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Executives

Al Woods - Chairman & Interim CEO

Tom Vossman - SVP and COO

David Martin - VP and CFO

David Morris - SVP, CAO and General Counsel

Analysts

Arnie Ursaner - CJS Securities

Richard Paget - Morgan Joseph

Chip Moore - Canaccord Adams

David Manthey - Robert W. Baird

Steven Braverman - East Hill Partners

Debra Coy - Janney

Sam Ophta - Fortress

Adam Thalhimer - BB&T

Francesca McCann - Stanford Financial

Insituform Technologies Inc. (INSU) Q4 2007 Earnings Call March 5, 2008 9:30 AM ET

Operator

Good day and welcome everyone to the Insituform Technologies' fourth quarter and year-end earnings results conference call. Just a reminder, today's 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'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 the 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'd like to turn the call over to Insituform's Chairman of the Board and Interim CEO, Al Woods. Please go ahead.

Al Woods

Good morning and thank you for joining us for Insituform's conference call on the fourth quarter and year-end 2007 results. I am Al Woods, Chairman of the Board and Interim CEO of Insituform Technologies. Joining me on today's call are the following Insituform executives, Tom Vossman, Senior Vice President and Chief Operating Officer; David Martin, Vice President and Chief Financial Officer; David Morris, Senior Vice President, General Counsel, and Chief Administrative Officer. After my opening remarks, we will address your questions.

2007 was a very challenging year for our company. We are pleased to report that we were able to substantially complete the shutdown of our tunneling operations in the fourth quarter. As a result, we have reported tunneling as a discounted operation for all periods presented in your press release. You will note that we have reported income from continuing operations of $9 million or $0.33 per diluted share. These results were favorably impacted by a one time litigation settlement of $4.5 million pre-tax.

However, we are not satisfied with these results as they are well below what does company can and will produce for its stockholders. That said I am an encouraged by the progress we've made as a company in the fourth quarter. Please recall when we last spoke in October, we promised aggressive action in four areas they were; first, restoring growth and earning stability to our North American CIPP business unit. Second, geographic and product diversification, third, cost reduction and fourth, the incorporation of an acquisition strategy.

Allow me to give you a brief recap of our progress in these areas. With regard to the North American CIPP business you are all familiar with the market weakness that has challenged us throughout the past year. I wish I could tell you that we expect the market to rebound in 2008, but we do not.

With respect to the marketplace we expect a flat to slightly down year. That means we are going to have to market aggressively, manage our projects efficiently and continue to reduce costs to improve results in a down market.

We are also mindful of the need to be well positioned for the eventual rebound in the North American marketplace. Despite the current weak market we maintained our backlog volume and improved our backlog margin in the US CIPP business unit during the fourth quarter.

We are very encouraged about completing the fourth quarter with a highest level of awards and apparent low bid volume. We have experienced in the most recent eight quarters. We have completed the realignment of our sales force to increase focus on negotiated business and we expect this realignment to yield positive results in 2008.

To improve our operating efficiency we restructured our project execution teams and put many of them through extensive retraining to resolve the execution problems that played thus early in 2007. We have realigned our cost structure in the field including the reconfiguration of crews and equipment to be better positioned to respond to the increasing volume of small diameter work.

We also have leaned up our fleet, and employed new two delivery modes to further reduce operating costs. We expect these changes to result in annualized cost savings of approximately $5 million.

With regard to geographic and product diversification the news is also encouraging. During the fourth quarter we were awarded projects in India and Hong Kong valued at more than $48 million.

Additionally, our European operations had one of its best quarters in history and for the full year recorded revenue growth of 24%. This growth was partially fueled by expansion into new markets in Eastern Europe. In Europe, year-over-year backlog grew 13%.

As we have projected we fully expect to have $80 million of backlog by the end of 2008 in our new international ventures. The continued success in the diversification of our markets will provide protection against discreet market cycles, such as we are experiencing in North America today.

At our Tite Liner operation revenue declined year-over-year, but profitability increased. The revenue decline was largely associated with a short-term decline in work in Canada. Factually, we entered 2008 with record backlog and we remained bullish on Tite Liner, expecting significant revenue growth in 2008.

We continue to position our Insituform Blue products in the marketplace. While we expect and anticipate that iBlue will contribute only modest profitability in 2008, we continue to believe that iBlue is an extremely important part of our future.

Our recently awarded Hong Kong projects include a significant portion of iBlue work. In 2008, we will pursue iBlue work in North America, Europe, Asia and Australia. We anticipate making further announcements regarding additional exiting iBlue projects in the near future.

We continue to see expansion of our iPlus Infusion products across North America and most recently Australia. We also recently qualified our iPlus Composite proprietary product for project work in India.

I touched on our progress in field cost reduction in my remarks on the North American CIPP business. We previously advised that we would eliminate on an annualized basis, $12 million in overhead by the end of 2008. As you will note in our fourth quarter results we have made progress towards this goal.

Regarding acquisitions we have nothing to report at this time, however we continue to evaluate opportunities that will allow us to build on our existing strengths in the market or that give us access to proprietary technologies that are strategically valuable and allow us to leverage our distribution channels.

In summary while we are not pleased with the results we reported last night, we believe that we are moving in a positive direction. We are taking the steps necessary to achieve an appropriate level of growth and profitability in the future.

Before opening up the line for your questions, let me touch on two other areas I expect you will want to discuss. First, you are aware of a schedule-13 filing by TRF Master Fund and Water Asset Management. And the certain demands they have made on our Board of Directors.

As is our practice, we frequently communicate with our stockholders and we expect to continue to do so. With respect to Water Asset Management's demands, we will communicate with our stockholders at the appropriate time and in an appropriate manner. The purpose of this call is to discuss the company's earnings and its prospects; we will not address Water Asset Management issues on this conference call.

Second, I will update on our CEO search. I'm pleased to report that we are at the end of this process and expect to make an announcement within a few weeks. I am enthusiastic about the news that we expect to share with you shortly on this subject.

With that I will ask the operator to open the line for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) 0We will take our first question from Arnie Ursaner with CJS Securities.

Arnie Ursaner - CJS Securities

Al, good morning.

Al Woods

Hey good morning, Arnie.

Arnie Ursaner - CJS Securities

First question I have is a major swing versus my expectation was on the SG&A line. I am just trying to kind of backend fill here. We had previously thought you had as much as $4 million of corporate G&A in the tunneling section. It's pretty close to the amount that you beat us on the SG&A line. What was the SG&A in tunneling and now that it's discontinued how much did that impact Q4, SG&A, if at all?

Al Woods

Thank you Arnie, I am going to allow David to respond to your question.

David Martin

The one thing that is somewhat confusing with that, is the fact we that we had discontinued operations at the end of the year. We had certain amount of corporate allocation that was included in tunneling before. That's no longer allowed to be allocated to tunneling, so some of that came back to the other segments. But within the tunneling segment itself there was only about $0.5 million of cost for the quarter. It's included in discontinued operations. The fourth quarter operating expenses were reduced significantly because of several one time things, but it's also part of our ongoing cost reduction effort.

Arnie Ursaner - CJS Securities

And a little more time on some of the one times. I assume you've reduced headcount and I am also guessing you may have had some bonus reversals. Could you just highlight what the one times were the reduced SG&A expense.

David Martin

The first item relates to cancellation of the stock compensation by senior management, representing about $700,000. There were as compared to prior periods there were no little or no incentive compensation accruals made during the quarter. Therefore in a normalized basis you would have seen more expense. But in the quarter there was little or nothing. And then the rest of the reduction does come from actual expense reductions some of that being field expense reductions and some of that being corporate as well.

Arnie Ursaner - CJS Securities

Final question is a little more strategic. I know that there is a major engineering publication each year that does a survey of buyers of CIPP processing. And a year or so ago it had given us a warning things we're getting pretty tough. What is the current status of that and I remember Al you had indicated when you first came in, that you are spending a great deal of time with customers trying to get a feel for what you needed to do to get your percentage of their dollars. So two broad questions one is what are the dollars you are seeing being spent. Number two, what were you told by municipalities at that point and given the changing environment for municipal revenues, what would you expect to see today?

Al Woods

That's a compound question. If I fail to respond to an element Arnie come right back and let me know which I missed. Let me begin with the end of your question, which was what did I hear from municipalities. If you recall all of that was teed up by a belief that there was a correlation and causality between a reduction in housing starts and spending in CIPP rehab in North America.

I was very interested in trying to understand what were the two drivers. When I went out and spoke to our primary customers, I heard more that spending was driven by primarily consent degrees. And they were spending as they were mandated too. And so in summary that was the principal issue that influenced patterns. Now I also found that in terms of how moneys were being spend that there was a purposeful shift from high cost projects to low cost projects to gain increased mileage out of the spend while trying to manage the spend.

So year ago a shift to smaller diameter projects to satisfy remediation mandates. So that said I didn't quite understand your question about the piece of about the engineering can you help me with that one.

Arnie Ursaner - CJS Securities

Good. There was a survey done last year which, it's not every year where it basically does a review of all of the major buyers or spenders in municipalities for CIPP work. To indicate kind of an industry demand number, it's an annual survey done were again, its been a pretty good indicator of future demand?

Al Woods

Got you.

Tom Vossman

Yeah. Arnie, this is Tom. I think you are referring to the UCT survey that actually just came out. If I have got it right and our marketing department has it now. It's projecting a modest growth in spend. I want to say the numbers between 2% and 3% it's in a low 2% range like 2.1. The portion related to rehab and the net sub portion related specifically to CIPP is projecting to remain somewhat flat in the low to mid 60% range of that means spend on rehabilitation.

And that seems to be, we also have recently completed a macroeconomic study try to look at the indicators and then what we see in our own funnel through our sale force. And if you triangulate that data it would suggest you that the four the impact of inflation we would expect the market to be somewhere in the 1% to 2% range for the next 12 months.

Al Woods

Before we leave that point, which is the third piece of your question as I heard it and if I didn't hear it correctly, let me know. Our experience given the spending patterns is encouraging because we seem based on what we see, we seem to be growing, our win rate. And that's very; very encouraging to us in terms of how we will sustain our operations and achieve the desired operating results in this soft market. So our win rate appears to be growing, which is very encouraging to us. Was that the last piece of your question?

Arnie Ursaner - CJS Securities

Yes, it was. Okay. Thank you.

Operator

Thank you. We will go next to Richard Paget with Morgan Joseph.

Richard Paget - Morgan Joseph

Good morning everyone.

Al Woods

Good morning Richard.

Richard Paget - Morgan Joseph

Now that your mix is increasingly become international, I wondered if you could talk a little bit more about the risks involved and how you structure your contracts and may be you can use the Delhi contract specifically just given that its such a different environment to work with them?

Al Woods

Yes, let me begin and then Tom will fill in. Let me begin by affirming that moves, projects and what I will refer to as exotic geography is scrutinized quite heavily. We are very concerned about risk associated with projects and so there is a rigorous process that is undertaken to ensure that we have essentially captured all of the risk components and understand if you will what we're getting into.

In markets like that, we tend to focus on the Tite projects that fall within, if I can use a vernacular, our sweet spot, things that we are known to do very, very well. And we try to align those competencies with the essentials or the specific specifications of the project that we are undertaking.

So to boil that -- to still that down, our project in India as an illustration happens to be a large diameter project in a type of working environment that we are very familiar with and conditions that we are very familiar with. We have examined it and scrutinized it and we are very, very comfortable that it falls within our bandwidth and we can handle it with a modest amount of risk.

We also have aligned ourselves with one of the most prominent utility contractors in India. So we do not assume that we fully understand the environment, but we are confident that aligned with this partner we are well positioned. That said, in a sort of overview or macro way, Tom.

Tom Vossman

Yeah Richard, although we don't like it with the softness in the North American market, one of the advantages with our scale we can offer is to provide training, resources for abroad. We have been able to assist some of or international partners in the construction of wet out facilities with our engineering group. We are taking some of our seasoned veterans in large diameter works, sending them for example to India with perhaps half a crew to provide onsite training with people who have 10, 20, 30 years of experience.

Then the third thing we've done in addition to the -- we have a process, it's pretty rigorous on dual corporate review of the estimates with people that have estimated this work for years. The last thing is we are bringing many of our partners and crew members over to the US. And we are actually training for weeks on end, some of the crew members on the various aspects of CIPP installation, curing the tube, tap cutting extra. So it's been very good and fortunately with our size we've been able to help in all those areas and in particularly your question were on India and it seems to be setting up very nicely.

Richard Paget - Morgan Joseph

Okay, bottom line it's still a fixed price contract and contractually you haven't been able to kind of pass through any of that risk back to customer?

Al Woods

Can you help us understand, can you give us that question one more time because I want to ensure that we understand what you are asking?

Richard Paget - Morgan Joseph

Sure, as you guys are still doing fixed price contracts here and I know you've outlined how you've rigorously looked at it and tried to take any safeguards but, it's still a relatively new market for you guys. And I know there is lots of other extraneous things that can happen and I guess as you call that as an exotic locale, there's nothing that you can do cost plus or it's still a fixed price contract, I guess is what I am getting at?

Al Woods

Yes, that is true. It is a fixed price contract, however some of the more favorable elements of doing work in that kind of environment; A, the specifications of the work we know a number of competitors. So it's the type of project where that requires a history of a pretty sophisticated organization to handle. So what's the meaning of that, the meaning of that is you offset some of the risk by pricing just a little higher, so the margins are little more attractive? As a result of the margins being attractive we have the cushion that allows we believe based on our assessment, that allows us to engage this kind of work with a reasonable and I say reasonable because there is always risk, but a reasonable amount of risk.

Richard Paget - Morgan Joseph

Okay. And then moving on to Tite Liner sequentially had a nice jump in backlog. Was that one large order or it was amalgamation of several orders?

Tom Vossman

Yeah, Richard, this is Tom, it's an amalgamation of several orders. They typically don't see a lot of large project work. On occasion we'll see some international work with some of our customers that's pretty large in scope, but the backlog we've seen at the end of 2007 is across the US, South America some of our offshore work. So it's diversified very nicely, we still feel very strong that we'll probably perform work on five continents this year with Tite Liner.

Richard Paget - Morgan Joseph

So do you see that being a seasonal jump or do you see this being more of a longer term trend?

Tom Vossman

Well, as long as, the prediction is that oil and gas industry is going to kind of stay where it is and as long as that's true, we see additional investment popping up all over the world that requires the type of work Tite Liner does. The same thing holds true for the mining industry, as long as prices hold on certain commodities it seems to be a very strong market for us. So given that the indications are that both of those industries are to remain strong we see this as a trend that should continue.

Richard Paget - Morgan Joseph

Okay. Thanks. I'll get back in queue.

Al Woods

Thank you.

Operator

We will go next to John Quealy with Canaccord Adams.

Chip Moore - Canaccord Adams

Hey, good morning this is actually Chip Moore on behalf of John. Looking at backlog can you talk about what you are seeing with pricing and then with the tunneling business going away may be address kind of margins for the new contribution?

Al Woods

Chip, its Chip or Chuck Chip is correct.

Chip Moore - Canaccord Adams

Yes. That's it.

Al Woods

Thank you, Chip.

Tom Vossman

Yeah Chip this is Tom. We've indicated to you that we see a flat US market overall with the North American rehab group. I will tell you that in certain regions in North America we are seeing improvements in market activity. It's not necessarily an all encompassing flat market and in those areas what we've seen that we've been able to raise prices and take advantage of those opportunities.

Other areas of North America still remain soft and it's making backlog a challenge. But overall we've seen a slight up tick in our margins in the North American market. With respect to Tite Liner as tunneling goes away we expect to see margins generally in the same range that you see them in 2007. We don't see much decline at all. I wouldn't expect a whole lot of movement upwards either because we are doing projects in further distances, but generally we are seeing opportunities to raise prices where we can.

Chip Moore - Canaccord Adams

Okay. Great and with the tunneling business going away can you talk about visibility? Is that something has improved now?

Al Woods

I want to make sure we understand your question. Do you mean do we have greater visibility into our markets as a result of tunneling no longer being a part of our operation?

Chip Moore - Canaccord Adams

Correct, in terms of your outlook into revenue just does that improve your visibility now that that goes away?

Al Woods

I can tell you what I think it does improve. It improves our focus on our fundamental business. It improves our ability to drive our core issues to produce the proper results in our core business. I think in terms of the allocation of executives and corporate energy there is an improvement, because we are less diversified and we are all driving to the same kinds of issues. And I don't know if that responds to your question but that's how I would respond to the question I think I heard.

Chip Moore - Canaccord Adams

Sure. I guess what I am trying to get at is any plans now to introduce some sort of kind of broad top line guidance or directional revenue outlook?

Al Woods

Not at this time Chip, but that's not at this time.

Chip Moore - Canaccord Adams

Great. Thanks.

Operator

And we will go next to David Manthey with Robert W. Baird.

David Manthey - Robert W. Baird

Hi, good morning. Al, I was wondering if you could please help us understand what would you say is a normal or acceptable gross margin in the North American CIPP business. I know you are driving to improve margins but what level would you consider okay? And second what do you think the key drivers are to improving gross margin in the core sewer rehab business?

Al Woods

I am going to give you my impressions and then I am going to turn it over to both David and Tom and because there may be a small divergences in view. First, were you asking specifically about North America?

David Manthey - Robert W. Baird

Yeah.

Tom Vossman

What were you asking about?

Al Woods

Was it North America or CIPP business in general?

David Manthey - Robert W. Baird

Primarily, North America.

Al Woods

Okay, thank you. Because there is a variance in the expected margins which we experienced in a variety of geographies. When I look at North America, I believe in the current environment that a range of 18% to 20% all in, is the range that we are going to have to learn to live with.

How we learn to live with that, we reduce our cost, we are more efficient, and we are more productive. As we examine ourselves or benchmark ourselves against others in the marketplace, both publicly visible and not. It would seem that we are competitively productive.

We have to, we believe take advantage of our technology, take advantage of our proprietary products that we have at our disposal that others do not, to reduce our costs so that we can leverage our operations to produce improved results in this 18% to 20% gross profit margin environment.

David Manthey - Robert W. Baird

Yeah, thank you. And second in terms of the industrial and negotiated work that you are targeting, could you talk about the efforts that you have made to target that sector of the business and then also what percentage of your North America backlog today is non-municipal.

Tom Vossman

Yeah David this is Tom. Can you repeat the first part of your question?

David Manthey - Robert W. Baird

I'm just wondering what steps have been taken to more aggressively target the industrial/negotiated type of work?

Tom Vossman

Okay, yeah great. We announced I think last quarter on the call that were in a process of realigning our sales force to create more focus and visibility on negotiated work. We have completed that realignment, it's now in place, we are very optimistic about what we are seeing in early activity.

Actually I get information on a weekly basis about the activity of that sales force in terms of how much they are pursuing non-bid work. I don't have the number to separate industrial, let's say as just a sector for you, but what I'll tell you is that as we come out of fourth quarter and enter 2008 we are seeing a backlog. The percent of our backlog that's from what I will just define as non-bid work in the range of 22% and increasing. So we are pleased with the progress that we're making on those lines.

Al Woods

David can I come back to you, you were asking me about North America rehab and you are asking about something information and may be directional. And I said doesn't it improve our ability to that and would we, I sort of implied not at this time. If you're asking as an organization on a consolidated basis what our outlook is, can I respond that way, would that be a satisfactory way of responding to your question?

David Manthey - Robert W. Baird

Sure.

Al Woods

We are looking to top line growth of between 5% and 10% for the year on a consolidated basis without tunneling.

Operator

And we'll go next to [Steven Braverman with East Hill Partners].

Steven Braverman - East Hill Partners

Good morning. I have a three part question. Have you been approached in anyway during the past year by any strategic or financial buyer? If you were to retain an investment banker would you disclose this to your shareholders? And thirdly have you in fact at this time retained an investment banker? Thank you.

David Morris

Steven, this is David Morris. Al, somewhat address that issue with regard to demands of Water Asset Management, and we did not believe that this is the appropriate forum to respond to those questions. We will correspond with our shareholders at the appropriate time and in the appropriate manner.

Steven Braverman - East Hill Partners

When might that be?

David Morris

We will make that announcement, when we make the announcement it's premature at this time to say when we will be doing that.

Steven Braverman - East Hill Partners

So you can't disclose whether or not you've retained an investment banker at this time?

David Morris

As I said at this point we are not going to discuss those issues.

Operator

We'll go next to Debra Coy with Janney.

Debra Coy - Janney

Good morning everyone.

Al Woods

Good morning, Debra.

Debra Coy - Janney

Follow up question on the margin issue. You said that margin has improved in backlog in the fourth quarter; you said that gross margins look like they are going to stick in the 18% to 20% in the North American market, and it sounds like the improvement in the fourth quarter was more related to some geographies. So, I guess what I am trying to understand is how we should think about the overall margin direction in rehab and another way to look at that is how should we think about the mix.

Certainly you have announced some large international projects; we haven't seen the case filing yet. But I am guessing that rehab was probably 20% or so international at the end of 2007. Can you give a sense where that should end up or roughly kind of where the directional mix is going for 2008? And then how we should think about margins in the offshore business?

Al Woods

Good, yes that's multi part but let's start with David lets see what we'll all pitch in.

David Martin

You are right Debra the margins in the international market area at a higher rate than what we're seeing in North America and we said 18% to 20%. We're probably talking about in the international markets particularly in Europe it's in the low 20s margin wise. And I expect the same for our other international markets including Asia. Overall as a mix this coming year margins will improve, simply because we were seeing margins in lower than 18% to 20% for the bulk of 2007.

Debra Coy - Janney

How is the -- can you say where the international versus US mix ended up at the end of 2007 and it maybe too early to tell, but if you have any idea of how that might look at the end of 2008?

David Martin

We comment overall in relation international --

Debra Coy - Janney

Within rehab?

David Martin

I mean total international is about 25%, I think about 30% actually if you look at the strict numbers, but that includes some of the international Tite Liner business.

Debra Coy - Janney

Right.

David Martin

So taking it just into rehab I think it's more like a lower less than 25%.

Al Woods

So I think its something like 23%, something like that Debra. Now David 2008.

David Martin

I expect that to be a little bit higher in 2008. As far as the strict number probably little bit in excess of 25%. Physically as we've gone into India, India is going to be a part of the revenue in 2008. Therefore that will have an impact on it the rest of the other international growth outside of Europe is going to come into equity earnings so you won't see the top line growth.

Debra Coy - Janney

That's right, okay.

Al Woods

I was just going to mention part of the complication and responding to that question is the mixture of how we're structured and some of that international doesn’t get consolidated. It shows up in equity earnings, so its --

Debra Coy - Janney

Exactly, so we should expect to see that line moving up in 2008 as well.

David Martin

Yes.

Debra Coy - Janney

Right, okay.

Al Woods

Our ventures in Hong Kong and Australia had lost money in 2007, and we don't expect to see that this year.

Debra Coy - Janney

Alright, that is helpful. And then looking at the market and as you said earlier just and a lot of discussion about what's going on in the market. And Tom you mentioned that you own survey work is showing that it looks like it will be flat in North America. I am wondering if you have any early thoughts on the municipal bond disruption that have been taking place with the auction rate security market? And reduce issuance of bonds, is that something you are keeping an eye on, something that you are concerned about having an impact later or do you feel that given the consent decrease and given the ongoing collection of sewer fees at a local level that unibond issuance isn't a major driver for your business?

Al Woods

We have been trying to figure that out and I had discussions with other people who are not necessarily in this direct business, but access business through municipalities in similar fashion. And we have been trying to understand what the potential impact of the bond market disruption will be on our businesses. We have not seen any sign of it to date Debra. The municipalities are not exhibiting behaviors to us thus far that would imply that there is a connection. It doesn't mean that there won't be one and its something we need to keep and eye on and be very cognizant of sensitive too, but as of right now the activity that we are looking to down the road seems to be at the same rate or even a slight up-tick, Tom?

Tom Vossman

Yeah, Debra the visibility we have and this isn’t largely been driven by the internal survey we talked about last call where we pulled -- I think our top 355 customers. Projecting out having our sales force talk to them on a much more frequent basis, I would concur with Al that internally we don't see it as a major driver. We see the consent decrees in place and some activity we've seen like in Hawaii are driving the business like they said it would.

If everything in the funnel were to happen it would indicate that we would see a slight up-tick this year and given that our run rates have been very positive lately. I think that’s a good sign, but we are also applying a little bit of discounting based on what we have seen in the past slide. So municipalities delay in spending to a new fiscal year and even with that then you come back to this number that says it's flat to slightly up. So we are kind of --

Debra Coy - Janney

I understand that the crystal ball is a little murky at this point. And I guess just in the near term your backlog growth and run rates have been good and that is still in terms of bidding opportunities that you're seeing, that’s still holding up for the time being?

Al Woods

It is.

Debra Coy - Janney

Okay.

Al Woods

And we are very encouraged as we said here today.

Debra Coy - Janney

Okay. Over on the Tite Liner business, very strong backlog growth as you have noted, can you talk a little bit about how you are approaching that business. I know there has been some discussion in the past so you have added sales resources there. Are you continuing to add, do you have the sales structure in place and that's more than dependent on market demand or are you kind of pushing that market a little from your end as you are building your focus on it?

Tom Vossman

Yeah, we are pushing it for sure on our end. We have added sales resources, a lot of the key leaders in Tite Liner actually do much of the selling themselves as we are executing as well as the business Al has in growing actually more on the execution side, preparing for the growth that we are seeing offshore. It's freeing up management to participate more and looking at new jobs, actually just got back last week on a trip with some very interesting prospects of work that we haven't seen before.

So we are pushing it, it's being pushed by the leadership of Tite Liner and as Al alluded to we fully expect to see double-digit growth this year. And it doesn't appear to be going away. So we will continue to invest in additional business development resources as we learn more about the markets, particularly in some of the ones where we haven't been in for some time if at all.

We completed our first project successfully in China. Some of our international partners are providing leads to us that's offering a free look at new work, as we train some of our new joint venture partners on the Tite Liner product, that's yielded some positive things. So that's also a nice funnel for us of leads that at least in our few cases has led to this closed business.

Debra Coy - Janney

Okay, thanks that's helpful and my last question for David Martin. David, you mentioned cost savings on the SG&A line and plus the lower accruals for compensation. How shall we think about the SG&A line going forward is a 19ish, 19 to 20 kind of million range on a quarterly basis around what we are looking at excluding additional cost savings in '08 or how you're thinking about that?

David Martin

What I would expect to see is that you will see a little slightly higher SG&A for the first half of the year and it will start trending down. Q4 is certainly a low end of the range because of the fact that we had -- did have these unusual accruals, low accruals and the one-time stock compensation adjustment. So starting out early in the years its coming a little bit higher and as some of these cost savings initiatives start to take hold, start ramping down towards maybe at or below 20 in the year.

Debra Coy - Janney

Okay, alright.

David Martin

So what I would say is certainly we are going to have less SG&A than we did last year, we got significantly less --

Debra Coy - Janney

Alright, understood. Thanks guys.

Al Woods

Thank you.

Operator

We'll go next to [Sam Ophta with Fortress]

Sam Ophta - Fortress

Hi, good morning. I wonder if you could help us to understand various litigation you have been involved in and I guess first of all with regard to Per Aarsleff, what's the basis of your lawsuit and do you consider going it alone in Europe without Per Aarsleff and wouldn’t that turn your partner in to a competitor?

Al Woods

Well, I am going to allow David to respond to the question, so that you understand the landscape. Per Aarsleff, is a competitor against Insituform. We happen to be a partner in enterprise in one country Germany. They compete against us, as they do other people in this business in all other Western European countries. We also compete in Eastern European countries. We also compete in India, Per Aarsleff also happens to perform CIPP work in India. When we won this Indian bid we actually won against Per Aarsleff and others. So I want you to understand that in terms of the competitive landscape, there is nothing different about what's going on now or what will be going on in the near term. So having said that David the question is about litigations?

David Morris

Yeah and Sam, it's generally our practice to not to comment on pending litigation. You will note that there are certain disclosures regarding certain litigations in our public filings and that is how we would like to comment on litigation.

Sam Ophta - Fortress

Okay. So you wouldn't want to comment on the basis of the lawsuit for this one?

David Morris

No, there will be disclosure regarding the Per Aarsleff litigation in our 10-K, which will be filed hopefully some time this week.

Sam Ophta - Fortress

Okay. And historically lets say for the past five or ten years. What kind of legal expense that you incur in I guess what kind of returns you been taking? I guess going forward currently and also if you can comment on what kind of return you made from these lawsuits in the past five or ten years?

David Morris

Again that's something we are not going to talk about. I will note that we have had a number of tunneling claims in the funnel, which has resulted in increased legal spending. We also have been spending money in terms of seeking patent and other IP projection for our new intellectual property. So there has been an increased spending in the legal budget. Overtime I do see that coming down though.

Sam Ophta - Fortress

Okay. Can you disclose that amount, what that amount has been recently?

David Morris

No, we will not.

Sam Ophta - Fortress

Okay. And I guess last one for the Cat Contracting settlement. What kind of legal, where did you pay for that?

David Morris

Again that's something that we like not to disclose.

Sam Ophta - Fortress

Okay. Thank you.

Operator

We will go next to Jack Kasprzak with BB&T.

Adam Thalhimer - BB&T

Good morning. Hey this is Adam Thalhimer calling in for Jack. I just had a couple of quick modeling questions here. First of all, on the tax rate if you take out the taxes that you paid on the legal settlement in the quarter, it appears that you had a net tax benefit and this would be for the second quarter in a row. And I guess the question is number one what's driving that? And number two, looking forward what should we assume for your normalized tax rate?

David Martin

That's good question. We did have significant tax benefits in the second half of the year as a result of primarily driven around where we made the money. We have certain tax jurisdictions that we pay very low tax rates in. And that always changes that's a fairly dynamic thing throughout the year. Plus we did assume serious tax reorganization a year ago and that's we are starting to see early results of that.

Then we also had something's developments in the second half of the year relating to some tax credits that we were able to achieve and a few things relating to net operating losses that we're going to be able to enjoy in the future, which we had previously thought we would not. So there were some adjustments to that.

So, as far as projecting after 2007 I certainly don't believe we're going to have a negative 1.1% tax rate going forward. I would expect to see normalized tax rate in that coming year between 25% and 30%.

Adam Thalhimer - BB&T

David thanks for that. And then lastly can you provide us any CapEx guidance for 2008?

David Martin

Yes. I can say that we spent about $15 million on continuing operations this last year. I expect that to grow a little bit this coming years as a result of our joint venture in India. We have to outfit the crews to do this large diameter work plus the small let up. And we have on the international things in iBlue, this is going to require some CapEx. So, I expect anywhere in the range from $18 million to $22 million.

Adam Thalhimer - BB&T

Okay thanks so much

Operator

(Operator Instructions). We will go next to Francesca McCann with Stanford Financial.

Francesca McCann - Stanford Financial

Hello, good morning, most questions have already been answered. But question on raw materials, we haven’t talked about this in a while but kind of what you're seeing and budgeting for particular salt and resin annually and then what you are seeing moving forward and then also if you can give us detail on kind of cost per square foot installed for resin and salt.

Al Woods

Good morning Francesca, Tom can you respond.

Tom Vossman

Yeah we, I don't have the information on the cost per square foot on those and probably wouldn’t disclose those anyway given, you know that we feel we enjoy some purchasing power. But on the resin side in 2007 we completed an RFP and qualified four vendors now versus the one contract that we had probably stated in years passed. That has resulted in very favorable purchasing for us in resin, we have seen net increase in price over the past six to twelve months and the projection is that we should be able to maintain that. We've negotiated some nice deals and so while we still build in a little bit of hedge in to our estimates particular on multi-year deals, we have got much more visibility control over that, we feel good about it.

So we don't see the volatility or change that we saw back in '05 and '06 happening going forward. The same really applies to fiber, we've qualified an offshore vendor, [ran tests] R&D groups has been involved. So we now have the capability to run multiple fiber, different fiber from various vendors including one offshore, that's allowed us to control our pricing on fiber as well. We don't see a lot of volatility in it. So I would tell you that we've got both under control very well Francesca looking forward.

Francesca McCann - Stanford Financial

Okay, and in terms of visibility, how far out?

Tom Vossman

We are able to very, we know our pricing out six months for sure and we get a good sense. We have, our vendors are now working with us on forecasting models based on what they look at as leading indictors for feedstock on what effect that might have on pricing, obviously in the oil and gas sector. So we are able to give forecasted pricing for them as far out as 12 months. That doesn't mean it will stick necessarily, but we are getting 6 to 12 months. And have real good visibility in security and pricing that out to about six months.

Francesca McCann - Stanford Financial

Okay, great. Thank you. And then just a kind of broad question, I guess probably Al for you, what you believe the kind of true earnings power of the company is for the next two to three years or so and expecting to get there through possibly straight revenue growth or improving gross margins. How high could we see gross margins just kind of drilling down, where you think that will come from and what you see is earnings power?

Al Woods

Great question. And short of giving, providing actual the guidance, let me share with you what I think about it. I think about our North American operations and I do see it as a great foundation for our organization, properly managed. And so it's our maintenance market and we are working to stabilize it, so that it does provide the foundation.

I think even in and with that foundation which is very important to us, we can have and enjoy respectable levels of earnings and I am not referring to a juggernaut or a growth engine. I am referring to a very nice business that maintains its market share, that produces predictable margins and we can do quite nicely with that. And when you couple that with the opportunities we have to our other strategic initiatives. That is the opportunities that we have for our continued and ongoing growth in Europe, we see that as a continuum.

We don't see there is no indication that the last three years have been or four years have been an anomaly. In fact there is considerable excitement about what we see in Europe and our opportunity to continue our growth. And what we see internationally, both with respect to the opportunities and the margins associated with those opportunities excite us.

So when I couple all that together, Francesca, I believe that this company in the future is going to produce significant gains in profitability and have very reasonable to attractive revenue growth and that's what we're capable of doing and I think that's what we will do.

I am encouraged as and you know that I have been here since August filling this role and it would appear that I am about to exit stage left. But I can tell you in this duration I have become convinced that through effective management there is considerable opportunity here.

I know you would like me to quantify what all of that means and you know also that that's difficult for us. But I hope that you're getting the flavor and feel of what I am seeing, what I am feeling and what should be manifested for this company in the future. As a result of the attention, the disciplines that we are baking in now and the vision, that very clear vision that we have about our company and where the opportunities are, what we should be focused on.

Francesca McCann - Stanford Financial

Okay, sounds good. Thank you. That's all

Operator

And we will take a follow up from Debra Coy with Janney.

Debra Coy - Janney

Yeah, just a, on income statement question David. On the India project, I know you have talked about this before but I apologize for not being quite clear. You will be accounting, that's a 50/50 joint venture. Will that come in through the income statement or is that another income item?

David Martin

No India will be a consolidated entity. It's actually 51% on entity, so you will see in the entire P&L of India coming in and then the 49% minority interest will be, showed up in that one line in minority interest of net income.

Debra Coy - Janney

Going back to the partner?

David Martin

Going back to the partner.

Debra Coy - Janney

Okay.

David Martin

We'll see, all the contracting revenue coming through the top line.

Debra Coy - Janney

Okay, got it. And finally for Al, I don't think this is, talking about issues that you said you are not going to talk about, to ask the question of the anticipated timing of your proxy filing?

Al Woods

Debra, David, as you know that has not been determined clearly as yet, but broad brush, David.

David Morris

Yeah Debra, I would anticipate that we would file a preliminary proxy statement in the next few weeks. At this point we have not set the date for our annual meeting and we don't have a date yet for filing the definitive proxy statement.

Debra Coy - Janney

Okay, there is nothing in your charter that sets a date by when you have to hold the annual meeting?

David Morris

There is a provision in Delaware Law that would require when that meeting must occur.

Debra Coy - Janney

And that says?

David Morris

I believe its 13 months after the prior year's annual meeting.

Debra Coy - Janney

Okay, alright that's helpful. Alright, that's good. Thanks.

Al Woods

Thank you.

Operator

And there are no other questions at this time. I would like to turn the conference back to our speakers for any closing remarks.

Al Woods

Well, thank you very much. Thanks to all and enjoyed the opportunity to address you regarding our view of Insituform. Should you have questions that we did not have the opportunity to address and/or we did not address thoroughly, please feel free to give us a call, and we will be happy to chat with you. Thank you very, very much.

Operator

Thank you everyone. That does conclude today's conference. You may now disconnect.

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Source: Insituform Technologies Inc. Q4 2007 Earnings Call Transcript
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