Q2 2004 Insituform Technologies, Inc. Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day everyone and welcome to the Insituform second quarter 2004 earnings conference call. This call is being recorded. Any financial or statistical information presented during this call including any non-GAAP measures, the most directly comparable GAAP measures and reconciliation to GAAP results will be available on our website Insituform.com. During this conference call, 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 call. We do not assume the duty to update forward-looking statements. Please use caution and do not relay on such statements. Now, I will turn the call over to Insituform's President and CEO Mr. Tom Rooney, please go ahead, sir.

TOM ROONEY, JR., PRESIDENT & CEO, INSITUFORM TECHNOLOGIES, INC.: Good morning and welcome to our second quarter conference call. As I look back on the second quarter, I am struck by the thought that it was pleasantly uneventful. Certainly, we continue to have our challenges with much work ahead of us. But the quarter was marked by very few unusual or unexpected events. As a result, we have been able to focus on executing our plans and growing our company.

Now some brief observations on our second quarter results. I am pleased by the fact that our revenue numbers were up 14% over the second quarter of a year ago, and our earnings were up sharply over the first quarter of this year. On the other hand, we have experienced pressure on our gross margin and we attribute this to lower margin backlog that was booked last year and put in place this quarter as well as operating inefficiencies that are being addressed by our ongoing strategic initiatives. As expected, our operating expenses are up resulting in lower operating margins primarily due to our ongoing investments in growth, operational excellence, and product innovation. I feel very good about our cash position, particularly in light of our recent debt repayment and our increased capital expenditure. Our entire team has done a great job of focusing on cash management.

And now for a quick update on our strategic initiatives. We have more than a dozen strategic initiatives underway, and I will touch on just on just few of them at this time. Safety continues to be our most important initiative and I am pleased to report that we are beginning to see improvement in our safety records in the majority of our business units. This is a multi-year effort and we anticipate that our expenditures in this area will increase significantly over the next 12 months. In the area of logistics, we continue to make great strive. We anticipate turning the corner on this initiative by the first quarter of 2005 in order to generate visible savings by the second quarter of 2005. In the area of sales, we are well along the path to rebuilding our sales force in order to meet the growing needs of our market. So far in 2004, we've added a total of 11 sales professionals and we may add as many as nine more by the end of 2004. New product development is proceeding ahead of plan with several new products and process innovation moving along nicely through our normal development cycle. I am pleased to report that I've just returned from Batesville, Mississippi where in Insituform's Board of Directors recently toured our newly expanded manufacturing facility. We have just completed spending nearly $10m to upgrade and expand our manufacturing facility in Batesville. The resulting improvements have already increased our capacity while lowering our manufacturing cost and should soon allow us to eliminate certain excess inventory. The Batesville expansion represents only one face of our overall capital spending plans, but the perfect illustration of our commitment to investing intelligently for the future.

Now let us talk a bit about where we see our overall market. I am encouraged by what appears to be early signs of growing municipal spending in our markets around the world. This appears to be the result of improving economic condition combined with continued pressure from regulatory agencies such as the US EPA. Our order-to-revenue ratio is currently 1.27 with a greatest growth coming from the tunneling sector. We have seen our backlog grow modestly in each market segment and in virtually every geographic market. Competitive forces continue to exist in every market with intensity varying by region. Insituform's most significant competition exists in the Mid-Western and Southwestern United States. Worldwide, we see our competition as regional and fragmented with no single competitor achieving any significant scale. With that as a very brief overview, we will now open the call up for your questions.

OPERATOR: If you do you any questions today, please press star one on your touchtone telephone. The question and answer session will be conducted electronically. We will take as many questions as time permits. Once again, if you do have a question today, please press star one now. We will take our first question from Arnold Ursaner with CJS Securities.

TOM ROONEY, JR.: Good morning Arni.

ARNOLD URSANER, ANALYST, CJS SECURITIES: Tom, how are you?

TOM ROONEY, JR.: Good.

ARNOLD URSANER: Couple of two quick question if I can, you indicated in your comments that you are running off some lower margin backlog. Can you give us a feel for how much longer that process may take to unfold?

TOM ROONEY, JR.: I would say that vast majority would be through the pipeline in a six month horizon.

ARNOLD URSANER: Okay, and you -- again dramatically expanding your sales force, can you give us a little bitter feel for the guidance for how -- what it is you want them to be out there doing and how this could influence your results over 2005 and 2006?

TOM ROONEY, JR.: Yes, first of all we want them out there getting new work, but I am sure that is not the level that you are looking for in terms of the question. First of all, obviously it is history but roughly or almost precisely two years ago, we slashed the sales force in half. I don't believe we are even back to that same number from two years ago, and in past conference calls that I have reflected on the fact that we will be fortunate to hire about one and half sales people per month worldwide, and so hiring a 11 after the first seven months if fairly well at that pace. So we are pragmatically adding the headcount in sales. We are adding individuals that are very talented and not only find new projects for us and there are many. But also help craft better win-win situation with our clients. By that I guess what I am saying is both topline growth but also higher value-added work and a better margin. We think that there is a very real impact; we have seen a negative effect of slashing the sales force, and we are now starting to see the positive effect of the new sales force. I would tell you this also and we talked about this little bit in the past - whenever we add a good solid new business development individual to our team, it is not uncommon for the best candidate or the best new employees to take 6 to 12 months to have a meaningful impact on the growth of the company. So I think the vast majority of the impact of the new sales force would be in '05.

ARNOLD URSANER: Thank you.

TOM ROONEY, JR.: Sure.

OPERATOR: Our next question comes from Jeffrey Beach with Stifel Nicolaus

JEFFREY L BEACH, ANALYST, STIFEL NICOLAUS: Yes, good morning Tom.

TOM ROONEY, JR.: Hi Jeff, good morning.

JEFFREY L BEACH: I guess the surprise number for me was the very low level of profitability in the Tunnel area, can you discuss what happen with the profits there, and talk a little bit more about the orders, opportunities, and margins ahead?

TOM ROONEY, JR.: Specifically in the Tunneling business?

JEFFREY L BEACH: Yes.

TOM ROONEY, JR.: Okay. You may recall about a year ago this time, we tightened the management discretion in regards to booking, claim, or booking revenue and earning on claim. The tunneling industry in its best case has a lot of claims to it - water, unusual circumstances underground, and so and so forth. So every tunneling contractor hits a lot of claims including ourselves. A lot of management discretion has to be used in terms of when you book and how much you book in terms of anticipated revenue and therefore profit associated with those claims. And I was not comfortable with the discretion or the approach that the Company used a year ago, and so I instituted, if you will, in a much higher bar in terms of when we would take those earnings. So for 12 months the Tunneling group has essentially not booked any …