EXHIBIT 99.2
INSITUFORM TECHNOLOGIES, INC.
JULY 25, 2003 CONFERENCE CALL
Operator: Good day and welcome everyone to the Insituform
second-quarter 2003 earnings conference call. This call is
being recorded.
At this time for opening comments and introductions, I would
like to turn the call over to President and CEO, Mr. Tom
Rooney. Please go ahead, sir.
Thomas Cook: Good morning. This is Thomas Cook, General Counsel. Any
financial or statistical information presented during this
call including any non-GAAP measures, most directly
comparable GAAP measures and reconciliation to GAAP results
will be available on our website, www.insituform.com.
During this conference, we will make forward-looking
statements which are inherently subject to risks 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.
Now, I would like to introduce our new non-executive
Chairman, Al Woods.
Al Woods: Good morning. Thank you, Thomas. It is my privilege to
introduce you to our new Chief Executive Officer, Thomas S.
Rooney, Jr. As you know, the Board elected Tom on Tuesday.
We also added him to the Board of Directors. Tom will retain
his title of President and with the additional duties of
Chief Executive Officer.
Tom joined Insituform this past April 1st. We hired him
after conducting a national search that, believe me, was
both expensive and intensive. We were looking for someone
who could take Insituform to the next level in our corporate
evolution. Someone with a track record in operations and
someone who understood sophisticated management systems.
Someone who could tap the best in people. When we hired Tom,
we knew we would be making a transition eventually. As it
has turned out, we have ended up making that transition
sooner than we had anticipated. But we feel very secure in
our timing because Tom has just the background and
combination of personal qualities we feel we will need to
unlock our corporation's considerable potential.
Let me tell you a little bit about his background first. Tom
is a civil engineer. He obtained his degree in engineering
from Cornell University in 1982. He went on to get his MBA
specializing in finance from the University of Chicago in
1991. Tom entered the construction industry immediately
after graduating from Cornell. So he now has more than 20
years experience. He has worked for three of the top
companies in the industry -- Turner Construction Company,
Centex Golden Construction Company, and Gilbane Building
Company. He has led four different turnarounds for those
companies in three different regions of the country, and he
has assembled an extremely impressive track record in
operations, marketing, and profit center management.
Now a few personal observations. First, Insituform has the
best people in our industry, and with Tom's collaborative
style, I am confident that he is going to bring out the best
in our people. Second, Tom Rooney with his background in
sophisticated management systems is exactly the man we need
to lead us in this new and exciting stage in our growth.
It is now my great pleasure to introduce Tom Rooney. Tom --.
Tom Rooney: Thank you, Al, and good morning everyone. I want to start by
saying how excited I am by the challenge the Board has given
me. When I think back to about six months ago when I was
first approached about joining Insituform, I realize now
that I knew very little about the Company at that time. But
fortunately the more I listened, the more intrigued I
became.
I learned that Insituform is without question the biggest
and most successful company in the industry. I learned that
it has what could be termed a dominant market share, that it
has huge leads in technological innovation in the trenchless
industry. And interestingly enough, that every prospective
client that has ever seen our research and development
facility has gone on to do business with Insituform. That's
right. If they see the R&D facility, they hire Insituform
100 percent of the time, and trust me, I found that
impressive.
I learned that Insituform has the strongest balance sheet in
the industry. I learned that it has the best employees in
the industry and the broadest array of services. I learned
that none of Insituform's competitors even comes close to
what Insituform can offer to this market. So I began to
realize that this was a company in a rare position, a
company with terrific assets and market advantages in a
market with huge pent-up demand. I began to realize that
this was really an opportunity that I just could not pass
up.
For one thing, in the past, I have primarily been involved
with turnarounds. Insituform is different. We are making
solid profits, and frankly with better execution, we can
make even more. So to make a long story short, here I am.
Over the last four months, I have visited all of
Insituform's facilities and talked with a lot of our people.
I have learned the Company's technology, studied its
operations and its finances, and I have decided that there
are at least four areas where I want to guide us in the
direction of change.
First is safety. I have already hired an outstanding new
Corporate Director of Safety, and over the next 18 months,
we are committed to developing and carrying out a safety
program that will be nothing short of world-class. Safety
has been a passion of mine for a long time, and I intend to
make it one at Insituform as well.
The second is forecasting our results. I think you all know
all about that. Well, in my opinion, companies have three
choices when it comes to making forecasts. Companies can
forecast aggressively, conservatively or not at all. One
thing you can be sure, I won't be in the aggressive
category. I appreciate the importance of financial
credibility.
While I am on that topic, let me add that we have decided
that it would not be prudent for us to provide specific
earnings guidance for the third and fourth quarters of this
year. But, while we won't provide specific earnings per
share numbers, we will discuss trends and directions of both
our industry and our businesses.
The third area where I know we can make improvements is in
doing a better job of delivering the full breadth of our
services to our customers. Our cured-in-place pipe business
is still our bread and butter, but we have many other
terrific services, and we have to do a better job of filling
all of our customers' needs. Therefore, we need to be better
integrated with all the products we offer to all of our
customers. Furthermore, we must continually innovate our
products and services in order to meet our customers' future
needs.
The fourth significant change is our management style. It is
going to be more collaborative. As I mentioned, we have the
best talent in the industry, and as Al said, we are going to
let that talent shine. The key to maintaining Insituform's
leadership in this industry is making this a nimble
organization complete with empowered and energized
employees. I know that if we do these things, we have
unlimited potential. I look forward to the challenge.
So now we are ready to take your questions.
Operator: Thank you, Mr. Rooney. This question and answer session will
be conducted electronically. If you would like to ask a
question, you may do so by pressing the star key followed by
the digit one on your touch-tone telephone. If you are
around a speaker phone, we ask that you please make sure
that your mute function is turned off to allow your signal
to reach our equipment. We'll take as many questions as time
permits. We'll take your questions in the order that you
signal. Once again, that is star one to ask a question.
We'll pause just a moment to assemble our roster.
And we'll take our first question from Arnold, excuse me
Arnold Ursaner, CJS Securities.
Arnold Ursaner: Good morning and welcome. One question I would have is that
despite your excellent experience in the engineering side
and construction side, you haven't run a public company, and
I would like you to perhaps address your view of what your
role is to deliver performance for your public shareholders
and how you plan to go at that over the next 18 months or
so?
Tom Rooney: Good morning, Arnie. Thank you. Of my 21 years of
experience, six have been with a private firm, that being
Gilbane, and 15 have been with publicly traded firms. Turner
on the AMEX and Centex on the NASDAQ.
Specifically what is my role in delivering profits for the
shareholders? My role is that of leadership, setting
direction for the Company, giving the business unit managers
that we have the kind of managerial accounting information
that they need in order to drive profits into our business,
making accurate projections quarter-to-quarter, year-to-year
so that we know where we are going, attain those goals and
hold people accountable for continuing to attain those
goals. So I tell you for 15 years including running profit
centers for publicly trading companies, I am very well aware
of the need to deliver on the results that we set out into
the future.
Arnold Ursaner: Tom, could you remind us again of the drivers of your comp
over the next two to three years? What will be the metrics
that will lead you to maximum bonuses?
Tom Rooney: Me as an individual?
Arnold Ursaner: You and your management team.
Tom Rooney: We are in the process of revising our incentive compensation
program. We are not satisfied with what we have currently or
in the past. I see in the future having specific management
objectives that individuals will be held to. Some nonprofit
objectives such as safety and quality performance, customer
satisfaction, but most importantly accurate forecasting of
business unit profitability, delivering on those forecasts
and most importantly growth, earnings growth.
Arnold Ursaner: OK. Thank you.
Operator: Then we'll go next to John Quealy, Adams, Harkness & Hill.
Tom Rooney: Good morning John.
John Quealy: Good morning Tom. Could you comment a little bit about any
near-term plans that you can share with us with regards to
the Kinsel and Elmore operations moving forward? What are
your thoughts on those?
Tom Rooney: Now are you asking the question operationally or
financially?
John Quealy: It is actually operationally.
Tom Rooney: The Elmore operation was always intended as an acquisition
to leverage our ability to work on the West Coast,
specifically in California. We see a lot of good
opportunities there in the future.
We have fully integrated Elmore into our operations now
financially. We have one of our key lieutenants from the
Affholder business is now running the Elmore business. We
are very confident/ That has been in place now about 60
days. We see a bright future for the growth of Elmore in the
future. Elmore is now being run using all of the Affholder
systems and prophecies and procedures from bidding to
financial reporting to project closeout, so we are very
confident in the management that we have put in place at
Elmore.
In regards to Kinsel, we are looking at Kinsel as a basket
of products that we can deliver to our services --
pipebursting, sliplining and so on. So we have taken all
those product lines, and we are looking to integrate those
into every one of our area businesses throughout the United
States. So rather than say that we put management into
Kinsel, I would tell you we put Kinsel into our business.
John Quealy: OK. Great. And you mentioned you're not giving forward
guidance. I was wondering if you plan to change your stance
on the buyback program. Previously the Company has been
active in that area. I was wondering what your thoughts are
there?
Tom Rooney: John, we haven't changed our outlook in terms of buybacks.
The fact is we did not buy back any stock this past quarter,
and the only reason for that is that we had overlapping
blackout periods for the entire quarter. We could not have
bought stock had we wanted to. So don't read anything into
our buying this past quarter. We had a blackout period for
the acquisition regarding East and other reporting, so we
just had no option to buy back stock this past quarter. We
have made no changes and don't foresee making changes.
John Quealy: Great. Thanks very much, Tom.
Tom Rooney: Thank you.
Operator: And our next question comes from Jeff Beach, Stifel
Nicolaus.
Jeff Beach: Yes, good morning, Tom.
Tom Rooney: Good morning.
Jeff Beach: I see you took extra charge - additional charges this
quarter and anticipate more, and there are two things that
are here, severance and insurance. Can you expand a little
bit on severance, whether there are executive changes, there
is a change that has happened at Elmore. Are there other
management changes? And then can you expand a little bit on
why the increase in the insurance?
Tom Rooney: Joe, you want to take that?
Joe White: Sure.
Jeff Beach: Good morning, Joe.
Joe White: Morning. If you are looking at the insurance, the insurance
is in the casualty area. You are aware of the claims that we
have had, and it is strictly relates to new estimates of the
claims. In the case of the severance, you know that as we
publicly announced the change in management, and that is
what we're forecasting for the third quarter. That's it,
Jeff.
Jeff Beach: All right. Thanks.
Joe White: Thank you.
Operator: And we'll go next to Michael Braig, A.G. Edwards.
Michael Braig: Good morning, Tom and Joe.
Tom Rooney: Good morning, Mike.
Michael Braig: Specific question on trend in rehab. The data in the
release shows a decline in the unreleased term work
available over the next twelve months, that decline
occurring from December through June. Is that an indication
of slower pace of release by municipalities in sewer
districts?
Tom Rooney: No. We see cycles all the time, and as much this is a
reflection on Kinsel and the JEA, which I think is a well
understood concept. No, there is no trend there whatsoever.
In fact, if anything, we think it's just in the opposite
direction.
Michael Braig: OK. Thank you.
Tom Rooney: Thank you.
Operator: We'll go next to James Gentile, Sidoti & Co.
James Gentile: Good morning, gentlemen. Given the fact that you have taken
some charges related to your Elmore contracts and certain
other projects associated with the Kinsel acquisition as
well, looking out into -- over the next few quarters I
guess, do you foresee any sort of unanticipated items just
as we have seen over the last two quarters, and is that the
reason
why we are not getting -- is that the reason why --
basically the question is, are there any more contracts that
you are not certain of the expense characteristics going
forward?
Tom Rooney: I -- let me answer that simply. If we expect expenses going
forward, we have taken them.
James Gentile: OK, this is a clean slate essentially?
Tom Rooney: From today and moving forward, when we know we have
challenges or issues, we take those issues now. We are not
in an unduly conservative position, but we are clearly
stating where we believe the Company is immediately and at
all times. We know we need to build credibility in terms of
our current earnings and in the future when we begin to give
guidance as well.
James Gentile: Are you pleased also with the backlog reporting style, Tom,
over the last -- that we have been getting over the last two
or three quarters which last year gave certain people some
headaches as well? Or will we see changes to the reporting
style of your contract backlog, maybe more granularity or
different presentation?
Tom Rooney: Well, let me answer that in two ways. I'm not sure we will
ever give -- I am not sure we will ever intentionally give
the finest grain analysis of our backlog because there is
some strategic advantage in understanding what our backlog
is.
Having said that, when we report out backlog, I anticipate
there will be more accuracy moving forward. But I but also
tell you that one of the areas we will be improving is
internal understanding and fine grain analysis of our own
backlog. It allows us to be much more strategic in the way
we bid, it allows us to ensure we have full loading, so
there really are two issues to this.
One is what we report to investors, which frankly when we
think about that we think about competitors understanding it
as well, but we have to be careful in terms of what we
report, but we will always be accurate. The second issue is
internal -- the internal advantages in having a crystal
clear understanding of what our backlog is, and I think that
is an area where operationally we will become much more
focused and it will benefit the company.
James Gentile: Thank you.
Tom Rooney: Thank you.
Operator: And next we'll go to John Levin, with Table Rock.
John Levin: Yes. Good morning, Tom.
Tom Rooney: Good morning.
John Levin: I'm wondering if you can describe what catalysts you
think are needed to release what you described before as
being the significant pent-up demand for Insituform products
and services? And also, how you view those catalysts
actually coming about and in what type of timeframe?
Tom Rooney: OK. That is a great question. The pent-up demand, depending
on what you read, there is a trillion dollar problem around
the world in crumbling infrastructure, underground
infrastructure, and we see that as our market.
That is growing by the day. The amount of underground
facility that is being upgraded is less than that which is
deteriorating. So if you will, that is the definition of
pent-up demand, as critical in the United States as anywhere
in the world, but certainly it is a worldwide issue.
In terms of helping to release that, the degree to which we
do our work in an inexpensive fashion, it allows and avails
clients more of this solution, and they will do more of it.
But there is also a pressing need for public disclosure of
what these issues are so that we have the kind of public
sentiment behind bond referenda and increased utility costs
and so on. And I can think right now in the City of St.
Louis there is a bond referendum upcoming for $500 million
to benefit the infrastructure. And Insituform, as a partner
with a lot of our clients, can help make public the
knowledge of what is going on in underground infrastructure,
so that the public will is there to make these improvements.
If you think about leaking roofs in schools, it is not hard
to imagine parents getting up and angry and wanting to put
money into the schools. Unfortunately, the other end of the
spectrum, we don't have many citizens down in the sewers,
and you have a hard time imagining just how bad the problem
is getting underground. So it is incumbent on us as the
industry leader to help our clients to educate the public so
that some of this pent-up demand begins to be released, and
we intend to do that.
John Levin: So you think the catalyst is public education?
Tom Rooney: Without question. As I say, if people had one tenth of an
understanding of what is going on in the systems underground
or the pollution in the rivers, this trillion dollar
business would be huge for us.
John Levin: OK, thank you.
Operator: And we'll take our next question from Jack Kasprzak, BB&T.
Jack Kasprzak: Thanks, good morning.
Tom Rooney: Good morning.
Jack Kasprzak: First, on tunneling, I think the last update we got was that
the backlog was down, there were more opportunities coming
up for bid possibly. Are you still seeing those kind of
opportunities, and was tunneling, was the work impacted in
the quarter at all by weather or any other factor for the
amount of work you were able to do?
Tom Rooney: Weather does not really affect us as you can well imagine.
When we are tunneling, we're -- there could be a hurricane
over our heads, and it would have little effect. So weather
has not as great an impact as it would on other parts of the
business.
As to the pending workload coming out, without question we
had -- we have had an extremely busy bidding period in the
last several weeks well in excess of $100 million worth of
bids. And we don't see it letting up. We see -- we see
opportunity after opportunity coming in the tunneling
business.
Jack Kasprzak: OK, great. And then, on the year-to-date, cap ex is a little
less than $6 million; D&A is a little less than 8. Where do
you think you will be for cap ex for 2003 now?
Tom Rooney: Joe will take that.
Joe White: Hi, Jack.
Jack Kasprzak: Hi, Joe.
Joe White: We've got some major expenditures that are going to be
occurring in the second half of the year, so look for us in
the 15 to 20 million range for the year.
Jack Kasprzak: For the full year, OK.
Joe White: For the full year.
Tom Rooney: We have some exciting cap ex expenditures yet this year. We
anticipate in particular one major move in our manufacturing
facility that has a one-year payback and will save -- net
the Company upwards of $2 million a year in net income, so
we are very excited about some of the cap ex steps we are
about to take.
Jack Kasprzak: OK, great. And then on the balance sheet, I noticed there
was--well, the balance sheet and the cash-flow statement,
there was a note offering of $65 million, and then the cash
is obviously up and the debt is up, the net debt is still
up, still where it has been for the Company in the past, in
good shape. Just wondering maybe Joe -- if you could talk
about what the offering was for. Are we going to be paying
down debt at the end of the third quarter? Will the balance
sheet look different with regard to the cash outstanding and
the debt outstanding, or what is the plan?
Joe White: I can speak to a small part. We will pay a small bit of the
debt down; however, the senior notes as you can see on the
balance sheet cannot be paid down except over the time
periods allotted. As far as use for the future, that we'll
discuss later.
Jack Kasprzak: OK. Can you remind me what the senior note balance is
currently?
Joe White: We have 65 million in the new senior note and in excess of
60 million in the old senior note, next payment being on
Valentine's Day, 15.7.
Jack Kasprzak: 15.7?
Joe White: With four payments of that left.
Jack Kasprzak: OK, great. OK, thanks guys.
Tom Rooney: Thank you.
Operator: We'll go next to Lorraine Maikis, MK.
Lorraine Maikis: Thank you. It's Lorraine from Merrill Lynch.
Tom Rooney: Good morning, Lorraine.
Lorraine Maikis: Good morning. In light of some of the recent problems you
have had with Elmore and Kinsel, have you taken an
opportunity to look at your goodwill balance? Have you
performed any additional impairment testing, and will we be
seeing a charge in the future?
Joe White: Lorraine, we do not expect a charge in the future, and the
reason is under the impairment tests you put it into the
operation that it is part of. And at this point, there is
none needed.
Lorraine Maikis: OK. So it's like Elmore is considered a piece of the
tunneling business?
Joe White: Correct.
Lorraine Maikis: So it is evaluated that way?
Joe White: Yes.
Lorraine Maikis: Looking to the rehab business, backlog's up this quarter,
could you talk a little bit about, you guys said during your
preannouncement call that there are some areas where you are
aggressively bidding to get the revenue levels up. Would you
view revenue expansion as a higher priority than keeping
your margins strong or where they are right now?
Tom Rooney: Lorraine, we are looking at it as margin expansion, and by
that I mean, I said earlier we were going to be much more
astute in the fine grain analysis of our backlog. That will
avail us of the opportunity to make what I consider micro
bidding opportunities, which is to say to bid aggressively
in some markets at some times so as to even out and
incrementally grow our backlog.
So we do not -- we think the simple and inappropriate way to
grow this business is a wholesale price reduction. We see,
if you will, micro strategies in bidding as an opportunity
to grow our aggregate gross margin backlog, and not do so at
the expense of margin percentages.
Lorraine Maikis: OK. And then just finally on the tunneling, you had said
that heavy bidding activities this month, is your backlog
higher now than it was at the end of the quarter?
Tom Rooney: To understand that question you have to understand it from
the day we bid a project, we have bid in excess of $100
million with the project since the -- I believe since the
end of the quarter, but we wouldn't know whether we have
those pieces of work for several more months. So, no, we
don't get fast swings in our backlog in that industry. These
are large high-risk projects as the clients see them, and
they take their time in awarding the work.
Lorraine Maikis: OK, thank you.
Tom Rooney: Thank you.
Operator: And we'll take a follow-up question from Jeff Beach with
Stifel Nicolaus.
Jeff Beach: Yes. When I look at Insituform, you've got a lot of
potential jobs to do out there, work on Elmore and work on
Kinsel and some of your other initiatives you mentioned at
the beginning of the talk. And I'm wondering where does the
opportunity to move in and try to get a solid position in
the mid-Atlantic that you have just acquired, where does
that fit in, in terms of priorities, and what -- where you
would focus first? Kinsel, Elmore, more tunneling, improve
the basic core business, aligning or moving into Pittsburgh
and Cincinnati and trying to establish a foothold early
enough there to really catch some of the spending that's
happening?
Tom Rooney: Right. That's a great question, Jeff. We see the East
acquisition as a fabulous growth opportunity for this
company. We see closing on that transaction in the next 60
days or so. We see that as a great opportunity, as I said, a
growth and a priority.
But I would say this, I don't know that we have to take one
priority over another. We have a fabulous management team
here, very deep, and we have begun in the last 60 days to
begin executing strategies against Kinsel and Elmore and
others. As you would well imagine, executing those
operational strategies will pay off in financial results in
a six-month horizon, so you may not see things like that
reflected on our balance sheet today.
So we are not beginning today to address the challenges
ahead of us. We have already begun to address those, and
with patience and execution, we are going to be able to
accomplish all of what you described.
Jeff Beach: Alright - thanks.
Tom Rooney: Thank you.
Operator: And once again ladies and gentlemen, that is star one on
your touch-tone telephone if you wish to ask a question.
Tom Rooney: Why don't we take one more question?
Operator: Very good, and we'll take our final question from Larry
Baker, Legg Mason.
Larry Baker: Good morning.
Tom Rooney: Good morning, Larry.
Larry Baker: Just a question on the -- I guess two questions. One is on
the additional debt that you have taken on. Could you just
offer a little bit of clarification? I think most of us
would urge a halt in acquisitions at this point. Could you
talk about whether you are going to use that for accelerated
share repurchase, or just something other than you will
announce that in the future?
Tom Rooney: Well, halting acquisitions is not a strategy that I
think we are going to employ in general. I think we are
going to be opportunistic. If an acquisition makes good
sense to us, we may still move forward. So I'm not going to
say that we have stopped all acquisitions. But we understand
from where you are coming, Larry. We don't -- if we make an
acquisition now or in the future, we intend to do so with
precision and with execution. And so don't expect us to make
an acquisition unless we are certain that we can make it
profitable immediately.
But as to the cash and the debt that we have taken on, it
enables Insituform to be very strong financially. It gives
us leverage that we need. We find time and time again now
against our competitors they cannot bond projects we can. We
can bond large projects. A recent large-scale tunneling
project, we were the only firm able to propose on a project
without going into joint venture. That gives us huge
financial advantages. So having the capital on our balance
sheet gives us the kind of strength that we need to have
financial advantage on projects. It doesn't necessarily mean
we have actually go do something with that cash.
Larry Baker: OK. And operationally, can you just, Tom, talk about where
you see the key opportunities to improve execution, improve
-- improve margins?
Tom Rooney: Yes. The first thing that comes to mind is safety. Our
insurance rates have gone up as well as the human side. And
so execution in the area, operational execution in the area
will benefit us in safety which in turn benefits us
financially.
We also see execution throughout the United States as an
opportunity for us to continue to improve our margins in
terms of some of the rework and general liability issues
that we have experienced. We have the ability to increase
our profitability through execution and our reliability.
Larry Baker: OK. Thank you very much.
Tom Rooney: Thank you. Well, we appreciate everybody today. I think
there were some good questions. I'm very excited about the
future of Insituform. We're well poised for returning this
to a growth company. We expect in the future to be able to
deliver solid results as the market and as our investors
have expected.
So we appreciate everybody's involvement today, and we look
forward to meeting with you in the future.
Operator: This does conclude the Insituform Technologies second
quarter 2003 earnings conference call. We thank you for your
participation, and you may disconnect at this time.
END