AEGION CORPORATION |
(Exact name of registrant as specified in its charter) |
Delaware | 001-35328 | 45-3117900 | ||
(State or other jurisdiction of incorporation) | (Commission File Number) | (IRS Employer Identification No.) |
17988 Edison Avenue, Chesterfield, Missouri | 63005 | ||
(Address of principal executive offices) | (Zip Code) |
[ ] | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
[ ] | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
[ ] | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
[ ] | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Class A Common Shares, $0.01 par value | AEGN | The Nasdaq Global Select Market |
Item 2.02. | Results of Operations and Financial Condition. |
Item 9.01. | Financial Statements and Exhibits. | |
(d) | The following exhibits are filed as part of this report: |
Operator: | Good morning and welcome to Aegion Corporation’s first quarter 2019 earnings call. (Operator Instructions) As a reminder, this event is being recorded. |
Katie Cason: | Good morning and thank you for joining us today. On the line with me are Chuck Gordon, Aegion’s President and Chief Executive Officer, and David Morris, Aegion’s Executive Vice President and Chief Financial Officer. |
Chuck Gordon: | Thank you, Katie, and good morning to everyone joining us on the call today. I’m pleased to spend a few minutes talking about the quarter and our outlook for both Aegion and the markets we serve for the remainder of 2019. |
• | It fits our core mission of protecting, rehabilitating and maintaining pipelines; |
• | The majority of our work is based on engineering, monitoring, and rehabilitating cathodic protection systems on existing regulated midstream oil and gas pipelines, which is less susceptible to the uncertainty of project approvals and funding in the Capital spending cycle; and |
• | We see strong market demand for more accurate and timely data analytics to support pipeline rehabilitation and maintenance decisions. Large midstream oil and gas pipeline companies are facing the potential of additional regulations later this year, which may include expansion of corrosion monitoring requirements to gathering pipelines and other previously non-regulated lines as well as more onerous reporting requirements for data collection and traceability. We are well positioned to benefit from this growth through our continued investment in data management and data assessment offerings. |
• | First - Returning the North America CIPP business to 2016 productivity levels. We came out of the gate strong on this effort and segment results reflected these improvements. |
• | Second - Driving further improvement in the execution of the Cathodic Protection Services business. As I mentioned earlier, project execution has made a lot of strides over the last twelve months and our current focus is on optimizing the overhead structure to support and grow the business profitability. |
• | Third - A renewed focus on delivering more value to stakeholders through technological differentiation of expanded offerings, which we continue to advance, particularly in our core CIPP operations. |
• | Fourth - Maintaining Energy Services’ share in the west coast refinery market. We continue to expand our core maintenance activities, which drive the lion’s share of results for the segment and we view the dip in turnaround activities as temporary this year. |
• | Fifth and finally, we are on target to substantially complete restructuring activities by the end of the second quarter. We may see the sale of our announced international divestitures in the Middle East and South Africa slip into the second half of the year, but the substantial portion of restructuring activities, closures and organizational changes are nearing wrap up in the next couple of months. |
David Morris: | Thank you Chuck, and good morning to everyone on the call. As Chuck previously mentioned, we were generally pleased with our results in the quarter, particularly the much improved performance from our Infrastructure Solutions segment and good progress on cost savings across the business. Construction activity is always slower starting out the year due to seasonal weakness and we were up against favorable comparisons in Q1’18 that we new wouldn’t repeat. However, our crews executed well, and we are in a good position across our three platforms to significantly improve performance over the next several months. |
• | Invested $8 million in maintenance and growth capital for our core businesses, with increases over the prior year partly due to recent investments in the North America CIPP business; we also |
• | Repurchased 622,000 shares of our common stock for $11 million through our open market share repurchase programs. In addition, we repurchased an additional 153,000 shares of our common stock for $3 million to satisfy tax obligations related to employee equity awards. |
Operator: | (Operator Instructions) Our first question comes from Eric Stine with Craig-Hallum. |
Eric Stine: | Obviously you have had, well, for quite some time, it’s been about restructuring and exiting some of these businesses. But just curious, when you look at your platform areas where you feel like potentially you can add to it, whether it’s adding more technology, some geographies in some of your businesses where maybe you’re underserving the market? Just any thoughts along those lines would be great because, as you said, I mean I think you’re expecting to be done with what you’re doing right now hopefully second quarter or third quarter this year. |
Chuck Gordon: | Thanks for the question, Eric. We’re actively looking for additional technologies for both the Cathodic Protection services business and for the Insituform business. I think that we probably won’t look at geographic expansion in either one of those businesses. We will continue to have a lot of international business as we sell tubes out of Insituform, but both those businesses could potentially benefit from more technology that we would tuck into the existing businesses. |
Eric Stine: | Got it. And maybe just sticking with the restructuring and some of the exited markets. How, you don’t need to break it down by specific markets, but how has the process gone when you get out of these markets, getting set up with third party tube sale arrangement, maybe just talk about that from a high level? |
Chuck Gordon: | Sure. I’m going to give you a really good example. As you know, we exited France in late 2014 or early 2015. That market had been unprofitable for us for a long time. We are now selling tube into that market. The run rate for the tube sales is between $1.5 million and $2 million at margins that are around mid 30s. Far more profitable than anything we ever had when we were doing construction business there, and that’s an example. I think we have an opportunity to provide more tube in the UK and Wales. That’s another market that we exited just recently, actually just exited this quarter. We were unable to do a lot of third-party tube sales because we were a competitor in that market. As we’ve exited, I think that opens up a nice market opportunity there. And that’s what we’re seeing, is that as we exit these markets, we’re able to come in with tube supply and actually make more money by providing tube with significantly less risk than we have when we try to do construction in small markets. So we continue to be pleased with how that transition is going. Certainly, a lot of work to do and as we exit the construction side, we’re trying to build up our network and our distribution internationally for CIPP tubes. |
Eric Stine: | Got it. Thanks. Maybe just, last one, just jumping over to Corrosion Protection, you talked about the funnel and I know that you finished the two big Middle East projects and you’ve got some small or medium-sized projects in there right now. As you look longer term, whether it’s those $5 million to $10 million projects or even larger projects, maybe just thoughts on how you see the mix between onshore and offshore. Correct me if I’m wrong, but I do think there’s a margin difference between the two. |
Chuck Gordon: | There is. We certainly have higher margins offshore. The projects that we see in the Middle East are mostly offshore, although we do do some onshore work there. The South America project is onshore and what we’re seeing as we look out for the sales funnel is that this year the Coating Services business is going to have a solid year. It’s certainly down compared to last year because of the lack of a big project, but they are going are going to have a solid year. As we go into 2020, we’re pretty excited about what we see in the sales funnel, in particular in the Middle East. So it is a mix of onshore and offshore there, but the majority of the projects are offshore. |
Operator: | Thank you. Our next question comes from Noelle Diltz with Stifel. Your line is now open. |
Noelle Diltz: | I’m sorry, I was a little late jumping on, so apologies if you already addressed some of this. But my first question was just in U.S. CIPP, you talked about, and even last quarter, bidding coming in a little bit slow early in the quarter and then it looked like it picked up. As you looked into that more, was there really any trend that you would call out in the market or was that just normal fluctuations? And it’s been encouraging to see you guys pick up some of these larger projects here recently. How would you describe the mix of larger work and small diameter work in the market? |
Chuck Gordon: | The market was down for the quarter. What we saw was the market was really slow, particularly in January and February. It started picking up in March. As we look out, we see a strong market for the rest of the year, Noelle. I don’t think there’s anything to it other than normal variability. We can’t see anything that we would see as a trend. The amount of large diameter work was down a little bit in the first quarter although our win rate was up. As we look out, I think it is pretty standard type of work. Most of these bids that we win include a mix of small, medium and large diameter, so typically these projects are a mix of all three. But I don’t think we see, as we look out over the rest of the year, a significant change in the overall mix of what we see coming onto the market. The first couple months of the quarter the bid table was slow though and it picked up nicely and as we look out now, looks strong to us for the rest of the year. |
Noelle Diltz: | Okay, thanks. And then shifting over to the Corrosion, actually the cathodic protection business within Corrosion Protection. I know there you’ve been working on kind of improving profitability. Can you just give us a sense of where you think you are in the process and how much more opportunity you see for improvement? |
Chuck Gordon: | I want to make a couple of statements about that before we get into where we think we’re going. In the first quarter, that business missed revenue by about 10 percent, like I mentioned. Unfortunately, because of the high fixed cost nature of the business, it’s a lot of people costs. And it’s the kind of people costs, these are engineers and technicians, it’s not construction labor, these are technicians and engineers that we need to have for the rest of the year. Unfortunately, with those kind of revenue misses, a significant portion drops to the bottom line, and that’s really what happened. As we look at it, we know we’re going to have bad weather in Q1, and in fact that certainly happened. I think there were two things that we didn’t plan on. We knew we had good backlog going into the year. The customer releases were much slower than we expected, although the business was in backlog and the releases have certainly come in March and April now. The second thing that happened was that while we expect a lot of snow in Canada and Midwest and Northeast, we did get a lot of rain in the South and that hurt the business. It was an unusually wet year down there for us, which impacts our ability to do some of the construction work. So we were, we did miss our revenue expectation, which unfortunately really drops to the bottom line in that business very significantly. As we go forward, we’re in the process of reviewing the business and the cost structure and implementing actions so that we reduce the overall breakeven point. If you think about that business, it’s always going to have a slow Q1. The revenue and the work releases and weather are always going to be an impact in Q1. So what we’re driving towards is being able to reach sort of a breakeven point for that business in Q1 and then the rest of the year we’ll be very strong. |
Operator: | Thank you. Our next question comes from the line of Tate Sullivan with Maxim Group. Your line is now open. |
Tate Sullivan: | Good morning. Thank you for all the detail, and particularly on the technology developments. First, when you’re, what caused the field testing, or did I miss that, |
Chuck Gordon: | It’s slightly off schedule. We had originally anticipated that we would be doing field testing with the 8 and 10-inch robots in June. That looks like it’s going to move into the third quarter. And then as you can imagine, these robots, there’s a lot going on with these robots and to downsize them so they fit and work effectively in a 6-inch pipe is challenging and we would expect that field testing to occur probably going into the fourth quarter. But I would say we’re probably off by a couple of months with the 8 to 10-inch field tests. |
Tate Sullivan: | That brings up my other question, too. Do you, based on the robot technology you already have, I think you have it in the Middle East inspecting welds inside of pipelines, can you leverage that experience in terms of what you’re trying to do in the U.S. in smaller diameter? |
Chuck Gordon: | It’s pretty fundamentally different robots. I think we’re comfortable with robotic technology. The Middle East robots, what we do is we go in and we take a picture of the weld so we can show our customers the quality of the weld that they have. Then we clean it, then we coat it, then we take another picture of it. And a lot of that technology is based on our ability to spray the coating on evenly and really go a long ways into the pipe. Sometimes we’re in the pipe a kilometer, and be able to keep up with a welding unit on a pipeline construction project. What we’re doing with the lateral reinstatement is a bit different. We go in and we cut out the laterals. We put a plug in that has a magnet in it and then the robot goes in with seals and we pop a seal in place. So what the robots are going mechanically is very different. We are certainly comfortable with robots and we have used the robotic team that does the internal weld, we have used them to help develop the robots that we use on the municipal side of the business, but the robots themselves are functionally very different. |
Tate Sullivan: | Thank you. Then the UV cure field testing and the $100 million market value, I was confused on if you’re replacing, you can use UV to replace or redo work that was done with glass liners? Is that a fair summary? |
Chuck Gordon: | Yeah, what I want to be clear on, so we think that the overall markets, I think we’ve talked to a lot of people about this, is probably in the $1.1. billion, $1.2 billion area for wastewater CIPP in North America. Glass has about a 10% share of that. So what they’re doing is, what’s used is a glass liner and it’s saturated with resin, and the resin catalyst is kicked off with UV light rather than steam. Our traditional method is to use steam. It uses UV light. So it’s about $100 million worth of business there on an installed basis that’s done with glass. We see the initial opportunity for the product to replace that space in the business because the felt has a better cost point than glass. The cure process is the same, the resin that we’ll be using is the same, but the tube itself, which is beta felt provides all the structural strength you need in a sewer, but you’re using a felt liner instead of a glass liner so it’s significantly cheaper. And that’s going to, we believe, that provides a nice value for our customers in the marketplace and we anticipate that we have an opportunity to win a lot of that $100 million business over time. |
Tate Sullivan: | That you for that detail. And the last one for me, David, on the warranty related work that you announced, is that excluded from the operating profit of Infrastructure or how is that accounted for? |
David Morris: | Yes, for adjusted results we have excluded that warranty reserve that we took during the quarter. So the GAAP results do include it, but the adjusted results exclude it. |
Tate Sullivan: | So is that, most of that, what you exclude from operating income for Infrastructure? I think it’s $6.6 million? |
David Morris: | There was about $2 million related to restructuring that was associated with Infrastructure Solutions that was also excluded from the adjusted results. |
Operator: | (Operator Instructions) Our next questions comes from the line of Zane Karimi with D.A. Davidson. Your line is now open. |
Zane Karimi: | This is Zane on for Brent. So first off, we have kind of talked previously about, and I was hoping for a refreshed view on the buildout of North America pipeline infrastructure and how it’s continuing at a feverish pace. You said you would like lag in terms of demand for your services, and do you have a better view today when you think of demand for your services in this market and could this accelerate down the road? |
Chuck Gordon: | Most of our business is on existing pipelines. We do do some new pipelines. What I think we’ve talked about is that we believe our cathodic protection services business in North America can grow in sort of that mid-single digit range over time. That’s the growth that we expect from that business. Probably 75 percent to 80 percent of that business is actually conducted on existing pipelines. There is a lot of new pipeline growth, but when you look at the percentage of the miles of new pipeline put in versus the existing infrastructure, the percentage growth of the overall infrastructure is still rather low, it’s probably in the 3 percent or 4 percent a year annual growth rate. We think we can grow faster than that pipeline infrastructure is growing, but we believe we can maintain sort of a 5 percent top line growth rate in the business over time. |
Zane Karimi: | Great. And then following that up a little bit, can you quantify, or how much did weather really impact CIPP in the quarter? |
Chuck Gordon: | The CIPP business year-over-year, the weather impact was about the same as we looked at it. We take a look at crew days lost to weather. It was about the same year-over-year. The biggest issue for us though was that our Canadian operation, which is a very profitable part of the business, was down for much of the first quarter, particularly in western Canada. The western Canadian business almost did no work during the first two months of the year, which is unusual for them. So as we looked around the country, the mix of where the weather impacted was a little bit different. Now the weather impact for 2018 and 2019 was up significantly over what we have seen in previous years. But this year, from a CIPP standpoint, was about the same as last year. |
Zane Karimi: | Thank you for that. One final, as you guys finalize these restructuring efforts this year, how are you looking at capital allocation? Where are your priorities falling? |
David Morris: | Actually, they’ll be the same as they have been. First priority is debt repayments followed by capital investments. Third would be share repurchases. We believe continuing to repurchase shares is a good use of cash. And then finally, acquisitions. Not at this point looking to do any sort of large acquisition, but as Chuck said, if we see opportunities for a technology acquisition, that would be something we would be interested in. |
Operator: | (Operator Instructions) All right, and I’m showing no further questions at this time. So with that I’ll turn the call back over to CEO, Chuck Gordon for closing comments. |
Chuck Gordon: | Thank you, operator. Aegion is now entering its seasonally stronger construction cycle and we have the backlog and crews in place to deliver significant results over the next several months. I look forward to updating you on our performance and progress on key initiatives as we progress throughout the year. Thanks for joining the call today. |
Operator: | Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day. |
D!
M\@'Z @,"# (4 AT")@(O C@"00)+ E0"70)G G$">@*$ HX"F *B JP"M@+!
M LL"U0+@ NL"]0, PL#%@,A RT#. -# T\#6@-F W(#?@.* Y8#H@.N [H#
MQP/3 ^ #[ /Y! 8$$P0@!"T$.P1(!%4$8P1Q!'X$C 2:!*@$M@3$!-,$X03P
M!/X%#044%]@8&!A8&)P8W!D@&
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M',P<]1T>'4<=:AZ4'KX>Z1\3'SX?:1^4'[\?ZB 5($$@
M;""8(,0@\"$<(4@A=2&A( &YXS'DJ>8EYYWI&
M>J5[!'MC>\)\(7R!?.%]07VA?@%^8G["?R-_A'_E@$> J($*@6N!S8(P@I*"
M](-7@[J$'82 A..%1X6KA@Z& -)#U95)QTY&:ATVHJ70T51.3CU)J*QO[9?[5]DP-GK@Y^YN]<=?:M.]F,$;
MR#JJL1GIP,T2IRBTN^H1JQDFUT=ON)J*Q=.U6:^@:554R!L =!_#GJ?<]ZHW
MNO75CCS$0;LX[].O1CZU:PTG)QTOZFM-T)72
MNKOS$L1'E
/3/&:]+HH S] TU]-@2
MWED:9UW9D?.XY8D9R6/ ..O:M"BB@ HHHH **** "BBB@ HHHH **** "BBB
M@ HHHH **** "BBB@ HHHH **** "BBB@ HHHH **** "BBB@ HHHH ****
M"BBB@ HHHH **** "BBB@ HHHH **** "BBB@ HHHH **** "BBB@ HHHH *
M*** "BBB@ HHHH **** "BBB@ HHHH **** "BBB@ HHHH **** "BBB@ HH
MHH **** "BBB@ HHHH **** "BBB@ HHHH **** "BBB@ HHHH **** "BBB
M@ HHHH **** "BBB@ HHHH **** "BBB@ HHHH **** "BBB@ HHHH ****
M"BBB@ HHHH **** "BBB@ HHHH **** "BBB@ HHHH **** "BBB@ HHHH *
M*** "BBB@ HHHH **** "BBB@ HHHH **** "BBB@ HHHH **** "BBB@ HH
MHH **** "BBB@ HHHH **** "BBB@ HHHH **** "BBB@ HHHH **** "BBB
M@ HHHH **** "BBB@ HHHH **** "BBB@ HHHH **** "BBB@ HHHH ****
M"BBB@ HHHH *SYM?@AG2P9L3R+N5=K<@;N
M>JURG@'P/_ ,(NC[GWR3;-V!A1M!X'<\L>3C(QP._5T %%%% !
M1110 4444 %%%% !1110 4444 %%%% !1110 4444 %%%% !1110 4444 %%
M%% !1110 4444 %%%% !1110 4444 %%%% !1110 4444 %%%% !1110 444
M4 %%%% !1110 4444 %%%% !1110 4444 %%%% !1110 4444 %%%% !1110
M 4444 %%%% !1110 4444 %%%% !1110 4444 %%%% !1110 4444 %%%% !
M1110 4444 %%%% !1110 4444 %%%% !1110 4444 %%%% !1110 4444 %%
M%% !1110 4444 %%%% !1110 4444 %%%% !1110 4444 %%%% !1110 444
M4 %%%% !1110 4444 %%%% !1110 4444 %%%% !1110 4444 %%%% !7A6B
MW,7ABYF358&E=LX9EWY(
;ZCX%N[")[A]1G*Q(S$ /G"@DXS,.>*L
M?"![FZBENKF1W1V41^8SL?DSN(W<8)(&0>JD'I0!Z!1110 4444 %%%% !11
M10 4444 %%%% !1110!4U:X>VADEB&Z1(W*K@G+!25&!R2)#-'+!(S?NOM,6S