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Executives

J. Joseph Burgess – President and Chief Executive Officer

David Martin – Vice President and Chief Financial Officer

David F. Morris – Senior Vice President, General Counsel and Chief Administrative Officer

Daniel Cowan – Vice President, Asia-Pacific Rehabilitation Team

Analysts

John Quealy – Canaccord Adams

Debra Coy – Janney Montgomery Scott LLC

Glenn Wortman – Sidoti & Co.

Lee Tagoda – CJS Securities

Insituform Technologies Inc. (INSU) Q3 2008 Earnings Call October 24, 2008 9:30 AM ET

Operator

Good day and welcome everyone to Insituform Technologies third quarter 2008 earnings call. Any financial or statistical information presented during this call, including any non-GAAP measures, the most comparably measurable GAAP measures and reconciliation to GAAP results will be available on our website, insituform.com.

During this conference call we’ll 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 rely on such statements.

As a reminder, today’s call is being recorded. Now I’ll turn the conference over to Insituform’s President and CEO, Joe Burgess.

J. Joseph Burgess

Thank you very much. Good morning and thank you for participating on Insituform’s conference call on our third quarter 2008 results. Joining me on today’s call are David Martin, Vice President and Chief Financial Officer; and David Morris, Senior Vice President, General Counsel and Chief Administrative Officer; and Daniel Cowan, Vice President of the Asia-Pacific Rehabilitation Team.

I plan to spend most of this call today addressing your questions but I’ll make a few brief remarks on the third quarter performance, the status of our operational improvements and our strategic direction. Before I get into those specific topics, you will note that with yesterday’s earning release we began providing new and expanded disclosure of our business segments. I believe that this is a very important step as we endeavor to become a more transparent company about the strategic direction we are taking.

These disclosures provide much clearer insight into our financial results and the distinct business lines and the geographies that we serve around the world. We do plan on going back to previous quarters and recasting the segments to reflect this improved disclosure. We file these changes with the SEC next week.

I am pleased to report the significant improvement and profitability again this quarter compared to last year and sequentially from the first and second quarter this year. Four of our five business segments delivered more in operating profit than last year. Only Europe declined and I plan on discussing that in detail later on.

Much of our improved results in the third quarter were driven by North American Sewer Rehabilitation. Our gross margin percent in North America was over 22.5% in the third quarter, up significantly from a year ago when gross margins were at only 17%.

Gross profit dollars in the third quarter improved by over 32% from the same period last year and were up 2% from last quarter. This improvement can be attributed to the hard work from our field management and our crews. Our execution against bid margins has shown marked improvement year-over-year due to a strong focus on eliminating quality errors, increasing productivity, reducing fixed costs and improving logistics of moving tube to installation. In addition we’ve been able to improve profitability through efficiency gains in manufacturing.

In terms of productivity in costs, let me share a few positive trends. For the nine months ending in September, crew productivity as measured by feet installed per crew – per week per crew is up over 6% from the same period last year. At the same time we’ve trimmed our labor cost for installed foot by 5.5% and our equipment costs have come down by more than 1.4% despite a 40% increase in the cost of fuel. We have continued to trim our administrative support costs in North America as well.

Our backlog in North America did come down this quarter by 3.7% from last quarter. While we do continue to see a mostly flat market in most of the United States, our 12 to eight month visibility into the market it appears to continue to be steady and not dramatically declining. While we have seen a small decrease in this quarter’s backlog, it is up from one year ago by 8.4% and the margins we see in our backlog have improved by several margin points since the third quarter last year, a very positive trend.

Also included in the results for North American Rehab are third party tube sales through our subsidiary MTC. This is a very strong success story worth mentioning. Year-to-date we have increased sales by 134% to approximately $7.5 million from $3.2 million last year. By the end of the year our third party tube sales will approach $11 million. We have even larger expectations for this business in 2009.

Our Energy and Mining segment, formerly Tite Liner, grew both revenues and operating profits by 31% from last year. While margins are down somewhat this is substantially attributable to the mix of projects and geographic markets. Our Chilean operations have grown nicely this year but margins typically are lower there.

What is not shown in our financial reports is our return on invested capital. This business is and has been delivering return on invested capital of more than 50%. As I have mentioned before, the sustained performance of this business and the attractive opportunities in the Energy and Mining space make this segment one which is being valuated for rapid expansion.

Our European Sewer Rehabilitation business is having a difficult year. While we saw modest progress sequentially in the third quarter, our operating results lag last year’s operating profits significantly. I’ve been in Europe several times in recent months to work closely with Bruce Frost on a turnaround strategy for this business unit. I do expect to see improved results in the fourth quarter and much stronger profitability in the year to come.

The key will be focusing on many of the same issues that have driven improvements in our North American Sewer Rehabilitation business, specifically eliminating execution errors, improving crew productivity, and driving down overhead costs.

Our Asia-Pacific operations are gaining significant momentum and I am pleased with our progress in India. We were recently awarded a $21 million contract in Sewer Rehabilitation work that we’ll begin performing in early 2009. This work is in addition to the $35 million that this operation won in late 2007.

We did see some slippage in the start of our existing lining projects during the third quarter due to delays in the completion of the pipe cleaning operations. We expect to begin lining in a few weeks. We now have approximately $56 million in backlog, all in Delhi. We are currently gaining visibility into contract opportunities in several other major cities in India and we believe we are well positioned to secure significant contracts in the near term. We have made good progress with respect to setting up operational and administrative infrastructure there and we are working very well with our joint venture partners, SPML.

I’m also pleased with the progress we’ve made in our Water segment. Our project on Madison Avenue in New York City has been very successful so far and our customer appears very happy with our progress. We will continue this project early in 2009 as we are on hiatus through the holiday months ahead. We were slightly profitable in this business in the third quarter. While backlog is down this quarter, our visibility into projects in the near term has grown recently, due greatly to the success we have experienced in New York City and in other key projects in the U.S. and Canada.

Now changing gears and looking forward. Last quarter I shared with you my vision of where we are heading at Insituform. Now let me spend a few minutes talking about where we are with that and add a few additional thoughts as I have had more time to evaluate the company and determine steps we need to take to deliver greater returns for our investors.

First, last quarter I discussed the adoption of a more rigorous return on invested capital discipline with our managers throughout the company. As we are in the late stages of our 2009 annual planning process I am pleased to report that our management team understands and is aligned on what we are going to be about, and that is delivering much improved returns. Our future investments will be properly aligned with stockholder interests and this understanding will become institutionalized throughout Insituform.

As part of our planning processes we have identified ways to drive a leaner overall capital structure for each of the operating businesses. This will enable more profitable deployment of capital to higher return business units within the company. Some examples of this North American Rehabilitation management has been heavily focused on reducing costs and improving tube delivery efficiency.

Since early 2007 we have reduced steering wheels in NAR by 25%, driving significant cost savings. Additionally we’ve invested in iplus Infusion capable wet out facilities in both Florida and Colorado to better support our growing and small diameter markets in those regions and reduce freight costs.

In Asia-Pacific we’re operating a new wet out facility in Delhi and are evaluating how best to supply our business needs in that fast growing Indian market. We’re going to continue to invest in our water business over the near term. Our success in recent projects, including the Madison Avenue project, should enable us to secure significant future project awards. We plan to focus on expanding our product portfolio to drive more efficient and cost competitive solution for our customers so that we can continue the trend of moving to this market away from dig and replace and towards trenchless solutions.

As I mentioned earlier, our Energy and Mining business Tite Liner continues to grow handsomely with very strong margins and return on investment. The management team led by Dorwin Hawn is actively finding new areas to grow organically in a global market and there are great opportunities for us.

We’re actively reviewing potential partnering relationships in various markets along with the valuation of potential acquisitions to expand our product portfolio in this exciting industrial rehabilitation sector.

You’ll note that we filed a shelf registration statement with the SEC yesterday and many may speculate as to what this means for Insituform. Simply we want to be in position when appropriate opportunities arise to move quickly to the market in the form of an equity or debt offering. This registration is an important first step in those preparations.

I believe that the results that we have announced yesterday are indicative of the progress we have made and can make into the future. We have vast improvements to make in delivering consistent and improving returns throughout the company, but we are clearly gaining momentum in each of our business segments and we are moving forward on some important strategic fronts.

I would like to conclude my remarks with a few comments on how recent economic events are likely to affect or not affect Insituform. I believe the company is fundamentally as strong as it has ever been. Our primary North American Sewer Rehabilitation business continues to improve its operating performance. We are better at acquiring negotiated work, better at using our manufacturing and logistical capabilities to increase competitiveness and profitability, better at identifying and eliminating quality issues with our execution.

We also have a leaner and more productive crew structure, installing more feet in 2008 than we did in 2006 with 13 fewer crews. Overall this is a business that is well positioned to perform in a variety of market conditions.

In talking with our clients over the last several weeks, there is certainly concern over the credit markets and the general state of the economy. If these conditions persist, they would certainly suggest that the overall municipal spending could shrink in the future. This is mitigated significantly, however, by the fact that much of our work is associated with EPA mandated consent decrees and financed through multi-year municipal bond programs. This is why we see the market as essentially flat for the next 12 to 18 months.

In the Energy and Mining sector we continue to position and grow this business as a way for our customers to enhance pipeline utilization for existing production capability. While our high end growth prospects are enhanced by higher commodity pricing, this business has historically been very resistant to changes in those commodity pricing and its profitability and revenue growth resilient in the face of those changes.

Regardless of the depth or duration of any economic downturn, the current situation only highlights that we need to continue to focus on operating efficiency, cost control, and targeted investments for growth that we improve the return that the company delivers to its shareholders.

And with that opening, I would now like too turn the call over to your questions. Thank you very much.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from John Quealy – Canaccord Adams.

John Quealy – Canaccord Adams

First on North American Rehab if we could, Joe, can you give us a little bit more detail on the volume and price relationship in the impact on the model moving forward? Clearly volumes have gone up significantly. It’s unclear what volumes are going to do moving forward in this municipal market, but can you give us a little bit more detail, the 22.5 give or take gross margin in the quarter, do you think that’s a defendable margin based on varying levels of volume growth or deceleration moving forward?

J. Joseph Burgess

Well, I think that our – I think it’s difficult to look at gross margin in any particular quarter because there is some variation and seasonality to this business. However, what I can tell you and what I addressed in the remarks is we as a company are very focused on seeking out work where we think we can deliver quality margins to our investors, and not seeking out work that we think is either overly commoditized or not going to be work that we can perform at margins that we think are worth our while, frankly, to be in that work. And that’s driven by a great many factors.

Some of it can be just the level of some sub-contracting work, which can be impacted by the level of bundling that communities do with certain services as opposed to our core CIPP work. But I do think that a number of the initiatives that we’re taking, trying to focus on negotiating work with our communities, again trying to focus on areas where we have a great crew presence and strength which allows us to minimize mobilization costs and other logistical issues within our business, are helping us to drive down costs and increase margins in the work that we’re selecting to participate in.

John Quealy – Canaccord Adams

Clearly you’re steering away from low margins. Can you characterize pricing in the market in North America? How would you characterize it? Is pricing aggressive now or you haven’t seen anything yet?

J. Joseph Burgess

You know, I’ll tell you what I kind of talk about internally here. I think this business is very difficult to generalize about in terms of North America. We operate in Sewer and Water Rehab businesses and in many ways it’s the most local of businesses. So while this may seem like a broad answer we see some very aggressive pricing in some regions from time to time, and then we see markets that we think are priced more fairly for the risk, particularly the execution risk of any particular vendor is taking on that job.

What we are doing is seeking work where that risk and reward is fair and balanced and we are not seeking to simply capture work for the sake of capturing it. And we feel like we have our company continuously and increasingly sized from a crew structure and a fixed cost standpoint to be able to do that.

John Quealy – Canaccord Adams

On the Metal and Mining business as it’s characterized now, you’ve had good growth there. That end market has suffered tremendously. Can you talk about your relative level of expectations for growth there given the headwinds in that overall segment?

J. Joseph Burgess

Well as I alluded to in my remarks I think a review of the history of that segment suggests its ability to grow and grow significantly across a very wide spectrum of commodity pricing in that sector. It’s also diverse in terms of both having some A grade clients in both the Energy and the Mining sectors. It’s also focused not so much on new pipe line or new expansion in either of those sectors but rather it’s more focused on rehabilitation and the opportunity for our clients to gain increased utilization and capacity through existing assets.

So I think that that’s one of the reasons that this sector has proven more resilient than maybe some technologies or service providers that are more focused on the new capacity.

John Quealy – Canaccord Adams

Last quarter you mentioned that you were comfortable with earning estimates for analysts. This quarter I didn’t pick up anything like that, I may have missed it, but what’s your thought about that comment and number two, are we going to go back to a guidance potential here moving forward?

J. Joseph Burgess

We are certainly comfortable with the expectations in the analyst community for the fourth quarter and the full year. I think we’ve said that consistently since I got here in the second quarter and it would be our expectation that we would provide guidance going into 2009 when that process is wrapped up.

Operator

Your next question comes from Debra Coy – Janney Montgomery Scott LLC.

Debra Coy – Janney Montgomery Scott LLC

Joe you talked about the improved execution in the North American market. I think you said that you have done – you’ve installed more feet this year with 13 fewer crews. Can you talk about kind of where you are on that utilization process? Where you are on current crew utilization? And as you look into probably a seasonally weaker period, how you adjust to that? And particularly interested, too, in your comments regarding kind of picking and choosing your work, seeing pricing more aggressive in some areas than others in the context of increasing the level of tube sales.

Is there an opportunity to kind of step back from the less profitable markets, sell to other vendors in those markets so that you can continue to concentrate with smaller crew footprint on more profitable work? How do you see that going forward?

J. Joseph Burgess

Well, in terms of crew utilization, which I think was your first question, we have 65 crews now and we judge them to be pretty close to their capacity. I mean basically new work for us, at least if it’s at a significant level or a term contract that might represent a more extended period, we’re looking essentially at crew additions in those cases to handle that work. And candidly that’s where we want to be as a business is feeling like our current pipeline and backlog is adequate for our current crew structure and then selectively adding resources, certainly the crew resources to attack new levels of work.

In terms of the regional pricing, again we are increasing our position of trying to get close to many of our key clients, trying to work to acquire contracts through a negotiated basis. That is representing an increasing amount of this work that keeps our current crew structure reasonably fully utilized.

As I’ve said in the past, we will continue to utilize our capabilities in the manufacturing end to participate in a broader range of projects that we either are not interested in as a contracting matter, or for whatever reason as I suggested earlier the pricing does not deliver the reward that we think matches up with the execution risk. Or even the simple mobilization effort. Because as I said earlier, we’re at a level now where we’re putting on new crews with significantly new work and we’re excited and happy to do that obviously, but it needs to be at returns that meet our internal and our shareholders expectations.

Debra Coy – Janney Montgomery Scott LLC

I’m interested in your comments; too, about the market as far as you can see appears stable based on your conversations with your customers. I think that has been the primary concern for investors, the primary point of weakness on the stock price is the fear that the municipal markets are going to deteriorate badly going into 2009. Can you talk about your level of confidence there, your level of visibility; kind of what your data points are that give you the flattish outlook over the next 12 to 18 months?

J. Joseph Burgess

Well as I addressed in the remarks, we – the great preponderance of our work tends to be associated with environmental consent mandated programs that are driven by EPA through whatever the local agency that we’re working on. And that is – those programs are almost never a month to month or a three month horizon or six month horizon. They are typically broadly negotiated and then funded across a period of years. And we’ve had that discussion with clients really from the west coast to the east coast over the last few months, trying to take their temperature on this very point.

And that’s why I’ve taken the view that for the most part, in the near term, economic downturns are mitigated by that fact. Now again some of that is a regional to regional thing. We’ve seen some new mandates in the Midwest that we think will drive even an expanded market in some sectors. But then that is offset by some markets in Florida, for example, where more of our work appears to be funded through current period tax revenues and one might expect some decline in those levels of expenditures for some of those clients.

But overall when I put those things into one basket, the great preponderance of our work is on the North American Rehab business, is associated with these longer term projects that are typically financed with multi-year bond offerings. And we do not see any move towards shrinkage or cancellation of those programs, primarily because those mandates are still enforced and most of that work is financed at least into the near term.

Debra Coy – Janney Montgomery Scott LLC

A lot have been issued.

J. Joseph Burgess

That’s right. So and that’s really as I said I think that really gives us a 12 to 18 month horizon where we feel pretty good about our prospects and our ability to become a more profitable company, even with the top line that is difficult to move in this market.

Debra Coy – Janney Montgomery Scott LLC

Okay. Thanks.

J. Joseph Burgess

In that sector.

Debra Coy – Janney Montgomery Scott LLC

Yes. Yes. Understood. And one final question for now. The shelf offering of -

J. Joseph Burgess

I might add if I can, just a thought came into my head, I think the Water side of the business will prove to be even more resilient to that. Again because as I think I’ve discussed in previous remarks, the Water side of the equation tends to be based on improving economics for the community versus avoiding environmental liability from a regulated agency which is why people spend money on the Sewer side. So we see on the Water side of the market communities we think that the Water side of the business can be part of a community’s program for essentially lowering its costs through lowering its water loss.

So I think that while that market is obviously smaller at this stage and still very much in the phase where we are working hard to convert from non-trenchless applications to trenchless applications using our technologies, I think the underlying economic relationship between us and our communities is stronger and that that will prove even more resilient.

Debra Coy – Janney Montgomery Scott LLC

My last question was looking at the shelf offering, it’s sizable, $250 million suggests that you may see acquisition opportunities of rather significant size. It sounds like you’ve put a lot of thought into approaching that mainly on the industrial side. Are you willing to talk at this point at all about the kinds of opportunities that you see there? What kind of product expansions presume they would still be related to the pipeline business? Kind of how you’re thinking about the opportunity there?

J. Joseph Burgess

Well I think it’s a little early to be into too much specifics there. But I guess I would say that we do see opportunities certainly on the industrial side and that I think you can expect us to generally stay pretty close to our knitting. We understand the pipeline rehabilitation and matters related to that and we see opportunity in those areas.

Operator

Your next question comes from Glenn Wortman – Sidoti & Co.

Glenn Wortman – Sidoti & Co.

Looking at your operating expenses, they fell pretty significantly sequentially, I was just wondering how we should think about that going forward here?

David A. Martin

I think you can expect to see that our operating expenses will remain fairly steady. As you noted it came down sequentially from last quarter, but second quarter’s operating expenses were higher due to the remnants of the proxy contest. So the numbers that you see around $22 million are reflective of a fairly normal state of affairs for the company. You may see some growth coming next year as a result of the growth initiatives as businesses grow, but we’re trying to offset that with decreases in areas such as North America and our corporate support group so to mitigate any of the overall increase in spending.

Glenn Wortman – Sidoti & Co.

And just with respect to India, the backlog there is at $55 million. Can you give us a broader sense of the opportunity, you know, maybe bid work outstanding and where you see that market going over the next year or two?

J. Joseph Burgess

Yes I’ll let Daniel Cowan who is our Asia-Pacific Vice President handle that.

Daniel Cowan

Sure. Absolutely. The two chunks of work that we have won are both two year contracts and we see next year and – Q4 and next year we’re going to run off that work and still will have a little backlog in that left over. Our visibility now with funded work is above $100 million of already funded work for trenchless rehab in the Sewer markets and that’s both inside of Delhi and outside and in other cities.

I think it’s important to note that as we look at sort of a global downturn and funding questions that India has set about a program about two years ago, the JNNURM that makes some 45 cities in India eligible to receive money from the federal government and that’s how this is being funded. So we do see a large pick up in demand coming in 2009 and we expect our backlog to continue to grow.

J. Joseph Burgess

Yes and the $100 million Dan spoke about is not exclusive to Delhi. That’s in primarily in Mumbai and Hyderabad as well.

Operator

Your next question comes from [Lee Tagoda] – CJS Securities.

Lee Tagoda – CJS Securities

Just looking at the domestic Sewer Rehab business it appears that there’s some news out of Alabama where certain counties are looking to default on municipal bonds for Sewer Rehab. Are you seeing anything else of that – to that extent and how would something like this affect you?

J. Joseph Burgess

Well are we – who’s defaulting, David? Jefferson County?

David A. Martin

Yes. Birmingham, Alabama. But I don’t think they have defaulted. I think there’s potential issues. I mean, the short answer is we have not – we’re obviously familiar with the Jefferson County situation because I guess we’ve been in and out of that as a sub-contractor for some years.

So we have not seen that as a trend certainly or heard really of anything significant along those lines. In terms of trying to forecast what that would mean to us, obviously a default on the bonding which I was talking about earlier, would suggest a lack of availability of those funds to fund whatever capital program was being discussed or whatever capital program was set up in support of that financing. So while typically those are broad programs, just meaning that they deal certainly with Sewer Rehab work and they might also deal with storm water separation or CSO issues or whatever else is going on in a community.

So if there’s a default and a reduction of funds, then communities would have to make separate decisions on what work they’re actually going to do with whatever monies were available. But you could certainly assume that the flow of work to us would be impacted by that if there was – if anything broad like that happened.

Lee Tagoda – CJS Securities

At this point you’re not really seeing any sort of cancellations in the near term?

David A. Martin

No and I right now would not anticipate a large amount of those. I mean, most of our programs are with the agencies that represent the Sewer and Water districts. Those tend to be separate quasi-municipal or even totally separate agencies from the cities and towns that they do the work for. And they tend to set up their financing systems as revenue based systems, if you will. So they put together long term financings and they set their rates over a period of time and of course they then execute the capital programs based on those long term financing things that they undertake.

So as I was trying to say earlier, if we get into a situation where while we feel very good about where our company is in an up economy and candidly we probably feel better about where we are in terms of how we’re positioned to handle any downturns in the market. But if one wants to think through protracted recessionary impacts in the U.S. economy and bond defaults for what are now A grade municipalities, I mean, certainly I could not predict that that wouldn’t have an impact on us.

But I do think that for the foreseeable future most of our work is executed through programs that are financed through these agencies, these revenue structured agencies that are executing work against environmental mandates. So for the foreseeable future we feel good about those prospects.

Operator

And it appears there are no other questions. At this point I’ll turn the conference back to our presenters for any additional or closing comments.

J. Joseph Burgess

Well thank you very much. This is Joe Burgess again. We appreciate you being on the call. We’re very very happy with the progress that we made in the third quarter. Again we anticipate a strong fourth quarter based on continuing to gather momentum on the many programs that we have and as I alluded to we’re also positioning the company to look at some expansionary opportunities. And we’re very very excited about it. So thank you very much for spending some time with us this morning.

Operator

And that concludes today’s conference call. Thank you for your participation. You may disconnect at this time.

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