EXHIBIT 99.1
INSITUFORM TECHNOLOGIES, INC.
APRIL 25, 2003 CONFERENCE CALL
Operator: Good day and welcome everyone to this Insituform first quarter
2003 earnings conference call. This call is being recorded.
At this time for opening comments and introductions, I'd like
to turn the call over to the Chairman and Chief Executive
Officer, Mr. Tony Hooper. Please go ahead, sir.
Tony Hooper: Thank you. Good morning and welcome to the Insituform
conference call.
Thomas Cook: If non-GAAP measurements are used during this call, a
reconciliation to GAAP results will be available on our Web
site, Insituform.com.
During this conference we'll make forward-looking statements,
which are inherently subject to risk and uncertainties. Our
results could differ materially from those currently
anticipated due to a number of factors described in our SEC
filings and throughout this conference. We do not assume a
duty to update forward-looking statements. Please use caution
and do not rely on such statements.
Tony Hooper: Thank you, Thomas.
I will give you our thoughts on the first quarter and on the
outlook before opening this call to questions for those
investors and analysts who are attending this conference call
by telephone.
But before I start, if any of you have read the Dow Jones
Business News Report on our earnings announcement and forecast
this morning, their numbers are all wrong and they will be
issuing a correction shortly...
Joe White: For the second quarter.
Tony Hooper: ...for this - for the second quarter and rest-of-the-year
outlook, but of course they certainly won't admit they were
wrong.
Turning to the first quarter, this was not an easy quarter for
us. Severe winter weather made things more difficult this year
but since I have formally foresworn using weather as an
excuse, I won't take that one any further.
The Elmore piece of our tunneling operation suffered from both
insufficient workload and unforeseen costs on one project in
particular. This is a project that was bid and awarded prior
to our acquisition of Elmore last spring.
The problem contracts that came with the acquisition are over
and we have some prospects of recovery through claims, but the
loading problem there will not go away until the end of the
second quarter.
We booked a small tunnel project at the end of March and we
hope to build substantial backlog in that operation during the
current quarter.
In the first quarter of this year tunneling - as part of a
joint venture - was the low bidder on a project in which our
share would have exceeded $100 million. The client - for a
variety of reasons - decided not to award the project, and we
understand intents to package it with other work and accept
bids probably in the current quarter.
We will of course continue to pursue this work but the
immediate future of this unit would be both brighter and more
certain had this work been awarded in the first quarter.
Tunneling projects in general continue to come to bid behind
schedule. There are more substantial opportunities in the
second and subsequent quarters and we will endeavor to ramp up
our tunneling backlog with some large projects.
In rehab, we had very strong performance n some domestic units
and problems in others. We incurred large costs to exit CIPP
contracts in New York, which were not profitable.
One of our normally strong rehab units suffered from low
backlog and slow releases, and under performed significantly.
Kinsel rehab had a difficult quarter with the combination of
under loading and operating difficulties. This will improve
somewhat in the second quarter because of work recently won,
but the unit will not be on plan until the second half of the
year at the earliest.
The TiteLiner unit exceeded plan and prior year's profits.
In Europe, performance in the Netherlands and Spain exceeded
plan and prior year, while rebuilding the troubled French
operation proceeded with a negative impact on earnings.
Notwithstanding these challenges, we posted an 11 percent
increase in revenues over the same quarter last year and an
eight percent increase in net income. Most of the revenue
growth was in tunneling which was up 69 percent.
However, tunneling was not the leader in income growth because
of the problems at Elmore. Tunneling net income actually fell
23 percent compared to Q-1 2002. The lion's share of the
profit increase came in North American CIPP, which improved
earnings 45 percent compared to the same quarter last year.
In North America the market was unexceptional in the first
quarter. As indicated, tunneling bids continued to come to
market behind schedule. The level of work put out for bid in
CIPP was up a little from last year - about five percent - but
down from 2001.
Experience has shown that bidding intensity in the first
quarter is a poor predictor of the year. Rehab bidding picked
up steam in late March and has been much stronger in April.
Our success rate in March and April has been good and we are
building backlog once again. We hope this market strength will
last at least through the quarter.
It may only be coincidental, but there appears to have been a
positive change in customer mood since the start of the war in
Iraq and particularly since its conclusion.
Our revenue per foot of CIPP increased again in the first
quarter. All indications are that price erosion remains in
single digits.
The aggregate decline in market price has slowed in each of
the last three years. With the strong revenues and relatively
weak bookings, we drew backlog down in the first quarter about
eight percent overall from the end of 2002.
Looking forward, we face short-term issues of loading in some
units and concern about release of existing work overall. In
tunneling, the second quarter depends on how fast we can start
the work we recently booked in Elmore, and how we close out
the old Elmore project claims.
This is how we arrived at the guidance for the second quarter
with a range from two cents per share below last year, to two
cents above. This is for continuing operations. Now last
year's result was 31 cents from continuing operations, so this
means a range of 29 to 33 cents.
Earnings per share in the second quarter last year as
reported, were 28 cents because of a three-cent loss in
discontinued operations. Our exposure to discontinued
operations this year should be much less.
We continue to be concerned about the medium-term direction of
spending. As we have reported in the past - and as reported by
AMSA, the Association of Metropolitan Sewer Agencies - 55 to
57 percent of sewer funding comes from user fees. Fifteen to
20 percent comes from issuance of bonds. Four to nine percent
comes from property tax and one to two percent comes from
grants from higher levels of government.
We've also tried to look recently at trends in spending by
cities, which are one of the four classes of domestic sewer
customers. The others are county governments, utility
districts and private operators. Cities account for 58 percent
of our domestic CIPP business.
We are working on a study of city budgets - in our sample, the
data collected to date shows that city budgets are made up 36
percent from various local taxes, 24 percent from various
forms of borrowing, 17 percent from user fees, 11 percent from
other governments, which includes revenue sharing with
neighboring communities, sharing with counties, and grants and
loans from state and federal levels. And 11 percent from all
other sources.
In fiscal 2003, 30 percent of the sample cities reduced their
spending, with an average cut of 4.6 percent. Seventy percent
increased spending, with an average increase of 5.5 percent.
Less than 20 percent of our sample have announced budgets for
fiscal 2004. And what we found is that the - there was no
correlation between the overall budget and spending by the
city, and decisions that were made about spending in the
city's water and sewer department.
Looking at city revenue sources, revenue in 2003 from local
taxes was flat, with sources like property tax up 4.8 percent,
while sales taxes were off 1.2 percent. And income tax fell
13.4 percent where those cities had collected it.
User fees rose 4.7 percent and borrowing was up 6.4 percent.
As may be expected, interest and investment income fell.
There is no clear connection between the poor financial health
of states and the financial condition of our cities, but
whatever effect there is it is negative. It seems to us that
the future of city spending depends on raising local taxes,
especially property taxes, raising user fees and issuing more
bonds.
While general economic conditions are not favorable, and state
budgets are under great pressure, the issues with municipal
spending are largely local.
Having said all this, we can only conclude that while the
general economy and state (deficits) will not help cities, it
is not obvious that this will directly impact decisions about
spending in our sector.
We think there are some positive factors. We believe that
customer desire for our services continues to build, limited
only by the local process of planning and raising funds. And
as we find more innovative ways to handle the purchasing
process, that opens up more opportunities.
We have essentially completed most of the cost reduction plan
we announced last year, with many of the reductions in force
taking place in March and April this year. Reductions in non
people-related spending, will continue. We will maintain our
focus on cost, which is part of our long-term strategy, as
well as a tactic to deal with market conditions. But we have
no plans for additional large reductions in force. And we do
not plan to cut production capacity.
The cost reductions we have made this year will begin to show
up in the second quarter results and more so in the third
quarter.
We are very happy with our operating cash flow, which from
continuing operations was almost double net income in the
first quarter.
Our cash position - already very strong at the end of the
first quarter - will be further enhanced by the proceeds of
the $65 million senior note that we placed this month.
With a 5.29 percent interest rate and no repayment of
principal until the end of the 10-year term, this financing
gives us great flexibility. The notes were purchased by some
of the existing holders of our 1997 senior notes on terms that
are generally more favorable - favorable to us that is.
This follows the renegotiation of our credit facility
completed in March, which raised our line of credit to 75
million.
You will naturally ask what we intend to do with the cash from
the new senior notes. The answer is that we have no immediate
plans other than paying down short-term borrowings and
offsetting the principal repayments of the existing notes. We
are not in a hunt for acquisitions.
However, an increasing number of companies in this business
are under pressure and values are becoming a little more
realistic. Our cash position gives us more flexibility to
expand by financing internal growth or considering other
routes.
Our strong financial position also currently enables us to
obtain surety bonds and insurance for projects - including
very large projects, which are essential in the domestic
market.
Many of our competitors are under financial stress and one of
the first places this shows up is in the difficulty they have
with bonding.
We're also enthusiastic about the progress of technology
development. Our tunneling projects are setting records for
production using the methods and approaches we have developed.
The installation of our first Insituform structural panel or
ISP project is under way and going well.
We have authorized investments in our U.S. tube manufacturing
operations, which will cut our production costs still further
next year. We are using the new Insituform ILS system in parts
of two domestic operations. This process is the most dramatic
change in CIPP technology in 20 years.
Our composite pipe development took a major step forward
recently and offers further improvements in our competitive
advantage.
CIPP order intake in April, as I said earlier was up
dramatically. April CIPP orders look like they will be equal
to at least 70 percent of what we booked in the whole first
quarter. The prospects for May are also strong, giving us hope
that we can rebuild backlog this quarter.
We are pursuing large tunneling projects and hope to have at
least one of these before the end of June.
There are enough opportunities in the market, provided the
timing is right for us to meet our original projections of
five to 10 percent earnings growth this year. We will continue
strengthening our company to make it more competitive and able
to capture share, and be robust enough to do well even in
difficult times.
And with that we will open the call to your questions.
Operator: Thank you, sir. Today's question and answer period will be
handled electronically. If you'd like to ask a question,
please press the star key followed by the digit one on your
touch-
tone phone. If you are on a speakerphone, please be sure to
turn off your mute function on your phone in order for your -
for your signal to reach our equipment. Once again if you'd
like to ask a question, please press the star key followed by
the digit one.
We go first to, Jeff Beach, with Stifel Nicolaus.
Jeff Beach: Yes, good morning.
Tony Hooper: Good morning, Jeff.
Jeff Beach: Can you expand or quantify - help us a little bit on the
hit you took in - expand a little bit on what happened in
New York City. And can you quantify a little bit, the amount
of cost incurred there?
And then the same thing for Elmore and maybe more generally
what's happening in California?
Tony Hooper: I could expand and explain what's happening. I'm not sure I
have the details to quantify those things.
In the New York operation, we have had contracts with the City
of New York and we've had contracts with Newark that frankly
we're not equipped with a combination of the mix in the
contract, our union setup - and the expectations of the client
to perform successfully. By successfully, I mean profitably.
And so we have essentially sold those contracts to other
people and discontinued work on them. We still do work in
other parts of that territory, but we would need to make some
changes to our operation to be able to work successfully and
profitably with those large cities.
That had a non-trivial impact on our cost in the first quarter
of this year. The pre-tax effect of that was on the order of
$1 million.
In the Elmore operation, there are essentially two issues that
impacted us in the first quarter. We had a surprise on one of
the original contracts where literally, approximately $1
million of subcontract work that had been performed and not
billed - that we thought had been paid prior to the
acquisition, or had already been - popped up. And so that was
a substantial hit.
But we are also not covering the fixed cost of that operation
in the first quarter because we don't have enough backlog
going into the quarter. And as I mentioned, we had a low bid
on a very large project in that part of the world, which would
have kicked in in the second quarter and begun immediately to
give them work. What happened instead is we booked an order
which is going to award at the very end of the first quarter
and that'll start to put work into that business at the end of
the second quarter. But we're going to have a couple of lean
months going into the second quarter.
We've built the backlog up - the order at the end of March was
about $7 million, which is enough to get their operating rate
back up in the third quarter.
In Kinsel there are really two issues. In general, if we look
at - Kinsel has a number of regional operations - in general
they had less work that they were able to get to in the first
quarter - of course they always make the excuse about how much
it rains in Houston in the winter, but I'm not sure it was any
worse this winter than last year. We had a combination both of
coming in with lower revenues than we expected, and having
execution difficulties on contracts in a couple of the newer
regions in Kinsel. And overall they came in well above $1
million below our expectation on operating income for the
quarter.
Jeff Beach: Just - back on New York City - have you - actually you
physically exited that market and this $1 million you
estimated; is there people cuts, office closings, things like
that that are gone and we won't see them again?
Tony Hooper: The overhead that was associated with dealing with that
specific customer is eliminated. So that any repositioning or
restructuring of the operation that's required to deal with
that change has been done - it's already reflected.
Jeff Beach: Right, thanks.
Tony Hooper: Thank you, Jeff.
Operator: We go next to, Barnie Kursaner with CJS Securities.
Arnie Ursaner: Hi, good morning. That's about as bad as it gets mangled.
Joe White: Morning, Arnie.
Arnie Ursaner: I'm fine.
Real quick question to ask you - I - you may have commented on
it - what are you thinking about these days on your JEA
contract? And how much of that is built into the second
quarter?
Tony Hooper: Thank you, Mr. Arnie Ursaner, of CJS Securities. Arnie, we are
still working off a few million dollars of revenue in the
second quarter that relates to the original JEA contract.
There will not be any other work on that contract until
October 1st at the earliest and I'm not sure that we'll
actually have any additional work under that original contract
number.
What JEA has started doing - somewhat later than we had hoped
- is releasing work to bid on the street. And they started
doing that in March and so we have picked up some backlog by
direct bidding and we picked up a couple of pipebursting jobs
in the joint venture and a couple of CIPP jobs.
So I'm not sure what exactly what the revenue stream from that
will be in the second quarter but I think we'll be looking at
another two million to $3 million of JEA work from existing
bids and we would - we would hope that JEA will continue to
put that work out on the street, and as long as they put it
out, we think we're well positioned to pick up the lion's
share of that.
So I don't think that - as we've announced in previous calls -
I don't think JEA is a contract that's going to go back to the
run rate that we had in 2002 and that's not built into our
forecast but we are at least starting to see some
replenishment of real backlog with respect to JEA.
Arnie Ursaner: And I guess the other broader question I have for you is -
unless I misheard you - it sounds like you're perhaps seeing
maybe a little weakening of some of the pricing pressure that
you've seen in the business. What do you - what do you think
is causing some of that to dissipate?
Tony Hooper: Well I'm not sure that we're - that we're seeing weakening. I
think that there's been a belated recognition in some quarters
of the fact that there has been price pressure and therefore
there have been some stories out there that have exaggerated
the rate of price pressure. And sometimes people misunderstand
- I'm not always clear on these calls by what I mean, because
we sometimes refer to what's happening just in the competitor
sector, only the part that we lose, when in fact the market is
made up of the part that both we get and we lose. At the risk
of over generalizing, Arnie, I think that while there are a
lot of people out there who are hungry for work because the
utility sector overall has been weak last year, I think that
in a lot of places where prices came down that people have -
don't have very much more room to cut prices and still be in a
positive earnings or a positive cash flow situation. And we
see quite a number of indications that people are under
pressure, so I do not want to go on record as saying I think
that we have hit a flat line here ...
Arnie Ursaner: ... Right.
Tony Hooper: ... But I do - I just don't believe that people have the
ability to keep pushing prices down by anything more than
mid-single digits.
And if - as long as the price decreases are at that level,
that is well within our ability to begin to catch up and
offset through improvements in productivity and cost.
Arnie Ursaner: Great, thank you very much.
Tony Hooper: Thank you, Arnie.
Operator: We go next to, Michael Braig with A. G. Edwards.
Michael Braig: Good morning, Tony. I wonder if you could tell us a bit more
about the - what appears to be three-way settlements among
yourselves, Kinsel and the buyers of the waste-water treatment
business - specifically where those amounts indicated show in
the consolidated income statement as well as the sector
results?
Tony Hooper: We'll be happy to - I'll pass that over to, Joe, but basically
what we've done, Mike, is that the escrow period came to an
end with Kinsel and so we settled all of the claims we had
against the original sellers, and we also reached agreement
with the purchasers of the waste-water treatment and so we
have a final settlement of any claims that they have against
us with respect to the value of the contracts they bought and
- Joe, will tell you specifically where it shows up.
Joe White: It's going to show up in three lines, Mike. You're going to
have a little over 400,000 show up on the other income line
and that relates to adjustments to the opening balance sheet
for Kinsel. You're going to have a little over 500,000 show up
as a credit to interest expense - and that's because of the
forgiveness of the notes. And the net is going to - the net
between how much we got from them related to discontinued
operations and what we paid out to the EIG is going to net
about 1.2 million in discontinued pre-tax, or 700,000 after
tax.
Tony Hooper: And the result, Mike, is that all of those numbers are below
the operating income line so they will not show up in the
sector report breakout that we have, because that only goes
down to the operating income line.
Joe White: That's right.
Michael Braig: (That's good). OK, thank you.
Tony Hooper: Thank you, Mike.
Operator: We go next to Lorraine Maikus with Merrill Lynch.
Lorraine Maikus: Thank you. Could you just go through the backlog numbers
quickly for me - that eight percent decline that you spoke of
- what's the base number that you're using to get there?
Tony Hooper: OK. Yes this - I agree, Lorraine, it's confusing. What we
published to try to keep the two senators happy and the SEC,
we put out the backlog numbers in the 10-K and - but we don't
add up the totals. So we had $227.2 million of contract value
at December 31st, 27.2 million of apparent low bid, and then
we have another 34.3 million of apparent low bid for future
periods and 20.9 million of work that is in backlog beyond 12
months. Internally I get to add all that up and that takes me
up to 309.6 million. So that's the starting number that I
have. When you see the 10-Q, what you'll see is those - I
guess those four breakouts and you have to do the math again
to add it up, but that - off the 309.6, we're down to about
eight percent in total, so that's the baseline.
Lorraine Maikus: OK. And then the adjustments that you made to those 10-K
numbers, were those primarily just to remove Jacksonville from
the balance?
Tony Hooper: No the - we took Jacksonville out of the backlog in September
last year. What we - what we did in the 10-K is we've adopted
a much more formal standard for how we report orders in
backlog. That's partly just to run the business better and
partly because of the new rules about disclosure of non-GAAP
numbers.
One of the challenges in reporting in this business is, how do
you value contracts since - with the possible exception of
tunneling contracts - most of the contracts we have only have
an estimated value. And so what we've done is to put in some
extremely rigid rules about the basis for valuation and the
need for documentation. And as of December 31st there were
contracts that we know we have, that we're working on for-we
have one large contract that probably is worth $20 million in
backlog and we invoiced seven million of it last year, but I
don't have a document that stipulates what the prospective
value is. So by our current rules, we can't report that in
this backlog.
So that's the change we made effective December 31st is to
take those kinds of things out. So it's more rigorous, but
it's also a very conservative type of reporting.
Lorraine Maikus: And then you said that orders were strong in March and April -
do you have an indication - you know, maybe just a broad
percentage of where backlog is today, versus the end of the
quarter?
Tony Hooper: That's a good question, but we - if we looked at he CIPP
business, backlog has got to have gone up by 20-plus million
in the first three weeks of April. And I don't have the - I
don't get weekly bookings numbers for all of the other
businesses so I can't tell you how they are, but in general
we're probably going to be up something close to 10 percent
above the December 31st number at the end of April. And
hopefully better than that at the end of June.
The second quarter again - there's no - there's no repeatable
seasonality to bookings in this business. Last year the second
quarter was spectacular and then we saw that the third and
fourth quarters were weaker but that's not a pattern that's
consistent with prior years. There's no clear pattern. So it
looks like this second quarter is also going to be very
strong. We have no way of knowing for sure whether the
prospects that are in there for the third and fourth quarters
will come to pass so that we can only speculate about that.
But we do expect now that we ought to see a big pickup in our
order bookings across the board in the second quarter, and
have a substantially stronger backlog at the end of the second
quarter than we had coming out of either the first quarter or
the end of last year.
Lorraine Maikus: And then finally, in terms of tunneling, last quarter we had
fabulous margins because of project closings this quarter -
things were pretty bad - is there a run rate - what you
would expect going forward excluding all of this noise that
we've had over the past couple of quarters?
Tony Hooper: Yes the - actually the core tunneling business - that is the
tunneling business excluding the issues with Elmore is still
doing very well. They were substantially above their
expectations for the first quarter. So what we looked at is
the total business and we will work our way past this. The
contract issues at Elmore are now behind us and from here it
can only get pick up - and we'll put some backlog in there and
then we'll start to run. That is a business which ought to be
producing double-digit operating income. We should see
operating income in the 10 to 12 percent range, which means
that we're looking at gross margins that are around 18
percent.
And there's some fluctuation up and down quarter by quarter.
But that's the expectation we would have for that business.
Lorraine Maikus: OK, thank you.
Tony Hooper: Thank you, Lorraine.
Operator: We go next to, James Gentile, with Sidoti & Company.
James Gentile: Morning, gentlemen. The $500,000 that you referred to with the
negotiations taken out of interest expense - is that primarily
why you're interest expense is quite low in the quarter?
Joe White: Absolutely, James.
James Gentile: OK, great. So we should expect about a million-and-a-half or
so in the next three quarters of this year?
Joe White: I'd say go back to our previous run rate, add a little bit
just because we now have the senior note ...
James Gentile: ... senior note right. OK, great.
Also you know, could you - all the basic margin and backlog
and questions have already been answered - could you - you
mentioned, Tony, in the conference call about - you know, your
happiness with the development of the structural panels. Could
you kind of give us some insight into how that's going to
change the landscape? Is that going to essentially replace
your core CIPP business? Is it opening a new market? What's
the opportunity there essentially?
Tony Hooper: OK, that's a good question. I couldn't have fed you a better
question. There are certainly people here who believe that any
product that we add cannibalizes CIPP - I'm not a person who
believes that. I think that the type of project that is
addressable with the structural panels is one that would not
have been a good candidate for CIPP rehabilitation. So I
believe it opens up a new market.
In terms of what the potential is, my expectations are that we
should grow that to a $30-plus million business in short
order. We have basically taken the first project and are
trying to work through the first project to make sure that we
have not only all the installation issues, but all of our
supply-chain issues because - consistent with our strategy,
we've designed the basic product from scratch ourselves and we
are working with a partner to manufacture the panels for
ourselves. And we're creating the installation techniques and
toolings ourselves, so we're working through this one large
project. And we really have not been out bidding this work and
don't intend to until this project is substantially complete.
But I think it can be a very nice addition and be purely
complimentary to what we have right now.
James Gentile: Look at - is - are gross margins comparable to - you know,
your existing CIPP business for example?
Tony Hooper: I think that the margins in that kind of work are probably
going to be in the high teens to low twenties, depending on
what the mix is on the job.
James Gentile: Yes.
Tony Hooper: However, it doesn't take the - you have to remember the
structure of the CIPP business is, there's a great deal more
asset and fixed cost required to run the cured-in-place
business.
James Gentile: OK.
Tony Hooper: So these other businesses produce good returns at the
operating margin line and at the return on investment and
equity line without having to have the same gross margin.
James Gentile: Great. And could you just give us a just a little insight into
the kinds of projects that would be more appropriate for
structural panels versus CIPP - it might be too technical but
I'm curious?
Tony Hooper: Well I can always try to confuse you with technical BS but
basically looking at projects that are large diameter - that
is they're comfortably man entry - in this country we would
not use that for projects where the entry was difficult, so
it's typically going to be projects that are 72 inches in
diameter and larger. It's particularly appropriate when you
have a non-circular cross section. It is able to handle
offsets and other kinds of irregularities and discontinuities
in the pipe that are much more difficult to do with CIPP
because it's - in CIPP you are essentially putting a single
sleeve into the host pipe ...
James Gentile: ... Yes.
Tony Hooper: and here we can custom manufacture each section as required.
We can also repair different degrees of deterioration in the
host pipe as we go along through it. So only a very small
portion of our footage and revenue in CIPP comes from things
that are 72 inch and above. So I think it really adds on to
that market for us.
James Gentile: Excellent, thanks a lot. I think it was a petty reasonable
quarter given the environment so.
Tony Hooper: Well thank you for your comment - appreciate that.
Operator: We go next to, Larry Baker, with Legg Mason.
Larry Baker: Morning.
Tony Hooper: Morning, Larry.
Larry Baker: Can you talk - just go back to the sort of the tone of
business - I mean you talked a little about pricing but I'd
like to know first of all the number of orders in the first
quarter - or the volume of orders in the first quarter - you
said April would be 70 percent of that.
Tony Hooper: That's right. I mean in the first quarter - you know, the
book-to-bill ratio was well below 1.0. So we've got therefore
a decline in backlog in the first quarter and what we saw at
the very end of March orders picked up. A bigger chunk of what
came through in the first quarter, came through in the last
two weeks of March. What we've seen in the first three weeks
of April is that bids that were delayed from the first quarter
to the second quarter are actually coming out right now and
not being pushed into the latter part of the second quarter.
And more of the work that was scheduled to come to bid in the
second quarter is coming - again in CIPP - is coming out to
bid on schedule - and so we're picking up.
If you recall last year's second quarter we had approximately
$100 million in bookings in CIPP and we're - we are looking as
if this April when we have the final numbers in it's going to
at least beat, if not beat handily the bookings result that
we had in CIPP last year.
When we talked about this tone - that's a very ephemeral
thing, Larry, but I spent a lot of time on the road in the
first quarter talking to cities and talking to various types
of people in the business and I certainly did not get a sense
of optimism - I got a lot of trepidation about what was going
to happen to budgets and so on.
But what we're seeing in the latter part of the quarter - and
now certainly in April - is more optimism. And whether that is
in fact related to the war or not, I think people are not as
pessimistic about what they're going to do with their budgets.
At the beginning of the year and the end of last year we had
people telling us that they weren't certain that they could
maintain spending. We had a couple of large clients that
talked about not having money - not every one of those, but
some of those people have come back and actually put the money
into their - the balance of their 03 budgets and believe
they're going to have it in their '04 budgets, so I think that
there's some more positivism about the trend of spending
there.
We still see, Larry - we still see all of the local if you
like, political issue delays. Places where people have
changed administration last year in their local election and
therefore there's a changeover in their planning and they
haven't put out nearly as much work.
We have substantial contracts out there right now on which
we should have had releases so far this year, where we've yet
to have releases and we expect to see some of that shake loose
pretty soon. Least that's what our hope is.
Larry Baker: Just clarification - you said that you thought April would
beat last year - you mean the second quarter ...
Tony Hooper: ... second quarter ...
Larry Baker: ... of last year - April ...
Tony Hooper: ... April of last year ...
Larry Baker: ... Yes, OK.
Tony Hooper: We think April will beat the April bookings from last year.
Joe White: April of last year was the biggest quarter - or biggest month
in the quarter.
Larry Baker: And then the good quarter?
Joe White: Yes.
Tony Hooper: Yes.
Larry Baker: OK. The - earlier there was talk of a number of large $500,000
and up programs that would be coming to market this year. Is -
do you still see those - have you seen them yet? Or has the
timing changed on those particular large orders?
Tony Hooper: Well, you're talking about the ...
Larry Baker: ... cities with large ...
Tony Hooper: ... You talking about cities with - you know, with 500
million plus ...
Larry Baker: ... year programs ...
Tony Hooper: ... Yes.
Larry Baker: ... Right.
Tony Hooper: Well if you pick up the popular press, you can see people who
write articles about all the cities that are going to be
spending money - in fact I can only think of two or three of
the top 20 programs in the country right now that are running
at anywhere near full pace. Frankly all of the other large
cities have spent nowhere near in the first half of this year,
what one would expect from that and again we're seeing issues
with changes in administration and planning. I think everybody
who reads the papers is familiar with the transformation
that's taken place in Atlanta, but there are other cities
where there have been either changes of administration or
changes in the management of the sewer utility, which have
resulted in spending plans being stretched out or bond issues
being delayed, so we are not benefiting right now from any new
program - there's no customer program that has kicked in in
the first half of this year that is buoying our results. To
the extent that that's going to happen - that's all in the
future.
Larry Baker: OK. So that's real good half empty - half filled - depends
on how you look at it answer?
Tony Hooper: Well not - again - it's not a good thing for me talking to
investors to discourage people from believing in mega projects
because that would tend to lower expectations. But I certainly
can't build our business plan based on the hope that a city is
going to kick loose hundreds of millions of dollars of work. I
have to build a business plan based on what's going to happen
in the next - you know, six months, 12 months and 18 months
and put the capacity and resources in place to deal with that.
So we always look at a much more practical horizon.
It's great if those things come to pass - if we have a large
customer that slows down releases, that really hurts us, but
we are going to inch our way forward here whether or not we
see those - large projects coming out any time soon or whether
they're in steps or staggered in the future.
Larry Baker: OK. Fair enough. Just two more questions. One is you talk
about the head count reductions were completed sort of late in
the quarter or even into April. Were there costs associated
with that? And could you help quantify some of the benefits
you'd expect to see going forward?
Joe White: Larry, if you remember right in the third quarter last year we
took a restructuring reserve?
Larry Baker: Right.
Joe White: That included the cost of the people to come out.
Larry Baker: OK.
Joe White: So there are no additional costs coming out. All you'll be
seeing in the future is the savings on the head count.
Larry Baker: OK. And that was annualized at around four million?
Joe White: In ...
Tony Hooper: ... Yes ...
Joe White: ... in total ...
Tony Hooper: ... in total. And part of that is already flowing through and
the balance will start to pick up and flow through in the
second and third quarters of this year. So we will see some -
see some dip in the overhead rate on a net basis in the second
quarter - that's what we expect. And we ought to be getting a
little better than that even in the third quarter.
Larry Baker: OK. And just then to go back to New York - just one final
question. Can you sort of do a lessons learned or what went
wrong - how did you get into contracts that were this awful?
Tony Hooper: I think the simple answer really wouldn't play well - I'd have
to fire myself if I told you the real reason - but the answer
is that there are - there are places where if we're going to
apply our model of being the low-cost producer and being cost
competitive, we can't just accept whatever hand is dealt us
and we went into New York with a very different labor
situation than what we have in our other unionized operations
situations. We went in - into a market where previously the
operation had been primarily as a subcontractor and we jumped
up to operating as a prime contractor without necessarily
being well equipped to do that. So I think there are - the
issues are primarily tactical. We will go back in that market
at some point when we think that we're positioned to do that.
I - there's not a broad strategic lesson to learn there -
essentially when we apply our model correctly and we
understand what local conditions are, it works for us.
And when we don't, what we have to do is we have to take our
lumps and work our way off the contracts. And what we decided
to do here was we found somebody else - rather
than prolonging the misery - we found somebody else to whom we
could assign those contracts and have them perform them for us
and so allow us to end that era.
Larry Baker: OK. And - sorry - just had one final thought occur to me. You
added a new president during the quarter I believe - can you
talk a little about what his role will be?
Tony Hooper: Oh, absolutely. He's going to do all the work and I'm going to
take all the credit. No, we have for some time, Larry, here
believed that the - as the company got larger and execution
being such an important issue, that we really wanted to have a
separation between the CEO role and the chief operating
officer role. And that the amount of time that I had to spend
on issues that were down into a fairly detailed level of
operations, cut into things that I should do as chairman and
CEO of the company, both with respect to business development
and with respect to the - to relationships with our major
customers. So in effect what, Tom Rooney, will be doing is
literally running all of the business on a day-to-day basis
and I will get myself completely out of the loop on all those
things that are short term and detailed. And I think we have a
much stronger management team now with the addition of that
position, and particularly with the addition of Tom, who comes
with an unusually seasoned background to this company. He's
got a lifetime of experience in various types of contracting,
he's worked on different types of projects all over this
country and we've never had anybody that we've hired at a
senior level that came with that specific development in this
business. So I'm very happy that we've brought him on board.
Larry Baker: Thank you, Tony.
Tony Hooper: Thank you, Larry, good to talk to you.
Operator: We go to next to, Todd Vencil, with BB&T Capital Markets.
Todd Vencil: Morning, gentlemen.
Tony Hooper: Morning, Todd.
Todd Vencil: Just to make sure I understand with regard to cured-in-place
pricing in North America - what I understood you to say was
that revenue per foot is up quarter-over-quarter but it's down
mid-single digits year-over-year?
Tony Hooper: No, our revenue per foot is up quarter-over-quarter from last
year and first quarter of 2003 is above full-year 2002 -
that's our revenue. And if we look at the market as a whole,
the overall market last year - combination of what we had in
revenue and orders that were booked by other people because I
can't recognize their revenue, I only can recognize their
order intake so they aren't time phased exactly right. The
overall market declined in low-single digits last year in
price and looking at what pricing was in the first quarter of
this year, this pricing in the first quarter is often lower
than the rest of the year because people try to - try to build
up backlog early in the year. There - you can't draw firm
conclusions from it but it's at very worst it's no more price
pressure than we've seen in the last years and you could
interpret that even more positive if you wanted to say the
price pressure has abated. And we've certainly seen our
success rate go up towards the end of the first quarter and
again in April, which is a further indication of what's
happening to pricing. I don't make any prediction or
representation about the longer-term trend of that but that's
certainly what's happening right now.
Todd Vencil: So with regard to the different directions between the overall
market and Insituform's price per foot - is that a mix issue?
Is it a market issue?
Tony Hooper: No, I mean there - when you look at our price per - the price
we have in revenue and the price that you have in the market -
the total market is going to include people who bottom feed
- it will include the people who come into this market from
elsewhere and put in very, very low bids that none of the
usual players would touch. So that there's always going to be
in a public bid market a piece of the market that the serious
players don't dabble in and that'll be at prices that are
several percentage points below where the market average is.
Todd Vencil: Yes. OK. Cap ex for the year - I guess you talked in the (K)
about $5.6 million that you might use to upgrade facilities
and then you mentioned some changes with regard to the line of
manufacturing. Can you - can you talk about what cap ex should
be this year?
Tony Hooper: Well we are going ahead with the - that 5.6 million, which is
- which relates to manufacturing ...
Todd Vencil: ... Yes.
Tony Hooper: ... we have been holding back on maintenance cap ex in the
CIPP business because we believe that they have - there are
places where people actually have to have additional
equipment, but we've been holding back on the replacement of
equipment because I believe the fleet is relatively new right
now and I don't want to see our run rate for equipment cost go
up unless we add more capacity. We're probably looking at a
net cap ex this year in the order of 15 million, subject
always to the issue of what we book in tunneling.
Todd Vencil: Yes.
Tony Hooper: There are some of the large tunneling projects that are in the
pipeline right now specifically require the purchase of new
machines. And we're very happy to see that because that limits
the playing field of who can bid and if we are looking at
those kind of projects you can see another - you know, $10
million per project of cap ex - again that wouldn't
necessarily be net for the year because what we typically do
is finance the construction and progress of those machines and
then do at least a partial sale lease back, whether we own 100
percent or half of the machine and that could drive up our net
cap ex slightly. But otherwise I think we're in the ballpark
with the 15, $16 million number.
Todd Vencil: OK. And final thing - you had mentioned I guess last quarter
that you might get more aggressive at the level for your
trading on repurchases of stock - I believe that's correct and
- you know, given your comments about cash before, can you
just sort of revisit that issue?
Tony Hooper: Well we bought back about 110,000 shares in the first quarter.
Todd Vencil: OK.
Tony Hooper: So we haven't been terribly voracious there. We certainly had
the opportunity and if we see downward pressure on the stock,
there are places at which our model kicks in more
aggressively. And we - the stock buy-back program is there and
we will continue to buy but we do not have any plans right now
to ramp up the rate at which we're buying stock.
Todd Vencil: OK. Thanks a lot.
Tony Hooper: Thank you, Todd.
Operator: We go next to John Quealy with Adams, Harkness & Hill.
John Quealy: Hi, good morning.
Tony Hooper: Morning, John.
John Quealy: Said in your release you had some success in booking orders -
couple - in two or more of your rehab trenchless technologies.
Could you talk a little bit more about that - specifically in
context looks like CIPP orders in April are picking up nicely
so just wondering if you could expand on those two a little
bit?
Tony Hooper: Yes, absolutely. One of the things that is part of our
strategy is that we are very successful in our individual
niches, but that means we tend to be essentially pursuing
projects where
the owner has already decided on the type of work to be done.
And we've invested over the last few years in developing much
better high-level relationships with our customers to profit
best from that. What we want to do is to take projects where
they would either be using simply dig or not understanding
what the optimal mix was on the project and going in there and
selling them an engineered solution. For example you would
look at a project where part of the line is going to go under
an open area that can be dug up. It's either a field or a
parking lot or a park and therefore the value of trenchless is
a lot lower, but the other 40 percent of the project is
trenchless. It's to our advantage if they will put that into a
single project and if they will allow us to decide what the
optimum mix of techniques is. And we've had a few successes
like that. We've also had now some successes in which we have
taken multiple trenchless technologies and explained to the
owner - you know, on a project for two, three, $4 million,
that the best way to do that is to dig a piece of it which we
will subcontract out or perform with Kinsel or do with a
partner. But that a combination of CIPP and pipebursting and
other rehab techniques allows us to do the complete project in
the most cost effective way. And we'd like to see that kind of
bundling and I think we're going to see more of it.
John Quealy: Great, and just in the second part of the question with
regards to some strength in that April CIPP, can you give us
an indication of the proportion of that business that was sort
of booked or coupled with another technology if it's relevant?
Tony Hooper: I think somewhere between five and 10 percent of what was
booked so far in April are orders that involve more than one
technique on a single order.
John Quealy: Great, thanks very much.
Operator: We go next to, Greg MacOsko, with Lord Abbott.
Greg MacOsko: Yes, thank you. If I could follow up on that dollar per square
foot on CIPP - simply put does that mean that your pricing has
gone up year-over-year and the market's is kind of eroded?
Tony Hooper: Yes, our pricing in 2002 was higher than our pricing in 2001
and our pricing in 2003 is higher than our price in 2002. So
yes we have in fact, in effect raised prices. Now you can
raise prices just by no longer doing some of the work at the
lower price - it's not the same as saying that we had - that
we sold 5,000 bushels last month at $1 a bushel and this month
we're selling if for $1.05, it means that last month - say
last year we sold 5,000 bushels of which 4,000 were at $1 and
1,000 were at 80 cents. And this year we've gotten rid of the
80 cent ones and we're selling things that bring the mix up.
And the - what we think we've seen is that there are people
who've come into the market and pushed the price down in a
short term in some areas to levels that don't make a lot of
sense. And so we essentially let them do that and not pursued
it directly and wait for them to get into trouble and go away.
Greg MacOsko: Good. With regard to the previous question, you said that five
to 10 percent of April's CIPP work was complex. Is that - are
you winning more than your fair share of that - those kinds of
projects and is that kind of where you concentrate in CIPP?
Tony Hooper: Frankly we're very happy to continue taking all of the
straight, pure CIPP work that comes out, but in general,
projects are being awarded with broader scope. So what we've
seen happening to us is that the non-CIPP content of CIPP
projects continues to grow. To take that from being a
liability to us - having to sub out non-core work - we're
trying to turn that into an asset by going after projects at
the planning stage and having them put in multiple trenchless
techniques that we can perform. It's not going to replace what
we do, but I think it's adding more market-share potential and
it's part of what is helping to raise our market share.
Greg MacOsko: Yes. OK. And with regard to tunneling - you know, the strong
69 percent growth there - I guess - would you say that the
projects that you won would be in that core tunnel that you
won, or that you got in the quarter were in that core
tunneling area in that we could fairly expect that these new
projects are 18 percent growth - 10 to 12 percent operating
margin?
Tony Hooper: Yes. I mean not every project is going to come out that way
but that will be the composition of the business in general
going forward.
Greg MacOsko: OK. And if I could just look at it on a overall basis - I mean
basically your profit numbers came in pretty close to your
expectations and yet the conversations throughout the - at
least the first part of the call has been well we had problems
here and problems there and problems here - you identified
quite a number of difficulties and problems and yet you were
still able to overcome those and kind of reach a profit goal
that you had expected. Could you give me a sense of - does
that mean that if you didn't - if you had half those problems,
you would have done much, much better?
Tony Hooper: Yes, I think the issue is that we have to be candid today,
even if we don't want to be, thanks to the new rules and so
you can see that roughly two cents of what we show in
continuing operations came from these settlements so we would
only just barely have been within our prediction range if we
hadn't had that.
But what we did have - to have a 45 percent increase in
operating income from the first quarter of last year to this
year in CIPP - with the difficulties that we had with
shortfalls in some areas means that the places that were
strong were extraordinarily strong. So that the regions right
now that have good loading are performing in a very strong
fashion. And the tunneling business - absent the issue of
settling this last contract in the Elmore acquisition and
getting some work back in Elmore is substantially ahead of
plan.
Greg MacOsko: OK.
Tony Hooper: So, we see these - the strength is there - for us the key
right now is to get rid of problem things like an Elmore
contract or contracts that make no sense with a particular
client in New York, and to load up the business with good
work. And that's the path that we're on.
Greg MacOsko: And if I could just focus on those quote, problem areas
- is New York the most recently - one project that had a
problem? What is the newest project that had a problem? Well
you've settled now or in the process of settling?
Tony Hooper: That's a good question. The issues in - with respect to that
customer in New York have been going on for a while and we've
basically just made the decision to stop doing that work. So
those are the same issues that we had during last year. At
Elmore we thought this contract was settled because we thought
we wrote down everything at Elmore at the end of last year,
which we explained at some length in both the K and on the
conference call. Really what happened on that contract was
this surprise invoice. It wasn't that the project had steady
deterioration during the quarter - $1 million - two bills
showed up for a total of $1 million which was completely
unexpected and that just killed what was left of that project
for the quarter.
We will get the loading problem in Elmore behind us because
we've got some bookings now and we will get bookings going
forward. And that team is no longer focused on cleaning up the
old contracts and the difficulties that go with those
contracts. It's focused on growing the business and I'm - the
team that's running that is the same team running tunneling
and they've done very, very solidly for us in the past three,
four years.
We have - I think what we have in this second quarter and
maybe even going to the third - we have one CIPP region that
normally is an excellent producer that's lean on backlog and
will not meet our expectations for the next four to five
months. And the key to that simply is we got to put more work
in there. Now that work is picking up, we'll do that and that
work will start to flow through.
Greg MacOsko: OK, and with regard to your mention of the 30 percent of city
budgets are down four percent, and 70 percent are up 5.5, do
you have any sense of how that was a year ago or is - or six
months ago or anything - or do you have any ...
Tony Hooper: ... Well - yes, what I'm comparing there is the 2003 fiscal
budget, which is the year - fiscal year coming to an end, with
fiscal 2002. I do have the database to compare '02 to '01 but
I haven't - I haven't got those numbers in front of me right
now. And what I'm more interested to see is what '04 looks
like and right now only about I think 15, 16 percent of the
people who are in our database have reported their expected
'04 budgets.
So what I'm looking for and I have my poor, harried staff
working on is - to checking every day to see who's issued
budget data for 2004, so we get some idea of what the outlook
is for the cities. Again I've been telling the investment
community that we're working on this study because it doesn't
seem to be another source and I could ask the question. I'm
not able to correlate the city spending with spending by those
cities in the water and sewer sector - I can't tie those two
together. I just think that if I have a comfort factor if I've
got a better understanding of what the magnitude of the
financing issue is with cities, because there's so much noise
out there and deservedly so about the problem at the state
level. State budgets are in very serious trouble in the U.S.,
running large deficits and a lot of states have a
constitutional problem with not being able to run deficit.
City, in fact - we have one of our members of our board is an
expert on state finance - City budgets are in a different
category entirely than state budgets and a different financing
method than federal budgets. Cities run very large amounts of
additional debt every year and that's a key part of their
financing. It's a lot closer to the way the federal government
runs than the states. I'm just - I'm trying to get a better
handle on what the climate's going to be at the
decision-making level in these cities and whether they think
they're under pressure or whether they've got a way to keep
moving the budget forward.
And these studies are complicated because if you have to look
at different populations. If you - if you put the top 10
cities in the plan - you know, the budget of New York is equal
to he budget of the next 30 largest cities and it kind of
skews the samples, so we have to do a lot of stroking to get
good data.
Greg MacOsko: OK, thank you.
Tony Hooper: Thanks very much, Greg. We have time for one more question
here.
Operator: We return to, Jeff Beach, with Stifel Nicolaus.
Jeff Beach: Hi. Can you give us first quarter backlog numbers by
tunneling, by categories and then somehow be able to - because
you've changed your definitions - try to relate that somehow
to your goal December - some other relevant point?
Tony Hooper: The answer, Jeff, is I have the internal management numbers
here for that, but because of the strictures of reporting,
until we have done the audit of those non-GAAP numbers and are
ready to put them into the Q - if I issue them today I may
have to retract them. Because - I mean I don't want it to -
you know, to be coy with you but we need - we go through an
audit process now to make sure that the contracts that are
actually in the system as reported, have the supporting
documentation. And that process - I checked with the young
woman who runs that process this morning and she was about 70
percent complete.
If you want to know what - but I can characterize overall.
Jeff Beach: OK.
Tony Hooper: What you've got is - there are three large buckets which is
the total rehab in North America, rehab in Europe and
tunneling - and the European backlog is going to be up
slightly and you've essentially got - the draw down then is in
the rehab piece in North America and tunneling and I think
it's going to be roughly the same percentage in both of them
from the end of December to the end of March. And I don't have
a comparison in front of me to compare them to where they were
at the same period last year that's on the same basis.
Because the reporting data that I have for 31st of March
agglomerates things that today - that don't go in to the
categories and put into the K so.
Jeff Beach: All right.
Joe White: Twenty, 30 million.
Jeff Beach: And the last question from me because I think tunneling is
becoming so important - can you expand a little bit more -
separate and talk about the core tunneling, and then
separately the microtunneling. It sounds like there may have
been a regional issue in California that's picking up, but
what's happening - we had a very tight market - if projects
are delayed, is it going to become sloppy? Can you talk a
little bit more about the outlook for both segments of that?
Tony Hooper: Yes, well we don't really internally break the segment down
between tunneling and microtunneling so I don't have data on
that. My response is going to be potentially anecdotal. The
break out of Elmore, which is not considered as a separate
operation except on a retrospective basis, is not between
microtunneling and tunneling. Basically the Elmore operation
does the same work so microtunneling and tunneling are nested
together.
There are differences in the market, firstly because in the
tunneling business we're dealing primarily with larger
projects today. Five years ago our projects were - you know, a
big project was just over 10 million - today 10 million is a
small project for us and a large project is well over 100
million.
Microtunneling jobs don't go that large but I think as you
know, Jeff, there's microtunneling and microtunneling. You
have a crossover point at which you could use either
technology - that is there are tunnel-boring machines that are
of the same size as the microtunneling boring machines, and
the election of which technology to use in an eight-foot
tunnel for example, depends on the specific conditions of the
job.
Where I think it - that microtunneling has been a highly
competitive and somewhat spotty business for most people is
in - is in the small end. For people looking at things that
are two and three feet that they're calling microtunneling
where the terminology gets a little blurred, because it's
tunneling but it looks an awful lot like drilling. And when we
get - the really small stuff that we do, we do inside the
rehab operation - we consider that part of - even though it
may technically be microtunneling, you consider that part of
just new pipe installation by a combination of guided boring,
on line, on grade installation, horizontal drilling, and very
small microtunneling.
And that - and that business is - that's not a huge business -
that's only a - you know, five to $10 million a year.
Jeff Beach: Just focusing then on this - you know, your larger projects -
is that market because of the delays which - was a tight
market becoming a little sloppier? Or is still a very tight
market for the few players there are?
Tony Hooper: Well I think on a small - a smaller tunneling project you may
see people who are relatively unqualified show up and do silly
bidding. But there aren't people who are going to show up and
be anything but serious for a large project and it doesn't
matter whether the market is tight or loose, I don't think
there's any utility that's going to give us an extra 30
percent or 10 percent on a project. And those are projects
where if you have three bidders, that's a high number. It's
not uncommon to see only two joint ventures or two consortiums
bidding, because the spectrum of players that can do those
kind of jobs is fairly limited. And our strategy is to be
very, very cost competitive in that business, which we are -
it's not easy to beat us. And to develop our capabilities to
be the prime contractor and to form strong alliances with good
contractors who do things that we don't do, like sinking
shafts and ancillary work, so that we can put together strong
joint venture bids.
So I - that business I don't see changing but I don't think
that business was ever tight in the sense that we saw
tightness in things like the CIPP market or in some of the
overcrowded parts of utility like horizontal, directional
drilling, where we had thousands of people who were putting
in fiber optics that suddenly went and looked for new things
to do.
Jeff Beach: All right, thanks.
Tony Hooper: OK. Thank you all for attending, I appreciate that. We hope we
answered your questions.
As we look forward I think we've given you a pretty balanced
assessment of the future. We listed the things that we like -
we're happy with the flow of orders at the current time. We're
happy with the progress on the issues that confront us in
launching our new technologies and in reducing our costs - we
have a good piece of that behind us.
There continues to be uncertainty about what the market's
going to be like in fiscal 2004, but the opportunities that we
have on the horizon right now continue to be exciting and
we're trying to position ourselves so that we will do well
even if the market doesn't strengthen. And if the market does
start to pick up then we will do very well indeed.
Once again, thank you all and good morning.
Operator: That concludes today's conference call. Thank you for your
participation, you may now disconnect.
END