Attached files
| file | filename |
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| 8-K - FORM 8-K DATED 10/27/2009 - Aegion Corp | form8k10272009.htm |
| EX-99.1 - EXHIBIT 99.1 - EARNINGS RELEASE - Aegion Corp | ex991earningsrelease.htm |
Exhibit 99.2
INSITUFORM
TECHNOLOGIES, INC.
Moderator:
Joe Burgess
October
28, 2009
8:30
am CT
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Operator:
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Good
day and welcome to the Insituform Technologies Third Quarter of 2009
Earnings call. Today’s call is being
recorded.
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Any
financial or statistical information presented during this call, including
any non-GAAP measures, the most directly comparable GAAP measures, and
reconciliation to GAAP results will be available on our Web site,
Insituform.com.
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During
this conference call, we will make forward-looking statements, which are
inherently subject to risks and uncertainties. Our results
could differ materially from those currently anticipated due to a number
of factors described in our SEC filings and throughout this conference
call. We do not assume the duty to update forward-looking
statements. Please use caution and do not rely on such
statements.
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Now,
I’d like to turn the call over to Insituform’s President and CEO, Joe
Burgess.
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Joe
Burgess:
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Good
morning and thank you for participating on Insituform’s call for the third
quarter 2009 results.
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Joining
me on today’s call are David Martin, Senior Vice President and Chief
Financial Officer; David Morris, Senior Vice President and General
Counsel; and Chuck Voltz, Senior Vice President, North American
Rehabilitation.
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As
has been our practice over the last few quarters, I’ll make a few remarks
discussing the third quarter results along with some updates on market
factors and key projects that will drive future
performance. Then we’ll spend the balance of the time available
responding to your questions.
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For
the quarter, income from continuing operations was $11.8 million,
representing a 51% increase over third quarter 2008. Earnings
per share from continuing operations, excluding the acquisition-related
credit recorded in the quarter, were 28 cents per diluted share, which is
essentially flat with 2008 performance.
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We’ll
look at the individual business units in detail, but I note at the outset
that North American Sewer Rehabilitation enjoyed another strong quarter,
continuing to enjoy gross margins better than 25% and finally beginning to
monetize the backlog that we’ve been building throughout
2009. Our Energy and Mining segment did not meet expectations
due to continued project delays at Bayou and with United Pipeline
Services. These delays have been resolved and both units will
produce stronger fourth quarter results.
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Backlog
for the company achieved another record, reaching $467
million. Our Asia-Pacific business led the way, booking large
contracts in Sydney, Australia and in Hong Kong. United
Pipeline Systems also booked $27 million worth of work through United
Pipeline Mexico with Pemex, the Mexican National Oil
Company. Only $13 million of this work is reported in these
backlog figures due to timing of signing after the quarter
end.
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So
a good quarter financially, but we also believe that we are
well-positioned to deliver stronger results in the fourth quarter and in
2010.
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Our
North American Sewer Rehabilitation Segment produced operating income of
$10.3 million which represents a $3.6 million or 53% improvement over 2008
performance. For the 9-month period, NAR has produced operating
income of over $25.8 million representing a 117% improvement over
2008. As revenue is up only modestly, the enhanced
profitability continues to be driven by operational management attention
to quality, elimination of execution errors and cost
control. These improvements are best illustrated by bridging
the operating income year-over- year.
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Of
the $13.9 million in operating income improvement, only $300,000 can be
attributed to revenue growth. Of the balance, $6.3 million is
related to lower fuel and resin costs, while $7.3 million is related to
improved quality, the elimination of re-work and execution errors,
manufacturing efficiencies and lower operating costs. Our teams
have done an excellent job preserving these cost savings in gross
margins.
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Backlog
remains strong for NAR at $184 million, ahead of last year but down from
the second quarter as we ramped up crews to execute on the many large
awards. This figure is artificially low, however, as we have
$18 Million of apparent low bid work with the City of Atlanta that was
delayed by competitor bid protests that took several months to
resolve. We continue to maintain our win rate in the mid-50%
range. We continue to increase crew count to manage the
backlog. We have 67 crews at the end of September with a target
of 71 by year end.
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Last
quarter we provided some information on the potential impacts of the
stimulus program on our business, so I’d like to provide an update on that
situation as well. As I noted last quarter, we are monitoring
projects at the state level, indicating that $1.1 to $1.2 billion worth of
underground pipeline rehabilitation projects have been submitted for
stimulus funding. I emphasize submitted because in the states that are
furthest along, the funded list can look dramatically different from the
submitted list in terms of the relationship between above-ground projects
that have been approved and underground projects that have been
approved.
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Early
funding trends suggest that the pipeline rehabilitation projects to
receive funding will be around $600 million. To date, we have
seen $150 million plus worth of opportunities, of which 60% is new or
incremental to the market situation as we saw it prior to the
stimulus. This is up from $75 million in the second
quarter. Most of the third quarter work is new, supporting our
earlier thesis that the early stimulus dollars were actually propping up
the existing market.
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For
Insituform, we have picked up $50 million in stimulus-related
acquisitions, up from $25 million in the second quarter. We
also have hard visibility on another $130 million of opportunities that
should come to bid in the near term. That leaves another $300
to $350 million of stimulus projects that are still in the
system. We expect these projects to hit the market in 2010 for
2010 and 2011 implementation.
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As
I mentioned in the second quarter and remind everyone now, individual
communities will ultimately decide to spend this money or
not. The stimulus is neither a federal nor a state
mandate. Based on the results, however, we continue to believe
that the stimulus will have a positive impact on revenue and profitability
for the balance of 2009, 2010 and 2011.
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Our
European operations continue to show improvement over 2008 by producing
$1.1 million in operating income, a 300% improvement over
2008. Revenue continues to be reduced from ’08 due primarily to
large reductions in capital and maintenance spending by the U.K. water
utility companies. Margins continue to improve as we reduce
cost and increase internal transfer pricing. Backlog is
significantly higher than last year and we continue to a see a
strengthening bid table.
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Performance
is also improved in our German JV, IRT. Additionally, we have
recently reached a framework agreement with our partner in IRT, which
enables us to manage the business going forward in a much improved
way. Our re-energized leadership, some changes in the German
management team and a shared view of the way forward in the German market
makes us believe that earnings from this unit will continue to
improve. We’re also evaluating both our commercial model and
overhead structure with the European business with a focus on creating a
business model that optimizes profitability and cash flow. We
will finalize these business plans during the fourth
quarter.
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Our
Asian-Pacific business continues to make steady progress on its path to
becoming a meaningful contributor to earnings at
Insituform. I’m pleased with the progress we have made in each
of our targeted markets: India, Australia, Hong Kong and China and
Singapore. In India, we continue to make steady, profitable
progress on our projects in Delhi. In addition, the business
has successfully expanded outside of Delhi by winning an $11 million order
in Utter Pradesh. This work will start in this
quarter.
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We
also see renewed federal funding driving a reinvigorated bid table in
Delhi, Mumbai and Hyderabad. As important, we have made great
progress upgrading operational capability in India. Our joint
venture partner, SPML, continues to impress us with tremendous knowledge
of local conditions, politics and labor markets. Our crew
productivity continues to improve at a rapid and faster than expected
pace.
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In
Australia, we achieved our first large-scale award, winning 1/2 of the
recent 3-year term award from the Sydney Water Agency. This
project will allow Insituform Australia to create a more cost-effective
base of operations which will allow for more effective bidding in other
metropolitan markets in Australia.
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In
Hong Kong, we continue to make progress bidding work directly with the
client. We have picked up another $12 million in water
rehabilitation projects which will be in year-end backlog. They
are a mix of ThermoPipe® and Tite Liner® applications, which continue to
expand our presence in this key market. We have begun utilizing
our presence in Hong Kong to evaluate tube partnership opportunities in
mainland China. We’re excited about the prospects for this
market in 2010 and beyond.
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In
Singapore, we expect to see initial sale of tube liners in the fourth
quarter on the small diameter packages that are being released by the
government. The initial large diameter projects are expected to
be bid in November.
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Clearly,
the Asian business remains on course to reach $100 million in backlog by
year- end, which will drive substantial growth again next quarter and into
next year.
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Our
water rehabilitation business was modestly unprofitable for the quarter as
we continue to shift our focus to achieving a broad level of acceptance
for the InsituMain™ product line. Pilot testing continues and
we’re pleased with our progress.
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As
I mentioned last quarter, we’re committed to bringing a fully-structural
CIPP product to market that provides a broad diameter portfolio in 6
inches to 36 inches, as well as the ability to efficiently re-establish
taps using either mechanical or chemical methods. By our
estimates, this should allow us to serve between 60 - 70% of the $1.3
billion North American market. This scale, combined with the
ability to make our own tube, controlling key costs and quality processes,
will allow us to eventually sustain a cost position below that of the dig
and replace option in most geographies. Of course, this is
critical if we are to achieve our goal of creating a meaningful water
platform for Insituform and its shareholders. We are also
evaluating complementary products and services that might accelerate the
growth in this sector.
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Energy
and Mining did not perform as expected in the quarter due to continued
delays with two large-scale piping orders at Bayou Coatings and work
releases associated with an early award in United Pipeline Systems through
a Mexican contractor in Poza Rica, Mexico. Corporate results
were in line with expectations.
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There’s
much to be encouraged about, however, as backlog at Bayou remains steady
and has been growing dramatically at United Pipeline Services due to the
recent project awards directly with Pemex in Mexico. In
fact, UPS backlog could approach $40 million by year end – a very high
level based on historical results. Additionally, we are seeing
the benefits of the E&M platform in our ability to market directly to
end users like Pemex, and large-scale pipeline developers like
Schlumberger. The recent award in Poza Rica clearly
demonstrates the value placed on a comprehensive service provider across
corrosion engineering, cathodic protection, field joint and pipeline
coating, internal linings and, of course, Insituform’s project management
capability to manage entire project scopes.
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It
is clear that we would not have been competitive for this work without the
combined strength of our new energy and mining platform. So
while we are excited about this award and focused on filling out an
appropriate project management organization to execute, I’m equally
excited and convinced about the longer term opportunities as we continue
to master selling our combined offering to the
marketplace.
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As
I mentioned, we expect Bayou to have a strong fourth quarter as we have
begun work on the ILVA Steel pipe that was originally expected in
June. Bayou’s bid activity is also picking up and we are more
confident about the back half of 2010 than we were
previously.
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Due
to the low natural gas pricing, we expect Bayou’s performance to remain
heavily dependent on large-scale and large diameter pipeline projects
through the balance of 2010. Corrpro’s backlog is holding
steady and near-term integration efforts are complete and I can confirm a
$5.5 million rate savings for 2010. United Pipeline Services
has seen a significant pickup in activity. Outside of the
Mexico awards, we have seen backlog growth in our North American business,
renewed bid activity in Chile based on higher copper pricing and several
large bid opportunities in Australia. We expect UPS to return
to the high-growth curve in 2010.
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In
summary, on balance our business performed well in the third quarter,
given the continued economic headwinds and project-specific delays that
have impacted our Energy and Mining segment. We expect a very
strong fourth quarter as NAR continues to monetize its current backlog
while putting the stimulus program into backlog for 2010 and
2011. Our European business will continue to improve
profitability through targeted cost reduction and a focus on profitable
markets. Our Asian operation is expected to have its best
quarter ever as we work in two regions of India, launch a major contract
in Sydney, Australia and expand both our tube and install businesses in
Singapore and Hong Kong.
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Energy
and Mining will produce much stronger results as Bayou processes the ILVA
pipe and UPS starts work on the large contracts in Mexico. As
our press release indicated, we have tightened our guidance for 2009 to
between $1.02 and $1.04 for a fully-diluted share for the full year,
excluding acquisition-related transaction and severance
costs.
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Thank
you for your time and we’ll now be happy to answer your
questions.
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Operator:
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Thank
you. If you’d like to ask a question today, you may do so by
pressing the star key followed by the digit 1 on your touchtone
telephone. If you’re using a speakerphone, we do ask that you
deactivate your mute function before signaling to allow your signal to
reach our equipment. Again, that is star 1 for any questions at
this time. We’re going to pause for just a moment to give
everyone an opportunity to signal.
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And
we’ll take our first question from Arnie Ursaner at CJS
Securities.
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Arnie
Ursaner:
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My
question relates to your Q4 guidance which obviously implies a fairly
dramatic improvement from Q3. You’d mentioned you’ve got a lot
of very positive things happening in international. Hopefully
you have sustained or even improved the margin in North
America. And you also talked about improving trends in
energy.
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I
guess what I’m trying to get a feel for is to the extent Q4 is a 40 cents
type of number, it seems like there may be some non-recurring catch up,
particularly in the energy space or if not since Q4 seasonally is normally
below Q3, I’m trying to understand the dramatic improvement we’re
expecting and is it sustainable at a 40 cents type run
rate?
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Joe
Burgess:
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I
guess there are two key differences in the fourth quarter from the third
quarter. The first is our operations at Bayou – I think we
mentioned in our second quarter results we have been waiting for a couple
of large orders that have been previously booked by Bayou but had not
shipped. We had expected those in late June, early
July. They did not arrive in New Iberia until
September.
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This
is a pipeline project obviously in the United States but sourced out of a
steel mill in India. That pipeline started arriving in New
Iberia in mid-to-late September and the facilities had been processing and
will be processing that single order really into the first quarter of
2010. So you’re essentially going from very little revenue, as
I’ve said before, the Bayou business because of the investment condition
in the old space right now will continue to be lumpy and based on big
orders and the third quarter and particularly August and September were
not good months for Bayou because we were waiting on those pipeline orders
to show. And since they’ve shown, both of their primary coating
facilities are really full go, processing that pipe order so that’s going
to be a significant difference from the third quarter to the
fourth.
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The
second is much stronger performance in Asia-Pacific. Two main
issues there: the first is our Indian operation coming out of
monsoon season, which is essentially the third quarter. That
really reduces our shot schedule by about 50% from kind of a normal
workflow. So the fourth quarter, as it stops raining, we’re
able to return to a more standard shot schedule in the Indian
business. You combine that with starting a new project next
month in Utter Pradesh, which is the state directly to the west of Delhi,
will add to Indian revenues and margins, and then of course this month we
started work on the $27 million project award that we received earlier in
the quarter in Sydney, Australia.
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Arnie
Ursaner:
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Two
follow-ups to that, if I may. Can you attempt to quantify your
year-end contribution from this Bayou contract that was
deferred?
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David
Martin:
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In
terms of bottom line improvements?
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Arnie
Ursaner:
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Yes
please.
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David
Martin:
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We
don’t have that on the call for today. We can certainly do it
as a follow-up.
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Arnie
Ursaner:
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Sure. And
the other question I have relates to the earn out obligation on
Bayou. If it sounds like the key factors that impacted Q3 was
timing and the deferral, why would we reverse or not pay out that
earnings? In other words, why wouldn’t they be earning it in
the next few quarters?
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Joe
Burgess:
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Well,
just the way the original acquisition was structured was based on Bayou
achieving results for calendar 2009 and then a separate set of results for
calendar 2010 and if they make it, they make it. If they don’t
make it, they don’t make it.
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Arnie
Ursaner:
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I
guess where I’m heading with that is if they didn’t make it because it
deferred slightly into Q4, why wouldn’t we get this back in Q4 as an
item?
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Joe
Burgess:
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Well,
because we missed a good portion of Q3 which is causing an overall miss
for the full year of 2009.
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Arnie
Ursaner:
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OK. Thank
you very much.
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Joe
Burgess:
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You’re
welcome.
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Operator:
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And
we’ll take our next question from Eric Stine at Northland
Securities.
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Eric
Stine:
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Good
morning guys. Thanks for taking the
questions.
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David
Martin:
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Good
morning.
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Joe
Burgess:
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Good
morning.
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Eric
Stine:
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First,
can we just talk about the crews a little bit. You said the end
of the quarter with 67 crews. I think initially you’ve kind of
stated low 70’s – anything there or is that basically just you know
judging how projects are rolling out and the stimulus going
forward?
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Joe
Burgess:
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It’s
not so much on the stimulus going forward as much as it is again finally
starting to monetize some of the backlog that was accumulated late first
and then into the second quarter and into the third quarter. I
think on some of the previous calls we’ve indicated a – frustration is
probably the wrong word – but we’ve had a lot of awarded backlog that was
not released for work certainly as quickly as we have seen things in the
past and there’s been – and I won’t tie up this call with that, but
there’s speculation that some of the tie-up was related to people trying
to evaluate the stimulus dollars and possibly that worked to freeze up the
market a little bit, but we certainly saw a significant slow down between
work that we won and actually having communities release that work to
us.
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That
started to pick up really late second quarter into early in the
third. I think that’s why we’ve seen the North American
business revenue tick up year over year. A mix of those work
releases plus, as we discussed, about $50 million this year so far of
awards related to the stimulus. So when you put all of that
together, we started the year at 59 crews, I want to say, Chuck,
right?
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Chuck
Voltz:
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It
was 60.
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Joe
Burgess:
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Sixty
and I feel that to get to the execution pace that we need to meet the
scheduled commitments in these contracts, that we’ve needed to increase to
67. And I think we’ll be up to 70, 71 by
year-end.
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Eric
Stine:
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OK. And
just to expand on the crew metrics a little bit, can you just give us an
idea of maybe where you stand in Europe and Asia-Pacific and maybe
what your long-term goal is?
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Joe
Burgess:
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On
crews?
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Eric
Stine:
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Yes.
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Joe
Burgess:
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I
do not know the crew count in Europe. We can certainly deal
with that in a follow-up. It’s a little more convoluted over
there because we operate through joint ventures, certainly in
Germany.
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In
Asia we have gone from – this year we’ve gone from two crews in India to
six now. In Australia we had a single crew and we now have four
focused on the Sydney contract and the balance of the business and we are
forming a crew now in Singapore to focus on what we anticipate will be
some successful bids later in the year.
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The
balance of our Asia-Pacific business is, of course, tube sales and
equipment and technical service into largely the Chinese
market.
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Eric
Stine:
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OK. Then
it’s…
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Joe
Burgess:
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Now
we have three crews in Hong Kong. Sorry.
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Eric
Stine:
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Three
crews in Hong Kong. OK. Can we just turn to
Bayou? Can you just talk a little bit about the recent
acquisition of the facility in Canada and how you view that, what that
does for your market opportunity?
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Joe
Burgess:
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Well,
Bayou has had long-standing relationships with a number of Canadian
pipeline and energy companies, TransCanada, EnCana, others, and they’ve
done quite a bit of work on their project-related activities in the
southeast, the U.S. southwest, around the Gulf of Mexico, even down into
Mexico on occasion.
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What
this allows us to do, Garneau Industries was a privately-held family
business that has been operating in Canada for 20 years plus, has enjoyed
a lot of success but for a variety of reasons, was not enjoying success
here in the last couple of years and the owners and investors had made a
decision to exit that business. We saw this as an opportunity
to extend our coatings capability. Of course, Corrpro has a
large Canadian presence in the Edmonton area focusing on the Canadian
market for cathodic services. UPS has had a strong presence in
the Canadian market for a number of years and so this gave us an
opportunity to extend our coating capability into the Canadian market for
we think again a very good value.
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We
also were able to bring into this deal a company, Perma-Pipe, who is a
company that specializes in piping insulation. They’ve been a
long-standing partner of Bayou – had successful partnerships with Bayou in
the Gulf Coast region for a number of years. They have a very
strong insulation product line. That’s obviously an important
part of the market in Canada, and so we were happy to have them join us in
a 51/49 venture for the Garneau assets.
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What
it really does for us – and when I say extend our coating capability into
Canada, the coating facilities, typically because of transportation
logistics, you can draw a 600, 700 mile circle around your operating
facility and that’s really the geography that you can support, just given
the cost of trucking pipe to various areas. So when I say that
Bayou worked with TransCanada or EnCana and those companies, they worked
on the U.S. portions that they could support from their geography in New
Iberia, Louisiana, pipeline projects in the U.S. So Arkansas,
maybe up into Colorado.
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What
this allows us to do is to work with some of those key customers and
clients on pipeline activities in the Canadian market which we believe are
going to see a significant investment over the next 5 to 10 year
timeframe, certainly related to the Tar Sands which are several hours
north of the Edmonton area and then, of course, there are also large scale
natural gas shale plays that are being developed by Exxon, BP and
others.
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So
this gives us an opportunity to support piping projects on the Canadian
side which previously we’ve been unable to do.
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Eric
Stine:
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OK. Just
one last question, switching gears to water rehab. In the
release you indicated that you had some execution issues. Can
you just go into that a little bit and maybe what you’re doing to remedy
that?
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Joe
Burgess:
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Chuck? Water
– I guess you’re talking about the – we had some execution activities on a
project in Monroe, Michigan.
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Eric
Stine:
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Right. I
didn’t know if it was specific to that one water project or if
it…
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Joe
Burgess:
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Yes. I
mean, the main issue with water – and we’ve said this, really for the last
two quarters – is we need a product that’s a structural solution and the
product line, candidly, that we were going with prior to our instruction
when InsituMain™ was not structural, and we can spend a lot of time with
the engineering community and our clients talking about the need for a
structural product, but it’s what they want. And so we have
been spending time focusing on developing InsituMain™ which is the
structural product that the market wants.
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I
think the other thing that we’ve had to focus on hard is the issue of
re-tapping connections, and we need to find solutions that allow us to
include, to achieve a productivity level that allows us to spend
essentially less time over the hole, and with the strict focus that we had
in the past on mechanical, robotic sealing that was really leading us – it
was taking too much time to execute the projects and time is money and it
was impacting our ability to get below the cost of dig and replace, which
is the real pivot point in that market, for us being able to convert more
and more of that market to dig and replace. Excuse me – away
from dig and replace into trenchless capabilities.
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So
we’ve spent a lot of time and energy, R&D money early in the year and
pilot test dollars really focusing on the InsituMain™ product which we
believe will enhance pilot testing and in some actual settings already
performed very well in the 12 to 18 inch diameters. We’re
working now to take it down to 6, up to 36. And as I said in my
remarks, that will allow us to be able to effectively work in about 70% of
the water main rehabilitation market.
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Eric
Stine:
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OK. Thanks
a lot for the color.
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Operator:
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And
we’ll take our next question from Glenn Wortman at Sidoti &
Company.
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Glenn
Wortman:
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Yes. Good
morning everyone.
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David
Martin:
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Good
morning.
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Joe
Burgess:
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Good
morning.
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Glenn
Wortman:
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Yes. In
last night’s release, you guys had mentioned that 2010 looks to be perhaps
the strongest year in Insituform’s history. Can you just
provide a little bit more detail on what that implies? Are we
talking our record EPS which – and what would that
imply?
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Joe
Burgess:
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Well,
I have a hard time hearing that. I’m sorry. Could
you …
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Glenn
Wortman:
|
OK. I’m
sorry. No, in the press release you had mentioned that you’re
looking at 2010 as perhaps the strongest year in Insituform’s
history. Can you give us a sense of what that might imply or is
it a little too early to get into specifics?
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Joe
Burgess:
|
Well,
it’s too early to get in the numbers but I don’t know that it’s too early
to get in specifics. We certainly see – let’s just go business
unit by business unit. I mean, we see a very, very strong year
for NAR in 2010. I think Chuck and his team – as mentioned in
the press release and in my remarks – continue to do an excellent job
driving improved margin performance. We’ve started to see an
uptick in the market; we think both in terms of the market and increased
revenues related to the stimulus. The stimulus still we have to
put a range on that for you.
|
|
As
I’ve described we’ve seen about $50 million in total awards through 2009,
$25 Million in the first half of the year, $25 Million in the third
quarter. There’s about $130 million out to bid or that we think
will be out to bid in the next 3 to 4 months and then that leaves another
$300 to $350 million that we think is somewhere in the pipe, if I could
use that phrase, yet to come out. So whether the $300 and $350
million turns into $200 or $150 million, you add it to the $130 million
that we already see – I mean, those are pretty significant numbers in a
market that we put at about $900 million.
|
|
|
So,
given our capture rates in terms of individual projects or total dollars,
we feel like that we’ll have a significant uptick, certainly in 2010 and
probably spilling over into 2011, although some of those logistics have to
get worked out based on the specifics of the legislation and when
communities have to make those commitments, etc., obviously the longer the
wait, the less they are really a stimulus and they are just folks spending
money.
|
|
|
So
we feel very good about NAR going into the fourth quarter into
2010. We feel like our European operations will continue to
improve profitability. We’ve persisted with an ineffective cost
structure there for a long time and we’ve persisted with, I think,
attempting to be an installer, a direct installer in a lot of markets
which weren’t particularly profitable. We’re seeing some impact
of some work we’re doing in those markets to increase profitability in
2009 and I think that market – that momentum will continue in
2010. We’re also adopting some of the strategies successful for
us in the U.S., like more market-based pricing on internal tube sales and
external tube sales which has added millions of dollars of profitability
to our U.S. operations and we expect on a smaller scale for it to do the
same thing elsewhere.
|
|
|
Asia-Pacific
is all about top-line growth and matching that with operational
capability, as we really started 2009 with $35 million worth of work in
India. We’re going to finish 2009 with almost double that in
India, $30 million worth of backlog in Australia to be executed in
2010. We see a very strong bid table in Singapore and in Hong
Kong and we’d done some good work I think this year in putting together
relationships that are going to increase – that have increased third-party
tube sales into this market and next year we expect to see some fairly
significant tube revenues out of the mainland China
market.
|
|
|
So
Asia, while it has experienced tremendous growth this year, we expect
to continue that momentum into the next years. We think
InsituMain™ will drive some contributions in the water
business. Again, we are piloting really in every region and in
Canada and feel like we have some good prospects that we will start
hitting the backlog by the end of this year. But we think that
that business will start to contribute next year.
|
|
|
And
then on the E&M side, as I said, both UPS and Bayou have kind of
endured down years. Some of that was
expected. But some areas, particularly some of the Bayou
ancillary business, was a little worse than expected. Based on
the old price we expect a modest rebound there but Bayou has also been
successful in capturing some of these large scale pipeline
awards. And we feel pretty good about where they are now
relative to 2010.
|
|
|
Corrpro’s
been a solid business from the get-go and we expect them to modestly grow
in 2010 and UPS has seen very large increases here recently in their
backlog, approaching 2008 levels and they also have a very solid bid table
entering the year in 2010. And this is a company when they have
a solid bid table and project development table, they create success
because of the quality of the product and the quality of their execution
capability.
|
|
|
So, when
you put that together for 2010 – I think it’s a fair statement that it’ll
be the most successful year Insituform’s ever had.
|
|
|
Glenn
Wortman:
|
OK. Thank
you. And then you guys have had two successive quarters with
the gross margin in North America, higher than 25%. Do you
think these margins are sustainable?
|
|
Joe
Burgess:
|
Well
we certainly think that higher gross margins are sustainable in
NAR. The market – it can be a difficult market to
price. Many of you followed Insituform for some
time. We think we’ve adopted a strategy of capturing larger
projects which really leans a lot of cost, creates manufacturing
efficiencies and gleens a lot of cost out of our mode and demode
situation, our transportation logistics, tube delivery logistics,
etc. It also allows us to very effectively buy the raw
materials and support our process and I think those things, together with
lower resin pricing and our ability to preserve that in the pricing in the
market place, have driven those margins up.
|
|
I’d
also like to think that we’re really only 17 months of me being here
and Chuck Voltz to my left here has been here not yet a year, so I know
that we are still early in terms of really driving a lot of these
improvements throughout the organization because it’s a fairly large
organization and I think we will continue to make
improvements.
|
|
|
What
I can’t predict is will you – there can be isolated price
pressure. We’ve seen that in some markets this year, certainly
in some of the large urban accounts on the East Coast. I think
it’s fair to say we’ve seen some pretty significant price
pressure. But, I guess the answer to the question is when I got
here we were in the high teens and I think anybody could see that that was
an unacceptable margin level, certainly for the risk we take in these
jobs. It was our sense that we could get that to 25% over
time. I think that we’ve been able to accelerate a lot of these
improvements that we’ve talked about and Chuck and his team has done a
great job of that and so we’re 25% now and we’ve been able to hold with
pricing.
|
|
|
So our
sense is that it is.
|
|
|
Glenn
Wortman:
|
OK.
|
|
Joe
Burgess:
|
But
you know the bid table can be the bid table sometimes and what we do know
running Insituform is that it’s not a good situation if you lose your
backlog. So while we work very, very hard to be leading the
pricing in the industry, sometimes you have to play in the market the way
it is.
|
|
Glenn
Wortman:
|
Yes. OK. Thank
you very much for your time.
|
|
Joe
Burgess:
|
You’re
welcome.
|
|
Operator:
|
And
we’ll take our next question from Debra Coy at Janney Montgomery &
Scott.
|
|
Debra
Coy:
|
Thanks. Good
morning guys.
|
|
Joe
Burgess:
|
Good
morning.
|
|
Debra
Coy:
|
Just
to follow up to NAR business, a couple of things. One, you
spoke about the delays in work releases. Does it feel like that
is done with and that work is flowing more normally now or are you still
seeing some issues of uncertainty and delays? It’s been pretty
steady it seems over the last several quarters it
seems.
|
|
Joe
Burgess:
|
Well
from my perspective, I think it’s getting back to normal although, Chuck,
you might color that.
|
|
Chuck
Voltz:
|
Yes. It
is. It’s getting back to normal but we still see some delays in
getting projects released. But as Joe had mentioned, with the
backlog increase, with the crews that we’d added since the beginning of
the year, it’s starting to come back into the common frame of mind right
now.
|
|
Debra
Coy:
|
So
it sounds like, as someone mentioned earlier, normally we see a seasonal
downturn in the fourth quarter. This year we should see a
sequential increase in the fourth quarter in NAR because we’re still kind
of in that catch up mode?
|
|
Joe
Burgess:
|
That’s
correct.
|
|
Debra
Coy:
|
OK. Thanks. And
then just looking ahead, Joe, you talked about the 25% gross margin level
being sustainable. I guess my question is what happens with
potentially rising fuel and resin cost in an eventually improving
economy? You broke that out as being a significant contributor
this year on the lower side. Do you feel like you’re in a
position where you’ll be able to pass those higher costs through and
maintain margins?
|
|
Joe
Burgess:
|
Well
we endured pretty significant resin price increases in the back half
of 2008 and were able to increase margins through those price
increases. I also think that we’re doing a much better job
managing ourselves with our suppliers. Again, I give the credit
to the NAR team but the strategy of capturing the large scale work, being
able to really concentrate what resources are needed, I think, have given
us some additional purchasing leverage as well which allows us to mitigate
the spikes that we know are coming in the market.
|
|
I
think it’s worth saying that we’ve seen resin price – and I don’t have the
data right in front of me, but resin pricing is higher now than we started
the year in. I mean, we started the year in a really low
commodity pricing arrangement and oil’s been around $70, $75 and now
pushing $80. So you know, people are hungry out there and
looking to pass pricing through. But it’s something that – it’s
certainly a significant issue, and it certainly impacts our margins or can
impact our margins but it’s something that we’ve been able to successfully
manage so far and I think that we’ll continue to be able to do
that.
|
|
|
Debra
Coy:
|
You
don’t have any big resin contracts that are set that would need to be
reset at some point, you’re more flowing through with spot market prices
and regular negotiations? There used to be some big year-long
or multi-year resin contracts. Is that no longer the
case?
|
|
Joe
Burgess:
|
We
don’t have any and we really don’t see the value in
that.
|
|
Debra
Coy:
|
OK. Alright. Fair
enough. And then, turning to Bayou, it sounds as if the pickup
is going to be strong in 4Q and in 1Q and then you mentioned some better
comfort level with the back half of 2Q – I mean, the back half of
2010. I guess my question is how lumpy should we expect that
business to be, the Fayetteville Shale project that you have announced
back in June has just gotten underway. That one was supposed to
be done in March. It got started late. Are you still
planning to be done in March? Is that the
case?
|
|
Joe
Burgess:
|
I
think that will spill over into the second quarter and then they have some
follow on – you know Bayou’s received some follow on orders not really
related to Fayetteville but other projects in the area. And
then they picked up a couple of orders that are pretty substantial based
on a lack of capability and some other coaters. I’ll
apologize. It’s just the nature of the business. You
can’t talk as specifically about every project as you can in the more
municipal wastewater markets.
|
|
And
then we also see a level of activity, of quote activity now in the
business that history will tell us is a good precursor for capturing work
that will allow them to fill out, make us more comfortable that we’re
going to be able to fill out 2010 much better than we would have thought 3
or 4 months ago. Almost all by the way in the oil pipeline
related activity.
|
|
|
Debra
Coy:
|
So
it sounds like on balance, that revenues from what you can see for Bayou
should be up in 2010 fairly comfortably versus where we are in 2009 even
with a stronger fourth quarter or not necessarily?
|
|
Joe
Burgess:
|
Yes
to the first part.
|
|
Debra
Coy:
|
OK. And
then, David, along those lines, can you break out what Bayou and Corrpro
revenues were in the third quarter? UPS I can back into from
the press release.
|
|
David
Martin:
|
Yes. Just
give me one minute.
|
|
Joe
Burgess:
|
Or
you can do that in the follow up, right?
|
|
David
Martin:
|
We’ll
just do the follow up call.
|
|
Debra
Coy:
|
Yes. That
would be fine.
|
|
David
Martin:
|
That
would be better, be more efficient.
|
|
Debra
Coy:
|
Right. OK. That
will be fine. And then Joe, my final question for you is you
talked about the European business model. That’s something
you’ve been talking about really since you got to
Insituform. It sounds like you’re coming close to making some
additional decisions there by year end.
|
|
Can
you talk a little bit more at this point or not yet about sort of how you
envision that business? Are all the countries that you’re in,
ones you want to stay in or the joint ventures, the right structure – what
is your thought on what could change in Europe in the coming
year?
|
|
|
Joe
Burgess:
|
Well
we’re going to make more money in Europe. That’s my primary
thought. To be honest, it’s a little early Debra, and I don’t
want to set the game for the team of managers that we have in Europe now
but I do think you’ll see us – it might be a little bit of a back to the
future plan in some ways. I think you’ll see us not trying to
be an install contractor as a prime in 12 countries, which is what we were
trying to do last year. That is a formula which we’ve learned
the hard way in Europe for getting some quick revenue and then writing it
down.
|
|
It
just becomes very, very difficult to manage to the level of quality that
we need and you just end up taking on you know more risk. So I
think you’ll see us adapt a style where we focus markets where we think we
can be a good contractor, where we focus harder on those. We’ll
get out of some others and greatly emphasize or reemphasize if you will
our tube and technical service businesses and maybe even a licensing
approach in some areas where we try to take advantage of the brand which I
think can be successful in some markets.
|
|
|
Debra
Coy:
|
OK. That’s
helpful.
|
|
Joe
Burgess:
|
But
most of what we’re looking at now suggests that that is going to be a much
more profitable way to go in Europe than in kind of adopting or
maintaining what I’ll describe as a CapEx heavy, let’s try to be a prime
contractor everywhere on the continent, approach.
|
|
Debra
Coy:
|
OK. That’s
helpful. And my final question coming back to the earlier one
as we’re all parsing through you know what is the meaning of the best year
in Insituform’s history? Obviously we can go back and look at
where your peak EPS was back in 2000. You have a lot more
shares outstanding now.
|
|
Are
you talking about the best year on revenue and net income basis versus
EPS? How should we think about that without backing you into
too many corners this early?
|
|
|
Joe
Burgess:
|
Well
it’s early but I think – I would think the answer is all of the
above. You know if I have to come back on that when we give
guidance here on the next call I’ll do it but from a revenue
perspective I think the businesses that we have now should
outperform the past certainly on an operating income and a net income
basis. That should also be the case and…
|
|
Debra
Coy:
|
When
you had $1.37 in EPS in 2000?
|
|
Joe
Burgess:
|
Yes.
|
|
Debra
Coy:
|
OK. I
hear you. Thanks.
|
|
Joe
Burgess:
|
I
know the number.
|
|
Debra
Coy:
|
OK. I’m
sure you do. Thank you.
|
|
Joe
Burgess:
|
You’re
welcome.
|
|
Operator:
|
And
we’ll take our next question from Jonathan Ellis at Bank of America
Merrill Lynch.
|
|
Jonathan
Ellis:
|
Thank
you.
|
|
Joe
Burgess:
|
Good
morning.
|
|
Jonathan
Ellis:
|
So
I just – good morning. I just wanted to first touch on the
stimulus-related projects. If I wrote down these numbers
correctly, you won $50 million so far out of total bids of $150
million. Is that correct?
|
|
Joe
Burgess:
|
Total
bids – now 50 divided by 150 is not our win rate.
|
|
Jonathan
Ellis:
|
OK.
|
|
Joe
Burgess:
|
There’s
a number of that 150 that are not awarded or not decided. But
there are 150 that are in – $150 million that’s in the market that have
been bid.
|
|
Jonathan
Ellis:
|
I
see. But you don’t use that as a denominator for your win
rate?
|
|
Joe
Burgess:
|
Well,
because they’re not decided yet.
|
|
Jonathan
Ellis:
|
OK.
|
|
Joe
Burgess:
|
But
once they’re decided – I don’t have the number that’s been decided but –
Our overall win rate for the year by dollars is 54% and I’m not aware of
any material difference in the
stimulus. Chuck?
|
|
Chuck
Voltz:
|
No. We’re
not seeing that…
|
|
Joe
Burgess:
|
Right.
|
|
Jonathan
Ellis:
|
OK. Got
you. And just on the $50 million that you have won, is there
any difference in margins vis-à-vis your existing North American
business?
|
|
Joe
Burgess:
|
I
don’t know. We can take a look at that and get back to
you.
|
|
Jonathan
Ellis:
|
OK. Maybe
I can ask the question in a different way -- are you seeing more
competitive pricing particularly on the new portion of the
stimulus-related bids?
|
|
Joe
Burgess:
|
Well,
as I said earlier the – we work very hard obviously to make progress on
the NAR margin you know kind of at the NAR level. Pricing is
though in this market a very local and then regional issue so we have as
I’ve seen – we’ve seen pockets of what I would describe as very aggressive
pricing. I could mention certainly some larger contracts on the
East Coast, a couple of California bids that were very aggressive and if
we anticipate that they’re going to be very aggressive then we’re
aggressive, again because we’ve …
|
|
I
think what the last 16 months have shown – 2009 have shown is that we are
able to really optimize our cost structure, when we optimize
our backlog and we become increasingly ineffective if we are out chasing a
series of $400,000 shots. So – But I’m not aware of any
additional price pressure on the stimulus. Intellectually I’d
say that if the stimulus hits in a condensed way, you know I’m just
saying, we were talking about the earlier numbers. There’s $150
million out to bid. We see another $130 million that we think
will bid near term. There’s another $300 million, you know,
that’s kind of in the system somewhere but we’re not coming out to
bid.
|
|
|
If
that all came out in the first half of 2010 to bid for execution, I think
intellectually we would think we would see some upward pricing as people
scrambled for the capital to be able to do that. You know there
might be some other material supply issues, etc., so trying to kind of
stuff that amount of work into this market, you might see some upward
price pressure. But our sense is that what will happen is that
work that people will come out of the – it will come out of the system at
a more even pace.
|
|
|
Jonathan
Ellis:
|
OK. That’s
helpful. Just on the overhead expense line and I know it’s been
somewhat elevated because of the InsituMain™ roll out at least with other
cross selling initiatives you’ve been pursuing. Can you give a
sense of what your timelines for maintaining more of an elevated
overhead expense initiative? Can you quantify what the dollar
impact has been on overhead expense from those various project roll
outs?
|
|
David
Martin:
|
Hi,
John. This is David Martin. Let me address the
overhead jump to Q3 from Q2. We had about $800,000 of increased
expense related to the Hong Kong and Australian businesses which were not
in the business or consolidated in Q2. We also had a little bit
of relocation and severance related to certain moves within each of our
businesses, but most notably in Corrpro. We had some rift cost
that took place during the third quarter so that was somewhat elevated and
that will be going down dramatically as we go into 2010. And a
little bit on – because of our profitability being more in second half we
improved additional incentives versus the second quarter of about
$800,000.
|
|
So
with respect to the initiatives of water, it’s really not that
dramatic. In fact we’re really taking in cost savings related
to that initiative because of the fact that we’re now integrated within
the geographic business units, most notably North American
Rehab.
|
|
|
Jonathan
Ellis:
|
OK. That’s
helpful. Just to turn our attention to Bayou, first of
all if I pulled out the revenue in gross profit dollars from the
press release correctly, it looks like you actually had an improvement in
gross margin in the Bayou business from the second to the third
quarter. Just given your commentary on the, you know, continued
project push outs, what can you attribute that gross margin improvement
to?
|
|
Joe
Burgess:
|
I
think they had a little bit higher volume in the third quarter relative to
the second.
|
|
Jonathan
Ellis:
|
OK.
|
|
Joe
Burgess:
|
In
terms of processing. There can be a lot going on there whether
to do in internal coatings or external coatings, external coatings being a
little bit higher margin than internal which is a higher
structure. So I think in the third quarter we had some mixed
things going on and then a little bit higher margin – a little bit higher
volume.
|
|
Jonathan
Ellis:
|
OK.
|
|
Joe
Burgess:
|
Which
we would think we’d sustain into the fourth quarter as we did mostly
external coatings.
|
|
Jonathan
Ellis:
|
Yes. OK,
great. And in just on the – you talked a little bit more about
this last quarter but looking at primary because specialty coatings, can
you help us understand what – you know why the primary coatings business
has been a little bit more inflated than the specialty coatings business
and if in fact the specialty coatings continue to be the biggest drag this
quarter?
|
|
Joe
Burgess:
|
It
does. They have two specialty businesses. There’s a
welding specialty business and a company, CCSI, which is a specialty
coatings business but in the field. They do a lot of field
joints. And that business has continued to be
down. But having said that, their order book has picked up and
we see that continuing to increase into the early part of next
year. CCSI is also – as is the welding company--participating
in UPS’s Pemex project in Poza Rica. So they’ve picked up some
nice orders related to that work as well.
|
|
So
we see them having – not returning to 2008 levels but certainly doing
better than they did in 2009.
|
|
|
Jonathan
Ellis:
|
And
are those specialty projects more tied to the natural gas side than the
oil side?
|
|
Joe
Burgess:
|
They
do a mix but as we discussed at the last quarter, the depressed
natural gas pricing is an issue for Bayou’s business. Bayou has
traditionally had about 30-35% of their business related to small diameter
gas piping. That’s been kind of a steady flow for
them. And with gas pricing still well below $4 a cubic
foot, that market is very, very slow and that’s created a drag on CCSI and
the welding company as well.
|
|
And
as I said in my remarks, I think what that means for 2010 is all of those
businesses are more dependent on landing the large scale orders and then
whether that trickles down to when Bayou gets a big order and then
there’s field work associated with that that CCSI can
capture.
|
|
|
So
that’s the potential to make the business a little lumpier than we saw and
certainly when we were doing due diligence, but that’s the way it’s
going to be until that gas price recovers a little bit.
|
|
|
Jonathan
Ellis:
|
OK. Great
and then just two more questions for me. Do you have the
utilization rate during the quarter at the Batesville plant? I
know you’d said it’s about 60% last quarter.
|
|
Joe
Burgess:
|
Chuck?
|
|
David
Martin:
|
We’ll
have to follow up with you on that.
|
|
Chuck
Voltz:
|
It’s
about the same. I know that…
|
|
David
Martin:
|
They’re
a little higher, though.
|
|
Chuck
Voltz:
|
Well,
yes. We’re shifting now to a three shift operation down
there. We’ve been running two shifts down there for basically
the balance of this year up to now so we’re going to be going to three
shifts. So there’s an uptick to that. I don’t know
exactly what the number is.
|
|
David
Martin:
|
That
obviously improves our capacity.
|
|
Jonathan
Ellis:
|
Right.
|
|
Joe
Burgess:
|
Yes. We’ll
have to follow up with you on that. But as Chuck said, we’re
going to a third shift there really for the balance of the year and that’s
to – we have to support tube sales in India, orders into Singapore and
Australia and then of course the NAR business which is just buying a lot
of tube.
|
|
Jonathan
Ellis:
|
OK. That’s
helpful. And just my final question just on the – I know you’d
mentioned the $5.5 million of savings that you’re targeting for
Corrpro. Just to clear though, are there any targeted cost
savings from the Bayou business next year or is it really all concentrated
in Corrpro?
|
|
Joe
Burgess:
|
We’ve
targeted some savings this year of about $1 million and we’ve executed on
those. So there’s very little savings this year when you look
at the cost versus cost severance, etc. But on a run rate basis
there’s been about $1 million taken out of that business, and Corrpro’s
$5.5 and that’s also done. So we’re starting to see those
savings on a monthly basis now.
|
|
Jonathan
Ellis:
|
OK. So
those are all completed as of the end of 3Q?
|
|
Joe
Burgess:
|
Right. So
for both businesses on a run rate basis for 2010, it’s $6.5
million.
|
|
Jonathan
Ellis:
|
Great. Thanks
guys.
|
|
Joe
Burgess:
|
And
most of that’s in cap ex. Right? I mean some at
Bayou would be in COGS but most of that is in cap ex.
|
|
David
Martin:
|
Substantially.
|
|
Joe
Burgess:
|
OK?
|
|
Jonathan
Ellis:
|
Thank
you.
|
|
Joe
Burgess:
|
You’re
welcome.
|
|
Operator:
|
And
we’ll take our next question from John Quealy at Canaccord
Adams.
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Mark
Segal:
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Hi. Good
morning guys. It’s Mark Segal for John. Just to be
perfectly clear, the guidance for ’09 excludes acquisition cost as well as
severance, is that correct?
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Joe
Burgess:
|
Yes.
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Mark
Segal:
|
OK. And
then just turning to water, perhaps could you lay out for us some
milestones either near term or longer term in 2010 that we can look
towards to measure progress with InsituMain™?
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Joe
Burgess:
|
Well,
for the last few months our focus has been on piloting InsituMain™ to
achieve a level of acceptance with certainly our client community but
almost as important the consulting engineering community which provides a
lot of the technical specifications and recommendations for our
clients.
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|
So
we have been really pushing both on the technical side and on the sales
side to capture the product. So in terms of milestones
that you might look for, in the fourth quarter and in the early next year,
we have some significant pilot level activity. You know we’re
doing some pilots here in the St. Louis area for the Metropolitan Sewer
District and we also have some project activity up in Minnesota for the
City of Rochester. We had some product activity in Florida,
which we think can be a good market, around Sarasota. We’re
doing some project activity piloting in several markets in
Canada.
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|
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And
the success of those pilots is very, very critical to us being able to
roll that technical success into a business plan and then some actual
revenue – well, most of these pilots are paid but they’re obviously not at
the level that we would want for the business.
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Mark
Segal:
|
All
right. That’s helpful. Thanks a
lot!
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Joe
Burgess:
|
And
then I think the second milestone would be in the first quarter
because our business plan here calls for us to translate that pilot
success into bid activity and project awards.
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|
We
also spend a lot of time on – but there is a not insignificant number of
dollars related to – is also focused on water pipeline
rehabilitation. It’s much, much smaller but it’s certainly a
factor and one of the reasons that we are sprinting, if you will, through
this process so that we can be positioned in the first half of 2010 to
capture some of that work as well.
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Mark
Segal:
|
Alright. That’s
very helpful!
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Operator:
|
And
it appears that we have no further questions at this time. I’d
like to turn the conference back over to Mr. Burgess for any additional
and closing remarks.
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Joe
Burgess:
|
I
don’t have any closing remarks. Thank you for your
time. Thank you for your questions and your continuing interest
in following the Insituform story which we think continues – that story
continues to strengthen and as I said in the remarks, we think we had a
good third quarter. We’re very, very excited about our
prospects for the fourth quarter and 2010 as we continue to build momentum
in this business.
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|
So
thank you for your time this morning.
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Operator:
|
Again
thank you for your participation. That does conclude today’s
conference.
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END