EXHIBIT 99.2
INSITUFORM TECHNOLOGIES, INC.
OCTOBER 31, 2003 CONFERENCE CALL
Operator: Good day and welcome everyone to this Insituform third
quarter 2003 earnings conference call. Today's call is
being recorded. At this time for opening comments and
introductions, I would like to turn the call over to the
President and Chief Executive Officer, Mr. Tom Rooney.
Please go ahead, sir.
Tom Rooney: Good morning. First I'd like to say thank you for
participating this morning, and I appreciate everybody's
patience with regards to conducting this conference call an
hour earlier than we normally do. We felt that it was
important to be able to distribute as much information to
you prior to the market opening given our earnings for the
third quarter. So we appreciate that, and in the future we
will be back at our normal time.
With that I'd like to turn it over to Thomas Cook.
Thomas Cook: Any financial or statistical information presented during
this call, including any non-GAAP measures, the most
directly comparable GAAP measures, and a reconciliation to
GAAP results will be available on our website,
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 the duty to update
forward-looking statements. Please use caution and do not
rely on such statements.
Tom Rooney: Again good morning. While the results of the quarter just
ended are disappointing, we are optimistic about our
future. We are committed to making the necessary
investments in our people, research, and technology in
order to continue our momentum as the leader in our
industry.
I have to say that like anyone else, I don't like to see
earnings like we are reporting for this quarter, but I'm
very optimistic about our future. I'm optimistic because I
have spent the past three months discovering the great
strengths that we can tap into to drive this company
forward. I'm optimistic because our management team has
identified more than two dozen initiatives that will
finally position Insituform to excel for many years to come
in this critical and growing industry. I'm optimistic
because we have a new sense of resolve throughout the
management team, and throughout the entire Insituform
organization. We have much work ahead of us, but we also
have a dominant market position, the best employees in the
industry, and now we have a strategic plan to move forward.
I assume by now that you've seen the earnings release, so I
will not spend much time reviewing the third quarter
results. I would rather focus on our strategic directions,
which are aimed to more fully capitalize on Insituform's
industry leading position.
This quarter's - this quarter's results were primarily due
to operational issues. Work volume and performance issues
in pipebursting, microtunneling, and horizontal directional
drilling, low work volume in two regions in our
rehabilitation business, and delays in backlog issues in
the tunneling segment.
Also occurring in the quarter was the departure of my
predecessor. Severance and related charges were
approximately $1.2 million, the full charge being taken in
the third quarter. This had a three-cent impact to earnings
per share for the third quarter.
The remaining domestic business units on a consolidated
basis are performing within our range of expectations.
However, the volume is not evenly distributed so that some
of our units are performing above expectations while others
are lagging somewhat behind. We are benefiting from reduced
overhead from recent cost management efforts, although
gross margins have remained under pressure during the year,
and in the most recent quarter compared to a year ago.
Partially offsetting the disappointing results in North
America was a strong performance in Europe. European
operating income increased approximately 50 percent in the
third quarter of 2003, compared to the same period a year
ago. We're optimistic about our acquisition of the
Insituform East assets this quarter. In the short period
between the time of the acquisition and the end of the
third quarter, East's assets generated half a million
dollars in revenues. The impact on earnings per share in
the third quarter was negligible, but we expect measurable
accretive contribution in the fourth quarter.
Throughout the company we continue to focus on
strengthening our backlog. I am pleased to report that
orders remain consistent throughout the third quarter,
continuing the acceleration that we saw in the second
quarter. To that end, the order-to-revenue ratio was 1.13,
representing the first time that we have been above 1.0
since the second quarter of 2002.
We see this positive trend in orders despite the fact that
nearly a year ago we reduced our sales force by half. Today
we are more focused than ever on real growth, so we intend
to reconstitute our sales force in order to maximize our
position in the industry.
The rebuilding of our sales force is but one initiative
that we are ramping up right now in order to generate real
improvements in our revenue and profits. Over the past six
months we have taken a long and hard look at the business,
and we have identified several significant areas for
improvement. Already we have identified more than two dozen
initiatives designed to reposition the company. Some of
these initiatives are simply doing what we already do
better, but many of these initiatives require the absolute
investment of capital. The initiatives that the company
will be undertaking have been well thought out, and will be
aimed at maintaining our dominant status in the industry.
We will lead the industry in development of new products
and strategies rather than simply chasing industry trends.
Our initiatives are intended to make significant changes
throughout the company, and basically fall into one of
three categories. Our three specific objectives are: to
one, reduce our overall operational expenses in order to be
more competitive and more profitable in low bid markets;
two, to innovate new products and processes in order to
meet our clients' unique needs while at the same time
increasing our profit margins; and finally three, to drive
higher growth through expanded sales.
The three most important opportunities for the company in
order to reduce overall operational expenses are in
trucking and logistics, the cost of quality, and the
financial exposures related to safety. With over 60
installation crews and multiple manufacturing sites in the
United States alone, the cured-in-place pipe rehabilitation
segment of our business has a sizable fleet of vehicles and
related equipment. The allocation of support equipment
among our crews and efficient utilization of trucks
delivering perishable
goods to the field require significant logistics planning
and execution. Today we simply don't do a good enough job
of managing those logistics.
Over the next year and a half, the company plans to
increase its investment in logistics planning, fleet
management, and asset tracking systems. This will allow us
to assess our requirements and efficiently deploy our
assets without carrying excess capacity. The cost to
implement these systems primarily affect the fourth quarter
of this year and 2004 with a modest return in 2005, and an
increased return in 2006 and beyond.
One of the most important things that we have discovered
over the last seven months is that our cost of quality is
far too great. The amount of money that the company spends
each year in insurance claims generated by sewer backups
alone is staggering, and it all comes down to quality
procedures and execution. A critical initiative over the
next 18 months will focus on improving quality in order to
drive costs out of our operating expenses.
Finally, but most importantly, we're making immediate and
ongoing investments in safety and safety training. The
impact of these initiatives will result in an immediate
impact to our gross margins, although the net financial
cost is expected to turn in 2005 and yield financial
benefits in future years.
Having indicated the financial benefit of our safety
efforts, it's important to point out that these are
investments in our people. Although enhanced job
satisfaction, worker security, and reduced risk of
interruptions in the personal health of our workers are
benefits that are impossible to value in dollars, the cost
savings from reduced insurance premiums and claims alone
made this investment one of the easiest decisions I've made
as the CEO. Safety is in fact our top priority.
Also in the second quarter we announced our intention to
further enhance our Batesville, Mississippi, manufacturing
plant. The plant is being expanded to accommodate an
additional felting line and to add coating capabilities.
The reduction in raw materials costs from manufacturing
more of our own felt, and the savings from the elimination
of trucking costs to and from our third party coating site
will generate an immediate contribution to our bottom line.
After completion of the Batesville plant expansion, our
original manufacturing facility in Memphis will be
decommissioned, eliminating some of the redundant overhead
costs.
In addition to enhancing our manufacturing capabilities and
reducing our production costs, we are continuing to invest
in new and innovative products. Increasingly you will see
Insituform bring a more complete set of trenchless
solutions to our customers. By doing so we will continue to
differentiate ourselves from our competition, and we will
reduce the amount of margin-reducing subcontract work
necessary to complete jobs.
Insituform has quietly launched several new product
offerings recently. For the most part these new products
have been solutions to the trenchless rehabilitation of
gravity sewer lines, our main line of business. One of the
products, structural panels, is not new to the market.
However, we have pioneered the application of a
manufacturing process that yields far greater cost
advantages in manufacture, and a much higher consistency in
quality of fit when compared to traditional lay up
construction methods for reinforced fiberglass panels.
Our company has a proud history of innovation in the
manufacture and installation of our now 30-year-old
cured-in-place product. Continuing that tradition, we have
begun using
a new CIPP product that is a slight variation on our
traditional manufacturing process. The highly integrated
product is proving itself in difficult installations, and
increased installation efficiencies on the job site. A new
- a new resin formulation now allows us to increase hauling
distances with fewer tubes curing in transit. Our engineers
have discovered a resin formulation that retards curing
while in transit with no measurable impact to cure times in
field installations.
Additionally we have been piloting an entirely new CIPP
product that utilizes a new, stronger carrier medium and
different resins. The new product benefits from reduced
cure times, thinner walls, and equal strength to our
heritage product.
It's worth noting that the product innovation was the
genesis of this company in the 1970s, and frankly we
haven't focused enough on product innovation in the last
few years. But today product innovation is central to our
growth strategy going forward.
The last of our three specific objectives is driving higher
growth through expanded sales. While our backlog
replacement rate has recently kept pace with installations
in spite of sales force reductions from last year's
restructuring, we intend to begin building backlog at a
greater rate as a catalyst for growth.
To achieve increased orders, we will begin strategically
increasing our sales force. It takes time for a new sales
person to become established in a market in order to begin
generating incremental orders for the company. Even after
an order is booked there is some lag time before work
begins and the company realizes a profit on the sale.
Therefore, our sales force investments, though primarily
occurring in 2004, are not likely to yield significant
returns until 2005 and beyond. The expected payback on our
sales force expansion is one year, including ongoing
support costs for those sales people.
So to reiterate, our three specific objectives are: to one,
reduce our overall operational expenses in order to be more
competitive and more profitable in low bid markets; two, to
innovate new products and processes in order to meet our
clients' unique needs, while at the same time increasing
our profit margins; and three, drive higher growth through
expanded sales.
Let me be clear that the steps that we are taken - taking
are not taken with a focus on improving short-term results.
It goes without saying that where opportunities exist to
improve operations in the near term, we will take them, but
not at the expense of long-term growth and profitability.
We anticipate that the expenditures associated with
repositioning the company will take place over the next 24
months, yet we don't expect to see measurable bottom line
improvements associated with these initiatives for 12 to 18
months.
However, when properly implemented, we see the impact to be
the kind of long-term profitability gain that best serves
our company, and which will finally begin to meet our
shareholders' long-range expectations.
The fact that we're fiscally strong allows us to take these
steps. By making these investments, we are building a
better future for our company by putting knowledge, people,
and assets into place to increase revenue, control costs,
and produce innovative products, and improve our bottom
line.
I am very optimistic about our industry in general. The
deterioration of the country's aging infrastructure is
widely known. We are uniquely situated as the industry's
undisputed leader in pipeline rehabilitation to take
advantage of these opportunities and become a real
contributor to the financial soundness and environment
health of the communities we serve.
The financial rewards for being a diligent steward of the
technology and resources with which we are entrusted are
great. The investments we will be making in the immediate
future will put us in a position to enhance our leadership
in the industry, and to expand the range of solutions that
we can provide to our customers.
That concludes this update of our business, and I'd be
happy to take any questions that you have.
Operator: Thank you. If you'd like to ask a question or make a
comment, you may signal us by pressing the star key
followed by the number one on your telephone keypad at this
time. Once again it's star one to ask a question or make a
comment, and we'll pause for just a moment to assemble our
roster.
Our first question comes from Jeff Beach at Stifel
Nicolaus. Go ahead.
Jeff Beach: Yes, good morning, Tom.
Tom Rooney: Good morning, Jeff.
Jeff Beach: It would be helpful to just review a little bit of the
near-term trends ...
Tom Rooney : Yes.
Jeff Beach: ... even though I understand the benefits of the long-term
initiatives. Can you help us a little bit with in
particular what I view as your two core businesses, your
CIPP lining and your tunneling? You talked about a overall
increase in the backlog, can you talk about the change
quarter-to-quarter, second quarter to third quarter in
sewer rehab and in tunneling? And then expand a little bit
on what's happening in the market right now if - it looks
like the CIPP backlog is up again, and if it's so, is it
because the market's improving? Is it aggressive bidding,
less competition?
And on the tunneling side you talked the last quarter it's
been talked about several very large bids that are out and
pending, I'd love to hear the status in that regard. And
what's happening in the - in the tunneling outlook. Thank
you.
Tom Rooney: Great, Jeff. Good questions. In our two core businesses,
cured-in-place and tunneling, yes, our orders are up over
our revenues, and that's a very good sign. But keep in mind
that in both of those businesses when - from the time when
we, if you will, take an order until the time when you see
revenue fall to our bottom line, it's anywhere from six to
12 months. Therefore, soft revenues today are mostly a
reflection on that which happened in orders six to 12
months ago. And so you have to sort of disengage revenue
numbers today and orders numbers.
But to your question, yes we see orders picking up in the
cured-in-place business, and we have no reason to think
that is not a trend that will continue. The world is full
of great stories of cities with pent-up needs that have yet
to be addressed, those needs climb daily, they're not being
met. So the demand for this work is out there, the only
thing that has been constraining it is municipalities'
ability to - or inability to get the financing to do the
projects. Projects are not going away, the issues are not
going away, the federal government through the EPA and the
Core of Engineers are putting more and more
pressure on the cities, and they've having to find
innovative solutions, so we expect that that's the trend
that will last for a while.
As to the tunneling - oh and by the way in terms of I think
you'd said competition and so on, we still seem to have as
many competitors, but frankly we're seeing that they are
financially weakening. At times that means they're
unpredictable in terms of pricing strategies, but overall
and in general we have a very clear understanding that our
competition is financially weaker today, much weaker than
in past periods, and that would indicate good signs for us
in the future.
As to the tunneling, yes we have been experiencing the bid
opportunities that we had talked about. Our Elmore unit has
in fact been picking up backlog. As you know they were
distracted in the past by trying to close out difficult
projects. We put that behind us, we've begun to focus on
the bid opportunities in the future, and Elmore is finally
starting to pick up backlog to make itself profitable.
The Affholder group and some of the other large diameter
tunnels is bidding aggressively and appropriately on a lot
of projects. Unfortunately there were two significant
tunnel projects where we took second by margin-thin errors,
which gives me great confidence in our estimating ability
and unfortunately it didn't add to our backlog. Having said
that, this month we are bidding on the 100 plus million
dollar tunnel in Los Angeles, the same tunnel that we took
first place on six months ago that the city just couldn't
fund at the time. Our backlog of opportunities to bid in
the tunneling market are unprecedented and look to be
growing by the day, so we're very optimistic about that.
Hopefully those answer your questions.
Jeff Beach: Just two things. One can you give us a sense how much in
CIPP orders were up over your revenues, a sense as how much
backlog continues to build? And in regard to that, as I
remember, I think it was starting in March that the orders
started to pick up dramatically over what - where they had
been running, it's been about six months now. Are we going
to see that finally start to translate into revenues here
in the upcoming months?
And then second, back on the tunneling, did it increase? Is
it down because you haven't won anything? Are you in danger
of seeing inadequate revenues ahead?
Tom Rooney: On the - on the rehab side our orders to revenue for the
rehab alone would be on the order of 1.1. And I guess I
would tell you that the fourth and first quarter - fourth
quarter of last year, first quarter of this year were very,
very light, and we got closer to where we need to be as was
suggested in the second quarter and much better now in the
third quarter.
Tunneling, are we in danger? No, we have - you know, the
projects that we have, have long durations, so we're
working through and profiting from those projects. We have
been hurt interestingly enough by five of our major
tunneling projects have hit delays wherein we hit change
conditions, and inevitably we will be earning more revenue
from those projects, but we just can't do the projects now
as we sit and wait for engineering solutions from our
client. That is to say that we typically will make more
profit on those projects, we just have to wait. Never
before have we had five projects hit that challenge in one
quarter, so no I think we're very optimistic about
tunneling. Our order to revenue in this quarter for
tunneling was on the order of 1.2.
Jeff Beach: Thank you.
Operator: And moving on we'll now turn to BB&T Capital Markets' Jack
Kasprzak. Please go ahead.
Jack Kasprzak: Thanks, good morning.
Tom Rooney: Good morning.
Jack Kasprzak: Just have a question on the margins, specifically in the
rehab segment the operating margin in the third quarter I
have a little under six percent. And that's typically over
the last few quarters been, you know, above nine percent at
least. And just wanted to get your feel for whether this
quarter's margin in rehab was more of an aberration, and
what we'll see as the norm going forward. I mean certainly
I would - I would expect you to say that you are not happy
with that level, and would hope to get it up, but say for
the next few quarters is that the level that we'll be
closer to? Or is it more of an aberration?
Tom Rooney: I would tell you that we're trying to work through - if you
look - first of all yes, I'm very disappointed, and there's
no question we're going to have those percentages back up,
so let me start by saying that. The greatest aberration is
the idea that a year ago we had a highly productive, highly
worked, pipebursting operation through Kinsel, specifically
the well-discussed Jacksonville contract. And that contract
went very well as far as we and the client are concerned,
but the need for pipebursting out there has dropped
precipitously. So we have under-utilized crews, and we have
scaled them back dramatically. But while - but in that flux
when they're under-utilized, we don't run as efficiently as
we would like. So we feel we have that under control, and
the fact is much of what we're focusing on in the - in the
long-term initiatives are all about increasing those
margins. So you don't turn - you don't turn that light
switch over night, but we see some very substantial ways
for us to increase those margins and make them more than
respectable.
Jack Kasprzak: OK, thanks. And secondly, I just want to get your feel on
SG&A expense going forward. As you make some of the
investments that you've been describing, which will benefit
the company longer term, should we see - should we expect
to see the SG&A expense increase at more of a - at a higher
rate than say inflation type rate or what we may have seen
in the past ...
Tom Rooney: Absolutely.
Jack Kasprzak: ... as you make those investments?
Tom Rooney: Yes, absolutely, that's where most of the invested dollars
will go.
Jack Kasprzak: Could you possibly give us a - some sort of a range either
qualitatively or quantitatively on how SG&A might expand
over the next year or so as you make these investments?
Tom Rooney: Jack, I think it's probably too early for us to do that. We
are going to be very measured about it, I think you
probably heard me say we have more than two dozen
initiatives, and I have to tell you the management team -
no management team would want to take on 20 some
initiatives at once, mostly from the standpoint that you
can't execute. But at the other end of the spectrum we
don't plan on dumping into our SG&A huge sums of money and
artificially destroy our earnings per share in the near
term. That is to say though that we have imperatives that
must be taken care of, but we're going to balance our
efforts so that we can manage every initiative extremely
well, and not - and not tank the earnings per share at the
same time.
Jack Kasprzak: OK great, thank you.
Operator: And up next we'll go to Adams, Harkness & Hill's John
Quealy.
John Quealy: Great, good morning.
Tom Rooney: Good morning.
John Quealy: Couple of questions. First off, on the revenue decline,
this is the first time that we've seen revenue decline over
the past couple of years. I know you talked a little bit,
Tom, about the backlog and the lumpiness, but can you give
us a little bit more detail on some of the factors in the
quarter that caused it to be weaker than at least I
expected?
Tom Rooney: Well the number one weakness would come from the fact that
we were standing around tunnels wanting to tunnel but were
unable to do so because of engineering - project
engineering challenges that we couldn't come up - we
weren't - we're not the ones to come up with answers for.
So our tunneling group was doing fantastic, but like I say
when five projects simultaneously are put on mid project
hold pending engineering solutions, you just can't control
that. But I would say beyond the concept of lumpiness,
which absolutely we are, you got the - you have to take
into account the fact that we have pipebursting as a - as
an absolutely decaying part of our business. We just are
not pushing through the kind of revenues that we were a
year ago, and that is because the industry just isn't doing
that much pipebursting. So we have internalized what that
means, and we're operating better because of it.
But also I would tell you that if you look back to our - if
we look back to our orders in the third and fourth quarter
of last year and the first quarter of this year, we are -
we are working our way to that deficit, there's nothing we
can to today to improve the orders that we weren't getting
in January of this year. But what we can obviously do is
work hard to get the orders today so that tomorrow and six
and eight months from now we will not have deficits. So
there's only - there's only so far that we can go in terms
of trying to improve our revenues based on not taking
orders in January.
John Quealy: And two quick follow-ups. First up on the large side, the
Affholder business on the tunneling, you mentioned the two
projects that you were not the low bidder on, I believe one
may have been the Rickenbacker tunnel out in Ohio. Sounds
like you didn't want to compete on price there to save
margins. Can you explain a little bit moving forward, do
you continue to plan that strategy? Or will you go down a
little lower on the ASPs to win some of this business?
Tom Rooney: Good question. Rickenbacker, we took second, and it was a -
it was a number - it was on the order of $100 million. We
took - we took second place, the next bidder was within
hundreds of thousands of dollars of our $100 million
number, the fourth place bidder was within a few more
hundred thousands of dollars. The number one bidder was $17
million beneath us, so there's no way in creation I would
have taken that job, even if it was offered to me at the
low bidder's number. I'd said earlier that it gives me
great confidence that our estimating team knows how to
estimate projects. I would - I'd give up a whole lot of
work to avoid a $17 million problem, and I'd hope you'd
agree.
But having said that, we also were - we took I think it was
third place on a - on a 40 something million dollar project
right here in St. Louis where we were one half of one
percent between the low bidder and ourselves. Had I to do
it all over again would I take that half a percent off the
table? Absolutely. But we run a very careful balance
because
if our estimating team in tunneling gets too aggressive, we
wake up and find ourselves $17 million low, and I don't
think we want to be there. So there is a phenomenal amount
of work - or bid opportunities coming in tunneling, and we
have to be very prudent and bid correctly and get good
work. And frankly it will come, we're going to be patient
and we're going to get quite a bit of work. I fully expect
that a year from now we will look back on a tremendous
uptick in our work in tunneling.
John Quealy: Great. And just one last question, Tom. You mentioned the
pipebursting business not up to expectations. Couple that
with can sell in $150 million of goodwill on the books,
could we expect a charge moving into the year end for that?
Or will you folks be looking at that at year end?
Tom Rooney: Are you talking like a goodwill impairment?
John Quealy: That's right.
Tom Rooney: We have been running Kinsel - we've integrated Kinsel - let
me take a step back - from an accounting standpoint, had we
run Kinsel as an independent business from the day we got
it with separate books until today, we would have that
option, and certainly we'd look at it. The fact of the
matter is very early on we saw the strategy to be to run it
without duplicate overheads, and therefore it became a
product line within our business units. Therefore in the -
or in any sense we are unable to take a goodwill
impairment. So intuitively I understand where you're coming
from, but we don't have that as an option.
John Quealy: OK, great, thanks very much.
Tom Rooney: Great.
Operator: And moving on we'll now turn to Lorraine Maikis with
Merrill Lynch.
Tom Rooney: Good morning.
Lorraine Maikis: Thank you, good morning. You had mentioned the decision
about a year ago to cut your sales force in half, and now
to rebuild it. Could you just walk us through - I know it
wasn't your decision back then, but the decision by
Insituform a year ago to get rid of that sales force, and
then factors affecting your decision to build that back up
again.
Tom Rooney: Great. The decision a year ago - roughly September of last
year was based on a consultant that came forward with what
you'd call the 80/20 rule, 80 percent of our new business
was coming from 20 percent of our sales force. And
therefore while in a restructuring mode looking for ways to
cut costs it seemed that we could slash that in half and
probably not see an appreciable drop in our - in our
growth.
The fact of the matter is, and there's an old adage half of
all business development's a waste of time, you just don't
know which half it is. And it's - that - we couple that
concept with the notion that it's easy to convince yourself
that we win work by being low bidder, but time and time
again it's proven in our industry that we, Insituform, have
made this market by influencing our customer's decision
making, we in fact invented the industry, there was no
cured-in-place until we convinced clients that it was a
good market to be in.
Our sales forces - our sales force year-in year-out has
created a market that did not exist. So the extent to which
we believe that we are held hostage to just being low bid
would
indicate that we should slash our sales force. We know that
not to be the case. We have to be smart, we have to put the
very best sales professionals in the industry back to work,
we are going to do that. We're going to do it prudently
too, by the way. But I think that's a little bit of a
glimpse into the rationale a year ago and the reality
today.
Lorraine Maikis: OK. And then on the improving product initiative, it seems
that each year over the past few years we've had some sort
of a restructuring or new program that takes costs out of
the process. I guess my question is how is this different,
and how do you - how do you plan on having a meaningful
impact on the process at this point?
Tom Rooney: That's a good question, Lorraine. One of the things that
this organization - and I know you're probably - investors
are probably tired of hearing about is the change. But
internally our organization, our management team is tired
of change as well to be frank with you. What we have not
been good at in the past is strong execution of otherwise
good ideas. And so we're going to take an execution
strategy, and we've looked at the areas where we know we
can make improvement, and we're going to drive relentlessly
until we get there.
The fact of the matter is if you look at areas like we just
discussed with cutting sales, I think that a lot of the
decisions were made in regards to short-term cost
elimination, slashing. Much of what we have underway right
now is geared towards the smart, long-term, repositioning
for operational excellence. A classic example, we spend in
excess of $4 million a year right now on sewer backups,
which is to say we have a very low, very small piece of our
business is cutting holes and allowing laterals to feed
into main lines. We frankly don't do that very well, and
when we don't do that very well we end up with backups. And
when we spend $4 million a year on something of that
nature, that's the kind of costs that we're going to drive
out of this organization. And it could take us a year to
change the culture to where we drive that out, but we're
going to do it. And it may take us significant sums of
money to reorient the culture just in that one area, but
it's well worth the payback.
Lorraine Maikis: Thank you.
Operator: And moving on we'll go to Michael Braig with A.G. Edwards.
Michael Braig: Good morning, Tom.
Tom Rooney: Good morning.
Michael Braig: Two questions I guess, indirect and specifically, if
you would, at North America and the CIPP. You're giving us
backlog to order - or order to sales numbers, which are
over one but the base of one is a declining number. Could
you indicate first of all whether North American
cured-in-place orders are increasing sequentially as we go
from quarter to quarter? And secondly since much of the
issue for the last couple of years has been funding those
orders, in other words a lengthening sales cycle from
placement of order to translation to profit, could you
indicate how much of that work is available for immediate
or at least within a couple of quarters?
Tom Rooney : And by that you mean what we would internally call our
workable backlog?
Michael Braig: Correct.
Tom Rooney: OK. Well first to your - to your notion of whether cured-
in-place and the - and the order-to-revenue numbers, we
have been below 1.0 for several quarters, or had been, and
in the last two quarters we have been above 1.0. And -
enough so that it would include inflation as well. So we
see real growth in that regard.
But as to the period of time and release of work, we
obviously don't control that with our clients. What our
clients, we perceive, are trying to do is pace the work
that they do, many of them - many politicians have to
balance new schools with highways, with sewer
rehabilitation. I would tell you the things like the energy
infrastructure challenges in upstate New York this past
fall have helped to bring to light the notion that the
unseen infrastructure must be dealt with, and it emboldens
many of our clients to bring forward the work that they
need to do.
Whether they want to or not, the federal government is
pressuring more today than ever, and that's releasing more
work. Of the work that we have in hand, and what we call
workable, that's a great question. In the past we've looked
at our backlog as backlog as backlog, without enough
fine-grained analysis of what's available to be worked
today, tomorrow, next month, and so on. We in the last
three months have begun a process to do very sophisticated
analysis of that, both in terms of how secure we are in
being able to do a particular piece of work, but also in
what timeframe it will play itself out. Such that our
bidding teams have better bid strategies to fill
under-productive months with new work, but also our
business unit managers are able to redeploy people and
assets to meet those needs. And I see e-mails now between
business unit managers, even this week, swapping resources
to meet needs and fulfill expectations. So we are doing
internally a much better job of making sure that we stay
utilized out into the future.
Michael Braig: OK. If I could follow that up, I guess just zero in a
little bit more. Your comments on the rehab sector would
suggest that most of the difficulty lies with the
pipebursting sector. Should we assume that cured-in-place
North America did move ahead at least sequentially second
to third quarter?
Tom Rooney: Yes it did.
Michael Braig: OK.
Tom Rooney: While we ...
Michael Braig: Thank you.
Tom Rooney: ... while we have been absorbing pipebursting on a decline.
Michael Braig: OK, thank you very much.
Operator: Up next we'll go to Arnold Ursaner with CJS Securities.
Arnold Ursaner: Morning, Tom.
Tom Rooney: Morning, Arnie.
Arnold Ursaner: Tom, it sounds like - very specific question - can you give
us a feel for the margins in the backlog that you have? It
sounds like you still have a pretty competitive
environment. Are you taking on backlog business at a lower
margin?
Tom Rooney: Yes, we are. And the reason that we are is that we have not
brought to bare the kind of operational improvements yet
that we need to, so we have to - we have to work against
the market in that regard. And obviously being fully loaded
is a critical issue for us in
terms of turning profit. Also the other trend that we have
seen in the last six months is that many of our competitors
are extremely weakened, unable to bond projects and things
like that. And interestingly enough, when that happens
their pricing strategies become very radical or highly
radical, and unpredictable. And so while they're in that
state and until they're out of business, we have to play to
that.
We see that as short-term challenges because they're in an
unstable fashion, literally some of our more significant
competitors are unable to bond. So we see it as the reality
of the market that we're in right now, we see it as not
continuing. With the - frankly with the gradual warm-up in
the national economy, we think that more work will be out
there, more of these competitors that have jumped into this
market will push back out into other utility markets when
there is other work elsewhere. The ones that are
financially unstable will not be in business in the future.
But more importantly for us we think that six and 12 months
from now we will have operational efficiencies in-house
that will allow us to exact more profits while still being
financially competitive on our - on our product. That's an
absolute driver for us in new product innovation. We have
more than one product out there that we are in the second
stage development that would have double-digit margin
advantages over our competition, and that enables us to
grow our margins and become more aggressive in the field.
And it's that kind of smart moving of the margins that is
the hallmark of Insituform.
Arnold Ursaner: I guess I'm still grappling with a kind of, you know, two,
three quarter issue, four quarter issue looking ahead. It
sounds like you're obviously going to be building up your
selling effort quite materially, sounds like you're going
to focus on logistics planning, fleet management, which
we'll, you know, be focused on in Q4 and Q1. And at the
same it also sounds like there's very little activity in
the industry, it just seems difficult. The question I guess
I'm asking is are you pushing on a string? Is there just no
business out there despite this massive investment you plan
to make?
Tom Rooney : Oh no, there's business out there. No we haven't seen the
business fall off.
Arnold Ursaner: Well again at the moment are you - you know, can you be a
little clearer as to why you're losing share of this growth
market?
Tom Rooney: I'm not sure I'm saying we're losing share of the growth
market.
Joseph White: Arnie, this is Joe. It - what Tom's been saying is our
issue this quarter really stems from the order rates back
fourth quarter last year and first quarter this year.
Arnold Ursaner: Right.
Joseph White: We're not losing share in the orders right now.
Tom Rooney: We - that which happened to us in the fourth quarter first
- and - third and fourth of last year plus first of this
year are the reasons that you don't see revenue today. But
if we're not talking revenue and instead we're talking
orders, which is more to your point of pushing the string,
the orders are there today. Those - and the orders that we
see today will determine our revenue and therefore
profitability six to 12 months from now. Because it's in
our pipeline.
Arnold Ursaner: I'm still unclear in my head, if you could kind of give me
a sense. If I were a salesman walking into a municipality
three, six months from now, how will I price my product? It
sounds like you have new things you're developing
internally, but the systems may or may not have been in
place.
Tom Rooney: We - I would - I think I had mentioned we have more than
one product out there right now going into the ground in
fairly large scale with dramatic pricing advantages to our
competition, and proving themselves. We are deploying those
new products and new processes right now, and we're
benefiting from those. We're also innovating new products
and we'll continue to do that. We are also - we also have
internal sales strategies that speak to how we position
ourselves against our competition, and the fact of the
matter is if you know many of your competitors are unable
to bond, you take on certain strategies. So there is more
than enough to be done, and we have terrific opportunities
out there for our sales people. There are success stories
literally everyday now.
Arnold Ursaner: And a final question for me. Someone asked before about
trying to get a sense or feel for the SG&A line. If - you
know, if salesman comp is a variable to any degree, can you
kind of remind us or explain to us what metric they're
going to be measured on over the next six, nine, 12 months?
Tom Rooney: Yes, and you are correct, they have highly variable
compensation. And the answer to your question is it's going
to be about value added sales. If a set of bidding
documents comes into Insituform, we win more than 50
percent of the time anyway. Therefore a salesperson will be
judged on the degree to which they create competitive
advantage, and put us in opportunities that we are not in.
And we have many avenues for competitive advantage that
frankly are to the benefit of our clients. And so, you
know, really going back 30 years, the whole product line
was an advantage to our client, it just had to be perceived
and sold that way.
So if a salesperson is on board, they will have the
strategies necessary to sell the work, there definitely is
work out there to be had. And the degree to which a
salesperson executes a value-added strategy ending in a
sale, they will frankly be very well-compensated.
Arnold Ursaner: Thank you.
Tom Rooney: Thank you.
Operator: And moving on we'll go to James Gentile with Sidoti &
Company.
James Gentile: Hello, my question has been answered, thank you.
Tom Rooney: All right.
Operator: If you would like to remove yourself from the queue, press
the pound key on your telephone keypad. We'll now go to Bob
Meeder with Wachovia Securities.
Bob Meeder: Hi, guys. A couple of questions. First one, on this R&D
increased investment, are you going to do an opportunistic
investment in R&D? Are you going to do it as a percentage
of sales? Is there anything we can kind of peg and model in
going forward your investment in R&D?
Tom Rooney: We - the answer is more opportunistic than percentage. We
have no interest in having mad scientists running around
dreaming up new ideas for fun. We are frankly linking what
we understand from our client as to be needs with solutions
that will fill those needs in the future. Plus we believe
we can innovate products that just flat cost less, we know
that, we have - we have real time experience with that
right now. So in the short run the
R&D effort is probably money - is money out the door, but
in a very short period of time we expect it to be a high
return on investment. But no, we don't - we don't have
planned spending levels, we have planned initiatives to
drive value.
Bob Meeder: OK, I can appreciate with as complicated a business as this
is, and as massive of changes you are making that it's
impossible to make projections on expenses and so forth. Do
you have any feel for when you might be able to give us an
idea of the type of capital investments that's going to
require the type of run rate on SG&A you're going to be
experiencing? Or are - you know, we looking one quarter
out, two quarters out to where you think you'll have a
handle on what it's going to take to invest to make these
changes?
Tom Rooney: Yes, I think - I think it'll be apparent within the next
two months. But remember what I had said in answer to an
earlier question, we are - we are not going to dump 20 some
initiatives into the till in the first quarter just because
it sounds like a good idea. We're going to engage those
initiatives on a highest value-added basis, and some are
kicking in right now frankly. But we're doing it on where
we get the biggest bang for the buck, what kind of
management focus is necessary, and what kind of investments
are necessary such that we do not cause an unexpected
severe drop in earnings as a result of SG&A.
Bob Meeder: And have you got a feel for the cap ex requirements for the
expansion of the Batesville facility?
Tom Rooney: Yes, Joe, and we - and that's ...
Joseph White: Yes.
Tom Rooney: ... understood.
Joseph White: We're going to spend about $9 million in total on the
Batesville expansion. Now that's being spent over basically
the third quarter and the fourth quarter with a little bit
left into the first.
Bob Meeder: OK. And will it cost you anything to close down Memphis? Or
are you going to still use that facility for something
else?
Joseph White: We do plan to close down Memphis, it will cost us
something, that'll be a fourth quarter charge. We're still
trying to - that'll be a first quarter charge, my
apologies. We're still trying to finalize what that'll be.
Bob Meeder: OK. And finally obviously this company's always generated a
lot of cash, and it's been accumulating a lot of cash here.
Can you discuss at all opportunities for a stock buyback
given the uncertainty in the stock price here?
Tom Rooney: Yes, well first let me say in terms of cash flow we
continue to improve our performance in cash. But for the
fact that when five tunneling projects slow down, our cash
gets hurt. Our future profitability goes up, but our cash
intake is hurt. That by the way will reverse itself fairly
quickly, so we don't see that as an ongoing issue. But one
- frankly one of the initiatives that we have underway is
much better cash management in terms of our billing
process. We expect to see significant gains from that
effort in the next 12 months.
But your question is really about stock buyback. And if you
recall in the - in the conference call one quarter ago, I
explained that we had had overlapping blackout periods,
therefore couldn't have done a stock buyback if we had
wanted to. And we said
that we had no intent to - that was not an indication, that
in fact we had an ongoing program. We did in fact buy back
stock this past quarter.
But moving forward we are going to make decisions on stock
buyback on an ongoing basis, we have a - we have already
filed for existing - I guess we have something like a
million shares we could be buying back. But the strategy
for stock buybacks going forward is going to be dealt with
at the board level on a quarter-to-quarter basis, and you
know, frankly you'll have to - you'll have to stay with us
in terms of what that strategy may evolve into. We're going
to make those decisions as we go.
Bob Meeder: OK, thank you.
Tom Rooney: And one last call I guess.
Operator: And that'll come from Alan Fournier with Tennant Capital.
Alan Fournier: Good morning, thanks for taking my question. I missed the
very first part of the call, so I don't know if this was
addressed. But in talking about cash flow, can you address
the cash flow from operations results in the quarter?
Tom Rooney: Joe, you want to take that one?
Joseph White: Yes, sure, not a problem. Cash flow from operations we were
actually adverse in the - in the quarter on the working
capital line. Just looking at it, it was about a 10 million
swing on the working capital line. Primary issue was in
both - our insurance program runs from June to June, we
have to prepay insurance during the third quarter, that
unwinds itself during the rest of the year. That's the
single biggest item.
The second, as Tom had already mentioned, was the tunneling
jobs. And when we actually take our job in Chicago, we're
turning our machine around, getting ready to actually start
going down the second tunnel, which we're doing now. We
stop billing during that process, that requires some use of
cash.
Also the other item that we have in cash flow is our cap ex
with Batesville, but that's below the operating cash flow,
but that's been a significant investment in the third
quarter and the fourth.
Does that help you?
Alan Fournier: Yes, so the prepaid expense and other asset line, that was
from an insurance payment? How much ...
Joseph White: That was from insurance payment. We typically spend between
three and four million in the third quarter, this year we
did it, last year we did it.
Alan Fournier: I see.
Joseph White: And that will start to obviously unwind itself here in the
next three quarters.
Alan Fournier : OK, great. Thank you very much.
Joseph White: Not a problem.
Tom Rooney: Thanks, Alan. Well that gets us to the end of this call. As
I had started off by saying, we are not satisfied with the
earnings reported this quarter, but we are rededicated and
totally focused on the initiatives that it will take to
drive this company to long-term high growth and
profitability. We're very confident that we have the
management team and the employees to do it. We have the
strategy and the plan to get it done. We are going to stay
focused on doing it appropriately, and with articulate
planning, and we expect an extremely bright future.
So with that, we appreciate everybody for being involved
today. Thank you.
Operator: And that does conclude our program. Once again, everyone,
thank you for your participation, and have a pleasant day.
END