Aegion Corporation
Q2 2017 Earnings Call Transcript

Published: 2 Aug 2017

[Operator:]

Good morning and welcome to the Aegion Corporation’s Second Quarter 2017 Earnings Call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference may be recorded. It is my pleasure to turn the call over to your host, Ruben Mella, Vice President of Investor Relations. Ruben, you may proceed.

[Ruben Mella:]

Good morning and thank you for joining us today. On the line with me are Chuck Gordon, Aegion’s President and Chief Executive Officer; and David Martin, Executive Vice President and Chief Financial Officer. We posted a presentation that will be referenced during the prepared remarks on Aegion’s website at aegion.com/investors/webcast. You will find our Safe Harbor statement in the presentation and the press release issued yesterday evening. During this conference call and in the presentation materials, the company will make forward-looking statements, which are inherently subject to risk and uncertainties. The company does not assume the duty to update forward-looking statements. I will now turn the call over to Chuck Gordon.

[Chuck Gordon:]

Thank you, Ruben, and good morning to everyone joining us on the call today. As you read in the press release issued yesterday, continued strong orders and the resulting backlog in all three segments were an important Q2 highlight. Earnings in Q2 were also up significantly compared to prior year due to strong performance in certain areas of the business. However, we have higher earnings expectations for the quarter and for the first half of the year. I will discuss the actions we are taking to resolve each one performance issues and the outlook for the remainder of the year. David will follow with more details on the quarter results. But first I want to start with additional color on the strategic initiatives we announced yesterday that will combine with the actions we are taking to improve performance and a strong backlog, position Aegion to generate financial results in 2018 that are consistent with the three year financial objectives. If you turn to Slide 3, our strategy is to build the company capable of delivering long term sustainable organic growth. We pursued this objective since October of 2014 when we formed the three segments, exited certain inconsistent international CIPP contracting markets and focused our market leading capabilities to serve customers and municipal pipeline rehabilitation, midstream oil and gas pipeline maintenance and West Coast refinery maintenance services at the time we elected to maintain the portion of our portfolio that was focused on the energy market until we understood the longer term outlook for oil gas prices. In January of 2016, as a result of our assessment of oil prices remaining lower over the long term, we divested our ownership stake in the pipe coating operation in Canada and dramatically reduced energy services upstream activities in the Central Valley of California. The decisions we made in January of 2016, although difficult, enhanced our focus on strategic markets and reduced annual costs by approximately $15 million. The recovery of energy services now with the strong focus on the strategic West Coast refinery market demonstrates our ability to develop discipline businesses capable of generating stable earnings growth over the long term. Markets are never static which requires us to routinely review the long term viability and positioning of our technologies and service in all of our end markets. The strategic actions we announced yesterday are the outcome of this continuous review. Please turn to Slide 4. We considered selling the pipe coating and insulation business in Louisiana when we took action in 2016 to reduce our exposure to the upstream market. However, we believe that the value of the large deep water project would have been significantly discounted as part of the sales price because the technology was new and production was unproven. We also wanted time to assess the Gulf of Mexico market as energy prices recovered to current levels. The project is not substantially complete, has exceeded our financial expectation and is expected to generate approximately $50 million in net cash. I'm sorry $40 million in net cash. The market opportunities for our pipe coating and insulation technologies in the Gulf of Mexico have improved since moratorium was lifted in 2013. We are participating in several bid proposals and continue work testing the new insulation material for another deep water project. However, we've also experienced periods of limited project activity which negatively impacted our financial results. While we have a good and viable operation, the offshore Gulf of Mexico market for our products is based on larger projects resulting from investments in new pipeline construction by our customers. As a result, the Gulf of Mexico project activity at current oil and gas prices is lumpy creating uneven demand for our coating insulation services which limits our ability to deliver predictable sustainable growth. These are the reasons for our decision to sell the business. Tyfo Fibrwrap is a unique and versatile technology used in the strengthening and rehabilitation of pressure pipes. We also see a promising market opportunity in the strengthening of buildings, bridges and other civil structures. We believed an investment in sales resource would allow us to drive growth in North America. Over the last 24 months, we have improved our sales efforts and also learned where we can add value to our customers’ rehabilitation project. As a result of our efforts in the market, there is a growing acceptance of fiber reinforced polymers (NASDAQ

[David Martin:]

Thank you, Chuck, and good morning to everyone joining us today. Please turn to Slide 11. We delivered much improved earnings performance in the second quarter of 2017 compared to the second quarter of 2016. The results highlights strong execution on the large deepwater coating and insulation project and improved performance in the energy services segment. This performance among others help to offset the negative impacts from the market challenges and isolated performance issue Chuck just shared with you. Let's first review the results for infrastructure solutions on Slide 12. As expected revenues declined a little over 1% to $148 million as increased activity in Europe mostly offset a temporary reduction in workable backlog for municipal pipeline rehabilitation in North America. Despite the lower backlog, we had a good quarter in the North American market for CIPP rehabilitation. However, our performance in Q2 2016 was one of the best for this period, which resulted in $3.3 million decline in gross profit. With that said, strong results in Q1 2017 brought the first half performance nearly in line with the performance in the first half of 2016. The other major impact for infrastructure solution’s Q2 performance related to lower backlog in Denmark and Tyfo Fibrwrap in North America as well as project performance issues in Australia, which in total reduce segment gross profit by $2.6 million and accounted for a significant portion of the decline in gross margins year-over-year. We expect year-over-year growth for the segment in the second half of the year excluding any restructuring and relating charges because of the stronger backlog position especially in North America and the actions we’re implementing from which to build a positive momentum across the platform for 2018. Now let's turn to corrosion protection on Slide 13. The strong results not only demonstrated the positive contributions from the deepwater project, but also improved performance for Tite Liner pipelining and our field pipe weld coating services, which is an encouraging sign given the struggles over the last two years from the decline in oil prices. Revenues increased 35% to $128 million, which was ahead of our expectations. Revenue from the deepwater project in the quarter was $41 million and $87 million for the first half of 2017. The strong execution on this project, lead to performance ahead of our original project plan and an early completion in mid-June for pipe insulation applications. Gross margins for this segment were boosted significantly by the performance on the project. However, overall gross margins would have been better if not for the continuation of the mix issues and performance challenges on several cathodic protection and construction projects in the U.S., which negatively impacted corrosion protection gross profit about $4.3 million. We plan to start work in the third quarter on the two Tite Liner projects in Central and South America as well as the onshore portion of the robotic internal pipe weld coating activity in the Middle East. The higher margin offshore component is scheduled to begin in early 2018. As we pursue the sale of the pipe coating and insulation business, assets will be classified as held for sale. From an income statement perspective, we will continue to account for future financial performance as normal; however, we are required to suspend the depreciation and amortization expense. Now let's move to energy services on Slide 14. The sequential performance improvements since the third quarter of last year demonstrates the progress we've made to restore this platform after completing the upstream downsizing in the first half of 2016. We began providing maintenance and other services for the recently secured long-term contracts at new sites during the second quarter helping to lift our overall margins for the segment. For the first half, our turnaround activity was up nearly double from the first half of 2016. We expect turnarounds in the second half to be slightly better than with the second half of last year and the outlook for early 2018 is shaping up nicely. We’re also optimistic about the second half of the year because of the strength in contract backlog and expectations for continued solid execution, strong focus on labor utilization and our visibility into increased share of wallet with small cap construction projects and turnarounds. Now let's turn to cash flow on Slide 15. The improved performance in the quarter resulted in a $27 million inflow of operating cash flow, which offset the $26 million outflow in the first quarter in generating more operating cash flow than in the second quarter of 2016. Our cash balance as of June 30, 2017 was $105 million. The cash flow improvement in the quarter came from higher net income, but we also saw some recovery in working capital. Receivables remain a bit higher than normal as we continue to collect cash during the prime construction season coupled with the remaining receipts expected on the deepwater project during the second half of the year, which was approximately $25 million at the end of June. Given the typical pattern for higher cash collections in the back half of the year, we're in good position to end 2017 with operating cash flow of at least two times projected net income and free cash flow at greater than net income in line with our objectives. We continue to execute our share buyback program, which allows us to repurchase up to $40 million worth of stock in 2017. We’ve spent $19 million for the first six months of the year to repurchase approximately 870,000 shares. We spent an additional $2 million in the first half to reacquire shares related to our equity compensation programs for employee tax obligations. Capital expenditures for the first six months of the year are trending below the prior year and our original plan for 2017. At this point, it's reasonable to expect the CapEx to end the year below 2016 levels in the range of $30 million to $35 million. If you turn to Slide 16, I will update the outlook for several other financial metrics. Consolidated adjusted operating expense in the second quarter was just over 16% of revenues, which reflects efforts underway to access new markets, future innovations, and enhance our sales capabilities, which we discussed last quarter. We continue to believe full year adjusted operating expense will be just under 16% of consolidated revenues excluding any savings from the restructuring efforts that we’re able to realize in the year, which it will obviously benefit earning. Interest expense in the second quarter was in line with our projection. While I expect full year interest expense to be slightly higher than 2016 due to somewhat higher borrowings on our line of credit and rising interest rates on the portion of borrowings subject to floating rates. The effective tax rate on adjusted pretax income in the quarter was nearly 30%, which reflects the greater proportion of pretax income from higher tax jurisdictions. I expect the full year effective tax rate to be around the same level near 30% on an adjusted pretax income. And it excludes the impact from the restructuring cost and the potential impairment charges that will be recorded in the second half. Finally, the substantial completion of a large deepwater means that non-controlling interests were likely to decline to about $1 million over the remainder of the year, which will result in full year non-controlling interests of nearly $4 million. Now I'd like to add to what Chuck stated earlier regarding our plans to reduce our cost position across Aegion in the coming period. In light of the two strategic actions we're taking with the divestiture of the pipe coatings and insulation business in Louisiana along with the exit of non-pressure pipe contracting activities for Tyfo Fibrwrap in North America, we believe it’s an imperative to reexamine our cost structure across the company to ensure that we’re right sized. We will complete our plans to further cost reductions during the third quarter. I would expect our actions with respect to this important effort coupled with the impact of the two strategic actions should yield annualized cost savings in excess of $15 million and should be fully realized in 2018. As we stated in the press release, approximately $9 million of annualized savings have been identified in connection with the plans for exiting the non-Tyfo Fibrwrap contracting activities in North America and the restructuring of corrosion protections operations in Canada. We estimate pretax charges of $9 million to $11 million associate with these activities. We currently believe the majority of these charges will be incurred in the second half of 2017. Over the course of the third quarter, we will make final determination with respect to the remaining cost savings and the additional cost to achieve those savings. As part of the prepositioning of Tyfo Fibrwrap business in North America, we will also evaluate the long lived assets and goodwill of the business for impairment during Q3. As of June 30, 2017, the business had $56 million of long lived assets and $56 million of goodwill. There's approximately $3 million of annual amortization associated with the long lived assets. Any reductions in amortization will be added to the savings we have identified as part of the strategic actions. Now please turn the Slide 17. In conclusion, we delivered stronger performance over the first half of 2017 while the financial results certainly fell short of our original expectations. The actions to address the isolated market and performance issues are designed to improve execution, lift performance in the second half of this year and restore earnings growth in 2018. The strategic actions we are taking are consistent with our long-term strategy and strengthens our confidence and commitment we have to achieve our three year financial targets. Now, I will turn the call over to the operator to begin the Q&A session.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Craig Bibb of CJS Securities. Your line is open.

[Chuck Gordon:]

Good morning, Craig.

[Craig Bibb:]

Good morning. In the quarter, you have kind of this weaker than expected quarter, but really strong quarter order growth. Can you talk about through the segments how big order growth with play out, was it backlog revenues over next year and are we talking about similar increases in revenues, the new order that you are seeing year-to-date?

[Chuck Gordon:]

Okay. So the backlog is obviously mixed. We mentioned the offshore weld coating project as an example that – most of that project – almost all of that project to be executed in 2018, very little of that will be 2017. Certainly, the increase in the Tite Liner projects we'd expect to execute those this year and maybe a little bit trailing in next year. And finally the backlog at North America rehab is about 9 months worth of backlog. Now the way that backlog plays out is that it typically when we put backlog in place, it takes probably 90 days before it really becomes workable. That was one of our challenges in Q2 was although the backlog had improved during Q1, we really didn't have workable backlog in several areas, which is certainly been rectified over the course of the quarter as that backlog became workable. The way you're going to see during the second half of the year is higher revenues, but a significant portion of the backlog also stretches into next year. We're very happy with the health of our core markets. I think what we're seeing on the West Coast in the maintenance market, in the refinery market, has been strong, it looks like it was going to be strong going into next year. Certainly, we've had tremendous orders in North America for pipe rehabilitation and also Europe. And then as we look at cathodic protection services as we look at North America and the U.S. in particular, the orders have been strong. So we needed the backlog that sets us up nicely for the rest of the year, Craig. And it will also provide a good solid position going into next year. Now there's a lot – a lot of time is going to pass between now and the end of the year. We don't see a slowdown in the markets, but that'll have to play out over the next five months, but certainly we have a lot of market momentum now in terms of orders and backlog.

[Craig Bibb:]

Okay. And then when you’re talking about EPS growth of 2018, is that ex-Shell or just you’re going to grow year-over-year?

[David Martin:]

It’s ex-Shell and we’ll certainly grow year-over-year.

[Craig Bibb:]

Okay. And then David maybe could you break down the $15 million of annualized savings that you expect?

[David Martin:]

Sure. As we look at the two strategic actions, we see around about $6 million in annualized savings with respect to the Tyfo Fibrwrap contracting exit. As several related to corporate Canada and then the remainder comes from all the other cost reduction initiatives that run across the company.

[Craig Bibb:]

Okay. I mean you guys have had a few rounds of overhead cost takeout, is there more to get there?

[David Martin:]

So I would answer that question a couple of ways Craig. The first thing is that when - the first round that we had in 2014 we really formed the segments and set up the corporation to be able to focus on our key markets and I think that effort has been successful. We also exited some inconsistent international markets at that point in time. What happened though in - at the end of 2014, as we went into 2016 is that oil prices declined by 50% and it really did have a dramatic impact on the portion of the business that faced the energy market. What we've done over the last two years and continue to do with the [indiscernible] divestiture is take a hard look at our businesses, take a hard look at our technologies and look at the health of the end markets and make sure that we feel like we've got a good opportunity to generate sustainable results. I don't think we're going to see another fundamental market shift like we saw in the oil markets that would - that have predicated some of the moves that we've made, but we are going to continually look at our businesses, look at our portfolio and make sure that they represent each portion of the portfolio represents a good opportunity to create sustainable long term organic earnings growth and we’ll continue to do that. I think the activity over the last couple of years has certainly been impacted by the change in the oil market.

[Craig Bibb:]

Okay. All right. Thanks a lot.

[David Martin:]

Thank you.

[Operator:]

Thank you. Our next question comes from Eric Stine of Craig-Hallum. Your line is open.

[David Martin:]

Good morning.

[Unidentified Analyst:]

Hi, it’s [indiscernible] on for Eric Stine. Thanks for taking the questions. First on value, I mean thanks for the color on walking through the reasoning for divesting it. I mean you talked about bidding on several projects and some of the tapping that’s going on, you know if you guys divested, is there any ability to participate and some economics going forward given that it’s your proprietary coating technology? And then second, can you just maybe talk about the process there on the sale? I mean are you starting from a standing start or do you have – you already received any indications on that?

[Chuck Gordon:]

Okay. I guess a couple of things. We are early in the process. We are talking to several potential buyers but we are early in the process. I think from a timing perspective, we would like to see the prospect - the process conclude by the end of the year – could trial into next year. But I think from a timing perspective, if you think five to six months that's probably appropriate for this kind of sale. I suspect that the technology will transfer with the business. As we look out there is a second deep water project. We’ve done material testing on. We had not included that project in our three year projections for the business. The timing of the project, the size of the project is still uncertain.

[Unidentified Analyst:]

Okay, thanks for the color. And then in the Middle East, can you just maybe talk about what the pipeline looks like they're? Split between maybe onshore and offshore? And then on the margin front, can you just refresh our thinking? I’ve seen remember the loss of project being kind of high 30s maybe low 40s gross margins. Is it - you mentioned being similar, is that the right ballpark?

[Chuck Gordon:]

So a couple of different questions, I’ll answer them sequentially. I think we are having in Asia and the Middle East, our Mideast pub had a more difficult year last year, wasn't a bad year but it was more difficult, they've rebounded nicely and across all the business lines we've had nice performance issue year-to-date. The offshore project, the margins that you suggested I think we've actually seen higher margins in that on the offshore portion of that business and we would expect this project to be consistent with the margins we've seen in the past.

[Unidentified Analyst:]

All right, sounds good. Thanks for the color.

[Chuck Gordon:]

Thank you.

[Operator:]

Thank you. Our next question from Bobby Burleson of Canaccord. Your line is open.

[Chuck Gordon:]

Good morning, Bobby.

[Bobby Burleson:]

Good morning. So one of the things that stood out for me and is so far is just you guys don't want to miss this opportunity in U.S. midstream or whether you see a nice market. So just curious with some of the managers you brought in there at the mid level et cetera how long it will take for you – the performance improvements that you're trying to implement?

[Chuck Gordon:]

Sure. So it became very apparent I think as the second quarter progressed. We had some challenges in the U.S. portion of the cathartic services business. We've put several key hires in place. I would expect that we're going to start seeing improvement almost immediately and that improvement will continue through the end of the year. I certainly would expect by the end of the year that, that business would be operating at the - in the same ranger of margins that operated in last year.

[Bobby Burleson:]

And it’s just kind of a slow turning shift in terms of the market itself having improved. Is that something that you guys expect that lasts for several years trying to capitalize on that.

[Chuck Gordon:]

You are talking specifically about the mid stream oil and gas market. We see a continuing good opportunity in that market particularly in the U.S. I think the Canadian market is probably going to be stable but not as strong as the U.S. market but we see a continuing opportunity to help our customers manage the integrity of their pipelines and we see that as a solid market going forward in North America overall but particularly in the U.S. We've had nice order volume this year year-to-date in the U.S. We have a strong backlog going into the second half of the year. And related to the opportunity for turning the business around quickly, I mean the good news is a lot of the PO's and a lot of that backlog works off reasonably quickly. So my expectation would be we took write downs, of the $4.8 million year-over-year impact gross margin, I believe we took write downs on some large cathartic protection system construction projects of about $2.8 million during the quarter slept behind us. And I think as we go forward, the combination of a good market and a good management team is going to turn that business relatively quickly.

[Bobby Burleson:]

I agree. And it sounds like you are looking at real long term involvement in Australia given some execution problems but wondering whether are there some structural issues there. How long is that assessment it would take, if you guys can figure out quickly.

[Chuck Gordon:]

Yeah. We have a team over there now. We expect to finish that assessment by mid-August. And we're going to make some decisions relative to the future of that business after we understand the content of the assessment. So this will be – to answer your question, we expect to move very quickly.

[Bobby Burleson:]

Thanks for taking my questions.

[Chuck Gordon:]

Thank you.

[Operator:]

Thank you. Our next question comes from Noelle Dilts with Stifel. Your line is open.

[Chuck Gordon:]

Good morning, Noelle.

[Noelle Dilts:]

Thanks. Good morning. Some housekeeping questions here. First, give us a better sense I guess of the financial impact of some of these restructuring actions and the divestiture you’re working on. Can you give us a sense of the revenue impact and then I'd be interested particularly with Louisiana coatings and insulation facility sort of how in your three year off financial outlook you were incorporating revenue and what you're assuming for profitability.

[David Martin:]

Thank you. Probably the best way for me to talk about the revenue portion of that business is that the current business that we have for North America civil structures strengthening is it has about a $20 million run rate. Now we would expect to replace some of that with material sales and because of the significant overhead reduction in the new business model, I would also expect gross margins and operating margins to improve significantly versus what we've seen year-to-date this year. The total backlog of the five business in North America for civil structural and also the backlog that we see for by you if we take out the remaining portion of the Appomattox project is less than $50 million. And so from a revenue perspective, we don't think that it - it's not a huge hit to revenue. As we look forward in our three year projections for the coating and insulation facility in Louisiana we did not forecast another large project. And basically that facility in a loss position as we project it forward.

[Noelle Dilts:]

Right, okay. And then you’re talking about defending the DNA associated with the value facility, what's not expected to run on a quarterly or an annual basis?

[David Martin:]

The depreciation annually runs pretty close to a little under $5 million.

[Noelle Dilts:]

Okay. And then finally circling back to the cathartic protection business I mean I think you know it sounds like based on your commentary you really think that this was - very much an project execution issue. I just want to make sure that the bid margins in backlog are pretty solid and in line with your expectations.

[David Martin:]

The way we've priced projects and the way we’ve approached projects hasn't changed over the last over the last nine months Noelle. So I don't and I want to be clear we had a execution issue in the U.S. but in Canada that business continued to execute pretty well. The issues in Canada are really market driven. We were fortunate up there in ‘15 and ‘16 have some large projects that allowed us to carrier our organization as those projects have finished now we realize that we need to right size the organization for the market reality in Canada. But Canada hasn't had execution issues the margins that got a little bit tighter up there certainly as the market has slowed down. But are our issues in the U. S. are execution related. We don't think that we have Issues of pricing in the backlog in the U.S.

[Noelle Dilts:]

Okay, great. And last question for me energy services obviously you know nine year-over-year profitability improvement. Margins were maybe a little bit below what I was forecasting. At this level that we thought the second quarter the right way to think about the margin profile as we move into the back half of the year.

[David Martin:]

It is - I think what we saw in Q2 was no pretty solid quarter for the business. The margins were where we thought they would be and we expect that margins in the second half of the year will be better than the margin that we experienced in Q4 of last year. If you remember, Q4 of last year we saw – we started to see the business come out of the restructuring and really show us what it could do. And we expect the margins in the second half to be above the margin that we saw in Q4 last year.

[Noelle Dilts:]

Okay, great. Thank you.

[David Martin:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] We have a question from Brent Thielman of D.A. Davidson. Your line is open.

[Brent Thielman:]

Good morning. Yes, maybe back on the corrosion protection operation began you talked about some of the challenges in the market there. I’m curious why still beauties is strategically important assets right now.

[David Martin:]

We see in a nice opportunity across North America to help our mid-stream customers manage their pipeline integrity. And we think long-term, it's a good market, we think long-term, it's a growing market. And we're going to continue to have a strategic focus on and really enhance our ability to provide predictive analysis for our customers to help them understand the integrity of their pipelines. But the market in the U.S. has been a little bit slower – I’m sorry, the market in Canada has been a little bit slower, but the market in U.S. is strong and we consider the combination of the North American market to be good.

[Brent Thielman:]

Okay. And then infrastructure solution, I think you talked about some large awards in Denmark and maybe even some of your other international locations. I guess is that under new management, how do we kind of get comparable with the execution going forward with some of the new work?

[Chuck Gordon:]

So we have put together over the last year – first of all, we’ve also – we’ve always had a core operating expertise in the Netherlands and we've got a good team there. They're proven. And what we did was, we expanded the overall operation when bought energy – I’m sorry environmental techniques and that business also brought nice operating acumen with this part of the acquisition. We feel good about our ability to bring Denmark launch from an operation standpoint. What happened there wasn't really busted projects, what happened was, was that we had a backlog that was made up of some projects that were very labor intensive that we had to work our way through before we really want to take on more larger projects and we work our way through much of that backlog now. It opens the way for that business to start bringing in additional larger projects, which we won in Q2, we expect a book early in Q3. But I don't think we will have significant operating issues as we go forward in Denmark and in fact I think I said in our – at the call at the end of Q1, we expected Europe to start improving at the end of Q4 based on where we're at now, we've moved that up and we expect to see nice improvement beginning Q4 for that business. So I think from a market, the market is healthy; I think we’ve got the right team in place, we certainly have the experience over there. If we need to send some folks over from the U.S. to support them for a while as they start some of these larger projects, we will certainly do that. But I think we've got the team in place in Europe now to execute and I'm excited to watch them as they go forward.

[Brent Thielman:]

Okay. Thanks, Chuck. And then maybe one more, does the second half look as robust for kind of new order activity in North America for infrastructure solutions, I’m just curious how the pipeline looks?

[Chuck Gordon:]

The pipeline looks good. We had a tremendous first half and so I don't expect the second half to be as strong as the first half. I would be remiss. I think typically what we see is more than 50% of the market opportunity happens in the first half of the year. I expect that will happen this year also, but we see a solid market as we go forward. It’s not going to be as strong as each one was, but we certainly don't see anything on the horizon that clouds the picture for North America CIPP.

[Brent Thielman:]

Great. I have one more just on that. I mean is the market growing at this pace or do you feel like you’ve taken some share there?

[Chuck Gordon:]

Yeah, the markets certainly grew in H1 over what H1 was last year. We also expanded share moderately. We are pretty careful with share. What I can tell you is that booked gross margins for the orders that we gained in H1 were pretty consistent with what we had a year ago. They were lightly – the booked gross margin on the construction side was down slightly, but not very much. So, the market grew, we grew our share moderately, you can see the results of the combination of those two things.

[Brent Thielman:]

Okay, thanks, guys.

[Chuck Gordon:]

You are welcome.

[Operator:]

Thank you. [Operator Instructions] We do have a question from [indiscernible]. Your line is open.

[Unidentified analyst:]

Good morning.

[Chuck Gordon:]

Good morning.

[David Martin:]

Good morning, Jamie.

[Unidentified analyst:]

I think the 3-year plan for operating margins in infrastructure solutions was more than 10% to 11%. I'm just sort of wondering from 5% that you’ve guided to this year, how you doubled the margins?

[David Martin:]

Obviously, last year we had margins that were just under 10%. And what we've guided to is that it’s going to certainly south of that. The first half of the year was more challenging, but we expect margins in the second half to return to fairly close to the levels that we had in the second half last year. So that would mean that we’re going to certainly see trends up in margin from the first after to the second half, so it’ not a doubling event margin at all. And keep in mind we also had these challenges within these businesses that we’ve talked about this morning and you'll be able to – that headwind will be removed over time as well.

[Chuck Gordon:]

I think that the fundamental core of the business, which is certainly the CIPP business in North America remains fundamentally very strong. I think the margins will be about what they've been historically. We have made some investments to grow that business geographically that'll bring the margin down a little bit, but the challenge in that business is really to – we have to remove the drag that Australia, Denmark, in fact North America would have created, that really is the drag that has to be addressed and we're doing that with the actions that we've taken with [indiscernible]. Certainly, we’ve set the table correctly for Denmark and like we mentioned a little bit earlier in the call we've got to address Australia, it’s just a little bit too early for us to explain exactly what we're going to do over there, but certainly during the month of August, we will have a long-term plan for Australia also.

[Unidentified analyst:]

So can you get to sort of back to a 10% level in 2018?

[Chuck Gordon:]

I think we will be in the very high single-digits and potentially into the double-digit range in 2018.

[Unidentified analyst:]

Okay. Thank you.

[Chuck Gordon:]

You are welcome.

[Operator:]

Thank you. Our next question comes from Tate Sullivan of Sidoti. Your line is open.

[Chuck Gordon:]

Good morning.

[Tate Sullivan:]

Good morning. Yeah, thank you. Really a follow-up to an earlier question is your guidance from 19 for EPS growth from 17 to 19 in the low to mid-double digits, what is the baseline for that. Did you mention earlier the baseline is excluding the Shell Appomattox Project in 2017?

[Chuck Gordon:]

No, our baseline is really starting with 2016 earnings per share. That’s out baseline.

[Tate Sullivan:]

Great.

[Chuck Gordon:]

And we expect to maintain the outlook that we have for 2019, we’ve maintained that and then certainly the actions we’ve outlined this morning help us do that.

[Tate Sullivan:]

Great. Okay, thank you very much for clarifying.

[Chuck Gordon:]

Okay. Thank you.

[Operator:]

Thank you. [Operator Instructions] I’m showing no further questions at this time. I’d like to turn the call back over to Chuck Gordon for any closing remarks.

[Chuck Gordon:]

Okay. Again, thank you for joining us. The actions we announced today are consistent with our strategic focus in the markets that best fit our leading capabilities as reflected in the strong backlog position as we entered the second half of the year, but we can’t be successful without sales and execution excellence and we fell short of that in the first half of 2017. I’m confident we will resolve these issues, put them behind us and restore earnings growth in 2018 and deliver on our three-year financial targets. Thanks for joining us. And pleased abide if you have any further questions. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today’s conference. Thank you for your participation. Have a wonderful day. You may all disconnect.