Aegion Corp (AEGN)

AEGN 
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Aegion Corporation (AEGN)

Definitive Agreement to Acquire Brinderson Conference

June 25, 2013 10:00 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

Analysts

Glenn Wortman - Sidoti & Company, LLC

Arnold Ursaner - CJS Securities, Inc.

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

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

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

Presentation

Operator

Good morning, and welcome to this Aegion Corporation Conference Call. [Operator Instructions] As a reminder, this event is being recorded.

Management has provided a presentation to further explain strategic rationale for this announcement. The presentation can be found on Aegion's website at www.aegion.com. Any financial or fiscal information presented during this call, including any non-GAAP information, the most directly comparable GAAP measures and a reconciliation to GAAP results will also be available in Aegion's website at www.aegion.com.

During this 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 the 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 statement.

I will now like to 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 call this morning to discuss a significant move we plan to take to broaden our presence in the U.S. energy market. With me today are David Martin, Senior Vice President and Chief Financial Officer; David Morris, Senior Vice President and General Counsel; Brian Clark, Senior Vice President of Business Integration; and Ruben Mella, Vice President of Investor Relations and Corporate Communication.

Earlier this morning, we announced the execution of a definitive agreement to acquire Brinderson, L.P. and its related entities for $150 million. We expect to close the transaction on or around July 1, 2013. This transaction is a continuation of our strategy to expand our earnings by transforming our company from a $450 million wastewater contractor to a diversified provider of infrastructure protection and rehabilitation. Aegion surpassed $1 billion in revenues last year. Soon, we'll become a $1.3 billion company with an even better outlook for value creation and sustainable growth.

We've been transparent about our desire to increase our participation in the long-term growth of U.S. energy markets, while also securing new sources of recurring revenues. We believe the addition of Brinderson to our Energy and Mining platform furthers these objectives. Brinderson is a leading integrated service provider of maintenance, construction, engineering and turnaround activities for upstream and downstream oil and gas facilities, primarily on the West Coast. In other words, Brinderson is responsible for keeping its clients' facilities running in a safe and reliable manner. The integrated solutions it provides involve anticipated and unanticipated repair of mission-critical systems and equipment, excavation and rigging and subcontracting management, which can include anything from new construction to turnaround or plant shutdown maintenance and replacement activities. Brinderson has approximately 2,000 employees, 200 of whom are program management and engineering professionals across the chemical, civil, structural, electrical and mechanical disciplines. While facility maintenance is the company's core competency, it also successfully cross-sells other services its professionals are known to perform exceptionally well. These attributes have allowed Brinderson to build a strong reputation for quality, reliability, and perhaps most notably, safety. The company's exceptional track record has resulted in long-term associations with blue-chip names such as Chevron, ExxonMobil, Occidental Petroleum, Valero and BP, to name a few. What most attracted us to Brinderson was its successful transformation from a project-based construction business into a much stronger maintenance service-oriented company. Today, Brinderson derives nearly 75% of its annual $230 million in revenues from recurring activities. That's compared to 45% for our current Energy and Mining platform. After this transaction closes, Brinderson's annual revenue contribution will boost recurring revenues for our Energy and Mining platform to more than 50%. Brinderson will also add significant scale with Energy and Mining set to become an $800 million to $900 million revenue platform.

Let me elaborate more on the market opportunity we see for this business. Brinderson opens a whole new end market for us. It allows us to take our first major step inside the fence of what we believe is a growing segment of the energy market. There is a remarkable transformation occurring in the U.S. where unconventional extraction methods are driving growth in the upstream and downstream end markets. Investment is growing rapidly to maintain, refurbish and expand production, flow lines, gas processing, terminals and other upstream facilities. Nearly all of the expected growth in U.S. production over the next few years will come from the Lower 48 states, including California, which is the fourth largest oil-producing state and Brinderson's home market. The demand for petroleum products is expected to grow 20% by 2020 compared to 2008. Refinery utilization is growing at a market where no new refineries have been constructed since 1976. California alone has 20 operable refineries, making it the third largest market for crude oil refinement in the U.S. In short, refineries are running harder to process new mixtures of crude with their existing assets. There are no greenfield opportunities and brownfield expansion space strict land constraints. These emerging, longer-term trends compound the current base investment needed to address aging infrastructure and increasingly stringent regulatory requirements. We are pleased that Brinderson's senior management team has agreed to join us after the close. The outlook in the company's core California market remains robust, and Brinderson is in negotiations on a significant amount of new work. Because of its sustained presence at the facilities it serves, Brinderson also developed a great track record for cross-selling its multiple services. Upstream investments by the major players in California doubled in 2013 from 2012, some of which is for deferred maintenance. The downstream market is defined by centralization of the procurement process, which we believe benefits Brinderson because of its integrated service profile.

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