Aegion's (AEGN) CEO Chuck Gordon on Q2 2016 Results - Earnings Call Transcript

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Aegion Corporation (NASDAQ:AEGN) Q2 2016 Earnings Conference Call August 2, 2016 9:30 AM ET

Executives

Ruben Mella - VP, IR

Chuck Gordon - President & CEO

David Martin - EVP & CFO

Analysts

Craig Bibb - CJS Securities

Eric Stine - Craig-Hallum

John Rogers - D. A. Davidson

Noelle Dilts - Stifel

Tate Sullivan - Sidoti

Operator

Good morning and welcome to the Aegion Corporation 2016 Second Quarter Earnings Call. [Operator Instructions] As a reminder, this event is being 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 our website at aegion.com/investors. You will find our Safe Harbor statement in the presentation and press release. 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?

Chuck Gordon

Thank you, Ruben and good morning to all of you joining us on the call and webcast. Let us begin on Slide 2. On the Q1 call, I mentioned we face a tough second quarter. The quarter turned out to be more challenging than expected because of several short-term factors that hit us in the quarter, and will potentially impact us in the second half as well.

We generated second-quarter adjusted earnings per share of $0.23, in line with the expectations we communicated in June. We have now transitioned from a challenging first half as we largely anticipated to expectations for a much improved second half performance, where we plan to deliver adjusted EPS in-line with our second half results last year.

However, we don't expect additional project activity to make up for the short-term Q2 issues, which means that adjusted 2016 EPS will likely fall below the adjusted 2015 results. The two biggest changes over the past few weeks have led to our revised full year outlook, where first, a dramatic slowdown of work releases from our oil and gas customers since the wildfires in Western Canada, despite a significant backlog increase during Q2.

While our customers may increase the rate of these work releases in the coming months, we have taken a conservative position based on the increased uncertainty in the market. Second, the winding down of the energy services upstream work, part of the downsizing in central California and the decision to exit the Permian basin given difficult market conditions negatively impacted Q2 margins more than expected because of higher cost to complete several lump-sum projects and the additional time it took to complete the restructuring.

While there are other puts and takes in the revised forecast, these are two key items that caused us to reduce our EPS expectations for FY ’16. There are several positive takeaways in the quarter that set up the improved outlook we expect in the second half of 2016 and build momentum into 2017.

Let us start with infrastructure solutions on Slide 3. During Q2, we had a record $114 million in project wins for the North America wastewater CIPP market. While backlog declined 13% to $314 million, about $70 million of these apparent low bid awards will move into backlog in the coming weeks after final contract signing.

A few weeks ago we announced the $12 million multiyear CIPP project [Indiscernible] as part of the strong sales results. If you include the reported backlog and these new orders we have at least six months of visibility into the North America pipeline rehab market, which gives us confidence we can deliver good results in this market during the remainder of 2016 and we expect to see continued favorable conditions into 2017.

On the pressure pipe side, we continue to market our broad portfolio of solutions to rehabilitate aging and deteriorating pipelines, which include the pressure pipe version of Insituform CIPP, Tyfo/Fibrwrap, Fusible PVC, and Tite Liner HDPE, Underground Solutions Fusible PVC has performed well in the first six months meeting our expectations when we acquired the company in February. I expect the full year earnings contribution to be in-line with what we established at the time of the acquisition in February of this year.

We are actively working on the large pressure pipe project we announced last quarter in West Palm Beach, Florida using Insituform CIPP, and in Valley Forge, Pennsylvania with Tite Liner. The pressure pipe market is mostly comprised of small projects with occasional large ones like the ones I just mentioned. We are pleased to have the opportunity to showcase our capabilities through more complex large project activity.

We do face significant headwind in 2016 due to the absence of a very profitable $13 million Tyfo/Fibrwrap industrial pressure pipe project booked in 2014, executed in Q2 and Q3 of 2015. The bid table as we entered Q2 was comprised of smaller projects and we hope to execute these projects to help fill the gap. Unfortunately timing was not in our favor during the court and it looks to us that we won't secure the needed projects in time this year to overcome the outsized contribution from this project in 2015.

The Tyfo/Fibrwrap technology is projected to end 2016 with about $75 million in revenues globally and double-digit operating margins despite lower than anticipated 2016 results. For this reason we expect infrastructure solutions to now deliver modest revenue and operating income growth including the contributions from underground solutions.

Let us turn to corrosion protection on Slide 4. David will provide more color on our performance, but corrosion protection is the story of upstream challenges, primarily in new pipeline construction overshadowed with better performance and an improving outlook for our US cathodic protection services, primarily in the midstream markets during H1.

We have record backlog of 95 million as of June 30 in the cathodic protection services we provide customers, mostly the North American midstream pipeline owners. A good portion of our backlog is in Canada, which I discussed earlier is now delayed for what we hope is only a few months because of the fires. But we do see initial signs of an improving US midstream market where about 75% of what we do is maintenance on existing pipelines rather than new construction.

We are monitoring the market carefully to verify a return to a more normal consistent spending environment. New orders in the US have increased for five straight months through July, which is a credit to the corrosion protection sales team. In addition, we are [immersed] in our lean continuous improvement effort to streamline all of our customer facing activities, which is beginning to have a positive impact on the quality of services we provide.

The Appomattox project is on schedule to ramp up coating and insulation production in early Q4 per the original schedule. Construction of the new coating plant at our facility in Louisiana is essentially complete. We are finishing the installation of the specialized molding equipment after successfully testing the first installation application a few weeks ago. We are working with Materia, our material vendor to ensure production quantities of the materials are available when we begin commercial production in Q4.

In the meantime we are able to do some FBE coating applications for the project in the second quarter. We expect more FBE work in Q3. Let me remind you this contract is valued at over $130 million, which we expect to substantially complete over a three to five-quarter period beginning in Q4 with gross margin broadly estimated to be about 25%.

Our strong position in cathodic protection services and the Appomattox project led to an Corrosion Protection backlog growth of 50% to $260 million at June 30, 2016. If you exclude about $30 million in revenues and associated operating income in 2015 from the Canadian coating plant joint venture we sold in February, we expect corrosion protection’s full year revenues to grow modestly, but operating income to decline modestly reflecting the upstream pressure this year, assuming the Appomattox project begins as scheduled in the fourth quarter.

Let us turn to energy services on Slide 5. The downsizing of our upstream operation was essentially completed in the second quarter. This turned out to be a bigger than anticipated effort for us, which ended up taking longer to wind down the operations in Bakersfield and added more cost to complete the remaining lump-sum projects. We are basically done with the restructuring and we are optimizing the platform structure for a smaller operation. We have several initiatives underway through our continuous improvement program to streamline administrative functions such as timekeeping, payroll and the onboarding and offboarding of large numbers of maintenance workers for turnarounds to create a world-class support organization in terms of the efficiency, accuracy, and cost management required to generate acceptable operating margins in this business.

Energy services backlog as of June 30 was $178 million, a $45 million decline from the prior year but a 5% increase from the end of March. The backlog in the upstream market went from $68 million at June 30, 2015 to $31 million at June 30, 2016. As expected a portion of the backlog decline was also in the West Coast downstream market, reflecting a slowdown in turnaround activity in the second half of 2016 and the absence of additional work we completed for cleanup and repair at the Torrance, California, refinery after the incident in early 2015.

We plan to do a few small turnarounds in the fourth quarter. We will gain more visibility in the months ahead about turnaround activity in early 2017. our position in the West Coast downstream market remains favorable and stable based on the robust maintenance schedules that energy services has with our customers. We recently grew our market position by winning a five-year $35 million maintenance contract award with a new refining customer in the Pacific Northwest.

We expect about $7 million in maintenance work per year from this contract. Our maintenance team began the work in June, which will result in modest revenue and profit contributions during the second half of the year. While energy services will be profitable in the second half of the year and deliver full year revenues of approximately $250 million, we now expect operating margins to return to 2015 levels over the course of H2, but we will not recover the one-time costs incurred in Q2 to exit the upstream contracts.

The dramatic changes in the energy markets forced us to rethink how we can be successful in the years to come. The 2016 restructuring [addressed] pressing need for us to reposition our upstream exposure and reduce costs across the company. We originally targeted annual cost reductions of $15 million to $16 million. We now believe we will reduce annual cost by about $17 million, most of which is expected to be realized in 2016. We reduced cost by $6.5 million in the first half of the year and we expect to see a bigger reduction in the second half.

If there is a lesson from all the changes we have had to make since I became CEO in the fall of 2014, it is that we must continuously evaluate our market positions across the company, focus on improving execution and adjust the portfolio based on what is needed to deliver sustainable growth.

We see opportunities for long-term organic growth within our three platforms. We have identified immediate areas to invest for growth as shown on Slide 7. The focus today is to grow infrastructure solutions’ presence in the North American pressure pipe rehabilitation market by broadening the portfolio. But we will also look at other geographic markets when appropriate.

We recently completed three small international acquisitions, two of them in Q2 that will give us opportunities to expand the infrastructure solutions market reach over time. First we invested approximately $3 million to acquire the remaining international legal rights not covered when we purchased the Fyfe Asian Latin America operations back in 2012. We now have access to an additional 72 countries in Europe, Africa and the Middle East.

We are in the process of developing our channel to market strategy that we will execute over the next several years. Second we invested $3 million to acquire the CIPP business of LMJ, a long-term licensee in Denmark for the Insituform CIPP products. Denmark is an attractive market for contract activity with steady investment by local municipalities and a favorable outlook.

We plan to leverage our expertise and scale in the Netherlands to compete more effectively in growing to Danish market. Finally, we acquired [Concrete Solutions] in July for $6 million, a long term New Zealand certified applicator of the Tyfo/Fibrwrap technology. In a similar way, we will bring our expertise to scale to help grow in a market that is investing in structural strengthening, especially for seismic upgrades.

We also believe [Concrete Solutions] has the capabilities and relationships to partner with our Australian CIPP operations to introduce Tyfo/Fibrwrap in the larger and attractive Australian market. Across Asia, we are driving to be a more valued partner to our customers. We are making internal investments to enhance our capabilities to effectively help our oil and gas customers with their pipeline asset integrity needs. We are also investing to improve Aegion’s sales organization, while searching for technologies and services to offer customers a broad range of effective solutions.

We are making progress to expand our continuous improvement effort we call the Aegion way across the company. This is a true cultural change where the objective is to apply the [need] principles we have in our manufacturing processes to sales, operations, HR basically across everything we do to be more efficient and expand margins.

I believe there is a lot of positive change happening at Aegion. We are in the process of completing our strategic review and long range plan. I plan to share with you at the appropriate time how Aegion can emerge from the current energy cycle to deliver long-term sustainable growth. We have had to talk a lot recently about upstream energy markets and for good reason in a tough year. But I see an opportunity for us to build momentum with the strong backlog position in water and wastewater pipeline rehabilitation and for cathodic protection services, especially in the North American midstream market.

The successful startup of the Shell Appomattox contract is expected to carry us through the second half of 2016 and into 2017. We have a strong and stable downstream market position that we must improve to deliver consistent revenues and profits and cash flow to Aegion. I and the management team are not pleased with the results in the second quarter, and we have a lot to do to build the momentum we need for growth, but I like our position today and the positive results we can achieve in the coming months.

Let me turn the call over to David for his perspective on our second quarter performance.

David Martin

Thank you, Chuck and good morning. You have seen the results in the earnings release we issued yesterday evening, which was in the new format. I will provide some additional commentary beginning with revenues on Slide 8. Infrastructure solutions grew revenues about 1% to about $150 million. Our momentum in the North American wastewater market continues as revenues grew low-single digits.

Underground solutions contributed over $10 million in revenues which was within our expectation. The combination of the two helped to offset the headwinds from the lack of the large industrial pressure pipe project that was performed in the second quarter of 2015 and lower revenues in the Asia-Pacific market, as we wound down the CIPP contracting operations in select markets.

Revenues for corrosion protection declined 11% to $94 million. The majority of the revenue decline was the result of weaker market conditions in Canada, significantly lower upstream activity and to a lesser extent the winding down of several large international projects, including the successful completion of an internal pipe coating project in South America.

In the prior year, we generated approximately $3 million of revenues from the JV in Canada, which was sold in the first quarter of 2016. As Chuck mentioned, corrosion protection’s cathodic protection services in the US was a bright spot as revenues grew low-single digits and was the largest source of revenues within the platform. The sharp revenue decline in energy services was due to the downsizing of the upstream operations in Central California, which accounted for about 60% of the revenue variance from the prior year.

As expected, the remainder of the decline came from the drop-off in turnaround activity and the additional one-time maintenance work related to the clean-up effort after the explosion at the Torrance refinery in the prior year.

Now turning to Slide 9, on an adjusted non-GAAP basis, gross profit declined 13% to $64 million, while gross margins were in line with the prior year period. Strong execution in the North American wastewater CIPP market and the mixed benefit from the underground solutions business resulted in an 80 basis point improvement for infrastructure solutions’ gross margins to 27.6%. The margin performance could have been better if not for some weather events during the quarter, which delayed several medium and large diameter CIPP projects.

As we discussed at the start of the year limited backlog within corrosion protection outside of Appomattox was expected to be the biggest factor in our margin performance in the first half of the year, and that was definitely the case in the second quarter as gross margins declined 240 basis points to 18.2%. We simply could not absorb the fixed costs at the coating facility in Louisiana due to the lack of project activity.

We saw pricing pressure in the upstream market most notably in Canada as well. Our gross margins did improve year-over-year by over 200 basis points for our cathodic protection services in the United States because of the improved labor utilization driven by more activity, along with better execution and that is definitely an improving story.

Finally energy services gross margin declined 430 basis points to 9.3% for two reasons. First upstream gross margins were down significantly as we absorbed the additional cost to close out the remaining maintenance and lump-sum project activity in central California as part of the restructuring. A little color on this, our upstream gross margins in the second quarter of 2016 were only 4.7% versus 12.4% in the second quarter of 2015.

A similar story for our downstream services with gross margins of 11% in the second quarter of this year versus 14.1% in the second quarter of 2016. So as you can see while our downstream gross margins were lower this year, this is related to lower volume and lack of turnarounds as opposed to a severe market pressure situation in the upstream and the difficult lump-sum project performance that we saw.

Now let us review our cash flow performance on Slide 10. In the first six months of 2016 cash flow from our operating activities provided $10 million of cash compared to $58 million in cash in the prior year period. In the prior year we generated strong cash flow from the winding down of operations in Asia Pacific on top of fairly dramatic DSO improvements. At the end of this quarter we had over $20 million of receivables from certain large international projects that were in late stages of completion and pending final billings with customers.

We expect to collect all of these receivables in the coming months. These delayed cash collections mask the progress that we continue to make in reducing DSOs across the business. We fully expect DSOs at the end of the year to decline consistent with our objective to reduce DSOs to at least 75 days on average, excluding certain prepayments on the Appomattox contract included in the balance sheet, since this will reverse as we execute that contract later this year and next year.

Our cash balance at June 30, 2016 was a healthy $111 million compared to $209 at the end of 2015. We typically need about $100 million of cash to fund our working capital needs during the peak periods of the year. Therefore we have put at year-end excess cash to work with $91 million spent in the first half of strategic acquisitions to enhance the infrastructure solutions platform, especially with the acquisition of underground solutions.

We are also returning cash to stockholders as we spent $25 million to repurchase about 1.5 million shares, including the shares repurchased for the management incentive equity program. Additional uses of cash in the first half included capital expenditures of approximately 19 million, which is higher than the normal for this time of the year. We spent over $8 million so far on the construction of our advanced coating plant in preparation for the Appomattox contract.

I continue to expect CapEx between 2016 will be approximately $35 million to support the Appomattox project along with the ongoing capital needs across the business, which is now running at levels lower than what we saw in 2015. We made approximately $9 million in debt repayments so far this year per the terms of the credit agreement. We have scheduled quarterly debt repayments close to $18 million for 2016. We will also reevaluate whether appropriate to make any additional payments depending on second half cash flow and other needs in the business.

The adjusted effective tax rate over the first six months is somewhat distorted because of a benefit in the first quarter related to the adjustment to corporate tax valuation allowances from prior tax losses. The adjusted effective tax rate in Q2 was 29.5%, reflecting the normal mix of earnings between domestic and international operations.

A greater portion of the expected second half earnings will come from higher tax jurisdictions, most notably in the United States, which means the effective tax rate of slightly above 30% will be where we are at especially in the fourth quarter. So I anticipate the full year adjusted effective tax rate to be around 30%.

As a wrap up, I want to summarize what we said earlier. Well, the second quarter turned out to be more difficult than we expected. We're well positioned for a better second half performance along with strong backlog position and our core markets and cost savings from a restructure. We have what is needed to build momentum, as we conclude 2016 and we move into 2017. I expect operating cash flow to improve significantly in the second half of the year because of seasonality in the business. Collections on certain large project I mentioned earlier, and the continued focus on reduced and VSO a profit company.

We should end 2016 with a strong cash balance to support future investments for long term sustainable growth and to continue to return cash -- investors per share repurchases, just as we have done in the past. That concludes our prepared remarks. Now, I'll turn over the call to the operator to begin the Q&A section.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Craig Bibb with CJS Securities. Your question, please.

Craig Bibb

If you could clarify, how much of the nuclear project revenue within Q2 last year and how much in Q3?

Chuck Gordon

I believe, I don’t have the [indiscernible] here Craig. But I believe it's about 60% of what was in Q2, and about 40% in Q3.

Craig Bibb

Okay. And that in that $13 million?

Chuck Gordon

$13 million project, yes.

Craig Bibb

Okay. And the [indiscernible] acquisition presumably doesn't move to need on with the revenues in Q2?

David Martin

They won't move the [indiscernible] Q2 and we don’t expect them to have a significant impact on the year.

Craig Bibb

Okay. And then just to clarify, the Infrastructure Solutions backlog is 70 million higher than what you then what you entered the quarter outlook.

David Martin

Yes. 70 million represents projects that we've been [indiscernible] bid on but sign. So, they don’t represent contract backlog which we can't report.

Craig Bibb

Okay. And then just in looking, looks like Q4 is going to be the Shell project kicked off and you have to all turn around business. Q3 is going to be a lot like Q2 but just with some cost savings from the restructuring or the other nuance in there?

David Martin

We would expect Q3 to be stronger than Q2. We have good backlog both in our cathodic protection services business and in the CIPP business. And along with the fact that this from a weather standpoint it is generally the best quarter we have in our construction businesses. So, we expect Q3 to be stronger than Q2.

Craig Bibb

Okay. And as you guys have mentioned weather on infrastructure exposure. How much -- what was the revenue impact of weather in Q2?

David Martin

Yes. I don’t have that summary here, Craig.

Craig Bibb

Okay. And then last one. You got turnarounds now in the fourth quarter which allows if we have any anecdotes or other visibility for into 2017?

David Martin

I'm sorry, repeat the last piece, that I didn’t hear it.

Craig Bibb

Your turnaround activity is picking up in the fourth quarter. It's will turn around. You have anecdotes or other like bidding activity that would get some visibility in the 2017?

David Martin

For energy services specifically or for the whole business?

Craig Bibb

For energy services turnaround.

David Martin

Okay. Yes, we are our general viewing is that the first half of 2017 will be stronger that what we've seen in the second half of 2016. But we'll learn a lot more in the coming months is as the refineries start from up their plans.

Craig Bibb

Okay. All right, thanks a lot.

Operator

Thank you. Our next question comes from the line of Eric Stine with Craig-Hallum. Your question please?

Chuck Gordon

Good morning Eric.

Eric Stine

Good morning. So, I just wanted to follow-up on the question about the CIPP or itself. Just to confirm, did you give a number because I know that 70 million hadn’t been signed as of the end of the quarter. Did you give a number of what has been signed to-date? And should we expect all that 70 million to be in the 3Q bookings number?

Chuck Gordon

You should expect all that to be in the Q3 bookings number. I don’t have the number to-date that we've looked, but typically we probably look at 30 to 60 day lag between the times we're worried at contract and when we have it signed.

Eric Stine

Okay, got it. Maybe just turn in to your commentary on the Permian, I know that that’s been challenging for some time. I mean, I might be wrong but I think that’s the first time I've heard you say that you're getting out of that business in that area?

Chuck Gordon

We made that decision in Q2 and what the conclusion that we came to is that we had a very small presence in the Permian that we were trying to grow under obviously very competitive conditions. Given the reduced activity out there and we thought that we need to focus strategically on our downstream West Coast business. And rather than have a very small business that was taking a lot of management time, we elected to exit that business and really become extremely focused on our downstream business on the West Coast.

Eric Stine

Yes. Now, that makes sense, okay. So, wanted to confirm that, maybe just turn into the Shell project, in this to confirm, you are not exclusive with Materia. I guess, that would be the first question, but secondly I know there are definitely some proprietary things or proprietary nature of the coating capabilities, just thoughts on how that positions you're going forward as you look to more projects?

Chuck Gordon

We feel like we're positioned very well. Materia owns the chemistry that we're applying in the project. We have a great working relationship with them. We own the way that we do the molding and the technology that we used to actually apply the technology in the installation application. I think we're for the offshore deep-water projects, it’s a very unique technology. I think we're positioned fantastically going forward. I think the big question mark is the time of these projects, they are big and when they all come he's going to be ready to make the large investments required.

Eric Stine

Right, okay. Thanks for that, and maybe last one. Just you mentioned the new refinery customer, as much as you can. Any way you can characterize this customer and maybe the ability to expand other facilities within their footprint?

Chuck Gordon

So, we already do several refineries on the West Coast with the customer. We're and we're able to leverage that relationship. We its very good customer for us. We're extremely pleased to be in the refinery and so far all the feedback we got from the customer and from our team is that the transition which occurred in June has gone extremely well.

Eric Stine

Okay, that's great. Thanks a lot.

Chuck Gordon

Thank you.

Operator

Thank you. Our next question comes from the line of John Rogers of D. A. Davidson. Your question please?

John Rogers

Hi, good morning.

Chuck Gordon

Good morning, John.

John Rogers

A couple of things. First of all, in terms of the cost savings that you've talked about the $17 million. And some of that is going to be recognized in '16. How much is incremental in '17?

Chuck Gordon

Yes. I would, obviously the $17 million is an annualized number and we'll probably get the substantial amount of it this year, but I don’t have the exact number of some here but it's in the range of 14, 15, probably.

John Rogers

And David, in 2015?

David Martin

Yes. So, if you want to call it incremental, a couple of million dollars.

John Rogers

Well, I'm just trying to think about the potential earnings benefit going forward but most of it can be recognized in '16.

David Martin

Right.

John Rogers

Okay. And then Appomattox, at this point, I know it starts up in the fourth quarter, the $130 million will the bulk of that be recognized, is that the current plan in '17?

David Martin

So, this is walked through maybe a few more detail that we've talked about earlier. Now, remember that we control the construction schedule and we recognized revenue as we produce product and that the current tracks does need to be completed by the end of the first quarter in 2018. What we anticipate is that we'll start up the plan at the beginning in Q4, obviously it'll be a ramp-up in terms of production during the quarter. But we would expect that we would produce the entire project over three to five quarters. And a lot of that will depend on how quickly we ramp-up production and what kind of production rates we ultimately achieve with the plan. But what we're projecting is that we'll complete the production over three to five quarters starting in Q4 of this year.

John Rogers

Okay. And Chuck, I mean, we are to more to assume that your margins on this should be consistent with what you're seeing in the corrosion protection in the past. I mean, at the 20% type range. I mean, I know you don’t want to specific, but.

Chuck Gordon

I don’t want to get too specific with it. I think typically on the insulation side, our margins are probably in the mid-20s and we certainly would expect that on this kind of project.

John Rogers

Okay. And prospects for follow-on work, when do you expect that that pipeline of opportunities might fall on?

Chuck Gordon

There will, we believe there is the potential for follow-on work with this project. Over the next couple of years, it's much smaller in terms of significance and scope. We don’t see another large Appomattox project type project on the horizon at this time. We certainly know if several other customers that are watching this project very carefully and my expectation is we'll hear more out of those as this project progresses.

John Rogers

Okay. And then thank you. And then lastly, in terms of the energy services business, can you tell us what the good will in tangibles associated with that business is?

Chuck Gordon

That's a good question John. I don’t have that answer here, I could probably follow-up with you on that. I'd -- we made some write-downs within the last year. The numbers down. They'll be into 10Q as well but I will certainly follow up with you on that.

John Rogers

Okay, right. Thank you.

Operator

Thank you. Our next question comes from the line of Noelle Dilts with Stifel. Your question please?

Noelle Dilts

Hi guys, thanks, good morning.

Chuck Gordon

Hi, good morning, Noelle.

Noelle Dilts

Hi. So, I just wanted to go back to Corrpro Canada, make sure I understand what's going on there. So, first, is that right that that's about 6% of total revenues or about is 30% of Corrpro? And then second, I just want to understand what you think is driving these delays given more kind of all the medium projects and this kind of defense of are you expecting some sort of rebound at some point, in the next 12 months. How are you kind of thinking about the outlook for that market?

Chuck Gordon

Well, a couple of questions here, Noelle. I think the first thing is your assessment of your size at Corrpro Canada is all right in terms of the overall business. It's been a very good business for us over the last couple of years in terms of revenue and profitability. We saw the, what we've seen since the players which I mentioned is just that the work releases have been [indiscernible]. We haven’t heard of any cancellations but we just we've seen a delay. And we look a second half of the year, we decided to be conservative and we don’t expect any cancellation. We're sitting on a nice backlog for that business. But as we looked at it, we think those delays will move some of that backlog into 2017 that we originally had forecasted to be 2016 work for us.

We do a lot of work up there for some of the major transmission companies. We also do a lot of work with smaller companies. So, the delays been sort of across the board and I can't, to be honest really I can't really explain exactly why they're delayed. I would have thought by now that we'd be back work in going for board, actually make up for some of the time we lost during the month of May. But that certainly hasn’t occurred.

Noelle Dilts

Okay. And then second, when you work at the Bayou business, you got this big project here that's going to carry you through I guess the next fourth quarter and then three to five quarters after that can you help me understand sort of how you're thinking about the plan for Bayou and what the right side of that operation is, sort of as you move past Appomattox?

Chuck Gordon

So, we have a very, we very successfully entered the five layer insulation market in the Gulf of Mexico. We have the plans positioned to really well for FBE coating and for doing all types of insulation, I just help deep insulation but all insulation. We certainly have sized that will be down there to breakeven at much lower revenue, maybe then we experience five or six years ago. Obviously this year has been challenging because in a way we have a great big project coming and we've had this size the authorization to be able to execute that project. Going forward, we won't see the kind of revenue that we are going to see in 2017, I don't think in 2018. But we believe we can size the plant properly for the market and be successful with the work that is in the Gulf Coast.

Noelle Dilts

Okay. And then finally, can you just kind of comment directionally on each of the three platforms and how you are thinking about '17 here and where you could see some growth and where you maybe [indiscernible].

Chuck Gordon

Yes. So, we have really good visibility I think going out about six months in the business. That's sort of across the whole business. Right now as you are aware, we focus strategically on the municipal market and on the mid-stream cathodic protection services business. Both of those businesses are doing well. They have great momentum at this point. We don't see anything that we just believe that that momentum is going to fall through as we go through 2016. I think we expect those businesses to go into 2017 with good momentum along with the Appomattox project, which makes us feel good about how we are going to end at the year. We will have a lot better perspective on 2017 in the upcoming months. It's little bit early for us to comment on what we think for the whole year but I would say going into '17 we feel really good about the opportunity.

Noelle Dilts

Okay, thanks.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Tate Sullivan with Sidoti. Your question, please?

Tate Sullivan

Thank you, gentlemen. And thank you very much for all the detail on the Shell Appomattox.

Chuck Gordon

Good morning.

Tate Sullivan

Good morning. On the Shell Appomattox project. And you assume the project begins in 4Q, I mean what are the variables in terms of Shell pushing that into '17?

Chuck Gordon

We don't have anything to believe that that would happen and remember this is the new plant. It's certainly in Shell's best interest make sure that we are done at the end of Q1 in '18 for their schedule. Certainly this is a huge project. We haven't seen anything that makes us believe that they are going to change their schedule or their agreements with us. And what that leaves us with is that we really have the opportunity to manage the schedule the way we think is most effective. Certainly we don't have any plans to push up against the final deadline for the contract which is why we are really targeting to finish the production over three to five quarters.

Tate Sullivan

And you said you will basically start the factory and start the project. Did I hear you right, and early Q4 but then ramp expect a little ramp on there on that time?

Chuck Gordon

Yes. That is right, we expect we will start up the plan with the installation plan with the commercial production in early Q4 and they are like all startups there will certainly be ramp. I will expect going to 2017 at a full production rate.

Tate Sullivan

Okay. And then if I heard correctly you mentioned a long range plan is that referring to coming out with specific guidance or is that a more of a strategic review or something you discussed before?

Chuck Gordon

It's more of a strategic review where we expect to take the company, what we think. There will be some metrics associated with what we think we can achieve over the long run. So, it's a combination of both.

Tate Sullivan

Is there a time line to unveil this findings?

Chuck Gordon

We are going to be doing that over the next month.

Tate Sullivan

Okay. Thank you, very much.

Chuck Gordon

Thank you.

Operator

Thank you. We have follow-up question from line of Craig Bibb with CJS Securities. Your question, please?

Chuck Gordon

Good morning, Craig.

Craig Bibb

Hi. Maybe if you can give us a quick follow-up on the road map for the monitoring project you guys are working on. When will that sort of task or which should be looked for?

Chuck Gordon

Okay. So, I think I mentioned on the last quarterly call that we are in the process of developing the databases and the way we transmit information from the field into the database and then from our database into our customers database, that work is ongoing. It's going well. I think what I said on the Q1 call was that we would expect it be commercial and started to using that product on a commercial basis. Going into 2017, we are still on track to do that. We did a project review a couple of weeks ago. I am very excited about what we saw. It's really going to be a nice step forward for our cathodic protection service business.

Craig Bibb

That's great. Okay and then just the sense of your collect with what our spending data on the factory down you're today, I know the numbers are not apples to what you guys are doing but, is you 1% up or is the overall activity level the same, I want to understand the difference between the negative and the flat?

Chuck Gordon

Yes. So, we've had I think what you asked is the sort of the state of the waste market CIPP market, I'm starting to catch all your question?

Craig Bibb

Yes. So, it's just --.

Chuck Gordon

We've seen growth in the overall market this year. We had a huge one last year. And I think I mentioned on the call that we either had in February or in April that when we expect to see this year was that we wouldn’t replicate the orders early in the year but we would have better orders in the second half and that certainly won't be seen. We had a phenomenal win number of wins in dollar value of wins in Q2. We have seen the market opportunity grow this year versus last year. And we as we look at the big table going in the second half year it look strong to us. So, overall I think we are very pleased with the state of the market and the size of the table.

Craig Bibb

Great. And your win percentage that's running about the same?

Chuck Gordon

Yes, it runs about the same. We try to manage our share pretty carefully. We obviously want to win our more than our pair of share but we also have to be cognitive of margins and in that. We manage that pretty closely but we certainly want our share of work to share.

Craig Bibb

Okay. And then just actually a follow-up question on margin on Infrastructure Solutions. So, your gross margin was up at higher but your EBIT margin was down a little bit, the mix of business or what of that?

Chuck Gordon

Well, I think what happened was it really the gross margins for Five and in Underground Solutions are sort of in the same range but obviously we added SG&A when we added Underground Solutions. And so what happens is the overall gross margin is probably up little bit with the addition of Underground Solutions but we did add SG&A and I think when you look at operating margins is down just slightly.

Craig Bibb

Okay. All right, thanks a lot.

Chuck Gordon

Thank you.

Operator

Thank you. There are no additional questions at this time. I would like to hand the call back over to Chuck Gordon, Chief Executive Officer for closing comments.

Chuck Gordon

We've entered our primary earning season with the pieces and place for a much improved earnings performance in H2 and an opportunity to build plausible momentum as we move into 2017. We are very excited about the way the business is positioned for organic growth going forward and are looking forward to our calls over the next several quarters. Thank you for joining us today. We appreciate it. Thank you.

Operator

Ladies and gentlemen, thank you for your participation on today’s conference. This does conclude the program and you may all disconnect. Everybody have a wonderful day.

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