Aegion Corp (NASDAQ:AEGN) Q3 2018 Earnings Conference Call October 31, 2018 9:30 AM ET
Katie Cason - VP, FP&A & IR
Charles Gordon - President, CEO & Director
David Morris - EVP & CFO
Eric Stine - Craig-Hallum Capital Group
Brent Thielman - D.A. Davidson & Co.
Peter Lucas - CJS Securities
Noelle Dilts - Stifel, Nicolaus & Company
Good morning, and welcome to Aegion Corporation's Third Quarter 2018 Earnings Call. [Operator Instructions]. As a reminder, this event is being recorded.
It's my pleasure to turn the call over to your host, Katie Cason, Vice President of Finance, Investor Relations. Katie, you may proceed.
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 Morris, Aegion's Executive Vice President and Chief Financial Officer. We posted a presentation that will be referenced during the prepared remarks that you can find on the Investor sections on Aegion's website at www.aegion.com. You will find our Safe Harbor statement in the presentation and the press release issued yesterday evening. During this call and in the presentation materials, the company will make forward-looking statements, which are inherently subject to risks and uncertainty. The company does not assume the duty to update forward-looking statements.
With that, I'll now turn the call over to Chuck Gordon.
Thank you, Katie, and good morning to everyone joining us on the call today. For those following along with the slides we posted this morning, let's start on Slide 3 of the presentation. Aegion delivered second quarter adjusted EPS of $0.45, a more than 40% increase above prior year and our highest quarterly results in nearly 2 years. Results were primarily driven by strong execution on our international coating projects within Corrosion Protection, as well as improvements stemming from restructuring actions taken over the last year. These positive drivers overcame the impact of unfavorable mix within the Infrastructure Solutions, weaker top line results from the cathodic protection business and an isolated project challenges at Energy Services.
The project mix in North America CIPP and lower backlog with the [indiscernible] protection are expected to further impact fourth quarter results relative to previous expectations. We have revised full year guidance to target adjusted EPS improvement of 15% to 20% over 2017 results.
While we are discouraged by the expected Q4 revenue shortfall in the previous forecast, our end markets remain quite healthy, and we have a strong sales funnel as we look to 2019 in each of our 3 segments.
In our August earnings call, we announced that we were reviewing our international operating footprint to ensure we were doing business in markets with an appropriate operating model, risk profile and where we generate adequate returns on investment and cash. As a result of this review, we are announcing the exit of multiple additional international markets, as well as further actions to streamline and optimize the business.
If you turn to Slide 4, I'll provide an update on each strategic initiatives. First, we announced the completion of the Bayou sale in the quarter for total proceeds of $46 million. The transaction is expected to reduce Aegion's future earnings volatility. Additionally, we were able to extract a significant amount of income and cash from the assets over the last 2 years due to the successful completion of a large deepwater project and the subsequent divestiture of the business.
We previously announced the exit to the Australian and Denmark CIPP operations and continue those efforts in the quarter. In Australia, inactive sales process remains underway with a prospective buyer and we currently expect to complete the transaction in the first quarter of 2019. In Denmark, contracting activities were completed by the end of September and a small group of retained employees are now working through final punch list items and closure-related activities.
We are pleased to announce that we reached an agreement earlier today to sell the Denmark CIPP business. During the quarter, we disclosed estimated cost for exiting Denmark contracting to be in the $5 million to $6 million range, with cash positive of approximately $1 million. The sale of the business will more than offset cash positive exiting the business in Denmark. The agreement includes a multi-year licensing tube sales supply agreement.
Finally, we announced yesterday the decision to exit several additional international markets following a more comprehensive review of our international footprint. I can talk about a few of these moves specifically. We are exiting our industrial linings businesses in Mexico, Brazil and Argentina. In each of these countries, we've been successful in the past winning projects for Tite Liner installation. However, the markets don't provide the long-term growth profile or scale to warrant a fixed operating footprint, A/R collection has been challenging, it's proven difficult to extract our cash from these businesses and we've been impacted negatively from foreign exchange disclosure.
We are exiting additional smaller international operations, but we're unable to provide full specifics today as we are working through communication plans in those markets following formal Board approval and the actions of late last week. We expect the total cash charges related to these additional efforts to be in the $8 million to $10 million range with annualized savings of more than $5 million.
In total, combined revenues from the exited operations, including Denmark and Australia, are less than 5% of Aegion's total, yet have generated $5 million in adjusted pretax losses year-to-date or $0.11 per share.
I recognize the distractions of the business and uncertainty for investors from these prolonged restructuring initiatives. We have dedicated management in place to wind down these restructuring activities and expect substantial completion by mid-2019. Not only will we benefit from the cost savings and loss avoidance going forward, but these exits and further actions will drive improved focus on delivering organic growth from the other 95% of our business.
With that update on restructuring initiatives, I'll walk through the discussion of operational highlights and our outlook for each segment, starting with the Infrastructure Solutions on Slide 5. First, I'll touch on the performance highlights in the quarter, particularly with the North America CIPP business. Following challenges in the first half of the year from weather and new crew ramp up, productivity improved in the third quarter. We continue to face pressures from the extremely tight labor market and keep increase adequately staffed and trained to keep at historical productivity levels. Crews install approximately 15% more footage in the quarter compared to the prior year. However, the project mix was more heavily weighted towards small diameter work, driving average revenue per Fyfe down by more than 20%. The net negative impact in quarterly revenue versus last year due to the installation of the higher proportion of small diameter work were $18 million.
Traditionally, roughly 80% of our CIPP installations are on small-diameter liners. Although large diameter projects are much smaller percentage of our total installed footage, the revenue per foot can average 10x to 20x higher for a host of reasons, including material costs, longer installation and curing time and also, generally, a higher component of the subcontractor revenues related to greater project complexity, which are a further boost to the top line.
By comparison, in the second half of 2017, we completed work on the large $8 million project in Canada, as well as a pressure pipe project in Southern California, but had higher margins than our typical projects though that we've been enable to backfill similar work in 2018.
Overall, backlog for the segment is $343 million, down 4% from the prior year, primarily due to reductions from exited or to be exited markets, including Fyfe North America contract in Europe and Asia. North America CIPP backlog grew 2% from the prior year. We saw some softness in the bid table in July and August, which tend to be quieter periods as [indiscernible] rollover to these new fiscal years that resulted in new growth order below our expectations. However, activity picked up nicely in September, and the funnel for 2019 looks to be as healthy as or stronger than 2018.
Also, we recently with low bid in a large project for nearly $11 million in Massachusetts, as well as a $7 million project in New York. Both our medium to large diameter projects are expected to be strong contributors in 2019. Also on the pressure pipe side, we've seen new orders up 35% year-over-year with CIPP projects up more than 20% and demand for Fusible PVC up more than 40%. Much of the increases in the CIPP pressure pipe backlog will be workable and 2019.
Looking more at the underlying market health, we track trends in State Revolving Funds, or SRF. A federal state partnership program through the EPA that provides low-cost financing for a wide range of water quality infrastructure projects and accounts for as much as 50% of the municipal funding for pipeline rehabilitation. Annual funding levels are market based for municipally independent business. Recent approvals for state funding water projects in 2019 are up 21% year-over-year, exceeding $1.5 billion for the first time in 5 years. Additionally, drinking water funding is up 35% year-over-year to more than $1 billion. This funding covers all types of water infrastructure projects, not just those in the pipeline rehabilitation market. However, these types of increases are a leading indicator for the general health in municipal spending over the next 12 months and bodes well for our wastewater and drinking water growth outlook.
We've also recently rolled out a new technology within our wastewater business that enables UV or ultraviolet curing of small-diameter beltline installations versus our more traditional steam curing process. Historically, UV cure has only been used for glass liner installations, which tends to be more popular in Europe and that's not widely used in the U.S. due to its higher install cost. Our new technology does not require a glass liner, and we believe it will be an attractive alternative for municipal customers. The UV curing process versus steam cure results in a significantly reduced overall investment in CIPP insulation equipment and a smaller equipment footprint at each job site. Due to the highly fragmented nature of our customer base, any new technology takes time to penetrate the market, but we're excited about offering a solution that differentiates us in the wastewater space as we also seek to offer new technologies in the pressure pipe side of the business.
Shifting to our outlook for the full year, we are now targeting revenues to be flat, slightly below 2017 record revenues, driven by the project mix I mentioned, as well as significant weather impacts we experienced in the first part of the year. Adjusted margins are now expected to be on par to slightly improved from the prior year, also impacted by the mix issues.
I'd like to move on to Corrosion Protection on Slide 6. We ended the quarter with backlog of $137 million, down 21% from the prior year, primarily due to work performed in the quarter in multiple coating projects. The large Middle East project, [indiscernible] at more than $35 million, are now more than 80% complete. We expect to [indiscernible] activity in those projects in Q4 '18 with final project completion by the end of Q1 of '19. We exhibited a track record of strong performance in the region and recently signed another $4 million contract for offshore coding work in 2019. While we don't anticipate another $30 million-plus project in the next 12 to 18 months, we do expect continued offshore development over the next several years, as well as a healthy funnel of onshore work that will fuel a strong flow of project for our Middle East business.
In the Industrial Linings business, backlog levels are slightly higher than prior year and included significant increases for projects in the U.S., Canada and the Middle East that offset the declines in markets that we are exiting in Mexico, Brazil and Argentina. We acquired a small competitor at the end of the second quarter for $6 million, and are seeing the benefit of expanded market coverage and relationships following the transaction. We've experienced challenges with getting work released due to customer driven delays this year, but feel good about our backlog position and timing of work on multiple projects as we look towards 2019.
Within the cathodic protection business, our focus continues to be on the pace of improvement. We are not yet where we expect we will be. As we look at progress this year, our safety culture is significantly better and improved project execution has resulted in significantly higher growth margins across key service lines. However, we haven't generated the top line we needed to meet our operating income targets, and backlog levels at September 30 were 10% below prior year, primarily due to the completion of several large construction projects in the Northeast of the U.S. that were in backlog a year ago. We don't believe this is an underlying market issue. More consistent execution and expanded sales focus on key accounts has started to pay off. Since June, new orders were up 10% year-over-year, and we're seeing average monthly win rates are closer to 60% compared to the rates in the 30% range earlier this year. We revised our guidance to reflect the lower backlog position us to move into the fourth quarter. However, we continue to see progress and expect an improved outlook for 2019.
For the full year 2018 outlook, we expect growth in Corrosion Protection segment revenues to decline 15%, reflecting the lost contribution from the Bayou business, which included the 2017 impact from the Deepwater project. Excluding the Bayou results, revenues are projected to increase 5% to 10%. Adjusted operating margins are still expected to be in the 3.5% to 4% range, benefiting from strong performance on the coating projects.
Shifting to Energy Services on Slide 7. After 6 consecutive quarters of year-over-year improvement and operating income, the business experienced significant challenge with a lump sum construction project that resulted in the reduction of operating income versus the prior year. The contract is with a large refinery customer and nearly double the scope over the course of the project. Unforeseen underground infrastructure challenges at the customer was unaware of late in the third quarter led to significantly lower than planned productivity levels. We have a strong relationship with the client and requested a significant change order that could favorably impact Q4 of '18 and offset some of the third quarter weakness.
Additionally, we have completed the lump sum scope of work and converted the rest of the production time materials to minimize our risk due to future scope changes. We also completed the acquisition of a small specialty turnaround contractor, P2S, for $3 million. This small investment will help us accelerate our expansion in the more specialty turnaround service offerings.
Our backlog at September 30 declined 10% or $22 million from the prior year. However, as we've discussed previously, the rolloff of this year from backlog related to 2 maintenance contracts up for renewal accounts for more than $30 million in declines. We expect to successfully renegotiate both agreements in the fourth quarter. Adjusting for this, our backlog is up from the prior year due to increases in our maintenance business.
For the full year, we continue to expect mid- to upper single-digit revenue growth with expected operating margins of 2.5%, representing a nearly 50 basis points increase from FY '17 levels and slightly reduced from the previous guidance due to the isolated project challenges.
This wraps up review of the markets and outlooks for each of the segments. As I mentioned earlier, we are now targeting EPS growth for the full year of 15% to 20%.
Looking at 2019, we are pleased that our core markets remain healthy. While we don't have visibility in replacing the $35 million international coating project, we will see the elimination of losses from the international businesses that we are exiting, as well as continued improvement in the profitability of the cathodic protection business. Additionally, we believe that the North American rehab business is past the execution and productivity issues that hurt performance in the first half of 2018. We are also excited about the potential impact of the technically differentiated UV cure felt product that we added to the market. While we are optimistic about 2019, we are working to our annual budgeting process now, and we'll continue to provide an update in our outlook for next year, as well as a refreshed view of our long-term financial growth targets during Q1.
With that, I'm happy to turn the call over to David for additional perspectives on our results and outlook performance for the remainder of 2018. David?
Thank you, Chuck, and good morning to everyone on the call. Looking more at the third quarter results, let's move to Slide 8. Aegion delivered adjusted diluted earnings per share of $0.45 in the third quarter compared to $0.32 in Q3 '17. As Chuck highlighted, the main drivers for the more than 40% increase in adjusted earnings per share included the strong execution on the number of coating projects in Corrosion Protection, adding improved contributions from a number of businesses undergoing restructuring activities over the last year. These favorable earnings drivers helped to offset the unfavorable revenue mix within infrastructure solutions and weaker revenues within our cathodic protection business.
Consolidated Q3 '18 revenues declined slightly compared to Q3 '17 despite the small dip in revenues, we saw a 10 basis point improvement in adjusted gross profit margin and 160 basis point improvement in adjusted operating margin, driven by a more than $5 million reduction in operating expenses in Q3 '18 compared to Q3 '17. This was our third consecutive quarter of the year-over-year operating expense reductions, driven by restructuring savings and lower corporate spending as a result of ongoing cost containment efforts.
On a GAAP basis, we reported a net loss of $0.01 per diluted share. The difference between GAAP earnings and adjusted results is primarily related to restructuring charges and divestiture-related expenses, including a loss related to the sale of the Bayou. During Q3 '18, we recorded an $8.7 million pretax loss on the sale with the lower valuation primarily attributable to project uncertainty from the steel tariffs announced earlier this year.
I'll now turn to the segment reviews, starting with Infrastructure Solutions on Slide 9. Revenues declined 11% year-over-year to $156 million, primarily driven by the unfavorable mix within the North America CIPP business that Chuck discussed previously as a result of a higher component of small-diameter work during Q3 '18. Year-to-date, revenues for the segment are on par with prior year's record results, driven by a expansion within North America and sharply higher demand for our Fusible PVC product, which together offset a more than $10 million decline in revenues related to our second half '17 exit of the Fyfe North America structural business.
Despite the revenue decline in Q3 '18, we achieved strong improvements in adjusted margins, delivering adjusted gross margins of nearly 25% and adjusted operating margins of nearly 11%. Year-over-year increases were primarily attributed to significant improvements at 3 restructured businesses: Fyfe North America, Australia and Denmark and higher contributions from our Fusible PVC business. These improvements offset the lower North America CIPP margins from the unfavorable project mix and the absence in Q3 '18 of the $3.9 million royalty settlement recorded in Q3 '17, which favorably impacted Q3 '17 gross margins by approximately 200 basis points.
We were able to deliver strong margin performance despite the still increasing more than $1 million in adjusted operating losses during the quarter from the Australia and Denmark CIPP businesses. Going forward, we are targeting a return over time to annualized double-digit operating margins in the segment following the exit of multiple underperforming businesses that had been a drag on results over the last 2 years.
Turning to Corrosion Protection on Slide 10. Revenues grew 3% to $106 million, primarily due to work executed on multiple coatings projects during the quarter. The large Middle East contracts where a large contributor drove the quarter with an exceptional execution but we also benefited from other favorable projects in that business this year in both the U.S. and Middle East. Partially offsetting the strength in the coatings business, we saw declines in cathodic protection from lower-than-expected new orders growth, continued customer-driven delays on a number of our linings projects and a reduction in Bayou revenues due to a sale in late August.
Corrosion Protection, adjusted gross margins and adjusted operating margins increased 290 and 650 basis points, respectively, driven primarily by the favorable coatings projects. Additionally, operating expenses declined nearly $3 million from Q3 '17 to Q3 '18, helping to drive adjusted operating margins to nearly 8%.
In the cathodic protection business, gross margins were down slightly during the quarter due to lower revenues in Q3 '18 as a result of the absence of a large construction project executed during Q3 '17. However, adjusted gross margins in this business are up more than 400 basis points year-to-date, driven by improved execution across all key service lines, including construction, engineering and material sales.
I'll wrap up the operating discussion with Energy Services on Slide 11. Revenues for the third quarter increased nearly 20%, driven by significant increases in both maintenance and construction activities, which offset the expected declines in turnaround activities following the strong first quarter activity this year. Unfortunately, much of the higher construction revenue was work performed at a large construction project where the team faced significant challenges during the quarter. As Chuck laid out, the project nearly doubled in size from its original budget and our project team encountered multiple delays due to site conditions that were known to the client or contemplated by our bid. These project challenges led to Energy Services is significantly reduction in adjusted operating income and margin performance in the quarter. We do expect to realize a significant cost recovery on this project in the fourth quarter, which, if realized, will help offset a significant portion of the third quarter shortfall.
As we look forward, final refinery labor transitions are anticipated to be completed by year-end, and we expect to see cost savings in 2019 related to reduced overhead levels that were needed to manage the transition activities over the last couple of years. We remain focused on growing higher margin specialty services within this segment and are continuing to benefit from the strong cash generation this business provides due to favorable cash conversion and low capital needs to support ongoing activities.
That wraps our review of each of the segments. Now let's review our year-to-date cash performance on Slide 12. We have generated cash flow from operating activities of $14 million through the first 9 months of 2018 compared to $32 million in the prior year. The decline in year-over-year as a primarily attributed to a favorable customer prepayments in 2017 related to the large Middle East coating projects. Additionally, we have spent $7 million more in cash for restructuring activities in 2018 compared to 2017.
We collected $38 million in cash proceeds related to the Bayou sale in late August, which we used to reduce borrowings on our revolving line of credit. Per borrowings against our revolver were $19 million as of the end of September. Investments in capital expenditures year-to-date are $22 million and primarily consists of equipment and fleet purchases associated with 2 expansion in North America CIPP, ongoing maintenance CapEx to support the business and investments in technology. We expect total capital expenditures for 2018 to be in the $25 million to $30 million range, reduced from our previous guidance due to lower needs related to exited businesses. We spent nearly $19 million for share repurchases in the first 9 months, which included open market repurchases of approximately 548,000 shares for $13.2 million an additional $5.4 million spent to acquire approximately 225,000 shares related to employee tax obligations in connection with divesting of employee equity compensation awards. We spent $9 million year-to-date to fund the 2 small acquisitions within our Energy Services and Corrosion Protection businesses that Chuck previously discussed.
We ended the quarter with $69 million in cash, which is below our target cash position of $80 million to $90 million, partially due to the higher cash restructuring costs we have incurred in 2018. Looking forward, we expect operating cash flows to be seasonally higher in the fourth quarter, and we also expect to reduce our required working capital as we exit the additional international operations. We have a strong liquidity position in excess revolver borrowings and feel good about our ability to continue to invest in the business through maintenance capital and small acquisitions, while also continuing to return cash to investors through open market share repurchases.
Turning to Slide 13. I'll walk through additional detail of our consolidated full year outlook. As Chuck mentioned, we are now targeting adjusted earnings per share growth of 15% to 20% of our 2017 results. Our revised outlook reflects the impact of lower than projected revenues from our Infrastructure Solutions and correction protection businesses. We expect revenues to be down 1% to 3% from 2017's record results. Despite the lower projections, we feel good about the organic revenue growth that has enabled us to offset the absence in 2018 of nearly $95 million of 2017 revenues from the large Deepwater project. We expect adjusted gross margin and adjusted operating margins to be on par with 2017, driven by improvements in our Energy Services segment, restructured businesses, cathodic protection and coating services, which together are offsetting declines in 2018 associated with contributions from the large Deepwater project in 2017.
Operational spend as a percentage of revenue is expected to be closer to 15.5%, down from 2017 due to restructuring savings and cost containment efforts. We also remain focused on streamlining our SG&A spending as we continue to simplify the business. We expect interest expense in the $14 million to $14.5 million range, and income attributable to noncontrolling interest of approximately $1 million. We are still targeting our adjusted effective tax rate to be between 23% and 24%.
For our 2017 restructuring initiatives announced in August 2017, we have incurred $126 million in charges to date, including cash charges of $21 million and noncash charges of $105 million, inclusive of $86 million in impairment charges recorded in 2017. We expect $130 million in total charges related to the August 2017 actions and the divestitures of our Australia and Denmark CIPP businesses. We expect all charges in restructuring activities associated with these actions to be substantially completed by the end of 2018.
We are targeting an additional $25 million in total charges associated with the exiting the additional international businesses announced today in our efforts to further optimizing certain North American operations. Of those charges, we expect $8 million to $10 million to be cash charges. As a result of these new actions, we expect to realize incremental annual savings of more than $5 million in addition to avoiding the significant operating losses and margin dilution associated with these smaller underperforming businesses over the last several years.
We expect to incur substantially all charges related to these actions by mid-2019. While restructuring activities have taken longer than we initially anticipated, and communities, we substantially completed all activities with respect to the initial 2000 restructuring actions by June 30, 2018, with the exception of the Bayou sale, which was concluded on August 31 and the sales of Denmark and Australia, which we expect to conclude in early November and no later than Q1 '19, respectively. The new restructuring actions that we announced today, while extending the timeline for restructuring activities, are result of the further review of Aegion's international operations that we discussed during our August call, and reflect our continued efforts to simplify the company and focus the management team and the company's capital on operations and activities that support Aegion's long-term growth and profit objectives. We are confident these new actions will result in a more focused and streamlined business, capable of achieving organic growth in our core markets and delivering long-term value for the Aegion's stockholders.
That wraps the review of our third quarter results and outlook for 2018. With that, operator, at this time, we would be pleased to take questions.
[Operator Instructions]. Our first question comes from the line of Eric Stine with Craig-Hallum.
This one will start on Infrastructure Solutions. I know you mentioned in depth the mix issues impacting 3Q, 4Q, but I may have missed this. But any commentary, I know you mentioned the 2 projects, which are more medium to large diameter. But just overall, what do you think about the mix? How that looks like in 2019? And then does that change any of your plans for that segment going forward whether it's a number of crews or other steps you might take?
As we look forward to the business, the market is healthy. And we don't anticipate having a mix problem as we go into 2019. I think what happened in Q3 was a function that as we got into it our workable backlog, we had a lot of the small-diameter work. And the decrease did a great job getting it out there. They had that little bit quarter, but it certainly impacted our revenues has impacted our gross margins. I look at that as a short-term phenomenon. It certainly doesn't reflect what we see is that the global market opportunity. And we committed to the market being competitive in that market over the long term.
Got it. Okay. And then just sticking with mix and moving to Corrosion Protection. You've talked about the two projects in the Middle East and what the pipeline looks like beyond those. But any thoughts on -- or any deals you can share on mix between onshore and offshore since I know there's a margin difference between the two.
Yes. So we've been successful over there booking what I would call smaller to medium-sized projects, projects that are in the $5 million to $10 million range. We don't spend a lot of time talking about those. But we continue to be successful in booking those. The $4 million project that I mentioned is in offshore project. As we go forward, I think we expect to see continued projects of that size. We don't believe that over the next 12 to 18 months, we're going to see another $30 million project like the one that we're working on. But I would say the mix of onshore and offshore over there generally favors offshore.
Got it. Okay. And then maybe last one for me, just to clarify so in Energy Services, the cost recovery that potentially comes in 4Q. Just to confirm so that's not in your guidance in any way, that would represent an upside?
Yes, we, I guess, our current guidance would anticipate a recovery related to that. We built that into our fourth quarter forecast.
You did? Okay.
Our next question comes from Brent Thielman from D.A. Davidson.
Maybe just sticking to that last question. Could you clarify the impact about lump-sum project, I guess within U.S.? And I'm trying to get to what margins would have been kind of normalized and what you're looking to recover from the customer?
We're in the middle of discussions with our customer. We've got a great relationship with them. But we don't want to talk about these, actually what the overall charge would be. I will tell you that even had we not had the project challenged, our overall margin would have been lower than what we expected for the quarter.
Okay. Maybe sticking with the -- if I thought about kind of this reinclusion of the $30 million for the two large customers back into the backlog base, I mean, that suggests something like kind of single digit improvement year-over-year. Is that how you are thinking about this business as we enter kind of 2019 in terms of the growth potential?
Yes. I think what we've said for long-term growth in CP is in that mid-single-digit range. And that's what we expect year-over-year. And as we go forward, we continue to have that kind of expectation for the business. Occasionally, we're going to get a large project, and there's always going to be a bid outlier, we love them when we get them. But year-over-year growth excluding those large projects that we would expect to be that mid-single-digit range.
Okay. And then in cathodic protection, the 10% improvement order since June, can you just talk a little more about where you see the orders strength of these markets are customers that have been on the sidelines and now starting to step up to the plate? Are they new markets for customers are pursuing? Any more color there?
Sure. So we've seen a nice pick up in orders in the U.S. and somewhat in Canada over the last 4 months or over the 4 months that I mentioned that our typical base in that business is midstream oil and gas. And I think what's happened in the U.S. is that we have been executing very well over the last 9 months, and I think we've regained the confidence of our customer base, and we expect to do even more as we go forward. The Canada market is still a bit slower than we would like. The oil and gas resurgence that we've seen in the U.S. has been far slower in Canada. We have seen improvement in orders, but the market over there is still, overall, is low. But I think what we're really saying is that, in the U.S. business in particular, we're coming out of a business that wasn't performing as well as it needed to. The business is performing very well now. We remain the largest player in our market space, and I think we've had been very successful at regaining our market share over the last 3 to 4 months.
Okay. So it's fair to say that this is all work that's pretty familiar to you?
This is all the work that's fairly familiar to you.
It's not new market or something like that.
And the other thing that's happening that I'm excited about is we continue to develop our aim package were working really closely with our 2 largest customers and tailoring that package to really fit what they need. We're excited about it, they are excited about that. And it truly has helped, I think, our overall relationship with those companies, and we're excited about that going forward. And what that package does is it gives us a differentiator in terms of our ability to manage data in the cathodic protection market. We will continue to be very excited about that.
Okay. Last one for me. Just the restructuring actions that you're taking now. I understand some specifics you don't want to share, but can you just talk a little about what that's going to entail? And through this process, should we anticipate slower bookings more in North America in the near term as you take these actions?
I don't think the North America business should be impacted at all in terms of bookings. So the business in Mexico, Brazil and Argentina will be substantially wind down by the end of the year and will have exited those businesses. We have some other international operations that we'll be announcing here shortly. But overall, I do not expect the North America business to be impacted at all. It's a different management team, they are very focused on the task at hand. And I believe we'll be able to exit those businesses with no impact on the North America business.
Our next question comes from Craig Bibb with CJS Securities.
It's actually Pete Lucas for Craig. Just 1 following up on the Infrastructure Solutions mix. You have mentioned the market is healthy going forward, you don't anticipate the mix issue in '19. Just wondering is does that mean that you expect to win a higher percentage of the large diameter business? Or that there's more available large diameter business to bid on? Just trying to figure out what the issue was and how it looks going forward.
I think, going forward, what we expect to see is sort of a traditional mix of large and small diameter projects. I don't see a change that -- based on the visibility we have in the market, we don't see a real change in that mix. What we do expect is that we're going to book our historical share of that market. And based on that, expectation is that our backlog going into 2019 and, in particularly, as we get little bit further into the year, it's going to reflect our historical win rates in that portion of the market.
So, I guess, another way to ask then would be so the shortfall that we saw year to mix issue that you had in the last quarter, was it the lack of leading those market projects? Or it's just a lack of the projects?
I think we had -- a lot of where we win depends on exactly where these projects are being bid. Our local strengths, how well we know the customers. There's a lot of things that go into this. And what I would say is that we did not win that share of those projects that we expected to probably early in the year.
[Operator Instructions]. Our next question comes from Noelle Dilts with Stifel.
So I just wanted to discuss the trends you're seeing in cathodic protection a little bit more. Can you just give us a sense of kind of what you're seeing as it relates to demand just kind of the maintenance side versus new project activity and where you think -- I know you said in the call, you kind of built so much of market issue in terms of the revenue being forecast, but maybe help us understand sort of unpack that a little bit and give us quite a sense of what you're seeing?
Love to. So I think what you've seen this year is a much higher -- is a higher mix of maintenance activity. The two projects that I mentioned, as we may have mentioned on the phone call, but we did the cathodic protection on the dapple pipeline, we also did on the rover pipeline. The dapple was a portion of that is still in backlog last year, the rover was all in backlog. Those were two new construction projects that certainly had impact on our revenue and margin in the Northeast U.S. This year, what we've seen is really good volumes in terms of serving the engineering, the kind of work that we do on the maintenance side. We have seen may be a bit of a low on the construction, on our new construction. Although as we go forward, we have some very good projects coming up. So I think the business still tends to be about 75% maintenance related. That portion of the business is strong. The new construction piece has been a little bit slower this year, but I would expect that's probably order pattern, and I'm sure we'll get whatever our share is as we go into next year. The overall market, particularly around the maintenance side, all seems very healthy for me.
Okay. Great. That's helpful. And then just was encouraging to see that you're seeing better utilization of crews and not really seeing any labor constraints on the Infrastructure Solutions. But given what we've heard from a lot of folks within the industry, they are seeing some regional and pockets of labor tightness. Is there -- are you watching that? Is there any concern, particularly as it relates to Energy Services and finding some of the right folks to work on those jobs the same as [indiscernible]
There was may be a couple questions there. The first one is relative to NAR, I don't want to minimize the labor challenges. It's been a tremendously difficult year keeping our crews completing NAR. And I would say is, on a weekend basis, we typically probably have a couple crews sideline, not a couple of the 70-plus. But we typically have a couple crews assigned line for labor issues. And this is just keeping people and maintaining crews has been very difficult. So I don't want to minimize that at all. I think we've been able to put experienced people on crews with new people. We've been able to maintain and actually improve our productivity. But the labor issue for NAR has been challenging all year. Energy Services is a unique situation. We have, as you know, our folks going to refineries every day. That portion of the market is well compensated. We do not tend to have anywhere near the same level of turnover in our routine maintenance business. We do have challenges when we do turnarounds and when we do construction projects, finding people. But we've been able to manage that pretty well. As we went through the year, the big issue there is on the construction projects and not on the maintenance side.
Okay. Great. And then last, I understand you're not in the position to give 2019 guidance, but can you give us a couple a little bit of information around your thinking about '19. But are there any comments that you like to make or provide around just kind of high-level expectations as it relates to growth in sort of margins look into next year?
Well, we've had -- as you look at the business, we've had a challenging year with our CIPP business in North America. It started out with a lot of weather issues in Q1. It really was a tough -- I mean, wet weather always seem an excuse construction, but we really do have a challenging Q1 from a weather standpoint. We also had some project issues that were isolated in the Midwest that I don't expect to repeat themselves. And as we -- and on top of that, we are moving into new geographies in an extremely tight labor market. And so as we move into '19, I think a lot of these issues will be behind us. I expect the labor markets is going to continue to be tight. But wouldn't expect the other 2 issues. So we are optimistic about our ability to improve margins in that business over what we've seen this year just because some of the weather and project issues we've had. On the cathodic protection side, we've seen very nice margin improvement year-to-date and gross margin improvement year-to-date. And that business needs to continue that rate of improvement. They've done a great job. It's not where we wanted to be, well, but it's so much better than it was a year ago. And the most important thing is they're executing really well in front of our customers.
So we're optimistic about that business also. Overall, I'm optimistic about the business. We are in the process of rolling up budgets. We don't see anything in the markets that has those concerned, in the overall market that has us concerned. But we do have a lot of puts and takes of this year as you can imagine as we go through the budgeting process and really able to provide a good update on '19 in February when we have our Q4 call.
[Operator Instructions]. And I'm not showing any further questions in queue at this time. I'd like to turn call back to Mr. Gordon for closing remarks.
Thank you. The entire management team remains focused on taking the actions necessary to serve our stakeholders, including our employees, customers and shareholders globally. We will continue to drive results in the remaining 2 months of 2018, and we look to see increased earnings through improved execution and organic growth in 2019 and beyond. We look forward to providing more updates on our outlook early next year. Thanks for joining us today and for your continued support of Aegion.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.