Aegion Corporation
Q1 2008 Earnings Call Transcript

Published: 25 Apr 2008

[Operator:]

Good morning, and welcome everyone to the Insituform Technologies First Quarter 2008 Conference Call. 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 website, insituform.com. During this conference call, we will make forward-looking statements, which are inherent and subject to risks and uncertainties. Our results could differ materially from those currently anticipated due to a number of factors described in the 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. I will now turn the call over to Mr. Al Woods, Chairman of the Board and Mr. Joe Burgess, President and CEO.

[Alfred L. Woods:]

Good morning and thank you for joining us for Insituform’s conference call on our first quarter 2008 results. I am Al Woods, Chairman of the Board and former Interim CEO of Insituform Technologies, Inc. Joining me on today’s call are

[J. Joseph Burgess:]

I’m very excited to be taking on the CEO role at Insituform. This company is a market leader with a great story and I believe we’re on the cusp of some important developments in the company’s history, and for the industry as a whole. First of all, let me tell you a little bit more about why I found Insituform attractive. Having spent 20 years in the water, energy, and petrochemical industries--the last ten managing companies in the water and waste water operating services industry—I am very familiar with the enormous need that municipalities and industries have for cost-effective solutions to the growing problems of infrastructure decay. In the water and waste water markets while demand remains suppressed domestically by economic conditions, Insituform has positioned itself as the leading platform company focused on underground asset refurbishment. I also have great respect for Insituform’s people at every level, including our hard-working and talented work force, strong management team, and board of directors that really understands this company. I believe there is significant value to be realized in this company and I am very enthusiastic about the long-term prospects. One of the first things that I needed to do when I met with the Board regarding this opportunity was to gain a better understanding of the Board’s strategic vision for Insituform and the market opportunities that lie ahead. It quickly became clear, from my discussions with Al Woods and the other Directors, that the Board is laser-focused on improving financial and operational performance and delivering enhanced value to our stockholders. I share these priorities. So let me share with you what our primary focus will be during the next 12 to 18 months. We will continue to explore opportunities in the U.S. sewer and water rehabilitation markets. I think a good example of this is that Insituform is expanding its customer base currently by refocusing its sales force to work with suburban collar communities located around many of our traditional urban clients. These communities represent an exciting growth opportunity for Insituform. We will diversify Insituform’s business both by exploring high-growth opportunities and by expanding in international markets where demand is virgining and competition is more limited. An excellent example of this market profile is the emerging market in India. Our current contracts in Delhi are the first awarded projects of an improved investment program of over $1 billion in that region. Insituform and its local partners are well positioned to grow this market rapidly. We will seek out products and services to compliment our existing businesses and that can be acquired or licensed for marketing through our global distribution network. Our recent iBlue awards in New York City and Hong Kong represent a major breakthrough for this exciting product line. Demonstrating a cost-effective non-invasive implementation of these projects in major urban centers will accelerate the acceptance and growth of the product line. And we will continue to rationalize overhead and improve our margins. We simply can’t just grow our way out of sub-optimal overhead percentages. I’ll be working closely with the management team here and abroad to optimize the overhead structure of the company. I will also be working closely with the Board and the management team to identify additional ways to profitably grow the company and improve its operational and financial performance. I share with the Board and the rest of the management team the confidence that together we can deliver sustainable and profitable growth and enhance value to our stockholders. For 2008, I have reviewed the business plan and the estimates of the analysts that follow the company. The consensus estimate is $0.54 this year and I believe that we will comfortably outperform that estimate. Insituform is known for its technological innovation and operational excellence and I am confident that we have the right plan in place and the right people to execute it. Over the coming weeks and months I will be spending a great deal of time visiting Insituform ‘s customers and employees around the world. I also look forward to meeting many of you who are on the phone today and sharing with you my enthusiasm and plans for this great company. With that, I would like to turn the call back over to you, Al.

[Alfred L. Woods:]

As most of you know, our Board recently completed a review of strategic options with the assistance of our outside financial advisor, Merrill Lynch. We thoroughly considered the company’s strategic options in the current environment in order to determine the best way to enhance value for our stockholders. We have spoken with many stockholders and considered many factors in our analysis, including our business prospects, capital structure, and the industry landscape in which we are operating today. We also considered the opportunities available to us which are quite significant, given, among other things, the aging of the U.S. infrastructure as well as the challenges of the current environment. Merrill Lynch reviewed our current business plan and a number of alternative scenarios and considered a variety of potential financial and strategic alternatives. We concluded from this review that the best path forward was to pursue our strategic plan and hire Joe Burgess as our permanent CEO. I have talked to you before about our strategic plan, which included expanding in domestic and international markets, continuing to improve our margins, and diversification and expansion of our portfolio of products and services. You have just met Joe Burgess, a seasoned executive, in whom we have great confidence. I speak on behalf of our Board when I say we are excited about the future of this company. I know some of you may have questions about the proxy contest initiated by one of our stockholders. The purpose of today’s call is to discuss our first quarter results and our plans and strategies going forward. We will not, therefore, address the issue of the proxy contest today. Earlier this week we mailed our proxy materials to stockholders and I refer you to those materials for further information. We do look forward to speaking with our stockholders about the upcoming election of Directors at an appropriate and future time. With that, I would like to open the call to your questions.

[Operator:]

(Operator Instructions) The first question will come from Debra Coy, Janney Montgomery.

[Debra Coy:]

My question has to do with—as it has been for some time—relating to the quarter profitability. I think that you would have already comfortable with the consensus estimates if we hadn’t had SG&A costs as high as they were in the quarter. And you’ve outlined some of the reasons for that. But I’m wondering how we should think about that going forward? In terms—and not to talk about the proxy fight per se, but $0.5 million dollars on that seems like a lot. And also, just the sequential rise is SG&A is significantly higher than I would have expected. How should we think about the cost structure going forward?

[David A. Martin:]

As you know, the fourth quarter—if you’re comparing back to the fourth quarter--SG&A was about $20 million. That expense was abnormally low due to a number of issues that we had in reversals in incentive compensation as well stock option cancellations.

[Debra Coy:]

Right.

[David A. Martin:]

So if you normalize for that and then add on the cost associated with the proxy contest, among other things, you get back in the range of around the $22 million-$23 million.

[Debra Coy:]

And is that the range we should think about going forward?

[David A. Martin:]

Well, what I would expect is we will continue to have ongoing proxy costs for this next quarter, obviously, until we get through May. But then after that you will start seeing SG&A going down.

[Debra Coy:]

And you also mentioned in the press release about almost $1 million related to CIPP and iBlue and other international expansion. Obviously international and iBlue expansion continue. Are we largely through the European restructuring costs?

[David A. Martin:]

Yes. We had some on-time costs associated with restructuring that particular region in Europe this quarter. Those costs are principally over at this point. Will we have additional costs associated with realignment and things such as that? Yes. And they will be clearly identified when we have them. But as far as normalizing for everything else and the expectation is that we will reduce expenses as a result of some of these one-time things that we have to do.

[Debra Coy:]

Final question on that is you also mentioned FEX in the press release. How significant was foreign exchange as an impact on both the top line and the operating line?

[David A. Martin:]

I would say that the top line, it was approximately $3 million. At the operating line it was fairly minimum.

[Debra Coy:]

Okay. And then my last figure question, and I’ll get back in line, is we have seen some improvement on gross margins over the course of the year over all of us around on the Rehab side. As we start some of this new work you mentioned India—the small project came in a little better—does it sound like—I think what Tom Vossman has told us is that operating margins in Rehab in North America are hanging around the 20% range on the gross line. How will the new Manhattan project look on the iBlue project, and how will India look, in terms of comparing to this approximately 20% range where we are in Rehab gross margins?

[J. Joseph Burgess:]

I have reviewed the bids for both of those works and they’re both higher than the margins than we see in the Rehab market now.

[Debra Coy:]

Well, that’s encouraging. So would we—can we expect, as the backlog has grown, that we can see a little bit of improvement in gross margin over the course of the year in Rehab?

[J. Joseph Burgess:]

That’s our expectation; yes.

[Operator:]

Now moving to the next question, Arnie Ursaner with CJS Securities.

[Arnold Ursaner:]

First question I have is can you give us a sense for the number of crews you currently have versus, let’s say, Q4 or a year ago, and give us feel for utilization, please.

[Thomas E. Vossman:]

We are excited that we have installed about 9% more footage on 17% fewer crews year-over-year. And we’re holding constant with the crews that we ended 2007 with.

[Arnold Ursaner:]

And that number, please.

[Thomas E. Vossman:]

I would like not to give out the number, Arnie. If that’s all right.

[Arnold Ursaner:]

As a follow up to Debra’s question regarding currency. Given that you indicated you had very strong revenue growth from Europe and you benefited from currency, were your revenues even up domestically or were they down year-over-year?

[David A. Martin:]

The revenues in the United States, in Rehab particularly, were fairly flat.

[Arnold Ursaner:]

Okay.

[David A. Martin:]

But margins were up. Significantly.

[Arnold Ursaner:]

Okay. A very kind of minor technical question. On the India contract you mentioned that it came in higher than your bid gross margin. Normally, given your percentage of completion, when you complete a contract well above margin you get a one-time benefit. Can you quantify what that impact was in the quarter? On margin?

[David A. Martin:]

Are you talking about the Indian project?

[Alfred L. Woods:]

Small project.

[David A. Martin:]

It was a very small project, Arnie. And it wasn’t significant in terms of our overall improvements of profitability. The project was started and completed in the quarter, as well.

[Arnold Ursaner:]

I guess my final question for Joe is, you mentioned in your prepared remarks that you will comfortably outperform the $0.54 consensus estimate. Kind of a little more underlying factors you see. Is it revenue, margin, G&A—where do you see the significant—the comfortable outperformance coming from?

[J. Joseph Burgess:]

Well, we see a strengthening in the pipeline, both in NR and in our international marketplaces, particularly in Europe. I’ve had a chance to look at the major projects that we’re getting ready to start in Delhi—in India—and those projects are very attractive for us both in terms of their near-term margin contribution and the long-term prospects because of their placement in a much larger spend profile in that marketplace. And I’m also confident that the current management team is focused on some of the operating expense cost reductions that we were questioned about earlier.

[Operator:]

Now moving on to the next question, John Quealy with Canaccord Adams.

[Chip Moore:]

This actually Chip Moore on behalf of John. I guess first, Joe, given that there have been several CEOs over the past--call it three or four years--what do see as the main challenges, from a company perspective? How do you intend to grow the organization and I guess, what’s unique about your approach?

[J. Joseph Burgess:]

Well, I guess first of all, I don’t really know that there’s been a number of CEOs. There was a CEO here for a number of years and then Al took the reins during this transition period. And I think underneath that there’s been a management team that’s certainly knowledgeable about the markets and has done some good work, both creating some new product lines and targeting some geographic diversity for the core of CIPP business, as well as the other products. I think the key challenge—I mean, this is a business that is still heavily dependent on its North American Rehab business so there’s obviously some ongoing challenges to make sure the company can deliver improved earnings and profits in times like this where Rehab spend is flat, as well as better times when pent-up demand will come through and that market will grow. And we also have to find ways to both work with our existing accounts and, as I described in my remarks, work with accounts around our traditional urban accounts that allow us to create new business within the North American market. That against the context of, I think, rationalizing the cost structure so, again, so that we can deliver shareholder value under whatever circumstance that market deals us. I think the second major challenge is there are some exciting new products and new geographies that the strategic plan has identified and the company is pursuing. The challenge there is to always pick the right ones. And obviously sprint at the ones that can make the major impact for our company and our stockholders, and discard the ones that won’t. And I’m working with the management team now to make sure that we are focused on making those right decisions.

[Chip Moore:]

Great. And just getting back to spending real quick. How should we be thinking about R&D for some of the newer technologies, such as potable water? How fast do you think that will ramp up?

[J. Joseph Burgess:]

I think iBlue is ready to ramp up now. I mean, that project in New York City that was described in our prepared remarks is obviously a project of critical importance for the company and I would add to that the project that we’re doing on Nathan Road in Hong Kong is of equal significance. So when you have a new product that is being installed in a significant way under Nathan Road and under Madison Avenue, it’s arrived.

[Chip Moore:]

Great. And just kind of last one for me. On the guidance, the $0.54, what should we be thinking going forward? What’s your approach? Is that something you plan on updating every quarter?

[J. Joseph Burgess:]

I think that—well, for right now we’ve said what we’ve said; we feel like it’s appropriate to communicate that the consensus analysis that’s on the Street is comfortably achievable and we’re going to do what we can in the future to communicate about what we think our prospects are.

[Operator:]

And Dan Levine with Robert W. Baird will have the next question.

[Dan Levine:]

Previously you had talked about on the strategic initiative you’ve been working on, one of the things you had mentioned was potential acquisition. Can you just update us there? Is that still something that’s on the radar screen or if you’ve stepped away from that?

[J. Joseph Burgess:]

I don’t think that we’ve stepped away from it. I think it’s something that our technology folks and our Board continuously review, when we have opportunities. Of course, those would be focused, as you might imagine, mainly on gaps within our technology profile, either here in the U.S. or as a response to a need in particular geographies. I think the short answer is, if we see something that we think is strategic and adds to our advantages in a particular marketplace, we’ll discuss it with our Board and pursue it.

[Dan Levine:]

And could you talk a little bit about what you’re seeing in terms of the backlog in projects that are out for bid in terms of large diameter versus small diameter projects, particularly in the North American market?

[Thomas E. Vossman:]

We continue to see a slight increase from previous years in small diameter. Maybe somewhere in the 2%-3% range, a higher small diameter percent of market than we’ve seen in the past.

[Dan Levine:]

And then just finally, when you’re looking out, you know, through the rest of the year, what are you seeing in terms of pricing trends. You know, with the market basically flattening out now, are things stabilizing? I can see the margins are better in the first quarter year-over-year; is this something that is stable now and has a chance to improve or are there still risks out there with a slowing economy and so forth?

[J. Joseph Burgess:]

As I stated before, Dan, generally speaking we’re seeing a flat market. That’s consistent through first quarter. We have seen stable margins. We’re trying to influence that certainly through our bidding strategies and some of our sales strategies are moving toward negotiated work, which is a very favorable trend through the first quarter. For the outlook, assuming that stays constant, which at least in our view of the pipeline, we think it’s going to be constant. I do not see any deterioration in our current margin level.

[Operator:]

And our final question will come from Jeff Beach, Stifel Nicolaus.

[Jeffrey Beach:]

First, could you tell me what the stock option expense was in the first quarter?

[David A. Martin:]

Stock option expense for the first quarter was approximately $800,000.

[Jeffrey Beach:]

I know it’s been pluses and minuses have swung around, but management incentive, or maybe broadly, manager incentive has swung with the ups and downs of the business. I don’t know if you would care to quantify last year’s incentive or just describe it. I’m interested to know how management incentive might change this year over last year if you meet your budget that you have set up.

[David A. Martin:]

I don’t believe we’re going to talk about exactly what that number is, Jeff. But obviously it’s going to be higher this year because we’re going to achieve our plan. But as far as numbers, we’re not going to talk about that.

[Operator:]

And that will conclude our question and answer session for today.

[Alfred L. Woods:]

I would like to thank everyone for joining our call today and, Joe, I would like to turn this over to you for closing remarks.

[J. Joseph Burgess:]

I just would like to thank everyone on the call and, as I said earlier, I look forward to meeting you in the future, along with many of Insituform’s customers, and I’ll just reiterate what I said about the prospects for this business. I think it’s a tremendous platform and a leading platform, really, globally, for exploring opportunities in underground asset refurbishment. And I think both the near-term and the long-term prospects are going to be very, very exciting for this business. And I thank you for joining us this morning.