Q2 2020 Aegion Corp Earnings Call

Good morning, and welcome to EG owns Corporation.

Second quarter, it's funny 20 earnings call.

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It's my pleasure to turn the call over to your host.

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Senior Vice President stability and communications PD <unk> you May proceed.

Good morning, and thank you for joining us today.

On the wine with me are check Gordon Aegeans, President and Chief Executive Officer, and David Morris Young Executive Vice President and Chief Financial Officer.

We issued a press press released yesterday that will be reference during the prepared remarks on this call you can find a copy of our release, our press release and our Safe Harbor statement on the Investor section and they do hands website at Www Dot ATM Dot com.

During this call the company will make forward looking statements, which are inherently subject to risks and uncertainty.

Singularly given the unknown impact of the current code that pandemic and the company's response to these evolving circumstances.

The company does not assume the duty to update forward looking statements with that I'm pleased to turn the call over to Chuck Gordon. Thank you Katie good morning, everyone. Joining us on the call today, Adrian delivered strong financial and operational performance in the second quarter in the face of significant disruptions.

David will spend some time discussing our results and outlook in greater detail and a few minutes, but I think the bigger question investors' minds. Today is how we're positioned to navigate is central to territory and what is shaping up to be a prolonged period of uncertainty for global markets.

Let's start first with an update on health and safety, which has always been our first core value and now more than ever.

Metro place is a critical operator that has continued serving our customers throughout this pandemic.

Through the first half a 2020, we reduced our total recordable incident rate by more than 60% compared to the same period last year.

This discipline has been consistent across your entire organization is all three of our operating segment segments have reduce your recordable incident rates by more than half.

As it relates to the pandemic, we continued to update or protocols to widen evolving health and safety mandates.

Consistent with much of the country, we are starting to see an increase in cases now employee base. However, we've had no documented employee to employee transmission, which is resulting aggressive focus on screening employees and working to minimize the spread of infection at our worksite.

I'm very appreciative of the commitment and focus from each bar employees, you don't health and safety response to cope with 19.

I've said this several times over the last few months for the bears repeating Aegean is better positioned today than at any point over the last decade to successfully navigate the type of significant global volatility that we are seeing well very few companies with the construction or specialty contractor focus our immune to cyclical challenges.

I believe the market spaces age you on occupies today are more resilient to market disruptions and I want to spend a few minutes highlight each of these.

Our cornerstone Insituform, C.I.P.P. business, which drives a large majority of our earnings primarily serves in North American munis form wastewater market.

Our focus is on the rehabilitation and maintenance side of the market, which is based on the sustainable long term demand for the repaired aging critical pipeline infrastructure.

The gating factor on growth in this market is not the need for our services, but rather the funding available for these projects and this has created a critical area, where we see a lot of stability I'll provide some additional background that I believe maybe underappreciated by potential investors in this environment.

The majority water and wastewater utilities operate independent of the city's general fund either through an entirely separate legal entity in larger cities or through a dedicated use enterprise one smaller cities.

Well General fund budgets rely heavily on sales and property tax revenues.

They that are more vulnerable to economic shock water utilities generally rely heavily on user rates.

The majority of our C.I.P.P. projects are funded as part of multiyear capital improvement plans developed by each city.

Funding of capital plans is very city specific but overall roughly two thirds of funding comes from debt financing with remaining one third from cash reserves or pay as you go user fee revenues.

The benefit to the Insituform business from a high portion of customer debt financing is that revenue bonds were other federal or state loans, often have pre determined dedicated usage in our restricted by covenant municipal utility bonds are generally perceived have reduced risk due to their specific tied to a specific revenue. So.

<unk>, which are often results in lower interest rates than general municipal bonds.

All these factors support our conclusion that water and wastewater utility budgets are in a far better position that municipal General fund budgets in terms of both revenue stream stability and the reduced likelihood for funding to be redirected away from utility capital improvement plans and ended the general fund to cover shortfalls.

Certainly.

It is reasonable to project, an overall decline in user rate revenues, resulting from the pandemic build a magnitude is difficult to estimate today.

We've been in contact with many customers over the last 12 weeks to understand potential changes to capital plans, starting with the new July 1st fiscal year. The sentiment from our discussions is that cities are taking a conservative approach to budgeting given the potential headwinds, but overall they do not expect a material change to project activity in the next 12.

Once.

Our order trend for the Intage for North American business also speaks for itself. The overall wastewater see I P. P market is up 10% year to date in our orders were up 11% with year over year increases in the second quarter, even is heavier impacts from the pandemic were felt.

Activity at the Beach bid table remains solid and we expect to see market growth in 2020 as compared to 2019. Additionally, any dedicated infrastructure funding bill would be a further benefit to the business.

We also have exposure to oil and gas markets go to a much smaller extent in the municipal water and wastewater markets. There have been signs of recovery in the oil sector with prices in the $40 per barrel range after dipping below zero in April.

However, pricing remains down more than 30% year to date and much uncertainty remains around future production disciplined and expanded extended impacts on demand from the pandemic.

Agents positioning touches a more stable portion of the global oil market.

Our corporate North American business provides cat critical regulatory driven services to more American midstream oil and gas pipeline operators.

Well a portion of revenues are derived from installing C.P. systems as part of the construction of new pipelines. The majority comes from the ongoing maintenance monitoring and compliance needs of existing pipelines. The demand for these services does not very significantly due to change in oil and gas prices, where the commodity volumes being delivered to the whos pipeline.

Fine.

We also deliberately shipyard shifted our 2020 focus for the corporate North American business away from the construction space and more toward higher value added design and field engineering services, including surveys and third party material sales, we have seen a decline in order intake as result of the reduce construction focus but overall orders.

And backlog of held up well year to date.

Our United and coating services businesses are more dependent on new construction activity in the upstream and midstream markets, but we believe our positioning enables us to capture upside opportunities and limit downside risk to our low fixed cost structure and more targeted geographic focus.

The majority of our revenues today for each of these businesses comes from the Middle East, where we see far less sensitivity to the price of oil for new offshore and onshore construction and maintenance needs due to the relatively low cost of drilling completion and production in the region and the longer term perspective on the industry.

Year to date, almost all of our business disruptions and project ways had been directly related to cold and pandemic through restrictions on the movement of people in supplies strict government curfews in other mandates and Middle East project backlog is up year over year, and we continue to see a strong formal for new awards and the potential for further geographic.

I think expansion in the region.

For our coatings United businesses in North America, the market outlook is more sensitive to price fluctuations in the current sentiment is weaker than in international markets.

However, we have a low breakeven costs, we have low breakeven cost structures in both businesses and we continue to evaluate ways to further reduce our fixed costs.

Across all regions, United in coating services market, leading positions provide customers with the reassurance of excellent quality, which resonates well in the current environment is a tolerance for risk goes down, particularly a new capital investments.

Our energy services segment, primarily serves the west coast downstream market, where historical demand for our our refinery maintenance offerings has remained stable based on a large percentage of captive need for west coast production, resulting in high utilization at a limited number of aging refineries.

Current pandemic is unprecedented in terms of the stay at home orders in Q2, which had a large negative impact on current air travel, resulting in dramatically reduce fuel consumption that forced refinery operators to defer maintenance and construction activities to preserve cash.

Well the severity of the refinery slowdowns and estimated timing for recovery is more unfavorable than we previously expected.

We still believe in the long term demand fundamentals for this business underpinned by strict regulatory and compliance needs to ensure safe and efficient refinery operation, which reduces the ability for operators to delay critical maintenance and upgrade activities for very long.

Our energy services backlog is up slightly year over year, reflecting some of our positive actions to expand share of wallet with existing customers and new maintenance contract wins and the Rocky Mountain region.

Additionally, turnaround backlog is higher reflecting the expectation that projects that were pushed out in the first half of the year will take place over the next six to nine months also construction backlog increased primarily due to a large renewable diesel project that we announced last month.

We believe maintenance man hours hit their trough in the second quarter, and we'll begin to recover as miles driven starts to return to something more normal.

That's a discussion of the markets. We're in today, but equally important to the discussion is highlighting the markets. We are not in any longer and how changes in the business over the last several years have made our earnings profile cash generation more stable.

We've exited a number of smaller either underperforming or marginally profitable international businesses that would have suffered greatly during this pandemic.

Many of our smaller international operations, you significant working capital and suffered from poor cash collections.

As part of the exit of these businesses, we've been able to return cash to the U.S. and improved our working capital management.

We've reduced our upstream oil and gas exposure to less than 10% of our business compared to nearly twice that level five years ago.

In addition into positioning ourselves in more stable markets over the last several years, we've reshaped the organization and leadership team to be more nimble and able to react swiftly to business disruptions. We've taken efforts to streamline our cost structure and improve operating leverage which is critical in periods of temporary revenue disruption like we're seeing today.

We announced additional multiple cost reductions.

Reduction initiatives in late March that were in effect to the duration of the second quarter.

Our ability to move quickly help the organization mitigate the dramatic 23% decline year over year revenues and produce a profitable quarter, while generating significant cash despite the distractions during the quarter from the pandemic the underlying operational excellence of the business is what really stood out.

Ill highlight a few of these performance highlights.

The performance the Insituform North America business has been truly exceptional and we've been able to grow our revenue by 3% year to date compared to the prior year crews have been executing projects more profitably project mix has been good and we've been making progress on growing contributions from new product offerings, including the for sale of unique.

Sure It felt to third party the installation of several thermal pipe Whiners and expanded application of our spread in place pocket Geo Palmer.

Our corporate North America business is showing consistent improvement in operating tens, including higher utilization better core fixed cost absorption and increased profitability.

Adjusted gross margins from the Corporal U.S. business went up more than 500 basis points compared to the prior year, which is a testament to how far we've come in improving the day to day blocking and tackling of that business.

And we are targeting a similar 500 basis point year over year improvement in Q3.

At energy services are strong partnership with key customers to navigate the sudden a dramatic reduction to demand has resulted in new project opportunities and expanded share of wallet several refineries.

Our cash management across the business has also been very strong driven by our cost reduction initiatives and a sharp focus on managing working capital needs.

We've been aggressively monitoring accounts receivable activity and communicating with customers to ensure timely collection.

We've not seen our receivables gets stretch and in fact, our dsos across multiple and in fact have reduced our dsos across multiple businesses.

We've also been fortunate to not be materially impacted by bankruptcies in the oil and gas market through the first half the year in North America, we're primarily selling to major midstream and refinery customers that have sufficient liquidity to weather the crisis, although we continue to monitor the health for key customers closely.

Our balance sheet is in excellent shape, we believe we have substantial liquidity to navigate market uncertainties, but also good firepower to take advantage of any opportunities that may come our way over the next 12 months that could support and complement the long term growth strategy for the business.

As we move into the third quarter outlook for the business is positive despite expectations for continued impact from the pandemic.

We expect year over year revenue impacts to be less severe than they were in the second quarter, we're projecting higher volumes compared to the second quarter with planned increases from each of our operating segments are adjusting earnings guidance reflects an expected increase over the results achieved in Q true driven by improved underlying business performed.

Pardon, partly offset by that.

Turn of onetime cost savings achieved in the second quarter, which David will discuss more fully in a moment.

Well there remains much uncertainty related to the pandemic, particularly with the troubling rising cases over the last month I'm very pleased overall with way our markets and businesses have held up, particularly our core North American see I PBS P. business.

Our current portfolio is not an accident. We spent several years deliberately shaping it for resiliency like we're seeing today in terms of stability in earnings and cash flow generation, we're well positioned for the long term is a critical need to repair aging infrastructure is not lessened by this crisis and our strong balance sheet provides ample opportunity for growth.

Before I close I want to update investors on a more personal matter after thoughtful planning and with full support from our board of directors I am announcing my intention to retires president and CEO when I accepted the position as CEO in late 2014, I committed to serving in the rule for five years.

Yes.

Steadied my commitment late last fall to see the organizations to the completion of its multi year restructuring efforts with these efforts largely behind us and a strong and streamline foundation in place I believe we're approaching the right time for me to step away move into retirement and that a new meter guide aegons growth strategy in the future.

He joins board of directors has been anticipating and planning for this transition for some time and has lost a formal executive search to identify qualified candidates, including the evaluation of internal and external leaders.

Typical CEO transition process is take anywhere from six to 12 months regard regardless of the timing for this process I have and will continue to serve it'd be fully committed to leading the organization until my successor is named and successfully on boarded to ensure a smooth an orderly transition we will provide more updates this pro.

Process on flows folds with that update I'll now turn the call over to David to provide additional details regarding our performance in near term financial targets David.

Good morning, everyone on.

I will walk through a more detailed review of our second quarter results updates on the actions we've taken do improved financial flexibility during the pandemic at our guidance outlook for the third quarter.

Before I jump into that I want to Echo Chuck's positive sentiment regarding our strong safety and operational performance over the last several months I am also very pleased with our successful cash management efforts and believe our balance sheet is in the best shape. We have seen in several years. Many companies actions in dealing with this crisis are designed to man.

As the business for cash, which age on has done well, but we have also been able to deliver solid earnings as well as significant working capital and liquidity improvements. We believe this will be a near term differentiator for the business as we navigate evolving market dynamics and also longer term as we look to opportunistically grow the business.

With that I will start with a review of our consolidated PML results for the second quarter, starting with the topline total revenues in the quarter were 245 million as expected we saw a sizable decline compared to the prior year nearly 20% when excluding exited or to be exited businesses reductions were primarily drew.

And by coated related disruptions across much of the business with the most concentrated impact in our energy services segment.

Revenue declines drove year over year reductions in a group adjusted gross profit and adjusted operating income.

Our focus on cost management to offset revenue declines was a positive contributor in the quarter among the many cost savings and other mitigation measures in place during the quarter, we benefited by more than 3 million dollar in savings related to temporary wage reductions and suspension of employee employer matching contributions.

To retirement plans certain of our international businesses also received nearly 3 million in government wage subsidies. These subsidies in most instances where paid in lieu of AG on Furloughing employees. These savings combined with strong operational performance enabled us to deliver a 50 basis point improve.

Movement and adjusted gross margins hold adjusted operating margins flat and manage at more than 70 million dollar revenue decline to a less than 5 million dollar reduction in adjusted operating income.

Below adjusted operating income we had increased adjusted interest expense due to higher rates and third party arrangement fees in Q2 related to our recent credit facility Amendment also although we significantly reduced borrowings on our revolver during the quarter. The bulk of repayments happened in late June which also contributed.

The higher borrowing costs in the quarter.

Our adjusted effective tax rate was 23.3%, which was in line with the adjusted rate in the prior year period.

All in we delivered adjusted earnings per share of 25 cents, you'll recall, we announced in early July our decision to return a portion of the redo salary in place during the quarter to employees through a onetime cash payment, which resulted in a pre tax expense in Q2 of approximately 2.5 million or approximate.

Me six cents of earnings per share.

Excluding this payment, which we elected to make due to our strong cash management performance our results exceeded the guidance target targets, we laid out in April.

We reported GAAP earnings per share of 12 cents for the quarter the adjustment between our GAAP and adjusted non-GAAP results, primarily consisted of 4.8 million a pre tax restructuring charges.

Of this amount 2.2 million consisted of noncash charges, primarily related to write down of certain assets in the energy services segment.

The remaining 2.6 million consisted of cash charges, primarily related to previously announced restructuring activities in corporate North America, including the downsizing of the lower margin construction business and other profitability improvement initiatives.

We also implemented a small number of reductions in force across certain other businesses driven by cobot related slowdowns. The majority of our pandemic driven cost savings have been short term.

We have done a good job pulling leavers to quickly respond to disruptions in revenue we wanted to take a balanced approach in where we are cutting costs. So that we can maintain our ability to meet rising volumes during a recovery and to grow the business longer term. However, we will continue to evaluate the long term financial impacts to the business and.

The need for more permanent or structural changes in light of ongoing cobot challenges.

Any such additional structural changes could require additional cash and non cash restructuring charges.

I will now walk through a high level review of our second quarter results and third quarter, our outlook for each of our three segments.

Infrastructure solutions delivered strong results that exceeded expectations driven by outstanding performance from the Insituform North America business, while most of our other age on businesses saw revenue and margin pressure in the quarter Insituform North America posted increases across the board in terms of volumes margins.

Orders and backlog compared to the prior year significantly Insituform, North America's backlog was up over 7% on a year over year basis.

Total segment revenues declined 3%, excluding exited or to be exited businesses driven by coded related declines in our smaller five underground solutions and international businesses, which offset the growth in Insituform North America.

Adjusted gross margins improved 100 basis points and adjusted operating margins improved 210 basis points to nearly 15%, which is the highest level in several years and particularly notable considering the challenging environment we are facing.

Profitability profitability improvements were driven by cost savings initiatives, the exit of on profitable international effort operations and strong productivity and favorable fuel pricing variances in the Insituform North America business.

For the third quarter, we expect infrastructure solutions revenues to be flat to down 5% compared to the prior year, excluding the impact of exited or to be exited businesses revenues are projected to be flat to up 5% driven by expected increases in the Insituform North America business that should.

Offset continued temporary declines from our smaller and international operations adjusted operating margins are expected to be on par with prior year levels of 13% the margin decline relative to a strong Q2 performance is the result of higher personnel costs. Following the easing of certain cost reduction actions.

As well as reduce fuel cost favorability as projects in backlog begin to more closely match current commodity pricing.

We generally have four to six months in backlog. So we realized the biggest fuel pricing benefit in Q2 related to projects estimated and one prior to the sharp decline in oil prices in late March.

While we remain cautious based on evolving pandemic impacts this baby an area of upside performance in the third quarter based on the strong trends, we have seen from the in such foreign business year to date.

Shifting to corrosion protections that segment performance in the second quarter came in shy of our expectations, primarily due to international project delays and slowdowns for our United and coating services businesses.

We have a strong backlog of high margin coatings project in the middle East as well as a large project in South America that are experiencing delays due to travel restrictions and shelter in place orders related to the pandemic. We're in constant customer contact on these projects and have high confidence that they will take place and we are currently.

Expect them to begin or resume work towards the end of the third quarter.

Compared to the prior year period revenues declined 26%, excluding exited or to be exited operations. In addition to the project delays I just mentioned year over year declines were primarily driven by the downsizing of our corporate us business, where we have reduced our exposure to certain higher risk and lower margin.

Construction activities as Chuck mentioned, the restructuring actions in that business have started bearing fruit and contributed favorably to margins in the quarter.

Despite the lower segment revenues consolidated adjusted gross margins grew by 310 basis points to 25.2% and adjusted operating margins increased 60 basis points to 3.7% results benefited from 1.5 million encoded related government subsidies to keep employees retail.

I mean, despite reduced revenues. These subsidies were assumed in the forecast for April guidance.

For the third quarter corrosion protection segment revenues are expected to decline, 10% to 15% from the prior year, excluding the impact of exited or to be exited businesses revenues are expected to decline 5% to 10%.

Adjusted operating margins are expected to increase 50 to 100 basis points driven by expectations for continued improvements in corporate us profitability and contributions the timing related to the international coatings project.

Projects as a risk factor for segment results as our ability to perform work is heavily dependent on the evolving responds plans of various international government. We're doing everything we can to be ready to mobilize safely on these projects as soon as we are allowed.

As Chuck outlined our energy services segment has been the most heavily impacted from the pandemic due to reduced west coast fuel consumption as a result of activity restrictions. Although the revenue decline was at the low end of our previous guidance margin performance came in significantly below expectation.

This was driven by a few different moving parts first our maintenance revenues, which are the base load capacity for the business were impacted more heavily than we anticipated due to prolong stay at home orders to offset some of these lower volumes, we worked with the key customer to schedule and perform a large turnaround while this project bent.

At the top line, we agreed to perform the work at reduced margins to allow more of our team to continue working through the quarter.

Second we agreed to extend temporary three to six month price concessions to several of our key customers to help mitigate the sudden drop in refinery volumes. These concessions ranged from anywhere from 100 to 300 basis points Lastly, while we had a high degree of variable costs in the business the lower revenues.

Resulted in higher than expected unfavorable fixed cost absorption, which further pressured margins.

The team implemented cost mitigation actions and reduced operating costs by more than 20% compared the prior year, but overall the segment delivered an adjusted operating loss of $2 million in the quarter.

As we look to the third quarter. We currently project that energy services will post another operating loss, though not to the magnitude. We saw in Q2 revenues are targeted the decline, 10% to 15% compared to the prior year and we are and we are currently expected to rebound off Q2 lows driven by new.

Asian for higher maintenance volumes and expanded construction and turnaround activities. Following deferrals from the first half of the year.

Margins are expected to remain depressed due to ongoing concessions with key customers, but we expect to see improvement in the fourth quarter and into 2021.

The ultimate volumes for this segment remained both the risk and opportunity for results in the third quarter, but we have made our best estimate based on trends we're seeing today.

We are evaluating potential long term impacts to the energy services business as a result, with the pandemic, we're focused on continuing to streamline the cost structure to navigate this period of uncertainty as well as continuing to capture white space opportunities with customers and expand our presence outside the west coast.

That wraps review of our operating segment results.

Adjusted corporate spend in the second quarter declined 25% compared to the prior year as a result of the cost reductions in place in the third quarter. We expect continued reductions year over year, though not to the same extend its the second quarter, partly due to the higher salaries to higher expected personnel costs due to the reince.

Statement of full salaries across North America.

Cost reductions that remain in place across the business include a suspension of employer matching company sponsored retirement plans continued freezes on all non critical spending for capital expenditures travel and other discretionary spending.

And employee furloughs and certain portions of the business to match reduced demand expectations for consolidated Adrian we expect to reported revenue decline in the third quarter of between five and 10%. We're projecting adjusted earnings per share of 25 to 35 cents, which implies improvement from second quarter results.

But as below the prior year due to lower revenues and business disruptions associated with the pandemic Q3 20 results will also reflects incremental expense of approximately $1.8 million associated with the vesting of stock awarded to certain employees and directors to return the value of salary and board fee reductions in.

Placed during Q2 20.

As there remains considerable uncertainty around the extent and duration of business disruptions related to the pandemic, we're continuing to suspend full year guidance in lieu of more near term qual quarterly projections, we will look to reinstate longer term guidance, when we had better visibility and confidence in our ability to.

Forecast more normalized volume activity.

I'll now shift to a discussion of our cash flows and balance sheet, which are strong highlights in the quarter and key differentiators for us as we navigate this crisis.

Ending global cash balances as of June Thirtyth were 96 million and that is after the repayment of more than 40 million in debt during the second quarter.

Notably our use cash balances comprise 80% of our ending cash balance, which is significantly higher than historical levels. Evan as we have reduced our international footprint and successfully brought cash back to the United States. Our net debt level as of June Thirtyth was up 165 million, which is the lowest.

Level in more than four years, our leverage ratio was just under 2.7 times and well within our required covenant compliance limits and we have capacity to borrow up to 140 million on our revolving line of credit we're extremely pleased with our liquidity position and feel confident in our ability to successfully.

We navigate the current uncertainty related to the pandemic.

Net operating cash flows year to date through June Thirtyth were $60 million, increasing by more than four times over the prior year level operating cash flows benefited from solid earnings generation as well as strong working capital improvements of more than $30 million, we had been aggressive in accounts receivable monitoring and collections.

Reducing inventory needs, where we can and working on it on to extend payment terms with suppliers key businesses driving the favorable working capital changes include Insituform, North America, corporate us and United pipeline systems.

While we expect to see an increase in working capital needs when revenues begin to rebound, particularly in the energy services business. I believe we will continue to benefit from the disciplined focus to derive improved cash conversion across the business.

Operating cash operating cash flows benefit in the quarter by approximately 4 million in deferred payments related to the timing of federal estimated tax payments and employer payroll taxes as permitted by the Cures Act, we expect to see a similar level of deferrals in each of the third and fourth quarters.

Within investing activities, we successfully collected 3.6 million related to the divestitures of our estriol in Spanish contracting operations. We continue to plan for the divestiture of our contracting operation in Northern Ireland, but we have pause activity on the process until market conditions improve.

Capital expenditures year to date were 10.5 million down more than 35% from the prior year period due to bending restrictions expenditures year to date were used primarily to support the Insituform North America business and Middle East project activity, we are targeting full year spending to be between 15 to 27 million.

And with a continued focus on only funding critical business needs.

While we remain committed to returning excess capital to Aegon stockholders overtime, our share repurchase program remain suspended throughout the second quarter year to date purchases of 5 million relate to first quarter purchases prior to the suspension of the program.

That wraps review of our second quarter results in near term outlook for the third quarter. We believe we are well position to successively nag navigate this crisis and our stable earnings strong cash generation and solid balance sheet position us well to emerge stronger from this period of uncertainty with that operator at this.

Time, we'd be pleased to take questions.

Thank you.

And gentlemen, if you have a question at this time. Please press the star and then the number one on your touched on telephone.

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Your first question comes from the line is having Stein from Craig Hallum. Your line is now.

Good morning, everyone.

Good morning, Eric player.

And then or sure gains for third party tube sales.

I think I think in the quarter we.

Probably very modestly increase sure.

The overall markets through the first half of the year was very strong and we certainly maintains share in terms of our order.

Turnover in terms of our orders, but I would say in terms of market share it was up moderately modestly.

Got it.

And maybe just turning to energy services, then you mentioned the price concessions and it sounds like that was more with one customer and that large turnaround but.

Just curious do you anticipate that you'll have any issues.

Cause some of that back or was it fairly well understood that that was kind of a one time deal.

Not necessarily open the other customers as well.

I think let me clarify something we had a large turnaround that we did it.

Reduce prices, but we also reduced prices at several of our large customers.

During during the to help them get through a very difficult time.

All of those price reductions have a sunset on them that we've agreed with the with the customers I don't think that we're going to see.

Long term impact from those short term price reductions we have made a long term we have made.

Couple of cases longer term price reductions for more <unk>.

Sure and the refineries.

And of course, social go on but we expect our total gross margin dollars to actually benefit from that.

Will the real issue and cute too was.

Just really low volume combined with the temporary price reductions that we gave several of our large customers. We don't anticipate a problem.

Getting those back the date that we're going to reinstate are normal pricing is very clear and the refineries are starting to run at a much higher utilization right. Then they were a couple of months ago. So we don't we don't anticipate that I think what it did help us do what is create stronger partnership long term partnership with our customers because you will.

To to provide those concession short term when they needed help.

Yep understood not as good to hear though on pricing as well.

Maybe last one for me just on the acquisition strategy, obviously your balance sheet.

Healthy shape.

I mean should we still view this as it would be more of a.

Bolt on acquisition or something technology wise rather than.

A sizeable acquisition that adds a new area to the business.

Absolutely.

Yeah, we don't we don't see it change in that strategy.

Are constantly looking for bolt ons and four we've got some gaps in technology, we'd like to feel.

This may be a good environment to be able to find some of those but our strategies absolutely to build up our core businesses and not expand outside of.

Businesses, we know well.

Okay, that's great. Thanks.

Thanks.

Your next question comes to the lineup rent Seelman from da Davidson.

Good morning, Great. Thank you very good morning.

Chuck I appreciate the opening commentary on <unk> kind of wanted to dig into that a bit more when you look at that.

Sure the core and city form business through.

Previous periods of economic contraction talk about how utilities or municipalities.

Maybe prioritize dirty winery kind of reasons drinking water investment I'm, just wondering if you've seen them kind of discernible trend and where they allocate goes down right.

In the area of water when times get a little tougher.

So we looked it looked at.

Certainly looked at the time frame it'll last recession in 2000, 832010, and it's hard to draw a really good comparisons because of the stimulus package that include.

[noise] included water and wastewater infrastructure.

Certainly during that time period in such a form had several really strong years.

But it's hard to it's hard to.

Compare that to the situation. We're in now because that stimulus package there isn't a stimulus package in place.

Most of the time these municipalities have a three year capital plan.

And what they're what they're doing is they take a look at their operating expense there that service and then they decide what they need to do from a from a capital improvement perspective, and they end up putting.

Coming up with the rate structure that typically sort of a three year cycle.

And I don't see a lot of money being moved from water to wastewater I think you're going to see.

Probably the same kind of spending what's hard to understand is exactly what user fees are going to do because a portion of our business is funded directly from user fees.

But I feel like.

Wastewater side of this thing is strong theirs.

About 20% of the business.

The market is under consent decree, but the other the other part of the market.

Maybe a lotta people don't realize is the epa's continually going in and finding municipalities for all all kinds of things.

And typically the threat is if you don't clean up your act.

We're going to we're going to put you through a consent decree, which all the city's want to avoid so most of the cities that we work with and most of them or what I would say not not necessarily the larger cities, but most of them. We work with have a very aggressive proactive program in place too.

To to rehabilitate they're they're sewer system, so I don't see.

We feel like the market stable, it's hard for us to look out we have a really good view on the market for about three to six months and then it starts getting a little bit more difficult for us, but and talking to a lot of customers over the last.

Couple of months.

Conclusion, we would come to is that most of them are saying they would expect project spending to be about the same next next year is it has been over the last 12 months, which is.

This.

Economic situation I think is is a great place to be.

Is there anything that green from.

It seems like headlines right now more than anything, but <unk> talkin infrastructure stimulus I mean anything that you'd like for you from that that.

That might fall down to your business.

So I don't know enough about exactly what they're.

Is there is a lot of talk about infrastructure Bill we always do are planning based.

I'm not having one and our outlooks always based on not having one I really I really don't know where all that we're all that stands and wouldn't wouldn't want to comment we try to track a lot of the discussions through our industry advocacy group, but even in discussions with them I think it's.

It's pretty uncertainty.

First of all if there will be a bill and then how much of it would relate to water water and sewer spending. So at this point why we would certainly like to have have a.

We're not planning on it.

Yep understood.

Maybe.

Just on the infrastructure solution segment again that that.

Trying to understand the components driving to match improved margins.

Presumably some of that is all the action taken.

Really over the last few years I I'm just wondering if there's other element feel cost saving driver cost savings things like that or this is just.

<unk> execution.

Alright.

David I'd say, it's a combination of all of that.

Certainly the accident that we've taken in divesting the international operations of ultimately improve the overall process profitability of the business.

We'd certainly taking further actions to take as much costs out of the business as possible while at the same time, allowing the business to continue to grow and then there were certain discreet benefits that we had this quarter related to the salary reductions specifically for the infrastructure.

<unk> platform those amount of two about $600000. So it was not that significant but not a small number and then there was a small impact related to the to the suspension of the matching on the 401k and then as we pointed out we did have a benefit during the quarter related to declining commodity price.

As compared to what was in our bids so it's really a combination of all of those but.

Notwithstanding the unique items I think the overall performance was still acceptable yeah. What was what was interesting during particularly during April and May was we had typically between $55 and 60 cruise in the field working everyday.

And the amount of.

Moving around of people and cruise that we had to do to maintain to schedule because different cities would ask us not to work in there were lots of things going on but our scale really benefited us.

During during the second quarter, because we were able to move cruise around we were able to keep people working we were able to keep the business operating and that was real benefit to us as we move now into Q3 I would say the market is has opened backup we still have challenges because.

We have crew members.

It.

Need to go into quarantine because of the coded.

Virus and we've had we've had some scheduling challenges around that but really I can't say enough about the job. The team did in Q too and also just about the advantages of the scale that we have because it allowed us to move people to cities that we're open where we could work.

Okay. Okay. That's helpful. Maybe last one that's free cash flow.

Really fantastic this quarter, obviously I just wanted to quit working capital benefit would predominantly associated with the energy business and then is that business pick back up I mean, how much do you think you have to give back there I'm just trying to get a sense for.

Yes, hi, actually actually very little is it working capital benefit during the six months was related to energy services. Most of that benefit actually came from the corrosion protection platform and also from the <unk> North American business significant improvement in our Dsos.

Which liberated working capital, but there was also a concerted effort to get out billings, we've done much better at that and then we'd also managed inventory down too.

So it is not energy services, certainly as the energy services business recovers that will require more working capital is <unk> ramp up in hours in that business, but that was really not a contributed at all to the working capital liberation during the first six months of the year.

And presumably it wouldn't be a big drain.

Ramp that backup either I would assume.

No the payment cycles with those customers are much quicker so that that helps.

Yeah.

Okay, great well, thank you for taking the questions I appreciate it.

Sure.

Your next question comes from the line of Snowbell.

Stilts. Your line is no open from stifle.

Alright, what else can mining good morning.

And congratulations on your planned retirement I know, it's been a lot of work.

Few years that.

Good job handling didactic cabinet.

So so I guess my first question then you kind of talked about that's a little bit on the call, but when I think about the impacts are covered it seems like one of the biggest changes has just been.

At least in terms of daytime population from big cities.

Like New York in D C to Morris Bourbon usage, and so I'm just curious how do you think about if that will have any impact on the market at all or.

If you could see that.

Having some impact on how you facilities are thinking about planning and now this is a longer term question.

And.

When we might have the ability on on if they're going to be any ramifications, but kind of at least temporary population chest.

Good good question, I guess I'm going to give you about a five part answer.

The first thing is is Noel is that.

The sewers are all gravity flow, they're not pressure and if they are in use and they're leaking may have to be fixed and so there's no. The fact that the flow through the sewer might be down 10, or 20% really doesn't impact the need for the rehabilitation. So that's one issue the second issue that we.

Have.

You mentioned, New York City, we don't do contracting work in New York City.

Very very little we sell some to do a a construction company that does work there and in Washington For example, D C water, which is the city water or a city water and wastewater utility.

Do a little bit of work with them, but we do far more work out in the suburbs and our our base of business really is with a lot of what I would call mid sized cities around.

Around the country and so.

And we are continually moving.

Are operations to where the city's have the most work that happens every year and so as these trends happen. If there's if there's more work in the in the in the middle sized cities.

We adjust our crews and we go where the work is and that's always the case. So I don't think there's anything anything new there.

It's hard to say what happens long term I agree with you I think there's going to be.

Probably less less let's use and some of the inner cities.

But we will adjust I think we've been very very nimble and being able to do that.

For a long time so.

We don't see that as a.

Particularly challenging issue for us at this point.

Okay Papa.

Then just given that we're seeing kind of a margin shift in terms of the segments from <unk> and you know did a lot of the reasons why but it does feel like there's quite a quite a few moving pieces. Maybe you could just talk about how you are thinking about that kind of longer term target margin profile.

[noise] that'd be the divisions.

Do you want and gross we're operating I guess I'll take operating operating it's operating inside I think yeah.

I would expect the infrastructure solutions for them to be north of 12% to 13% longer term.

For the corrosion protection platform, we're targeting high single digits, and then the energy services business.

Somewhere in probably the 3% to 5% range.

And we're excited Noel because we would expect.

Even with even with maybe some of the subsidy has gone that that the corporate businesses is up to mid single digits and certainly we expect long term for that business to continue to improve but it's it's a heck of a heck of a lot better than performance and it was over the last couple of years.

And that's been over really the last last couple of quarters.

And then no L E.

Corporate or the Adrienne consolidated operating margin would be north of 10%.

Okay, Great that's helpful.

That's it for me.

I'll get back in Q.

Thank you.

If anyone wants to ask a question. Please press bar followed by one touchdown telephone.

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Look forward to providing more updates on the business in the coming months, thanks for joining us.

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[music].