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)) |
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: |
Exhibit Number | Description | |
99.1 | Earnings Release of Aegion Corporation dated August 1, 2018, filed herewith. | |
99.2 | Transcript of Aegion Corporation’s August 2, 2018 conference call, filed herewith. |
AEGION CORPORATION | |||
By: | /s/ Mark A. Menghini | ||
Mark A. Menghini | |||
Senior Vice President and General Counsel |
Operator: | Good morning and welcome to Aegion Corporation’s second quarter 2018 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. For those following along with the slides we posted this morning, let's start on Slide 3 of the presentation. |
• | First, we saw top-line strength within Infrastructure Solutions, driven by a higher number of crews, within our core North America wastewater business that grew contracting revenues more than 10 percent over the prior year. And, even with this strong Q2 revenue burn, we've ended the quarter with the North American wastewater business in a record backlog position. Additionally, we saw another quarter of strong demand for our pressure pipe offers led by Fusible PVC® products, which drove year-to-date orders and revenues sharply higher than the prior year. |
• | Second, we continued to execute, successfully, on the large Middle East robotic coating projects. Although the changes in customer scheduling for these projects have shifted more earnings into the back half of the year, the nearly 60 percent of work completed to date has gone very well at margins in line with our projections. |
• | Also, within Corrosion Protection, the cathodic protection business continues to show strong year-over-year improvements, particularly within the U.S. where we've seen a nearly 600 basis point year-over-year improvement in gross margins through the first six months. |
• | Finally, we saw a sixth consecutive quarter of improved year-over-year performance from the Energy Services segment. |
• | First, we discussed last quarter the significant impact from severe weather, which cost us approximately 10 percent of scheduled installation footage in the first quarter. |
• | Second, we've seen a rise in labor and fuel rates that impacted work on projects awarded late last year. While we can factor these increases into our future estimates, we face near-term pressure in inflationary periods on our margins in backlog, which tend to cover about six months of work. |
• | Additionally, despite the higher overall footage installed due to crew additions, we've seen lower productivity trends as our newer teams come up the learning curve toward full capacity. These productivity losses manifest themselves in site readiness delays, equipment challenges and slower installation times leading to project write-downs. We've developed strong operating systems for our wastewater installation business and generally manage this learning curve without disruption when crews are added at a measured pace over time. However, the expansion in crews has been significant in a short time frame to serve the strong growth in new orders from last year. We have been aggressively addressing these issues by placing more experienced management with the newer crews, upgrading project management and retraining where necessary. In response, trends in June and July have improved sharply and we expect these challenges to be largely behind us as we enter the second half of the year. |
David Morris: | Thank you Chuck, and good morning to everyone on the call. |
• | We continue to expect total revenues to be essentially flat with 2017's record results, offsetting the absence in 2018 of approximately $95 million in revenues in 2017 from the large deep-water project. |
• | We expect adjusted gross margin and adjusted operating margin improvements of approximately 50 basis points, driven by improvements in the restructured businesses and in the U.S. cathodic protection business. We've reduced this guidance from our previous 50 to 100 basis point range to reflect the lower margins year-to-date, primarily within the Infrastructure Solutions segment. |
• | Operational spend as a percentage of revenue is expected to remain in line with 2017 levels at approximately 16 percent, and we continue to expect interest expense in the $13.5 to $14.5 million range. |
• | Income attributable to non-controlling interests is now expected to be approximately $1 million, down from our previous range due to a change in earnings mix from our joint ventures. |
• | And, we still expect our adjusted effective tax rate to be between 23 and 24 percent. |
Operator: | (Operator Instructions) Our first question comes from Bill Newby with D.A. Davidson. Your line is now open. |
Bill Newby: | Just a couple of questions on the IS business, following these strategic decisions. Can you give us the stand, or I guess, the stand alone margins excluding the Australia and Denmark businesses? I guess what you expect that business to generate on a go-forward basis of what you're keeping? |
Chuck Gordon: | I think what we gave for the margin improvement carries about, there's probably for the year going to be around a 500, I'm sorry, about a 50 basis point improvement, we would expect on an ongoing basis as we exit those two business. |
Bill Newby: | Okay. So I guess, as we look forward for the next 2 to 3 years, I guess, mid-7s on the operating basis is what you can expect? |
Chuck Gordon: | No. We would actually expect it to be higher than that. We have, remember that we had, what we believe was unusual weather pattern in the first half of the year. We've brought on 10 percent more crews and we're also in a period where we've had significant oil price increases, which impacts our fuel and impacts some of our materials, our chemicals. What happens is as those prices have stabilized now we have built all those increases into our bids without affecting our win rate. So that's also past us, so going forward I would expect the margins to be significantly higher than what we are projecting for this year. |
Bill Newby: | Okay, that's helpful. And then, I guess, on the backlog there, can you, is there a way to quantify the headwind from the Fyfe exit? I guess, what that backlog would be on a like-for-like basis? |
David Morris: | On a year-over-year basis, we're probably down $10 to $12 million associated with the exit of the non-pipe structural side of the Fyfe business. |
Operator: | Our next question comes from Eric Stine with Craig-Hallum. Your line is now open. |
Aaron Spychalla: | It's Aaron Spychalla for Eric. Thanks for taking the question. Maybe, first on Australia and Denmark, over the last couple of quarters, it sounded like you're turning the corner there, maybe specifically more in Australia. Can you just kind of talk about what changed there to bring on these actions? |
Chuck Gordon: | So in Australia -- first of all in both businesses, we weren't in a position to exit until very recently because we had some legacy issues that we needed to resolve in terms of work that we had previously done. We've completed most of that, almost all of that work during the first half of '18, so now we're in a position to exit. But the second thing is, in Australia in particular, I think that could be a nice small business, but it does not offer us the ability to leverage any kind of operating expenses because of its location and we just feel like it's a better plan for us is to be a tube supplier and a technology provider to a local construction company or a local organization that has a better opportunity to leverage overhead. |
Aaron Spychalla: | Understood. And then, I mean, there in Australia, is there any -- do you expect any kind of money from that transaction? Or like you're saying, is it more really of the third-party tube sales? |
Chuck Gordon: | We've been going through the sales process and we do expect a nominal amount of cash for the business. |
Aaron Spychalla: | Okay. Sounds good. And then, maybe lastly for me, on the corrosion side of things, can you just talk about the pipeline there. Now that we have a little bit left on those two large projects. In the past you've kind of talked about some other projects that you thought you could see some order activity in the near term. So maybe just an update there, please. |
Chuck Gordon: | I think, as I look at the year, the thing that pushed back the most were some of the Tite Liner® projects and those, we had a very good month in June, we followed up with a nice month in July and as we look out, going forward, we see a nice opportunity for the Tite Liner® business. I would also say that in our cathodic protection business, particularly in the U.S., where we had significant operating issues last year, the business is performing exceptionally well and there we feel like we're back on track from an execution standpoint, while we have very solid backlog going into the second half, the funnel looks extremely strong. |
Operator: | And our next question comes from Noelle Dilts with Stifel. |
Noelle Dilts: | I was just a little bit late dialing in so I apologize if you've addressed some of these things, but you mentioned a few times that labor and kind of bringing on new crews and CIPP is driving some inefficiency. So can you give us a sense of, I think that the growth outlook for the market is still pretty solid, so how do we thing about that, kind of, resolving if you move forward? Or is it going to be a drag as we move into 2019? |
Chuck Gordon: | We think we've actually moved forward now. We had very good execution in June. I think July is going to be a good month for us and what happens, Noelle, is typically when we bring these crews on, and we're up about 10 percent year-over-year in crews, we don't have a problem bringing on one or two crews at a time, in this case, we brought on six or seven crews and it stressed the organization. But typically, it takes a crew about six months to get up to full speed and most of these crews are at that point now. So we feel pretty confident going into the second half of the year. We've got record backlog in NAR and the crews are up to speed. We saw a really good productivity in July, so we feel like those issues are behind us. |
Noelle Dilts: | Got it. And then in terms of, with the new elements of the restructuring plan, it looks like you still maintain the, kind of, somewhat north of $20 million of savings target. Was there anything that's kind of tracking below your expectations? Or was that just because of somewhat of a more general number? |
David Morris: | Yes. That's general with respect to the actions that we previously announced. However, both with respect to potential additional charges and any potential additional savings, |
Operator: | (Operator Instructions) Our next question comes from Craig Bibb with CJS Securities. |
Michael Hagan: | It's actually Mike Hagan for Craig. Just real quick, I wanted to see, do you guys have a ballpark selling price estimate for Bayou? |
David Morris: | Nothing that we're able to disclose at this time, no. |
Michael Hagan: | Okay, but assuming proceeds from that, can you just remind me, again, what were the proceeds expected for in terms of either stock buyback or debt pay down? |
David Morris: | Yes. What we had previously said, we did amendments to our credit facility in February and as part of that amendment, we've committed to apply net proceeds from the sale up to $38 million against the outstanding borrowings on the line of credit. So most of any cash proceeds would go against the line of credit and then any remaining proceeds would be for other general corporate purposes, which could include share repurchases. |
Operator: | Thank you and I'm showing no further questions in the queue at this time. I'd like to turn the call back over to Charles Gordon, President and CEO, for any closing remarks. |
Chuck Gordon: | Thank you, operator. We will continue to take the actions necessary to ensure we are best serving our stakeholders, including our employees, customers and shareholders globally. At the halfway point in the year, we remain confident in our outlook for significant earnings growth in 2018, underpinned by continued strength in our core end markets, including North America CIPP, midstream pipeline protection and energy services. We are excited about the strong earnings outlook for the second half of the year and look forward to providing additional updates in the next quarter. Thank you for joining us today and for your continued support of Aegion. |
Operator: | Ladies and gentlemen, than you for participating in today's conference. This does conclude your program and you may all disconnect. Everyone have a great day. |
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