Aegion Corp (AEGN)

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Aegion (AEGN)

Q4 2012 Earnings Call

February 26, 2013 9:30 am ET

Executives

J.Joseph Burgess - Chief Executive Officer, President, Executive Director and Member of Strategic Planning & Finance Committee

David A. Martin - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Brian J. Clarke - Senior Vice President of Business Integration

Analysts

Eric Stine - Craig-Hallum Capital Group LLC, Research Division

Arnold Ursaner - CJS Securities, Inc.

Liam D. Burke - Janney Montgomery Scott LLC, Research Division

Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division

Gerard J. Sweeney - Boenning and Scattergood, Inc., Research Division

David L. Rose - Wedbush Securities Inc., Research Division

Presentation

Operator

Good morning, and welcome to Aegion Corporation's Fourth Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this event is being recorded. Any financial or statistical information presented during this call, including any non-GAAP information, the most directly comparable GAAP measures and reconciliation to GAAP results will be available on Aegion's website at www.aegion.com.

During the conference call, the company will make forward-looking statements which are inherently subject to risks and uncertainties. Results could differ materially from those currently anticipated due to a number of factors described in our SEC filings and throughout this conference call. The company does 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 Joe Burgess, President and CEO of Aegion. Sir, you may begin.

J.Joseph Burgess

Thank you, and welcome to our 2012 earnings call. With me today are: David Martin, Senior Vice President and Chief Financial Officer; David Morris, Senior Vice President and General Counsel; Brian Clarke, Senior Vice President of Business Integration; and Ruben Mella, Vice President of Investor Relations and Corporate Communications.

Let me begin the call with some thoughts on how we concluded 2012 and what this means for the outlook in 2013. 2012 was a pivotal year for Aegion as we completed our first full year with the 3 business platforms we created that support our diversification strategy. By improving our portfolio with a richer mix of products and services, we believe we have now established a strong foundation for growth.

This is our company, one dedicated to infrastructure protection. More than 90% of our work today involves protecting pipelines in the water, wastewater, oil, gas and mining end markets. Our product portfolio also includes a truly exciting and emerging technology that works not only on pipelines, but also on commercial and industrial infrastructure that requires rehabilitation or strengthening.

We delivered growth in 2012 in the areas that matter most to our future, Energy and Mining, Commercial and Structural and North American Water and Wastewater, resulting in a 50% increase in non-GAAP earnings per share, the second-best earnings performance in our history. And we have a great outlook for 2013, supported by a record backlog and a robust market environment across our technologies and services offerings, particularly in the Energy and Mining and Commercial and Structural segments.

For the year 2013, we expect diluted earnings per share of between $1.60 to $1.80 per share. We also expect cash from operations in excess of $100 million and return on invested capital of between 9% and 10%, up from 7.4% in 2012. I will discuss the outlook in more detail after David shares some insights in our fourth quarter and full year results. David?

David A. Martin

Thank you, Joe, and good morning. You've seen the results in the press release, so I'd like to use my time to provide some perspective on the quarter and the full year.

Three important things stand out to me. First, our Energy and Mining, Commercial and Structural and North American Water and Wastewater businesses delivered significant operating income growth and solid margins both in the quarter and for the full year. Second, our cash flow from operations in the quarter was $52 million, pushing our full year operating cash flow to a record $111 million. And then third, our return on invested capital improved in the quarter. And for the full year, it increased by 1.5 percentage points.

Now let's look at our segment results, beginning with Energy and Mining, which recorded another strong quarter. Beginning with UPS, revenues in UPS increased 15% to $41 million in the quarter and gross profit rose 1.6% to $9.3 million. The core U.S. and Canadian businesses remained strong as our customers' maintenance programs remain a strong area of focus. Pipe fusion and lining activity continued on the Morocco phosphate pipeline project, another prime driver of the quarter's results. At 22.8%, gross margins for the UPS business were lower year-over-year, reflecting the large size and the lower margins associated with this Morocco project.

Moving on to Corrpro, where year-over-year quarterly revenues grew 4.5% to $57.6 million. Gross profit increased to $15.3 million, representing gross profit margin of 26.6%. Demand for our pipe integrity engineering services remained strong in Corrpro's core North American market, accounting for the majority of the revenue and the operating income improvement. The success of our strategy is to guide this business towards our higher-margin engineering services. And better cost management was reflected in Corrpro's operating margins, which increased to 14.3% in the fourth quarter. And that's up from 9.1% a year ago before allocation of corporate expenses.

Bayou's performance was mixed as revenues increased 29.5% to $34.7 million. This growth was attributable primarily to coating market in New Iberia and in Canada, where our second coating line came online this winter. While smaller in size, our field coating services business performed very well and was a strong contributor for profitability both in the quarter and more importantly for the full year. Bayou's gross profit in the quarter was $6.7 million, which was down 18.7% from the year-ago period when our operations in New Iberia had 3 high-margin concrete weighting coating projects, which were not present during this quarter. We also had fairly significant losses this quarter from our welding operations, mainly because of cost overruns associated with a large crane fabrication project. As a result, gross margins were 19.4% versus 30.9% a year ago in Bayou.

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