AEGN
#Thank you, <UNK> 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.
Aegion delivered first quarter adjusted EPS of $0.13, which was overall aligned with both The Street and our internal projections.
As we said in our call in March, the first quarter is typically a low period for construction activity in many parts of our business due to weather and a slower pace for working uses from customers at the start of the new fiscal year.
Weather conditions were more severe than what we've experienced in recent years and persisted for much of the quarter into early April.
This impacted our Infrastructure Solution segment the hardest, specifically our North America CIPP business, where we estimate the negative impact to be approximately $10 million in revenues and more than $3 million in adjusted operating income or $0.08 per share.
Offsetting this impact, we saw favorable results in both our Energy Services and corrosion protection segments and benefited from discrete tax items that lowered our adjusted effective tax rate for the quarter, which <UNK> will discuss more fully in a few minutes.
Our core markets remain intact as well.
North America wastewater rehabilitation orders remain strong.
And in the broader energy markets, improved oil prices provide additional tailwinds for our linings and coating businesses in Corrosion Protection.
We also secured new business in our Energy Services segment, where we are now embedded in 14 of the top 17 refineries in California and Washington.
These positive market forces contributed to an 8% year-over-year increase in our contract backlog ending March 31, excluding backlog for the large pipe corrugated installation project, which was substantially completed in 2017.
All in all, I'm pleased with our start for the year and feel good about our position as we head into our seasonally stronger quarters.
We remain confident in our outlook for adjusted EPS growth of more than 30% this year.
I'll review each of the segment results and outlook in a bit more detail, beginning with infrastructure solutions on Slide 4.
New orders in the first quarter declined 5%, primarily driven by the exit of our Fyfe North America structural contracting business.
Order intake in North America CIPP remains strong, and we saw an increase in both orders and revenues for our fusible PVC products, which is a positive indicator as we seek to further penetrate the North American pressure pipe market.
Backlog levels as of March 31st increased 10% from the prior year period driven by a 16% increase in our North America CIPP business.
Although part of this increase is due to weather-driven delays that reduced our revenue burn in the quarter, we are well-positioned as we seek to recover volumes for the remainder of the year.
Also in North America CIPP, our current crew count was up year-over-year as we continue to further expand our reach with underserved markets.
While the additional capacity was contributed to top line growth, we were unable to operate crews at full productivity due to approximately 10% loss of ---+ of lost installation footage from severe weather impacts.
This drove unfavorable margins due to the lower absorption of fixed costs, and was the main driver for a performance below our expectations.
The teams are working aggressively on volume recovery plans and our size and scale should help our efforts to offset these impacts later in the year.
The restructuring activities within our Fyfe North American and Australia operations are largely behind us, and results from those businesses improved significantly from prior year levels.
Our Denmark operations continue to be challenged, primarily with workable backlog.
But we feel good about the market potential and remain focused on creating an optimal business model to support our broader European CIPP strategy.
For the full year 2018, we are maintaining our infrastructure solutions segment outlook for revenue growth in the low to mid-single-digit range and operating margin improvement of 100 to 200 basis points over 2017 levels.
The team has work to do to recover from unfavorable first quarter impacts.
Additionally, we are experiencing a tighter labor market across North America, which we expect to become more challenging as we enter the strongest portion of the construction season in the upcoming months.
However, we have strong backlogs and are putting in place aggressive recovery plans to work towards achievement of our 2018 infrastructure solutions targets.
Shifting to corrosion protection on Slide 5.
Backlog as of March 31 increased 12% from the prior year, excluding the large deepwater project, driven primarily by the field joint coatings projects in the Middle East.
Project execution to-date has been strong and the timing for the projects is now expected to extend into late 2018 or early 2019, with minimal impact to overall 2018 operating income results.
New orders in the quarter were largely in line with the prior year, and we have line of sight to multiple international project opportunities within our industrial coatings and linings businesses to support second half performance.
In addition to the successful execution of the international field joint coating projects, improved performance in the cathodic protection business is a key catalyst for achieving our 2018 targets.
The first quarter is seasonally the weakest for this business, and this year was no different in regard.
However, we continue to see positive momentum in the North America business, following our 2017 restructuring efforts in Canada and the significant focus on operational and leadership improvements within the U.S. business.
These improvements resulted in nearly a 300 basis point increase in adjusted gross margins for the cathodic protection business year-over-year, despite lower volumes.
If we can sustain the positive momentum in operations, combined with additional top line growth, our cathodic protection business will deliver significant year-over-year improvement in the second half of 2018.
For the full year 2018 outlook.
We expect Corrosion Protection segment revenues to decline 10% to 15% reflecting the lost contribution from the deepwater project.
Excluding the project, revenues are projected to increase 15% to 20%.
Our projections now include Bayou results for the second quarter of 2018, which doesn't result in a meaningful change to our overall outlook.
The Bayou sales process remains intact, and we expect to complete a transition ---+ transaction by the end of the second quarter.
Adjusted operating margins are expected in the 3% to 4% range, based on improvements from our cathodic protection businesses and the successful execution of the international field joint coating projects.
Shifting to Energy Services on Slide 6.
Record quarterly new orders growth drove backlog at March 31 nearly 5% higher than the prior year-over-year period, despite the roll-off of approximately $8 million in revenues associated with long-term contracts up for renewal later this year.
The favorable growth was driven by a stronger-than-expected Q1 turnaround season and new project awards within the construction services segment.
The successful repositioning of this segment to serve the less volatile downstream markets, combined with exceptional performance from the team, continues to drive meaningful improvements in operating income contribution for Aegion.
For the full year, we still expect Energy Services segment to see middle single-digit revenue growth with operating margin improvement of 75 to 150 basis points.
We are encouraged by the strong performance to start the year but remain cautious on our outlook for turnaround activity in the back half of 2018.
That wraps the review of the markets and outlooks for each of the segments.
Despite the first quarter weakness in our Infrastructure Solutions segment, the strength of our diversified portfolio positions us well to deliver the significant improvement we are targeting in 2018.
There have been a number of leadership transitions in the organization over the last few years, and I'm very pleased to have in place tenured industry experts leading each of our platforms with the vision and leadership necessary to drive improvements, both this year and going forward as we advance our organic growth strategy.
I'm also excited to have recently named <UNK> Morse as our new CFO.
<UNK>'s significant industry and company knowledge, financial acumen and leadership position him well for this role.
I believe his strategic vision and aggressive focus on disciplined forecasting and execution will drive significant value as we look to strengthen our financial organization.
With that, I'm happy to turn the call over to <UNK> for his perspective on Q1 results and additional commentary for the remainder of 2018.
<UNK>.
Thank you, Chuck and good morning to everyone on the call.
Looking more at the first quarter's results.
Let's move to Slide 7.
Aegion delivered adjusted diluted earnings per share of $0.13 in the first quarter compared to $0.18 in Q1 '17.
Positive income drivers for the quarter included contributions from our international field joint coating projects within Corrosion Protection, higher Energy Services results and lower corporate spending as a result of ongoing cost reduction initiatives.
Additionally, we benefited from a lower adjusted effective tax rate of 2% compared to 22% in Q1 '17, driven by certain favorable tax items, including the impacts of employee stock incentive awards that vested during the quarter.
These favorable results were unable to overcome the impact of lower contributions from the large deepwater project within Corrosion Protection that benefited 2017 and the severe weather impacts within Infrastructure Solutions that Chuck discussed previously.
At the top line, revenues for the quarter were on par with Q1 '17, largely driven by increases within Energy Services that substantially mitigated the impact of lower revenues within Corrosion Protection.
However, adjusted gross margin performance was down year-over-year primarily due to weather and isolated project challenges in the Infrastructure Solutions platform.
Our adjusted operating expenses were largely flat with Q1 '17 at just over 16% of consolidated revenues.
Within this total, we saw lower operating spend in Infrastructure Solutions primarily due to restructuring savings, which were partly offset by an increase in operating expense in Energy Services due to increased spending to support turnaround activities and the refinery workforce transitions as well as the favorable impact during Q1 '17 of a legal reserve reversal.
With flat operating expenses, Aegion's total adjusted operating margin declined 180 basis points, primarily driven by the weaker infrastructure solutions results and lost contribution from the deepwater project.
Looking more closely at Infrastructure Solutions on Slide 8.
Revenues increased by 4% year-over-year or by nearly $6 million, primarily driven by higher international volumes in both our CIPP and Fyfe FRP businesses in Asia.
Additionally, we saw increased demand for our fusible PVC products, as we look to grow our position in the North America pressure pipe market.
Despite the weather impacts that hampered volumes in certain parts of the U.S. and Canada, revenues in our North America CIPP business were up due to additional crews added during the second and third quarters of 2017 to reach underserved regions.
Unfortunately, notwithstanding the top line growth, adjusted margin performance was disappointed ---+ disappointing, driven by more than 400 basis points adjusted gross margin decline in North America due to weather impacts, isolated project challenges in the Midwest and the benefit of favorable project closeouts in Q1 '17.
Our North America business is a key driver for results within the overall AGM portfolio.
But when volumes are impacted by whether or project challenges, the inability to cover fixed costs can significantly impact margins.
Fortunately, when volumes pick up, crews can realize significant efficiencies.
We are targeting this improvement for the remainder of the year as we move into seasonally higher production quarters.
Outside of North America CIPP business, margins were further impacted by continued weakness in Denmark and isolated project challenges in the Netherlands.
Partially offsetting these issues, we saw margin improvement within our recently restructured Fyfe North America and Australia businesses, and look for these trends to continue going forward.
Now let's turn to Corrosion Protection on Slide 9.
Revenues declined 21% or $25 million primarily due to a more than $40 million decline from the large deepwater project, which was substantially completed in 2017.
Excluding this impact, revenues increased more than 20%, largely driven by the large international field joint coating projects as well as international lining projects.
We saw a modest revenue decline in our global cathodic protection business due to weather as well as a result of higher third product ---+ product sales during Q1 '17.
Corrosion Protection adjusted gross margins increased 130 basis points due to favorable contributions from the large field joint coating projects in the Middle East, which generate higher margins compared to our overall portfolio.
Cathodic protection adjusted margins increased 200 basis points from Q1 '17 due to operational improvements within the U.S. and recently restructured Canadian businesses.
This is notable, considering the revenue decline from Q1 '17 to Q1 '18, adjusted operating margins were unfavorable to Q1 '17, primarily due to relatively flat overhead expenses for the segment, despite the top line declines.
I'll wrap up the operating discussion with Energy Services on line 10.
Revenues for the first quarter increased 27% or $19 million over to Q1 '17, driven by growth in all 3 key service lines of maintenance, construction and turnarounds.
In particular, we were awarded and executed significantly more turnaround work during the quarter than we previously expected.
The majority of this favorable performance is expected to be timing and not incremental to full-year results based on current expectations for turnaround activity during the second half of the year.
Gross margins and operating margins increased 100 basis points and 110 basis points, respectively, compared to Q1 '17.
improvements continue to be driven by increased labor utilization and a greater mix towards higher margin services.
We are encouraged by the ongoing and sustained improvements in profitability within the segment with significantly more leverage today in the historically less volatile downstream market.
That wraps our review of each of the segments.
Now let's review our cash performance on Slide 11.
We generated cash flow from operating activities of $1.3 million in the first quarter, which is notable considering the first quarter generally results in cash usage, due to seasonally weaker results combined with the timing of cash payments for incentive bonuses and certain payroll tax liability.
Our favorable results were driven by improvements within working capital, including strong cash collections on large international projects.
On the cash usage side, we spent nearly $14 million for share repurchases, which included open market purchases of nearly 354,000 shares for $8.4 million and an additional $5.3 million spent to acquire 218,000 shares related to employee tax obligations in connection with divesting of employee equity compensation awards.
Additionally, we spent $5.2 million on capital expenditures and funded net debt repayments of more than $2 million.
We ended the quarter with just under $90 million in cash, which we believe is a healthy level to support the business.
We expect cash flows to improve as we enter seasonally stronger periods for the business.
On this slide, we've also reiterated our priorities for cash usage this year, which include debt repayments, funding of capital investments and executing against our share repurchase program as our top focus areas.
Turning to Slide 12, we are reaffirming the full year outlook components previously laid out in our March call, including our expectation for adjusted earnings per share growth of more than 30% in 2018.
Overall, the phasing of our earnings remains largely intact with our previous guidance.
Though more earnings may shift into the second half of the year as we work to recover lost weather volumes, continue to improve our cathodic protection operations and adjust for the timing extension on the large offshore field joint coating projects.
We continue to expect total revenues to be essentially flat with 2017's record results, offsetting the absent ---+ absence in 2018 of more than $90 million in revenues in 2017 from the large deepwater project.
We expect total adjusted gross margin and adjusted operating margin improvements of between 50 and 100 basis points, primarily driven by improvements in the restructured businesses and in the U.S. cathodic protection business, partially offset by the loss of margin contribution from the large deepwater project.
As previously discussed, severe weather negatively impacted the infrastructure solutions platform in the first quarter, but we will be working to recover lost profitability in the remainder of the year.
Operational spend as a percentage of revenue is expected to remain in line with 2017 levels at approximately 16%.
We are evaluating additional opportunities to streamline our fixed overhead base to improve income margins and reduce overall operational spending as a percent of revenue to closer to 15% over the next 12 to 24 months.
Interest expense is expected to be in the $13.5 million to $14.5 million range, declining from 2017 levels, primarily due to lower expected levels of debt that more than offset the impact of rising interest rates.
Our interest rate exposure is limited by a fixed rate on 75% of our term loan debt through interest rate swaps.
Income attributable to noncontrolling interests is expected to be in the $2 million to $2.5 million range, driven primarily by expected earnings from our joint ventures in the Middle East and Asia.
Our adjusted effective tax rate is expected to be between 23% and 24%, despite the favorable discrete tax benefits we saw in the first quarter.
Our full year outlook remains unchanged due to the timing of certain discrete items as well as our expected taxable earnings mix for the remainder of the year.
We expect to substantially complete the restructuring activities we announced last year during the second quarter of 2018.
We have incurred $115 million in charges to-date, inclusive of $86 million in impairment charges and expect total restructuring and related impairment charges to be between $117 million and $120 million.
Total cost reductions from the 2017 restructuring initiatives are expected to be in excess of $20 million.
Looking forward, we are reviewing options to simplify our operating and tax organizational structure under the new U.S. tax laws.
We may incur additional restructuring charges related to changes to our legal entity structure and related intercompany transactions.
But believe a simplified organizational structure will facilitate business across Aegion and further reduce operating expenses.
We expect these activities to take place between now and the end of the year and we'll provide updates regarding these activities as they progress.
That wraps a review of our first quarter results and outlook for the remainder of the year.
As Chuck mentioned, our performance was in line with our expectations despite the weather-related headwinds through the first 4 months of the year.
Looking forward, continued market strength and operational improvements give us confidence in our ability to achieve our 2018 targets and to continue making progress on our long-term goals.
With that, operator, at this time we would be pleased to take questions.
We've picked up a couple of refineries over the last 12 months, where we now have the leading outsourced maintenance position.
And certainly, those were added into backlog compared to where we were a year ago.
I'm sorry.
Would you repeat that <UNK>.
You broke up saying that.
Well, so what we look at, we typically have about 6 months visibility to turnarounds.
And we had a stronger Q1 than we anticipated, with the ---+ with turnarounds.
Most of our turnarounds, as you probably know, are in the first quarter and in the fourth quarter.
The refineries typically don't do them in the summertime when they're busy making gasoline.
As we look at the fourth quarter now, we're ---+ we like the way we're positioned at the different refineries.
But from what we can see, we're being ---+ I think, we're being careful with our forecast for Q4.
It's not that we're going to lose market share or anything like that.
It's just really the activity that we see coming up and that we're aware of as we go into the rest of the year.
So we've had ---+ as I look at the year so far, we've had many orders for fusible PVC.
And I think a lot of that is that we had a bit of turnover early last year in the sales force.
The new team has just done a remarkable job coming up to speed.
I think that that's part of it.
We've also ---+ the economy is obviously good.
That helps us.
And on CIPP, we just recently received several very nice orders that position us really well to hit our goals for the year on the CIPP side.
So overall, that's been a focus area for us.
It's good to see some of the results starting to come in.
A lot of work to do.
We still have a lot of work to do to get to the market position we want to have.
But I would say, both on the CIPP side and on the fusible PVC side, we certainly are carrying a lot of momentum into the rest of the year.
So I think what we ---+ when we talked about new projects, I was talking about coatings and linings, field joint coatings and linings.
And certainly we're seeing more activity than we've seen in the last couple years.
What I expect to happen, we have a very nice backlog of business on the field joint coatings side, particularly in the Middle East.
What we see a lot of ---+ we're seeing a lot of opportunity for linings in the upstream oil and gas market.
We would expect to see ---+ based on what we see in the funnel, we would expect to have pretty nice orders growth in the second half of the year.
Some of the execution of that work, particularly on the linings side, could spill into 2019.
But it's really, really nice to see the market coming back.
From a mix standpoint, those ---+ both those product lines, linings and the field joint coatings, carry nice margins.
No I think we have had ---+ we had a ---+ we've had what I'd call solid orders in Q1.
That business is always a little bit slow out of the gate.
They tend to ---+ the customers tend to have annual budgets.
They spend them in December.
November, December is typically a very busy time for us.
And then it takes a while for work to get released as we get into the new year.
And when we combine that with weather, and remember, a good portion of that businesses is in Canada.
But when we combine that with some of the weather issues we had, our volume was down, our revenue was down.
I think backlog is in pretty good shape.
But we are seeing a lot of opportunity with the funnels.
I don't think there is any kind of market issue there.
We are being very selective as we bid construction projects.
We're being very careful to bid those appropriately.
We've struggled with some of those in the past.
But I think, as we go forward, we see good momentum in the business.
And what was really exciting for us was that, that business, overall, had almost a 300 basis point improvement in gross margins, even though the revenue for the quarter was down.
And that's ---+ that was a nice accomplishment for that team.
If they continue that with what is normally a pretty nice revenue pick up in the rest of the year, they're going to have a very nice year, which is certainly what we expect.
That's about right.
Yes, yes.
I guess, subject to the additional part that we're looking at, our operating and tax structure.
There may be additional charges to come out of that.
But at this point, we don't have a feel for what that would be.
I don't expect it'd be a large number, but that may increase the total a little bit.
Yes.
As Chuck said, we estimated it to be about $10 million in revenue, about $3 million, $3.2 million in operating income but about 400 basis points in terms of gross margins.
(inaudible)
That's correct.
Yes.
We haven't disclosed that yet.
And we're certainly well into discussions.
But we haven't disclosed the price yet.
Yes.
And at this point, we're operating under a letter of intent with the prospective buyer.
And we would expect the simultaneous signing and closing of a definitive agreement, as Chuck said, hopefully before the end of the quarter.
With the amendment to our credit facility, the first portion of proceeds needs to go to extend ---+ extinguish the amount that we have outstanding on our line of credit, which as of right now is $43 million.
I would expect $5 million of that $43 million would be paid off before the closing, which would take us down to $38 million, which was our line of credit borrowing as of 12/31.
And then after that, any net proceeds would be for general corporate purposes which could also fund share repurchases.
So what we have targeted is to bring the business back to where it was several years ago over the course of the year.
And we would ---+ and based on the first quarter, we feel like we're on track to do that over the course of 2018.
So really, we have about 75% of our business, I want to reiterate this, about 75% of our business is on existing pipelines, where we're doing rehab and doing assessment of the condition of the pipelines.
About 25% of our business is related to new pipelines.
There is certainly ---+ that market has been good over the last couple of years.
And I think we forecast it to be good over the next several years, particularly in the U.
S.
So that's always been part of our business and we continue to do work on new pipelines, although 75% of the overall cathodic protection business is on existing pipelines.
So we're very pleased with what we've seen in Australia.
That team down there has done a nice job.
They were very close to breakeven for the quarter.
And so if we look at that versus where they were in 2017, it's a very nice improvement, year-over-year.
They're executing well.
And so we just continue to evaluate, long term, what makes most sense for us in Australia.
But the team performed well and they had a solid Q1.
So we had ---+ the projects that we had in Midwest were really 2 tubes on 1 project.
It was a complicated project.
We struggled with them.
We thought we had reserved enough at the end of the year.
We ended up having to go in and take a tube out and reinstall it in sort of the March time frame.
The very isolated ---+ a very isolated situation there.
Both those projects are in now, I think.
I don't know if we're completely done with some of the lateral work and those things.
But in terms of the main line, the lining is all done and we've moved on.
We also had a challenge with a couple projects in the Netherlands that we struggled with.
I think we understand what happened there and we've addressed it and wouldn't expect those kind of problems to continue to persist.
I would characterize both the problems in the Midwest and the problems in the Netherlands to be isolated.
I don't there ---+ there's no indication that those are going to be ongoing issues for us.
The impact of those 2 projects, we said that we had about a $4 million gross margin impact ---+ or, I'm sorry, $3.2 million gross margin impact.
The impact from the projects was probably in the $1.5 million to $2 million range of the impact that we had from the projects in the Netherlands and the Midwest.
Although, the margin degradation as a result of weather was the 400 basis points.
This additional amount for the project issues would have been on top of the 400 basis points.
Thank you.
We remain confident in our outlook for significant earnings growth in 2018.
We see tailwinds in our core markets, combined with strong backlog across all segments as we move into our seasonally stronger months of the year.
We are focused on driving operational excellence to deliver improved profitability this year and to position the company for long-term value creation.
Thank you for joining us today and your continued support of Aegion.
We look forward to providing additional updates next quarter.
