Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Joe Burgess - President and CEO

David Martin - VP and CFO

Analysts

Arnold Ursaner - CJS Securities

Debra Coy - Janney Montgomery Scott

Chip Moore - Canaccord Adams

Steven Denault - Northland Securities

Glenn Wortman - Sidoti & Company

Jeff Beach - Stifel Nicolaus

Chris Blackman - Empirical Capital

Insituform Technologies, Inc. (INSU) Q4 2008 Earnings Call February 27, 2009 9:30 AM ET

Operator

Good day and welcome everyone to this Insituform Technologies Fourth Quarter and Year-End Results Conference Call. Any financial or statistical information presented during this call, including our 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 rely on such statements.

Now I will turn the call over to Insituform’s President and CEO, Joe Burgess.

Joe Burgess

Good morning and thank you for participating in Insituform’s conference call on our fourth quarter and full-year 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.

We would like to spend most of the call today addressing your questions, but I will make a few brief remarks on the fourth quarter and full-year performance, the status of the operational improvements that are driving these improvements. Our strategic thinking in creating a broad industrial pipeline rehabilitation platform with the acquisition of Corrpro and Bayou Companies and lastly our prospects for 2009.

I am pleased to report the significant improvement in profitability again this quarter compared to last year. Income from continuing operations excluding the impacts of the Per Aarsleff settlement and the reduction in force was $0.23 per diluted share for the quarter. This is inline with our expectation and 81% better than our operating result for the fourth quarter of 2007, adjusted for the one-time patent infringement, legal settlement of $4.5 million recorded in the fourth quarter of 2007.

North American Rehabilitation continued its year long turn around was solid margin performance against essentially flat revenues. We saw our first significant profit from the Asia Pacific markets due to the start of liner installation in our Delhi projects. And our Tite Liner business closed the year on a strong note with 46% increase in operating income. Much of our improved results in the fourth quarter were driven by North American Sewer Rehabilitation. Our gross margin percent in North America was at 23% for the fourth quarter, up significantly from a year ago when gross margins were only at 16%. I’m probably starting to sound a bit like a broken record but much of this improvement can be attributed to the hard work from our field management and our crews.

Year-over-year reductions in the cost of quality exceeded 15%, the difference between as bid and as executed margins short by 2 percentage points. Manufacturing profitability increased by $1.6 million year-over-year and increased by $5.8 million for the full-year. This full-year figure includes a $1.1 million contribution from our MTC group, which as I mentioned in my third quarter remarks continues to gain share in the dry tube market.

In addition to this, we restructured the North American operations during the quarter essentially collapsing six regions into four while also reducing support cost at the corporate level.

We expect this restructuring to save over $4 million in 2009. Recorded on backlog in North America, the raw figures show a 15% reduction quarter-to-quarter and a 6% reduction from year-end 2007. Digging into these figures reveals that we have a number of projects that we were expecting to close in the fourth quarter which were delayed into 2009. And an example of this is our recent award in Clark County, Nevada. This $13 million contract was originally bid in the fall but not booked into backlog until recently. We have experienced and are experiencing similar re-bids on large dollar contracts in Sacramento, California and in Hawaii. And building our prospects for 2009, we entered the year with a comfortable level of backlog to achieve our profitability targets.

While we do continue to see mostly flat market in the United States, our 12 to 18 month visibility into the market appears to continue to be steady. As importantly the margins we see in this backlog continue to improve.

Our European Sewer Rehabilitation business did not perform well in the quarter and had a difficult year overall. Fourth quarter results were negatively impacted by a downturn in the UK market due to economic conditions and lower spending driven by the UK tariff review cycle. Bright Spots included a record year for our business in the Netherlands and improved performance in our Swiss subsidiary late in the year.

As I mentioned last quarter the key continues to be focusing on the basics, optimizing manufacturing efficiency and profit, focusing on the cost of quality, execution mistakes and the overall level of capitalization in the business to drive improved returns.

We upgraded our team in 2008 in Europe and we expect to see benefits of this stronger management team as we move into 2009.

Our Asia Pacific operations continue to gain momentum. We were recently awarded two additional contracts in Delhi valued at $4.5 million during the fourth quarter while starting the lining work on the major awards announced earlier in the year.

We are pleased with the progress of the work and with the productivity that we are seeing from the Indian operation which made its first significant contribution to earnings during the quarter. We continue to enjoy a strong relationship with our joint venture partner SPML and together we have created a robust project management organization that will allow us to execute crisply in this market.

At the bid table we continue to see a strong pipeline for additional projects with a near-term prospect for competing for an additional $60 million of work. We believe that we are on-track to achieve an $80 million backlog for India in 2009.

Our water business continues to make strides forward while the fourth quarter was the not the strongest in terms of operating performance. We performed on a number of difficult projects during the quarter and we continue to validate and improve our execution capabilities.

We were able to secure another large project in Victoria, British Columbia for $4.4 million and this project should be another milestone project. We will pick backup on the Madison Avenue project in a month or so. Our bidding prospects are also looking very positive and we expect that we will grow this business significantly in 2009, and it should began to contribute to operating income by the end of 2009.

Energy and Mining, formerly Tite Liner, grew both revenue and operating profits by around 50% this year. This business achieved record levels for both revenue and earnings in 2008. We believe the business is well positioned to deliver a strong 2009 as well. Project awards remains strong in North America particularly in Canada. The business has secured new contracts in the Middle-East and is rapidly expanding it's address for market in that region. We also expect to grow our business in Mexico as PEMEX focuses on several large maintenance projects.

As I have mentioned in our last call, the sustained performance of this business have the attractive opportunities in the Energy and Mining space made this segment one which was being looked at for rapid expansion. Obviously, with the announced acquisition of Corrpro and The Bayou Companies we believe we have found solid companies that strengthen our offering in the industrial sector.

Before I talk about what that business platform looks like though, I would like to go back to a concept that I discussed on the third quarter call. That concept is a notion that Insituform can be and must be a premium return company. I mentioned that we were driving to a return on investment culture in our operating businesses and that achieving a premium return for our shareholders would become mission number one for our company.

As we studied our return profile and different past to meet our goals are being a 15% return company by 2012, it became clear that we needed to dramatically invest in the piece of our business; the only piece by the way that had been delivering superior returns and doing so for over 20 years. When we turn to our attention to the industrial segment we were able to determine that investing in this sector would be the accelerator that we need to reach our return goals.

There are two fundamental reasons that we drove this conclusion. First, both of these companies and the comparable companies deliver superior returns in the past and our positioned to perform even better in the future. Bayou has delivered an average 18% return over the last 10 years, Corrpro has delivered an average 12% return over the same timeframe. We believe that we can improve upon those figures, but the simple fact is that these returns on a standalone basis greatly accelerate Insituform's return profile.

The second reason or rationale has to do with the addressable markets, with these acquisitions we created a $370 million industrial pipeline rehabilitation platform and $1.4 billion North American markets and in a global market that exceeds $4 billion. These markets provide the opportunities for organic growth that will allow us to rapidly accelerate our return profile, so that we can meet our shareholder expectations.

As to the individual companies they are both solid businesses coming off record years for both revenues and earnings. As important, given the current economic conditions both businesses had record levels of backlog as of September 30, 2008 and they have maintained these levels since then. They both have superior management teams that will become part of the Insituform team to drive future growth.

Corrpro is the leading provider of cathodic protection and corrosion prevention services in North America. Headquartered in Huston, they have experienced tremendous growth over the last several years and achieved last 12 months revenues of over $185 million. They have strong engineering, project management and execution capabilities and enjoy a leading market share position in North America. We see an immediate upside for this business by connecting the Corrpro service profile to Insituform's distribution channels in the municipal market. As well as providing a front end engineering capability for water pipeline assessment work.

We are very exciting on adding this business to our company and are expected to close the transactions some time in March. The Bayou Companies is a family owned business based in New Iberia, Louisiana focusing on protective flow efficiency and concrete wet coatings for industrial pipelines.

Last 12 months revenues approached $130 million. The business has been managed for three generations by the Shea family and enjoys an outstanding reputation for quality and service within the industry. Breadth of coating services combined with the deep water port facilities in the New Iberia area provide competitive advantage that we believe can accelerate the growth of this business in the future.

We closed this transaction early in the week and are actively focusing on achieving the 2009 targets for this business. While both of these companies operate in the energy sector we believe that they will be able to produce strong results across a range of commodity pricing scenarios.

I mentioned that both have record backlog levels $72 million for Corrpro and $87 million for Bayou. Both also have significant portions of their business focused on maintenance projects, two-third for Corrpro and one-third for Bayou which act as a hedge against curtailment and new pipeline projects.

And lastly neither of these companies has any significant exposure to the exploration side of the business, where the most dramatic spending capital cuts are likely to be made. So, we have two very solid companies that together with our Tite Liner product line give us a complete service offering to the industrial sector. We expect these acquisitions to be immediately accretive to earnings in 2009 and to greatly increase our ability to produce organic growth in the future.

To conclude, these are very exciting times in Insituform. 2008 is seeing a dramatic improvement in our core Sewer Rehabilitations business, and more importantly, there is more to come in terms of making that business increasingly profitable. Our water business achieved its top line targets in 2008 and we expect it to double in size again in 2009. As our products continue to improve and become more cost effective, we believe we will be able to accelerate the conversion of clients to trenchless capabilities from traditional dig and replace.

We have done this before and we believe we can do it again. Our Asian efforts are starting to produce the results we anticipated and this will be an exciting growth area for Insituform for the foreseeable future. And of course, the acquisition of Corrpro and Bayou create a dynamic platform in the industrial pipeline sector that positions the company for accelerated organic growth. All of this means that we are well on our way to being that premium return company. We expect that 2009 will accelerate us along that path. We expect the business to grow earnings by 25% and then approve upon that with the integration of our industrial platform. Yes, these are very exciting times in Insituform.

With that, I would now like to turn the call over to your questions. And thank you very much for allowing me to [find in the front end].

Question-and-Answer Session

Operator

Thank you Mr. Burgess. (Operator Instructions). We will take our first question from Arnie Ursaner at CJS Securities.

Arnold Ursaner - CJS Securities

It's Arnie Ursaner with CJS Securities, good morning. The one question I have relates to your two acquisitions, I know you don’t intend to give more formal views till later in the year, but a very simple straight forward question if I can. Are you assuming both will be up in revenue and in 2009 versus the 2008 levels given their backlog? And you mentioned some margin numbers there a little bit different than some of the things in your public filings. But the broader question would be, do you expect 2009 margins in each of these businesses to be higher than the levels in 2008.

Joe Burgess

Arnie, this is Joe. We basically and we stated this when we were on the road talking about these investments, we do not expect the top-line revenue for these businesses to meet their 2008 record last 12 months levels. Corrpro we expect to just see a modest decline. Bayou while they have a record backlog and a pretty robust pipeline, we took that top-line for that business down about 8%.

Arnold Ursaner - CJS Securities

Okay. And if revenues are down to that magnitude given our energy exposure what sort of margin profile might we look for relative to the 2008 levels.

Joe Burgess

About the same, we didn’t really see, when we were doing to due-diligence on their pipeline, there was certainly some re-pricing going on, on some of the larger pipeline projects, but that fell mainly in the cost of materials related to steel. And so we really, we did not see any margin pinch on the quoting side of the equation.

Arnold Ursaner - CJS Securities

Okay. Thank you very much.

Joe Burgess

You're welcome. Thank you.

Operator

And we will go next to Debra Coy with Janney.

Debra Coy - Janney Montgomery Scott

Thank you. Good morning, Joe.

Joe Burgess

Hi, Debra.

Debra Coy - Janney Montgomery Scott

Following up on the Bayou and Corrpro outlook, you mentioned in your opening remarks about the backlog and the characterization of it, two-third maintenance is related for Corrpro and one-third for Bayou. Can you just give a little bit more color around what's driving that, what the customers are spending money on that you think those have less exposure to the downturn in CapEx funding that operation?

Joe Burgess

Well, I think Bayou is doing a lot of work on gas distribution pipelines, working on projects that are taking gas from new fields specifically in Northern Louisiana, Arkansas. Large projects works on the TransCanada gas pipeline. Lot of that is being driven, of course, by the new fields and the cost effectiveness of those new fields but also demographic shifts as people look to gain more capacity in the US Southwest and in the US Southeast. So big part of their pipeline is based on projects like that.

Corrpro does a lot of DOT work on existing pipelines. They do lot of product engineering and protection work on kind of within the fence refinery based work as well, tank farms, etcetera. So, a lot of their work tends to be more based on existing assets and assets that are currently unprotected but already built.

Debra Coy - Janney Montgomery Scott

Okay. That's helpful. And then in terms of the drinking water market, how much is cathodic protection used in drinking water lines now. I presume applicable to [duct line] or steel pipes. Is that widely used, is that something that you would be introducing. How do you see that kind of playing out in terms of an opportunity?

Joe Burgess

Well we certainly like the opportunity to have some engineering capability on the front end. Most of our business as you know is kind of reactive to spending plans and cure strategies that are defined by somebody else. So we believe that Corrpro will give us some front-end capability on the water side.

The municipal market for cathodic though is much broader than just water pipelines, most municipal entities will have their own water storage tanks that need to protected, they will have obviously the water pipelines, they will have fuel tanks, they will have the steel and rebar that are in bridges overpasses, it’s a wide variety of that. When we studied that market and this is one of the exciting things we think about the acquisition is Corrpro, the municipal cathodic market in the US looks to us to be about $400 million market. Corrpro while being the largest provider of cathodic protection in the US at $185 million really only does about $7 million or $8 million on the municipal side, most of that with their host town, Houston, Texas. So, if we are able to achieve anywhere near their share on the industrial side that they have on the municipal side, there would be obviously significant revenue growth potential for the business.

Debra Coy - Janney Montgomery Scott

Understood. So would you, this is a $400 million market that applies to industrial, how big of a market is it if you include municipal.

Joe Burgess

$400 million is the municipal market.

Debra Coy - Janney Montgomery Scott

Okay, so they have a roughly 50% share without doing hardly anything in municipal.

Joe Burgess

That’s right.

Debra Coy - Janney Montgomery Scott

Okay, understood

Joe Burgess

And obviously we feel pretty comfortable with our own distribution and marketing channels to the municipal sector.

Debra Coy - Janney Montgomery Scott

Okay. My couple of other quick questions. One is related to the North American margin. As NOR said and as you noted strong gross margin in the fourth quarter although the operating margin was down from the last couple of quarters, I assume that some of that is probably related to the one-time restructuring charges. So, can you talk about what the and probably some seasonality too, but can you give us some sense of whether we think that 7.5% range on the operating margin that you got to in third quarter is kind of what we are looking at for '09, or how are you thinking about that?

Joe Burgess

I think we will do a little better than that in '09. As I said we think there is more to come there. We really only three to four months into restructuring NOR, we certainly think we have strengthened the commercial management that runs our regions. We have brought in some individuals at the corporate level that I think are going to accelerate the upgrade and improvement of our project management capability, which is going to drive further improvements and further shrinkage in the gap between how we did projects and how we execute them. I have been around project management organizations for a long time now and this is really the first company I have been in that judges it’s success by how small the negative is or as-bid to as executed versus judging themselves by how much they can improve on the as-bid. And we are working very hard to transition to a project management organization that focuses on how much we can improve over what we bid versus how much we can preserve against executioners and if you do a math on that there is some pretty significant upside as we continue to improve there.

So, we think we will do a little better. We have also talked in the past, I didn't mention it but we are continuing to focus our marketing people on trying to transition accounts to term contracts and a higher level of negotiated work that gives us a better opportunity to preserve margin.

And then frankly we are not bidding everything we see because we can't make money on everything we see. So, I think when you put those things together we feel like we will be able to continue to improve that margin performance.

Debra Coy - Janney Montgomery Scott

Thanks. One last question on India, obviously you had good backlog growth. There you said, you still see some bidding activity in the pipeline. Does the pending Indian elections concern you in terms of slowdown or disruption in that market for this year?

Joe Burgess

Yes sure, for as much concern as you have in our core traditional markets in North America and in Europe the funding for our types of rehabilitation programs are more out of current period operating expenses in some of these developing markets than they are here in the US. So, there is concern that there might be some volatility there. Having said that, we feel pretty good, I talked about some good visibility on $60 million worth of work in Delhi and Mumbai, and Hyderabad, where they have been taking us into the early first quarter that gets us past the elections. It's our thinking that while some of the more aggressive spend numbers that have been thrown about in India which were $7.5 billion in 10 years for waste water, possibly some of that gets a hair cut. You also have mitigating against that, the use of those types of spending as an overall stimulus within their economy.

So, we are still pretty bullish on being able to grow that business and we are very excited about the out of issue operating performance and productivity performance. We probably if you look at ratios and matrices we probably over spent on getting stepped up for project management, but we think that’s very improved because obviously we are doing very well there.

Debra Coy - Janney Montgomery Scott

Thanks. I appreciate it.

Joe Burgess

Sure.

Operator

And we will go next to John Quealy, Canaccord Adams.

Chip Moore - Canaccord Adams

Yes, good morning. This is actually Chip Moore for John. You are obviously moving pretty significantly into the resources business. Maybe you can just talk about the process how long you have been looking at these opportunities, and kind of wind out the right time.

Joe Burgess

When we started we spent most of the summer looking on these. Again as I said in my remarks, well certainly these are strategic decisions, they are very much rooted in our desire to be a premium return company. And when we looked at the portfolio offerings that we had and we have a sewer rehab business that operates in mature markets and can certainly is becoming more profitable and can be more profitable even still. But it’s a regulated market where really external forces drive demand for those services. So, while we felt like we can do a lot better there we also felt somewhat limited in our ability to generate organic growth opportunities within that market.

We obviously like our water business we have spent tremendous amount of time and effort expanding on our products but it’s a small business that is going to what we think will be a pretty long conversion cycle. And while that will allow us to be successful in doubling our revenues for the foreseeable future, that still left us with a need to find other avenues to accelerate our growth.

We have been in the corrosion protection business in the industrial sector for 20 years, with a business that has generated certainly easily the highest margins within our portfolio businesses. And because of the relatively low CapEx very-very high returns and when we started studying the space adjacent to our linings product which kind of took us to cathotics and took us to coatings, we found that while those returns were not tight lined esque if you will because of the premium nature of that product. They were nonetheless, very robust and had a significant premium to the traditional returns that Insituform has seen in its core sewer rehabilitation business.

So, we felt like with the strength of our balance sheet position that we posted pretty well and enjoyed in 2008. And we were enjoying a pretty strong position with our stock later in the year and we saw the ability to get a couple of quality companies that we think if you look over a four or five year period of time look at comparables, these are 10 and 11 times companies and we were able to negotiate to acquire them at really five times multiples. So, we felt like that when you combine it with the opportunity to gain a dramatic increase in our addressable market size, that would put us in a position to both improve our return immediately, accretive earnings for our current shareholders, but also but us in a situation to really drive organic growth for our self, which would be the real accelerator to getting us to the return profile that we want to be.

Chip Moore - Canaccord Adams

Okay. I guess, if we look, they look kind of like fairly different businesses from your core business. It is the kind of business that should pretty much kind of run themselves or anything or doyou have to add some capabilities to manage them appropriately?

Joe Burgess

Well, to the first question, I guess, I would say, not really. I mean, we are a pipeline rehabilitation company and that’s a lot of what these companies do. Bayou works pretty much strictly with pipelines. Corrpro extends kind of corrosion prevention and cathodic protection from pipeline work to tanks and really any metal structure that needs corrosion protection and prevention. So we don’t see these businesses as different other than they sell primarily to industrial accounts rather than our sewer and water business which sell primarily to municipal accounts. And while I didn’t make this remark in my opening remarks, we think that diversification will provide solid benefits for the business going forward.

To your second point about how to run them, clearly one of the things that we loved about both these companies, is that they are going concerns in their own right. So, you can see the track record, you can see the results. These were not acquisitions that to get to a reasonable valuation or to get to the return hurdles where we needed to take out tremendous levels of cost or tack-on, revenue side synergies etcetera.

Now I mentioned some synergies that we think are very real, certainly taking Corrpro service profile to our municipal markets is very real, but we did not bank on that to drive the valuation or our analysis of if either of these transactions will be accretive to our shareholders. So, we basically thank there can be tremendous upside in these transactions.

Chip Moore - Canaccord Adams

Sure. Maybe if I can move over to these businesses in the contract. So you talked about the backlog and maintenance portion, maybe you can just talk about how these contracts are structured for these businesses and customers opted out, the penalties involved, costs escalation, etcetera.

Joe Burgess

Different for both companies. Corrpro has a much smaller average transaction size, they run off a lot of purchase orders short-term term contracts. It’s a people business, they provide services, while they are vertically integrated like we are in terms of asset manufacturing and fabricating cathodic protection systems and then they have a sizable business in replacement parts and a service profile. So, they really work much more heavily on the maintenance side with whatever the local plant manager, maintenance manager or engineering group is for the respective client.

Bayou tends to work on larger projects, because they are working on both maintenance of existing pipelines which are larger and more significant capital assets, as well as new pipeline projects. So when we studied the Bayou pipeline, we really kind of drilled past whether or not they just had a contract. I mean when I mentioned that they had a $87 million backlog they would actually have contracts for well more than that. We try to drill past to determine where was the pipe actually, because once you make the pipe and get it on a truck or get it shipped, that greatly enhances the likelihood that you are going to protect the pipe with a coding application and actually install the pipes.

So, when we say they had $87 million of backlog it was contacts and then contracts where the pipe was made and shift. So, that gave us a higher level of comfort that those projects will actually going to come to fruition.

You asked the detailed question about cancelability, I am not sure that's a word but we will go with it. Of contracts I think that I mean a lot of these, you can obviously cancel these projects and they have termination fees, but I don’t think that the termination fees in our judgment are enough to have somebody proceed with a pipeline project that is no longer economic. That's why we really focused on if they had made the pipe, because then you pretty much want to protect it or risk kind of loosing that investment. So, the $87 million, we felt like put their coding facilities at a pretty high level of utilization into the spring of next year, with a reasonable level. Certainly by Bayou historical standards of identified work that they needed to meet their revenue targets.

Having said all that, I will go back to what I said earlier, given the economic situation and some of the commodity pricing issues, when we valued these deals we did take down their first year revenue by 8%.

Chip Moore - Canaccord Adams

I guess I can switch gears, one other things we can talk about was stimulus spending. So my understanding that water should get some of that relatively quickly. Maybe talk about your expectations there and anything you are hearing from your customers.

Joe Burgess

Well in terms of expectations embedded in any of the financial performance discussion, we have not. Let me color that for a little bit. I think Insituform has long been a company that kind of structured itself waiting for the damn to bust on infrastructure spending, and maybe did not structure itself to remain profitable on a wider variety of market conditions. So, we have not taken advantage of credit or for any potential impact for the stimulus and any of my comments related to 2009.

Having said that, in both waste water and water it appears, my reading of the bill appears that we enjoy a large share in that market based on the improvements we have seen in the last 12 months and that we anticipate in the next 12 months we find ourselves in an enhanced competitive position we believe. And so, to the extent that the stimulus package encourages communities either because they get projects funded or they get interest rate subsidies through revolving funds. We feel like we are positioned to capture at least our share of that market and probably more, but we will have a cautious view on that certainly in terms of altering our organizational structure to react to any of that.

Chip Moore - Canaccord Adams

And I guess last one from me.

Joe Burgess

You asked about clients, I do think we are seeing some kind of uptick in planning on the client side. As we talked to our regional folks if we have seen some kind of oscillation of our clients between where we are going to defer a few projects to now or not, we have seen a few of our clients in the Southeast that who aren't so bullish on '09 spending that have now gotten back into the game in terms of getting ready to put things on the bid table. We are seeing some increases to the value of some of our term contracts which are kind of annual spend things. So that’s obviously in anticipation that there might be some cheaper money out there for communities to participate in. So we do see, we are starting to see some positive signs, but at this stage it’s certainly not a damn break that would kind of cause you to put a SWAT team on it.

Chip Moore - Canaccord Adams

Okay, yes that fair. And I guess just lastly on your outlook for '09, maybe you can just walk through some of the parameters that you look at your different markets?

Joe Burgess

We see a pretty flat market in North America at the top-line, but improving bottom-line performance that will contribute to overall improvement. We see Europe is flat but with improved profitability just mainly because as you guys know and we have discussed, we had kind of a weathering list early in the year of problem projects in Poland and cost to reshape the management team that were pretty expensive. We don’t expect a repeat of those, so we expect to capture those profits as well as improve overall.

We see a doubling on our important but modest water business and kind of a first time contribution to operating income. Very nice growth in the Asia Pacific markets which will translate to increased operating income growth out of that market. And then obviously we anticipate 10 months of Bayou and nine months of Corrpro and we will be obviously working in the next 30 to 45 days to sort out what exactly that looks like for 2009, but as we said when we are on the road raising the money we expect those acquisitions to be immediately accretive to our shareholders in 2009. Obviously, dramatically increasing the both the top line of our business and the overall EBITDA.

Chip Moore - Canaccord Adams

With respect to Bayou and Corrpro and I guess Energy and Mining business overall. Maybe what's your take on the commodity cycle? How do you look at that, when you look at the 8% decline for Bayou and the modest decline for Corrpro that you expect?

Joe Burgess

Well, I would characterize as the same, we don’t think Corrpro is particularly sensitive to that commodity pricing because of the predominantly maintenance nature of their business. We also think we have a hedge against that, as I said earlier because we do almost no business on the municipal side. While these are growing concerns and I think you will see us take very much or less more approach to integration, because we don’t want to be integrating and loose ownership of the near-term result which is something that we are very focused on here. We do think that business is both less sensitive and has some upsides to perform.

Bayou probably a little more sensitive to commodity, to commodity pricing in terms of win new piping projects get released, somewhat mitigated, they have made a big push in the gas distribution lines which can be driven as much by demographics as they can gas pricing, but overall that’s why we really extended and kind of retched it up to the level of due-diligence that we did on their backlog, to make sure that we weren’t just dealing with paper projects that weren't far along where there were easily cancelable. And that’s really the level that we got to, that’s really the standard we used to create that $87 million.

In terms of, I don’t know how much we get going from getting my views on what commodity pricing is going go to. I will say that when we studied the data that, if you look over the history of the situation $40 oil and $5 to $6 per cubic foot gas was not a price level that stippled capital spending in those sectors. I think some of the dislocation that we have seen is because six to eight months ago it was an $130 and now it's down to $40. We have looked at a lot of projections that suggests by 2011 it will be at $65 to $70 conservatively, which is a lot of the breakeven point for some of the more exotic extractions that you see with the [Tar Sands] in Canada and others.

What we really try to do was to take this business out and look really what their backlog could produce, how resilient had they have been historically. I think the best answer I can give you is the tenure for current profile that I talked about earlier. Have these businesses grown their top line and bottom line every year, no, but those are good solid returns certainly superior to our core municipal business, not as good as Tite Liner but what is. So, at the end of the day we became very comfortable that these were solid businesses that were well positioned to perform in the down side of that commodity cycle. And then of course, structured in with good management teams to create really exciting growth opportunities when economic conditions are better. And as I said earlier we feel like we got them at excellent values.

Chip Moore - Canaccord Adams

Alright, thank you very much.

Joe Burgess

You're welcome.

Operator

(Operator Instructions). We will go next to Steve Denault, Northland Securities.

Joe Burgess

Well you don’t have to remove yourself. You can just come on and say how you are doing.

Steven Denault - Northland Securities

Good morning everybody.

Joe Burgess

Good morning.

Steven Denault - Northland Securities

I wanted to drill down on the Asia Pacific a little bit more, it sounds like there is a potential for backlog improved nicely. Is there in your mind any limiting factor there from a quarterly revenue run rate?

Joe Burgess

Well as we talked earlier we would have more of a concern of general economy impact driving how much the Federal Government in India and some of the other Asian countries that we are participating in. In terms of how much money flows to these projects. I mean because there is a higher proportion of the spend over there, that kind of comes out of what I will just call current period in operating expenses versus the United States which tends to be these multi-year consent decrees that are then backed by multi-year municipal bonding, etcetera. So, we expect to see a little bit of increased volatility. But having said that I mean they are going through elections. We have not seen the government in any formal way back off their stated desire and commitment to spend multiple billion of dollars, they announced $7.5 billion.

Our view is that we have a very well structured and capable joint venture there. If in the near-term that number retches down to 4 or 5, 5.5, we still want to be there with the infrastructure in place to capture our share of that market.

And we feel like, so we feel like it's appropriate to continue to do that work. Near-term bid activity as I suggested between now and kind of early string we see at least $60 million that we feel, we have been on the front-end working with clients to structure those projects and we are hopeful that after the election there will be a reaffirmation of the spending commitment forefronts from the federal side that will even boost our big table opportunity.

Steven Denault - Northland Securities

Okay. Is there anything limiting on the installation or equipment side in Asia-Pacific? And are these operating margins sustainable?

Joe Burgess

Limiting on the equipment side. I would say, we endured some start-up issues this year related to getting the large diameter tube that we needed for these initial shots in country. I think that’s fair, David. We feel like those things are, we feel like those issues have been resolved. We have been working with resin suppliers to get also some increased in-country capability. So, we and frankly other competitors can avoid some of the transportation issues. So, I mean it's a new market for what we do. So there is some of those upfront things that, that have to be managed, but in the near-term frankly, I think as we approve on those things will actually become more cost efficient in the near-term on those things.

The market will have to get larger before we get involved in any longer term decisions, I mean we build the wet-out facility there. But the market will have to get larger before we undertake any decisions about closure manufacturing capability and that will have to be studied closely because, of course, we have pretty significant capacity in both our Batesville and linings facilities in the UK. Now we want to take advantage of that capacity to the best level that we can.

David Martin

Hi, Steve, this is David Martin. I just wanted to add to that is that you are actually looking in '08 operating margin of about 16% which is very reflective of the fact that it's been a small business. A lot of the profitability is come from equipment sales and royalties and things of that nature, as we ramp up our business in India you won't see the traditional margin as high as that, but we still see them north of those of our existing businesses particularly North America. So, you may not see 16% but you will certainly see something very healthy there.

Steven Denault - Northland Securities

What do you think the revenue on that business in that segment can be in '09?

Joe Burgess

Yes, we are not really about our revenue guidance, we think we will see very strong growth, it’s a new market for us. So the more typical relationship that you have between translating your backlog to revenue, those things I guess still been understood, but clearly we are striving to get to as I said in $80 million backlog we expect obviously very strong revenue growth because we are going to give full-year of the implementation and execution on the two large projects that we awarded. But our aspirations over the next two or three years are certainly to drive that into $100 million and $125 million plus business.

Steven Denault - Northland Securities

Okay, that’s fair enough. If I can just ask one final question. The sequential decline in your overall backlog, and I think is weighing a little bit on the stock today and you made reference to some of the similar awards being pushed off in early '09? I mean can you help people maybe get comfortable with where backlog is today versus where it was on December 31?

Joe Burgess

You mean for '07?

Steven Denault - Northland Securities

Given the $249 million in backlog was down sequentially, $43 million, $44 million and I think that’s what weighing your stock today, but you made reference to some projects being awarded in early '09. But it's sort of directional qualitative comment.

Joe Burgess

I think you have to; the problem with, I kind of look at the year-over-year figures where if you take NOR it was down $10 million and unfortunately you cut these things off and we were pretty disappointed about what we put in backlog it's a hard backlog number and there is no pipeline in it.

So, were just addressing the fact that we felt like we went into the year and roughly the same position of hard backlog for 2009 as we went into 2008. And in fact in NOR there were some projects that were bid and we had been selected if you will, but for a variety of reasons did not get into a hard contract until the first quarter. So, if you put Clark County and we had been able to achieve, get some of the Hawaii work to contract as we had anticipated in the fourth quarter, those would have essentially wiped out this December 31 cut off backlog reduction.

So, we don’t really see our backlog position as any different as we ended 2007 with the exception that the margins that are in that backlog are more robust. Same thing with really Tite Liner’s backlog which is also down, but mainly related to the fact that we worked off some of the larger projects in Chile. Have been awarded some significant projects within our Mexico joint venture that replaces those, but those we do not anticipate until getting the contract really here until the end of February and March. And that just makes the backlog somewhat lumpy. But again we view it as essentially the same position.

As we entered this year although we have what we think our more exciting growth prospects certainly in the Asia Pacific market to increase our backlog.

Steven Denault - Northland Securities

Okay, and that’s fair. Thank you.

Joe Burgess

You’re welcome.

Operator

And we will go next to Glenn Wortman, Sidoti & Company.

Glenn Wortman - Sidoti & Company

Hi, good morning guys.

Joe Burgess

Good morning

Glenn Wortman - Sidoti & Company

Just aside from the stimulus book, do you have any impact on the new administration you may have on your business perhaps and more forcefully EPA or any other effects?

Joe Burgess

Well our core sewer rehab is driven by regulation, so to the extent that the EPA was more aggressive with current client communities or potential client communities. As I said earlier related to the stimulus bill, I think that once that trickled through to shovel ready projects that would be helpful. But it's just because of the timing and your inability to predict how a more forceful EPA and how long that takes to actually manifest itself with more rigorous enforcement. It's not something that I think it would be prudent for the company to plan for.

Glenn Wortman - Sidoti & Company

Thank you. Then one other question. Do you guys have an update on what's your cash position and that just will look like following these two acquisitions?

Joe Burgess

Sure. David?

David Martin

Yes, Glenn, it's David Martin. Debt position is going to be approximately $115 million with the addition of the term loan that we will be taking as a result of the acquisition of Corrpro. Cash position will be down somewhat from $99 million that you see there. We are going to use approximately $30 million associated with the acquisition there. So thats $60 million.

Glenn Wortman - Sidoti & Company

Okay. Thank you very much.

Operator

Our next question comes from Jeff Beach, Stifel Nicolaus.

Jeff Beach - Stifel Nicolaus

Good morning, Joe.

Joe Burgess

Good morning.

Jeff Beach - Stifel Nicolaus

The large project wins in North America and the US and Canada recently. I remember back it seems like in '03, '04, '05 time period that some cities were looking at trying to break up projects into smaller pieces to get more competition. And all of a sudden you are seeing a flood of these multiple million dollar projects. Is this is a kind of change in strategy and if it is, what's behind this?

Joe Burgess

Well from our standpoint we certainly encourage communities to do that. One, because we think we can offer them better pricing, to the extent that they bundle work and allow us to execute on $4 million to $5 million versus a sequential series of $400,000 shots that require separate biding, they also require separate mobilization, separate demobilization, you become very inefficient on your up front inspection, your cleaning work. So I don’t think that, that’s while there is a maybe a gut sense by some that fosters increased competition. It does bring significant additional costs that are in the main pass-through communities. So we think we can certainly add, get better pricing when the contracts are larger. So we certainly drive towards to that.

We have seen a tendency of communities to do that whether we are, I would stop sure of taking credit that we are kind of driving that trend with our marketing efforts, but we certainly are seeing that a number of communities feel like they are gaining efficiencies by. And I think better control over quality, because the other down side of doing 20 bids is that you might end with seven or eight vendors with a variety of quality and service capabilities in your system. So I think communities also feel like they can get better overall of the quality side of the equation by bundling some of those transactions. And there are more on the horizon that we were expecting to be at the bid table here in late first quarter early second.

Jeff Beach - Stifel Nicolaus

When you move up into the $5 million up to $13 million range how many legitimate competitors do you have that can take on a project of that scope.

Joe Burgess

It certainly narrows the field, I would not have feel qualified to opine on the legitimacy of any of our competitors.

Jeff Beach - Stifel Nicolaus

How many competitives bids might you have when you get in to something that size.

Joe Burgess

You go may be have, seven or eight people that can effectively qualify to that work they are certainly, probably down to two or three and then of course that is, that can be may be plus one, plus two based on what they actually want you to do. But the real, the real issue is that it becomes much more difficult and I think communities are being focused more on some of the things that play to our strengths frankly like our you go to a $15 million or $20 million you are more interested in the quality of the performance guarantees, the quality of the company's financials to back stop the warranties. Their ability to bond and to maintain those surety arrangements for multiple periods of time.

So, I mean look, it certainly works to our advantage we work with our key accounts to try to offer them much more effective pricing and show them the benefits of this type of bundling and I think it certainly helps us against, it certainly helps us relative to some of the competition that lack some of those capabilities.

Jeff Beach - Stifel Nicolaus

And last question, I know over the last several conference calls you have focused a lot on efficiency and it’s a driver right now. I can't remember specifically on the sewer rehab side, something new and different on the technology side, you know, it was some of the carbon fiber linings a while ago, and there are some other things, is there any new technologies any thing that you can talk about that you have been developing?

Joe Burgess

I think we have already talked about it. I think the main comment that's driving efficiency is pushing through our field organization the actual utilization of some of these technologies. I mean, we developed infusion, for example, which is a product that we pull through the line rather than our traditional inversion techniques, and it's both more efficient at the wed-out and a faster install, which allows us to get more productivity out of the crews.

And I know, early in the year, we frankly did not have the percent utilization of that new technology in the field that we think the conditions that we are working in suggested and we worked very, very hard to push that from, I want to say a high teens percentage of our small diameter work to ending the year somewhere closer to 30% of utilization of infusion, which saves money for the company.

Jeff Beach - Stifel Nicolaus

Great. Thank you.

Joe Burgess

You are welcome.

Operator

And we'll go next to Chris Blackman, Empirical Capital.

Chris Blackman - Empirical Capital

Thank you. I appreciate it. Hi Joe, hi David.

Joe Burgess

Hi Chris.

Chris Blackman - Empirical Capital

Going back to the stimulus plan, I know you mentioned, you really have not put anything into your projections there. But could you break up where some of that money, where do you expect some of that money to go? I know I think, he is looking at possibly $6 billion towards sewer, $2 billion towards drinking, and then I know there is some funds for military bases. Some of that will go to water and then some rural water and waste suppose it goes to farm bureau. Can you give us some clarification on where you all see dollars being spent from that plan?

David Martin

Well, the $6 billion is sooner with work largely like this. So, that money will get dolled out largely to state clean water revolving funds and in the main act is then kind of interest rates subsidies for communities that apply to those funds for financing and there is obviously requirements that the projects be already, this type of things.

So, once that money gets distributed or allocated to the state level, we are hopeful that you will see communities take advantage of the opportunity to essentially get, I mean, at today's rates any type eventually interest rate subsidies essentially makes it free money, not quite a grant, but no cost, no long-term cost to the money. So, communities will come up they will apply for that financing and hopefully it will spur some increased project activity.

And then we would be there with our position, both in terms of market share and cost effectiveness to capture that work. I think the other good thing is something we were talking about earlier which is those projects are likely to fund but just what I call bundled or larger remediation efforts in communities because you are not going to apply for that type of financing to go do $400,000 shot for manhole A to manhole B. You will be more likely to be up in the $15 million, $20 million, $30 million range which we think makes us even more competitive because of our cost advantages and our project management capability.

Chris Blackman - Empirical Capital

Right, and I mean this is only stuff that will be turned on pretty quickly, I mean, once they make that decision I would assume, and it seems like Insituform should benefit this disproportionally in that. So none of that's in your guidance. In short of giving guidance, can you give some expectation of what you will may, you will be able to achieve from that?

Joe Burgess

No, whatever, I mean we enjoy 35%, 40% market share and improving margins in the business. So whatever additional monies go to the sewer, pipeline, rehabilitation market we would expect to benefit to greater degree than that, with that flow of funds. But at this stage it just too difficult to predict how long it takes for them to make a final decision, how long it takes to get the money at the state level.

Ones it's at the state level there is obviously an administrative burden to judge which project should get the funding. So we are hopeful but like everybody else by the way just for we are hopeful that it has the positive impact on our economy that, that the Washington leadership believes it will have but we are also hopeful, it will flow additional project opportunities for us as well. And we will be there to capture them. We just do not want to be a company anymore that’s waiting around for that.

Chris Blackman - Empirical Capital

I appreciate it.

Joe Burgess

I said that earlier.

Chris Blackman - Empirical Capital

But obviously as shareholders and watching the value of the equity take the deteriorations taken in the last month or so it gives us some indication what kind of upside their possibly could be. What about on the disposal, say the rural water and waste disposal that goes with Farm Bureau. Is that any different?

Joe Burgess

We are not really in that market, so I do not really have any information or believe that, that’s much of a driver for what we do.

Chris Blackman - Empirical Capital

Okay. Commodity costs would you spend a little bit more time may be touching on commodity costs, raisin cost and are you with commodity costs coming down somewhat, are you seeing any pricing pressure from your customers at all?

Joe Burgess

Both of course, resin and fuel costs are down pretty dramatically, certainly since from the third quarter and most of the 2008, particularly third and early fourth quarter. We are seeing that benefit and certainly in our cost structure and working to capture it. I can not point to really at this stage any trending that, any of the competition is just straightforward passing that through to the community. I am sure there will be some of that just because it’s a pretty dramatic cost shift so there will be a natural tendency to I think for some of our competitors and in even all sort of case by case basis in some of our regions, to think that capturing all of that shift might be a little greedy.

Chris Blackman - Empirical Capital

But you aren’t seeing customer put pressure on you at this point as far as price.

Joe Burgess

Well they tend to put pressure on us just through the competition and we are not, I do not think we have seen any situation we are like on our term contracts, where we have given unit pricing, where we are being asked to renegotiate those?

Chris Blackman - Empirical Capital

Okay this time last year your company was suggesting that I believe yourself I'm looking behind on $150 million business in the next three to five years. Is that still consistent?

Joe Burgess

Yeah, we do.

Chris Blackman - Empirical Capital

It’s doubling every year as I guess but does get us there. Okay thank you very much

Joe Burgess

You are welcome

Operator

(Operator Instructions) and Mr. Burgess with no other questions standing by, at this time I would like to turn the conference back over to you for your additional or closing remarks.

Joe Burgess

Thank you. I will just say to those on the call, thank you again for joining us again these are very exciting times in Isituform. We feel like the company is on a solid footing as it has ever been and well positioned to optimize its capability really across all its market segments and we are certainly excited about that and energized by it. And are anxious to get on and are already actively working on delivering and we are very happy and pleased with the 2008 results and we are even more excited about what we are going to be able to do in 2009. So, thank you very much.

Operator

And that does conclude today’s conference call. We do thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Insituform Technologies, Inc., Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts