in on ECO, can you help us understand what the weighted average life of that backlog is?

[David Barta:]

Yes. We generally haven't provided that. I think historically, we've talked about the average length of initial contracts being 7 to 8 years. And the contracts we've been signed in the last few years tend to be longer than that. And I think in the 10-K, you'll see a rollout of that backlog. So I'd probably refer you to that as we'll file that K later today.

[Brian DiRubbio:]

Okay, great. Then just looking at the balance sheet, one thing that's stuck out to me, your accounts receivable balance seems a bit elevated. Can you provide any thoughts on what's going on over there?

[David Barta:]

Yes. I think there's a couple of things. One, with the North American business, tended to have DSOs that -- I mean, most of our customer terms in North America are 30 days, and internationally they tend to be longer than that. So you're seeing a little bit of a mix in the business is that the U.S. business has really dropped to a little to nothing. So you're getting a little bit of the weighting of the international terms. And there are some receivable challenges we have. We have one and there's a note in the K, so you'll see it there. We've got an ongoing challenge is going to arbitration with the customer in Latin America. And that's a fairly significant receivable balance, over $30 million. So there's that one specific challenge there. But beyond that, frankly, we've been pleasantly surprised. Many of our key customers have continued to pay very good and -- but we do have that one issue that, again, is noted in the K.

[Brian DiRubbio:]

Got it. And how should we think about what you view as adequate liquidity levels?

[David Barta:]

We tend to run the business on a kind of a multiyear rolling forecast. So always trying to make sure we're as best we can looking forward, which is difficult in these environments. And I think we certainly feel like just the normal operations of the business, the normal cash needs, kind of operating cash basis. We're in good shape. This is not a business that has wild fluctuations in inventory and so forth that require you to think about maintaining kind of liquidity in your pocket. For us, really, the question around liquidity often comes down to how comfortable we are on bidding on an ECO project where there's CapEx required. And that's where we're, I would say, being very, very selective now in terms of making sure these projects hit our criteria. The good news is they're a lot more predictable. You know what you're signing up to, if you sign up to one of these projects. So we don't need to as many companies that have shorter cycles maybe and have more inventory needs, need to keep a bunch of liquidity in our pocket. Operating cash is very predictable, and CapEx is a conscious decision we make.

[Brian DiRubbio:]

Got it. And then just finally, raw material inflation, specifically I'm thinking about steel costs, how are you guys addressing that with your products? And obviously, your ECO contracts that are being built?

[David Barta:]

Yes. I think on the -- certainly, existing ECO contracts, certainly things like steel and copper and other things don't really impact us. We're not generally putting those kind of inputs into an existing operation once it's up and running. And many of those contracts, just on kind of non-material inflation. We have inflation factors built into the contracts. So if we see labor rates, which is a bigger variable when you're running O&M side of the contract, we've got offsets in pricing for labor increases. So we will see more of an inflation impact would be on an existing project that we're currently constructing, given the length of time. And with those, we try to anticipate upfront. We try to really push hard on productivity to offset anything. And you certainly have the opportunity to go back to customers in certain circumstances with engineering changes. And again, we try to be as upfront, accounts for everything as we can and make sure we've got the right contingencies and so forth in place to guarantee that we're going to deliver a project as promised in terms of returns and margins.

[Operator:]

Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Way for any final comments.

[Andrew Way:]

Thank you, all. Appreciate everyone dialing in today. We look forward to updating you all at the end of the first quarter. Thanks a lot.

[Operator:]

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.